AUGUST 26, 2023 – Hopefully, it is a full liquidation bankruptcy and its 2300+ stores are closed down. For 30+ years, I have wondered why shareholders didn’t complain about the drugstore chains paying 500%-1000%+ too much for their real estate. The excuse that the business profits would make up for the real estate losses was BS.
I am aware of a situation about 25 years ago where one of the chains wanted a rural site that was worth about $100,000. They gave the site selector instructions to buy at any cost. The farmer that owned it didn’t want to sell and turned down offers of $3 million, then $4 million, on up to $10 million!!!! The market turned down and they ended up not buying any site in the area. But, to be willing to pay ANYTHING for a $100,000 piece of property was insane.
This bankruptcy may be due to the opioid lawsuits. But, it is needed just for the stupidity of real estate purchases over the past 30+ years.
There are modern day companies doing the same. Some pay too much and others land lease at obscene rates. A few years ago I reviewed an appraisal report where one big-name c-store leased a parcel of land that was just bought for $800,000. The capped land rental was $6mm!!!!! Again, why pay a rental rate that is 7.5x market!?!?!? I probably won’t be around to see these companies go bankrupt.
Call me insane for thinking you can buy your real estate at market AND have a profitable business.
Lastly, I hope all the appraisers that use 0% Vacancy for these national tenant leases realize how stupid that is. As I have said for decades, large companies have the best lawyers and can get out of leases easier than local tenants can. Divide the number of store closures over the past 20 years by the number of stores in the country and you probably have a good vacancy factor to use for these leases.
One of the reasons big-time investors have consistently overpaid for real estate by about 20% for the past 30+ years is assuming no vacancy loss. The other two items they underestimate in their assumptions are expenses and cap rates.
If appraisers really wanted to ‘reflect the market,’ they would come in 20% below the purchase prices for national tenant properties. Easy to do by using a realistic 5%-10% vacancy and 100bp higher cap rate.
Alas, it won’t happen. Market Price is what the market wants and what appraisers provide. At least we know for this property type, Market Value is 20% lower.
Shalom,
The Mann
Tag Archives: Market Value
THE CRE LOAN DEBACLE – FACT OR FICTION?
UPDATE – JUNE 16, 2023 – One lender contacted me and said a 300bp increase in mortgage rates has occurred. So, I wanted to update the analysis below accordingly. Most everything stays the same below. Loan amounts, Market Values, and LTVs do not change. The only items that change are the new ADS and resulting DSCR.
For Apartments/Industrial the DSCR declines from 1.3 to 1.2, which is where it was when the original loan was made. Again, I do not think this would present problems for refinancing.
For Office/Retail the DSCR declines from 1.13 to 1.05. Per below, the new LTV is 72%. So, there might be some work to do on refinancing these property types. Are the hurdles significant? I don’t think so.
Thanks to all that provided some feedback on this post.
JUNE 15, 2023 – Besides the media hanging the threat of a recession over our heads for the past year, they have jumped on the commercial real estate (CRE) loans are going to go bad by the millions and take banks down bandwagon. So far, the financial institutions I talk with have seen virtually no pain. Of course, the pundits would say, just wait, it is coming. As you probably know, I am a numbers man. So, let’s do some math. What you will see below is some property types should have no problem refinancing at the current interest rates and other property types should have a little struggle. Is there a HUGE problem out there? Per the math, I don’t see it.
APARTMENTS and INDUSTRIAL – 3+ years ago we had a property with $100,000 PGI. 5% Vacancy and 30% OER and we have an NOI of $66,500. Using common appraisal acronyms, so hopefully you know what they mean. At a 1.2 DSCR the Annual Debt Service (ADS) was $55,417. At a 4% interest rate and 20-year amortization, the Loan Amount was $762,084. At a 6% cap rate, the Market Value was $1,108,333. A 69% LTV.
In the past 3+ years, rents for these property types have increased by well over 30% in most markets. So, today we have a PGI of at least $130,000. Let’s reflect the market decline of the past year and increase vacancy to 10% (pretty crazy for these property types today) and increase the OER due to inflation increases expenses (albeit rents probably went up way more). Our current NOI is $76,050. At a 7% cap rate (rates are up about 100bp over the lows last year…might not actually be up from 3 years ago, but…we are assuming the worst-case scenario), the Market Value is $1,086,429. The original loan has been paid down to $682,750, resulting in a 63% LTV. Using a 6% interest rate (commercial rates are not up as much as residential rates) and 20-year amortization, the new ADS will be $58,697. The resulting DSCR is 1.30.
