JUNE 14, 2022 – It is rare that you see and know a peak is occurring as you speak. Three months or a year down the road it is easy to look back and see when a top occurred. But, while it is going on….that is difficult. Being in the forest makes it tough to see the trees.
There are 4 steps for the housing market (any market for that matter) to go from growth to decline.
Step 1 – Acceleration in appreciation begins to slow down. This occurred 6+ months ago.
Step 2 – This is occurring now. Annual home appreciation in June will be lower than it was in May. We will look back at May-June 2022 and see the rollover in annual appreciation. Essentially, acceleration has turned negative. Better to call it deceleration.
Step 3 – This is the opposite of Step 1. The steep upward slope of accelerating price appreciation now becomes a steep downward slope of slowing price appreciation. This will occur the remainder of 2022 and into 2023.
Step 4 – The final step occurs when the accelerating slow down (think of slamming on the breaks) takes the market from price appreciation into price decline. This seems a far way off. But, I think we might be in for a surprise and see declining home prices quicker than we expect. We shall see.
As an aside, Bitcoin (slightly below $20k) and Ethereum (around $1k) are nearing major lows. The next move should take both to record highs (4x-5x moves from these levels).
Shalom,
The Mann
Tag Archives: The Mann
HOUSING MARKET SHOWING SIGNS OF TOPPING
APRIL 14, 2022 – The housing market has been incredibly strong since the pandemic started two years ago. Prices are increasing at a record pace. The supply of houses for sale is at an all-time low. Of course, what goes up, must come down. But, when…Tops in financial markets take awhile to form. Bottoms are usually a spike panic low – a V-shape.
We are starting to hear of markets where list prices are being lowered in mass. With mortgage rates up from around 3% last Fall to 5% this week, the number of potential buyers has dropped by many millions.
It will take awhile for the momentum to slow, stop, and then reverse. But, the signs of this occurring are in place and starting to mount.
One leading indicator I follow peaked in the 1st quarter of 2006. This was a full 2.5 years before the Lehman Brothers event the public recalls as being the start of the last recession. Of course, the recession started in 2005 and 2006 and Lehman Brothers (and others that went under) was the end result of the decline that had already occurred. In fact, this indicator bottomed in the 1st Quarter of 2009 and turned up from there.
This same indicator peaked in early December 2021. It has declined 29% since then. That doesn’t mean home prices will decline this much. (For perspective, the leading indicator declined about 85% and house prices declined about 30%.) It just suggests a peak in the housing market is on the horizon. The Case-Shiller U.S. National Home Price Index topped out at the end of the 2nd Quarter in 2006. Just a few months after the leading indicator suggested it would. I think the current momentum is too strong to have prices turn down this year. In fact, it will be tough to have prices turn down next year. But, it is now a decent chance of occurring.
Economists will confirm that as the housing market goes, so goes the overall economy. If the housing market slows done and rolls over, expect the same for the national economy.
Shalom,
The Mann
FANNIE MAE STUDY CONCLUDES NO RACIAL BIAS IN APPRAISALS
MARCH 12, 2002 – Now, two studies of millions of appraisals by the American Enterprise Institute (AEI) and Fannie Mae have concluded that there is no racial bias in real estate appraisals.
For those involved in the industry, this comes as no surprise. It is essentially impossible for real estate appraisers to be biased. Probably 95% of the time the appraiser knows nothing about the physical characteristics of the borrower. Nearly 100% of the time the appraisal reviewers know nothing about the borrower. And ALL appraisals must be approved by a reviewer.
Also, the market sets prices and all appraisers do is analyze recent comparable sales and arrive at a value for the subject. Which, in purchase situations, is equal to or higher than the sales price 95%+ of the time.
Racist organizations like the Brookings Institution and others that are falsely complaining about appraisal bias need to ‘follow the science’ as they like to say. Scientific studies 100% conclusively say there is no appraisal bias.
Maxine Waters and President Biden owe the appraisal industry an apology. And so does the Appraisal Institute for not supporting its own members.
The real estate appraisal industry is the gold standard for an unbiased profession. We have been the independent referee for 80+ years.
Lastly, we all know about the Fair Housing Act, redlining, discrimination being illegal, et al. To say we need to be educated about such is ridiculous. If you have lived in America since the 1970’s, you know all about fair housing laws and what is and is not discrimination.
The true racists are those that accuse everyone else of being racist. These people need to be exposed and told where to stick their unfounded claims. They should be sued for slander and defamation, also.
