Appraisal Journal - Appraisal Institute

Transcription

Periodicals Postage
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at Chicago, Illinois
and Additional
Mailing Offices
The Appraisal Journal
200 W. Madison
Suite 1500
Chicago, IL 60606
The Business of Show Business Act II: Appraising the Movie Theater
by Arthur E. Gimmy, MAI, and William Condon
129 A National Profile of the Real Estate Industry and the Appraisal Profession
by J. Reid Cummings and Donald R. Epley, PhD, MAI, SRA
143 Tax Abatement Issues that Impact Limited-Market and Special-Purpose
Properties
by John M. Crafts, MAI
151 Spring 2013
Volume LXXXI
Number 2
The Business of Show
Business Act II:
Appraising the Movie
Theater
www.appraisalinstitute.org
112 Appraisal
Journal
THE
The Trouble with Rates in the Subdivision Development Method to Land
Valuation
by Brian J. Curry, MAI, SRA
Spring 2013
Richard L. Borges II, MAI, SRA, President
Ken P. Wilson, MAI, SRA, President-Elect
M. Lance Coyle, MAI, SRA, Vice President
Sara W. Stephens, MAI, Immediate Past President
Frederick H. Grubbe, CAE, Chief Executive Officer
Stephen T. Crosson, MAI, SRA, Editor-in-Chief
Ken Chitester, APR, Director of Communications
Nancy K. Bannon, Managing Editor
Michael P. Landis, Manager, Book Design and Production
Stephanie Liverani, Senior Communications Coordinator
The Appraisal Journal Editorial Board
Stephen T. Crosson, MAI, SRA*
Chair
Dallas, Texas
George Dell, MAI, SRA*
San Diego, California
Stephen F. Fanning, MAI
Denton, Texas
Edwin M. Farr
Pittsboro, North Carolina
David C. Lennhoff, MAI, SRA
Darnestown, Maryland
Frank E. Harrison, MAI, SRA
Woodstock, Illinois
Nathan Pomerantz, MAI
Rehovot, Israel
John A. Kilpatrick, PhD, MAI
Seattle, Washington
Larry T. Wright, MAI, SRA
Houston, Texas
The Appraisal Journal Review Panel
Gregory J. Accetta, MAI
Providence, Rhode Island
Brian L. Goodheim, MAI, SRA
Boulder, Colorado
Stephen A. Rosenthal, MAI
Sacramento, California
Anthony C. Barna, MAI, SRA
Pittsburgh, Pennsylvania
Robert M. Greene, PhD, MAI, SRA
Portland, Oregon
Dennis P. Ryan, PhD, MAI
New York, New York
C. Kevin Bokoske, MAI
Ft. Lauderdale, Florida
Brian M. Holly, MAI
Washington, D.C.
David J. Sangree, MAI
Cleveland, Ohio
E. Nelson Bowes, MAI*
Denver, Colorado
Douglas M. Laney, MAI
Tucson, Arizona
John A. Schwartz, MAI
Aurora, Colorado
Robert C. Clark, MAI
Bethesda, Maryland
Calvin M. Lassere, MAI
Washington, D.C.
Dan L. Swango, PhD, MAI, SRA
Tucson, Arizona
Larry O. Dybvig, MAI
Vancouver, British Columbia
Timothy J. Lindsey, MAI
Denver, Colorado
James D. Vernor, PhD, MAI
Atlanta, Georgia
Timothy A. Eisenbraun, MAI, SRA
Southfield, Michigan
Mark R. Linné, MAI, SRA
Lakewood, Colorado
Marvin L. Wolverton, PhD, MAI*
Leander, Texas
Jack P. Friedman, PhD, MAI, SRA
Dallas, Texas
Dan P. Mueller, MAI
St. Paul, Minnesota
The Appraisal journal Academic Review Panel
Tim Allen, PhD
Florida Gulf Coast University
Karl L. Guntermann, PhD
Arizona State University
Brent C Smith, PhD
Virginia Commonwealth University
Peter F. Colwell, PhD
University of Illinois
William G. Hardin III, PhD
Florida International University
Mark A. Sunderman, PhD
University of Memphis
Glenn E. Crellin
University of Washington
Harris Hollans, PhD, MAI
Auburn University
Grant I. Thrall, PhD
University of Florida
François Des Rosiers, PhD
Laval University
Thomas O. Jackson, PhD, MAI*
Texas A&M University
Alan Tidwell, PhD
Columbus State University
Mark G. Dotzour, PhD
Texas A&M University
G. Donald Jud, PhD
University of North Carolina,
Greensboro
H. Shelton Weeks, PhD
Donald R. Epley, PhD, MAI, SRA
University of South Alabama
Jeffrey D. Fisher, PhD
Indiana University
*Statistics Work Group member
Kenneth M. Lusht, PhD, MAI, SRA*
Penn State University
John E. Williams, PhD
Morehouse College
Elaine M. Worzala, PhD
Clemson University
Mission Statementii
Appraisal Journal Article Award Sponsorsiii
Appraisal Journal Sponsorship Opportunitiesiv
Appraisal Journal Outstanding Service Awardv
Armstrong/Kahn Awardvi
Swango Awardvii
Richard U. Ratcliff Awardviii
Spring 2013
Volume LXXXI
Number 2
COLUMNs
Cases in Brief
Recent Court Decisions
91
Financial Views—Spring 2013
A Positive State of Mind
99
by Alan M. Weinberger, JD
by James R. DeLisle, PhD
Features
The Business of Show Business Act II: Appraising the Movie Theater
112
A National Profile of the Real Estate Industry and the Appraisal Profession
129
Tax Abatement Issues that Impact Limited-Market and Special-Purpose Properties 143
The Trouble with Rates in the Subdivision Development Method to Land Valuation
151
Departments
Notes and Issues
Appraisal Institute Releases Guide Note 13:
Performing Evaluations of Real Property Collateral for Lenders
by Christina Austin
173
About the Appraisal Institute180
Erratum181
Publications of the Appraisal Institute182
Article Topics in Need of Authors183
Manuscript Guide184
Appraisal Journal Order Form186
Cover photo: The Cinemark Rio 24
movie theater in Albuquerque, New
Mexico. Photo appears courtesy
of Luigi Novi (Nightscream [Own
work]) [CC-BY-SA-3.0 (http://
creativecommons.org/licenses/
by-sa/3.0)], via Wikimedia Commons.
Appraisal
Journal
THE
Volume LXXXI
Number 2
Mission Statement
The Appraisal Journal is published to provide a peer-reviewed forum for information and ideas on the practice and
theory of valuation and analyses of real estate and related interests. The Appraisal Journal presents ideas, concepts, and
possible appraisal and analytical techniques to be considered; some articles are for the development and expansion of
appraisal theory while others are useful in the evolution of practice.
Manuscript Review
Each submitted manuscript to The Appraisal Journal is considered in a double-blind review. Manuscripts may be reviewed
by members of the Editorial Board, Review Panel, Academic Review Panel, or by outside specialists when appropriate.
See the Manuscript Guide for information on submitting a manuscript.
Disclaimer
The materials presented in the publication represent the opinions and views of the authors. Although these materials may
have been reviewed by members of the Appraisal Institute, the views and opinions expressed herein are not endorsed or approved by the Appraisal Institute as policy unless adopted by the Board of Directors pursuant to the Bylaws of the Appraisal
Institute. While substantial care has been taken to provide accurate and current data and information, the Appraisal Institute
does not warrant the accuracy or timeliness of the data and information contained herein. Further, any principles and conclusions presented in the publication are subject to court decisions and to local, state and federal laws and regulations and any
revisions of such laws and regulations.
This publication is for educational and informational purposes only with the understanding that the Appraisal Institute
is not engaged in rendering legal, accounting or other professional advice or services. Nothing in these materials is to
be construed as the offering of such advice or services. If expert advice or services are required, readers are responsible
for obtaining such advice or services from appropriate professionals.
Nondiscrimination Policy
Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession
and conducts its activities in accordance with applicable federal, state, and local laws.
The Appraisal Institute advances professionalism and ethics, global standards, methodologies, and practices through the
professional development of property economics worldwide.
The Appraisal Journal (ISSN 0003-7087) is published quarterly (Winter, Spring, Summer, and Fall).
© 2013 by the Appraisal Institute, an Illinois Not-for-Profit Corporation at 200 W. Madison, Suite 1500, Chicago, Illinois
60606. www.appraisalinstitute.org. All rights reserved. No part of this publication may be reproduced, modified, rewritten,
or distributed, electronically or by any other means, without the expressed written permission of the Appraisal Institute.
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ii
The Appraisal Journal, Spring 2013
Mission Statement
Thank you
to The Appraisal Journal Award Sponsors
Gold Sponsor
Group Insurance Program
Right coverage,right now.
Silver Sponsor
Appraisal Data Entry Service
Appraisal Journal Article Award Sponsors
iii
Align your company with the best-known and most
well-respected journal among real estate
appraisers—The Appraisal Journal.
As a corporate sponsor of The Appraisal Journal’s
annual article awards, you’ll enjoy numerous benefits.
This prestigious Appraisal Institute publication has
a readership of over 23,000 appraisal professionals.
BECOME AN APPRAISAL JOURNAL SPONSOR
The Appraisal Journal presents three annual awards:
• Armstrong/Kahn Award for most outstanding article
• Swango Award for best article by a practitioner
• Ratcliff Award for outstanding article by an academic
THE APPRAISAL JOURNAL OFFERS A VARIETY OF SPONSORSHIP LEVELS:
PLATINUM SPONSOR: $5000 ANNUAL COMMITMENT
You receive:
• 30 percent discount on all Appraisal Institute advertising rates.
• 25 percent discount on AI Connect sponsor, exhibit and advertising packages.
• Announcements for your company’s website and social media sites.
• Recognition on The Appraisal Journal homepage.
• Acknowledgement in each quarterly issue and in email announcements of The Appraisal Journal.
GOLD SPONSOR: $3000 ANNUAL COMMITMENT
You receive:
• 20 percent discount on all Appraisal Institute advertising rates.
• 15 percent discount on AI Connect sponsor, exhibit and advertising packages.
• Announcements for your company’s website and social media sites.
• Acknowledgement in each quarterly issue and in email announcements of The Appraisal Journal.
Contact Appraisal Institute Marketing for additional sponsorship levels.
TO BECOME AN APPRAISAL JOURNAL SPONSOR CONTACT:
Kerry Spaedy
Senior Manager, Marketing
312-335-4476
kspaedy@appraisalinstitute.org
iv
Nancy Bannon
Managing Editor
312-335-4445
nbannon@appraisalinstitute.org
Stephen T. Crosson, MAI, SRA
Editor-in-Chief
214-932-1808
scrosson@crossondannis.com
Appraisal Journal Sponsorship Opportunities
Appraisal Journal Outstanding Service Award
Gregory J. Accetta, MAI, MRA, is the winner of the 2012 Appraisal Journal Outstanding Service Award. This award recognizes
the member of the The Appraisal Journal ’s Editorial Board, Review
Panel, or Academic Review Panel who during the previous year
has shown exceptional commitment toThe Appraisal Journal
through outstanding service as a reviewer.
Accetta is a certified general real property appraiser in
Rhode Island, Massachusetts, and Connecticut, with an extensive
background in commercial appraisal and appraisal review. He
is a senior vice president with Bank of America where he has
responsibility for the engagement and coordination of externally
prepared appraisals, appraisal review, and policy administration.
Accetta holds the Appraisal Institute’s MAI designation and
the MRA designation from the Massachusetts Board of Real Estate
Appraisers (MBREA). He is a former chair of the Appraisal Standards Board, which is responsible for amending and interpreting
the Uniform Standards of Professional Appraisal Practice (USPAP).
Accetta is a faculty member and curriculum developer for
the Appraisal Institute, the Risk Management Association, and
MBREA. He is an AQB-certified USPAP instructor and is the
author of numerous articles published in The Appraisal Journal,
Valuation, and The RMA Journal. He earned his BA in philosophy
from Trinity College, in Hartford, Connecticut.
Appraisal Journal Outstanding Service Award
v
Armstrong/Kahn Award
William G. Steinke, SRA, is the winner of the 2012 Armstrong/
Kahn Award and a $3000 honorarium for his article, “Price, Value,
and Comparable Distinctions in Distressed Markets,” published
in the Spring 2012 issue of The Appraisal Journal.
The Armstrong/Kahn Award is presented by The Appraisal
Journal’s Editorial Board for the most outstanding original article
published in The Appraisal Journal during the previous year. Articles are judged on the basis of pertinence to appraisal practice;
contribution to the valuation literature; provocative thought;
thought-provoking presentation of concepts and practical problems; and logical analysis, perceptive reasoning, and clarity of
presentation.
In “Price, Value, and Comparable Distinctions in Distressed
Markets,” Steinke emphasizes critical distinctions in the definitions of market value, disposition value, and liquidation value as
they relate to various appraisal scenarios and market segments.
The article stresses the importance of literal interpretation of the
various definitions to ensure clear and accurate appraisals—especially when defining value and selecting comparables in distressed
markets. The author cautions that alternate interpretations of
market value obscure price distinctions and promote inaccuracy.
William G. Steinke, SRA, is an appraiser, broker, and consultant in Wayne County, Michigan. He earned a Certified General
Appraiser license, from the State of Michigan, upon its inception in
1992. He has been a member of the Appraisal Institute for almost
thirty years, earning his SRA designation in 1984, and he is a 2013
AI Great Lakes Chapter Regional Representative. His article, “The
REO Addendum—Square Pegs and Round Holes,” was published
in the Fall 2009 issue of The Appraisal Journal.
vi
Armstrong/Kahn Award
Swango Award
Robert M. Greene, PhD, MAI, SRA, is the winner of the 2012
Swango Award and a $3000 honorarium for his article, “Market
Conditions Adjustments for Residential Development Land in
a Declining Market,” published in the Winter 2012 issue of The
Appraisal Journal.
The Appraisal Journal’s Editorial Board presents the Swango
Award to the best article published during the previous year on
residential, general, or technology-related topics, or for original
research of benefit to real estate analysts and valuers. The article
must be written by an appraisal practitioner. Articles are judged
based on practicality and usefulness in addressing issues faced
by appraisers in their day-to-day practice; logical analysis, perceptive reasoning, and clarity of presentation; and soundness
of methodology used, especially in an area of original research.
In “Market Conditions Adjustments for Residential Development Land in a Declining Market,” Greene outlines a protocol
for analyzing rates of price decline for raw land in markets with
few or no recent closed sales. The article offers a method for
extracting time or market conditions adjustments in a distressed
market through identification of the value at the market peak,
investigation of a wide range of transaction types, analysis and
reconciliation of quantitative data, use of compounded time adjustments, and application of the concluded time adjustment to
the estimated value at the market peak.
Robert M. Greene, PhD, MAI, SRA, is the president of G&A
Valuation, Inc., in Portland, Oregon. He is also an adjunct professor at Portland State University. He was previously the director
of Litigation Support Services in the Portland office of Integra
Realty Resources; director of the Real Estate Advisory Group
for Stout, Risius, Ross, Inc., in Chicago; and an appraiser with
MaRous and Company in suburban Chicago. For ten years he
operated Greene & Associates in southwest Michigan, where he
specialized in single-family residential valuation. Greene was the
2012 president of the Greater Oregon Chapter of the Appraisal
Institute. He serves on the Comprehensive Examination Panel
and the University Relations Panel of the Appraisal Institute, and
The Appraisal Journal Review Panel.
Swango Award
vii
Richard U. Ratcliff Award
Joseph B. Lipscomb, PhD, MAI, and J. R. Kimball, MAI, are
the winners of the 2012 Richard U. Ratcliff Award and a $3000
honorarium for their article, “The Effects of Mineral Interests on
Land Appraisals in Shale Gas Regions,” published in the Fall 2012
issue of The Appraisal Journal.
The Richard U. Ratcliff Award is presented annually for the
best original article published in The Appraisal Journal written by
an academic author. Articles are judged on the basis of pertinent
appraisal interest, provocative thought, logical analysis, perceptive
reasoning, clarity of presentation, and overall contribution to the
literature of valuation. To be eligible for this award, an article must
have been peer reviewed by members of The Appraisal Journal’s
Academic Review Panel and the principal author must be primarily engaged in teaching at a college or university.
In “The Effects of Mineral Interests on Land Appraisals in
Shale Gas Regions,” Lipscomb and Kimball discuss mineral interests and issues appraisers must consider in regions affected by
shale gas formations, including dominance of the mineral estate.
The article focuses on mineral estates attached to, or severed from,
the surface estate and the resulting value implications. The article
presents an example case demonstrating analysis of comparable
sales to estimate value of land with and without the mineral estate.
Joseph B. Lipscomb, PhD, MAI, is a professor of finance and
real estate in the Neeley School of Business at Texas Christian
University, in Fort Worth. He holds a BS in architectural construction, an MBA, and a PhD in finance. He served as chair of TCU’s
Finance Department from 1993 to 2001. He has been the director
of the Luther King Capital Management Center for Financial Studies since 2001. In 2002, he served as president of the American
Real Estate Society (ARES), the largest US academic organization
dedicated to real estate research and education. His research has
focused on real estate investment analysis, valuation issues, and
developing a modern mortgage market in Mexico. He has published in The Appraisal Journal, Journal of Real Estate Research,
Journal of Real Estate Literature, and Journal of Housing Research.
J. R. Kimball, MAI, is owner of J. R. Kimball, Inc., an appraisal
firm in Texas offering appraisal review; easement analysis and
consulting; eminent domain valuation and consulting; litigation and
litigation support; and property management. His formal education
includes Texas A&M University, BBA; Texas Christian University,
ranch management program; Institute of Property Taxation; and
Advanced Real Property Tax School. Other professional affiliations
include the National Association of Realtors. Kimball has published
a number of articles in The Appraisal Journal.
viii
Richard U. Ratcliff Award
CasEs in brief
Recent Court Decisions
by Alan M. Weinberger, JD
Statute providing alternative procedures for
resolving disputed property insurance claims
does not allow insured to avoid appraisal
process
According to the District Court of Appeal of Florida,
a Florida statute that provides alternative procedures for resolution of disputed property insurance
claims will not allow the insured party to avoid the
appraisal process.
In 2005, the Schneider Family Partnership
(Schneider Partnership) filed a claim with its
insurer, First Protective Insurance Company (FPIC),
to recover property damages sustained during
Hurricane Wilma. FPIC promptly acknowledged that
the Schneider Partnership’s policy covered the loss,
but the two parties could not agree on the amount of
damages. FPIC then invoked the insurance policy’s
appraisal provision in an effort to determine the
amount of damages.
Prior to the completion of the appraisal process,
and after an unsuccessful attempt at mediation of the
dispute, the Schneider Partnership filed suit against
FPIC seeking damages for breach of contract and
bad faith. The Schneider Partnership also sought
a declaratory judgment that FPIC was not entitled
to an appraisal. FPIC responded by filing a motion
to compel appraisal, citing a policy provision in
their agreement providing no lawsuit could be filed
until all policy provisions had been complied with,
including the appraisal provision.
FPIC argued that it was contractually entitled
to an appraisal as the dispute was related to the
amount of damage caused by the storm, rather than
the scope of the insurance policy’s coverage. The
Schneider Partnership responded by filing a motion
for summary judgment, arguing that, under Florida
law, only the insured party may compel appraisal
after an unsuccessful attempt at mediation.
The trial court denied FPIC’s motion to compel
appraisal. FPIC appealed, arguing that the trial
court’s decision improperly deprived the insurer
of its right to appraisal under the policy’s contract.
On appeal, the District Court of Appeal of Florida
found that the purpose of the Florida statute at issue
was to resolve insurance claims through mediation
before resorting to the appraisal process or litigation.
In this case, because the insured—the Schneider
Partnership—and not the insurer—FPIC—requested
mediation, the appellate court determined that FPIC
was entitled to appraisal pursuant to the terms of
the contract.
Accordingly, the appellate court reversed and
remanded the trial court’s decision, ordering the trial
court to grant FPIC’s motion to compel appraisal.
First Protective Insurance Company v.
Schneider Family Partnership
District Court of Appeal of Florida,
Second District
November 14, 2012
2012 WL 5499987
Evidence showing purchaser paid less than
fair market value at non-judicial foreclosure
sale supports trial court’s denial of confirmation of sale
According to the Court of Appeals of Georgia,
judicial confirmation of a foreclosure sale may
properly be withheld if there is evidence sufficient
I would like to acknowledge the contributions of my research assistant, Michael Brain, in the preparation of this column.
Cases in Brief
91
to establish that the property did not sell for at least
fair market value.
In 2007, Winmark Homes, Inc. executed a
security deed and note for more than $3.8 million
in connection with loans from RBC Real Estate
Finance, Inc. (RBC). Winmark obtained the loans
for the purpose of developing properties in Smyrna,
Georgia. Winmark defaulted on its loan payments.
The lender notified Winmark that it would attempt
to obtain deficiency judgments, culminating in two
separate foreclosure sales of distinct portions of the
Smyrna properties.
On December 1, 2009, a portion of the Smyrna
property consisting of 14 unimproved residential
lots was sold at a foreclosure auction. RBC, the
sole bidder, purchased this portion of the property
for $750,000. RBC subsequently petitioned the trial
court to confirm the sale, and a hearing was held on
August 15, 2011.
At the hearing, RBC’s principal witness, a
real estate appraiser, testified that under a sales
comparison approach, the value of the property
was $840,000 and that under a discounted cash flow
approach, the value of the property was $650,000.
After scrutinizing these approaches, the appraiser
concluded that the fair market value of the property
was $750,000, the price that RBC offered to pay for
the properties at the foreclosure sale. The trial court,
however, denied the sale of the property and cited
Georgia law prohibiting judicial confirmation if the
trial court is not satisfied “that the property so sold
brought its true market value on such foreclosure
sale.” RBC appealed the trial court’s denial of
confirmation of the foreclosure sale.
On appeal to the Court of Appeals of Georgia, RBC
argued that the trial court’s denial of confirmation
of the sale was unsupported by the evidence of the
property’s fair market value. The Court of Appeals
first noted that it will affirm a trial court’s decision to
confirm or deny a foreclosure sale if the trial court’s
decision is supported by “any evidence.”
The court noted that evidence at trial, including
that of RBC’s appraiser, showed that the fair market
value of the property was $840,000 rather than the
$750,000 paid by RBC. Finding that the evidence
was sufficient to sustain the trial court’s decision
to deny RBC’s petition to confirm the foreclosure
sale, the Court of Appeals upheld the trial court’s
denial of confirmation of the foreclosure sale on the
92
ground that RBC did not pay fair market value for
the property.
RBC Real Estate Finance, Inc. v.
Winmark Homes, Inc.
Court of Appeals of Georgia
November 14, 2012
2012 WL 5503848
Advertising billboards in Kansas are considered trade fixtures and are personal property
for which compensation is not required in
eminent domain proceedings
According to the Supreme Court of Kansas, a lessee’s
advertising billboard structure is a trade fixture, or
personal property that is not part of real property,
and, therefore, it is not compensable in eminent
domain proceedings.
Kenneth Denton owned a 26,610-square-foot
tract of land in Wichita, Kansas located near a
major local thoroughfare. In November 2001,
Clear Channel, Inc. (Clear Channel) renewed, for
an additional 20 years, its lease with Denton for
approximately 500 square feet of the property. The
lease allowed Clear Channel to erect and maintain
outdoor advertising billboards on the leased parcel.
The leased parcel contained a billboard that had
originally been constructed in 1985.
In 2002, the City of Wichita (City) initiated
eminent domain proceedings for highway purposes
against Denton and Clear Channel. After an appraisal,
Denton’s property was valued at $1,075,600, with no
consideration given to Clear Channel’s advertising
revenue from the billboard and no compensation
given for the billboard structure itself. During the
eminent domain proceedings, the district court
subsequently provided that amount as compensation
for the taking. Both the City and Denton accepted
the appraiser’s award, but Clear Channel appealed.
The City moved for summary judgment, arguing
that Clear Channel’s billboard, advertising contract,
and related assets were personal property not
acquired by the City during the eminent domain
proceedings. Further, the City argued that it had
taken only Clear Channel’s leasehold interests in
the property, not the assets used to conduct business
Cases in Brief
there. Clear Channel, however, argued that the
billboard was fixed to the property and that income
generated from advertising on the billboard should
be included in its compensation.
The district court granted the City’s motion for
summary judgment and affirmed the appraiser’s
award, finding that Clear Channel had the right
to remove the billboard from the property. Clear
Channel appealed to the Supreme Court of Kansas.
On appeal, the Supreme Court of Kansas held
that the billboard was a trade fixture, subject to
removal by the lessee, Clear Channel. As such, the
higher court held that the billboard was considered
personal property. The court gave special weight to
the fact that Clear Channel paid personal property
taxes on the billboard, showing that Clear Channel
intended it to be personal property.
Accordingly, the Supreme Court of Kansas
determined that the district court correctly granted
the City’s motion for summary judgment, finding
that the billboard was personal property for which
compensation was not required in eminent domain
proceedings. The Supreme Court of Kansas did note
in its decision that there were authorities in other
jurisdictions where evidence of rental income was
considered in reaching a decision on compensation.
