Commercial Grade

In today’s New York Times Julie Satow writes about commercial appraisals in her article Accuracy of Appraisals is Spotty, Study Says.   The article was not particularly flattering to commercial appraisers as it noted that in a recent study that examined sales prices and appraised values, the appraisals were high 64% of the time.  Overall, though, I think that she did a great job with this article.  I am quoted commenting (complaining?) about the commoditization of appraisals and the evolution of the appraisal from integral professional service to commodity.  (A frequent comment of mine!)

I agree with the comments of Bill Garber, the director of government and external relations for the Appraisal Institute, that comparing the values with prices can be misleading.  I did not review the study that Ms. Satow referred to in her article but from my many years in this profession I have seen how frequently appraisals are misinterpreted.  Price and value are not synonymous.  For example:

• What was the time difference between the date of value in the appraisal and the eventual sale? Remember that the appraised value represents a point in time and a sale six months, a year or more after that time can reflect very different market conditions.
• Is the study confusing a stabilized value for an “as is” value?  If a property is not operating at stabilized occupancy (whatever that is for a particular property type in a particular submarket) the lender will typically ask for a future value upon stabilization as well as the value based on the lower occupancy (in its “as is” condition).  Was the property in the same condition and occupancy at the time of sale as premised in the appraisal?
• Was the appraisal based on any extraordinary assumptions.  Per the Uniform Standards of Professional Appraisal Practice (USPAP) any specific assumptions regarding a property must be clearly specified in the report.  For example, did the appraisal assume that a major lease that was out for signature get executed, whereas by the time the property sold that lease negotiation fell through?
• Did the circumstances of sale truly meet the definition of market value?

The list of potential differences between the premises of the appraisals and the circumstances of actual sale can go on and on.

You would think that after 26 years of appraisal experience that I would know the answer to this, but one of my senior appraisers recently asked me if a non-licensed appraiser was legally permitted to appraise property in New York State.  (This came within the context of reviewing a Broker’s Opinion of Value that had been submitted to us.)  I scratched my head and responded, “er..yes…no…maybe…not really sure…” So to get the real answer, we went to the source, the State Certified and Licensed Real Estate Appraisers License Law (June 2011) put out by the Department of State.

Section 160-b of the law, paragraph 2, says plain as day “Nothing in this article shall preclude a person who is not a State certified or licensed real estate appraiser or a licensed real estate appraiser assistant from appraising real estate for compensation.”  So, there you have it:  Anyone can appraise property professionally, but only certified or licensed appraisers can call themselves certified or licensed appraisers.

by Marc Kushner, The Informed Appraiser

On January 1st of this year, the latest edition of the Uniform Standards of Professional Appraisal Practice went into effect. Admittedly, the study of USPAP is not quite as exciting as, say, washing dirty dishes or watching grass grow. However, what it lacks in intrigue it duly compensates for with importance, given the simple fact that the overwhelming majority of real estate appraisals in this country are performed under the rubric of USPAP.

In the course of the next several posts, I’ll be exploring some of the changes that have been implemented in the 2012-2013 edition of USPAP, as well as the associated USPAP Advisory Opinions and USPAP Frequently Asked Questions.

So, fasten your seatbelts for what is sure to be a wild ride . . .

It was just a matter of time.  With the success of Selling New York, Million Dollar Listing and my all-time favorite, Househunters International (did you know that you could buy an oceanfront condo in Ecuador for under $100/SF?  The catch?  It’s in Ecuador!)…I just stumbled upon a new reality TV show:  Price This Place on HGTV.   This is a game show where contestants are randomly stopped and asked to look at homes around the country (on an ipad) and if they guess what they’re worth, they win $100!  See…appraisal is so easy that anyone can do it!  No inspections, no comps, no adjustment grids, USPAP, no file memorandum!  With the national obsession on real estate, an appraisal sitcom has got to be right around the corner…

by Marc Kushner, The Informed Appraiser (got to give credit where it’s due!)

A few chuckles (or groans) to start off your week:

Q. What method should be utilized in the valuation of a fitness club?
A. The GIM.

Q. What is the best way to appraise a marina?
A. Using the Sails Comparison Approach.

Q. What is Santa’s preferred narrative report format?
A. Elf-Contained.

Since I’ve been told that my sense of humor (or lack thereof) is best experienced in small doses, I’ll end this post here….

by The Affordable Oracle

There is an interesting high profile, high stakes battled going on between two well known money managers.  What are they arguing about?  The value of Florida land and the resulting valuation of St. Joe’s REIT.