Hey, Appraisal institute, get a backbone and stand up for your members! There is no legislation that can change 4,000+ years of economic theory. The appraisal industry does not need to make any changes. It is already fully diverse and inclusive of people of all socio-economic classes (I grew up in mobile homes and am Jewish….I have the low-priced housing and minority characteristics covered!). Remember, skin-color and the only two genders have nothing to do with diversity and inclusivity.
Shalom,
The Mann
STUDY CONCLUDES THAT APPRAISERS ARE NOT BIASED
JANUARY 8, 2021 – The American Enterprise Institute has published a study about the possibility that appraisers have intentional or even unintentional racial bias. Their conclusion is:
We conclude allegation that knowing the race of the applicant results in racial bias by appraisers on refinance loans is uncommon and not systemic. This same analysis supports the conclusion that unintentional bias based on race is also uncommon and not systemic.
You can find the article and link to the report at:
It would be nice if the racially biased Brookings Institute would issue an apology to the appraisal industry. But, racists have an agenda and do not apologize. Thankfully, there is access to actual data and entities like the AEI can analyze and report the facts.
Basically, it is simply impossible for the appraisal industry to be racial or gender biased. Probably 99%+ of the time appraisers know nothing about the physical characteristics about the borrower in residential transactions. Also, every appraisal report is reviewed and I would say near 100% of the time the reviewers know nothing about the borrower at all.
AVMs are often used in the residential arena and they know nothing about the borrower nor the subject’s neighborhood, et al. To them, data is data. Finding the best comparables is based on analyzing numbers. That simple. And for the most part, it is the same for human appraisers.
There is one group of people in real estate that can have significant bias. I won’t name them. You can probably figure it out. There might actually be a few groups involved in this arena that can have bias. That is not to say it is widespread and rampant.
For those who want to keep the ‘conversation’ going, provide the AEI report. You will see how fast the other side wants to stop the conversation and change the subject:)
Great work AEI. I hope they will now do a study about the 20 million whites that live in poverty and see what it is about their neighborhoods that is common and how action can be taken to improve their standard of living….and housing. At the same time, I am sure those solutions can help everyone that lives in poverty. Remember, poverty is colorblind.
The Mann
ENDING MARCH AND INTO APRIL WE GO
UPDATE APRIL 3 (EVENING) – Thankfully, a calmer week in the books. Nothing has changed regarding my market forecasts.
I did want to congratulate Morgan Stanley on correctly forecasting the 700,000 job losses that was reported this morning. That was an extremely difficult forecast to make and to nail it is impressive.
Oil was up 40% in two days. We will let it play out a bit more to see if a final low is in place or not.
It is becoming apparent that there will be some major changes in our world going forward. Hopefully, AirBNB and Uber are dead. Dining in at restaurants might be forever changed, too. How do we know that someone in the kitchen area doesn’t have the virus? Plus, the virus can stay around 2-3 weeks after a place has been thoroughly disinfected (per the Diamond Princess experience).
Grocery delivery will finally succeed. 25+ years in to its existence, telecommuting will finally go mainstream. Executive offices (now called shared worked areas, .e.g. WeWorks) should go back away. They are simply VIs as I have termed them – Virus Incubators.
Other VIs are apartment complexes (especially mid- to -high rise buildings) and large cities like New York and San Francisco. The denser the population the higher the rates of crime, disease, and numerous other issues. If people truly want healthy lifestyles, move to the suburbs or rural areas.
The changes will be interesting to observe. Everyone continue to be safe. Maybe next week will be more interesting regarding the markets.
Godspeed
The Mann
UPDATE APRIL 1 (EVENING) – You know you are becoming immune to the chaos when 1000 point days in the stock market are no longer shocking. Not much to add this evening. Stocks might be starting their next significant downturn, but it isn’t a certainty.
One thing to note is that all of the stimulus acts that are being passed are only trying to replenish what has been lost. There is no pent-up demand. Wealth and Output have been permanently lost. It is a misnomer to call these stimulus packages. No stimulus is going to occur. The money handout is simply trying to make as many people and companies as whole as possible.
I will say that it is about time that an infrastructure act is being considered. $2 trillion at this time. We missed the opportunity to do that in the last crisis. With an expected 45 million people being unemployed over the next month, it would be good to put people to work to build our versions of the Hoover Dam and TVA and so on.
I won’t bore you as there isn’t much to add to what I have already said. It is truly tragic that we will start seeing 3000 and 4000 Americans die each day. Amazing we will likely hit 100,000 deaths by the end of this month. And we just surpassed 4000 today.