So, we are refinancing today and the LTV has declined from 69% to 63% and the DSCR has increased from 1.2 to 1.3.
I am not seeing how these borrowers, and lenders, will have any difficulty with refinancing loans that are 3-5 years old. For these property types.
OFFICE and RETAIL – I won’t bore you with the same narrative all over again. I changed the rent growth to 0% from 30%+. One could argue rents have declined for these property types. If you have evidence of such in your markets, then the scenario described here is better than you will experience. I assumed 20% Vacancy and 40% OER then and now. Those are relatively pessimistic.
The original loan was $550,073 on a Market Value of $800,000. LTV was 69%.
The outstanding loan balance is now $492,810 and the Market Value has declined to $685,714. The LTV is now 72%.
To refinance at 6% for 20 years, the new ADS will be $42,368. NOI has remained at $48,000. So, the new DSCR is 1.13.
Again, I am not seeing where the borrower or lender will have trouble refinancing this loan. If I didn’t make such negative assumptions about these property types 3 years ago (but, remember back to June 2020 and virtual all office buildings were empty and most retail stores were closed) and used a lower vacancy, it is likely the LTV increase and DSCR decrease would be a bit more. But, still not problematic.
I know the CMBS market is getting killed. However, in talking with my clients, their borrowers that own office and retail buildings have shored up the loans and there isn’t a feeling of much risk. I know for sure banks lend much different than the CMBS market.
As always, we shall see how this plays out. Note, the above is about income-producing properties. Business loans are a different story. Lots of businesses can fail and lenders take back CRE as collateral. But, the loan going bad had nothing to do with the CRE market.
Glad to receive comments as usual.
I now think I have emptied my queue of ideas to post about. As my brain never stops thinking, I am sure it will come up with something else to write about soon. All I have to do is look at media headlines and I will be triggered. lol
Shalom,
The Mann
PRUDENTLY CONSERVATIVE VALUE IS THE NEXT MORTGAGE LENDING VALUE
MARCH 14, 2023 – The European Union appears to be headed towards adopting the ‘Prudently Conservative Valuation Criteria’ (PCVC) in accordance with Basel III. The concept is similar to Germany’s Mortgage Lending Value (MLV). However, the EU didn’t want to simply adopt a German concept.
For those interested in the concept, please read the article on Pages 6-10 of the latest issue of the European Valuer.
https://tegova.org/static/ea861b1ab7eae74037bb22655c7bc2fb/European%20Valuer%20(29)%20March%202023%20(desktop%20version).pdf
As expected, they make it clear that market price (what American appraisers estimate) and market value (I only know of one American appraiser that has estimated such in an assignment) are often different. What is new to me is they say value and market value are different. I will need to read up on that myself.
In one of my other posts I recommend that the FDIC deposit insurance be terminated as a way to make financial institutions safer. Another way would be to mandate the use of Mortgage Lending Value (MLV) instead of Market Value.
I hope you find the article interesting.
Shalom,
The Mann
IT IS TIME FOR APPRAISALLAND TO FACE REALITY
FEBRUARY 3, 2023 – As I review appraisal reports, I continue to see appraisers remain in the fantasy AppraisalLand regarding cap rates and values. When asked about declining values and increasing cap rates, I get the NIMBY reply. No decline in our market. Must be occurring everywhere else:)
Although the GreenStreet CPPI is for investment-grade properties, it is still an indicator of the overall CRE market.
file:///C:/Users/Owner/Desktop/2023%202%20Feb%202%20-%20GreenStreet%20CPPI%20update.pdf
Overall prices have declined back to pre-pandemic levels. Have you been adjusting 2021 and 2022 sale prices downward at least 10%-20%? Have you been using cap rates 75-100bp higher than those shown in 2021 and 2022 sales? Are you forecasting residential lot and home price declines of 10%-20%+ (should be WAY more for finished lots) over the next 1-2 years? Have you adjusted absorption rates in 2022 downward 50%-75%+?
As me and my wife have joked for decades, in AppraisalLand every subdivision sells out quickly….office buildings in markets that literally haven’t seen vacancy rates below 10% since the 1980’s will lease up to 95%…on and on. Vacant land that has been for sale for 30 years will have a marketing time of 12 months. AppraisalLand is a very, very happy place to be in lol
It is up to reviewers to start pushing back hard on conclusions that don’t reflect current and future market conditions. Market Value is based on looking forward thru the windshield, not looking in the rear-view mirror. Data from the rear-view mirror must be adjusted to reflect current and future market conditions.
