Category Archives: Reviewer Thoughts & Tips

The main attempt of this blog is for me to give back to the real property valuation industry. I can’t take my knowledge with me when I leave this world. So, my goal is to share everything I know through writing articles, teaching classes and seminars, and this blog.

I usually receive several questions a week from fee appraisers, appraisal reviewers, and chief appraisers regarding appraisal reports, FIRREA, or USPAP. Hopefully, these will provide most of the content for this blog. In this way, we can all learn from the same issue under discussion. Obviously, items will be redacted as needed to maintain confidentiality.

If I hit a lull in inquiries, I have a huge treasure trove of topics to draw on. I will try to discuss interesting topics I have encountered in international reports. It is a neat world out there and us American valuers should be amazed at how the rest of the world handles various items.

Yes, I will give my interpretation of FIRREA and USPAP. Everyone knows I am not shy. However, to CYA, I need to give the standard verbiage that my interpretations are not legal interpretations….they have not and cannot be approved by examiners and regulators. Each Bank should contact their specific examiner and/or the appropriate regulator in Washington DC that interprets FIRREA.

Market Value As Is is not always the same as Market Value

August 24, 2015 – I had this email exchange with a review appraiser today.  This is one of the situations where Market Value As Is and Market Value can differ.

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George,

I have a question regarding an appraisal that I am reviewing if you have a moment to help me out.  I am overthinking this and now can’t decide which is correct.
Background info:  The property is a large (100,000 SF) multi-tenant industrial building.  The client asked for “as is” and “as stabilized” values in the engagement letter.  The building is currently 30% vacant and the appraisal estimates stabilized to be 15%.  The appraisal also states that the building will achieve stabilization within the year.  Four of the tenants have rent increases within the next 12 months.  The appraisal utilizes the current rent roll at current rent levels, but increases the four tenants to their future rate.  In addition, rent for the vacant space is estimated at market levels.  Using these parameters, PGI is estimated.  Vacancy is set at 15%, expenses are subtracted.  The appraisal then has two below the line expenses for tenant improvements (assuming a 10-year amortization) and leasing commissions.  The resulting figure is capitalized into a value which the appraisal calls “as is”.  The appraisal further states that this is also “as stabilized” because the property will be stabilized within the year.
Here is where I feel that I’m over thinking this.  I know that the Income Approach is based on the principle of anticipation and that future income is to be considered.  So is the “as is” value the rent roll at current rent levels with no consideration toward the rental of the vacant space and no bumps in rates for the 4 tenants?  Or is the application noted above correct give the anticipation of future benefits?
I find it hard to believe that the “as is” and “as stabilized” can be the same value since the property is not currently stabilized.  However, given the principles of the Income Approach I can also see how this could be so.
Sorry for the long email.  I would appreciate any guidance you can give me on this.  I value your input.
On a side note, I have enjoyed reading your website and blog; very informing.
Thanks!
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Hi ABC,

Thanks re the blog….appreciate it.
Regarding the As Is Value, the appraiser is wrong.  For a Market Value appraisal (non-Bank client), s/he may be right or wrong.
As Is means just that.  Deductions MUST be made for leasing commissions to go from 30% to 15% vacancy.  TI for that same space.  And lost income during the 12 months the space is leased.  And of course discounted for time.
The December 2010 Interagency Guidance states the following:

Partially Leased Buildings – For proposed and partially leased rental developments, the appraiser must make appropriate deductions and discounts to reflect that the property has not achieved stabilized occupancy. The appraisal analysis also should include consideration of the absorption of the unleased space. Appropriate deductions and discounts should include items such as leasing commission, rent losses, tenant improvements, and entrepreneurial profit, if such profit is not included in the discount rate.