City of Wichita v. Denton
Supreme Court of Kansas
January 4, 2013
2013 WL 50250
Failure to address property owner’s extensive evidence concerning property value
may result in remand of tax court’s property
valuation
According to the Supreme Court of Minnesota, when
a tax court fails to explain why it ignored extensive
evidence offered by a petitioner in support of his
or her petition for tax relief, the tax court may be
required to explain its reasoning.
John Beck owns a lakeshore home in Turtle
Creek Township, Minnesota. The property is
approximately 1.12 acres and includes 245 feet of
lakeshore frontage. In 2009, Todd County assessed
Cases in Brief
taxes on the property based on its conclusion that the
property had a fair market value of $397,400. Beck
petitioned the tax court for relief, and Todd County
retained a licensed real estate appraiser to determine
the fair market value of the property.
At trial, the county’s appraiser testified that she
used the cost approach and the sales comparison
approach to determine the value of the property.
Using these approaches, the county appraiser
valued the property at $395,000. Beck, a licensed
CPA, did not submit a written appraisal report, but
instead testified that the value was significantly
less than that amount based on his analysis of ten
comparable land sales. Additionally, Beck’s wife,
a licensed real estate agent in Minnesota, testified
that market trends showed that the assessment
overvalued the property. Ultimately, the tax court
adopted Todd County’s appraisal and concluded
that the assessment of Beck’s property should
be decreased to $395,000. Beck appealed to the
Supreme Court of Minnesota.
The Supreme Court of Minnesota noted that
the tax court is entitled to determine the weight
and credibility of testimony and that, although it is
generally deferential to a tax court’s property value
determinations, it will not defer to the tax court
when it has “clearly overvalued or undervalued
the property, or has clearly failed to explain its
reasoning” (emphasis in original). Moreover, the
higher court noted that when the tax court fails to
explain its reasoning “it runs the risk of having its
determination overturned.”
Following these statements, the higher court
went on to find that the tax court’s decision failed
to analyze and address the testimony by Beck and
his wife challenging Todd County’s assessment. As
such, the Supreme Court of Minnesota remanded the
case back to the tax court to adequately explain the
reasoning underlying its valuation determination.
Finally, the higher court noted that, at a minimum,
property owners are entitled to know why the tax
court rejected their testimony.
Beck v. County of Todd
Supreme Court of Minnesota
January 16, 2013
2013 WL 163476
93
Execution of enforceable option-to-purchase
agreement requires independent appraisal
and hearing to determine property’s fair market value
According to the Court of Appeals of Mississippi,
when a party seeks to execute an enforceable
option-to-purchase agreement, the execution of
that agreement requires an independent appraisal
of the property and a hearing to determine the fair
market value.
Martha Crow (Crow) owned property in
Mississippi known as Crow’s Sports Center. On
May 31, 2005, Lynn and Rhonda Lambert entered
into a lease agreement with Crow. The agreement
included an option-to-purchase provision. In
July 2007, Crow had the property appraised and
a value of $110,000 was reported. In May 2010,
the Lamberts informed Crow of their decision to
exercise the option-to-purchase provision and
included in their correspondence an appraisal of the
property for $47,000. On June 23, 2010, Crow had
her property reappraised and a value of $105,000
was reported. Crow subsequently refused to accept
the Lamberts’ offer to purchase. The Lamberts then
filed suit seeking specific performance of the optionto-purchase agreement.
On May 20, 2011, a chancellor found that the
option-to-purchase agreement was enforceable. At
a hearing on the property’s value, Crow’s attorney
offered that the property had recently been appraised
for $105,000. The chancellor, however, granted
specific performance of the option-to-purchase
agreement in favor of the Lamberts at a purchase
price of $47,000. Crow appealed the decision.
The Court of Appeals of Mississippi first noted
that, in order to be enforceable, an option-topurchase agreement must have definite terms as well
as some evidence that the agreement contemplated
a purchase price or a method for determining a
purchase price. In this case, the court noted that,
although there was no purchase price included in the
original agreement, the option-to-purchase included
a clear method of determining the purchase price as
it stated that the property could be purchased at its
fair market value.
Accordingly, had the chancellor followed the
proper method for determining the fair market
value, the Court of Appeals of Mississippi would have
upheld the chancellor’s findings. However, the court
noted that the chancellor arbitrarily found that the
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lowest appraisal of $47,000 was the fair market value,
despite appraisals submitted by Crow showing that
the property had a fair market value of $110,000 in
2007 and $105,000 in 2010.
Moreover, the court found that the chancellor
failed to adequately consider the contents of the
various appraisals. For instance, the appraisal
submitted by the Lamberts did not include
improvements such as a concrete pad, a storage
building, and a heat and air system. The court
noted that disparities such as these in appraisals
require a chancellor to consider all valuations
when determining the accurate fair market value.
As such, the Court of Appeals remanded the case to
the chancellor to obtain an independent appraisal
and conduct a hearing to determine the fair market
value of the property.
Crow v. Crow’s Sports Center, Inc.
Court of Appeals of Mississippi
November 13, 2012
2012 WL 5485417
Appraisals may be ordered when disagreement over amount of loss arises, but disputes
over insurance policy coverage will not be
settled by appraisal
According to the United States District Court for the
Western District of Missouri, an insurance policy’s
appraisal provision may be invoked to settle a disagreement over the amount of loss covered under
the policy, but not disputes concerning the scope of
the policy’s coverage.
Underwriters at Lloyd’s of London (Lloyd’s)
insured properties owned by Tarantino Properties,
Inc. (Tarantino), including properties located in
Independence, Missouri. These properties were
insured by Lloyd’s from April 1, 2010 to April 1,
2011 for physical loss or damage up to $5,000,000.
The policy included an appraisal provision stating,
in part, that if the two parties could not agree on the
amount of loss, each party would select an appraiser
and differences in value would be submitted to an
umpire. A decision agreed to by any two of them
would bind the parties.
Cases in Brief
On September 18, 2010 and December 11, 2010,
the properties were damaged by wind and hail
during severe storms. Lloyd’s hired a professional
engineer, who determined that most of the damage
was caused by normal wear and tear, rather than
the storms. The cost of repair according to Lloyd’s
would have been $277,854.98. Tarantino also
retained a professional engineer who determined
the amount of loss from wind and hail damage was
$2,967,548.98. On February 3, 2012, Lloyd’s paid
Tarantino $227,854.98, the amount of their estimate
minus a $50,000 deductible. Additionally, Lloyd’s
sought declaratory judgment that the remainder
of Tarantino’s claimed losses were excluded by the
policy. Tarantino responded by filing a motion to
compel appraisal.
The Western District of Missouri first noted that
an appraisal is appropriate when there is a dispute
over amount of loss, and, further, that an appraisal is
not appropriate to decide issues of policy coverage.
As such, in order to decide Tarantino’s motion to
compel appraisal, the court needed to determine
whether the dispute was over the amount of loss or
the scope of coverage.
In this case, the court determined that the
disagreement between the parties was over the
amount of loss, not over the scope of coverage of the
agreement. The court believed that Lloyd’s payment
to Tarantino pursuant to the terms of the policy
indicated that Lloyd’s admitted to some covered
loss, and that an appraisal would be appropriate to
determine the correct amount of loss. Further, the
court indicated that it would not allow Lloyd’s to
circumvent the appraisal provision by casting the
dispute as one of scope of coverage, rather than
amount of loss.
Accordingly, the United States District Court for
the Western District of Missouri granted Tarantino’s
motion to compel appraisal.
Underwriters at Lloyd’s of London v.
Tarantino Properties
United States District Court
Western District of Missouri
September 4, 2012
2012 WL 3835385
Cases in Brief
Presumption that equalization board faithfully
performed duties and acted upon competent
evidence may be rebutted by clear evidence
that board’s decision was arbitrary and
capricious
According to the Supreme Court of Nebraska, the
presumption that an equalization board acted upon
competent evidence to justify its valuations may be
rebutted by clear and convincing evidence that the
board’s decision was arbitrary and capricious.
JQH La Vista Conference Center Development
LLC (JQH) owned the La Vista Conference Center
in Nebraska. During the 2009 and 2010 tax years,
the Sarpy County Assessor (Assessor) valued the
conference center at $23,400,000. In both years, JQH
protested the valuations at the Sarpy County Board of
Equalization (Board), but both protests were denied.
JQH appealed the denials to the Tax Equalization
and Review Commission (Commission). Before the
Commission, JQH argued that under the income,
sales, and cost approaches, the appraised value of
the property was $7,100,000 in 2009 and $10,100,000
in 2010.
The Commission, however, rejected JQH’s
appraisal, finding that JQH did not provide competent
evidence to rebut the presumption that the Board
had sufficient evidence to make its determination,
and that JQH did not provide clear and convincing
evidence that the Board’s determination was
arbitrary and capricious. As such, the Commission
affirmed the Assessor’s valuations at $23,400,000.
JQH appealed to the Supreme Court of Nebraska.
The Supreme Court of Nebraska first noted
that there is a presumption that the Board faithfully
performed its official duties of assessment and that it
acted upon competent evidence to justify its actions.
The court also noted that this presumption could
only be overcome when there is competent evidence
offered to the contrary.
On appeal, JQH argued that the Commission
erred in finding JQH failed to rebut the presumption
and that JQH had established the Board’s decision
was arbitrary and capricious. The court found that
the Commission erred in holding that the Board’s
presumption of correctness was not overcome by
competent evidence. This evidence came in the
form of JQH’s appraisals, which were prepared
in conformity with the uniform standards of
appraisal practice.
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As the Supreme Court of Nebraska determined
that JQH had successfully rebutted the Board’s
presumption of correctness, it then dealt with the
reasonableness of the Board’s valuation. Here, the
court noted that Sarpy County utilized professionally
accepted mass methods for determining property
value, which are reasonable methods for
determining the valuation of the property. As such,
the court determined that, although JQH rebutted
the presumption, it did not meet its burden of
showing that the county’s valuation was arbitrary,
capricious, or unreasonable. As such, the Supreme
Court of Nebraska affirmed the property’s valuation
at $23,400,000 for the 2009 and 2010 tax years.
JQH La Vista Conference Center
Development LLC v.
Sarpy County Board of Equalization
Supreme Court of Nebraska
January 25, 2013
285 Neb. 120
Claims of negligence and negligent misrepresentation against appraiser must show
that appraisal was produced for plaintiff and
plaintiff relied upon it
According to the Court of Appeals of North Carolina,
a plaintiff alleging negligence against an appraiser
must show that the appraisal was produced for its
use and that it justifiably relied upon the information
in the appraisal.
In the spring of 2007, Yolanda Hernandez
considered investing in a multiunit residential
property in Wilmington, North Carolina. Upon
viewing the property, she retrieved an MLS listing
describing the property as a triplex. On April 9, 2007,
Hernandez contracted to purchase the property
for $205,000. The contract contained an appraisal
contingency that expired on April 30, 2007, which
provided that Hernandez could terminate the
contract if an appraisal determined the property
value was lower than the sale price.
An appraisal of the property had been completed
on May 16, 2007. The appraisal report listed the
property as both a duplex and a triplex, and further
stated that the property was legally in compliance
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with R-7 zoning requirements. The R-7 zoning
requirements prohibit triplexes. In an affidavit, the
appraiser stated that it was his understanding that
the property was grandfathered against any zoning
restrictions that would have prohibited a triplex
rental property. Hernandez stated that she never saw
a copy of the appraisal report prior to purchasing
the property.
In September 2007, a city zoning officer informed
Hernandez that the property could not be used as
a triplex as it was an illegal use under the zoning
code. Hernandez subsequently stopped making
loan payments on the property and lost the property
through foreclosure in February 2009.
On May 25, 2010, Hernandez filed a complaint
against the appraiser, alleging claims for negligence
and negligent misrepresentation. On August 11,
2010, the appraiser filed a motion to dismiss
Hernandez’s claims, and the trial court granted
summary judgment dismissing Hernandez’s claims.
Hernandez appealed to the Court of Appeals of
North Carolina, alleging that the trial court erred in
dismissing her claims.
On appeal, Hernandez argued that her evidence
showed that the appraiser breached his duty of care
to her and that she suffered economic loss as a result
of her reliance on the appraisal, which showed
no defects in the home. The court noted that for
Hernandez to succeed in her claims she would have
had to show, first, that she was a person for whose
benefit the appraiser intended to supply the appraisal
report, and second, that she relied on the report.
The court noted that Hernandez admitted in
a deposition that she never viewed a copy of the
appraisal report. Based on this and other related
facts, the court determined that Hernandez did not
justifiably rely on the appraisal report. As such,
the Court of Appeals of North Carolina found that
Hernandez did not properly allege her claims and
affirmed the trial court’s grant of summary judgment
in favor of the appraiser.
Hernandez v. Coldwell Banker
Sea Coast Realty
Court of Appeals of North Carolina
November 6, 2012
2012 WL 5392328
Cases in Brief
In Pennsylvania, a murder/suicide on a premises is not an objective material defect that
must be disclosed by the seller
According to the Superior Court of Pennsylvania, the
occurrence of a murder and/or suicide at a property
does not constitute a material defect to real estate
such that a seller must disclose it to a buyer.
On February 11, 2006, Konstantinos Koumboulis
allegedly shot and killed his wife and himself at
his property. On September 23, 2006, Kathleen
and Joseph Jacono purchased the property from
the Koumboulis Estate. Subsequently, the Jaconos
spoke with representatives of the Pennsylvania Real
Estate Commission, who told the Jaconos that the
murder/suicide that took place at the property was
not a material defect that needed to be disclosed to
potential buyers. Thereafter, the Jaconos entered into
a listing agreement with Re/Max Town & Country for
the sale of the property. Re/Max conducted its own
research confirming that a murder/suicide was not
a material defect requiring disclosure.
On June 17, 2007, Janet S. Milliken entered
into an Agreement of Sale for the property with the
Jaconos. The Seller Property Disclosure Statement
included in the agreement did not disclose the
murder/suicide as a known material defect and
noted that the property was last occupied in March
2006. On August 10, 2007, Milliken closed on the
property for $610,000. Sometime after September
2007, Milliken became aware of the alleged murder/
suicide. She subsequently filed suit against the
Jaconos, alleging fraud and misrepresentation
regarding the sale of the property without disclosing
the murder/suicide of the prior inhabitants. The
trial court granted the Jaconos’ motion for summary
judgment, finding that the murder/suicide was not
a material defect that must be disclosed. Milliken
appealed to the Superior Court of Pennsylvania.
On appeal, Milliken argued that a material
defect existed at the property, and the failure to
reveal that defect constituted fraud or material
misrepresentation. Milliken claimed that the defect
was the psychological damage to the property caused
by the murder/suicide.
The Superior Court of Pennsylvania, however,
found that the psychological impact caused by the
murder/suicide could not be considered an objective
material defect that must be disclosed by a seller
to a buyer. The court reached this conclusion by
determining that a monetary value could not be
Cases in Brief
assigned to the psychological damage caused by the
murder/suicide. The court observed that the fact that
a murder occurred at the house fell into the category
of homebuyer concerns described as caveat emptor,
or “let the buyer beware.” A dissenting opinion
noted that two real estate appraisers who appraised
the subject property reported that stigma related to
the murder/suicide had reduced the market value
of the property. The dissent further noted that in a
case with substantially identical circumstances, the
California Court of Appeals had ruled that the sellers
had a duty of disclosure.
Milliken v. Jacono
Superior Court of Pennsylvania
December 26, 2012
2012 WL 6684757
Valuations conducted by state appraiser will
only be set aside if taxpayer can demonstrate they are clearly erroneous
According to the Supreme Court of Vermont, an
assessment by the state appraiser based on findings
of fact will only be set aside if those findings are
clearly erroneous.
Stephen L. Petrie owns 0.35 acres of land in
Colchester, Vermont. The land is improved with
a five-year-old, single-family dwelling. The land
has lake access by way of a deeded right-of-way. In
2011, the Town of Colchester (Town) conducted a
reassessment of the entire town and valued Petrie’s
property at $346,400. Petrie appealed this assessment
to the Board of Civil Authority, and the value was
decreased to $331,600. Again, Petrie appealed, this
time to the state appraiser.
At a hearing before the state appraiser, Petrie
argued that the fair market value of his property
was between $225,000 and $250,000. In response, the
Town submitted three comparable sales properties
and analysis supporting a fair market value of
$318,500. The state appraiser concluded that the
Town’s valuation of Petrie’s property was persuasive,
and concluded that the fair market value of the
property was $320,000. Petrie appealed again.
On appeal, the Supreme Court of Vermont noted
that when a taxpayer challenges an assessment to
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the state appraiser, there is a presumption that the
Town’s assessment is valid. If the taxpayer is able
to present evidence that the appraisal is above fair
market value, the Town must produce evidence to
justify its appraisal. Ultimately, the burden is on
the taxpayer to persuade the court that the Town’s
appraisal is incorrect.
Petrie argued that the appraiser’s findings were
erroneous because the appraiser failed to account for
the fact that his home is a land-locked seasonal home
without lake access, and that it is located close to an
interstate. Despite Petrie’s arguments, the Supreme
Court of Vermont held that Petri failed to rebut the
presumption that the Town’s assessment was valid.
First, the court noted that, although it was
incorrect, it was not an error for the appraiser
to include water access as a characteristic of the
property as the right-of-way was listed on Petrie’s
own deed. Further, the court noted that the state
appraiser did not err in relying on the Town’s
comparable sales approach, as this approach
factored in differences between Petrie’s property and
comparable properties. Lastly, the court found that
the appraiser accounted for the seasonality of the
property by deducting $10,800 from the appraisal.
The appraiser found that the lack of a sprinkler
system was the only real impediment to occupying
the home full time, and $10,800 was the cost to install
a sprinkler system in the home.
As such, the Supreme Court of Vermont found that
Petrie did not demonstrate that the state appraiser’s
findings were clearly erroneous, and affirmed the
state appraiser’s valuation of the property.
Alan M. Weinberger, JD, has been a professor
at St. Louis University School of Law since 1987.
Previously, he practiced for twelve years with law firms
in Detroit and Washington, DC, where he specialized
in real estate transfer, finance, and development.
Weinberger graduated magna cum laude from the
University of Michigan Law School. He has published
articles and chapters in the fields of real estate
finance, partnership, and property law. He is coauthor
of Property Law Cases, Materials and Problems,
3rd ed., published by West Group.
Contact: weinbeam@slu.edu
Petrie v. Town of Colchester
Supreme Court of Vermont
November 8, 2012
2012 WL 6827294
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Cases in Brief
financial views
Spring 2013
A Positive State of Mind
by James R. DeLisle, PhD
Commentary
The collective psyche among investors has turned
bullish, creating a positive state of mind that has
affected the economic outlook and a number of asset
classes. This is most visible in the stock market,
which has surged to record levels catching many off
guard. The surprisingly strong stock market can be
explained, in part, by the combination of solid balance sheets and improving economic prospects for
a number of industry sectors. However, the recent
improvement can also be attributed to the low
interest rate environment that has permeated the
economic and capital markets. Indeed, the impact
of low interest rates on economic and investment
activity cannot be overstated. This situation is not
confined to the domestic market, as evidenced by
the recent decisions by the European Central Bank
(ECB) and other countries to reduce interest rates.
While artificially low interest rates have provided
a temporary respite to the economic doldrums and
have helped bolster prices for hard assets, they
are no cure for weak market fundamentals. When
combined with increasing access to debt, however,
the continuation of low interest rates might just
be sufficient to help jump-start overall economic
activity. If this occurs, the fledgling recovery might
gain added momentum and strengthen the positive
state of mind. At some point interest rates and
inflation will return to long-term averages, which
will create a downward drag on the economy and
asset values. For now, the market seems to be either
ignoring the day of reckoning or assuming that
economic growth will be sufficiently strong to offset
the transition to more normal interest rates.
While an economic slowdown is anticipated for
the second half of the year, there are some signs that
activity will regain momentum after a temporary
pause and might be able to move into a sustainable
Financial Views
expansion mode. Given the record run in the stock
market and in commercial real estate, it is clear
that many players are discounting such a scenario.
Hopefully, improvement in economic and market
fundamentals will create a convergence between
expectations and realizations. If this alignment does
not occur, the economy will be in for a rough ride.
The Economic Environment
As 2012 wound down, gross domestic product (GDP)
growth experienced a sharp decline, raising concerns
that the economic recovery had lost momentum.
Fortunately, this situation was short-lived, with real
GDP bouncing back during the 2013 first quarter to a
respectable, but somewhat disappointing, 2.5% rate
of growth. The economic growth was attributable to
a number of factors, including increased consumer
consumption as well as positive inventory investment as businesses became more optimistic. On the
downside, net exports were a drag on growth, as the
global slowdown dampened demand for US products. Similarly, government spending continued to
decline, although cuts in defense were not as severe
as in the prior quarter.
During the 2013 second quarter, the economy
appeared to be on track, maintaining a moderate
rate of improvement, with consumers and businesses
helping support economic activity. However,
economic activity is expected to slow during the
second half of 2013, as government spending cuts
and tax increases hamper activity. The global
economic slowdown is also expected to place a
dampener on the economy.
On the domestic scene, the Federal Reserve
(the Fed) is talking as though it will start
unwinding its stimulus efforts, including its
record-setting $85 billion monthly bond-buying
program. Given the support that the program has
99
provided to the financial markets, the timing and
level of deceleration is being closely monitored. This
attention has not been lost on the Fed, which is struggling with how to manage the withdrawal without
creating excessive shocks to the market. The inclusion
of mortgage-backed securities along with Treasury
bonds is of particular note since the capital infusion
is partly behind the stabilization of the mortgage market. While the easing out of the stimulus program is
inevitable, the tenuous state of the economy as well as
its ability to withstand cutbacks in government spending have created heated debates over the exit strategy.
Indeed, there are some signs that the program could
be amended to provide additional short-term stimulus if the economy loses ground. The lack of clear
direction as to the timing and magnitude of changes
in the Fed’s policies has created a corollary level of
exit risk for investors. This is especially true for those
holding positions in real assets whose prices have
been bolstered by the temporary infusion of capital.
On the budget front, Washington has done little
to resolve the standoff as the two parties continue to
defend the lines they have drawn in the sand. The failure
to resolve the standoff triggered sequestration, which
was presented as an automatic program that would
force some type of agreement on both the revenue
and expense sides of the equation. Some of the acrossthe-board cuts did not pan out that way, as in the case
of the Federal Aviation Administration (FAA), where
public outrage over widespread flight delays forced
the FAA to reverse cutbacks by transferring funds from
construction projects and less essential areas.
The FAA situation was seen as a test case and
appeared to open the door to a spate of piecemeal
fixes that would mute the impact of across-the-board
cuts and take pressure off Congress to come up with
a permanent solution. Of particular concern was the
potential to shift funds from longer-term needs to
cover short-term problems, which would exacerbate
the budget crunch down the road. A case in point was
the FAA reallocation of capital funds to operating
funds, which could lead to a significant increase in
flight delays and congestion in the future. Congress
is likely to continue looking for ways to dampen the
impact of sequestration and defer the pain.
At an aggregate level, sequestration is estimated
to cut some $85 billion from the federal budget in
the current fiscal year and a total of some $1 trillion
over the next ten years. Real estate veterans are likely
to see the cuts as analogous to the underfunding
100
of routine maintenance and deferred capital
expenditures that typically snowball and can create
a budget time. Ironically, the sequestration budget
impact for the entire fiscal year—$85 billion—
matches the Fed’s monthly bond-buying program
that has been used to bolster the economy.
Regardless of the obvious lack of financial
acumen emanating from Washington, there has
been some good news on the deficit front. In a recent
report, the Congressional Budget Office cut its deficit
projection for fiscal 2013 by some 20%, putting
it at 4% of GDP. This improvement came from a
combination of factors, including higher revenues
associated with recent tax increases and lower
expenses associated with entitlement programs.
With respect to the balance of trade, the foreign
deficit declined during the first quarter, with exports
relatively flat and imports declining moderately.
Much of the challenge with exports can be attributed
to the global economic slowdown—especially in
Europe. With respect to China, the trade deficit
declined due to a significant decline in imports and
a moderate increase in exports.
Going forward, the fate of the deficit will depend
in large part on the relative pace of economic recovery
in the United States compared to that of its major
trading partners. Regardless of cyclical adjustments,
the United States remains dependent on global partners
for both trade and capital flows. This situation is likely
to become more pronounced as global forces play a
more prominent role in domestic economic conditions.
Employment
The employment scene has been closely watched as a
harbinger of economic recovery. Accurate estimates of
job creation rates have proven to be somewhat elusive,
however, triggering relatively significant revisions.
Fortunately, these revisions have been to the upside,
indicating that employment growth was stronger than
initially reported. Thus, when April job reports came
in above expectations, prognosticators and investors
had some unexpected positive news to digest. While
the news helped contribute to the positive state of
mind, it also set the stage for disappointment when
weekly jobless claims exploded over tenfold to 360,000
workers. Despite this setback, some observers dismissed it as an anomaly and a temporary pause. But, it
was a red flag for those bears whose ranks have been
gradually eroded by the fact the economy seems to
have stabilized.
