highest & best use: case study...real estate division sauder school of business at ubc 1717 net...

Sauder School of Business at UBC Real Estate Division

Highest & Best Use: Case Study

Larry Dybvig, AACI, P.App., MAI, FRICS

Real Estate Division Sauder School of Business at UBC 2 Sauder School of Business at UBC Real Estate Division 2

Highest & Best Use Defined

That reasonably probable and legal use of vacant land

or an improved property that is physically possible,

appropriately supported, and financially feasible, and

that results in the highest value

Canadian Uniform Standards, 12.34.1

• Four criteria: legal permissibility, physical possibility,

financial feasibility, and maximum profitability

• This case study deals with legal permissibility

Sauder School of Business at UBC Real Estate Division 3

Case Study:

The Bay Department Store

Vancouver


Property Summary

• The Hudson’s Bay store is Vancouver’s flagship store

• An important heritage icon for both Downtown and the

City

• In 1974, Vancouver Council municipally designated the

building as Heritage ‘A’, which requires the entire

exterior of the building be protected from any alteration


Property Summary

• Prime site in the Downtown area of Vancouver, British

Columbia

• 1.76 acres of land

• A six-storey retail department store with basement

levels; constructed 1913 to 1949

• 620,000 square feet gross leasable area

• Zoned: DD - Comprehensive Development District

(Downtown) 9.0 FSR maximum density


Site Highest & Best use if vacant

and unencumbered would be

for mixed use development at

9.0 FSR, per zoning

Value if vacant and

unencumbered at highest and

best use:

Site area floor space ratio

= maximum buildout

76,726 SF 9.0

= 690,534 BSF

If land value say $90/BSF

690,534 $90

= $62,148,060

= $62,000,000 rounded


Property Tax Assessment History

Assessment Year Land Improvements Total

2007 $36,430,000

2008 initial 28,052,000 29,977,000 58,029,000

2008 (Property Assessment Review

Panel Decision – “PARP”) 59,315,000 724,000 60,784,000

The 2007 taxes were $909,000


Highest & Best Use

• The site located at 674 Granville Street is at its highest

and best use potential because:

The building is a municipally designated Heritage

Class ‘A’ building – cannot be demolished

No additional development rights due to 1974

designation

Parking for any future expansion would be difficult to

find since there is no potential for on-site parking


Valuation – By Income Approach

Traditional Department Store Rents

Lease Summary Table

Index Tenant Province Type Start End SF $/SF

1 confidential BC Net Nov-00 Oct-08 146,452 $6.00

2 confidential BC Net Feb-03 Jan-23 229,275 $2.36

3 confidential BC Net Oct-01 Oct-16 138,877 $7.00

4 confidential BC Net Sep-00 Jan-16 111,668 $7.50


6 confidential BC Net Sep-00 Sep-15 99,490 $6.32

7 confidential BC Net Dec-04 Dec-19 110,795 $8.30

8 confidential BC Net Feb-02 Feb-17 115,407 $8.24

9 confidential BC Net Apr-03 Apr-18 109,414 $7.24

10 confidential BC Net Mar-01 Mar-16 115,476 $5.00

11 confidential AB Net Jan-02 May-22 167,946 $4.50

12 confidential SK Net May-00 May-20 174,306 $1.78

13 confidential SK Net May-00 May-20 182,355 $3.95

14 confidential Mb Net Aug-03 Jul-23 212,086 $1.74

15 confidential ON Net Feb-03 Feb-08 223,477 $6.24

16 confidential Toronto Net Sep-02 Sep-07 299,375 $1.67

17 confidential Toronto Net Apr-04 Apr-19 738,102 $4.46

18 confidential Mississauga Net Dec-01 Apr-07 287,178 $5.68

19 confidential BC Net May-00 Apr-20 132,633 $5.00

20 confidential BC Net Sep-01 Aug-21 120,094 $3.61

21 confidential BC Net Jul-03 Jun-28 128,020 $3.12



Size vs Lease Rate


Lease Rates Over Time

• Department store rents not changing

• Reflection of underlying pattern where DSTM sales

are flat


Net Operating Income Estimate

Basic Rent 620,000 square feet 5.00 per square foot 3,100,000

Property taxes 940,000

Operating and reserves 3,129,000

Potential gross income 7,169,000

Vacancy & collection loss 2.16% of PGI 155,000

5.00% of basic rent

Effective Gross Income 7,014,000

Operating expenses

Property taxes 940,000 2007 + 3%, rounded

Operating expenses 3,100,000 $5/SF, rounded

Structural reserve 29,000 $7.50/footprint SF over 20 years, rounded

Total 4,069,000

Net Income 2,945,000


Overall Capitalization Rate Benchmarks

Index City

Heritage

Status Sale Date Sale Price Land Size

Building

Size FSR OAR

1 Vancouver n/a Mar-05 $44,500,000 81,701 148,751 1.82 6.4%

2 Vancouver n/a Jul-05 $143,500,000 48,000 383,972 8.0 6.5%

3 Vancouver n/a Jun-05 $31,400,000 38,999 255,417 6.55 6.5%

4 Vancouver B (M) Nov-05 $47,500,000 23,788 174,713 7.34 6.7%

5 Vancouver B Mar-06 $13,250,000 9,360 72,235 7.72 7.0%

6 Vancouver B (M) Apr-06 $20,250,000 14,140 90,119 6.37 6.5%

7 Vancouver A (M) Jan-07 $22,885,000 18,720 93,400 5.04 6.4%

8 North Vancouver n/a Feb-07 $18,000,000 52,751 44,031 0.83 7.0%

9 Vancouver B (M) Mar-07 $7,890,000 5,998 27,000 4.5 6.3%

10 Richmond n/a Apr-07 $24,500,000 58,806 99,332 1.69 6.3%

11 Surrey n/a Apr-07 $28,700,000 542,061 149,565 0.28 7.0%

12 Burnaby n/a Jun-07 $23,600,000 139,305 119,605 0.86 6.2%

13 Burnaby n/a Jun-07 $18,300,000 83,605 91,502 1.09 6.8%

14 Vancouver n/a Feb-08 $16,800,000 9,048 33,739 3.73 5.0%

Heritage Class A Represents the best examples of a style or type of building

Heritage Class B Represents good examples of a particular style or type, either

individually or collectively

(M) Indicates that buildings or sites that are protected by a legal heritage

designation by the City of Vancouver


Valuation at Highest & Best Use

$2,945,000 / 7.5% = $39,266,667

Rounded to $39,270,000


In Summary

• Legally permissible use determines Highest & Best

Use

• Heritage designations affect legal permissibility and

thus value

• Valuation must respect restrictions imposed by

heritage designation

Sauder School of Business at UBC Real Estate Division

Thank You

We want to hear from you! Give us feedback on this and other

presentations at [email protected]

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