Kitsap County Assessor Narrative for Countywide Drug Store Appraisal Date 1/1/2014, Tax Year 2015 Updated 03/31/2014 by CM20 Valuation Summary Approach Used The income approach was considered the best approach for this property type. Analysis and Conclusion Summary - The three approaches to value were considered. The cost approach is unreliable for this property type. Components such as replacement cost new and depreciation are difficult to calculate due to rapidly changing costs of labor and materials, a variety of obsolescence items including mechanical or power supply, changing demands, and other unaccounted for items. The cost approach is given little consideration in the final analysis. A market or sales approach uses sale prices of comparable properties. Kitsap County lacked sufficient, recent sales to develop a cost per square foot market approach. The income approach is the best method for valuing these properties. The income model was developed with local market rents, vacancy, and expenses collected from our mail survey, Board of Equalization and State Board of Tax Appeal files, site visits, and local sales, in addition to national publications. Property Type Overview Population Drug stores are single tenant standalone buildings. The countywide population consists of seven buildings located in Bremerton, Silverdale, Port Orchard, and Kingston. These buildings range in size between 14,406 square feet and 18,187 square feet. Drug stores are located at primary intersections representing superior locations throughout the county. Drug store tenants in attached units associated with shopping centers are valued using the Community Shopping Center model for an anchor tenant. Economic Condition The current market conditions are improving based on the increase in sales and listings for this property type. Land to Building Ratio The median land to building ratio plus one average deviation is 5.78:1. Since standalone drug stores follow a formula for building and lot size, the deviation for this property is very small and does not adequately indicate whether property has useable excess land. Review of zoning requirements such as total lot coverage or parking requirements, as well as topography or shared easements, must also be considered before calculating excess land. Rating System Two income classes were recognized based on location, traffic, zoning, age, condition, and synergy from surrounding commercial properties. Rating is based on retail classification guidelines. Model Calibration Preliminary Ratio Analysis Three drug store sales occurred countywide between 01/01/2009 and 03/31/2014. The median ratio was 38% with a coefficient of dispersion (COD) of 16.26. Since initial sales of drug stores are a sale/leaseback agreement, and resale of national chain operated stores have values placed more on the credit worthiness of the business enterprise, these sales were not used to establish value. G:\ASSR\comml\PROPERTY TYPES\29_Rtl greater than 100k\MODEL DOCUMENTATION DRUG\15_Narrative Drug.doc
Narrative for Drug Store (continued) Sales Approach Data and Analysis Regional Sales - Range of Sales Dates 01/01/2010 03/31/2014 Insufficient valid local sales prevented the development of a market approach. Three sales occurred in Kitsap County: the Rite Aid in Kingston, and the Walgreens in Bremerton that sold twice. Price per square foot ranged from $308.74 to $468.55. Nine closed sales of drug store properties from other counties were reviewed. Price per square foot ranged from $271.22 to $619.48 with a median of $378.01. Additional sales and listings of single tenant large retail structures from Kitsap County and