Financial Views
Setting aside the recent figures, the increase
in jobs through April put downward pressure on
unemployment, which fell to 7.5%—the lowest level
since the Great Recession. Despite this improvement,
by the end of the first quarter the labor force
participation rate fell to its lowest level since the
recession of the early 1980s. While a sign of concern
regarding shadow unemployment, the participation
rates across the country were correlated with job
losses, suggesting it reflects a cyclical phenomenon
rather than a structural shift. This will make it
more difficult to get unemployment rates under
control as improving prospects are likely to draw
more employees back into the labor pool. At the
same time, older employees with jobs are likely to
hang on as long as possible, creating an additional
drag on the correction. Also, a significant number
of employees—especially seasoned workers whose
skills were not valued during the early stages of
recovery—remain underemployed.
While employment growth generally improved,
some sectors lagged. This was especially true with
respect to government employment, although the
impacts of sequestration were not as pronounced
as some had feared. Similarly, manufacturing
employment declined due to impending cutbacks
in defense spending. The lack of manufacturing
employment growth in other economic sectors
reflected nagging concerns by businesses regarding
the demand side of the equation, especially when
factoring in the global economic slowdown. In
addition to softness in some economic sectors,
weather-related forces created a drag on employment,
creating a modest decline in average workweeks and a
temporary increase in part-time employment figures.
On a positive note, temporary employment levels,
which typically precede an increase in permanent
employment, have improved.
It should be noted that continued improvement
on the employment front will stimulate an increase
in voluntary job separations as employees decide
to look for new jobs. Such a trend is evidenced by
a number of studies that report record-low levels of
job satisfaction. Employees may feel trapped in their
jobs by a number of forces, including a prolonged
weak job market after the Great Recession. Those
who did hang on to their jobs have been expected
to pick up the slack and produce more with less.
Also, frustration with the lack of wage growth has
increased, especially in companies with wealth
Financial Views
created in the recent stock market run. In addition,
rising health care costs and lack of access to low
cost, portable insurance tied many employees to
existing jobs. Finally, the collapse of the housing
market eliminated mobility for many employees who
could not take the economic hit by selling houses at
historically low prices.
As the economy moves forward, the result may
be new employment opportunities. That is, there may
be an increase in employment turnover as employees
begin to search for new opportunities. While jobrelated moves have historically affected interstate
migration rates, a number of employees may change
jobs without changing location. The degree to which
voluntary separations occurs depends, in part, on
whether the economy picks up some lost momentum
in the second half of the year as anticipated, as well
as on the efficacy of proactive efforts of companies
to reengage employees. Given strong balance sheets
and record stock prices, many will have the financial
wherewithal to invest in their employees, although it
is not clear if leadership from human resources can
supplant the corporate cost-cutting mantra of the past
several years. The choice may well be compromised
by analysts and investors who focus on quarterly
earnings and punish companies that make strategic,
long-term decisions geared toward improving
forward earnings and the long-term bottom line.
The lessons learned from this reengaging of
employees will be telling in terms of how effective
companies are in dealing with a new labor force of
young millennials. In this new world, job turnover
rates can be expected to increase with a new
structural level replacing old norms, at least until
the new rules of engagement between companies
and workers are codified. Unfortunately for some
younger employees, this debate will be postponed
until the economy picks up enough momentum to
let aging workers retire and free up jobs.
Despite longer-term structural concerns, improving
near-term employment figures have made a material
contribution to the positive state of mind. This helped
bolster stock prices, and placed upward pressure on
business and consumer confidence levels.
Inflation and Interest Rate
During the second quarter, the annual rate of
inflation slipped toward 1%, which was significantly below the Federal Reserve’s target of 2%.
Expectations for future inflation suggest the low
101
The Fed is well aware of
the economy’s dependence
on low interest rates.
inflationary environment should continue for the
near term. Inflation rates will be dampened by the
lack of wage increases and by increases in payroll
taxes. The global slowdown, which has reached
recessionary levels in some countries, has also
taken pressure off commodity and import prices and
should help maintain low inflationary rates. This
will allow the Fed to ease into its transition period
as it begins to wean the market from its aggressive,
prolonged effort to stimulate the economic recovery.
The Federal Reserve has continued its
commitment to hold interest rates at historically low
levels. This policy has been fully discounted in the
market, which has internalized low interest rates. The
Fed is well aware of the economy’s dependence on low
interest rates and the need for a gradual transition
as it begins to plan its pullback. At the same time, a
growing number of countries have cut interest rates
to stimulate economic activity in the face of weak
demand. This was evidenced by the European Central
Bank (ECB) decision to reduce its benchmark rate
to a record low in early May 2013. However, China
has been a notable exception, signaling it believes
the moderate contraction in its economic growth
is manageable and that its domestic demand and
global competitive advantage can insulate it from the
global slowdown. Given the degree of contagion with
respect to low interest rate policies, the adjustment
to a higher interest rate environment will be a global
phenomenon that will bear close monitoring.
In addition to a trend toward longer-term average
interest rates and the eventual ending of the Fed’s
stimulus program, the financial system will face
additional stressors as efforts are redoubled to avoid
future banking crises. As noted by Chairman Bernanke,
these efforts could take a number of forms, including
increased capital requirements in general and for
certain higher-risk activities in particular. In addition, as
the economic recovery continues, regulators and policy
makers are expected to refocus energy on controlling
the “too big to fail” phenomenon that many believe has
yet to be resolved. These efforts will come on top of
pressure to enforce provisions built into the Dodd-Frank
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law, many of which have taken a back burner during
the height and aftermath of the financial crisis.
Domestic banks will have to adopt additional policies
and practices to comply with the Basel III accord that
seeks to stabilize the global financial system. While
compliance is voluntary, the increasing integration and
interconnectedness at the global level will force larger
banks to adhere to added capital requirements designed
to manage liquidity risks and help ensure they are able
to survive foreseeable stresses.
The cumulative effect of these efforts will place
a dampener on bank activities to help forestall
future financial crisis that could threaten the
domestic and global economies. Unfortunately,
there is no guarantee the combination of voluntary
and mandatory standards will work over the long
term, although the added scrutiny and resultant
transparency may monitor emerging risks and signal
the need for additional interventions or corrections.
In the meantime, interest rates a likely to remain at
historically low levels with upward pressure over
the intermediate to longer term.
Business Indicators
Business indicators were mixed to positive during the
2013 first quarter with some slippage in the second
quarter. For example, in January, the growth rate in
business inventories was at the highest level since
shifting into positive territory, but the rate of growth
slowed in February. While inconsistent, the growth
rate was generally in line with expectations for sales.
The positive trend was led by retailers who were anticipating continued growth in retail sales. Inventory
growth surged in January, but then remained generally flat as businesses paid close attention to demand
and focused on improved supply chain management
to manage costs. In terms of sectors, wholesale inventory levels contracted a bit and lagged growth in the
retail and manufacturing sectors. During the second
half of the year, businesses are likely to continue to
keep a close eye on inventory levels in the face of a
potential slowdown in economic growth.
On the production front, industrial production
levels through the first quarter rose at a respectable
5% annualized, although activity slipped after
that point. Advance orders for durable goods
have continued to exhibit a volatile pattern, with
expectations for moderate improvement in line
with the overall economic recovery. Factory orders
have exhibited a similar pattern, with downward
Financial Views
revisions indicating activity has been weaker than
initially thought. Fortunately, the magnitude of these
adjustments and the range of volatility have not been
sufficient to alter the generally positive state of mind
among manufacturers. One wild card that will bear
watching will be defense-related spending, which
will be under negative pressure.
On the export front, the global slowdown
and the inability to jump-start economic activity
among key trading partners is likely to place an
additional dampener on manufacturing. The uptick
in the housing market and improved outlook for the
commercial sector might bolster the construction
sector, although public-sector demand is likely to
continue to soften. The result will be added delays
in much-needed infrastructure investment, setting
the stage for a surge in activity when the domestic
and global economies pick up momentum.
On a positive note, confidence levels among
small business owners increased during the second
quarter of 2013, continuing an upward trend
that began in the 2012 third quarter. Despite this
improvement, confidence remains below par with
respect to historical levels and is based on a belief
that near-term conditions will be stable rather than
expectation of a significant recovery. However,
access to credit for small businesses has improved as
lenders have relaxed standards although they remain
relatively tight compared to long-term standards.
With respect to big business, CEO confidence levels
have shown some gains, bolstered by solid balance
sheets and strong stock prices as well as improvement
in economic conditions. In general, CEOs recognize
the challenges ahead but are shifting more attention
to the opportunities that may be emerging as the
domestic economy improves. According to a recent
Conference Board CEO Challenge survey, the most
critical challenges they face are related to human
capital and achieving operational excellence. The
top strategies for addressing human capital concerns
focus on growing talent internally through training
and development, which bodes well for current
employees. Not surprisingly, these efforts carry
over to the operational excellence side of the ledger
for which the top strategies relate to improved
employee engagement and productivity, as well as
to further reduction in baseline costs. Whether these
two approaches will work at the same time will be
interesting to watch, especially since there is generally
a lag in the return on investment in human capital.
Financial Views
This may bode well for some of experienced workers
who can make an immediate contribution. Going
forward, business indicators will be characterized
by a period of gradual improvement with some nearterm adjustments in response to economic conditions
on the domestic and global fronts.
Stock Market
The stock market has enjoyed an unexpectedly
strong run with 18 straight weeks of positive
Tuesdays (which is something of a bellwether for
investor expectations), helping the market recover
and set new records for the Dow and S&P indices.
Despite record index levels, the underlying price/
earnings ratios remain below record levels. This
provides fuel to the positive thinkers who contend
the market may not be as overheated or over exuberant as the entrenched bears continue to argue.
In addition to the generally positive state of mind,
stock prices can be attributed to positive financial
conditions, with many companies sitting on healthy
reserves and strong earnings growth. However,
it should be noted that a number of companies
increased earnings through cost-cutting measures
and austerity programs rather than an increase in
top-line sales. The ability to squeeze more out of less
has played out for most companies, suggesting that
further improvements will have to come from revenue growth that depends on the economic recovery
or on outperforming the overall economy. The fact
that corporate balance sheets are strong and earnings growth rates in a number of sectors are coming
in above expectations are positive indicators that the
stock rally may continue.
While the outlook for stocks over the long term
will depend on the economic recovery, there are
some short-term phenomena that might explain the
prolonged bull run as well as why it might continue. A
major factor is the absence of viable options for returns
from other asset classes. The search for yield in what
is expected to be a low interest rate environment over
the near-to-intermediate term has led a growing cadre
of investors to stay on the offensive in search of yield.
Even some investors who had stayed out of the market
are being drawn back in to see if they can recover the
money they left on the table when they got defensive
and pulled out of the market.
When the Fed signals it will start backing off on
its stimulus programs, investors are expected to rotate
portfolios away from assets that will lose value in a
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rising interest rate environment and seek out stocks
and other investments with more “offense” that can
benefit from economic expansion. An additional
stimulus to the stock market could come from asset
allocators who find their portfolios under-allocated
to stocks compared to long-term averages; this is the
case for a number of institutional players that have
adopted defensive portfolio positions. Finally, the global
decline in interest rates that has recently accelerated
has put the United States at something of an advantage
as it is ahead of the pack. Until the global economy
stabilizes, US assets might be seen through a positive
lens in terms of investment performance. Regardless
of how the domestic and global scenes play out, recent
momentum in the stock market and investor remorse
by those who missed out on the correction coupled
with new players trying to rebuild wealth in a low-yield
world will make for interesting headlines.
Consumer Confidence
Consumer confidence has continued to bounce
around, although the general trend is upward and
came in above expectations for April. Despite this
improvement, confidence levels have not recovered
from the peak in early Fall 2012 before the budget
debacle played out. Of significance in the recent
figures is the fact that consumer expectations leapt
ahead of present conditions, echoing the positive
state of mind exhibited by other players in the market. Going forward, consumer confidence levels are
expected to become more aligned with economic
activity levels, especially those that are likely to
affect their personal situations. Thus, reports of
strong economic growth or bull stock markets that
are achieving records highs are not expected to offer
significant solace to consumers who feel left behind
and do not benefit from the economic recovery.
Consumers have worked at addressing their
credit woes, resulting in a decline of over $110 billion
in outstanding credit during the first quarter. At the
same time, delinquency rates for mortgages and for
lines of credit, credit cards, and automobile loans all
declined moderately. This improvement included a
decline in delinquency rates on student loans although
rising tuition and college attendance levels pushed
outstanding student debt levels upward. Indeed, during
the first quarter student loan balances increased by
some $20 billion pushing the total outstanding balance
toward $1 trillion. This debt represents a future drag
on consumer spending and economic activity.
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Overall, the outlook for consumer confidence
is stable to positive, with consumers paying close
attention to how Washington deals with unresolved
conflicts as well as news related to how the economy
is actually performing. However, the real acid test will
be how their pocketbooks and wealth are likely to fair.
Retail Sales
The volatility in retail sales growth is somewhat
understandable given the uncertain economic,
budgetary, and political environment that has characterized much of the first half of the year. Retail
sales started off 2013 at a slow pace before racking
up an unexpected increase in February. While the
economy continued to gain momentum during the
first quarter, retail sales growth slipped again into
negative territory. The pattern was generally negative
across categories, with lower gas prices contributing
to the decline along with automobile sales as interest in new models waned. This pattern was broken
in April, with sales growth outperforming expectations. Despite a relatively volatile pattern of retail
sales and some disappointing monthly figures, on
a year-over basis sales were up. It should be noted,
however, that the rate of increase was the lowest in
over three years. These figures were dragged down
by revisions to sales earlier in the quarter, which suggest consumers were more tentative than reported.
In a recent Gallup poll, around 40% of consumers
reported they are spending less money than in the
past; this is a substantial change from 2010, when
almost 60% were in a contraction mode on spending.
Despite this improvement, only 25% of consumers
are in an expansionary mode in terms of consumer
expenditures. This attitude is likely to create a drag
on retail sales growth until consumers develop more
confidence in their personal economic situations.
Of some concern is the fact that of those
Americans reporting they are spending less, some
75% indicate they believe this will become a new
pattern rather than being a cyclical phenomenon.
This response is likely tempered by the increasing
attention on the fact most Americans have nowhere
near the savings needed to fund comfortable
retirement living. For the surge in baby boomers,
the fact that time is running out to make up for
past spending will likely continue to place a drag
on consumer expenditures. While rising housing
values and an improving economy may provide
some respite, not all will benefit from such forces.
Financial Views
During the first half of 2013, online retailers
enjoyed an increase in market share. Although this
trend is not new, the rate of compound growth has
been impressive. Pure online sales continue to be
a relatively small share of total retail sales, but the
low market share understates the importance of
online sales, and the Internet in general, since many
traditional retailers are placing increased attention
to Internet sales. Additional advances in technology
and improvements in supply-chain management
are likely to help increase throughput for traditional
retailers and improve margins. The proposed
Marketplace Fairness Act may create a more level
playing field, and the fact that Amazon has signed
on as a supporter of the bill suggests that sales tax
reform for Internet transactions is on the horizon.
That said, a number of details must be worked out,
including how to protect smaller retailers who may
not have the infrastructure or systems to address the
myriad tax jurisdictions that would have to be paid
if the legislation passes.
The volatility in retail sales has not been
experienced across the board, especially with upperend retailers whose core customers benefited most
from the recovery in the housing market and the bull
stock market. However, the middle class continues
to be eroded and has been losing significant
ground. Indeed, going into summer, the impacts
of government cutbacks and lost jobs are likely to
create a drag on overall retail sales; however, the
upper end of the market may continue to outperform.
Housing Market
The housing market has been closely watched as
a sign of things to come. Thus, the generally positive housing figures have been a major contributing
factor behind the positive state of mind. Through
February, the housing market continued to deliver,
with single-family prices reported in the S&P/CaseShiller Index pushing double-digit increases over the
trailing twelve months. The improvement was fairly
widespread, with the biggest gains in the markets
that were the hardest hit during the housing crisis.
While the increase in home prices is good news, the
percentages benefited from the low base of valuations that was a carryover from the collapsed housing
market. In addition, the increase in median prices has
benefited from a shift in the quality of product, with
sellers of higher-priced homes testing the market and
foreclosed sales declining. At the same time, potential
Financial Views
buyers have been lured back into the market by the
combination of improved economic outlook and low
interest rates that have made ownership more attractive than renting in some markets.
With respect to housing starts, the pattern of
recovery has been somewhat mixed although still
generally on the upside. After a string of generally
positive news, housing starts slipped at the end
of the second quarter with two straight months of
declining figures. This pattern mirrored the decline
in homebuilder confidence as measured by the
NAHB Housing Market Index, which by the end of
April had slipped for the third month in a row. The
biggest negative drag on the index was the decline in
homebuyer traffic. In addition, builders are struggling
with rising costs for labor and materials that are putting
upward pressure on prices. In some cases, builders
have been struggling to find laborers since many skilled
workers walked away from the industry or were sent
home during the collapse of the housing market.
While the decline in housing starts and builder
confidence levels created some angst among housing
observers, much of that concern was assuaged
by the fact that building permit activity exhibited
double-digit increases during the same period. The
divergence of these two indicators suggests the
recent slowdown in starts is a temporary pause.
Indeed, the fact the decline in starts was led by the
multifamily sector may actually be a healthy sign
of a pullback from the excess exuberance that has
led to record prices for existing assets and a spike
in new development.
The pace of existing home sales grew in early
2013. Indeed, the annualized pace of sales through
February came in at the highest level since the
stimulus created by the homebuyer tax credit
program in 2009. With respect to closings, pending
home sales levels were up only moderately during
the first quarter. In general, this lack of activity was a
reflection of the lack of product on the market rather
than a lack of demand. In terms of inventory, the
reported supply of houses for sale was around 20%
below the six-month average in a normal market.
In terms of distressed housing, the April
foreclosure activity was at the lowest level since
the collapse of the housing market, suggesting the
worst may be over. Indeed, on a year-over basis
residential foreclosures are off a third, with even
more improvement in the recent figures. While
generally healthy, the improvement in involuntary
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Many commercial transactions are still occurring
at record-low cap rates.
repossessions is likely to face some headwinds in
the second half of 2013, as many who tried to hang
on realize they have run out of time for values to
rebound. This is especially true if the economy slows
down in the second half of the year as expected.
Regardless of economic and housing market
conditions, distressed homeowners are likely to start
focusing more attention on the impending expiration
of the IRS’s temporary abeyance on treating mortgage
forgiveness as a taxable form of income. This provision,
which was already extended another year, expires at
the end of 2013. This might lead to a wave of short sales
that could dampen recent price gains. Similarly, banks
may decide it is time to more aggressively thin their
holdings of foreclosed properties and take advantage
of improving market conditions. All in all, the second
half of the year is likely to see an increase in housing
activity, with a number of builders continuing to gear
up in anticipation of continued improvement. Whether
that optimism is warranted will depend on the fate
of the overall economy and rising confidence among
potential buyers.
Real Estate Market
Overview
It is well known that real estate is a cyclical industry,
one that is at times out of sync with the rest of economy
and other leading indicators. Since capital flows to real
estate can be driven by factors outside of the real estate
market, assets often trade at premiums or discounts
relative to the values that would otherwise be supported by underlying fundamentals. This situation is
clearly the case in the current real estate market, where
access to low-cost, non-recourse debt and the lack of
viable investment options for income-producing assets
have driven capitalization rates to historical lows.
Although trophy building sales on flipped
transactions are not capturing the headlines as they
did at the peak of the market, many commercial
transactions are still occurring at record-low cap rates.
To understand how some investors are justifying such
prices, it is useful to look at a simple example. Assume a
value-add investor is looking at acquiring a $10 million
property at a 5% cap rate, which translates to $500,000
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per year in stabilized income. If the buyer is qualified
and can get a 70% loan-to-value mortgage with a 3%
interest-only loan for seven years, the effective cash
throw-off is over 10%, which is extremely attractive
relative to other fixed-income options that are not
collateralized by hard assets.
While the typical investor might be accepting
some risk in terms of exit values and foreclosure,
those with strong track records have been able to
get loans that have some assumption options as well
as non-recourse features. This scenario is currently
playing out in some segments of the market, putting
upward pressure on values as investors use leverage
to amplify returns. As long as low-cost financing is
available and investors’ options are limited, prices
may hold up. However, this situation could rapidly
change in the face of rising interest rates, higher
yield requirements, and/or renewed interest in
the risk side of the equation by both lenders and
investors. In the meantime, the market is likely to
remain very competitive in terms of pricing, with
growing optimism on the economic front putting
additional pressure on prices as investors pencil in
rent increases into discounted cash flow models.
While recent pricing levels for real estate
have kept some investors on the sidelines, other
investors have expanded their horizons, moving
beyond gateway cities and core assets in search
of higher yields. In addition to increased activity
supported by expanded deal sourcing, market
activity is likely to increase further as a growing
number of investors, lenders, developers and many
other industry professionals begin to discount the
economic recovery. The fact that tenants and space
users have not quite gotten caught up in the same
sense of optimism seems somewhat irrelevant with
respect to increasing transaction volume.
Given recent market momentum, it is likely that
real estate transaction activity will continue to increase
over the near term. Whether the increase in market
activity is sustainable depends on solid improvement
in underlying market fundamentals. This improvement
will have to be rather broad based to allow the market
to absorb the distressed assets that lenders ultimately
have to dispose of to clear their portfolios.
Office Market
The office market has exhibited some improvement
in underlying fundamentals, benefiting from a lack
of new product and moderate increases in demand.
Financial Views
At a national level, office vacancy rates have continued to improve at a gradual rate falling toward
15% overall. The pattern of vacancy rates differed
by market and submarket, with some outperforming
the averages and others languishing.
In terms of cycle stage, the office sector has not
yet shifted into the recovery stage, although it is
postured for additional improvement when hiring
activity picks up along with the broader economic
recovery. The modest improvement in occupancy
rates has supported some increases in leasing rates.
Some gateway markets with strong technology,
biotechnology, and energy activity have experienced
greater improvement. Nationally, rental rates are
still significantly below levels needed to support new
construction, which has constrained development
activity. This scenario is expected to continue at the
national level, although some markets are beginning
to see speculative construction.
In terms of market share, the office component
of the NCREIF Property Index accounted for some
35% of the $329 billion total market cap. Despite this
dominance relative to other property types, office
performance lagged overall returns, with a rather
disappointing 9% total annualized returns through
the end of the 2013 first quarter. Despite these
trailing figures, the income component was relatively
competitive, falling 20 bps off the overall pace.
With respect to office subtypes, CBD properties
generated higher total returns than their suburban
counterparts with annualized returns slightly under
10% for CBD and suburban trailing by a significant 182
bps. Reflecting strong investor demand and favorable
comparable sales for properties that actually traded,
CBD offices generated slightly over 5% income returns
compared to suburban properties that generated over
100 bps. With respect to market share, CBD offices held
a moderate advantage with end of period market cap
of $60.4 billion compared to $54.5 billion for suburban
holdings. On the public side, pure office REITs account
for some 10% of the market. Through April 30, although
slightly lagging the overall index office REITs generated
solid total returns over 13% on a year-to-date basis
including 3% dividend yields.
During the first quarter, Real Capital Analytics
reported a moderate increase in the value of office
transactions and a significant increase in the number
of sales. The difference between these two figures
suggests investors have been moving down the size
spectrum in search of higher returns. Associated
Financial Views
with a decline in deal size, suburban transaction
volume outpaced CBD transactions. Similarly,
activity continued to pick up in secondary and
tertiary markets, which is a major shift from the
dominance of the larger markets. Capitalization
rates remained relatively flat at slightly over 7%
overall, with CBDs around 6% compared to 7.5% for
suburban. Major metros still remain priced at lower
cap rates, running some 120-150 bps below the mid7% range for smaller markets. Specialty and niche
office products continued to command higher yields,
with 7.6% cap rates for single-tenant and medical
office space reflecting their higher-risk profiles.
On the distressed asset front, workouts on
office loans outpaced new distressed activity, thus
continuing the downward trend in outstanding
volume. Lenders are selling the more marketable
properties, and the residual holdings are declining in
size and quality, which might lead to higher returns
for value-add or risk-tolerant investors.
Retail Market
Retail market fundamentals have experienced some
improvement as the uptick in consumer sales helped
bolster the demand side of the market. At a national
level, retail vacancy rates improved during the first
quarter, with positive net absorption benefiting from
the lack of new construction.
The renewed interest in retail is likely to
continue to grow as the economy picks up and
attention shifts to differences in the inflation-hedging
potential of various property types where retail
has an advantage. However, the ability to grow
net operating income will require added expertise
as owners figure out how to increase overall mall
productivity. In some respects, the collapse of
General Growth Properties ahead of the commercial
market collapse, and JC Penney’s woes at the end of
the cycle provide bookend lessons. That is, over the
long term no amount of financial engineering or
visioneering can supplant the importance of retail
acumen, customer orientation, value creation and
real estate fundamentals. This renewed interest in
market fundamentals, and an appreciation for the
upside potential in the retail sector, may explain the
increased attendance at the International Council of
Shopping Centers’ annual convention, which is on
track to attract over 33,000 attendees in 2013.
Retail investments accounted for some 24% of the
NCREIF Property Index at the end of the first quarter.
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Overall, private retail holdings generated 12.6%
total annualized returns through the first quarter.