The above has been a broken record for my entire 36-year career. You would think the industry would learn from past cycles and change quickly when the market changes. It is not acceptable to wait until sales data is available to show the decline has occurred. Sales volume dries up in a declining market. By the time you have sales data the bottom has probably occurred and the market is starting to turn up. Reports like this one from GreenStreet provide the data needed to reflect current and upcoming market conditions. The data proving a decline has occurred and may continue is readily available. Use it.
I have a dream that one day AppraisalLand will no longer exist.
Shalom,
The Mann
DATE OF VALUE DIFFERS FOR APPRAISALS AND EVALUATIONS
JANUARY 8, 2021 – It only took the Interagency Appraisal and Evaluation Guidelines (IAEG) document being out for a full 10 years for me to be made aware of the difference in Date of Value for Appraisals versus Evaluations. As they say, you learn something every day!
For Appraisals, the IAEG states:
The estimate of market value should consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value. (emphasis added)
In my 35 years of doing appraisals and appraisal reviews, the ‘Date of Value’ has always been the last date the appraiser(s) inspected the subject. Usually, there is only one inspection and that is the Date of Value. Of course, this is for Market Value and Market Value ‘As Is.’ We are not talking about prospective values.
For Evaluations, the IAEG states:
Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions. (emphasis added)
‘The date that the analysis was completed’ is what us valuers call the Date of Report. The Date of Report can be the same as the Date of Value, but that rarely occurs. For appraisals, nearly 100% of the time the Date of Report comes after the Date of Value.
In conclusion, the IAEG wording indicates that the Date of Value for an Appraisal is what it has always been. However, the Date of Value for an Evaluation is the Date of Report.
For Evaluations, I have always assumed the Date of Report was also my Date of Value. I am not sure why. I just felt that my analysis did indeed go thru the day I was finishing the Evaluation. So, that was my Date of Value. Blind luck I guess.
As an aside, it has been suggested that Evaluators add an Extraordinary Assumption to their Evaluation Report that assumes no material changes have occurred between the date the subject was inspected and the Date of Report. Probably not a bad idea. I won’t digress into my rant that I don’t like including Appraisal/USPAP items (e.g. Certification, Hypothetical Conditions, Extraordinary Assumptions, et al) in Evaluations. It’s your Evaluation, do what you want to CYA.
Lastly, I have checked with the Regulators and sure enough this is a difference that was overlooked. Hopefully, in the next revision this will be addressed.
Happy New Year!
The Mann
ABOVE MARKET LEASES CANNOT INCREASE REAL PROPERTY VALUE
January 17, 2020 – I addressed this issue in a June 29, 2016 post. It is sad that almost 4 years later appraisers still do not separate the value of national tenant leases (almost always significantly above market) between Real Property Value and Intangible Value.
Recent examples I have encountered have been extreme. A proposed c-store ground lease had the land valued at $1,000,000 (based on numerous nearby land sales) and the lease valued at $4,300,000. Therefore, Prospective Value ‘Upon Completion’ (of the sitework) was $1,000,000 and Intangible Value was $3,300,000. Several ground leases to fast food restaurants weren’t as extreme. But, still the Intangible Value was over 100% of the Real Property Value.
Although I care less what the market does (See Mann’s Axiom), it is a common argument appraisers like to make when they are arguing that FF&E in Apartments aren’t separately valued by market participants (find me a Balance Sheet that does not have a Short-Lived Assets category…recent purchase contract I reviewed had FF&E separately discussed and one even placed a value on these items!) or national tenant leases sell based on the contract rent, et al. However, I came across the following standard wording in annual reports of several REITs:
Purchase Price Allocation
When we acquire real estate, we allocate the purchase price to: (i) the tangible assets acquired and liabilities assumed, consisting primarily of land, improvements (including irrigation and drainage systems), buildings, horticulture, and long-term debt, and, if applicable, (ii) any identifiable intangible assets and liabilities, which primarily consist of the values of above- and below-market leases, in-place lease values, lease origination costs, and tenant relationships, based in each case on their fair values.
So, that eliminates that argument:) In fact, the market does allocate value to above market rent to intangible assets. Case closed on this issue.
What was surprising to me was they also allocate the amount of value due to below market rent to (I assume) liabilities. That is interesting.
My post from 2016 is below.
Happy New Year to all. May 2020 be a great year for you.