I tell appraisers MV As Is different from Market Value.  In a general MV appraisal, MAYBE (only maybe) might the market not make deductions if they think all will be fine within a year.  Personally I would make deductions if buying your subject property, but optimistic investors may not.
However, for As Is appraisals the deductions MUST be made.
I think it would be fun for you to ask the appraiser for a list of names and numbers of people s/he talked to that said in a case like this they would not make any deductions for LC, TI, and rent loss.  Simply say you would like to talk to market investors and better understand their viewpoint:)  I seriously doubt you will be provided with a list of such contacts.
I hope this helps.
George

It Has ALWAYS Been Leased Fee Interest

Following is a recent conversation between a bank review appraiser and a fee appraiser:

Dear Fee Appraiser,

A review has been completed on your appraisal of the Apartment located at XYZ in City, ST and am wondering if you could provide some clarity in the following area:

I am wondering how the property rights appraised can be Fee Simple, when the subject apartment building is not vacant.

Thank you for addressing this item. Please make any necessary revisions and return a revised report to me at your earliest convenience.

Thanks.

Review Appraiser

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Mr. Review Appraiser,

The subject property has current contract rents on a very short-term basis (most are month-to-month), and the rental rates at completion are based on market rental rates.  In both analyses, market rental rates are utilized (see Page 78).  Therefore, the market value opinion is fee simple.  If contract rental rates are market rental rates, the fee simple and leased fee values are essentially equivalent.

The report date has been changed to the current date to comply with USPAP.  Thank you for your input.

Sincerely,

Fee Appraiser

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Mr. Fee Appraiser,

Your prompt response has been greatly appreciated.

Please refer to an explanation regarding the leased fee interest on Page 114 of the Appraisal of Real Estate (13th edition) as follows:

“The lessor’s interest in a property is  considered a leased fee interest regardless of the duration of the lease, the specified rent, the parties to the lease, or any of the terms in the lease contract. A leased property, even one with rent that is consistent with market rent, is appraised as a leased fee interest, not as a fee simple interest  ……”

If the contract rent is the same as the market rent, the leased fee value becomes equivalent to the fee simple value, not the other way around.

Thank you in advance for your quick follow up on our request.

Thanks.

Review Appraiser

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MANN’S COMMENTS

Geez, for almost my entire 29+ year career I have had to deal with this error made by many appraisers.  Thankfully, over the years, fewer and fewer appraisers think lease terms have anything to do with the property interest appraised.  OCCUPANCY is essentially all that matters in this determination.

The quote the reviewer presents from the 13th Edition is 100% on target.  In fact, it sounds exactly like my response over the past 20+ years….since I contribute to the each edition of The Appraisal of Real Estate and this is a pet peeve, the odds are those are words I wrote.  Obviously, I like them:) lol

I have had exactly ONE existing apartment complex appraised as Fee Simple Estate.  It was a 200-unit apartment project in Orlando in 2007 that had been vacated for condo conversion and the market crashed and that did not happen.  In that case, the owner could immediately occupy all 200 units, if they so desired.

Another item the above fee appraiser assumed, that is likely in error, is that the subject contract rents were all at market.  Once an existing apartment property is a few years old, it is near impossible that all of the contract rents are at market.  My experience is actual income from contract rents is typically 5% to 25% (!) below the hypothetical market rent at 100% occupancy – this is often termed Economic Vacancy….and often not accounted for by many appraisers.

I encourage all appraisers to simply read the definitions of Fee Simple Estate and Leased Fee Interest.  It is clear as day that lease terms are not mentioned.  Also, note this nitpicky item – only Fee Simple is an ‘Estate’ – everything else is an ‘Interest.’  Why?  I don’t know.  I just had this pointed out to me while on The Dictionary of Real Estate Appraisal committee.

This is a long first post….but, I want to thank the Chief Appraiser who shared this item with me and allowed me to redact the emails and post the conversation above.  I look forward to doing this on an ongoing basis.  My hope is all of us can learn from these situations – fee appraisers, review appraisers, newbie fee and review appraisers, bank credit employees, et al.