Integra – San Diego Appraises Industrial Property, San Diego

2016-0040picIRR-San Diego recently  completed the appraisal of a single tenant industrial warehouse property consisting of 64,160 SF gross leaseable building area, on 3.91 acres, built in 1987. The site is 100% occupied by a single tenant. The purpose of the valuation was for loan underwriting.

 

IRR – San Diego Values “Egyptian” Commercial Condos, Hillcrest, San Diego

Integra – San Diego appraised the retail condominium units of a high-visibility mixed-use, commercial/residential property in San Diego. This property was originally built as a movie theater in 1911, and preserving only the Egyptian Revival architecture facade, in 2005 it was developed as a six-story mixed-use building containing 80 residential units, as well as the commercial condos. Site area for the entire project is .76 acre. The six retail condominium units were appraised as a single unit, for loan underwriting purposes for a financial institution.

Appraisal of Religious Facility – Oceanside, CA

IRR San Diego recently appraised an existing religious facility consisting of 2 parcels, totaling 18.44 acres. One of the parcels was in escrow to be sold and determined to be excess land. The second parcel is 100% occupied by a third party tenant. Due to the short term nature of the lease, with no options to renew, our value conclusions included the contributory value of the remaining rent without a present value discount. The two parcels were valued separately. The appraisal was done for a federal bank’s portfolio management.

In Search of a Consulting Expert

real-estate-litigation-appraiserReal estate appraisers can provide a competitive edge in assisting attorneys for trial in both civil and criminal cases. The following article from IRWA Magazine was written by Donnie Sherwood, SR/WA, R/W-AC, MAI, FRICS, of IRR’s Dallas/Fort Worth office.

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Which Real Estate Valuation Approach is Most Reliable?

San-Diego-Commercial-Real-Estate-AppraiserWhen appraising commercial real estate, there are three generally accepted approaches to value: the sales comparison approach, the income capitalization approach, and the cost approach. Each approach is used to help assist an appraiser to determine an opinion of value, and many times all three approaches are used to appraise a single property. However, there are instances where one approach may be considered more reliable or credible than the others. Here are instances when a particular approach is the most reliable valuation method.

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Can a Real Estate Appraiser give Broker Price Opinions?

irrsandiego-commercial-appraisalsIn the lending world, banks and other financial institutions generally order an appraisal to determine value of a property. However, what is becoming more popular is a valuation known as a Broker Price Opinion, or BPO. A BPO is an opinion determined by a real estate agent or broker to establish the selling price of real estate. While this type of evaluation is typically performed by real estate agents and brokers, it is often asked whether an appraiser can perform a broker price opinion, desktop reconciliation of value, or other similar type of valuation. In this article, we share what is included in a BPO and whether or not real estate appraisers can provide one.

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The Top Commercial Real Estate Appraisal Designations (and What They Mean to You)

There are dozens and dozens of designations related to the real estate field. In fact, after a quick search on the National Association of Realtor’s website,  we found over 20 designations listed for a variety of specialties. The real estate appraisal field has several designations, as well; however, it can be confusing to understand what these designations mean and (more importantly) how can they help you decide which appraiser to choose.

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How to Challenge a Commercial Appraisal

san-diego-commercial-appraiserWhether a property is being appraised for estate tax purposes, a refinance, or a purchase, there are times when an appraiser’s opinion of value may differ from your own. If this happens (and you know that your opinion is more accurate), there are a few steps one can take to ensure that an opinion of value is reconsidered.

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Commercial Appraisal Facts You Should Know

san diego 5Commercial appraisals are very different from residential appraisals due to the fact they’re much more subjective in nature. In fact, these days business owners have a lot to take in when it comes to the subject of commercial real estate, not to mention trying to understand the appraisal process when the time comes to hire an appraiser to value a piece of commercial real estate.