surrounding counties were used for analysis on the principal of substitution. Drug stores, built by or for the intended tenant are at primary intersections representing superior locations throughout the county. The tenant (drug store) typically sells the property and leases it back. A saleleaseback transaction is defined as a financing arrangement in which real property is sold by its owneruser, who simultaneously leases the property from the buyer for continued use. Dictionary of Real Estate Appraisal, Fourth Edition, Appraisal Institute 2002. As such, the value dictated by these sales is for value in use rather than the fair market value as if it were an unencumbered fee estate. Sale and resale of these properties reflect a value more attributable to the creditworthiness of the business enterprise than the real estate value itself. Current Sale Listings Seven current sales listings of occupied drug stores from around Washington State were reviewed. Price per square foot ranged from $433 to $724 per square foot with a median value of $477. Additional sales listings for single tenant standalone retail buildings were reviewed based on the principal of substitution and given more weight in the analysis. Rates No market rates were developed. Income Approach Data and Analysis Data Three local drug store rents were documented. The leases in place for drug stores occupied by a national chain are typically for twenty to twenty-five years with multiple five-year renewal clauses and are an absolute net basis where the tenant is responsible for all operating expenses. The lease amount established is more by investors estimate of required return rather than market rates. Therefore, the documented rents of stores currently occupied by chain pharmacy retailers have not been used as a basis of value. Using the principal of substitution, review of other single tenant structures, and their rents, were used to develop the income model. Vacancy Data There were no vacancies in Kitsap County. Typical drug store leases are for a term of 20-25 years with multiple 5-year options. A modest 2% was applied for unanticipated collection. Expense Data Drug stores rent on a triple net () basis. A modest 5% rate for management and reserves was applied. Capitalization (Cap) Data Cap rates were available from the three local drug store sales. Six drug store sales from western Washington had cap rates that ranged between 5.95% and 8.64%. Seven sale listings reflect cap rates between 5.50% and 7.00%. Regional and national publications were reviewed for cap rate ranges. Comparison of single tenant retail and drug store cap rates show a disparity in the rates associated on value given by investors to the credit worthiness of the chain pharmacy retailers rather than the real estate. Cap rates from retail were adopted. Current Lease Listings No listing for freestanding drug stores was found within Kitsap County, additional lease rates were reviewed from surrounding counties. Seven sales listings included current lease rates which ranged from $24.90 to $40.59 per square foot. Listings for former drug stores, and single tenant retail buildings were reviewed for rental information for local and statewide properties. G:\ASSR\comml\PROPERTY TYPES\29_Rtl greater than 100k\MODEL DOCUMENTATION DRUG\15_Narrative Drug.doc