These returns benefited from higher income returns
that exceeded the overall averages by some 35 bps
on an annualized basis. With respect to subtypes,
large retail assets outperformed smaller assets, with
regional malls and super-regional malls racking
up annualized total returns of 13.6% and 15.3%,
respectively. At the same time, larger properties
generated around 6% annualized income returns.
Other retail properties provided generally solid total
returns, with neighborhood centers, fashion/specialty,
community, power, and single-tenant properties all
generating low double-digit returns. From a risk/
return perspective, community, neighborhood, and
power centers were all valued at higher yields, with
income returns around 6.5% annualized.
In terms of public holdings, retail equity REITs
have dominated other property sectors, accounting
for almost 25% of the total market cap of all REITs.
On a year-to-date basis, retail REITs led the overall
index with total returns over 17%, including 3%
dividend yields. Freestanding properties led all
retail categories and were above overall averages
as were shopping centers although regional malls
lagged slightly.
On the transaction front, retail sales volume in the
2013 first quarter declined over 2012, although those
figures were skewed by two major transactions. Setting
those aside, transaction volume of non-portfolio sales
were up some 10% on a year-over basis. Retail pricing
has been fairly stable, with cap rates plateauing at
slightly over 7%. In general, cap rates have been lower
for stabilized properties, which might be benefiting
from better access to low-rate debt. Average cap rates
differ by subtype, reflecting differences in investor
demand. Interestingly, the market is fairly bifurcated,
with small strip and regional malls trading at almost
8% cap rates, while single-tenant properties are 100
bps lower. Reflecting renewed investor demand for
infill properties, urban/high street retail properties
are trading at 6.5% cap rates.
With respect to distressed retail assets, the
volume of outstanding loans increased moderately
but remained significantly lower than the peak of the
downturn. The pace of workouts has accelerated as
lenders try to liquidate their holdings while interest
rates are low and investor demand is increasing. The
residual portfolio of distressed retail contains smaller
properties as well as those with weaker fundamentals,
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which will be more difficult to liquidate and involve
higher risk in terms of fundamentals.
Industrial/Warehouse Market
On the spatial front, the market fundamentals
improved during 2012 with a surge of leasing activity
in the fourth quarter. During the 2013 first quarter,
leasing activity cooled as growth in the related
manufacturing and distribution sectors slowed.
However, CoStar still reported over 35 million square
feet of net positive absorption despite the fact activity
was off in two-thirds of the markets. When coupled
with a dearth of new space, the cumulative positive
absorption that has occurred has pushed vacancy
rates down overall. This tightening has supported
rent increases in some markets.
Demand has been particularly strong for midsize product in the 100,000 to 250,000-square-foot
range that can accommodate the logistical needs
of shippers. As economic activity picks up, demand
for light manufacturing and distribution facilities
is likely to continue to grow, setting the stage for
additional improvement in the sector. However, some
markets are expected to benefit more than others,
making market and product selection an important
component of investment success.
In terms of transactions, the industrial market
was relatively active during the first quarter, with a
double-digit increase over 2012. This trend differed
by subtype, with warehouse sales up over 40% and
flex sales declining by almost 20%. In terms of pricing,
industrial cap rates rose moderately, averaging 7.7%
overall for the quarter. Flex properties averaged 8%
in the face of slowing investor demand for higherrisk properties. Portfolio sales were relatively active,
accounting for almost a third of transaction volume.
As with other property types, investment
activity continued to move beyond core distribution
markets as investors sought higher returns. In terms
of market size, primary and secondary markets
experienced similar pricing, while tertiary markets
were priced to yield 150-170 bp cap rate premiums.
In terms of distressed assets, the industrial sector
experienced net improvement in the first quarter,
with an increase in workouts outpacing the moderate
increase in new distressed assets in the 2012 fourth
quarter. Due in part to underlying fundamentals,
lenders that have disposed of distressed industrial
assets have experienced higher recovery rates than
for most other property types.
Financial Views
On the private market front, industrial
investments had a significantly higher share than
their public counterparts, with a 14% share that is
around three times the size of the public holdings.
On an annualized basis, private market industrial
properties mirrored the overall index with 10.5%
total returns. For the same period, the income
returns were almost 50 bps above the overall average,
reflecting a moderate decline on a year-over basis.
At a subtype level, industrial R&D space generated
the highest total returns, coming in over 12.2%. At
the same time, investors recognized the higher risk
associated with such assets, which translated to
above-par income returns near 7% on an annualize
basis. On the other hand, industrial flex space
generated income returns that lagged by 45 bps while
generating negative appreciation—the only property
subtype among all investment categories falling into
negative territory on values. Industrial warehouse
properties generated low double-digit returns, with
a solid 6.2% coming from income. Industrial REITs
generated above-par total returns of slightly more
than 17% through April.
Apartment Market
The apartment market has been a leading force in
the recovery of the housing market but shows some
signs of peaking. Apartment fundamentals continued
to improve over the near term, extending the four year
bull run. Despite an increase in development activity, vacancy rates should remain tight through the
balance of 2013, supporting additional increases in
effective rent. Some markets are likely to experience
softening, however, due to increases in new supply
stimulated by capital providers’ emphasis on apartments over other property types. This is especially
true in markets where development activity focused
on narrow segments of demand, such as homogenized
urban projects targeting a finite portion of the market.
Going forward, once lessons about the importance
of market segmentation and product stratification
are learned, development activity is likely to spread
out to match demand, which will favor overlooked
suburban areas.
Apartment transaction activity continued to
lead other property types during the first quarter,
extending the upward trend that began in early 2010.
Indeed, total transaction volume reached a record
level. In the face of strong investor demand, cap rates
continued to fall toward 6%, although the pace of
Financial Views
declines slowed as the sector exhibited signs of being
fully priced. Student housing continues to attract
interest, but the sector may be getting overcrowded
and in danger of some softening.
In terms of market size, major markets appear
to have peaked in terms of pricing, with cap rates
hovering above 5% as they have for more than a year
and overall cap rates experiencing some declines as
demand shifts to secondary and tertiary markets.
With respect to subtypes, garden apartments traded
at 70 bps cap rate premiums over mid/high rise
apartments. Tertiary markets’ cap rates averaged
over 220 bps over major metro areas, although
there should be some compression going forward.
As might be expected, strong investor demand and
the search for returns helped clear out some of the
backlog of distressed assets and led to a net decline
in outstanding value.
On the private side of the market, apartments
accounted for a robust 25% of the total NCREIF
Property Index. While in line with some asset
allocation studies, this market share is high by
historical standards and reflects some of the
herd mentality that institutional capital often
demonstrates. In terms of private market returns,
the overall apartment component of the NCREIF
Property Index through the first quarter continued to
outperform the overall index, with 11% annualized
total returns. With respect to income yield, apartments
lagged the overall average with 5.36% annualized
returns. The fact that income returns have been
relatively stable suggests that the apartment sector
is fully priced. When combined with the aggregate
allocation, the data provide anecdotal information
that private market apartment sector’s bull run may
well have played out.
With respect to subtypes, apartment market
holdings are led by high-rise assets, which account
for some 55% of private market apartment holdings.
This market dominance reflects the recent interest
in high-density, urban holdings. The market is
somewhat bifurcated with high-rise and low-rise
properties at the upper end of the total return
spectrum and garden apartments lagging by some
30 bps annualized. On the other hand, the almost
frenetic pace of demand for assets has yielded
significant differences on the income side, with
high-rise assets generating 4.9% annualized income
that trails garden apartments by 100 bps annualized.
Apartment REITs represent a significant share of the
109
total REIT universe, with market cap constituting
some 15% of the total. Interestingly, apartment REITs
lagged all property types in terms of year-to-date
returns, which fell below 3.8% and for which all but
50 bps were in the form of dividends.
Real Estate and Capital Markets
Equity Market
The equity side of the commercial real estate market
has continued to pick up speed as investors pour capital into the asset class. This activity was some 35%
higher during the 2013 first quarter than in 2012. As
transaction volume picked up, investors continued to
move down the food chain in terms of risk and into
secondary and tertiary levels in a search for returns.
It is noteworthy that in the current environment
competition is so strong that investors are focused
more on the adequacy of returns as spread investors
rather than the level of returns. This subtle shift in
emphasis has had a profound impact on pricing as
investors seem willing to support the aggressive pricing of the recent past that has pushed cap rates down
to historically low levels for individual transactions.
The search for product has led to a growing
number of portfolio sales as REITs (e.g., Equity
Residential, Avalon Bay, American Realty Capital
Trust) and private sources of capital seek to satiate
their investment appetites. These larger, nonrecurring transactions dominated first quarter
activity, but even after they are taken out of the
equation, transaction activity was significantly
up on a year-over basis. This trend of net positive
equity capital flows to real estate is likely to continue
although cap rates have been pushed about as far
as they can. When interest rates ultimately rise, cap
rates are likely to follow as the leverage subsidy that
is supporting some segments of the market is taken
out of the pricing proposition.
Mortgage Market
The commercial mortgage market has become
more competitive, providing adequate capital flows
to support transaction activity. Indeed, commercial
banks have begun to increase new loan activity,
joining the ranks of other capital sources that have
allocated capital to the commercial mortgage markets. Competition for product has forced lenders to
expand their investments by expanding the type and
quality of properties. Lenders also have been forced
to combine low interest rates with easier access
110
through relaxed underwriting standards.
The market has also benefited from the orderly
burn off of the supply of distressed loans. However, the
residual pool of distressed assets will be more difficult
to work out without a decrease in recovery rates. The
increasing competition for mortgage investments on
the demand side, coupled with improving market
fundamentals, will help lenders move some of these
more troubled assets off balance sheets without
incurring severe losses. At some point in the cycle,
however, lenders will have to bite the bullet to clear
out inventory and make room for growth as the real
estate markets pick up momentum.
The commercial mortgage-backed securities
(CMBS) market has continued to show improvement,
with new delinquencies falling below $1 billion for
March, which according to Fitch Ratings is the lowest
monthly pace in over four years. When combined with
resolutions of distressed debt, the overall delinquency
rate slipped below 7.5%, the lowest rate since the 2008
third quarter. In terms of property types, industrial
and hotel delinquency rates rose moderately, coming
in around 10% and 8%, respectively. Apartment
delinquency rates showed the most improvement,
with a moderate decline in office rates putting the
two sectors on par. Retail delinquencies were flat as
improving market conditions allowed lenders to avoid
a net increase in distressed assets.
In terms of market activity, CMBS issuances
gained momentum during the 2012 fourth quarter.
This trend continued during the 2013 first quarter,
with increased competition forcing issuers to relax
underwriting standards to source product. As a result,
estimates suggest total CMBS originations increased
by more than 25% for the first quarter. For 2013 as a
whole, projections are for issuances over $70 billion.
While significantly below the heyday prior to the
market’s collapse, the CMBS sector has come back
stronger than expected and is again a significant
player in the commercial debt market. It should be
noted, however, that the market has benefited from
the Fed’s quantitative easing program that allocated
a portion of its funds to mortgage-backed securities.
This has led to an increase in the share of assets on
the Fed’s balance sheet and has contributed to some
of the growth on the commercial side of the market.
As the Fed winds down its buying program, there is
some risk that CMBS activity will face headwinds.
The good news is that the Fed is very mindful of the
tenuous nature of the economic recovery and the close
Financial Views
scrutiny financial markets are paying to its ultimate
exit strategy. The result is that there will be sufficient
capital flows to support the forecasted increase in
transaction volume at an overall level. That said,
overall capital flows will be tempered, with credit
worthiness of borrowers and underlying property
fundamentals continuing to be a concern to lenders.
Conclusion
The US economy entered 2013 on a strong note in
the face of number of headwinds, some of which
were self-imposed (Washington’s inertia) while
others were external (global economic slowdown).
Although there were no clear breakout moments or
economic sectors, leading indicators trended moderately upward. GDP growth increased, creating
a positive outlook despite the slow post-recession
recovery. The positive mindset became a self-fulfilling prophecy as it spilled over into the stock market.
The commercial real estate market, which
had been projected to lag the economic recovery,
continued to outperform expectations on the capital
side of the equation. Indeed, the willingness of
investors to accept lower returns for real estate
and the increased availability of low-cost mortgage
capital have driven capitalization rates down to
historical lows. Going into the second half of 2013,
economic growth is expected to slow before kicking
back into higher gear in 2014.
On the commercial real estate front, the nearterm lack of viable higher-return investments is
likely to continue to support aggressive pricing and
valuations, providing some stability to the asset class.
However, as the Fed implements its exit strategy from
quantitative easing and backs off its low interest rate
Financial Views
policy, commercial real estate values will face some
downward pressure. Depending on the speed of the
economic recovery, this pressure on values could
be offset by an increase in net operating income
that appears to be embedded in current transaction
prices. In the absence of an unexpected shock to the
system, the sense of positivism may help carry the
day, at least over the near term. However, at some
point the positive state of mind must be based on
reality rather expectations. Hopefully the economy
will be able to deliver on the promise that is being
discounted in the current market.
James R. DeLisle, PhD, is the Runstad Professor
of Real Estate and Director of Graduate Real Estate
Studies at the University of Washington. DeLisle
previously was director of the Real Estate Research
Center and coordinator of the e-Commerce Program
at Georgia State University. Before returning to
academia, he was an executive vice president and
head of strategic planning for Lend Lease Real Estate
Investments, a global company and the successor
firm to Equitable Real Estate, where he founded the
Investment Research Department and directed it for
nine years. He has published widely in academic and
professional journals. DeLisle received his BBA in
real estate and MS in marketing research from the
University of Wisconsin. He received his PhD in real
estate and urban land economics from the University
of Wisconsin under his mentor, the late Dr. James A.
Graaskamp, one of the leading academic proponents
of applied real estate research. To increase industry
connections, DeLisle has created a personal website,
http://jrdelisle.com. Contact: jrdelisle@jrdelisle.com
111
abstract
The movie theater
business is in troubled
The Business of Show
Business Act II: Appraising
the Movie Theater
times, facing competition from many viewing
alternatives. Numerous
vulnerable venues
are declining, while
national chains are
increasing their share
of the market. Values
have dropped for some
properties, but ticket
prices keep going up.
The exhibition business
and development of
megaplex theaters has
surpassed its stage of
maturity; now obsolescence appears to
be thriving. Valuations
involving adaptive reuse
will be an opportunity.
This article updates the
1999 text The Business
of Show Business: The
A
n estimated 1,000 theaters are in danger of failing, representing nearly
20% of the motion picture venues in the United States and Canada.1 Most of
these theaters are first generation multiplexes or miniplexes, as they became
known once megaplexes came along. The endangered theaters typically have
eight screens or fewer in a tilt-up concrete box and are located at the perimeter
of shopping centers, where reciprocal parking and ingress/egress agreements
provide sufficient parking at peak viewing hours that have minimal overlap with
peak shopping hours. Or, that was how the movie theater business worked for
close to four decades. Now, theater attendance is dropping, although prices are
not, and the megaplexes (typically 10–20 screens per auditorium) dominate
the market. Small is not beautiful in the movie exhibition business, except in
locations where land is scarce and expensive, and entry into the market is limited.
Movie theaters are special-purpose properties that require appraisal
expertise, knowledge of the motion picture industry, and an acquaintance with
current trends, which are overviewed in the introductory sections of this article.
The first text on this subject was the Appraisal Institute’s The Business of Show
Business and the discussion here is intended to update that text.2 The article
also provides other supportive material, including the data sources listed in the
Statistics Index of the Appendix.
Valuation of Movie
Theaters.
Industry Background
The motion picture industry is comprised of three facets that operate in sequence.
At the leading end of the spectrum is the production process, which is typically
what happens in Hollywood, Bollywood, or other locales. The industry requires
a constant flow of new movies or film product, and it is a worldwide industry.
Many nations have their own movie production industries, which produce
films mostly for the domestic market. Movie production can be a major source
of employment.
1. Michael Hurley, “We’re About to Lose 1,000 Small Theaters That Can’t Convert to Digital. Does It Matter?”
IndieWire, February 23, 2012.
2. Arthur E. Gimmy and Mary G. Gates, The Business of Show Business: The Valuation of Movie Theaters (Chicago:
The Appraisal Institute, 1999).
112
Appraising the Movie Theater
In the middle of the industry are the distributors,
who release films to the public in both theater
and home-viewing formats (e.g., DVD, television
programs). The distributors negotiate a contract
with theatrical exhibitors, establishing the amount
of the gross ticket sales to be paid to the distributor;
this is usually a percentage of the exhibitor’s gross
income. The distributors are responsible for deciding
how many theaters the film will be shown in and
for how long, making the proper amount of prints
of a film and ensuring the delivery to the theaters
by opening day. The distributors’ duties also include
creating the advertising for a film, such as posters,
television commercials, print ads, trailers, and more.
The exhibitors are responsible for delivery of
the movies to the public. They manage and market
films and related products or productions (films of
events such as operas or the Oscars) and operate
the theaters. Essentially, exhibitors are selling the
experience of the film to the audience. They may
own the theaters or just lease the real estate. They
typically pay over 50% of what they take in at the box
office to the distributor or directly to the producer.
Theater Industry Trends
A movie theater, movie palace, or cinema is a venue
for viewing motion pictures (drive-in theaters, which
have been disappearing, are not considered in this
article). Most movie theaters are commercially operated and cater to the general public, who attend by
purchasing a ticket. The film is projected onto a large
screen at the front of the auditorium. Recent technological developments in the projection process have
led to an increasing use of digital projection equipment in theaters. Although the number of theaters
offering digital projection has increased dramatically
over the past several years (a total of 27,749 or 65% of
all screens), many existing theaters are still equipped
with conventional analog film projection equipment.3
Theater Venues
Once relegated to the outskirts of parking lots and
shopping centers, innovations in the movie theater
industry have included the development of megascreen theaters as anchor tenants centrally located
within urban entertainment and retail shopping centers in an effort to capitalize on the ability of cinema
complexes to generate considerable traffic (larger
megaplex theaters can draw up to 2 to 3 million
customers annually). The result of this development
trend during the past fifteen years has been a direct
increase in sales and revenues for retail establishments, restaurants, and other businesses located
in proximity to movie complexes. Because movie
theaters are good at generating traffic, at times they
have been specifically used in attempts to spur retail
development in previously declining urban areas.
The ongoing evolution of the motion picture
theater business was, until 2005, in a growth cycle of
producing new screens at a faster rate than the growth
of movie ticket sales. Exhibitors desired a greater
range of movies to show viewers, who continued
to visit movie theaters despite an increasing range
of entertainment options to choose from. Some
industry analysts forewarned of a potential problem
due to the rapid expansion and overdevelopment of
megaplexes, and the theater industry growth trend
has left some exhibitors as victims. The continued
cannibalization of older theaters by the larger, newer
theater complexes is a risk to the smaller exhibitors,
especially if a fall in film quality or fewer blockbuster
movies limit revenue to the point of not carrying
the necessary overhead load. The ongoing shift in
the industry toward the expansion of new, larger
megaplex facilities is likely to continue, however,
due to a number of factors:
•The continued decline of discount or second-run
movie houses due to the high costs to convert
to digital, increased competition, and the evershortening interval between first-run play dates
and video releases.
•The nationwide decline in admissions per capita.
•The ability of the major exhibitors to raise debt
and equity capital and also secure very favorable
leases in shopping centers due to the ability to
draw in retail traffic.
•The desire of developers to have chain theaters
as anchors for a variety of shopping center and
entertainment venues. Theaters and restaurants
benefit by co-locating (but much less so if there
is a shared parking lot).
Movie theaters, limited to indoor screens for the
purposes of this analysis, have had a varied history
of ups and downs. During the 1950s and early 1960s,
there was a general decline of approximately 50%
3. Conventional analog projection equipment is an opto-mechanical device displaying moving pictures by projecting them onto a projection screen.
113
Table 1US Screens by Type of Venue
2007
2008
2009
2010
2011
1–7 Screens
9,804
9,091
8,673
8,345
7,878
8+ Screens
29,170
29,743
30,560
31,202
31,763
Total
38,974
38,834
39,233
39,547
39,641
Source: IHS Screen Digest (www.screendigest.com)
Table 2 US and Canada Top Five Exhibitors—Screen and Theater Statistics
Screens
Theaters
Screens per theater
Regal
AMC
Cinemark
Carmike
Cineplex
Mean
6,614
5,034
3,878
2,254
1,352
3,826.40
527
342
297
237
130
306.60
12.55
14.72
13.06
9.51
10.40
12.05
Sources: Annual Reports of Regal, AMC, Cinemark, Carmike, and Cineplex
of the national inventory, with screen numbers
dwindling to a low of 9,150. However, a steady rate
of growth began in the late 1960s, averaging more
than 350 new screens per year for the next decade.
In 1978, there were a total of 13,129 indoor screens
in the United States. Growth rates accelerated even
further during the 1980s and 1990s, as the number
of total screens increased by 160% from 1978 to 1998,
when there were 34,168 screens. During most of the
1990s, growth rates achieved records, averaging over
1,200 screens per year. During the past decade, movie
theater growth rates have slowed; currently, there
are 39,641 screens in the United States (Table 1) and
2,749 screens in Canada.
Since the late 1990s, a key industry trend has
been the dramatic increase in the number of screens
per theater. Nationally, the number of screens
per theater has increased from 3.2 in 1988 to an
average of 12.05 screens for the top five chains. The
expansion was driven by major exhibitors upgrading
their asset bases to an attractive megaplex format,
which typically includes 10 or more screens per
theater along with features such as stadium seating,
digital projection, and superior sound systems (e.g.,
Dolby). The modern multiplex/megaplex stadiumseating format is generally preferred by patrons over
a sloped-floor theater, which was the predominant
theater floor layout prior to 1996. However, venues
with more than 20 screens are generally categorized
as having a higher level of risk due to lack of enough
movies to fill each screen and high overhead.
Multiplex and megaplex theaters now represent 80%
of all domestic screens.
114
Major Exhibitors
The exhibitor market is competitive as there are no
real dominant entities in the industry, though local
markets may sometimes be controlled by a single
major company. As of June 24, 2010, the top ten
exhibitors accounted for about 57% of total screens
in the United States and Canada. The top ten exhibitors included Regal Entertainment Group; AMC
Entertainment, Inc.; Cinemark USA, Inc.; Carmike
Cinemas, Inc.; Cineplex Entertainment LP; Rave
Motion Pictures; Marcus Theaters Corp.; Hollywood
Theaters; National Amusements; and Harkins
Theatres. The top five exhibitors controlled roughly
49% of total screens. Table 2 presents screen and
theater statistics for the top five exhibitors.
Box Office and Admissions
In 2011, the total US/Canada box office was $10.2
billion, down 4% compared to $10.6 in 2010, but up
6% from five years before. Despite strong second
and third quarter box office performance, the 2011
box office could not fully overcome the slow start of
the first quarter. Also, 3D box office was down $400
million in 2011 compared to 2010, which contained
Avatar’s record-breaking 3D box office performance;
2D box office in 2011 was consistent with 2010.
US/Canada admissions (number of tickets sold)
were 1.28 billion in 2011, down 4% against 2010’s
1.34 billion admissions. The average number of
tickets sold per person (admissions per capita)
decreased 5% to 3.9 in 2011, which was the first
time in over a decade that admissions per capita fell
below 4.0 (Table 3). The most recent high point in
Table 3 US and Canada Admissions Data
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Percent Change
2011 vs. 2010
US/Canada
Total
Admissions
(billions)
1.57
1.52
1.50
1.38
1.40
1.40
1.34
1.42
1.34
1.28
-4%
US/Canada
Admissions
per capita
5.20
4.90
4.80
4.40
4.40
4.40
4.20
4.30
4.10
3.90
-5%
Source: Motion Picture Association of America, Theatrical Market Statistics 2011.
Table 4 US Average Cinema Ticket Price
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
$5.81
$6.03
$6.21
$6.41
$6.55
$6.88
$7.18
$7.50
$7.89
$7.93
% Change vs.
Previous Year
3%
4%
3%
3%
2%
5%
4%
4%
5%
1%
CPI % Change vs.
Previous Year
2%
2%
3%
3%
3%
3%
4%
0%
2%
3%
37%
32%
28%
24%
21%
15%
10%
6%
1%
n/a
Avg. Ticket Price
% Change vs.
2011
Note: Ticket prices typically vary by age groups (child, adult, senior), for time of day (matinee, evening), and for special effects or viewing format (3D, IMAX).
per capita admissions was 4.3 in 2009, which was
10% greater than in 2011. The ten-year trend in per
capita decreases—from 5.2 admissions per capita in
2002 to 3.9 admissions per capita in 2011—averaging
−2.8% per year will need to be considered when new
movie theater projects are being proposed.
The ability to increase ticket prices has sustained
the industry for many years, with a price growth rate
of about 3.5% per year from 2002 to 2010 (Table 4).
However, this changed in 2011, when the Motion
Picture Association of America (MPAA) reported
that the ticket price increase for 2010–2011 was only
$0.08 (+1%), less than the 3% increase in inflation
as measured by the Consumer Price Index (CPI).
At an average ticket price of under $8.00, a movie
still provides an affordable entertainment option,
costing less than $35 for a family of four (excluding
concession purchases).
