Background

Your longtime client, Gary, called your office. Gary owns a parcel of land on Route 9 in Howell. The parcel is rectangular, has 500 feet of frontage and is 400 feet deep. For years the area was generally rural, but Interstate 195 was completed about 30 years ago, which dramatically increased traffic on Route 9. With Lakewood to the south and Freehold to the north now more easily accessed via Interstate 195, residential and commercial development in the area has been strong. Garys property is about two miles north of the Interstate 195 interchange, and it is clearly in the path of development.

Current Use

The property is improved with a 75,000 square foot industrial building that was originally built in 1947, but was added to several times in the 1950s and 1970s. The building has low ceilings and is obsolete, however, the tenant, Mill Steel, a steel fabrication company, has been there for over 25 years. The noise from the operation makes relocation difficult, so Gary has been receiving a premium rent for years. Mill Steels lease will renew in six months, and Gary has a handshake deal with Mill Steel to renew for 10 years at a rent of $6.00 per square foot, triple net. Gary tells you his expenses are minimal, $2,000 per year to file a tax return and he sets aside $0.10 per square foot per year for reserves to replace the roof and parking lot. Mill Steel has good credit, and you think vacancy would be minimal at 5% and the property would sell at a 6.5% capitalization rate. Using these parameters, you estimate the current value:

Potential Gross Income
Vacancy
Effective Gross Income
Expenses
Reserves
Net Operating Income
Capitalization Rate
Value Conclusion

The Problem

Gary thinks the property might be worth more if he sold it to a developer. He wants you to research the market and determine whether another use might be more valuable.

You obtain a copy of the Howell Townships Zoning Map and determine the property is in the C-3, Commercial Zone. You then analyze the requirements of the zone which show a minimum lot size of 3 acres and minimum lot width of 300 feet. There are three primary permitted uses in the C-3 zone: office, retail and apartments.

You call a demolition contractor, who estimates the demolition and removal of the existing building will cost $5.00 per square foot (you will need to know this when developing land value as this cost must be deducted when determining an alternate use).