Background story:

St, Joe’s was originally a timber land owner in Florida that amassed closed to 1,000,000 acres of land in northeast Florida. In the late 90’s they switched gears and hired a guy out of Disney to reposition the company and transform it into a Real Estate Development Company.   Today the company is sitting on close to 500,000 acres of land, the majority of which is agricultural.. They also have several projects in various stages of development.

The Short:

On October 13, 2010 David Einhorn of Greenlight Capital made a presentation to a group of investors at the Value Investing Congress completely bashing St. Joe’s, and concluding to the fact that they are worth $7-$10 per share (trading at $24.54 at the time of the presentation).  Two years before David made a similar presentation to the same group bashing Lehman Brother; needless to say they were listening.  In his 139 slide presentation David dissects each and every development in St. Joe’s portfolio and shows comps, absorption data and correlates it the reported book value of each asset.  He says St. Joe’s needs to impair almost every asset and they are refusing to do so on their public financials.  The presentation can be found by clicking here.

The Long View:

On the other side of the table is Bruce Berkowitz of Fairholme Fund, a mutual fund that has had a stellar track record. Bruce has been bullish on St. Joe’s for a while and he holds a huge stake in the company through his fund.  So huge that he made it to the company’s board.  Bruce says the company is undervalued at $25. His rebuttal presentation just released on in February 2011 points out that his pal at Greenlight Capital used dated images and thus presented St. Joe’s assets in bad light.  The presentation was put together by a professional photographer and not by a financial analyst, there is 21 pages of pictures and absolutely no numbers.  The presentation can be found here.

My Take

If you ask me, the meat of David’s argument was not the pictures; it was his comps, absorption data and highest and best use analysis.  His pictures were probably picked to illustrate his bullish perspective for those in the audience that are not good with numbers or were too liberal with the complimentary cocktails to concentrate.  Now i don’t know the Florida market and i don’t know if David picked bad comps, but i assume if he did Bruce would not rebut with pictures but with other comps. To date Bruce is winning, St. Joe’s is trading at $25/share and has a market cap of $2.3B.

by Marc Kushner, The Informed Appraiser

Today is the day!

No, I’m not referring to April Fool’s, although that’s worth a mention as well.

What I’m referring to is the fact that today is the day when compliance with the Federal Reserve Board’s Interim Final Rule regarding appraisal independence becomes mandatory rather than optional. This rule was announced by the Fed on October 18, 2010, and was the result of the Dodd-Frank Act, which was signed into law back in July 2010.

For those not already familiar with the Interim Final Rule, this is the one that specifies, among other things, the requirement to pay “customary and reasonable” fees to appraisers.

I can’t help but wonder who came up with the term, “Interim Final Rule”. That’s a classic, textbook example of an oxymoron. It makes as much sense as saying “Temporary Permanent Rule” or “Optional Mandatory Rule”. (Perhaps it’s the same people who tell us that the employment market is experiencing “negative growth”.)

Between the unfortunate choice of name as well as the selection of April Fool’s Day for mandatory implementation, something tells me these regulations might not prove to be the panacea many appraisers were hoping for. Ultimately, only time will tell.

by The Affordable Oracle

NYS condemned a former helicopter testing site to be used by Stony Brook University.

The state valued the property at $22m. The owner’s appraiser valued the site at $125m or 5.7 times the state’s valuation.

A payout was approved based on the owner’s valuation which assumed a zoning change from industrial to residential.

The state is now appealing saying the appraiser overstated the probability and density changes that are likely for the property.  You can read the brief and Appraisal Forum discussion from the following links:

Brief

More discussion on AppraisersForum.com

By Marc Kushner, The Informed Appraiser

“Complacency is a state of mind that exists only in retrospective: it has to be shattered before being ascertained.” -Vladimir Nabokov (1899–1977), Russian-born U.S. novelist, poet.

Retrospective valuation assignments typically pertain to property tax matters, estate or inheritance tax matters, condemnation proceeding, suits to recover damages, and similar situations. The average appraiser will encounter these situations from time to time, but typical run-of-the-mill assignments are performed on a “current market value” basis with no retrospective element. However, a careful reading of USPAP indicates that the vast majority of appraisal reports produced by appraisers on a regular basis actually qualify as retrospective valuations.

