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.
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 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.