Attendance Demographics
More than two-thirds of the US/Canada population
aged 12+ (67%), or 221.2 million people, went to a
movie at a theater at least once in 2011, which was
comparable to the proportions in prior years. This
group is identified as moviegoers, as opposed to the
33% of people who did not attend a movie in 2011,
labeled as non-moviegoers. A typical moviegoer
bought 5.8 tickets during 2011, which was below
the number in prior years and reflected the overall
decrease in ticket sales.
Frequent moviegoers continue to drive the
industry. Frequent moviegoers are moviegoers who
purchase at least one ticket a month. They account
for less than 10% of the population, but they bought
half of all tickets sold in 2011, which was comparable
to the 2009 and 2010 results for this group. In 2011,
those within the age group 25–39 were the majority
of frequent moviegoers. Meanwhile, occasional
moviegoers, or those who attend the cinemas on
average less than once a month, accounted for 48%
of total tickets sold in 2011. Those who bought only
one ticket in 2011 purchased 2% of total tickets.
The decrease in ticket sales in 2011 was among all
categories of moviegoers.4
4. Motion Picture Association of America, Theatrical Market Statistics 2012.
115
Trend Analysis
According to IBISWorld, the world’s largest independent publisher of US industry research, the gradual
recovery in business and consumer spending since
the recession and the lagging recovery in unemployment continue to curb demand for the movie theater
industry.5 However, enhanced cinema experiences
like 3D technology, digital projection, superior
sound systems, and luxury theaters attract a steady
audience, partly counterbalancing low consumer
spending. As a result, industry revenue only declined
at an annualized rate of 1.2% over the five years to
2012. IBISWorld predicts that increasing consumer
spending driven by disposable income growth will
contribute to an estimated revenue of $12.9 billion
in 2012.6 Relative to profit, the Risk Management
Association (RMA) examined 121 financial statements involving theaters or chains with annual
revenue up to $250 million and reported net income
before taxes of 6.3% and EBITDA of 12.7%.7
Movie theater industry demand is being affected
by competition from many product viewing and
access alternatives, including cable and satellite
TV, cell phones and Internet movie downloads to
computers and game consoles. This competition is a
major consideration for investment in theaters, and
it has also spurred some companies to consolidate
or declare bankruptcy. Several major players have
closed locations and others have made significant
acquisitions, such as Regal Entertainment Group’s
purchase of some of AMC Entertainment theaters and
AMC’s acquisition of Kerasotes ShowPlace Theaters.
Major operators are investing in significant
improvements to their auditoriums. Industry
observers note that movie theaters continue to
switch to digital and 3D projection systems. The
popularity of 3D movies has supported these theater
investments, as operators charge premium prices for
3D movies that offer an experience very few people
can replicate at home. Various advances in movie
making have also helped to stimulate demand for
cinematic screenings. Industry profitability improves
when admission prices escalate and attendance
rises. However, second-run theaters and promotional
discounting are still factors, catering to those with
lower disposable incomes.
In addition to 3D projection, most theaters have
invested in equipment necessary for digital movie
format presentation. Figure 1 shows the proportion
of digital to 35 mm screens in the global marketplace.
Film projectors were in more than 99% of theaters
as recently as 2004 and 85% of theaters in 2009. By
the end of 2012, however, traditional 35 mm film
projection was estimated to be present in just 37%
of cinemas.8
Market Analysis
Movie theaters face competition from technology
advances in consumer products that were not typically a factor until recent years. Personal computers
as well as DVD players, home theater systems, and
the Internet all play a part in entertainment for a wide
range of age groups. The introduction of additional
in-home entertainment options can affect movie
industry revenues by increasing the competition for
a portion of household disposable income spent on
entertainment. The availability of video on demand
offerings by cable and satellite TV operators also has
an effect, as well as the pirating of movies.
There are some realistic limits to this competition.
Typically, when movie distributors license their products
to the theater industry, the terms of the agreement
specify that they will not license their motion pictures
to other distribution channels for a specific period of
time. This factor is called the theatrical release window.
This period can range from about three months from
the release at cinemas to availability on DVD to as long
as twelve months. The typical time frame is about six
months for cable, satellite TV releases, and other legal
video download sites.
Depending on the intended use of an appraisal,
the analyst will prepare a Level B or Level C market
analysis.9 A Level B type of analysis employs areawide market data on a general property class. The
projected use conclusions are more subject-specific,
and the timing projections depend on interpretation
of market-wide data on the property type. The
public and proprietary surveys cover broad areas
5. “IBISWorld Industry Risk Rating Report 51213: Movie Theaters in the US,” IBISWorld May 2012.
6. Ibid.
7. Risk Management Association, 2010–2011.
8. An article by CNN Money online discusses how this change occurred so quickly. The answer comes in one word: Avatar. That very successful 2009–2010
film was distributed to theaters only in the digital format.
9. Stephen F. Fanning, Market Analysis for Real Estate: Concepts and Applications in Valuation and Highest and Best Use (Chicago: Appraisal Institute, 2005).
116
Figure 1 Projection Technology in Global Cinemas: 35 MM vs. Digital Screens
100%
35 MM Screens
Digital Screens
80%
60%
40%
20%
0%
2004
2015
Source: IHS Screen Digest, November 2011
in an urban setting. The geographic boundaries of
the survey rarely conform to the submarket for the
subject property. A Level C type of analysis goes
further. Whereas a Level B analysis uses historical
absorption rates as indicators of future absorption,
a major shift occurs in Level C analyses, which
incorporate future-oriented forecasting techniques.
Future demand and absorption are forecast by first
projecting the growth of population, income, and
employment. A Level C study provides detailed
submarket data on which to base absorption and
net operating income (NOI) projections as well as a
competitive ranking of the subject property.10 Level
C analyses make extensive use of primary data,
which are compiled by conducting field work and
direct surveys.11
Market Area
The purpose of a market analysis involving an
existing theater or a proposed theater (a totally new
project or an expansion of an existing theater) is to
determine whether there is unsatisfied demand in
the market area. The first step is to define the market
area. The critical parameter in an urban environment
is driving time, parking, and public transportation.
Theater customers will patronize the closest venue if
the competing theaters are offering similar first-run
movies. However, for a blockbuster, a unique special effects or IMAX movie, or an art-house theater,
viewers will break the rules. In a major urban area,
market areas may be defined by neighborhoods, for
example Greenwich Village in New York, the Gold
Coast in Chicago, and Hollywood Boulevard in Los
Angeles. In suburban areas, driving time gets more
emphasis as parking is free or relatively inexpensive
and public transportation is limited.
Demographics
Population demographics are an important factor
when investigating a market area, as certain groups
within the population are more likely to attend cinemas than others. The Motion Picture Association of
America (MPAA) publishes information on moviegoers in its Theatrical Market Statistics. According
to MPAA market statistics, in 2011 people within
the age group 12–24 constituted 35% of frequent
moviegoers, and purchased 30% of all tickets sold.
Those within the age group 25–39 purchased 24%
10.For further discussion of levels of market analysis, see The Appraisal of Real Estate, 13th ed. (Chicago: Appraisal Institute, 2008), 180–182; and Ibid.,
18–26.
11.Data on box office (attendance) numbers for individual theaters is not available to be purchased. Data can be obtained from a client exhibitor or from
interviews from management of theaters.
117
of all tickets and made up 28% of the frequent moviegoers. Thus, movie theaters are more likely to be
successful if they are located in areas with a higher
percentage of young people. The MPAA’s Theatrical
Market Statistics 2011 also reports movie attendance
percentages by population ethnicity (Figure 2).
Demand
Demand for a current or proposed theater will
depend on a number of factors, including number
of screens and theaters in the market, distance of
other theaters from the subject, and driving distance
and driving time.
Suppose a new theater is proposed in a market.
For the purposes of this analysis, a 15-mile radius
will be used to examine the hypothetical market
area. Table 5 presents data for multiscreen theaters
in the competitive area of the proposed theater with
15 screens.
In order to determine demand in the hypothetical
subject market, several factors must be taken into
consideration. There are currently 0.13 screens
per 1,000 persons in the US/Canada market. This
includes both rural areas as well as metropolitan
regions. A populated area, such as that of the
proposed subject, would contain a slightly higher
ratio of screens to population. We will use a factor
of 0.15 screens per 1,000 persons for our projections.
Demographic data from our hypothetical market
indicates a population of 643,460 persons within the
15-mile radius. Using this population and a factor
of 0.15 screens per 1,000 persons, the market can
support 96 screens, indicating an undersupply of 22
screens for the market. Theaters A and B in Table 5
are both modern facilities of a quality level similar
to the proposed subject facility, with stadium seating
and 3D digital screens, but their locations are inferior
due to less advantageous freeway orientation.
With the population of 643,460 within the 15-mile
radius and the 2011 average of 3.9 admissions per
capita, there would be 2,509,494 admissions in the
market area. With a revenue of $8.00 per person,
there is a total potential revenue of $20,075,952 for
ticket sales, exclusive of other revenues. For the
74 screens in the 15-mile radius, this indicates an
average of $271,297 per screen. With the subject
Figure 2 2011 Ethnicity Share of Total Population, Moviegoers, and Tickets Sold
Population
65%
Moviegoers
16%
63%
Tickets sold
18%
10%
20%
Caucasian
30%
40%
Hispanic
50%
60%
70%
African American
7%
12%
7%
11%
22%
58%
0%
12%
80%
9%
90%
100%
Other
Table 5Proposed Theater Demand Analysis—Competition in Market Area
Theater
Screens
Distance from Subject
Driving Distance
Driving Time
A
16
5 miles
6.4 miles
13 min.
B
14
10 miles
10.5 miles
16 min.
C
14
10 miles
13.6 miles
22 min.
D
16
15 miles
15.6 miles
22 min.
E
14
16 miles
19.7 miles
28 min.
Total
74
118
featuring 15 screens, annual revenues from ticket
sales are estimated at $4,069,455.
There are other methods of estimating unsatisfied
potential demand. For example, the potential market
area can be defined by zone. Assume the zones in
the market reflect a population base totaling 132,784
people in 2012. Based on a number of assumptions,
the appraiser could determine that the proposed
project would have a market of approximately 63,500
persons, or 48% of the total market area population,
calculated as follows by zone.
Zone A. Zone A is defined as the core of the entire
market area due to its geographic proximity or easy
access to the venue and is delineated by the less
than 5-minute driving time from the subject. Zone
A consists of 21,379 people, and it is estimated that
60% of this population will attend the subject and
the remaining percentage would mainly attend the
other stadium-seating option within the service area,
which is 6 miles away.
Zone B. Zone B represents an isolated neighborhood
that is within a 5-minute drive time of the subject and
is also within the 5-minute drive time of the closest
stadium seating competing theater. Zone B consists
of only 363 people and the management expects to
capture only 10% of the population within the area.
Zone C. Zone C represents the market area that is
within a 10-minute drive time of the subject to the
southeast and is also within a 10-minute drive time
of the 16-screen megaplex. Zone C consists of 15,706
people and management expects to capture 40% of
the population within the area.
Zone D. Zone D represents the market area that is
within a 10-minute drive time of the subject to the
east and also within a 10-minute drive time of another
megaplex with an IMAX. Management estimates it
can capture 50% of the 24,610 people living in the area.
Zone E. Zone E represents the market area to the
west that is within a 10-minute drive time of the subject and has no significant influence from any other
competing theaters. Management expects to get 60%
of this area. Zone E is comprised of 40,626 people.
Zone F. Zone F represents the 30,100 person market area to the west of Zone E that is within the
15-minute drive time of the subject but also within
the 15-minute drive time of two other megaplexes.
Management expects to capture 25% of this area.
To summarize, the subject theater project has the
potential to serve about 63,500 moviegoers.
Zone
Population
Capture %
A
21,379
60%
12,827
B
363
10%
36
C
15,706
40%
6,282
D
24,610
50%
12,305
E
40,626
60%
24,376
F
30,100
25%
7,525
Totals
132,784
Potential Market
63,351
The proposed project was for 15 screens. However, at
a rate of 0.15 screens per 1,000 persons, the potential
market can support only 9.5 screens. Since exhibitors would also want a cushion, the theater project
as conceived is too large.
Valuation Principles
Unlike the cost of a recreational activity that can vary
depending on the quality or perception of quality
of the experience (e.g., golfing), the entertainment
cost of a motion picture experience (meaning a
single, first-run movie) is virtually standardized.
This means that the prices (e.g., tickets) of the business cannot be used as some type of unit indicator
of value.
Sale prices for motion picture theaters converted
to price per screen or per seat are relevant only
when they adjusted for differences in profitability or
potential profitability. Unlike a real estate commodity
such as prices for apartments—which can be grouped
or categorized by quantitative measurements such
as average rental rate and by locational factors such
as neighborhood—the prices paid for motion picture
theaters are based for the most part on the present
value of future benefits.
What are the future benefits? One, they are the
capitalized value of the net rental stream to typically
estimate the market value of the theater real property
(it is common for theaters to be leased investments).
Two, they are the capitalized value of the net
119
earnings of the theater as a going concern. Using
sales comparables where the rights transferred
represent all of the assets of the business is also an
indicator of going-concern value.
Project Development Factors
Data obtained from theater projects developed by
a top ten regional exhibitor can assist in the highest and best use analysis of existing or proposed
theaters.12 The data include (1) floor area ratio; (2)
square feet of land per seat; (3) square feet of building
per seat; (4) average number of seats per screen; (5)
parking spaces per seat; and (6) building area per
screen. The megaplexes used in the sample ranged
in size from 40,000 to 98,000 square feet and ranged
in seating capacity from 2,000 to 5,400 seats.
Floor Area Ratio
According to industry data, the average floor area
ratio (FAR) is 0.163, which means that for every acre
of land (43,560 square feet) there is 7,100 square feet
of building area. The range is 0.11 to 0.24.
FAR is useful to the appraiser in determining
whether there is adequate land area as well as
the amount of land area that may be required for
a proposed development. Floor area ratio analysis
can also assist the appraiser in identifying where
there may be inadequate parking and in adjusting
comparable sales from one site to another.
Square Feet of Land per Seat
Another measure of the amount of land required
for a theater project is based on square feet per seat.
The mean for the sample is 121.5 square feet, with a
range 80 to 178 square feet of land per seat.
As with the FAR measurement, the amount
of land area required can vary, depending on the
topography of the site, requirements of the local
zoning ordinance, amount of required or desired
landscaping/buffer area, and setbacks. In urban areas
where there is limited land for parking and public
transit is available, these factors are inapplicable.
Square Feet of Building per Seat
Square feet of building per seat indicates the space
adequacy of the building housing the auditoriums.
The mean is 18.2 square feet of building per seat,
with a range of 13.1 to 23.5 square feet of building
area per seat. A higher space allotment is preferred.
Variables that can impact the ratio include the development budget, size of the building envelope, and
desired combination of public/common area and
auditorium space.
Average Number of Seats per Screen
There is a wide range in auditorium capacity among
theaters because newer facilities tend to have more
and smaller auditoriums. Virtually all megaplexes
have 150 to 300 seats per screen. In certain small markets, auditoriums with fewer seats may be justified.
Parking Spaces per Seat
The number of parking spaces in suburban locations
can vary substantially from one theater to another
depending on arrangements for the sharing of parking
spaces such as in a shopping center or between office
buildings and a cinema. For the sample, the mean is
0.235 parking spaces per seat, with most at 0.20 to 0.28,
which is one parking space for every 3.5 to 5.0 seats.
The rule of thumb of one space for every four seats
is based on the assumption that one-half of the seats
are typically occupied at the most popular times for
viewing and that each car will have two moviegoers.
Building Area per Screen
Obviously, building area per screen must be a function of the number of seats per screen so there is a
substantial range in this unit of measure. The industry
mean is 5,200 square feet, with most theaters having
between 4,400 and 6,500 square feet of area per screen.
Development Costs
Most of the newer megaplexes consist of a Class C
(insurance rating) air-conditioned masonry box with
a steel trussed roof, concrete floors, high ceilings,
and specialized tenant improvements. Auditoriums
range in size from 150 to 300 seats with the average
about 175 seats, and have well-insulated walls, use
stadium-type seating, and are accessed directly from
the corridors that extend out from the lobby.
The lobby should be designed with enough space
to display posters of coming attractions, and have a
concession stand with a flexible design and stations
that can accommodate small or large numbers of
patrons with a variety of food and snack options.
There are two profit centers in a theater—ticket
12.Data computation source: author’s files.
120
sales and concessions—and the one with the highest
margin is the concession stand. Critical factors
here are fast and friendly service and good, hot
popcorn. The lobby area also provides a waiting
area (conveniently oriented to the well-displayed
food and beverage offerings) and access to men’s
and women’s restrooms. A game area is optional,
depending on the demographics of the market area.
Any game area should be placed where it does not
interfere with the moviegoers. Game areas may be
more of a negative than a plus.
Typical direct costs of a megaplex theater according
to the Marshall Valuation Service are as follows:13
Base cost, very good quality
Class C megaplex = $162.27 per
square foot,
(8/2011)
This can be computed for an individual theater as
Time adjustment Local adjustment
(assume 1.03) × (assume 1.22) = $203.90 per
square foot,
which would include the structure, interior finish, lighting, and plumbing and HVAC but not
the snack bar, screens, seating, draperies, and
projection equipment.
Assuming there is an average of 4,650 square feet
per auditorium, the direct cost of construction would be
$948,000 per screen; fixtures and projection equipment
could amount to as much as another 20%, raising the
total costs of $1,138,000 (rounded) per screen.
Sales Data for Theaters
In any market area, comparable sales of theaters
will be few in number and difficult to analyze and
adjust. Important variables for comparable sales
include date of sale, condition of sale, number of
screens, age and condition, location, competition,
parking, and reputation. In analyzing a comparable
sale property, the analyst might buy a ticket, critique
the amenities, watch a movie, study the patrons, and
buy a box of popcorn. A simple checklist may include
the following:
•Is the box office located and sized where flow is
maximized?
•Does the lobby present an impression of good
design?
•Is the concession stand designed and located to
encourage moviegoers to buy a snack or some
other type of food plus popcorn?
•Are there clear directions to the individual auditoriums and are the corridors wide enough for
comfort?
•Is lighting adequate to navigate the aisles?
•Are auditoriums kept clean?
The basics of sales data are relatively easy to
obtain. CoStar Group provides sales data of movie
theaters for locations throughout the United States.
The information optimally includes: (1) address; (2)
buyer and seller names, addresses, and telephone
numbers; (3) type of buyer; (4) broker names and
telephone numbers; (5) sale price and terms; (6) land
area and parking spaces; (7) building area, FAR, and
age; (8) user or tenant occupancy; (9) data on rental
income and expenses, plus a capitalization rate; (10)
parcel map; (11) location map; and (12) assessor’s
parcel number.
The strengths of using CoStar Group sales
data are ease of access to a lot of transactions and
descriptive information that would take time to gather
from multiple sources. The disadvantages are cost
and the tendency of some to rely on the data when it
could be inaccurate and all of the subtleties are not
reported. The data needs to be verified, in particular to
determine the circumstances of the sale (why would
one sell a profitable investment?) and other important
information such as the number of screens and seats.
Once the appraiser has gathered market data it
can be consolidated and displayed in a table format.
Table 6 summarizes some basic data derived from
the CoStar Group database, representing 65 sales of
movie theaters throughout the United States, with
the total price converted to price per square foot of
building area. More specific information, which is
not available for purchase, was developed from local
and regional research. Appraisers need to conduct
their own market research and data collection. (Note
that the CoStar Group does not report the number
of screens or seats.)
Table 6 shows the variety of possible prices in a
market. In Table 6, the sales range in date from 2008
13.See Marshall Valuation Service Section 16. Note that direct costs in this example do not include special foundation work, loan points, entrepreneurial
overhead and profit, and contingencies.
121
to 2012, in price from $500,000 to $30,000,000, in
year built from 1913 to 2008, and in unit price from
$12 to $1,364 per square foot. The median total sale
price is $3,625,000 and the average (mean) price per
square foot is $190.
Sale prices at the low end of the spectrum,
with unit prices far below replacement cost,
illustrate the negative financial impact of newer
megaplexes on smaller venues and the inability of
marginal operations in small markets to survive
the recession. Some properties sold for land value,
and older properties may have been purchased by
preservationists. Some sales involve chains disposing
of assets acquired in portfolios that were not a good
fit, or sales of smaller chains to larger ones because
of a favorable price. For the most part, transactional
volume in the industry is dominated by small chains
selling out to the large exhibitors.
The following equation is an example of the
opinion of value of a 15-screen theater by the sales
comparison approach. The value is derived from
analysis of sales in the sample that are more recent
in time and are of a similar size to the proposed
project are used.
Sample Summary of Sales Comparison Approach
By Price per Screen
15 Screens × $1,400,000 (adjusted
per screen sale price from
comparables) = $21,000,000
By Price per Square Foot
69,750 square feet × $300 (adjusted
per square foot sale price from
By Price per Seat
4,000 seats × $5,500 (adjusted
per seat sale price from
because most theaters are purchased as part of a
portfolio of theaters and the portfolio details are
virtually impossible to investigate in detail. The key
aspects of any lease can vary substantially. As retail
properties, theaters are typically leased on a net
basis. The appraiser’s job is to analyze the contract
rental rate, market rental rate, discount rate, and
capitalization rate when valuing a theater that is
subject to a long-term lease or a short-term lease.
Leases involving new properties will be based on
a return on investment (recapture of cost and yield
on equity). Leases on older properties, such as an
8-screen theater, will typically be based on a rate that
considers the percentage of ticket sales or box office,
and a percentage of total projected revenue. Rules of
thumb have been 15% of total revenue or 20% of box
office. For example, an older theater that has revenues
of $1,200,000 from box office and concessions may
support a rental of $180,000, which is 15% of total
revenue. That same theater with 36,000 square feet
has a triple net annual rental of $5.00 per square foot.
Capitalization rates for leased fees will likely
vary between 7% and 9% based on a variety of key
information, but relying extensively on the credit of
the tenant. At an overall annual yield rate of 8% to
9%, the valuation of an older 8-screen theater would
be between $2,000,000 to $2,250,000 (or $250,000 to
$281,250 per screen) and $55.55 to $62.50 per square
foot of building area.
Data for yield rates can be derived from
transactional information and surveys. As a survey
example, the quarterly PwC Real Estate Investor
Survey provides market data for national net lease
properties of institutional quality. The overall
capitalization rates for the 2012 second quarter ranged
from 6.0% to 8.75%, with a mean of 7.4%, and discount
rates in a range of 7.0% to 9.0%, with a mean of 8.16%.
Since theaters are considered to be, for the most part,
non-institutional in investment quality, an allowance
of an additional 50 to 150 basis points is reasonable.14
Rental Rate Survey
Income Analysis—Leased Investment
There are as many transactions involving purchases
of theaters that are being leased as there are purchases of the fee simple interest. No data is available
on the actual number of leased theater transactions
A rental rate survey is typically conducted on a
regional basis due to the lack of a sufficient market
rate lease transactions in any one market and the
size of the market. Table 7 sets forth the results of a
rental rate survey of megaplexes with the unit rent
14.The PwC Real Estate Investor Survey was previously known as the Korpacz Real Estate Investment Survey. The national net lease market survey information is typically found at approximately pages 46-48 of the survey report. The data for the second quarter 2012 survey relative to the addition of an
allowance for non-institutional quality investment yields is located on pages 85 and 86.
122
Table 6Example of Summary of Theater Sales (2008–2012)
Sale
No.
Location
Sale Date
Sale Price
Size (Sq. Ft.)
Year Built/
Renovated
Price per Sq. Ft.
1
Suburb
5/9/2012
$30,000,000
62,857
1983
$477.27
2
Suburb
3/15/2011
$29,140,000
129,323
1998
$225.22
3
Downtown
1/31/2008
$18,654,500
67,033
unk.
$278.29
4
Suburb
1/31/2008
$18,550,800
52,800
unk.
$351.34
5
Downtown
11/30/2008
$18,000,000
79,823
unk.
$225.50
6
Suburb
1/31/2008
$15,830,000
52,800
unk.
$299.81
7
Downtown
11/25/2008
$14,500,000
23,000
1940/Renov. 2005
$630.43
8
Suburb
1/31/2008
$14,070,150
67,033
unk.
$209.90
9
Suburb
1/28/2008
$13,096,634
67,189
2005
$194.92
10
Suburb
5/4/2010
$13,026,053
68,064
1985
$191.38
11
Suburb
4/30/2009
$12,100,000
66,732
2001
$181.32
12
Suburb
5/20/2008
$10,640,000
170,000
1990
$62.59
13
Suburb
1/31/2008
$9,100,150
67,189
2005
$135.44
14
Downtown
9/22/2010
$9,050,218
64,234
1998
$140.89
15
Suburb
12/30/2011
$7,400,000
36,427
2005
$203.15
16
Suburb
3/12/2008
$6,022,000
53,238
1915
$113.11
17
Suburb
2/1/2008
$5,900,000
18,920
1925
$311.84
18
Downtown
4/28/2010
$5,600,000
43,170
1999
$129.72
19
Downtown
1/30/2008
$5,363,700
31,591
1997
$169.79
20
Downtown
11/1/2009
$5,000,000
75,000
1916
$66.67
21
Suburb
6/27/2011
$5,000,000
47,581
unk.