First and most importantly, all appraisers must follow the Uniform Standards of Professional Appraisal Practice (USPAP), which requires appraisers to provide an “unbiased” opinion of value. Failure to do so may include disciplinary action from the state and possibly the appraiser having their license revoked.
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Commercial Appraisals – Income Approach Basics

irrsandiego commercial appraisalsIn commercial real estate, during the appraisal process there are several methods used to evaluate a property’s value. The appraisal may include a cost approach to value, a sales comparison approach to value, an income approach to value, or all three.

The income approach is used for the widest range of commercial properties and looks at both the specifics of the property in question as well as the information gathered from comparable properties located within a specified area. There are several items which the income approach will factor into its overall value analysis including:

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How do easements affect the final value of your property?

Expertise in the practice of commercial real estate valuation and counseling is a complex amalgam of art, science, and experience.  Donnie Sherwood, MAI, SR/WA, FRICS, has served many of IRR’s clients in the Right of Way / Eminent Domain specialty for many years, and his views on easement valuations will be featured in the November issue of the International Right of Way Association’s (IRWA) ROW Magazine.  An advance abstract of the article and a related infographic are available below.

Easement-Valuation

We invite you to contact us regarding your Right of Way/Eminent Domain, Legal Support / Expert Witness, and other commercial real estate valuation and counseling needs.

During a Divorce…What is The Appraiser’s Role?

Whether a divorce is friendly or fierce, a divorce usually requires the services of a professional appraiser. In most cases two separate appraisals are completed – one for each side. Many times there may even be need for the use of a third appraisal.

If two appraisals come in with significantly different amounts, the judge may then order a third independent appraisal to help settle the matter. The appraiser’s role in a divorce is to help assess value for the division of property.

san diego 3Your attorney will usually advise you of this anytime there is property involved. While the cost of your divorce seems to be adding up quick enough to make your head spin, you simply can’t skimp on obtaining a professional appraisal. It may seem like a formality, yet you should realize what you end up getting out of the split once the dust settles is based a great deal on the report from a professional appraiser.

In some cases the divorcing couple or their attorneys may agree to use just one appraiser. This works for couples who may already have an idea of what the value probably is and do not intend to be out for blood when it comes to splitting property and assets.
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What Is A ‘Date Of Death’ Appraisal?

Although it is not that uncommon, it seems to be one of those things that is hard to find out much information about. Anyone who has to face this situation certainly needs to be informed and having at least some basic knowledge is important. In most common cases the “date of death” appraisal is for anyone who has recently lost a loved one or inherited property.

san diego 2If a loved one dies and leaves you property or a transfer of ownership occurs because of death, this appraisal usually occurs for tax purposes. This appraiser may be chosen by a family member or heir, but an attorney or accountant may be appointed to order the appraisal.

These appraisals are usually ordered within two to six months from the time of death or the inheritance of the home or property. There are times when it may be ordered in just a few weeks or it may also be prolonged past the six month mark.
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The Top 10 Questions to Ask Before Hiring an Appraiser

san diegoA real estate appraiser plays a significant role in nearly every situation that involves real estate. It can be a tax appeal, purchase, estate settlement, divorce, bankruptcy, and more. The role of the appraiser can never be downplayed, since they can be the difference between a successful or unsuccessful transaction. Therefore it is vital that that you hire a ‘qualified’ appraiser for whatever the need may be. There are a lot of things you should consider before hiring an appraiser, and below is a list of the ‘Top 10 Questions You Should Ask before Hiring an Appraiser’:
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The Difference Between Gross Income and Effective Gross Income

Potential-Gross-Income-Effective-Gross-Income-San-Diego-Real-Estate-AppraiserIn appraising income-producing residential properties (such as apartments), gross income multipliers are used as a method of determining an opinion of value. Depending on your area, however, the multiplier can be based on potential gross income or effective gross income. Here is the difference between the two.

Potential Gross Income

Potential gross income (also known as PGI or gross potential rent) is the total revenue a property could generate if 100% leased at market rent. This may or may not be what is actually happening with the subject property, but many times this is not the case. For example, some rents may be over or under market, or the property may not be 100% occupied. Nevertheless, PGI reflects the the most annual rent a property would collect.