Per Standards Rule 2-2 (a/b/c) (vi), every report must “state the effective date of the appraisal and the date of the report”. The Comment to this rule states:

“The effective date of the appraisal establishes the context for the value opinion, while the date of the report indicates whether the perspective of the appraiser on the market and property as of the effective date of the appraisal was prospective, current, or retrospective.”

Statement on Appraisal Standards No. 3 (SMT-3) states, in part:

“Retrospective appraisal (effective date of the appraisal prior to the date of the report) may be required for….and similar situations. Current appraisals occur when the effective date of the appraisal is contemporaneous with the date of the report.”

Got that? The only time you have a current appraisal is when the report date and valuation date are one and the same. Most appraisers I know tend to use the inspection date as the valuation date. The inspection typically takes place prior to the date of the appraisal report. Consequently, the valuation date is usually earlier than the report date. In theory – according to USPAP, that is – this common scenario qualifies as a retrospective valuation, and should be treated accordingly.

Now I ask, do you know anyone who actually does this?

By Marc Kushner, The Informed Appraiser

“Letters are like wine; if they are sound they ripen with keeping. A man should lay down letters as he does a cellar of wine.” – Samuel Butler (1835–1902), British author

This being my first blog post here on Commercial Grade, I think it is appropriate to start at the bottom. Hence, this entry will touch on some issues regarding basements and cellars. I know, I know – you can hardly contain your excitement at this point. So please go ahead and read on.

(A brief comment regarding my chosen moniker, “The Informed Appraiser”: While this title might appear to be nothing more than a cheesy and conceited attempt at self-promotion, it’s actually also a shameless plug for my own website of the same name. But I’ll leave that topic for another blog post.)

In common use, the terms “basement” and “cellar” are usually bandied about interchangeably with fairly reckless abandon. To be fair, most any thesaurus will show the two terms to be synonymous. Here are their definitions, per the Random House Dictionary:

base·ment

/ˈbeɪsmənt/ –noun

1. a story of a building, partly or wholly underground.

2. (in classical and renaissance architecture) the portion of a building beneath the principal story, treated as a single compositional unit.

3. the lowermost portion of a structure.

4. the substructure of a columnar or arched construction.

cel·lar

–noun

1. a room, or set of rooms, for the storage of food, fuel, etc., wholly or partly underground and usually beneath a building.

2. an underground room or story.

3. wine cellar.

Close enough, right? For most people, perhaps. (All things being equal, “basement” has the advantage of avoiding the potential for confusing “cellar” with “seller”.) However, as appraisers we must hold ourselves to a higher standard. For those of us lucky enough to be working in NYC, the Department of City Planning’s Zoning Resolution could be taken as that standard. Weighing in at 3,349 pages, this voluminous tome sets the tone for the development and use of real estate in NYC. Take a moment to peruse it and you will see that “basement” and “cellar” have very specific definitions.

In short, the Z.R. defines a basement as “a story partly below curb level, with at least one-half of its height (measured from floor to ceiling) above curb level.” A cellar, on the other hand, is defined as “a space wholly or partly below curb level, with more than one-half its height (measured from floor to ceiling) below curb level.”

This is not merely a matter of semantics. The above distinction carries with it legal and practical implications in terms of permissible uses, construction requirements, and the like. Perhaps the point most significant for appraisers is that Zoning Resolution’s definition of Floor Area specifically includes basements, but excludes cellars (with the noteworthy exception of cellars that are used for “dwelling purposes”). Because floor area is typically the most fundamental building metric used by appraisers, it is vitally important to know precisely what any particular building’s floor area includes – or should include.

To further complicate matters, the NYC Department of Buildings as well as the Department of Finance – whose building records are often referenced as the source for building floor area measurements – do not always follow this rule consistently. (This is apart from the general observation that published floor areas can be inaccurate in virtually any case due to a variety of reasons, even where there are no basement/cellar issues at play.) In my experience, basements are sometimes excluded from recorded floor areas, while in other cases cellars may be included. Consequently, two buildings with identical published floor areas may in fact not be the same size at all. Conversely, two buildings with appreciably different recorded floor areas may actually be the same size.

In light of the above, I tend to proceed with caution when utilizing published building floor areas, particularly where basements and/or cellars are involved. To ensure consistency, care should be taken to consider exactly what is being included in the floor area measurements for both the subject and any comparables being analyzed. Otherwise, flawed comparisons and conclusions may result.