Hopefully, we have learned a lot from this experience. The sad thing we have learned is that some people are plain stupid and some just don’t care about others. But, that is nothing new for the human species. A lot of the virus spreading is due to plain selfishness.
The upside is we have seen how good most people are. How we help each other out. It would be great if we continued that after this pandemic is gone. But, well before Election Day I am sure we will be back to a hateful 50/50 split country again. Tragic.
I will post Friday evening. As the markets are starting to calm down (well, to me they are getting boring already), I will likely post less frequently.
I did want to thank everyone that has been sharing information with me. The more I can absorb the better.
Please stay safe!
The Mann
MARCH 30 (EVENING) – As expected, our essential shelter in place recommendation has been extended thru the whole month of April. April has been projected to be the month where we finally peak in cases and start to see the curve flatten and rollover, hopefully.
I am confident the shelter in place will be extended to at least May 15th. Maybe until Memorial Day weekend.
Trump is right when he says people in this country want to live a normal life. Colds and the flu have never gone away. We live normal lives with them coming and going thru the population and seasons. I guess that will be the way with Covid-19, also – when we have a vaccination. That is supposed to be 12+ months away.
There is a point where we just have to get back to normal and deal with the Covid-19 cases and deaths. There is no choice. But, we had to do this Social Distancing in this initial phase so as to avoid the 2,000,000+ deaths that were projected if we did nothing.
Continue to be safe. And take advantage of the world being on a long time out. I always wanted things to slow down. To stop. Time to stand still so we could relax and smell the roses. Now is that time. This likely will not happen again in our lifetime. Take advantage of this. Reduce your stress, permanently. Learn that things do not need to be rushed. Do all of those things you stacked up to do when you finally had some time to do them. You have that time now!
As for the stock market, today was up a bit. I still cannot rule out a move above last week’s high of 22,595. Whether or not that occurs, the expectation of a 25%+ decline remains. I took advantage of the rally last week to get out of some oil stocks I stupidly got in too early. We all make mistakes eh:) But, best to cut your losses than let them ride.
Oil broke below $20 today. I believe we are seeing the final down wave to what might well be the end of a 120-year combined bull and bear market. I haven’t followed up on the timing issue mentioned last week. So, just sitting on the sideline and watching the crash continue.
Gold and silver didn’t do much. Significant declines are still expected. That is a bit longer-term view so this isn’t a day-to-day forecast.
Everyone went crazy about the US Dollar being so strong. So last week, I believe, was one of the worst weeks ever for the USD. The markets love to get everybody to one side of the ship before sinking them.
So, nothing has changed re my forecasts. The markets are starting to trade in a bit of a range. This helps alleviate all of the record oversold readings for technical indicators. We can’t go straight up to infinite nor straight down to zero. More Wednesday evening when I post next.
I will drop this after one more mention of it….I don’t recall firefighters and police whining after 9/11. Those people were proud of the fact that their peers ran straight into those towers to save as many people as possible. I don’t recall them saying they were like lambs being led to the slaughter. They were true heroes. They know every day they go to work could be their last. They don’t ask for sympathy.
So, I just don’t get it, and am truly disgusted by, the doctors and nurses in New York complaining about everything…we are risking our lives, we are overworked, whine whine. They are truly ruining the appreciation they would get and deserve. Maybe they just aren’t as tough as firefighters and police officers. That isn’t in doubt really. If you didn’t think you were going to be in many situations where you could become very sick or die by helping others, you shouldn’t have become a healthcare provider. Thanks to the majority that do their job proudly and don’t whine in hopes of getting pity.
And as to us real estate appraisers arguing that what we do is essential….really? An appraiser friend in Puerto Rico said they ruled it wasn’t essential. I agree. Albeit, I was happy the appraiser came out and appraised my daughter’s farm today so hopefully her closing will still occur in 2 weeks:) But, truthfully, this isn’t an essential service. Closings can be pushed back 2-3 months like everything else.
Enjoying life on the 5/3 Farm…..til Wednesday evening….be safe and stay well.
The Mann
THE DECLINE IS NOT COMPLETE
MARCH 18TH (EVENING) – The DOW closed below 20,000 for the first time since 2017. Today’s low was 18,917. Nothing occurred in the last two days that would change my range forecast for an intermediate bottom. All I can say is further declines are ahead.
