Today's question comes from Martin who writes:
I thoroughly enjoy the invaluable resource that you provide on the RE espresso podcast. I would like to get your opinion on a project that has come across my desk. Many aspects of the project are subject to the normal DD process. However, having done some research on the special permit that was approved to entitle a 6 unit commercial site to a 56 unit mixed use site, with the addition of 50 residential units (24 Studio, 20 one bed and 6 two bed units) to the existing 6 commercial. There is a restrictive covenant as it pertains to parking. There are 24 designated parking spaces on the site. The planning board approval had an allocation of 12 spaces (2 each) to the 6 commercial units. It seems the remaining 12 are to be allocated to commercial customer parking. They also incorporated a specific condition that none of the residential tenants can own a vehicle. They specifically have tied this to the excise tax bills paid to the City for all vehicles, as proof that tenants of this building do not own a car. This concerns me, as in all of our units, there is at least one vehicle per lease. There is access to the metro train system close by (walking distance) However the site is not a downtown urban development, and is actually situated within 5 miles of the main downtown of a major city. The metro would have one downtown in 12-15 mins. The proforma rents are in line with other class A building comps within a 2-5 mile radius. I have three questions:
1. How does one account for the qualitative impact of not being able to own a vehicle.
2. Having answered the first question, how to quantify and discount rent comps with other similar class A buildings, that are not encumbered by the aforementioned restrictive covenant.
3. As part of an exit strategy what impact on the cap rate should one contemplate for potential buyers. Or, taking the contrarian position, are we moving in the direction of reduced carbon footprint with more people buying into 100% dependency on public transportation in conjunction with Uber /ride sharing, in which case the building valuation would suffer no undue financial degradation.
As always, I appreciate your opinion and keep up the great work on the espresso podcast!
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Host: Victor Menasce
email: podcast@victorjm.com