Cap Rate for Mixed-Use Buildings

[Anonymous]

Maybe this is getting ahead of things a bit and this will be discussed in an upcoming course, but as we were looking at the sales comps in this course to help determine the cap rate, I am wondering how the cap rate is determined if you have a building with multiple uses. For example, if you had a building with retail, office, and apartments and similar retail spaces were trading at a 7% cap rate, and similar office spaces were trading at 6% cap rate, and similar apartment types/sizes were trading at 5%. Would you use some sort of blended cap rate? Or would it be best to look at other mixed-use buildings that were similar and see what they were trading at to get comps for the cap rate?

[Spencer Burton]

Thanks for the question.

The best way to evaluate cap rates for mixed use properties is to separate out the NOI derived from each use and then apply a property type specific cap rate to each.

So for instance, imagine a mixed use retail and office building. Total NOI is 10 million. The retail accounts for 4 million and the office accounts for 6 million of NOI. Similar retail properties (excluding any office) are trading at 6% cap rates while comparable office properties are trading at 7% cap rates.

The direct cap value would be as follows:

Retail = 4,000,000 ÷ 6% = 66,666,667
Office = 6,000,000 ÷ 7% = 85,714,286
Total = 66,666,667 + 85,714,286 = 152,380,953

Thus, when looking at comparable properties you would actually have two (or maybe three) comp sets. One for the retail component, one for the office component, and a third (possibly) of mixed use projects as a gut check.

Great question!

[Anonymous]

Thanks Spencer. That makes complete sense and helps clear that up completely. Thanks!

[Author]

Posts