The Mann
=================================================
Another item I have been shouting about for almost 25 years is the appraisal of drug stores, big box retailers, and other buildings leased to national tenants. Capitalizing these leases does NOT yield Market Value of real estate only. I may have been the only Chief Appraiser that required that the Market Value of Real Estate not exceed the Cost Approach indication with the additional value reflected by the Income and Sales Comparison Approaches having to be identified as an Intangible Asset. I admit that even allowing the Cost Approach indication to represent real estate value is being way too generous. These companies usually pay way above market for the land and the cost to build the improvements is absurd – I have seen costs for these basically shell buildings be more than medical office!
FIRREA and FDICIA require that 1) Market Value be of real estate only, and 2) LTV be calculated on Market Value of real estate only. We all know a shell retail building is not worth $300 or $400/sf as most drug stores have appraised at for 20+ years. Excluding the inflated land purchase price and using the real value of the land, these properties are lucky to be worth $100/sf in most markets. Yet, I am sure the vast majority of financial institutions have used the incorrectly stated Market Value provided by appraisers to calculate LTV and base their loan on. This is similar to those institutions that used, or may still use, Going Concern Value to calculate LTV.
Can we say violation of numerous federal regulations….but I digress.
All of this leads me to two recent articles that I believe finally end this absurd debate. I highly recommend you find the following articles:
David Charles Lennhoff, CRE, MAI, ‘Valuation of Big-Box Retail for Assessment Purposes: Right Answer to the Wrong Question,’ Real Estate Issues (Volume 39, Number 3, 2014): 21-32.
Stephen D. Roach, MAI, SRA, AI-GRS, ‘Is Excess Rent Intangible?’ The Appraisal Journal (Spring 2016): 121-131.
In my opinion, both authors prove beyond a shadow of a doubt that the excess rent present in almost all drug store, and similar leases, is not indicative of the market value of real estate. They use both theory and real data to prove their points. Mr. Roach sums up the logic better than I have ever seen (from page 125 of his article):
- “By definition, the real estate (a property) can produce market rent, but no more.
- By definition, excess rent exceeds market rent.
- By definition, excess rent is created by the contract, not the real estate.
- By definition, a contract is an intangible asset; it’s not real estate.
- Therefore, excess rent is intangible.
Each step in the argument is based on long-accepted definitions and concepts of the terminology.”
I challenge all of the Chief Appraisers in the country to step up and require appraisals of these properties to appropriately indicate the Market Value of REAL ESTATE ONLY with the huge additional amount above this figure being termed Intangible Value (or something similar). It is time both appraisers and lending institutions provide the correct value and LTV.
Plus, this will make the lives of us reviewers easier – it has been frustrating to lower the values 50%-75%+ all of these years! Of course, we could simply order these appraisals from the two authors above and have slam dunk reviews forever:)
MARKET VALUE ‘AS IS’ MUST CONSIDER EXISTING LEASES
February 21, 2019 – Every once in awhile the same question arises from several people in different parts of the country. I wonder if people attended the same seminar and were told the same (erroneous) information. Or just plain coincidence.
The topic du jour is bank/credit union clients asking appraisers to ignore existing subject leases and appraise Fee Simple Estate only. There are two main scenarios to deal with – one where such a request is not acceptable and one where it is.
Scenario #1 – The subject has one or more arm’s-length leases in place that are not all month-to-month or say expire within a month. I just use one month as technically the appraisal will be done by then and the tenants could be removed in that time period (assuming such is legal). In this case, Market Value ‘As Is’ MUST be of the Leased Fee Interest. The subject must be appraised as it legally and physically stands today. If the bank/credit union would also like to know the Fee Simple Estate value, then this can be provided IN ADDITION TO Market Value ‘As Is’ of the Leased Fee Interest. I would call this additional value Hypothetical Value of Fee Simple Estate. A Hypothetical Condition is needed as this value assumes the existing leases are not in place. Now, if the subject is leased to a single tenant and that tenant is purchasing the property…we go to…
Scenario #2 – The subject is leased to a single tenant who is purchasing the property. Obviously, when the purchase occurs the lease goes away. Or at least for us appraisers, it is ignored because now it is no longer arm’s-length. The bank/credit union’s request for Fee Simple Estate only is now acceptable. With a bit of a twist though….Market Value ‘As Is’ would still be of Leased Fee Interest. However, this value is not needed. Why? Because the loan is not being made until the property is purchased. Therefore, the appraiser provides a Prospective Value as of say a month or two in the future (whenever a closing is projected to occur). An Extraordinary Assumption is needed to say that we assume the purchase will occur and the lease will be extinguished in the stated timeframe. What about the requisite Market Value ‘As Is’ that FIRREA requires? Well, on the day the property is purchased and the loan is closed, the appraiser’s Prospective Value is now Market Value ‘As Is.’ And now FIRREA is satisfied and all is good in Appraisal Land:)
((As an aside, Scenario #2 is useful when a zoning change is in process. Until it occurs, Market Value ‘As Is’ must consider the subject as currently zoned. I encourage banks not to make the loan until the zoning change occurs. This way an appraiser can provide a Prospective Value ‘Upon Zoning Change’ with a future date and not have to deal with Market Value ‘As Is.’ But, if the loan is being made today, then two difference scenarios must be valued. Once again, the value difference might not be that much.))