Effective Gross Income

Effective Gross Income (of EGI) is the amount of income a property generates after other factors are considered. Depending on the property type, the first factor are expense reimbursements, which are operating expenses that are paid for by the tenant. This could include a portion of the expenses (such as real estate taxes and insurance), or, in the case of an absolute net lease, all of the expenses. Expense reimbursements depend on the terms of the lease, but in the case of multifamily properties the tenant is generally only responsible for paying their pro-rata share of the utilities.

Another item to consider is vacancy and collection loss. Vacancy occurs when all or a portion of the property is not occupied, while collection loss is an estimate of how much rent is expected to not be collected during the projection period. This is typically estimated based on the subject’s historical performance, comparable properties, and/or industry benchmarks.

The last item to consider would be other income, which can include parking, laundry income, vending machines, and other types of income not included in the rent. Similar to vacancy and collection loss, other income is typically based on historical figures and comparable properties.

Summary

In short, potential gross income is the total rent a property could generate is 100% leased at market rent, while effective gross income is a net figure that considers expense reimbursements, vacancy and collection loss, and other income. In estimating these two figures, especially EGI, it is best to determine what income is affected by vacancy. For example, some other income (like rent from a billboard), is not necessarily affected by occupancy. However, items such as expense reimbursements could be affected if there is a higher than typical vacancy rate. When performing due diligence on a property, an appraiser would look at both historical numbers and the property’s competitors in estimating market value for the subject.

If you have any questions about income, multifamily properties, or are in need of a commercial real estate appraisal, please contact us today.

Market Rent Studies: Three Ways Appraisers Determine Market Rent

San-Diego-Market-Rent-Study-Commercial-AppraiserOne of the many services Integra San Diego provide are market rent studies, working with a tenant or landlord (and sometimes both in the same study) to provide an opinion of market rent for their property.  There are three methods commercial appraisers use when determining market rent for a property.

Lease Comparables

One of the best methods to estimate market rent for a property is researching recently leased space that has similar characteristics as the subject. In a perfect world, if a commercial appraiser was estimating market rent for a suite in an office property, then a suite down the hall that leased two weeks ago would be a great comparable to use. However, solid data like this may not be available, so an appraiser would expand their search to find other comparable properties, and then make adjustments similar to adjustments made in the sales comparison approach.

Lease Listings

Another source used to determine market rent are lease listings. Similar to lease comparables (where a lease is actually signed) active lease listings are also useful because they provide an indication of what rent landlords are typically looking for in a particular submarket.  Most times, active listings set the upper limit of the rental range because contract rents are usually less than asking rents. Similar to lease comparables, lease listings can also be adjusted to the subject; however, depending on the market, an additional downward adjustment would need to be made for the active listing status.

Market Participant Interviews

Another method used in market rent studies is interviewing local market participants such as commercial real estate brokers, property managers, and property owners. Not only can these individuals provide information on recently leased space or space currently on the market, but they can also identify specific characteristics about properties that make it more or less desirable (such as superior access, low parking fees, etc.). This can be especially helpful if there have not been many lease transactions or active listings in the area. A knowledgeable broker or property manager who is active in a particular submarket will have a general indication or range of market rent. This combined with lease comparables and lease listings helps the appraiser provide a more accurate opinion of market rent.

Summary

There are several methods used by commercial appraisers to determine market rent, and ideally all of these methods would be used to arrive at the most accurate estimate. Whether you are a tenant looking to renew or your lease, or a landlord looking to establish an asking rate, it is best to utilize an appraisal firm that are experts in determining market rent for commercial property.

If you have any questions about market rent studies or are in need of commercial valuation services, please contact us today.

Yield Capitalization – How to Appraise Commercial Real Estate

Yield-Capitalization-Real-Estate-AppraisalWhen appraising commercial real estate based on a property’s income potential, an appraiser uses capitalization to convert income into value. In fact, the definition of capitalization is simply the conversion of income into value.

