MARCH 16TH – I am seeing appraisal reports that have added an Extraordinary Assumption about the coronavirus. I was asked today by an appraiser if he should add such to his reports. My answer is Yes.
I won’t cut and paste what I have seen in reports. That wouldn’t be cool – and not ethical really. You can come up with something quickly. I would add this immediately.
The Mann
October 16, 2018 – The Federal Agencies have issued an updated guidance titled ‘Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines.’ This rescinds a similar document issued in 2005.
You can download this 14-page document at the following URL:
https://www.fdic.gov/news/news/financial/2018/fil18062a.pdf
Please pass this document along to your in-house appraisal staff and other bankers.
Reportedly, there are no significant changes. Simply, an update of a 13-year old document with some needed clarification.
August 9, 2018 – Over my 30+ year career, this question has come up every few years. When performing the Income Approach for a vacant or owner-occupied building (same thing), should there be discounting for the time and cost to lease it up?
My short answer is – Yes. However, I would say 99% of appraisers do not make such a deduction. Why not?
A few notes before I summarize a great response from an appraiser who does make the deduction.
First, America’s definition of Market Value assumes a sale occurs. Therefore, an owner-occupied property is vacant when it sells. That occupant moves out so either a new owner occupant can move in or third-party tenants can move in. I have long argued that EVERY house/condo in America sells vacant – regardless if the owner occupies it right up to closing or it is physically vacant beforehand. Of course, rental properties are the exception.
Second, the Income Approach assumes an investor owns the property and will lease it up to stabilization to third-party tenants. The Income Approach does not assume owner occupancy!
Therefore, a vacant or owner-occupied property has to be leased up to obtain stabilization that is assumed in the direct cap method of the Income Approach. Lease-up is not free and instantaneous that often. Below is the summarized response that was shared with me.
As always, I welcome your thoughts. Unlike our cultural and political world, differing opinions are welcome and will not be called ‘tone deaf’ or racist or some kind of phobic and so on:) If I get enough comments, I will do a follow up post.
(Oh, let me add that the Sales Comparison Approach will depend on what sales are used. If the comps were 100% vacant and/or owner-occupied, then the SCA already reflects such discounting for lease-up. If the comps were partially or 100% leased, then….hmmmmm….)
(Second oh….all of this is needed to determine one of the 3 highest & best use conclusion items – type of occupancy. Sometimes it is Owner Occupancy and other times it is Third-Party Tenants via an Investor owning the property.)
OK, finally to the Anonymous Appraiser Reply:
I agree with this logic. Even for non-FIRREA appraisals.
What does the market do? Well, that is answered in the Sales Comparison Approach as prices for vacant and/or owner-occupied properties reflect how an owner values the property or an investor values it knowing s/he has to find a tenant(s).
Thoughts….
The Mann
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,
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.