Narrative for Drug Store (continued) Model Validation Final Ratio Analysis The three drug store sales were considered invalid as the basis of the purchase price was more related to the leased fee estate value attributed to the long-term over market rent associated with these stores rather than the value of the real estate. Sources Internet www.commercialmls.com www.loopnet.com Publications Boulder Group Q3 2013 the Net Lease Drug Store Report Calkain Research Pharmacy Report 2013 Calkain Monthly Net Lease Trend Report, August 2013 Cassidy Turley Single Tenant Net Lease Investment Overview Fall 2013 Cassidy Turley US Retail November 2012 Integra Realty Resources Viewpoint 2014 Marcus & Millichap 4th Quarter 2012 Realty Rates 3rd Quarter 2013 Other - Kitsap County Board of Equalization appeal documentation Drug Store Valuation: Important Issues to Consider for Ad Valorem Taxation, Keith E. Darin, MAI You can t get the value right if you get the rights wrong. David C. Lennhoff, Appraisal Journal Jan 2009. G:\ASSR\comml\PROPERTY TYPES\29_Rtl greater than 100k\MODEL DOCUMENTATION DRUG\15_Narrative Drug.doc
RETAIL IFICATION GUIDELINES A Location Synergy Access Visibility Traffic Parking Quality of Building Condition of Building Delivery Access Associated with a shopping center, attached or free standing building. Destination shopping such as shopping centers or designated retail developments. Multiple accesses, lighted access, round-a-bouts, allway stop signs. Store front or signage highly visible. High traffic count or destination shopping area. Ample on-site parking. Very good retail New or recently renovated building with with modern mechanical impressive façade. upgrades. Drug stores. Good delivery access to rear of building, possibly loading docks. Highest and Best Use As developed. B Associated with a shopping center or, attached or free standing building. Destination or easy impulse shopping location. Multiple accesses, lighted access, round-a-bouts, allway stop signs. Store front or signage highly visible. High traffic count or destination shopping area. In midst of downtown core walking pattern. Ample on-site parking or adequate nearby parking for locations. Good retail building with attractive façade. Drug stores. New or recently renovated with modern mechanical upgrades. Good delivery access to rear of building, possibly loading docks. As developed. C Free standing or Adequate access, Good traffic from possible multiple neighboring business accesses, turn lane mix. on busy roads. Good store front or signage visibility. Adequate traffic counts. In midst of or at edge of walking pattern. Adequate on-site parking or nearby parking for locations Average retail building, typical façade. Average condition, no functional obsolescence. All mechanical components meet requirements. Typical maintenance on building completed as needed. Rear access man doors with good road. As developed. D Free standing, secondary street locations, or in defunct shopping center. Limited synergy from neighboring businesses. Adequate access, possibly difficult during high traffic commute hours. Limited store front or signage visibility. Adequate to low traffic count, or extremely high count during peak commute hours. Off the main walking pattern for. Adequate to limited on-site parking or nearby parking for locations Possible deferred Average retail maintenance, possible building with plain functional obsolescence. May or dated façade. not meet todays standards for mechanical improvements. As developed, Possible rear possibly access, alley access. transitioning away from current use. E Free standing, secondary street locations, or in defunct shopping center. Limited or none. Adequate to difficult Very limited. access. Low traffic count. Not part of typical walking pattern for areas. Limited parking, distance to parking in areas. Fair or low quality retail building, plain or dated façade. Needs maintenance, possible functional obsolescence, approaching need for redevelopment. Does