Appraisal Scoop

The Sell Off of Commercial Real Estate Begins

Author: Warren K. Hoppke, SRPA  - Principal of http://www.appraiservalues.com specializes in Los Angeles commercial and industrial real estate. He provides full real estate appraisal services throughout Southern California, including mortgage lender reports and detailed forensic appraisal reporting requirements for court testimony.

As Wall Street reels from major losses many cash starved Wall Street firms, financial institutions, and some insurance companies are scrambling for capital to shore up struggling balance sheets. Liquidation of real estate assets will be one of the first places firms will look for cash.

Prices are on the decline and many firms will soon be in the market hocking their commercial real estate in trade for cash. To top it off, unemployment has doubled over the past year and continues its upward spiral.

This double whammy will result in investors placing upward pressure on capitalization rates as vulture funds hover around looking for fire sales on commercial real estate. Unfortunately, one feeds on the other and as Wall Street layoffs start commercial office and industrial markets will be hit.

For example GE has been selling off its commercial real estate and many other cash strapped corporations and financial institutions will follow. Credit has contracted by almost 400 billion dollars. As credit contracts it has a multiplier effect. The multiplier effect can be 3 to 4 times the amount of the contraction. As Leman Bros. goes under approximately $150 billion of bonds will default.

As reported by AFX News Limited, besides banks and other financial institutions pension funds have been among the top investors in mortgage backed securities (MBS) and collateralized debt obligations (CDO). After years of channeling money into MBS and CDO portfolios of mortgages bundled and sold as debt securities the total size of pension fund securitizations are massive. Thomas Martin, president of the Homeowners Consumer Center estimates pension funds will take a 1 trillion dollar hit from devalued securities.

The nations largest public pension fund the California Public Employees Retirement System (CalPers) could take a hit as large as their $2 Billion dollar residential mortgage portfolio.

Has the Great World Wide Depression started ?

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10 Keys To Successful Tax Assessment Appeals - Twelve Part Series

John Simpson, MAI has authored 4 books with the Appraisal Institute and 12 Appraisal Journal articles, but that’s just a part of his monologue. He helps run an appraisal firm, and has been an active day-to-day commercial appraisal for almost 2 decades.

John Simpson, MAI has done an excellent job of identifying many of the key rules of successfully appealing property in his recent 12-part series - Simpson's Keys to Successful Tax Appeals - on his Appraisal Matters blog.

As a commercial appraiser for a township assessment office in Illinois, I can attest to the validity of his remarks!   Although his series of articles focus on commercial property appeals . . .the same rules will apply to residential income properties and even single-family homes. 

Here's a brief summary of his series:

Keys to Successful Tax Appeals - Part 1 - With the current well-publicized real estate problems, tax appeals have become more viable for commercial property owners.  The bottom line is a lower property value, yet real estate tax assessments have not been reduced accordingly.

Keys to Successful Tax Appeals - Part 2 - Key 1 – Know the Rules Before You Play -
Although this may seem cliché, not knowing the jurisdiction’s tax assessment and appeals rules can derail a tax appeal well before it even has a chance to be heard.

Keys to Successful Tax Appeals - Part 3 - Key 2 - Avoid “Protective” Appeals - In the last few years, it has become more common for clients to file protective tax appeals on all owned properties. This is a practice that can severely backfire

Keys to Successful Tax Appeals - Part 4 - Key 3 – Know Your Market and Submarkets - Although you may not be an expert, you can call upon experts to learn about your market. Brokers have their fingers on the pulse of the market and they are often more than happy to provide you with truly comparable properties for comparison . .

Keys to Successful Tax Appeals - Part 5 - Key 4 – Always get the Assessor’s worksheet - The Assessor’s worksheet is a document that shows how the Assessor arrived at the market value a property. Many times, the addresses of the comparable sales are included and sometimes operating expense comparables and capitalization rate comparables are shown.

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Verification of Data: Understanding Buyer-Seller Motivations

AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training.   

I received a private email this morning on the verification step of the Direct Sales Comparison approach and started to respond privately, then realized it was this type of question that spurred creating the InlandCAAppraisers Forum at Yahoo Groups. That, along with an encounter with an appraiser in denial about what the Housing Market was doing. That was 2-years and 19,930 Messages ago.

Here was this morning’s question: “I would like to pick your brain on some of the most informative questions to ask agents (market participants) during research and verification when doing a commercial property.”

There are two elements to verification, transactional, and physical. Transactional deals with motivations of the parties, terms and conditions.

Often when appraisers do verifications, they concentrate on Price Point verifications, not on the transactional aspects. Yet it is the motivations of the parties and understanding whether they were normal or one party was under some kind of pressure or duress that can make a large difference in the price.

