Hi Folks,

I'm starting a new thread for the second exercise because the first thread is already long enough and besides the method for calculating the value of a commercial property investment is different to that of a residential property chiefly, I think, because the risks are greater. (I just gave you a clue.) Perhaps that may be a point of discussion later in this thread but first have a go at this exercise.

An investor is looking to purchase a shop in a prime retail street location and wants to calculate what the rental income should be and how much the shop is worth. The investor finds a suitable shop (Shop D) which is to be sold at auction shortly. Having researched previous sales in the area the investor chooses three shops (A, B, C) to compare which have sold in the same street in the last month. The following comparisons are noted:

1. All 4 properties are in identical positions; are held on identical leases; and have been maintained in good order. (Point of clarification: Take "identical leases" to mean identical length of term. Shop D which is the target shop is being sold without a sitting tenant. But the investor is simplifying the adjustments by choosing the same lease term as the other shops have.)

2. No adjustment is needed to compare: position; date of the transaction; differences in tenure; and condition.

3. However, the shops are different in size and the quality of the covenants of the tenants varies. ("Quality of tenant covenants" could be a point for discussion, however, for the purposes of this exercise I'm happy to simplify this to mean quality tenants. You will have to exercise your own judgement on what constitutes a quality tenant.)

Floor area is 74 sq metres;

Rent is $16,000;

Tenant is a National franchisee;

It sold subject to the tenancy for $232,000

Floor area is 102 sq metres;

Rent is $23,000;

Tenant is a popular local baker;

It sold for $255,000

Floor area is 140 sq metres;

Rent is $32,000;

Tenant is unknown and of doubtful quality; (Perhaps is an independent retailer of second-hand books with no profile.)

It sold for $228,500.

To be sold at auction shortly

Floor area is 116 sq metres;

It is in good repair.

Not currently let so rent is unknown.

Price: ?????????

Please answer the following questions:

When determining the worth of the shop I'd like you to take into consideration the fact that you have found a tenant who will move in within 6 months if you purchase the property. The tenant is a local retailer who has a chain of 12 shops.

Good luck, hope you get the property at a reasonable price.

Regards, Mile

PS: The link to

I'm starting a new thread for the second exercise because the first thread is already long enough and besides the method for calculating the value of a commercial property investment is different to that of a residential property chiefly, I think, because the risks are greater. (I just gave you a clue.) Perhaps that may be a point of discussion later in this thread but first have a go at this exercise.

**How to calculate the rent and value of a shop.**An investor is looking to purchase a shop in a prime retail street location and wants to calculate what the rental income should be and how much the shop is worth. The investor finds a suitable shop (Shop D) which is to be sold at auction shortly. Having researched previous sales in the area the investor chooses three shops (A, B, C) to compare which have sold in the same street in the last month. The following comparisons are noted:

1. All 4 properties are in identical positions; are held on identical leases; and have been maintained in good order. (Point of clarification: Take "identical leases" to mean identical length of term. Shop D which is the target shop is being sold without a sitting tenant. But the investor is simplifying the adjustments by choosing the same lease term as the other shops have.)

2. No adjustment is needed to compare: position; date of the transaction; differences in tenure; and condition.

3. However, the shops are different in size and the quality of the covenants of the tenants varies. ("Quality of tenant covenants" could be a point for discussion, however, for the purposes of this exercise I'm happy to simplify this to mean quality tenants. You will have to exercise your own judgement on what constitutes a quality tenant.)

**Shop A:**Floor area is 74 sq metres;

Rent is $16,000;

Tenant is a National franchisee;

It sold subject to the tenancy for $232,000

**Shop B:**Floor area is 102 sq metres;

Rent is $23,000;

Tenant is a popular local baker;

It sold for $255,000

**Shop C:**Floor area is 140 sq metres;

Rent is $32,000;

Tenant is unknown and of doubtful quality; (Perhaps is an independent retailer of second-hand books with no profile.)

It sold for $228,500.

**Shop D:**To be sold at auction shortly

Floor area is 116 sq metres;

It is in good repair.

Not currently let so rent is unknown.

Price: ?????????

Please answer the following questions:

**What rent can be expected for Shop D?****How much is it worth?**When determining the worth of the shop I'd like you to take into consideration the fact that you have found a tenant who will move in within 6 months if you purchase the property. The tenant is a local retailer who has a chain of 12 shops.

Good luck, hope you get the property at a reasonable price.

Regards, Mile

PS: The link to

**Estimating buy price - Part 1**is: http://www.somersoft.com/forums/showthread.php?s=&postid=1147#post1147
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