Drabkin & Conway has executed a strategy in recent years of acquiring residential real estate in River North and taking advantage of decreasing cap rates in that area, allowing the value of the condominiums to appreciate in value. However, with River North’s extreme growth for the last ten years, increased recent building in the area and with River North cap rates down to 4.5%, we do not see cap rates falling any further. The firm is deciding whether to continue to invest there.
In that vein, we have identified a property that we would like to bid on and we are looking to you to provide a valuation of the property using the 1) Sales Comparison approach and the two income approaches, the 2) Direct Capitalization method and the 3) Discounted Cash Flows method.
The property is apartment 1304 at 200 W. Grand Ave. Built in 2004 as a luxury building, 200 W. Grand Ave has provided consistent value in the area. It is at a desirable corner at Grand and Wells in the heart of River North, but yet the prices in the building currently lag the price of new construction considerably.
The listing of the property can be found here:
HYPERLINK "https://www.redfin.com/IL/Chicago/200-W-Grand-Ave-60654/unit-1304/home/12571372" https://www.redfin.com/IL/Chicago/200-W-Grand-Ave-60654/unit-1304/home/12571372
You can also search for the property on Zillow or similar sites.
Sales Comparison Approach
We have provided MLS data on other 04 units in the building that you should use to evaluate the property. All of the units are the same square footage and same layout. Please adjust the comparables for 1) Market Conditions (time), 2) Floor and 3) Parking. Please use apartments 1004, 1204 and 1404 for comparison.
There is one sale that is not listed on MLS. Details below:
Unit: 1404
Close Date: February 1, 2016
Single Space Parking Included
Sale Price: $494,000
Unit 1004
Close Date: 7/01/2016
Single Space Parking Included
Sale Price: $470,000
Unit 1204
Close Date: 1/01/2016
Single Space Parking Included
Sale Price: $435,000
Unit 1004
Close Date: 6/01/2017
Single Space Parking Included
Sale Price: $299,000
For 1) Time, you should use the closing date as the day for comparable. You should also not worry about the specific date within the month, just adjust for the number of months and assumes that we would close on our condo November 1, 2017. Meaning if one condo sold April 2, 2016, that is 18 months ago, as is April 29, 2016. You should use Unit 1004 here as that unit has sold twice in recent years.
For 2) Floor, the first two numbers of the apartment are the floor number. Just find two that are similar and use those.
For 3) Parking, look in the listing see if the parking was included in the sales price or not. You will see by garage ownership if it says “Deeded Sold Seperately,” you can assume that deeded parking was not included. Single spaces consistently sell for $35,000 and tandem spaces for $45,000 there and you can assume those values.
Direct Capitalization & DCF
In calculating NOI, please make the following assumptions:
Rent the unit for $3,100 per month for the next year. This will increase 3% per year starting in May, 2018
A vacancy rate of 5%
Monthly assessments as shown in the listing, we will assume these will stay the same for the next five years (don’t forget to multiply by 12!)
Property taxes of $4500/year to increase by 8% per year based on City budget problems
The cap rate today is 4.5% to stay steady for the next 5 years
We anticipate selling the property on May 1, 2022 or exactly 5 years later
You can assume that our discount rate is 8%
Deliverable
Please provide a valuation using all three methods and also what you think we should bid. As we have full legal and diligence capability on staff, you can assume $0 in closing costs.