not meet todays mechanical standards. Transitioning away Limited with narrow from current use or alley, or no rear need of complete access. redevelopment to today's standards. Onsite parking is not typical in areas where 100% building footprint to land is allowed. Locations within the typical walking pattern for areas are prime retail sites. Those located at the fringes or back streets are less desirable. Retail stores in excess of 10,000 sf for single tenant occupancy tend to be square in shape. Retail stores are typically rectangular in shape with the short side being the store frontage. Consider higher rent class if the long side is store frontage. Standalone drug stores are rated Class A, except for those located in Bremerton, which are rated Class B.
Income Model: Property Type: Neighborhood: 302014 Retail Countywide 0 Not Used Outside Rtl>100K SA Drug Class A 11.60 8.00 9.00 18.00 2.00 7.75 Class B 10.10 8.00 9.250 15.30 2.00 8.000 Class C 6.50 20.00 10.00 8.55 9.00 9.50 Class D 7.70 10.00 9.50 Class E 6.50 20.00 10.00 4/14/2014
Local Income Survey Property Type: Sub Type: Retail-Large & Drug Store Retail-Large & Drug Store PGI per Unit Vacancy EGI per Unit Expense % NOI per Unit $30.00 0.00% $30.00 % $28.50 $24.97 0.00% $24.97 36.73% $15.80 $24.70 0.00% $24.70 0.00% $24.70 $23.36 0.00% $23.36 0.00% $23.36 $19.26 2.00% $18.87 28.56% $13.48 $18.97 0.00% $18.97 16.00% $15.94 $18.41 0.00% $18.41 20.00% $14.73 $17.95 0.00% $17.95 36.73% $11.36 $17.56 0.00% $17.56 17.31% $14.52 $16.48 0.00% $16.48 20.00% $13.18 $16.42 0.00% $16.42 0.00% $16.42 $15.92 0.00% $15.92 41.00% $9.39 $14.84 0.00% $14.84 32.54% $1 $14.30 0.00% $14.30 3.00% $13.87 $13.44 0.00% $13.44 0.00% $13.44 $13.24 0.00% $13.24 25.60% $9.85 $12.77 0.00% $12.77 36.73% $8.08 $12.09 0.00% $12.09 27.04% $8.82 $11.00 0.00% $11.00 0.00% $11.00 $10.45 0.00% $10.45 41.00% $6.17 $10.24 0.00% $10.24 21.00% $8.09 $9.58 0.00% $9.58 41.00% $5.65 $9.24 100.00% $0.00 17.05% $0.00 $9.11 0.00% $9.11 23.16% $7.00 $9.00 0.00% $9.00 % $8.55 $8.50 0.00% $8.50 3.00% $8.25 $8.50 0.00% $8.50 0.00% $8.50 $8.25 0.00% $8.25 0.00% $8.25 $7.53 0.00% $7.53 2.50% $7.34 $6.90 0.00% $6.90 0.00% $6.90 $6.81 0.00% $6.81 % $6.47 $6.45 0.00% $6.45 5.79% $6.08 $6.05 0.00% $6.05 0.00% $6.05 $3.53 0.00% $3.53 56.00% $1.55
Tax Year 2015 Drug Stores Sales from 01/01/2009 to 03/31/2014 Drug Store Sales No. NBRHD PC Account Number Project Name Units Excise VC Sale Date Sale Price Price/Unit Assessed Value Ratio 1 8100503 590 3783-008-012-0006 Walgreens Kitsap Way 14,406 2011EX03007 M 06/15/2011 $ 6,225,000 $ 432.11 $ 2,564,990 0.41 2 8100503 590 3783-008-012-0006 Walgreens Kitsap Way 14,406 2012EX03298 M 06/26/2012 $ 6,750,000 $ 468.55 $ 2,564,990 0.38 3 8400302 590 272702-2-044-2006 Rite Aid - Kingston 18,187 2013EX05633 M 08/15/2013 $ 5,615,000 $ 308.74 $ 3,932,620 0.70 Single Tenant Retail Sales No. NBRHD PC Account Number Project Name Units Excise VC Sale Date Sale Price Price/Unit 1 8100502 590 142401-3-016-2007 NW Liquor and Wine 5,610 2013EX08642 V 12/17/2013 $ 650,000 $ 115.86 2 8400203 550 152601-4-098-2003 Courtesy SW of Edvard & Viking Wy 19,255 2013EX02159 V 04/10/2013 $ 1,400,000 $ 72.71 550 172501-3-092-2000 3 8401104 550 172501-3-100-2000 Destination Harley Davidson 910 172501-3-101-2009 36,826 2013EX08251 D 11/26/2013 $ 3,500,000 $ 95.04 4 8401606 580 352501-1-112-2008 Outback Steakhouse Restaurant 6,224 2013EX08882 V 12/27/2013 $ 1,200,000 $ 192.80 5 8401101 590 162501-2-078-2001 Wherehouse Music 590 162501-2-079-2000 Party City 590 162501-2-080-2007 La Z Boy Furniture 580 162501-2-091-2004 Applebees 49,608 2013EX03750 D 06/12/2013 $ 6,500,000 $ 131.03 6 8401101 590 