And this is a way too long post. But, I had lots of things on my mind:)
I saw an indicator that may be useful in telling us when an intermediate bottom is occurring. I will share this one with you so you can follow it yourself. Go to this web page:
https://www.etf.com/etfanalytics/etf-fund-flows-tool
There is a table for the Top 10 Creations (aka inflows, people buying) and Top 10 Redemptions (aka outflows, people selling). Then look for the Vanguard S&P 500 ETF (VOO). Incredibly over the past two weeks people have BOUGHT over $12 billion of this ETF. In the first phase of a Bear Market, the public buys the dip thinking the market will rally back to new highs. This is when the Smart Money sells their holdings to the public so they get caught holding the bag as Joe Granville would say. When you see VOO in the Redemption column, then we might be near a significant bottom. When VOO is being sold in HUGE amounts then we know the public has thrown in the towel and never want to own stocks again. Remember that for every transaction there is a buyer and seller. So, when the public finally caves the Smart Money will be buying everything the public dumps.
Another indicator many traders follow is called TRIN. I won’t explain it here (I am sure somewhere on the web it is explained). But, amazingly, this indicator is at a level seen at market tops. Not market bottoms. Like VOO above, there is massive buying going on. There is no panic. All the way down people have been buying and buying. In fact, two friends told me their advisors said to just keep buying as the market declines. Those advisors get paid for such brilliant advice:( For those who know about TRIN, when we see 5-day average readings over 1.60, then we start looking for a bottom to occur.
Some items of note. As of today you can pay the government interest to hold your money for 4 weeks to 3 months. Negative interest rates have arrived in America. I do hope banks will soon pay us interest on the loans we get from them:)
I saw this information from an automobile expert and wanted to add Auto Dealerships to the list of commercial properties that will likely see significant closings and bankruptcies. If all auto dealerships are forced to close (like many other retail establishments….and supposedly one state has required dealerships to close, already) for 1 week, it will cost the car industry $7.4 billion and 94,400 American jobs. The government will lose out on $2 billion in taxes. But, that is now insignificant when trillion dollar bailouts are being handed out.
Remember that is only one week of closure. As we have seen, closures are much longer than that. Banks need to be looking at their floor plan and real estate loans immediately. As I have tried to explain for almost 30 years, an auto dealership is never the highest & best use of a site. It is an interim use from the day it is built. This special purpose property type is going to result in a lot of losses for lenders. It is time to get those loans in order.
As for auto stocks, it is likely all of them will go bankrupt. If I recall right, only Ford did not go bankrupt in The Great Depression II ten years ago. I wonder how the people that bought the great Tesla stock at $969 feel with it hitting $350 today. I wouldn’t be surprised to see it fall another 50% and hit a new annual low below $175.
Almost no one pays attention to parabolic patterns and what happens when they occur. I learned about this from one of my idols, Joseph Granville, back when I was a teenager in the 1970s. Essentially when something has a blow off parabolic rise it gives up the entire gain when it crashes. Or at least say 85%-95% of its gains. There are probably hundreds of stocks that have graphs showing a parabolic rise and this subsequent crash.
Oil crumbled right thru $25 and bottomed near $20 today before having a dead cat bounce back to $23 at the close. I believe it was yesterday that Morgan Stanley said that oil would hit $30. It closed at $28. They get paid the big bucks to provide such wonderful advice:)
As for the China Virus, an American in Wuhan said only one new case has occurred in the past week. Wuhan is basically back to normal. And China did nothing like the USA has done to slow this virus down. So, I am wondering if a month from now we will see optimism as the number of cases rolls over and starts to decline. Maybe Tax Day will have a bit of silver lining. The next two weeks will be bleak as the number of cases soars due to tests finally occurring. But, a month from now we may see a light at the end of the tunnel that is not a train coming at us. Always think ahead.
A few side thoughts. First, this crisis should set globalization back many decades. I think countries, especially America (finally!), realize the importance of not relying on other countries for critical goods. Of course, most countries are small and have no choice. But, for America to let Asia take over production of so many items is (you fill in the word). Because of globalization the average American wage has not increased for 50 years in real terms. It is all about greed – corporate greed and individuals having the desire for everything they buy to be cheap (or even free!) but wanting to get paid more and more. We can’t have it both ways.
Second, the China Virus might have finally made telecommuting a significant reality. 25 years ago my MBA group wrote a paper that telecommuting was not going to take over as was being projected at the time. The experts were saying that by the Year 2000 most people would be working at home. We argued that the human species was a social animal and wanted to deal with each other in person. We were right. In the past 5 or so years many companies have changed their policies and required all employees to come into the office. It might have taken an annoying little virus to finally make working from home go mainstream.
