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
Tag Archives: Market Value
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:
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
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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 ============================
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!
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,
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.