The illusion of owning commercial real estate.

I recently read a fascinating article by Mr. Stephen D. Roach, MAI, that was published in The Appraisal Journal. The title of the article is “Is Excess Rent Intangible.” A Powerpoint presentation summarizing the argument he presents in the article may be downloaded here.

One of the important points Mr. Roach makes in the article is the ambiguity of certain definitions published by regulatory agencies and the general body of knowledge as they relate to the task of appraising commercial real estate, particularly commercial real estate that is leased. From my perspective, the hallmark of a good article is that, like a favorite movie, it prompts us to reflect. In reflecting on the article, I am revisiting thoughts I’ve had in the past regarding property ownership.

The constraints of time have prevented me from researching the issue but I’ve often heard that Native Americans had a much different concept of ownership. In a nutshell, their concept of ownership (or so the story goes) is that we belong to the land, rather than the other way around. This morning, I can’t help but believe that they were onto something. I am of the opinion that real estate, the material components of land and building materials, has no intrinsic value. What is valuable, or can be, are the rights associated with real estate. The valuation of these rights has become a hot topic within the appraisal community as national franchises contend that local governments are taxing them on the basis of a value that includes intangible assets.

I strongly agree.

For businesses, commercial real estate plays an incidental role in the production and distribution of goods. But the role it plays and the associated rights must be viewed from within a larger business model – a model that may result in intangible assets being taxed as real estate. For example, most people within the real estate industry readily admit that certain national pharmacy franchises will pay a premium, above market rents for buildings specifically designed to reflect their brand. Might this premium be the result of a willingness on their part to pay above market rates, knowing that the premium will be more than offset by the revenues from drugs they distribute from that location?

I say yes.

Kindly, Mr. Roach has agreed to an interview which I will publish in an upcoming blog post. In the meantime, I’d be interested in hearing your feedback. Please leave a comment in the section below.