$105.08
22
Suburb
12/13/2011
$4,900,000
30,910
1998
$158.52
23
Suburb
7/15/2008
$4,800,000
3,520
1913
$1,363.64
24
Downtown
4/30/2008
$4,800,000
29,101
1997
$164.94
25
Downtown
9/12/2011
$4,782,420
23,962
unk.
$199.58
26
Downtown
5/17/2012
$4,780,000
30,729
2008
$155.55
27
Suburb
28
Downtown
2/10/2010
$4,650,000
64,400
1998
$72.20
10/24/2011
$4,200,000
35,000
2004
$120.00
29
Suburb
2/28/2012
$4,050,000
37,499
1917
$108.00
30
Suburb
9/15/12010
$4,000,000
7,500
1940
$533.33
31
Downtown
32
Suburb
1/30/2008
$3,700,000
34,000
1986
$106.62
12/16/2008
$3,625,000
5,429
1999
$681.53
33
Downtown
11/4/2008
34,000
1986
$106.62
34
Suburb
6/23/2009
$3,625,000
$3,300,000$3,600,000
41,000
1985/Renov. 2006
$80.49–$87.80
35
Suburb
9/2/2011
$3,066,000
17,401
1976/Renov. 2009
$176.20
36
Suburb
1/16/2009
$3,000,000
28,518
1988
$105.20
37
Downtown
8/17/2009
$3,000,000
32,640
1995
$91.91
38
Suburb
9/8/2010
$3,000,000
6,862
1938
$437.19
39
Suburb
10/22/2010
$2,850,000
15,562
1949
$183.14
123
Table 6Example of Summary of Theater Sales (2008–2012) continued
Sale
No.
Location
40
Suburb
41
Downtown
42
Downtown
43
Suburb
44
45
Sale Date
Sale Price
Size (Sq. Ft.)
Year Built/
Renovated
12/16/2010
$2,800,000
53,837
1996
$52.01
6/9/2011
$2,606,000
39,332
unk.
$66.26
Price per Sq. Ft.
9/18/2009
$2,600,000
101,233
unk.
$25.68
12/16/2010
$2,580,000
86,662
1997
$29.77
Downtown
6/8/2011
$2,540,000
7,279
1941
$348.95
Downtown
7/7/2008
$2,400,055
11,634
1928
$206.30
46
Suburb
6/2/2009
$2,100,000
11,927
1923
$176.07
47
Downtown
2/1/2008
$2,100,000
11,232
1980
$186.97
48
Suburb
1/16/2009
$2,053,000
28,518
1988
$71.99
49
Suburb
11/12/2010
$2,000,000
53,238
1915
$37.57
50
Suburb
4/1/2008
$1,850,000
41,624
1999
$44.45
51
Downtown
8/28/2008
$1,700,000
3,461
1918
$491.19
52
Suburb
4/17/2009
$1,691,911
16,000
unk.
$105.74
53
Downtown
6/6/2008
$1,600,000
4,461
1999
$358.66
54
Downtown
55
Suburb
56
Downtown
57
Suburb
58
59
1/27/2009
$790,000
11,828
unk.
$66.79
12/16/2011
$781,000
30,934
1990
$25.25
6/20/2008
$700,000
6,193
1920/Renov. 2010
$113.03
6/6/2010
$650,000
34,354
1980
$18.92
Downtown
2/27/2009
$600,000
32,301
1971
$18.58
Downtown
2/25/2010
$600,000
6,045
1945
$99.26
60
Suburb
6/16/2011
$600,000
39,096
1998
$15.35
61
Suburb
1/25/2012
$600,000
50,024
unk.
$11.99
62
Downtown
10/31/2008
$575,000
23,000
unk.
$25.00
63
Downtown
4/4/2011
$572,500
18,345
1979
$31.21
64
65
Downtown
Suburb
7/1/2008
9/30/2008
$540,000
$500,000
6,180
12,477
1915
1976
$87.38
$40.07
Sources: CoStar Group and Author’s files.
calculated on the basis of a rate per screen, rate per
seat, and rate per square foot.
The rent comparables produce a relatively wide
range of rental values for good-to-excellent quality
megaplex theaters in market areas that range from
small suburban markets to highly populated urban
markets. All the leases are relatively long term and
are either triple net (NNN) or absolute net in nature.
The expenses to the owner would be limited to the
deduction for rent loss associated with vacancy or
with respect to a professional management fee. All
expenses associated with operation of the theater,
such as maintenance, taxes, insurance, utilities, and
even major items of replacement (e.g., roof, HVAC,
parking lot, and grounds maintenance) are to be paid
124
for by the lessee. Vacancy and management fees on
this type of long-term lease with a strong national
credit tenant (such as Cinemark) are minimal,
with a typical deduction of 2% to 3% considered
reasonable as a combined total expense figure for
both categories of expense. The next step would
be to capitalize the estimated stabilized net annual
rental income.
Capitalization Process
In this example, it is assumed that a sale of the subject property (real property only) would occur under
financing terms considered typical in the local market place. It is also assumed that a sale of the subject
property would be either an all-cash sale or a sale
based on conventional financing (both are typical in
the local market place). It is further assumed that the
subject property would be exposed during a marketing period of nine to twelve months. Table 8 sets forth
a summary grid of comparable sales and includes
information about location, sale date, square footage
of the theater, sale price, net operating income, and
overall capitalization rate.
The sales produce a relatively wide range of
overall capitalization rates, from 6.45% to 9.0%.
The lower end of the range (Comparables 1, 2, and
3) represents capitalization rates that are based on
the acquisition of a leased fee interest for the real
property only. The remaining three sales produced
substantially higher overall rates because they were
sales of going concerns.
Beyond valuation, the discounted cash flow
technique can be used for investment analysis,
with allowances for annual debt service and loan
balance at time of reversion, to develop an internal
rate of return.15
Summary
The motion picture theater business is continually
evolving. There has been rapid expansion, a decline
in admissions per capita, a continuing increase in
the average ticket price, a very rapid conversion to
digital projection at a high investment cost, changes
in per capita attendance by demographic categories,
and significant declines in average values due to
the age-old problems of overbuilding and expenses
growing faster than revenue. The prospect of a
Table 7Comparable Rental Rates—Theater Leases
No.
Description
Size
Rental Rate/Month
Comments
1
Only downtown
location in 120,000
population rural city
16 screens
3,432 seats
70,505 sq. ft.
$7,095 per screen
$33.07 per seat
$1.61 per sq. ft.
Very good quality theater; constructed in 2003.
Lease written on a NNN basis for 20-year term.
Theater anchors a retail center with 17,500 sq.
ft. in-line retail. Tenant pays share of city
parking.
2
Only location in
90,000 population
suburban city
16 screens
3,800 seats
58,903 sq. ft.
$6,921 per screen
$29.14 per seat
$1.88 per sq. ft.
This is a very good quality 16-screen complex
located north of the subject. 20-year lease
written on NNN basis; with percentage
clause. Theater anchors in-line retail.
Excellent parking ratio.
3
Only theater in growing 14 screens
affluent suburb
2,746 seats
55,001 sq. ft.
$5,893 per screen
$30.04 per seat
$1.50 per sq. ft.
Very good quality 14-screen complex located
north of the subject. Constructed in 2005.
Anchors a large shopping center with
33,153 sq. ft. of in-line national and local
tenants.
4
Only downtown
theater in suburb of
metropolitan area
with over 5,000,000
people
20 screens
4,200 seats
72,857 sq. ft.
$7,539 per screen
$35.90 per seat
$2.07 per sq. ft.
This is a newer facility (2006). The 20-screen
complex is 72,857 sq. ft. and is part of
a larger 153,979-sq.-ft. retail center. Free
parking for theater patrons. No rent increases
until 2020.
5
Small rural town
12 screens
1,800 seats
38,400 sq. ft.
$4,800 per screen
$32.00 per seat
$1.50 per sq. ft.
(with $15.00/sq. ft.
TI allowance)
This represents the pre-negotiated lease
rate on a proposed movie complex that
would anchor a larger (148,740 sq. ft.)
retail center, approx. 200 miles north of
the subject. Landlord will be giving tenant a
$15.00/sq. ft. TI allowance.
6
Suburb of largest
metro area
30 screens
5,400 seats
95,150 sq. ft.
$6,946 per screen
$38.59 per seat
$2.19 per sq. ft.
Very good quality, relatively new 30-screen
megaplex located a substantial distance south
of the subject. Leased to AMC Theaters with
17 years remaining on the 25-year term.
15.This procedure, along with an appraisal of a megaplex as a going-concern, is set forth in The Business of Show Business, 81–85.
125
Table 8 Market Data Summary—Overall Capitalization Rates
No.
Description
1
Newer theater in suburb with
perimeter retail stores (not
included)
Newer theater in rural city (pop.
90,000)
2
Sale Date
Size (SF) N.R.A./
Screens
Sale Price/
Price per SF
Net Operating
Income
Overall
Rate
4/2009
81,706 SF/18
$23,690,000/
$290
$1,563,540
6.60%
11/2009
58,903 SF/16
$20,000,000/
$340
$1,289,557
6.45%
11/2010
72,857 SF/20
$26,400,000/
$362
$1,713,080
6.49%
3
Downtown location in major
metropolitan area
4
Suburban mall in major
metropolitan area
7/2008
95,150 SF/30
$26,315,000/
$277
$2,215,092
8.42%
5
Suburban mall in major
metropolitan area
5/2010
51,720 SF/12
$12,900,000/
$249
$1,103,647
8.56%
6
Suburb of major capital city
12/2008
32,185 SF/8
$10,000,000/
$311
$900,000
9.00%
slow-growing economy, continued production of
average-quality movies, and lack of growth of moviegoers’ discretionary income must be considered
when projections of theater performance are made.
The job of the appraiser or analyst is made more
complicated by these factors. Hopefully, the methods
and approaches presented will endure in spite of
ever-changing conditions.
Arthur E. Gimmy, MAI, is the president of AGI
Valuations, a firm with appraisers and staff in
Petaluma and Newport Beach, California. Gimmy’s
practice concentrates on the analysis of difficult,
unique, or specialized properties and appraisal
concepts, and he provides expert testimony in litigation matters involving large and complex real estate
projects and related business issues. Gimmy has
published over fifty articles and has authored various
books for appraisal professionals, including eight
texts published by the Appraisal Institute and its
predecessor, the American Institute of Real Estate
Appraisers. Gimmy received the MAI designation
in 1965 and has taught appraisal courses for the
Appraisal Institute. He has served on numerous local
and national AI committees, including The Appraisal
Journal’s Editorial Board. His awards include the
Professional Recognition Award (1975 and 1978) and
the George L. Schmutz Memorial Award (1996) from
the Appraisal Institute for his special contribution to
the advancement of appraisal knowledge.
Contact: agi@arthurgimmy.com
William Condon is a graduate of the University
of California, Santa Barbara, majoring in anthropology. He interned at AGI Valuations and developed an
interest in the entertainment industry, particularly the
workings of the movie theater industry, leading to his
collaboration on this article.
126
Appendix
Statistics Index
Who Goes to the Movies
The current edition of the Encyclopedia of
Exhibition published by the National Association
of Theatre Owners includes the following
statistical data:
Moviegoing Frequency, 1986–2007
Movie Admissions by Age, 2002–2006
Moviegoers by Age, 2002–2007
Moviegoers by Ethnicity, 2002–2007
Moviegoers by Household Composition,
1986–2007
Movie Admissions by Gender, 1986–2005
Movie Admissions by Education, 1986–2005
How Many Theaters
Number of US Movie Screens, 1948–2009
US Theatres by Number of Screens, 1995–2009
Number of US Cinema Sites by State, 1995–2008
Number of US Movie Screens by State, 1986–2008
Number of US Indoor Screens by State, 1986–2008
Number of U S Drive-In Screens by State,
1986–2009
US and Canadian Exhibitors, 2010
US Public Digital Cinema Screens, 1999–2010
U S Motion Picture and Video Exhibition
Employees, 1972–2007
Employment Percentiles by Hourly Wage for
Ushers, Lobby Attendants, and Ticket Takers,
1998–2008
How Many Films
Number of Movies Released by US Distributors,
1930–2008
Top 20 Grossing Films and Their Rating, 2008
Number of Top 20 Grossing Films by Rating,
1985–2008
Average Gross by Rating, 1985–2008
Number of Movies Rated by CARA, 1968–2008
Post-Theatrical Movie Markets
DVD Player and VCR Penetration into US TV
Households 2003–2007
Sales of Prerecorded DVDs to U S Dealers,
1997–2007
Basic Cable Households, 1980–2007
Pay Cable Subscribers, 1982–2007
Satellite and VOD Penetration in US Households
Digital Cable Households, 2000–2007
For more information about the National
Association of Theatre Owners and its publications, contact the organization at:
National Association of Theatre Owners
750 First Street, NE
Suite 1130
Washington, DC 20002
T: 202-962-0054
F: 202-962-0370
E-mail: nato@natodc.com
How Much Money
Money Spent on Movie Admissions in the United
States, 1929–2008
Number of Movie Tickets Sold, 1970–2009
Seasonal Box Office Performance, 1983–2006
Domestic Theatrical Film Distributor Market
Shares, 1970–2008
Domestic Film Grosses, 2009
Domestic Film Grosses, 1990–2008
Average U.S. Movie Ticket Prices, 1946–2009
Average Movie Production Costs, 1980–2007
Average Movie Print and Ad Costs, 1980–2007
Share of Movie Ad Costs by Media, 1990–2007
127
Web Connections
Internet resources suggested by the Y. T. and Louise Lee Lum Library
Entertainment Merchants Association
http://www.entmerch.org/
Film Journal International Magazine
http://www.filmjournal.com/filmjournal/about-us/index.jsp
Motion Picture Association of America, Policy and Research Reports and Statistics
http://www.mpaa.org/policy
National Association of Theatre Owners
—Movie Theatre Statistics
http://www.natoonline.org/statistics.htm
—Box Office Magazine
http://www.boxoffice.com/the_vault
128
A National Profile of
the Real Estate Industry and
the Appraisal Profession
abstract
This article presents a
current employment
profile of the US real
estate industry, with
T
special attention given
to appraisal profes-
he real estate industry has been devastated on many fronts1 in the years
following the Great Recession, which began in 20072 due to the bursting of the
housing bubble and the subsequent financial crisis relating to the mortgage
market meltdown.3 The implosion of the mortgage markets initially began when
two Bear Stearns mortgage-backed securities hedge funds, holding nearly $10
billion in assets, disintegrated into nothing.4 Panic quickly spread to financial
institutions that could not hide the extent of their toxic, subprime exposures, and
a massive, worldwide credit squeeze ensued; outright fear soon replaced panic.
Subsequent credit tightening and substantial illiquidity in the financial markets
rapidly and severely affected the housing and construction markets.5 Throughout
the United States, properties of all kinds saw dramatic value declines.
In thousands of cases, real estate foreclosures disrupted people’s lives,
forced businesses to close, caused financial institutions to falter, capsized whole
market segments, devastated entire industries, and squeezed municipal and state
government budgets dependent upon use and property tax revenues.6 While the
effects of property value declines and the waves of foreclosures in markets across
the country captured most of the headlines, one significant impact of the upheaval
in US real estate markets has gone largely unreported: its impact on employment
in the real estate industry, and specifically, the real estate appraisal profession.
sionals. It serves as an
informative picture of
the appraisal profession
for use as a benchmark
for future assessment
of growth. As a
component of the real
estate industry, the
appraisal profession
ranks as the smallest
in employment, is
highly correlated to
movements in employment of brokers and
agents, and relies on
commercial banking,
credit, and real estate
lessors and managers
to deliver its products.
1. James R. DeLisle, “At the Crossroads of Expansion and Recession,” The Appraisal Journal 75, no. 4 (Fall 2007):
314–322; James R. DeLisle, “The Perfect Storm Rippling Over to Real Estate,” The Appraisal Journal 76, no.
3 (Summer 2008): 200–210.
2. Randall W. Eberts, “When Will US Employment Recover from the Great Recession?” International Labor Brief
9, no. 2 (2011): 4–12 (W. E. Upjohn Institute for Employment Research); Chad R. Wilkerson, “Recession and
Recovery Across the Nation: Lessons from History,” Economic Review 94, no. 2 (2009): 5–24.
3. Katalina M. Bianco, The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown (New York:
CCH, Inc., 2008); Lawrence H. White, “Federal Reserve Policy and the Housing Bubble,” in Lessons From the
Financial Crisis: Causes, Consequences, and Our Economic Future, ed. Robert W. Kolb (Hoboken, NJ: John Wiley
& Sons, Inc., 2010), 453–460.
4. John Bellamy Foster, “The Financialization of Capital and the Crisis,” Monthly Review 59, no. 11 (April 2008):
1–19.
5. Major Coleman IV, Michael LaCour-Little, and Kerry D. Vandell, “Subprime Lending and the Housing Bubble: Tail
Wags Dog?” Journal of Housing Economics 17, no. 4 (2008): 272–290.
6. Dean Baker, “The Housing Bubble and the Financial Crisis,” Real-World Economics Review no. 46 (2008): 73–81.
129
Hundreds of thousands of professionals
are involved in brokering, leasing, managing,
appraising, and developing all property types.
Service professionals include residential sales
agents, multifamily-property managers, commercial
investment advisors, industrial property brokers,
land developers, property appraisers, and many
others.7 Their professional education and training
includes academic work performed in colleges and
universities; industry-specific education and training
programs; advanced professional association
development and designation certifications; company
and franchise training; pre- and post-licensing
continuing education requirements; and many years
of on-the-job training and experience.
The disintegration of the housing and financial
markets has affected all professionals in the real
estate industry and its employment components.
This article shows professional real estate appraisers
have been particularly hard hit. Before the recession,
as property values and sales grew, and as demand for
loans increased, appraisers’ workloads did as well.
When the bubble burst, appraisers felt its impact and
experienced significant declines in their businesses.
As a result, the real estate appraisal industry
experienced a significant loss in jobs. Recent growth
in employment within the appraisal profession has
neither mirrored other sectors in the real estate
industry, nor that of the US economy.
The purpose of this article is to provide a crosssectional view of the national real estate industry
with special attention given to employment in the
appraisal profession. Nothing in the professional
literature attempts to establish a data-driven profile
of the appraisal business, or compares and contrasts
it to other real estate-related professions. This article
is not a survey, but rather an effort to establish a basic
real estate appraisal employment baseline that will
serve as a benchmark for future trend comparisons.
This profile uses the latest data estimates from
private, state, and federal sources in support of
regional input-output tables used for the estimation
of economic impacts from events in a region.8
The results indicate that overall real estate industry
employment at the end of 2011 was higher than at
the beginning of 2001. However, the trend of annual
increases in the number employed evident in the
early years of the 2001–2011 study period reversed
itself during the recession. Declines in employment
appear to coincide with concurrent declines in the
economy during the latter years of the same period. The
results further show a significant correlation between
employment in the real estate appraisal profession and
production measures of the national economy, but not
with national employment. This research is not only
very timely, it also is extremely important because
changes in the employment trends in the real estate
industry since the financial crisis began have been
substantial. The information and analysis presented
offer unique insights into understanding the current
state of the real estate industry, and in particular, the
real estate appraisal profession.
Employment Profile and Trends
This article examines national employment trends
in five real estate-related categories:
•Agents and Brokers
•Appraisers
•Lessors and Lessors’ Agents
•Property Managers
•Other Services (i.e., Escrow Agents, Consultants,
Fiduciaries, Asset Managers, and Listing Services)
It extracts the data according to the North American
Industry Classification System (NAICS) at the
six-digit code level across all real estate-related categories for the period 2001–2011.9 Each category
draws from information provided by the US Census
Bureau NAICS category definitions.
Agents and Brokers
The industry classification Offices of Real Estate
Agents and Brokers (NAICS Code 531210) includes
people primarily engaged in acting as agents and/or
brokers in one or more of the following: (1) selling
real estate for others, (2) buying real estate for others,
7. Association of Real Estate License Law Officials, Digest of Real Estate License Laws and Current Issues (Chicago: Association of Real Estate License
Law Officials, 2011).
8. Proprietary data obtained by paid license from Economic Modeling Specialists, Intl. For information on purchasing licenses enabling information access,
see http://www.economicmodeling.com.
9. NAICS codes adopted by several government agencies such as the US Bureau of Economic Analysis and the US Bureau of Labor Statistics for the
standardization and reporting of data such as employment and income. Further explanation of the accounts used and specialties covered is shown in
the Appendix at the end of this article.
130
and (3) renting real estate for others. Figure 1 shows
that at the end of 2001, 1,061,482 people in the United
States worked in Offices of Real Estate Agents and
Brokers. At the end of 2011, 1,717,627 people worked
in this classification, or 61.8% more than in 2001. The
annual employment number increased each year in
2001–2007, peaking in 2007 at 1,857,576. However,
coinciding with the beginning of the recession, the
number of people in this classification began to
decline, and the annual decreases continued until a
slight increase occurred in 2011 over 2010.
Two caveats are noteworthy. First, substantial
increases in employment during the early years of the
period may be due to entry of new licensees hoping
to capitalize on the potential income opportunities
provided by the booming, pre-financial crisis real estate
markets. Therefore, the sharp growth trend may have
been an unsustainable anomaly. Second, the data does
not differentiate between those licensed professionals
who work full-time versus those who only work parttime. Therefore, some portions of categorical declines
in the post-financial crisis economy may be due to
part-time licensees choosing not to renew their licenses
during the economic downturn.
Appraisers
The industry classification Offices of Real Estate
Appraisers (NAICS Code 531320) includes people
primarily engaged in estimating the fair market
value of real estate. Figure 2 shows that at the end
of 2001, 80,724 people in the United States worked in
this classification. At year-end 2011, 111,233 people
worked in this classification, or 37.8% more than in
2001. The annual employment number increased
each year in 2001–2007, peaking in 2007 at 118,657.
In addition, again coinciding with the beginning of
the recession, the number of people in this classification began to decline, and the decreases continued
through 2011.
Although the percentages of growth in this
category are different from those of the category
Offices of Real Estate Agents and Brokers, it is
possible the explanations are similar. The booming
real estate markets prior to the financial crisis
increased demand for appraisals, and therefore,
more people entered the profession. Likewise,
as the markets slowed after the crisis began and
appraisal demand declined, so did the demand
for appraisers. Due to the reduced demand, some
licensed appraisers may have sought other types
of employment, or suspended or terminated their
licenses. Further, some lenders, especially those
focusing on the residential mortgage sector,
increased use of alternative valuation products or
turned to using broker price opinions (BPOs).10
Figure 1 US Offices of Real Estate Agents and Brokers (NAICS Code 531210)
2001
2002
1,857,576
1,759,946
1,717,627
400,000
1,714,691
600,000
1,758,834
800,000
1,377,460
1,000,000
1,110,676
1,200,000
1,207,540
1,400,000
1,061,482
Number of People
1,600,000
1,601,316
1,800,000
1,780,643
2,000,000
2008
2009
2010
2011
200,000
0
2003
2004
2005
2006
2007
Year
10.So many real estate brokers began performing BPOs after the financial crisis that in May 2011, the National Association of Realtors (NAR) introduced a
new BPO training and certification program. Information obtained from the National Association of Realtors available at http://www.realtor.org/rmodaily.
nsf/pages/News2011051306.
131
Figure 2 US Offices of Real Estate Appraisers (NAICS Code 531320)
140,000
112,938
111,233
2005
113,209
2004
114,397
2003
118,657
2002
101,635
2001
95,450
40,000
91,173
60,000
85,318
80,000
80,724
100,000
110,780
Number of People
120,000
2007
2008
2009
2010
2011
20,000
0
2006
Year
Lessors and Lessors’ Agents
or 54.7% more than in 2001. The annual employment
number increased each year in 2001–2007, peaking
in 2007 at 1,083,847. However, coinciding with the
beginning of the recession, the number of people
employed in this classification began to decline,
dipping slightly in 2008 and 2009. The trend reversed
in 2010 and 2011.
The industry classification Lessors of NonResidential Buildings (NAICS Code 531120) includes
people primarily engaged in acting as lessors
of buildings (except mini-warehouses and selfstorage units) that are not residences or dwellings.
Included in this industry sector are owner-lessors
The industry classification Lessors of Residential
Buildings and Dwellings (NAICS Code 531110)
includes people primarily engaged in acting as lessors of buildings used as residences or dwellings,
such as single-family homes, apartment buildings,
and townhomes. Included in this classification are
owner-lessors of residential buildings and dwellings
or people employed by them.
Figure 3 shows that at the end of 2001, 683,905
people in the United States worked as Lessors of
Residential Buildings and Dwellings. At year-end
2011, 1,057,764 people worked in this classification,
Figure 3Offices of US Lessors of Residential Buildings and Dwellings (NAICS Code 531110)
1,059,699
1,049,542
1,056,524
1,057,764
925,919
2002
810,695
2001
1,083,847
400,000
764,646
600,000
712,237
800,000
683,905
Number of People
1,000,000
1,029,796
1,200,000
2007
2008
2009
2010
2011
200,000
0
2003
2004
2005
2006
Year
132
of non-residential buildings and people employed
by them.
people in the United States worked in the Lessors
of Non-Residential Buildings classification. At yearend 2011, 493,600 people worked in this industry
classification, or 33.7% more than in 2001. The annual
number of people increased each year in 2001–2005,
decreased slightly in 2006, and increased in 2007
and 2008, when it peaked at 510,576. Thereafter,
the annual number of people employed in this
classification decreased each year in 2009–2011.