We have seen properties sell at a discount because of the owners timing needs. I once had a man that I had been prospecting call me on a Monday and tell me he was ready to sell but he had to close by Friday. We did the deal, putting it in escrow that day at a 17% discount from what I thought it was worth. Other times it is as simple as the buyer being an adjacent owner that needed the property and paid a premium. We have seen more than 20% premiums paid by adjacent owners.

The point is that Motivations can make big differences in the Sales Price. Getting to an understanding of them, cannot really be done by reading our data sources.

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Say Goodbye To The Gross Income Multiplier

You may be familiar with the gross income multiplier. This simple formula for determining the value of rental real estate has been around for ages.

The first book I read on investing in real estate advised me to "never buy a property with a GIM of more than 8." GIM is the acronym for gross income multiplier, of course, and the formula is this: divide the price by the gross annual rents to get the GIM.

In other words, the author was advising me to never pay more than 8 times the annual rent for a rental property. That seemed simple enough. I started looking at properties in terms of GIMs. If it was selling for 6 times rent it must be a good deal. If it was 12 times rent it had to be bad. It was great to have such a simple rule to follow - except that it never was a good rule to begin with.

Using a gross income multiplier is a crude way to put a value on a property. It is just too simplistic. Suppose two buildings each are selling for eight times their gross annual rent collections. One however, includes all utilities in the rent that tenants pay. That changes things, doesn't it? Of course, you could try to subtract out the utilities, to see what rents would be if they weren't included, and use that for the GIM. But that's not the only problem.

You need to constantly change the GIM expectations to reflect interest rates, because a property might be profitable at 12 times rent when interest rates are low, but a money loser at eight times rent if the financing is expensive.

Also, there are just plain different expenses for different properties, whether higher maintenance costs, insurance premiums, or whatever. Gross rent doesn't say much about the factor that really makes a rental property valuable: the net income.

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Appraisal and Market Analysis of Indoor Waterpark Resorts

The appraisal of an indoor waterpark resort requires analysis and expertise beyond what is required for the appraisal of a typical hotel or other commercial real estate property.

Unlike other types of appraisals, a waterpark resort appraisal requires a thorough market analysis involving a study of the economic and demographic factors as well as a review of the hotel and indoor waterpark resort markets.

It also requires a complete financial analysis which looks at various revenue categories. When appraising an indoor waterpark, the appraiser must have a full understanding of waterpark usage issues and a firm grasp on the trends in the indoor waterpark market.

Author: David J. Sangree, MAI, CPA, ISHC is President of Hotel & Leisure Advisors, a national hospitality consulting firm. He performs appraisals, feasibility studies, impact studies, and other consulting reports for hotels, resorts, waterparks, golf courses, amusement parks, conference centers, and other leisure properties. He has performed more than 1,000 hotel studies and more than 100 indoor waterpark resort market feasibility and/or appraisal studies across the United States and Canada

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Appraiser Penalties for All? The New and Troubling IRS Code Provision

According to the Wills, Trusts & Estates Prof Blog: William S. Forsberg (Attorney at Law at Leonard, Street & Deinard) and Hugh F. Drake (Attorney at Law at Brown, Hay & Stephens, LLP) have recently published an article entitled The New IRS Appraiser Penalties Under Code § 6695A, Prob. & Prop., Sept./Oct. 2007, at 46.

Here is an excerpt from the introduction to their article:

The Pension Protection Act of 2006 (PPA) imposes new penalties under Internal Revenue Code (“Code”) §6695A for substantial or gross valuation misstatements.

Without question, the need for property to be valued properly is critical under our current transfer tax and income tax system. Estate and trust attorneys often must obtain appraisals of property or property interests when making strategic lifetime gifts for clients as well as on a client’s death. Common lifetime gifting strategies that require an appraisal include transfers to grantor retained annuity trusts and transfers to qualified personal residence trusts. Sales of property to grantor trusts, or gifts of family limited partnership interests, also require an appraisal. Asset transfers to certain types of charitable trusts require appraisals for both income and transfer tax purposes.

The American Bar Association Section of Real Property, Probate and Trust Law has submitted comments to the Internal Revenue Service on the issues surrounding new Code § 6695A.

The uncertainties surrounding the new Code section are troubling not only for professional appraisers but for any person involved in the appraisal process, including attorneys and CPAs.

This article will discuss the questions raised by the task force about new Code § 6695A and provide some insight into the concerns the task force raised regarding the ability of the IRS to implement its provisions fairly and equitably.

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2007 Hotel Valuation Index Shows Increased Per-Room Value

The U.S.hotel industry experienced a 22 percent increase in per-room value in 2006, according to information recently released by Hotel Valuation Services. This marks the third year in a row with at least 20 percent growth.

