Q: I own a small shopping center. It has a supermarket as the anchor tenant, six stores and a restaurant. The supermarket owner wants to buy the part of the property he occupies -- about two-thirds of total floor space. How can we determine a fair price for this part?
A: I think the best method is what appraisers call the "before and after" values. First, estimate fair market value of the remainder after selling the supermarket. The difference indicates a fair price for the supermarket part.
It's possible you'll discover that a fair price to you will not be fair to the supermarket operator. Hence, you'll both be better off keeping the shopping center under single ownership.
Q: What is a standby commitment? I've heard the term recently with respect to mortgage loans on real estate investments.
A: A standby commitment is a promise by a prospective lender to lend a sum of money at a future date on specified terms to a prospective borrower who normally promises to pay a fee for this commitment. (If there isn't a fee, there's no "consideration" and the lender's promise can't be enforced by the borrower.) The borrower gets a standby commitment because he wants to postpone long-term (permanent) financing (sometimes called a permanent "takeout") and he can't get short-term (usually construction) financing unless he has a lender standing by willing to lend him money long-term, if necessary.
Normally, the interest rate is significantly higher than that charged for long-term (permanent) loans. But the expectation is that the loan will not be consummated. Chances are, the borrower will secure long-term (permanent) financing or make other arrangements so that he won't have to use the standby commitment. Sometimes, however, interest rates increase so greatly between the date when a standby commitment is made and the time when it may be needed, that the interest rate on the standby commitment is less expensive than on long-term (permanent) financing. In that case, the borrower "takes down" the standby commitment.
Q: What is straight line depreciation?
A: It is depreciation which assumes that an equal amount of capital is recovered each year. (It may be for a period other than a year but it's virtually always a year.) To put it another way, the total depreciable investment to be recovered is divided by the number of years over which it's to be recovered. That amount of depreciation is allowed or allowable each year.
Earl A. Snyder, a realtor, appraiser and attorney who specializes in investment real estate appraising and counseling, answers questions only in this column. His address: 14909 Kamia Dr., Laurel, Md. 20810