The industry classification Lessors of MiniWarehouses and Self-Storage Units (NAICS Code
531130) includes people primarily engaged in
renting or leasing self-storage space (e.g., rooms,
compartments, lockers, containers, or outdoor space)
where clients can store and retrieve their goods.
people in the United States worked as Lessors of
Mini-Warehouses and Self-Storage Units. At the
end of 2011, 280,702, or 112.6% more than in 2001,
worked in this classification.
The annual number of people in this classification
increased each year in the study period except for
2009, when it decreased slightly by −2,393, or −0.86%
less than 2008. A possible explanation for the strong
growth performance could be a combination of
Americans continuing to accumulate more material
possessions and the downsizing of residences,
increasing the need for storage of their possessions.
Another explanation might be that foreclosures
forced people to place their possessions in storage
as they transitioned to other residences.
The industry classification Lessors of Other
Real Estate Property (NAICS Code 531190) includes
people primarily engaged in acting as lessors of real
estate (except buildings), such as manufacturedhome sites, vacant lots, and grazing land. Figure 6
shows that at the end of 2001, 125,915 people in the
United States worked as Lessors of Other Real Estate
Property. At the end of 2011, 146,858 people, or 16.6%
Figure 4Offices of US Lessors of Non-Residential Buildings (NAICS Code 531120)
2006
493,600
2005
498,246
2004
505,773
2003
510,576
2002
494,087
2001
451,954
100,000
469,151
200,000
441,761
300,000
385,547
400,000
414,909
500,000
369,031
Number of People
600,000
2007
2008
2009
2010
2011
0
Year
Figure 5Offices of US Lessors of Mini-Warehouse and Self-Storage Units (NAICS Code 531130)
2005
2006
2007
280,702
2004
274,723
2003
216,815
2002
194,825
2001
274,394
0
276,787
50,000
150,654
100,000
139,096
150,000
171,772
200,000
245,963
250,000
132,064
Number of People
300,000
2008
2009
2010
2011
Year
133
Figure 6Offices of US Lessors of Other Real Property (NAICS Code 531190)
2008
2009
2010
146,858
2007
151,500
2006
151,200
2005
152,532
2002
162,193
2001
160,401
80,000
152,270
100,000
141,744
120,000
131,788
140,000
125,915
Number of People
160,000
164,596
180,000
60,000
40,000
20,000
0
2003
2004
2011
Year
Figure 7Offices of US Residential Property Managers (NAICS Code 531311)
289,706
2005
287,576
2004
285,252
2003
284,327
2002
246,035
2001
272,290
50,000
226,842
100,000
197,821
150,000
184,485
200,000
212,191
250,000
178,244
Number of People
300,000
2007
2008
2009
2010
2011
0
2006
Year
more than in 2001, worked in this classification. The
increases and decreases in the number of people in
this classification are inconsistent, showing increases
in 2001–2005, 2007, and 2010, but decreases in 2006,
2008–2009, and 2011.
Property Managers
The industry classification Residential Property
Managers includes people primarily engaged in
managing residential real estate for others. Figure 7
United States worked in this industry classification,
and at the end of 2011, 289,706 people, or 62.5% more
than in 2001, worked in this classification.
During 2001–2011, the number of people in this
classification increased each year, with the highest
annual increase (10.7%) occurring in 2007, which
coincided with the beginning of the recession. The
10.7% increase in 2007 was the only double-digit
134
increase during the study period. One possible
explanation for this is that 2007 was the first year people
began losing their homes to foreclosure because of the
recession. As the demand for rental units increased due
to increased home foreclosures, there may have been
a commensurate increase in the need for residential
managers. Another explanation could be that more
apartment complexes came on line in 2007 due to the
rapid expansion of construction of multifamily units in
the middle part of the decade, resulting in employment
of more residential property managers.
The industry classification Non-Residential
Property Managers (NAICS Code 531312) includes
people primarily engaged in managing nonresidential real estate for others. Figure 8 shows at the
end of 2001, 83,213 people in the United States were
employed as Non-Residential Property Managers. At
the end of 2011, 130,346 people, or 56.6% more than
in 2001 worked in this classification.
Figure 8Offices of US Non-Residential Property Managers (NAICS Code 531312)
2006
130,346
2005
129,549
2004
129,497
2003
130,161
2002
114,573
2001
105,598
40,000
100,472
60,000
93,436
80,000
86,466
100,000
118,980
120,000
82,213
Number of People
140,000
2008
2009
2010
2011
20,000
0
2007
Year
With the exception of 2009–2010, when growth
was relatively flat, the number of people working in
the Non-Residential Property Managers classification
increased during the study period, with the highest
annual increase (9.4%) occurring in 2008. A possible
explanation for the significantly higher increase in
2008 is that demand for asset managers increased
due to the increased foreclosures of non-residential
properties. Another possible explanation is that
demand for commercial real estate was increasing
in the years prior to the financial crisis—peaking in
2008—and thus, more real estate firms employed
more non-residential property managers to service
the industry. It is important to note that because this
NAICS industry classification includes only those
managing non-residential real estate for others,
property management services for owner-occupied
properties are not included.
Other Real Estate Activities
The industry classification Other Activities Related
to Real Estate (NAICS Code 531390) includes people
primarily engaged in performing real estate-related
services (except lessors of real estate, offices of real
estate agents and brokers, real estate property managers, and offices of real estate appraisers). Figure 9
United States worked in Other Activities Related to
Real Estate. At the end of 2011, 852,824 people, or
44% more than in 2001, worked in this classification.
Th e e m ployment growth trend of this
classification is similar to the growth trend in the
classification Offices of Real Estate Appraisers. The
annual number increased each year in 2001–2005,
and peaked in 2007 at 890,100. Coinciding with the
beginning of the recession, the number of people
employed in this classification then began to decline
and the decreases continued through 2011.
Correlations and Summary
The analysis in this article compares employment
categories of the appraisal profession to other segments of the real estate industry and various national
economic indicators. The statistical test used is a
simple correlation analysis utilizing the Pearson11
method to produce correlation coefficients between
the appraisal profession and other segments of the
real estate industry. The purpose of performing
this statistical test was to uncover strong and weak
relationships with other parts of the economy that
could serve as future indicators of the welfare of the
appraisal profession.
Correlation analysis examines the degree
to which relationships exist between variables.
Correlations, labeled as coefficients, are numbers
between -1 and +1. A coefficient between 0 and +1
suggests a positive relationship between the variables,
whereas a coefficient between -1 and 0 suggests a
negative one. Correlation analysis helps reduce the
range of uncertainty about the relationships between
the variables. Hence, correlation analysis produces
greater variance of the predicted outcomes—how
much movement of one variable is related to
movement of another variable—that are closer to
11.Joseph F. Hair Jr., Mary Wolfinbarger Celsi, Arthur Money, Phillip Samouel, and Michael J. Page, Essentials of Business Research Methods, 2nd ed.
(Armonk, New York: M. E. Sharpe, Inc., 2011).
135
852,824
2004
870,236
2003
875,510
2002
882,445
2001
890,100
0
863,033
200,000
678,384
400,000
621,156
600,000
880,137
800,000
802,499
1,000,000
592,155
Number of People
Figure 9US Offices of Other Activities Related to Real Estate (NAICS Code 531390)
2005
2006
2007
2008
2009
2010
2011
Year
reality. A simple correlation is between two variables.
Perfect correlation exists between two variables
when the correlation coefficient is either +1 or -1.
Table 1 shows the correlation analysis results
for the study.12 They reveal a positive relationship
between the appraisal profession and the other
sectors. The highest correlation of +0.998 was with
the classification Offices of Real Estate Agents and
Brokers, which was statistically significant at the
0.01 level (this means that 99.8 times out of 100, this
relationship will exist and will be highly, positively
correlated). Also, a strong, positive relationship
of +0.997 was revealed with the classification
Residential Property Managers, which was highly
significant at the 0.01 level. The interpretation is that
as employment in the sectors identified goes up or
down, employment in the appraisal profession will
do likewise.
The analysis leads to the following conclusions
related to the Real Estate Appraisers classification:
1. The industry classification Real Estate Appraisers
is the smallest among all real estate sectors
examined, with 111,233 jobs in 2011.
2. Employment increased annually from 80,724
in 2001 to a high of 118,657 in 2007, for a total
increase of 37,933, or 46.99%.
3. Employment decreased annually from 118,657
in 2007 to a low of 111,233 in 2011, for a total
decrease of -7,424, or -6.3%.
4.During the study period, the largest annual
decrease was from 118,657 in 2007 to 114,397
in 2008, a decrease of -4,260 or -3.6%.
5. The smallest decrease, between 2009 and 2010,
was -271 or -0.24%.
6.The most recent decrease, between 2010 and
2011, was -1,705 or -1.51%.
Total Requirements Needed to Operate
The Bureau of Economic Analysis prepares and
publishes a variety of economic statistics on industries. Its data on total requirements represent the
total demand for goods or services that an industry
needs to produce its particular goods or services.13
While other industries or resources operating or
existing within the region satisfy some of the demand,
in many instances not all of the requirements
are satisfied from within the same region. This
unsatisfied or leftover demand is satisfied through
imports into the region. Thus, the total requirements
equal the amount satisfied within the region plus the
amount of imports into the region.
Figure 10 displays the US 2010 total requirements
for real estate-related industries. Because this data
is for the entire United States, the region is the
entire country as well. The 2010 total requirements
for all real estate-related sectors totaled over $1.09
12.The correlations shown in Table 1 are between people working in the appraisal profession and other real estate-related sectors.
13.The total requirements (TR) technique does not derive estimates based on employment but instead focuses on the total demand for goods or services
that an industry needs in order to produce its particular goods or services. In the United States, the Department of Commerce’s Bureau of Economic
Analysis (BEA) produces two types of TR tables, in coefficient form, using benchmark input-output information drawn from make and use tables. The tables
present input values of goods or services purchased directly in order to produce one dollar of output. The coefficients of the TR tables provide the total
sum of direct and indirect inputs necessary to produce output. For example, the direct purchases (inputs) necessary to produce an airplane would include
the steel and aluminum used in the construction of the aircraft fuselage, and the indirect purchases would include the energy resources necessary to
produce the steel and the aluminum. The different types of direct and total requirements information produced by the BEA depend on whether the defined
goods and services are industries or commodities. For a comprehensive explanation of the BEA’s methodology and data-derivation techniques, refer to the
BEA’s Methodology Paper Series and other methodologies on the national, industry, international, and regional accounts available at http://www.bea.gov/
methodologies/index.htm and articles published in the Survey of Current Business available at http://www.bea.gov/scb/index.htm.
136
137
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
Other R.E. Related Activities
Significance (2-tailed)
Non-Residential Property Managers
Residential Property Managers
Lessors - Other R.E. Property
Lessors - Mini-Warehouses and Storage
Lessors - Non-Residential Buildings
Lessors - Residential Buildings
Offices - R.E. Appraisers
0.876**
0.000
0.000
0.985**
0.000
0.988**
0.042
0.620*
0.000
0.983**
0.000
0.947**
0.000
0.962**
0.000
0.940**
0.000
0.924**
0.044
Offices - R. E. Agents & Brokers
0.615*
1.000
US Unemployment Rate
US GNP (000’s)
US GNP
(000’s)
Table 1Correlation and Analysis Results
US Unemployment
Rate
0.289
0.388
0.030
0.651*
0.032
0.645*
0.777
-0.097
0.023
0.673*
0.089
0.536
0.169
0.446
0.215
0.406
0.301
0.343
1.000
Offices –
R. E. Agents
& Brokers
0.961**
0.000
0.000
0.923**
0.000
0.926**
0.002
0.822**
0.000
0.911**
0.000
0.941**
0.000
0.989**
0.000
0.998**
1.000
Offices –
R. E. Appraisers
0.932**
0.000
0.000
0.944**
0.000
0.951**
0.006
0.770**
0.000
0.934**
0.000
0.951**
0.000
0.992**
1.000
Lessors –
Residential Buildings
0.927**
0.000
0.000
0.959**
0.000
0.965**
0.000
0.741**
0.000
0.953**
0.000
0.946**
1.000
Lessors –
Non-Residential
Buildings
0.942**
0.000
0.000
0.961**
0.000
0.958**
0.009
0.741**
0.000
0.951**
1.000
Lessors –
Mini-Warehouse
& Storage
0.847**
0.001
0.000
0.995**
0.000
0.997**
0.074
0.559
1.000
Lessors –
Other R. E. Property
0.905**
0.000
0.050
0.603*
0.056
0.590
1.000
Residential
Property Managers
0.862**
0.001
0.000
0.995**
1.000
Non-Residential
Property Managers
0.874**
0.000
1.000
1.000
Other R. E.
Related Activities
Figure 10US 2010 Real Estate-Related Total Requirements
Lessors of Residential Buildings
and Dwellings
$231
Lessors of Non-Residential Buildings
$221
Offices of Real Estate Agents and Brokers
$201
$112
Other Activities Related to Real Estate
$107
$73
Lessors of Mini-Warehouses
and Self-Storage Units
$65
Lessors of Other Real Estate Property
$63
Offices of Real Estate Appraisers
$21
$0
$50
$100
$150
$200
$250
Data reported in billions
trillion. This number is significant relative to US
gross national product (GNP) because the total
requirements of all national real estate industry
sectors in 2010 accounted for nearly 7.3% of GNP.
Clearly, as an industry real estate is a critically
important segment of the US economy.
The appraisal profession, relative to the other
real estate-related sectors had the smallest total
requirements in 2010 at $20.7 billion; this is less
than one-third of the next largest sector, real estate
management. Although the ranking is small relative
to the others in the real estate industry, its magnitude
is significant relative to the economic impact of
consumption in the various markets throughout the
country. Figure 11 displays the total requirements of
all real estate-related sectors relative to the number
of people working in each sector. This number,
therefore, represents the total requirements or
the total demand for all goods or services needed
by a particular industry to operate, reported on
a per-person basis within each of the real estaterelated sectors illustrated. As shown, the 2010 total
requirements for Offices of Real Estate Appraisers
per employee was $183,134.
Industries Serving Appraisal
Data analysis provides an interesting profile of the
national industries that sell goods and services needed
by the appraisal profession to operate. Total requirements data indicate that the total sales to the appraisal
industry exceed $4.3 billion each year.14 The following
are the top-seven industry segments selling goods and
services to the appraisal profession (sales exceeding
$100 million to appraisal profession).15
1. Commercial Banking—$363 million. This industry includes establishments primarily engaged
in accepting demand and other deposits and
making commercial, industrial, and consumer
loans. Commercial banks and branches of foreign banks are included in this industry.
2. Le s s o r s o f R e s i d e n t i a l B u i l d i n g s a n d
Dwellings—$268 million.
3. Lessors of Non-Residential Buildings—
$255 million.
14.As previously explained, total requirements are the total amount of dollars spent by an NAICS industry to produce its goods and services. Unfortunately,
the data does not show the specific items purchased because the data tables are extracted using input-output analysis based only on industry-level
information.
15.Proprietary data obtained by paid license from Economic Modeling Specialists, Intl. For information on purchasing licenses enabling information access,
see http://www.economicmodeling.com.
138
Figure 11US 2010 Real Estate-Related Total Requirements Per Employee
$560,244
Lessors of Non-Residential Buildings
$443,442
$412,583
$388,857
Lessors of Mini-Warehouses
and Self-Storage Units
Lessors of Residential Buildings
and Dwellings
$236,316
$218,383
$183,134
$123,062
$117,163
$0
$100,000
4. Offices of Real Estate Agents and Brokers—
$232 million.
5. Real Estate Credit—$180 million. This industry
includes establishments primarily engaged in
lending funds with real estate as collateral.
6. Residential Property Managers—$123 million.
7. Other Activities Related to Real Estate—
$120 million.
These seven industry segments account for over
$1.5 billion in sales of goods and services to the
appraisal industry.16 It is noteworthy that each of the
seven industry segments detailed either is directly a part
of the overall real estate industry or closely related to it.
Correlations with US Economic
Indicators
As shown in Figure 12, US GNP increased each
year during the study period, growing from $10.3
trillion in 2001 to $15.55 trillion in 2011.17 On the
other hand, national unemployment tracked national
economic recessionary trends more closely. As
shown in Figure 13, the unemployment rate was
5.40% in 2001 and fell to a study-period low of 4.30%
$200,000
$300,000
$400,000
$600,000
$500,000
in 2006.18 However, as the real estate and financial
markets began reacting to the real estate market
implosion that began soon after the financial crisis,
so did unemployment. The overall national unemployment rate grew in 2008 to 7.10% and peaked at
9.70% in 2009.
The data show that even though the economy
was in recession, and unemployment was rising
during the latter part of the decade, US GN P
continued to increase. This is puzzling and motivates
inquiries as to why and how this happened. One
possible explanation is that during the recession,
in order to survive, businesses not only found ways
to continue to be productive, they apparently found
ways to increase productivity with fewer employees
than before the crisis. Another possible explanation
is that GNP increases resulted from substantial
increases in federal government economic stimulus
spending. However, the data also show that even
though unemployment had declined to 8.30% at
the end of 2011, the employment in the Offices of
Real Estate Appraisers classification continued to
decline. This suggests that employment growth in the
16.Data obtained from the US Census Bureau and found at http://www.census.gov/cgi-bin/sssd/naics/naicsrch.
17.Data obtained from the US Bureau of Economic Analysis and found at http://www.bea.gov.
18.Data obtained from the US Bureau of Labor Statistics and found at http://www.bls.gov.
139
20.00
12.77
13.45
14.20
14.35
14.56
15.05
15.55
0.00
12.00
5.00
11.30
10.00
10.64
15.00
10.30
GNP ($ Trillions)
Figure 12US Gross National Product
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Year
12.00%
4.30%
4.80%
2002
2003
2004
2005
2006
2007
2008
2009
2010
8.30%
4.60%
2001
0.00%
9.10%
5.10%
2.00%
5.40%
4.00%
5.70%
6.00%
7.10%
8.00%
9.70%
10.00%
5.40%
Unemployment Rate (%)
Figure 13US Unemployment Rate
2011
Year
appraisal profession as of that date had not improved
relative to the overall national economy and GNP.
The correlation analysis estimated the degree
of strength of the relationship between national
indicators and real estate sectors, with particular
attention paid to the appraisal profession. As
expected, there was a strong, positive relationship
with GNP. The highest correlation, with a coefficient
of +0.940 and statistical significance at the 0.01 level,
was between the appraisal profession and GNP. While
the relationship with the unemployment rate was
positive, it was also the lowest in the analysis, with
a statistically insignificant coefficient of +0.406. This
means that while there is a significant relationship
between employment in the appraisal profession
and growth or decline in the national economy, it
is also relatively independent of movement in the
overall national unemployment rate. It is possible
that analysis of correlations between employment
levels in the real estate-related sectors and the total
amounts of inventory of housing or commercial
real estate might be meaningful. However, as this
research did not pursue such an analysis due to data
limitations, future study might address this question.
140
Conclusion
The purpose of this article is to report information
on the state of the real estate profession in the United
States, with specific attention paid to the appraisal
profession for the period 2001–2011. The analysis
reveals several interesting results. First, overall real
estate industry employment at the end of 2011 was
higher than at the beginning of 2001. Second, the
trend of annual employment increases evident in
the early years of the period studied began to reverse
after the financial crisis. Third, declines in employment in the real estate profession coincide with the
declines in the overall national economy. Fourth,
recovery in employment in the appraisal industry
remains weak relative to the real estate profession
and overall employment in the national economy.
Thus, the conclusion is that during the time
studied macroeconomic factors impacting US real
estate markets directly correlated with reductions in
the number of people employed in most categories of
employment in the real estate profession and, even
more so, in the real estate appraisal segment of the
real estate industry. The results are both timely and
important because they illustrate substantial changes
in the real estate profession and the appraisal sector
in particular. As economic conditions improve,
understanding recent employment trends will better
equip new employers and businesses considering
expansion to identify potential gaps and to capitalize
on growth opportunities.
This article offers unique insight into the current
state of the real estate industry, how the various
segments within it have adjusted to the changes in the
real estate markets in the United States, and the likely
directions employment might take in the future. This
information should be particularly useful to those
in the real estate appraisal profession as the data
suggests that opportunities for future growth do exist
due to an overall reduction in the number of people
employed in this area in recent years.
J. Reid Cummings, is a doctorate student, with
a finance concentration, in the Coles College of
Business doctor of business administration program
at Kennesaw State University in Kennesaw, Georgia.
He earned a bachelor of arts in political science from
the University of North Carolina at Chapel Hill, and
a master of business administration, with honors,
from the University of Mobile. He serves as adjunct
faculty member in the Mitchell College of Business
at the University of South Alabama (USA) in Mobile,
Alabama. He also serves as senior researcher and
project analyst in the USA Center for Real Estate
and Economic Development. Cummings is president
of The Cummings Company and The Chamberlin
Company in Mobile, Alabama. For over 30 years,
he has been active in the real estate development,
brokerage, leasing, management, mortgage, and construction industries.
Contact: jrc@cummingsal.com
Donald R. Epley, PhD, MAI, SRA, is a professor of
marketing and e-commerce and the current holder of
the USA Distinguished Professorship in Real Estate at
the University of South Alabama in Mobile, Alabama.
He also serves as director of the Mitchell College
of Business Center for Real Estate and Economic
Development. He is a licensed real estate broker
and a certified general appraiser. Epley is the author
and coauthor of 8 textbooks and over 100 referreed
journal articles. He was the editor of the Journal of
Real Estate Research and has served on its editorial
board since its creation. He holds the CCIM designation from the Commercial and Investment Real Estate
Institute and the MAI and SRA designations from
the Appraisal Institute and serves on the Academic
Review Panel of The Appraisal Journal. Contact: depley@usouthal.edu
This project was partially funded by a federal grant
from the Economic Development Partnership
of Alabama. The authors wish to express their
sincerest thanks to Joseph F. Hair, PhD, Lucy F.
Ackert, PhD, Christopher H. Newman, PhD, Ken H.
Johnson, PhD, Edmond G. Eslava III, MAI, Madeleine
L. Downing, MAI, and three anonymous referees
for their helpful comments and suggestions.
All errors and omissions are our own.
141
Appendix
This article uses US Bureau of Labor Statistics data
as provided by Economic Modeling Specialists,
Intl. (EMSI). EMSI uses the NAICS coding system
in the development of its database that includes
data from other federal and state surveys, inclusive of economic base analysis, jobs by industry
scenarios, and economic impact analyses. The
primary emphasis in this article is on people
NAICS Industry
Classification
53
531
5311
53111
531110
53112
531120
53113
531130
53119
531190
5312
53121
531210
5313
53131
531311
531312
53132
531320
53139
531390
NAICS
Level
1
2
3
4
5
4
5
4
5
4
5
3
4
5
3
4
5
5
4
5
4
5
employed in the real estate appraisal profession.
As shown in the table below, at the two-digit level,
the US real estate profession is contained in NAICS
account number 53, labeled as Real Estate and
Rental and Leasing. As shown in the table below,
at the six-digit level the US appraisal profession
is contained in NAICS account number 531320,
labeled as Offices of Real Estate Appraisers.
NAICS Industry Classification Description
Real Estate and Rental and Leasing
Real Estate
Lessors of Real Estate
Lessors of Residential Buildings and Dwellings
Lessors of Residential Buildings and Dwellings
Lessors of Nonresidential Buildings (except Mini-warehouses)
Lessors of Nonresidential Buildings (except Mini-warehouses)
Lessors of Mini-warehouses and Self-Storage Units
Lessors of Mini-warehouses and Self-Storage Units
Activities Related to Real Estate
Real Estate Property Managers
Nonresidential Property Managers
Web Connections
Appraisal Institute—Fact Sheets
http://www.appraisalinstitute.org/newsadvocacy/FactSheets.aspx
Appraisal Subcommittee of the Federal Financial Institutions Examination Council—National Registry
https://www.asc.gov/National-Registry/NationalRegistry.aspx
US Census Bureau—American FactFinder
http://factfinder2.census.gov/main.html
US Department of Housing and Urban Development—Appraiser Roster
http://www.hud.gov/offices/hsg/sfh/f17c/f17appr_xmlhlp.cfm
142
Tax Abatement Issues that
Impact Limited-Market and
Special-Purpose Properties
abstract
Limited-market and spe-
cial-purpose properties
present unique challenges in valuations
H
related to ad valorem
taxation. Municipalities
istorically, owners of limited-market and special-purpose properties
have little success in tax abatement appeals. This article looks at the unique
challenges of valuation of these properties for ad valorem tax purposes. It is
intended to shed light on tax abatement appeals by exploring judicial rulings
made by the New Hampshire Board of Tax and Land Appeals. The cases
summarized focus on key appraisal issues and concepts that influenced the
rulings. The issues presented are fundamental to the appraisal process and
worth consideration in any tax abatement valuation involving a limited-market
or special-purpose property.
typically use the cost
approach for property
assessments. Owners
of limited-market and
special-purpose properties engage appraisers
who utilize the sales
comparison, income
capitalization, and cost
approaches in apprais-
Background
als used to appeal their
Judicial bodies have classified a broad range of properties as limited market or
special purpose. These properties are typically owner occupied, with a diverse
spectrum of users that includes:
assessments. This article summarizes appeals
cases in one state to
explore why taxpayers
•Big-box retail buildings
have had little success
•Large owner-occupied office buildings
in abatement hear-
•Research and development facilities
ings. The case rulings
•Custom-built industrial buildings
present issues worth
•Taxable college and educational facilities
consideration in any tax
The unique characteristics of these buildings present challenges in their appraisal
for ad valorem taxation.
abatement appraisal
Definitions
property.
involving a limited-market or special-purpose
The term unique can be used to describe many custom-built, owner-occupied
buildings. However, the appraisal profession and governmental entities have
developed their own specific language to describe such buildings. The Dictionary
of Real Estate Appraisal presents two definitions applicable to unique properties:
•A limited-market property is “a property or property right that has relatively
few potential buyers.”1
1. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010), 114.