On average, per-room values in the United Statesrose by roundly $18,000 in 2006, and all but four of the 66 markets reviewed experienced increases in per-room value, according to the 2007 HVS U.S. Hotel Valuation Index.

"Even more telling is that the decline of capitalization and interest rates in the United States indicates continued favorable financing conditions for investors to refinance or buy lodging facilities for the next two years,” according to report authors Steve Rushmore, MAI, president and founder of HVS, Sumit Kapur and Michael J. Pajak.

The HVI tracks and discusses hotel values in 66 major U.S.markets and for the United States as a whole. Created in 1987 by HVS, a global hospitality consulting and hotel appraisal firm, the HVI is derived from an income capitalization approach, utilizing market area data provided by Smith Travel Research and historical operational and capitalization rate information from HVS’s extensive global experience in hotel feasibility studies and valuations.

The 2007 HVI also features a Volatility Index, an investment analysis tool that assists in identifying markets in which to buy or build hotels. Index developer Rushmore explains that the Volatility Index determines the standard deviation in market per-room value changes since 1987, and divides this standard deviation by the overall average per-room value of a market during the same period. “Markets with historically minimal changes in value (volatility) that are expected to record strong increases in per-room value demonstrate favorable market conditions to buy or build hotels,” Rushmore said.

To download a free PDF of the 2007 Hotel Valuation Index, click here, or contact Joan Raffetto at [email protected].

Source: Appraisal Institute

Appraisers' Valuations for Tax Filings Come Under Microscope With New Law

According to the Wall Street Journal article by Arden Dale, Feb. 27, 2007; "It may soon become trickier to get an item appraised for tax purposes. The Pension Protection Act, passed in August, puts appraisers in the sights of the Internal Revenue Service by saying they can be penalized for valuations the agency later decides are off the mark."

"The move marks a big change because taxpayers, not appraisers, historically have borne the brunt of a wrong valuation. One result: The cost of getting something appraised may well rise."

"Appraisals are used for a number of purposes in tax filings. For instance, noncash assets donated to charity are often appraised so the donor can claim the value as a deduction on his income-tax return and lower his tax bill."

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MIT Center for Real Estate announces new commercial property index

Real Capital Analytics (RCA) and the MIT Center for Real Estate are launching a set of pioneering indexes for tracking commercial investment property prices in the United States, the center director and RCA president said in a joint announcement today. Source: MIT News Office

The Center for Real Estate (MIT/CRE) developed the new suite of 29 indexes to support derivatives trading such as index return swaps. The indexes are based on comprehensive data on commercial property transactions prices from the New York-based RCA.

In making the announcement, MIT/CRE director David Geltner said, "The development of an active futures market, which does not currently exist for commercial property, would greatly increase the efficiency of the real estate industry. It will address such long-standing problems with real estate investment as high transactions costs, lack of liquidity, inability to sell 'short' and difficulty comparing investment returns with securities such as stocks and bonds."

The new indexes will be published on the web sites of MIT/CRE and RCA and will be available free of charge as an information service to the academic and industry research communities.

Value Checks, Comp Checks, Compouts: An Understandable Desire, But a Bad Idea

The author is James Stein, Certified General Appraiser and principal of Stein Valuation, Inc.  He has focused on matters relating to commercial real estate appraisal since 1991. His experience includes appraisal analysis, highest and best use analysis, feasibility analysis, and due diligence reporting primarily in the Southern California five-county region, including Los Angeles, Orange County, Riverside County, San Bernardino County and Ventura County

We receive many calls from mortgage brokers and borrowers for value checks. In most cases, these requests are related to a refinance, a purchase money loan or a construction loan. In each case, it is typically stated that the borrower would like a “feel” for the property’s value before paying for a “full-blown appraisal.” Further, there is usually the dangling carrot of an appraisal assignment (either implied, inferred, or stated) at the end of the value check stick.

"While we understand the desire to have a comfort level that the appraisal will “come-in” at a desired value, value checks are simply bad for all parties involved."

The role of an appraiser is primarily that of an independent third party. But the concept of a value check fly’s in the face of such independence and can cause far more harm than good. The laws of most states recognize this and have made value checks ostensibly illegal through the adoption of the Uniform Standards of Professional Practice, USPAP.

Such illegality comes into play in several ways:

• first, USPAP makes it illegal to provide a value for a subject property without having inspected the property;
• second, USPAP states clearly that an appraisal may not be based upon a predetermined value;
• third, USPAP makes clear that if an appraiser states, writes, or otherwise transmits a value to another party, the appraiser is, in fact, reporting findings of an appraisal; which takes us to the fourth problem with value checks, reporting a value without having done the analysis is clear ethics violation.

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