Have a question on purchase price allocation. I have drawn up an example below.
Portfolio
- 100 industrial buildings
- 250 tenants
- Average size building 200,000 SF
- 20,000,000 SF
- Occupancy 95%
- Market Rent $0.50 NNN / month
- Yr 1 NOI - $114,000,000 ($1.14M)
- $1,900,000,000 ($1.9B) Purchase Price -- ($95/SF)
- Going-in Cap Rate: 6.00%
Some properties are vacant, partially leased and fully leased.
We easily assume the purchase price using the direct capitalization, dividing the NOI by the market going-in cap rate. But what is the industry standard for allocating purchase price to each property?
1) Should we use this same direct capitalization method, Going-In Cap of 6.00% on each property in the portfolio to come to a purchase price? (ie. NOI/Going in Cap)
2) Should we allocate the $/sf purchase price of $95/SF to each property?
Please share your experience. Also, please let me know if I have made any mathematical errors in my example and we can make adjustments to the assumption.
Thanks!
.
This looks like you are trying to use a Blackstone (or another MF) deal to figure out some sales comps of individual properties. The problem is you can't really apply the price per sf and have an accurate comp.
It's a bit of an art. Ultimately you want to properly allocate the value of each asset - rather than just a blanket $/SF or cap rate - in order to have a good value on your books. For a proper valuation, you would use a combo of the approaches you discussed above on each asset, allocating the whole $1.9B between the 100 properties. Having the accurate value on each asset helps for a variety of reasons: depreciating different assets on different schedules, avoiding massive gains/losses on sales when you peel off individual assets, etc. Depending on how detailed you need to get, there would be further segregation within the assets between land, building, TI, in-place lease value, etc. Often acquirers will hire appraisers or valuation shops to help them prepare the PPA.
Thanks bolo. You brought up some good points that I haven't thought of. Glad to know this is an art. Will be able to ballpark the figures using the two methods above and massage the numbers to make sense until we hire appraisers or valuation shops down the road.
I would imagine, if the properties are geographically diverse, that would be an obvious way to put the properties in subgroups. Where it gets tricky is when you have vacant buildings in the mix. This is probably where sales comps would come in handy.
As I go down the rabbit hole, its obviously part art and part science.
Great question and answer by bolo up
Out of curiosity, are you currently working on this deal for work, school, etc? If for work, what type of firm are you with (mega fund, regional PE shop, etc) and how much exp. do you have?
I'm asking BC this looks awesome and am interested to know at what level (associate, vp, etc) and type of group these situations come to. Currently a second year analyst on the LP side of a large fund with national coverage, but I wouldn't think I would get this down into the weeds of valuing each asset and putting a play together; this is something a few people one or two levels above me would spend time on and pull me in as-needed when-needed.
Do the individual properties not have their own appraised cap rate?
They have not been appraised. The portfolio is assumed to be marketed without a purchase price or cap rate guidance.
If you're anywhere close to a final product or actual IC memo on this deal, you'll want to actually understand each properties characteristics and assign a value to the property. You may want to group properties into different classes such as A B C D E and then look at different PSF valuations for the different classes in your valuation. This is art more than science. But you definitely want to get granular.
To make things even more complicated... what is the purpose of the PPA? Each one has a different methodology, and often all three will come into play at some point in the portfolio life-cycle. It's not unusual to have somewhat different values for each purpose, and it's important to understand the interaction
1) Business Process Driven: This is the allocation based on your firm's (and potentially investors) opinion of value. It can be driven by a lot of factors including the fair market value, the business plan for each asset, and future incentives, such as the promote, etc
2) GAAP driven (i.e. ASC 805): This is primarily an accounting exercise, but may have important implications if you have a public investor
3) Tax: This is related to #1, but can have significant variances based on valuation methodology and any premiums/discounts paid for the portfolio. If you have taxable investors, it's important to have an solid strategy here - you must be realistic, and honest, but there are also significant taxation implications (i.e. it's best to defer your gains as long as possible).
As a side note, make sure you understand each asset individually. When underwriting a portfolio, it's all too easy to focus on the forest without understanding the individual trees. At a minimum, make sure you have an in-depth understanding of the properties that contribute ~80% of the NOI.
Praesentium consequatur soluta qui ea eum amet. At ut magnam eaque ea. Id dolores error dolore dolorem iure. Suscipit dolorem reprehenderit tempora voluptatem necessitatibus ut. Alias voluptatem occaecati placeat blanditiis hic illo autem esse. Vel deleniti eos ab sint illum.
Autem aut omnis et officia assumenda. Voluptatum at consequuntur voluptatem magnam sit et. Recusandae qui dolorem eum pariatur praesentium ut nobis cupiditate.
Mollitia reprehenderit praesentium ducimus porro placeat. Debitis et dolorum illo est laudantium qui et. Cupiditate enim deleniti voluptatum fuga qui. Cum dolorum natus aliquid sed aut. Autem commodi ratione similique aliquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...