There are likely some other less common scenarios that arise. But, the above two seem to take care of the vast majority of transactions.
I will quickly mention one scenario that provides an example of why Market Value and Market Value ‘As Is’ are not always the same.
The subject is leased to a single tenant with say 3 or 6 months left on the lease. The owner or a buyer is going to occupy the property once the lease expires and the tenant has moved out.
In non-bank/cu appraisals, Market Value could likely just ignore the existing lease. We could argue that market participants don’t care about the next 3-6 months of the tenant being in place. They know they will occupy the property very soon. This is ok for Market Value.
However, for a bank appraisal under FIRREA, this is not acceptable. The lease is in place and Market Value ‘As Is’ is of Leased Fee Interest and the lease must be part of the value. Obviously, if the rental rate happens to be at market, then there is no difference in value between the Leased Fee Interest today and the hypothetical Fee Simple Estate today. If contract rent is above or below market, then there is a difference in these two values. Admittedly, it is likely to be a small amount. But, it MUST be included in the Market Value ‘As Is’ conclusion. In this case, Market Value and Market Value ‘As Is’ differ. And this is one of several examples where USPAP and FIRREA differ.
As with FF&E, please do not pull the ol’ ‘this is absorbed in rounding and thus is not added or deducted’ routine. Make the addition or deduction to get to Market Value ‘As Is’ and move on.
Please contact me if you have any questions. Any other scenarios worth me addressing. et al. Thanks for taking the time to read my blog:)
The Mann
CAN WE END THE DEBATE ON VALUING NATIONAL TENANT RETAIL BUILDINGS
June 29, 2016 – Some people have bucket lists. I guess I was born to have a list of pet peeves:)
For 25+ years, I have tried to get our industry to identify the correct interest when appraising an existing apartment complex or any property with arm’s-length leases. It has always been Leased Fee Interest, not Fee Simple Estate. I can say that finally the majority of appraisers have come to recognize this. The ‘urban myth’ that we were taught (i.e. if leases are less than 12 months long and/or contract rents are at market, then the interest being appraised is Fee Simple Estate) is almost eradicated.
For 30+ years, I have identified the kitchen and laundry appliances (and any additional common area items that might be in a club house or such) in apartment complexes as FF&E. Til this day, many appraisers still think refrigerators, stoves/ranges, dishwashers, washing machines, and dryers are real estate! As a lady on TV many years ago said – Stop The Insanity!
Another item I have been shouting about for almost 25 years is the appraisal of drug stores, big box retailers, and other buildings leased to national tenants. Capitalizing these leases does NOT yield Market Value of real estate only. I may have been the only Chief Appraiser that required that the Market Value of Real Estate not exceed the Cost Approach indication with the additional value reflected by the Income and Sales Comparison Approaches having to be identified as an Intangible Asset. I admit that even allowing the Cost Approach indication to represent real estate value is being way too generous. These companies usually pay way above market for the land and the cost to build the improvements is absurd – I have seen costs for these basically shell buildings be more than medical office!
FIRREA and FDICIA require that 1) Market Value be of real estate only, and 2) LTV be calculated on Market Value of real estate only. We all know a shell retail building is not worth $300 or $400/sf as most drug stores have appraised at for 20+ years. Excluding the inflated land purchase price and using the real value of the land, these properties are lucky to be worth $100/sf in most markets. Yet, I am sure the vast majority of financial institutions have used the incorrectly stated Market Value provided by appraisers to calculate LTV and base their loan on. This is similar to those institutions that used, or may still use, Going Concern Value to calculate LTV.
Can we say violation of numerous federal regulations….but I digress.