162501-4-096-2005 Furniture Store and Sporting Goods 118,153 2013EX05260 V 08/05/2013 $ 10,050,000 $ 85.06 7 8401101 592 4489-000-009-0003 Plat of Central Kitsap Mall- Michaels + 592 4489-000-035-0001 Center 910 4489-000-037-0009 87,400 2013EX03749 W 06/12/2013 $ 9,500,000 $ 108.70 NBRHD Neighborhood Median $ 108.70 8100503 West Bremerton Mean $ 114.46 8100503 8400302 8401101 8401104 8401606 Kitsap Way Kingston Silverdale Central Kitsap Brownsville Highway VC Validity Code PC V Valid Sale 590 M Invalid - Other 592 D Not and economic unit Property Class Other Retail Trade Shopping Center -Community Out of Area Drug Store Sales No. Location Project Name Units Excise Sale Date Sale Price Price/Unit Cap* City County 1 Bothell Snohomish Walgreens 13,771 421565 11/05/2010 $ 3,735,000 $ 271.22 2 Hoquiam Grays Harbor Rite Aid - Hoquiam 17,363 E205323 04/10/2012 $ 6,563,330 $ 378.01 8.59% $ 32.47 3 Lake Stevens Snohomish Walgreens 15,004 1023797 04/01/2013 $ 9,294,605 $ 619.48 5.95% $ 36.86 4 Lake Stevens Snohomish Walgreens 14,891 E# 420490 10/18/2010 $ 7,276,697 $ 488.66 5 Lynnwood Snohomish Walgreens 12,043 1034520 06/28/2013 $ 5,890,000 $ 489.08 7.00% $ 34.24 6 Tacoma Pierce Walgreens 13,650 4279829 03/07/2012 $ 5,028,000 $ 368.35 6.86% $ 25.27 7 Spokane Spokane Walgreens 15,048 201203980 04/05/2012 $ 4,800,000 $ 318.98 8 Graham Pierce Rite Aid Graham 14,490 4313220 06/04/2013 $ 5,350,000 $ 369.22 7.38% $ 27.26 9 on King Rite Aid 16,892 2620059 07/25/2013 $ 6,645,000 $ 393.38 8.64% $ 33.99 Median $ 378.01 7.19% $ 33.23 Mean $ 410.71 7.40% $ 31.68 Out of Area Single Tenant Retail Sales No. Location Project Name Units Excise VC Sale Date Sale Price Price/Unit Cap* City County 1 Sequim Clallam Big 5 10,980 95501 07/03/2012 $ 1,700,000 $ 154.83 2 Tacoma Pierce Rite Aid in Shopping Center 21,878 4325804 10/24/2013 $ 2,365,000 $ 108.10 6.69% $ 7.23 3 on King Auto Zone 6,219 2644264 12/04/2013 $ 1,408,815 $ 226.53 4 Bellingham Whatcom PetCo 12,096 173833 11/20/2012 $ 4,050,000 $ 334.82 5.85% $ 19.60 5 Tacoma Pierce Pier 1 Imports 8,000 4298012 11/20/2012 $ 3,225,000 $ 403.13 6 lakewood Pierce Discount Store 41,431 4288237 07/12/2012 $ 3,950,000 $ 95.34 7 Tacoma Pierce Lazy Boy 21,920 4329895 12/27/2013 $ 3,050,000 $ 139.14 8 Tacoma Pierce Tacoma Lighting 11,685 4321968 09/06/2013 $ 810,000 $ 69.32 9 Tacoma Pierce O'Reilly Auto Parts 6,360 4325450 10/25/2013 $ 1,813,230 $ 285.10 10 Tacoma Pierce Hollywood Video/Subway 10,950 4283175 04/23/2012 $ 4,000,000 $ 365.30 11 Tacoma Pierce discount store/warehouse 6,653 4318182 07/29/2013 $ 900,000 $ 135.28 12 Tacoma Pierce Auto Zone 7,147 4300305 12/27/2012 $ 1,525,000 $ 213.38 13 Spokane Spokane Former CompUSA 21,947 201208221 08/07/2012 $ 3,000,000 $ 136.69 14 Seattle King Pet Smart 26,115 2631397 09/18/2013 $ 7,246,400 $ 277.48 15 SeaTac King Auto Zone 7,380 2595072 03/21/2013 $ 1,465,000 $ 198.51 16 Burien King Value Village 23,530 2578942 12/12/2012 $ 4,125,000 $ 175.31 17 Kent King Central Ave N Bldg 22,320 2622247 07/26/2013 $ 1,190,000 $ 53.32 18 Issaquah King O'Reilly Auto Parts 5,442 2635612 10/11/2013 $ 675,000 $ 124.04 Median $ 165.07 6.27% $ 13.42 Mean $ 194.20 6.27% $ 13.42 *Cap rates developed from net operating income (NOI) from listings applied to final sales price. G:\ASSR\comml\PROPERTY TYPES\05_Retail\RETAIL\MODEL DOCUMENTATION\15_Retail_Model_Documentation\15_Drug Stores2