We have previously discussed direct capitalization, which is the process of converting a single year’s expected income into value in one step, either by dividing net operating income by a capitalization rate (cap rate), or multiplying income by an appropriate factor. Direct capitalization is most commonly used for small commercial properties or properties which have stabilized, predictable income (such as apartment complexes).

Yield Capitalization – What is it?

The other capitalization method used to appraise commercial real estate is yield capitalization, which is defined as the process of converting future benefits into present value. In other words, future cash flows that a property generates are converted into a present value conclusion using an appropriate yield rate. The most commonly used method of using yield capitalization is discounted cash flow analysis, where each future year of income is discounted to present value using a discount rate. While capitalization rates are typically derived from market data (sales that reported a cap rate), discount rates are typically supported by published yield rate data or by interviews with market participants such as investors.

When Does an Appraiser Use Yield Capitalization?

Yield capitalization is often used to value complex commercial properties (such as office towers and shopping centers) or properties which will take several years to become stabilized (such as high vacancy properties, proposed projects, etc.). It is also used to by valuation professionals to estimate value over a given holding period. For example, if an investor plans to purchase a property, hold it for five years, and then sell it, then yield capitalization can be used to determine value based on the projected performance (future cash flows) during the five-year holding period.

What’s the Difference Between Direct and Yield Capitalization?

The main difference between direct and yield capitalization is time. Direct capitalization is based on only a single year’s income, while yield capitalization takes into account several years of cash flows. Depending on the property type, income characteristics, and the overall assignment, one or both methods of capitalization may be appropriate.

Summary

If you have any additional questions about yield capitalization, or if you are in need of a discounted cash flow analysis of commercial real estate, please contact us today.

Appraising Industrial Property: Three Adjustments and Why They’re Made

San-Diego-Industrial-Appraiser

When appraising commercial real estate, appraisers make adjustments to comparables based on a variety of factors, including location, size, and age/condition. That said, additional adjustment factors need to be considered for industrial properties beyond what is typical for other types of commercial real estate. Here are three adjustments that should be considered when appraising industrial properties and why they should be made.

Building to Land Ratio

This adjustment, also known as a floor area ratio (FAR) adjustment, considers the ratio of building area to land area. For example, if the subject property consists of a 1,000 square foot building on a 4,000 square foot lot, then the property has an FAR of 0.25. For industrial property appraisals, this is an important adjustment to consider because some properties have a smaller FAR than what is typical and thus, more value can be attributed to the land (for example, a contractor’s storage yard typically has a small improvement and a large lot area, which equates to a lower ratio). When choosing industrial comparables, it is best to select sales and leases with a similar floor area ratio as the subject.

Office Build Out

Another adjustment to consider when appraising industrial properties is the amount of office space the building has. Properties such as flex buildings or research and development (R&D) buildings have a high percentage of build out compared to other types of industrial properties such as storage warehouses. Generally, an industrial property with a higher percentage of office space commands a premium due to the cost to install the improvements (this is why medical office space tends to sell for a higher price than general office space). As with floor area ratios, it is best to select comparables with a similar amount of build out. It is also best to not compare different types of industrial properties (e.g. an R&D property with lab space to a warehouse property).

Clear Height/Loading

A third adjustment to consider is the subject property’s clear height and number of loading doors (both grade-level doors and dock-high doors). These physical characteristics are essential for industrial uses such as distribution and storage, so an adjustment for these may be necessary. For example, if the subject property being appraised has 15 feet of clear height, but comparable properties typically have 20 feet of clear height, then an adjustment would need to be made to the comparables.

Summary

The above adjustment factors are a sample of items that should be considered in the valuation of an industrial property. That said, the market may not show any significant difference with some of these factors. For example, there may not be a significant difference in price between a property with 4 loading doors and one with 5 loading doors. In addition to reviewing sale and lease data, it is also critical to interview industrial market participants (buyers, sellers, brokers, etc.) to determine what influences value. This combined with good comparable data will lead to an accurate appraisal.