All of this leads me to two recent articles that I believe finally end this absurd debate. I highly recommend you find the following articles:
David Charles Lennhoff, CRE, MAI, ‘Valuation of Big-Box Retail for Assessment Purposes: Right Answer to the Wrong Question,’ Real Estate Issues (Volume 39, Number 3, 2014): 21-32.
Stephen D. Roach, MAI, SRA, AI-GRS, ‘Is Excess Rent Intangible?’ The Appraisal Journal (Spring 2016): 121-131.
In my opinion, both authors prove beyond a shadow of a doubt that the excess rent present in almost all drug store, and similar leases, is not indicative of the market value of real estate. They use both theory and real data to prove their points. Mr. Roach sums up the logic better than I have ever seen (from page 125 of his article):
- “By definition, the real estate (a property) can produce market rent, but no more.
- By definition, excess rent exceeds market rent.
- By definition, excess rent is created by the contract, not the real estate.
- By definition, a contract is an intangible asset; it’s not real estate.
- Therefore, excess rent is intangible.
Each step in the argument is based on long-accepted definitions and concepts of the terminology.”
I challenge all of the Chief Appraisers in the country to step up and require appraisals of these properties to appropriately indicate the Market Value of REAL ESTATE ONLY with the huge additional amount above this figure being termed Intangible Value (or something similar). It is time both appraisers and lending institutions provide the correct value and LTV.
Plus, this will make the lives of us reviewers easier – it has been frustrating to lower the values 50%-75%+ all of these years! Of course, we could simply order these appraisals from the two authors above and have slam dunk reviews forever:)
FF&E – FIRREA vs. USPAP
January 7, 2016 – Below is a question I received followed by my reply. Happy New Year to all.
George – Hope your holidays were great and 2015 is finishing off strong. I was hoping to get your opinion on an item below.
It’s just how non-realty items are reported in the appraisal report. No change at all in the new USPAP – I’ve just been inconsistent in how I treat it. Sometimes I show a $ allocation, sometimes I don’t and just say it is included in the value and has a positive effect on value. Either way, I’m always clear on whether non-real property items are in the value or not.
So just trying to nail down exactly what is right or what USPAP expects. I’ve seen personal property treated many different ways and some appraisers still don’t say anything about it… USPAP doesn’t say much on the topic.
Thanks for any input!
As stated in Standards Rule 1-4, part (G): When personal property, trade fixtures, or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items.
My question is what is the extent of “analyzing the effect on value?” For instance, in a multifamily property with appliances necessary for continued operation, do we need to actually state the estimated amount that the appliances contribute to value or is it sufficient to note that the market value includes all personal property items which contribute to the market value? If the value needs to be broken down and allocated between real property and non-real property items – can the allocation be stated once near the beginning of the appraisal report or does the allocation have to be every place where there is a market value stated?
Just curious because I have heard several versions and I didn’t really see any Advisory Opinions on the topic.
============ MY REPLY ============================
Your question only exists because the ASB and AI and others won’t specifically address the various differences between USPAP and FIRREA.
The bottomline is USPAP does NOT require a value on the FF&E. Albeit, it would probably help all clients to know such. More info cannot hurt.
However, FIRREA DOES require values be allocated to FF&E and Business/Intangible Assets so that the appraiser provides the ONLY required value per FIRREA – Market Value As Is of REAL ESTATE ONLY.
So, when doing an appraisal for a Federally-Related Transaction, you MUST provide a value for the non-realty items. It has been that way since 1990/1991.
Where you place it….well that is up to you. But, technically, when you state Market Value As Is (as well as Upon Completion and Upon Stabilization) it should just be the Real Estate Only number.
However, 99%+ of appraisers state Market Value INCLUSIVE of FF&E and Biz Value and then have some kind of footnote or wording in parentheses saying ‘the above includes $1,400 of FF&E’. Something like that. They let the Bank do the math to get to the real estate only number.
So, you can do it that way and you will be in line with your peers. As I always tell appraisers though, if you want to stand out from the crowd provide what your client really needs, and in this case, state MV without the FF&E and Biz Value and then let the footnote say how much the FF&E and Biz Values are worth.
The reason banks need the Real Estate Only number is it is Federal law (FDICIA of 1991) that LTV must (!) be calculated on this number only. Any MV number that includes FF&E and/or Biz Value is worthless to a bank!
Now, for non-Bank clients you can forget all of the above. However, I still recommend providing the separate values.
I hope this helps.
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.
=====
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!
=====
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