No. Drug Store Listings Tax Year 2015 Drug Stores Sale and Lease Listings Location Price Lease Lease Source Project Name Units Sale Date Sale Price Cap City County Per Unit Rate Type 1 Issaquah King CBA 534520 Walgreens 15,120 Listing $ 7,100,000 $ 469.58 6.00% $ 28.17 2 Federal Way King Loopnet 18625637 Walgreens 14,446 Listing $ 6,798,000 $ 470.58 6.25% $ 29.41 3 Bremerton Kitsap Loopnet 18530885 Walgreens 14,490 Listing $ 7,724,000 $ 533.06 5.50% $ 29.32 4 Tacoma Pierce Loopnet 18139546 Walgreens & Starbucks 15,154 Listing $ 10,975,000 $ 724.23 5.63% $ 40.59 5 Burlington Skagit Loopnet 17518175 Walgreens 14,753 Listing $ 8,200,000 $ 555.14 6.50% $ 36.08 6 Marysville Snohomish CBA 529822 Bartell Drugs 14,300 Listing $ 6,192,500 $ 433.04 5.75% $ 24.90 7 Lynnwood Snohomish Loopnet 17943798 Walgreens Lynnwood 12,336 Listing $ 5,890,000 $ 477.46 7.00% $ 28.45 Median $ 477.46 6.00% $ 29.32 Mean $ 523.30 6.09% $ 30.99 Single Tenant Retail Listings No. Location Price Lease Lease Source Project Name Units Sale Date Sale Price Cap City County Per Unit Rate Type 1 Sequim Clallam CBA 517007 former Sears 13,000 Listing $ 560,000 $ 43.08 2 Sequim Clallam CBA 501714 former Rite Aid 22,645 Listing $ 7.00 3 Bellevue King CBA 475441 24 Hour Fitness 43,299 Listing $ 7,323,066 $ 169.13 8.25% $ 13.95 4 Federal Way King CBA 507013 former Bally Fitness 77,531 Listing $ 3,500,000 $ 45.14 5 Issaquah King CBA 513133 Big Lots 32,517 Listing $ 7,544,205 $ 232.01 5.28% $ 12.25 6 Redmond King Loopnet 17939743 former Ethan Allen 40,320 Listing $ 8,750,000 $ 217.01 7.37% $ 16.00 7 on King CBA 517909 former McLendon Hardware 35,936 Listing $ 4,000,000 $ 111.31 8 Seattle King CBA 522888 former PriceCo 38,384 Listing $ 6,750,000 $ 175.85 7.96% $ 14.00 9 Tukwila King CBA 527937 FedEx Kinkos 17,588 Listing $ 3,500,000 $ 199.00 10 Woodinville King CBA 537025 McLendon Hardward 18,928 Listing $ 5,710,000 $ 301.67 6.00% $ 18.10 11 Bremerton Kitsap CBA 509963 Boater's World 6,600 Listing $ 12.00 12 Port Orchard Kitsap CBA 408963 former Hollywood video 5,040 Listing $ 5.75 13 Port Orchard Kitsap CBA 526577 Bethel (Safeway) strip 7,510 Listing $ 22.00 14 Poulsbo Kitsap CBA 520608 former Hollywood Video 6,600 Listing $ 1,400,000 $ 212.12 15 Silverdale Kitsap CBA 237196 Long's 24,446 Listing $ 12.00 16 Tacoma Pierce CBA 507012 former Bally Fitness 67,200 Listing $ 4,000,000 $ 59.52 17 Tacoma Pierce CBA 521248 former Rite Aid 16,182 Listing $ 9.50 18 Arlington Snohomish CBA 511654 former Food Pavilion 66,730 Listing $ 5,500,000 $ 82.42 15.77% $ 13.00 19 Lynnwood Snohomish CBA 523926 Ritz Property 27,000 Listing $ 4,950,000 $ 183.33 20 Lynnwood Snohomish CBA 535607 Vacant 26,656 Listing $ 3,590,000 $ 134.68 21 Lynnwood Snohomish CBA 527341 Susumu Restaurant 6,428 Listing $ 1,290,000 $ 200.68 7.54% $ 15.14 22 Marysville Snohomish CBA 531672 Allen Creek Shopping 28,064 Listing $ 1 23 Stanwood Snohomish CBA 524854 former Ace Hardward 13,920 Listing $ 2,250,000 $ 161.64 9.28% $ 1 24 Spokane Spokane CBA 526138 former Ashley Furniture 58,202 Listing $ 4,995,000 $ 85.82 9.90% $ 8.50 25 Spokane Valley Spokane CBA 488973 former Hollywood Video 28,162 Listing $ 26 Olympia Thurston CBA 507010 former Bally Fitness 65,292 Listing $ 3,250,000 $ 49.78 27 Olympia Thurston CBA 531664 former furniture store 28,020 Listing $ 3,650,000 $ 130.26 28 Olympia Thurston CBA 526786 former Stack Furniture 28,020 Listing $ 3,650,000 $ 130.26 9.21% $ 12.00 29 Bellingham Whatcom CBA 535526 former grocery store 25,000 Listing $ 9.00 30 Bellingham Whatcom CBA 537315 Michael's 23,687 Listing $ 4,071,000 $ 171.87 6.34% $ 10.90 31 Bellingham Whatcom CBA 522299 Bakker Building 15,000 Listing $ 2,400,000 $ 160.00 32 Blaine Whatcom CBA 535367 former Rite Aid 31,456 Listing $ 10.00 33 Lynden Whatcom CBA 444639 former Rite Aid 20,122 Listing $ 7.00 Median $ 160.82 7.96% $ 12.00 G:\ASSR\comml\PROPERTY TYPES\05_Retail\RETAIL\MODEL DOCUMENTATION\15_Retail_Model_Documentation\15_Drug Stores2