If you have any additional questions about the appraisal of industrial properties, or if you are in need of an industrial appraisal, please contact us today.

Appraising Small Residential Property: Gross Income Multiplier

WSan-Diego-Apartment-Appraisere recently wrote about direct capitalization, a method to value property via the income approach using the subject’s net operating income and an appropriate capitalization rate. However, this method is typically only used when valuing commercial property or larger apartment properties. Additionally, this method of valuing property can also be challenging when there is not enough credible expense information to estimate net operating income.

In these instances, another method of appraising income property involves gross income multipliers (GIMs) and gross rent multipliers (GRMs). GIMs/GRMs compare the income producing characteristics of properties, most often small residential income properties such as duplexes, triplexes, and four-plexes.

Potential gross income or effective gross income is converted into an opinion of value by applying a relevant gross income multiplier. The multiplier is derived by dividing a comparable property’s sale price by its known gross income or gross rent, either at the time of sale or its projected income over the first year of ownership.

An example of how a gross income multiplier is calculated is shown as follows:

San-Diego-Multifamily-Appraiser

Based on the above, the PGIM (Potential Gross Income Multiplier) of the sales range from 4.35 to 4.44. If the subject has potential gross income of $90,000 and the appraiser applies a 4.40 PGIM, the estimated value conclusion would be $396,000.

An appropriate GIM is derived by utilizing comparable sales. When choosing comparables to derive a multiplier, it is important to ensure the following:

  • The comparables used are similar in terms of physical, locational, and investment characteristics (e.g. similar operating expense ratios).
  • The comparables used are of properties that were rented at the time of sale or were anticipated to be rented within a short time.
  • Gross income or gross rent is identified (gross income may include items other than rent such as laundry or parking income).
  • The income and multiplier used are consistent with both the comparables and the subject. In other words,  an income multiplier based on effective gross income (EGI) is applied to the subject’s EGI, not the potential gross income.

If you have any additional questions about using GIMs or GRMs to value income property, or if you have any need for an apartment appraisal or valuation consulting, please contact us today.

3 Common Commercial Real Estate Appraisal Questions

San-Diego-Commercial-Appraisal-QuestionsRecently, we discussed the ways to help prepare for a commercial real estate appraisal, which included providing as much income/expense information as is available and helping the appraiser inspect the entire property.

There are many questions that can be asked regarding a commercial appraisal. Here are some of the more common.

What if I don’t have any income or expense information?

As stated previously, appraisers generally ask for three years of income and expenses. If three years are not available, then provide as many years as you can because some information is better than none. If no information is available, then inform the appraiser and he or she will state this in the report. If there is no historical information, the appraiser will generally use market rent and market expenses, which are based on comparable properties and industry benchmarks.

Do I have to meet the appraiser at the property?

Sometimes, the owner or property representative is out of the area or unavailable to physically be at the property during the appraiser’s inspection. As long as the appraiser has full access to the subject property, then an owner or representative does not have to necessarily be present. However, it is important to 1) let the appraiser know of any important issues prior to the inspection (such deferred maintenance) and 2) be available for follow up in case issues or questions arise after the inspection.

What happens if not all of the property is inspected?

There are some assignments where portions of the property are not able to be fully accessed. For example, in a hotel appraisal or apartment appraisal some of the units may be occupied and unable to be accessed. If you know that an appraiser cannot access the entire property in advance, please let them know. The appraiser will state this in the report and will generally add an extraordinary assumption to the report, assuming that the condition of the areas not inspected are similar to those that were.

Do you have any other questions about the appraisal process? If so, or if you have any need for a commercial real estate appraisal in San Diego County, please be sure to contact us directly. Also, please be sure to check out our YouTube page, where we provide education on the appraisal process as well as answer other frequently asked questions.

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