I wanted to give a shout to a few friends (not by name). One told me a month ago to get ready for martial law. I believe his prediction will come true any day now. Even the California Governor said today he has the right to invoke such. I believe the ONLY way to stop this virus is to lock down the entire country. People just aren’t listening to what they are being told to do. Of course, the leftists will say yep we told you Trump wanted to be a Dictator:) As Ron White says, you can’t fix stupid!
Another friend said he bought some S&P 500 Puts and was up 10x. That was yesterday, so he is up more after today. It is good to know someone plays the downside. Options are extremely difficult to trade. It is pure gambling (as my mentor said, the stock market is the world’s largest casino). I would not recommend trading options to anyone. You can buy ETFs that are short the stock market or industries or many things. And there are 2x and 3x ETFs that will magnify the move by those factors. Unlike options, ETFs do not have time decay working against them.
It is always easier to make money in a Bear Market than it is in a Bull Market. But, 99% of the public never plays the downside. And every time we have a Bear Market people start screaming to make short trading illegal. Too funny. It is ok for insane buying to push markets to unsustainable levels. But, it is not ok for people to push the market back to fair value and then down further to bargain levels. Stop complaining and learn how to play the game or get out.
Some of you have passed along information on the few people that predicted this downturn in advance. I sincerely appreciate it.
As for investments, I obviously cannot give any specific advice. This blog just provides my thoughts for all to see. It helps me get things in print. It reminds me of things to watch for (like VOO and TRIN). And it actually does help some people with their investment decisions.
Thankfully, my wife and step-daughter listened last August/September and let me put their retirement 100% in cash. I think the only time they listen to something I say is when it is about the stock market:( They missed the last 10% of the Bull Market. But, they have had no worries in this crash. And we have enough toilet paper, so no worries outside the market either lol As I tell people, I do follow my own advice with my investments.
Lastly, my step-daughter is selling her horse farm (hopefully, it closes in 3 weeks). Great time to sell. She has been looking at houses to buy right away. I am thinking she might want to hold off until Fall. By then, many local businesses will have failed. Few people will be buying this Summer. Sellers should become desperate. I am seeing my thoughts about residential real estate start to form as I write this.
I remember the only good buy my wife and I ever made was in 1992 when we saw a house for sale in a neighborhood we liked. Doing some research (before the internet was used for such) we found out the owners were losing the restaurant they owned and needed to sell and move in with their parents. We offered almost 20% below the list price and our realtor said don’t hold your breath. We said give them the offer and tell them they have til 11pm tonight to make a decision. We got a call at 10:30pm that they accepted the offer straight up. Every other house we ever bought we lost money on:( Typical of many of us appraisers eh:(
Don’t be afraid to buy low. It is the best way to make money:)
My email is GeorgeRMann@Aol.Com
Yell anytime. Pass my blog along to anyone you want.
Please stay safe. Take extra precautions for the elderly and sickly. Go out of your way to buy what they need for them so they don’t have to go out in to the public and risk their lives. Remember to sanitize everything you do buy for them before they touch it.
It is better to give than to receive. Pass it forward.
Godspeed
The Mann
FRTs – Federally Related Transactions
February 25, 2020 – Most of us know which loans are classified as FRTs. The loans that have caused confusion are those that are under the various threshold levels. Are those FRTs or non-FRTs? So, here is a short explanation that will hopefully be of assistance.
We start out with everything being a FRT.
Then we see if any of the 12 or 13 exemptions apply. Here we fork in two directions.
1. For the 9 exemptions where neither an appraisal nor an evaluation are needed (e.g. Abundance of Caution, Unsecured loans, loans sold to FNMA/Freddie et al), those transactions are outside of FIRREA entirely and thus are not FRTs.
2. For the 3 or 4 exemptions that do not require an appraisal, but require an evaluation, these loans also are NOT FRTs. However, federal regulations still apply as they cover what is needed in the evaluation realm.
The federal regulators only care about evaluations being done by a competent person and providing safety and soundness to banks/CUs. The December 2010 IAEG is NOT law and, thus, although it addresses who can perform evaluations, the content of evaluations, et al, none of that matters to the bank examiners. The only requirements in the law itself is that someone competent perform these (can be a licensed appraiser or not a licensed appraiser) and the resulting report provides what is needed for safety and soundness to be met.
So, it is left to the courts to decide debates on whether states can require that only licensed appraisers can perform evaluations. Although federal regulators believe states have this right, they recognize that the preemption argument can be made and judges might see it that way.
It obviously would be nice if things were not left to various judges to give different rulings. However, that is not the situation we have to live with.
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
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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:)