Tax Abatement Issues
143
•A special-purpose property is “a property with
a unique physical design, special construction
materials, or a layout that particularly adapts its
utility to the use for which it was built; also called
a special-design property.”2
These definitions have been adopted by judicial bodies in New Hampshire and elsewhere.
Tax Abatement Appeals
In 1984, the Supreme Court of New Hampshire wrestled with a tax abatement case that involved a unique
property. In City of Manchester v. Town of Auburn,
the City of Manchester challenged the assessment
levied by the Town of Auburn on its water supply, a
large lake, and the surrounding watershed. The state
supreme court recognized in this proceeding that:
•There are multiple approaches to the valuation
of property.
•There is no rigid formula that can be used to arrive
at a full and true value of property assessment.
•There is specific weight required to be allocated
to any of the several approaches.3
The case left open the appraisal methodology that
could be used with unique properties. However, during the last two decades the appraisal methodology
given weight by judicial bodies has become more
and more refined.
NH Board of Tax and Land Appeals
In New Hampshire, the Board of Tax and Land
Appeals (BTLA) provides an alternative forum to the
superior court for property tax appeals. The BTLA
consists of three full-time board members who are
appointed by the Supreme Court of the State of New
Hampshire. The board has responsibility equal to
the superior court in regard to hearing appeals of all
local and state taxes. The BTLA also has the authority to change tax assessments and award refunds
whether the state or its municipalities levied the
taxes. BTLA decisions on tax abatement may be
appealed to the New Hampshire Supreme Court.4
In BTLA proceedings, appraisals are often
presented on limited-use and special-purpose
properties involving a variety of property users.
These appraisals have included the sales comparison,
income capitalization, and cost approaches.
However, the hearing results have a consistent
theme: the rulings favor the cost approach and set a
high standard of proof as to the taxpayer’s obligation
to show the assessment is disproportionate to
market value.
For example, the BTLA addressed the specialpurpose property concept in the 1990 case of
American Property Investment 3 v. City of Concord.
Here, the board recognized that there are specialpurpose properties, which tend to be owner occupied
and often reflect “institutional pride, prestige,
and success.”5 Later, in 1994, the BTLA ruled in
the Hitchcock Clinic v. the City of Concord, “The
functional utility of a special-purpose building
depends on whether there is continued demand for
the use for which the building was designed.”6 As
recently as the 2011 ruling in Wal-Mart Trustees v.
City of Concord, the BTLA reconfirmed its definitions
as follows:
A limited-market property is defined as “a property
that has relatively few potential buyers at a particular
time” and a special-purpose property is defined as “a
limited-market property with a unique physical design,
special construction materials, or a layout that restricts
its utility to the use for which it was built.”7
Taxpayer Burden of Proof
The BTLA has repeatedly stated,
The taxpayer has the burden of showing, by a
preponderance of the evidence, that the assessments
were disproportionately high or unlawful, resulting in
the taxpayer paying a disproportionate share of the taxes.8
Disproportionality is established by showing that the
property was assessed “disproportionate to market
value and higher than the general level of assessments in the municipality.”9 The property must be
appraised “at its full and true value” and at its best
2. Ibid., 184.
3. City of Manchester v. Town of Auburn, 125 N. H. 147, 154 (1984).
4. See the BTLA website for additional information, http://www.nh.gov/btla/.
5. Decision available at http://www.nh.gov/btla/decisions/searchable/1987_pdf/3935-87.pdf.
6. Decision available at http://www.nh.gov/btla/decisions/searchable/1991_pdf/12728-91.pdf.
7. BTLA decision at page 3, available at http://www.nh.gov/btla/decisions/searchable/2006_pdf/22691.pdf.
8. See RSA 76:16-A; Tax 201.27(f); Tax 203.09(a); Appeal of City of Nashua, 138 N.H. 261, 265 (1994).
9. Ibid.
144
and highest use. The taxpayer must present evidence
to demonstrate, through the appraisal process, that an
abatement of the property’s assessment is warranted.
The 2011 ruling in Wal-Mart Real Estate Business
Trust v. Town of Rindge10 presented an interesting
twist on the burden of proof. The taxpayer’s appraiser
submitted a narrative appraisal report that used the
cost, sales comparison, and income capitalization
approaches to arrive at a reconciled value supporting
an abatement. The town did not present any
appraisal of its own, but simply submitted a
reasonably supported cost estimate. The board
found that the taxpayer’s appraisal used unreliable
market data and did not meet the burden of proving
substantial disproportionality. In this case, the board
ruled that the cost approach computations presented
by the town were the most representative of a fair
and proportionate assessment. The Town of Rindge
case shows that for special-purpose properties the
taxpayer has a very high hurdle to overcome to
demonstrate disproportionality.
Previously, the superior court in Wise Shoe Co.
v. Town of Exeter had ruled that “there is never
one exact, precise or perfect assessment; rather
there is an acceptable range of values which,
when adjusted to the municipalities general level
of assessment represents a reasonable measure of
one’s tax burden.”11 The board has noted that the
challenge of finding a proportionate assessment is
magnified where there is a more substantial and
complicated type of property constructed to meet
special requirements.
Limited-Market and Special-Purpose
Property Cases
Research was conducted to identify BTLA cases
that involved limited-market and special-purpose
properties. These rulings are summarized to focus
on the pertinent appraisal issues that had a primary
impact on the findings. The following eight cases
are presented in chronological order, beginning in
1990 and ending in 2011. The relevant appraisal
concepts presented by the cases are summarized and
discussed. It is important to note that in all of these
cases the petitioner’s request was either denied or
only partially granted. A common theme throughout
these cases appears to be that the taxpayers did not
adequately support their appraisal methodology,
resulting in findings of unreliable valuations.
American Property Investment 3 v. City of
Concord
The 1990 case American Property Investment 3 v.
City of Concord12 looked at appraisal issues related
to the definition of special purpose, the theory of
substitution, functional obsolescence, and appropriate appraisal methodologies. In American Property
Investment 3, the subject property consisted of two
owner-occupied office buildings with a total of
212,950 square feet, constructed in 1976 and 1986,
with the older building refurbished in 1986.
The taxpayer introduced the concept that the
buildings constituted a special-purpose property
because of their design and owner occupancy.
Defining market value, the City of Concord addressed
the theory of substitution, where the owner occupant
can be considered a potential buyer, in that the owner
would not pay more to build a new complex than the
replacement cost less depreciation plus land value
of the existing complex.
In its decision, the BTLA adopted the cost
approach and found that the tax courts have also
supported the use of the cost approach in the
valuation of special-purpose properties. Because a
building was refurbished in 1986, the board found
there was no evidence of functional obsolescence.
The board stated that it was not impressed with the
taxpayer’s selection of comparables that included
generic office buildings, which due to substantial
differences in size, age, condition, and location did not
support the sales comparison approach. The board
also found that the comparable rental properties
did not offer probative value when “compared to
the subject’s campus type ‘special-purpose, owneroccupied, monumental development’ worthy of
a company anxious to achieve an international
corporate image, which reflects institutional pride,
prestige, and success.”
The theory of substitution is identified in The
Appraisal of Real Estate as an underlying concept
in both the sales comparison and cost approaches.13
Functional obsolescence is defined in The Dictionary
10.Decision available at http://www.nh.gov/btla/decisions/searchable/2006_pdf/22873.pdf.
11.Wise Shoe Co. v. Town of Exeter, 119 N.H., 700, 702 (1979).
12.Decision available at http://www.nh.gov/btla/decisions/searchable/1987_pdf/3935-87.pdf.
13.Appraisal Institute, The Appraisal of Real Estate, 13th ed. (Chicago: Appraisal Institute, 2008), 298–299, 380.
145
of Real Estate Appraisal, as “the impairment of
functional capacity of a property according to market
tastes and standards.”14 The dictionary also refers to
functional inutility, which is equivalent to functional
obsolescence because ongoing change makes the
plan, form, style, design, layouts, or features obsolete.
Adopting the cost approach in American Property
Investment, the BTLA weighted in on the theory of
substitution. The board discounted the taxpayer’s
application of functional obsolescence because
of the recent refurbishing. The board discounted
the income approach because it found the rental
comparables to be of little or no probative value
when compared to the subject.
Hitchcock Clinic v. City of Concord
The 1994 case Hitchcock Clinic v. City of Concord
looked at appraisal issues related to market
value—especially in terms of viewing the owner as
a hypothetical buyer, functional obsolescence, and
expanded highest and best use.15
In Hitchcock Clinic, the subject property was
a state-of-the-art, three-story medical clinic with
approximately 66,000 square feet of interior space.
The BTLA in its ruling indicated that there was
precedent for viewing the owner as a hypothetical
buyer whose fair purchase price would depend
largely on the price it would have to pay for building
a new, equivalent building. The board adopted this
hypothetical buyer viewpoint and went on to find
that the highest and best use of the property was
as a medical clinic and the fair market value could
encompass the use of the property for the special
purpose for which it had been constructed and was
being employed.
The board did not consider functional obsolescence
in its determination, in part because “the functional
utility of a special-purpose building depends on
whether there is continued demand for the use for
which the building was designed.” The board went on
to find that the clinic currently occupied a state-of-theart, custom-built facility, and therefore had no reason
to move in the foreseeable future. Because the facility
was designed and built to the taxpayer’s specifications
and still was considered state-of-the-art, the market
value must encompass the special purpose for which
it was constructed and was being employed.
The Hitchcock Clinic case established the
board’s position on value, stating that value must
be based on a property’s highest and best use and
the owner may be considered as a hypothetical
buyer. The board recognized that the building had
a higher-than-average cost per square foot, and the
design and cost could severely limit the number
of perspective buyers interested in its acquisition
for the purpose for which it was built. The board
stated, however, that all parties agreed the highest
and best use was a medical clinic. Thus, the board
determined a fair purchase price would depend
largely on the price the owner would have to pay
to build a new equivalent clinic. Richard Person v. Town of Campton
The 1996 case Richard Person v. Town of Campton16
discusses appraisal issues related to economic depreciation and fixtures versus chattel. In this case, the
subject property consisted of a concrete batch plant
and service garage. One basic issue raised in the
appeal was what property qualified as realty and
what property qualified as personalty. Based on court
cases, the board ruled that chattel loses its character
as personalty and becomes part of the realty when
there is “an actual or constructive annexation to
the realty with the intent of making it a permanent
accession to the freehold and an appropriation or
adaption to the use or purpose of that part of the
realty with which it is connected.” The board stated,
“If a chattel becomes an intrinsic, inseparable and
untraceable part of the realty, it is deemed a fixture
regardless of the intent of the parties.”
The board concluded that the equipment inside
the steel-framed, metal-sheathed building and the
cement tank bolted to concrete piers outside the
batch plant should be considered taxable as fixtures.
In its finding, the board also acknowledged that
the property suffered from economic depreciation as
a result of declining construction in the late 1980s
and early 1990s. Today, the literature recognizes the
relationship between depreciation and obsolescence.
Economic depreciation is now defined in The
14.The Dictionary of Real Estate Appraisal, 5th ed., 85.
15.In adopting the cost approach the board included special architectural features; decision available at http://www.nh.gov/btla/decisions/
searchable/1991_pdf/12728-91.pdf.
16.Person v. Town of Campton, NH TAX Lexis 99 (BTLA May 3, 1996); decision available at http://www.nh.gov/btla/decisions/searchable/1993_pdf/1476293.pdf.
146
Dictionary of Real Estate Appraisal as external
obsolescence, which is “an element of depreciation; a
diminution in value caused by negative externalities
and generally incurable on the part of the owner,
landlord, or tenant.”17
Sears Roebuck and Company v. City of
Manchester
The 2006 case Sears Roebuck and Company v. City
of Manchester18 looked at appraisal issues related to
renovations and the income capitalization approach
versus the cost approach. In this case, the subject
consisted of an approximately 139,584-square-foot
retail building, which was renovated in 1997 and in
1998 when there was a 35,200-square-foot addition.
The taxpayer in its appeal emphasized the
income approach, while the city focused on the
cost approach. The board discounted the income
approach, stating that these types of properties are
typically owner occupied and the petitioner was
unable to identify any rental market data that was
truly comparable to the property. There were two
main reasons why the board gave little weight to
the taxpayer’s cost approach. First, the physical
depreciation applied to the building appeared
excessive given the property’s renovations in 1997
and 1998 and its well-maintained condition. The
second reason was a dismissal of the large functional
obsolescence adjustment because the property was
owner occupied.
The taxpayer argued that while the property
was well maintained it suffered from high functional
obsolescence because it was obsolete for anyone
other than Sears and would be either torn down
or totally renovated to suit the unique facade,
layout, and motif requirements of any other anchor
store. The board ruled that the taxpayer’s high
functional depreciation for such a property would
be appropriate only if there was little or no demand
for its continued use. The board further stated that
the evidence was to the contrary, as Sears had
occupied, expanded, and renovated the store for a
number of years and no evidence was presented that
its continued use was not its highest and best use. Wal-Mart Real Estate Business Trust v. Town of
Conway
The 2009 case Wal-Mart Real Estate Business Trust v.
Town of Conway19 looked at appraisal issues related
to depreciation, appraisal methodology, and taxpayer
burden of proof. In this case, the subject property
consisted of a single-story building of approximately
100,000 square feet with a canopy garden center. The
board found that the property met the definition of
a limited-market property but was not a specialpurpose property.
The board restated that the taxpayer has the burden
of showing, by a preponderance of evidence, that the
assessment was disproportionately high or unlawful,
resulting in the taxpayer paying a disproportionate
share of taxes. To establish disproportionality, the
taxpayer needed to show the property’s assessment
was higher than the general level of assessment in
a municipality. The board found the cost approach
provided the most reliable indicator of value for the
property and ruled that the comparable sales presented
by the taxpayer did not meet basic standards. The
board also questioned the physical depreciation used
by the taxpayer in its cost approach. The board found
that the taxpayer’s depreciation calculations were not
well founded or supported and were less credible than
depreciation rates produced using Marshall Valuation
Services tables.
This case highlights the difficulty of identifying
truly comparable sales to be applied in the valuation
of limited-market properties. The case also reflects
the importance of being able to support depreciation
estimates whether they are physical, functional, or
economic.
Wal-Mart Real Estate Business Trust v. Town of
Plymouth
The 2009 case Wal-Mart Real Estate Business Trust
v. Town of Plymouth20 looked at appraisal issues
related to depreciation estimates. In this case, the
subject property consisted of a freestanding Wal-Mart
Supercenter constructed in 2002 and comprised of
about 156,708 square feet.
The board indicated that the property met
the definition of a limited-market property, and
17.The Dictionary of Real Estate Appraisal, 5th ed., 73.
18.Decision available at http://www.nh.gov/btla/decisions/searchable/2002_pdf/19814-02pt-and-20026-03pt.pdf.
147
it stated that market value could most reliably be
estimated by using the cost approach. The board
found that the taxpayer’s depreciation estimates
were unsupported or lacked reliability and again
referenced depreciation estimates represented in
the Marshall Valuation Service. As in the previously
cited Town of Conway case, the board rejected the
taxpayer’s depreciation estimate as unsupported.
Wal-Mart Real Estate Business Trust v. Town of
Rindge
The 2011 case Wal-Mart Real Estate Business Trust v.
Town of Rindge 21 addressed appraisal issues related
to appraisal credibility, the cost approach, and exactness of an assessment.
In this case, the subject property consisted of an
approximately 74,506-square-foot retail building. The
board found this to be a limited-market property, but
the taxpayer did not meet the burden of proof as to
substantial disproportionality. The board also found that
the cost approach presented by the town reflected an
appropriate assessment for the property; it further stated,
There is never one exact, precise, or perfect assessment;
rather, there is an acceptable range of values which,
when adjusted to the municipality’s general level of
assessment, represents a reasonable measure of one’s
tax burden. Wise Shoe Company v. Town of Exeter,
119 N.H. 700 702 (1979). The challenge is magnified,
of course, when a more substantial and complicated
type of property, such as a ‘big box,’ free standing store
constructed to the special requirements of a major
retailer like the Taxpayer, is involved.
In the Town of Rindge case, the taxpayer’s
appraiser suggested a different highest and best use
for the subject property, which reflected substantial
incurable functional obsolescence. The board
rejected this notion and reconfirmed its concept of
a limited-market property and its reflection of the
property’s highest and best use.
Finally, the case Town of Rindge is of interest
because the town prevailed without engaging a formal
appraisal. At that hearing, the town only submitted
a well-documented cost approach—which was
not offered as a formal appraisal document—yet it
prevailed in the appeal hearing.
Wal-Mart/Trustee, Glass v. City of Concord
The 2011 case Wal-Mart/Trustee, Glass v. City of
Concord22 looked at the appraisal-related issues of
whether the owner can be recognized as the hypothetical purchaser and the taxation of fixtures.
The subject property consists of an approximately
116,000-square-foot building constructed in
1993, with an approximately 83,000-square-foot
supermarket/grocery addition built in 1999. Here,
the board ruled that the property was a limitedmarket property. However, the board also found
the taxpayer’s appraisal was so flawed that it would
give its market value conclusions no weight. Within
its decision, the board reconfirmed that the state
supreme court had recognized that an owner can
be considered the hypothetical purchaser/user and
thus, the cost approach has merit in estimating
the property’s market value. The board went on to
address furniture and fixtures, stating as follows:
[T]he Property built in 1998 for the supermarket
or grocery area of the building contains many
infrastructure items and specialized features (e.g.,
built-in coolers, freezers; plumbing and electrical
installations for food prep, butcher and deli areas, and
restrooms). Such specialized features contribute to the
Property’s highest and best use and, if not recognized
and valued, “valuable property would entirely escape
its just share of the burden of taxation.”
Although this case rehashes many of the issues
previously discussed, it brings to light the recognition
of fixtures such as built-in coolers and freezers as
realty in the assessment process.
Conclusion
This article has discussed rulings in one state, New
Hampshire, to illustrate treatment of appraisalrelated issues in ad valorem appeals. The New
Hampshire Board of Tax and Land Appeals hearings
and rulings on assessment issues involved limitedmarket and special-purpose properties. Key elements
of the decisions discussed include:
•The adoption of Appraisal Institute definitions of
limited-market and special-purpose properties.
•The owner can be considered the hypothetical
purchaser/user.
•The highest and best use may be the current use
of the facility.
•Appropriate appraisal methodology must consider
the properties highest and best use.
148
•Estimates of depreciation types (physical, functional, and economic) must be supported with
market evidence.
Finally, when conducting an appraisal of a
limited-market or special-purpose property for tax
abatement, the following are suggested:
•The rehabilitation of a property supports its current use as the highest and best use.
•The physical description of the building should
be carefully detailed so the size and features can
be documented.
•Many chattel items may be assessed as fixtures in
limited-market and special-purpose properties.
The board appears most likely to give the cost
approach the greatest weight as the valuation
methodology in determining the appropriate
assessment for limited-market and special-purpose
properties. There is the potential that the income
capitalization approach would be considered
if convincing comparable rental data could be
developed. However, given the board’s previous
rulings, an appraisal based on the income approach
would have difficulty in prevailing in a tax abatement
case. Also, the unique attributes of limited-market
and special-purpose properties often make it difficult
to develop credible support for the sales comparison
approach when there is limited market data.
Where chattel is annexed to the realty in a
constructive manner for an intrinsic use or purpose
of the realty, it loses its character as personalty and
is deemed a fixture. Items such as walk-in freezers
and coolers have been ruled to be fixtures and
appropriate for inclusion in the assessment.
Rehabilitation or renovation of existing properties
supports two concepts. First, rehabilitation of a
property adds to its compliance with the definition
of a special purpose. Second, rehabilitation places
a constraint on the amount of depreciation that
can be supported. Depreciation appears to be an
area where taxpayers overreach in their appeals,
potentially resulting in a finding that their appraisals
are unreliable. Therefore, caution and support must
be used in developing depreciation estimates.
•The analysis should focus on the cost approach,
depending on the property type and market data
available.
•Actual cost and cost manuals should be considered and supported by local contractor estimates.
•The cost estimate used by the municipality should
be analyzed for accuracy and support.
•The depreciation utilized needs to be well
supported.
•Comparable data needs to have characteristics
very similar to the subject property.
Individual jurisdictions may emphasize additional
or different aspects in their abatement proceedings. As the eight cases presented demonstrate, the
issues related to limited-market and special-purpose
property increase the difficulty of prevailing in tax
abatement cases. Therefore, special care should
be taken in preparing an appraisal in this type of
assignment.
John M. Crafts, MAI SRA, is president of Crafts
Appraisal Associates, Ltd., a commercial real estate
appraisal firm founded in 1978. Crafts is a past chair
of the New Hampshire Real Estate Appraiser Board.
He has had prior articles published in The Real Estate
Journal and The Appraisal Journal, and he was recipient of The Appraisal Journal Editorial Board Award for
an Outstanding Residential Article in 1999. Contact:
jcrafts@craftsappraisal.com
Additional Reading
Robinson, Rudy R., III, and Scott R. Lucas. “Appraising Special-Purpose Industrial Facilities for Ad Valorem
Purposes.” The Appraisal Journal (October 2003): 321–327.
149
Web Connections
International Association of Assessing Officers—Technical Standards
http://www.iaao.org/sitePages.cfm?Page=219
Institute for Professionals in Taxation
—Amicus Brief Filings
https://www.ipt.org/IMIS15/IPT/Publications/Amicus_Filings.aspx
—State Government Links
https://www.ipt.org/ I M IS15/ I PT/ Publications/Government_Website_Links/ I PT/ Publications/
Government_Website_Links.aspx
National Association of Real Estate Investment Trusts—Data and Research
http://www.reit.com/DataAndResearch/Highlights.aspx
Society of Industrial and Office Realtors
http://www.sior.com/
150
The Trouble with Rates
in the Subdivision
Development Method to
Land Valuation
abstract
Valuation of subdivision
land is not a one-sizefits-all endeavor. This
article demonstrates
the relationship
between profit and yield
I
and their application
in land valuation. A
t is approaching six years since the start of the worst housing downturn
in a generation. Recent studies suggest that the residential development and
construction markets are stabilizing, with many markets demonstrating positive
momentum in construction, home sales activity, and price appreciation. These
trends foreshadow an increase in land sales and development and construction
loans, which will spur greater demand for professional services in valuing
residential development land. Hence, it is an appropriate time to revisit the
subdivision development methodology to land value.
This study focuses on rates of return and is aptly titled “The Trouble with
Rates.” In this context, rates refer to profit and yield—the two most commonly
expressed rates of return in developing and constructing residential property. The
trouble is the misunderstanding and misapplication of the two rates in valuation.
The primary intent of this study is to demonstrate the relationship between
profit and yield and the applicability of the subdivision development static method
and/or discounted cash flow. Real estate development pro formas often indicate
both profit and internal rate of return and reflect the same land purchase basis.
Therefore, they reflect the same total rate of return but expressed two different
ways. The discussions deal with cash flow trending, leverage, and development
duration (time), and their effect on both profit and yield.
This article proceeds as follows. First, profit is defined and its applicability
in the subdivision development static method to land valuation is shown. The
static method provides an estimate of land value by subtracting all development
and construction costs and expenses from estimated retail sale revenues. A
deduction is also made for profit or overall return. The analysis is conducted on
a “static” basis, rather than the dynamic model in a discounted cash flow, which
projects sale revenues and costs over time. Many market participants analyze
development property acquisitions via static land residual methodology, and a
form of the static model is commonly exhibited in developer and builder pro
formas and business plans.
Next, the article reviews subdivision development discounted cash flow and
subdivision development static method
is suggested, and the
impact of leverage,
trending, and project
duration on profit and
yield are emphasized.
The article illustrates
the pitfalls of adhering to a discount rate
from published studies
and calls into question the applicability of
discounted cash flows
for short-term developments. It emphasizes
that appraisals should
reflect what market
participants actually
do in their analyses of
subdivision land and
that the best sources
for profit, yield, or discount rates are actual
developer or builder pro
formas, surveys, and
interviews with market
participants.
151
discount rates. The terms yield rate, discount rate,
and internal rate of return are often used interchangeably in this context. Mathematically, they are
synonymous in subdivision development cash flows.
When land is a known cost in a cash flow, a yield
rate (internal rate of return) can be generated. When
land is the unknown, as in subdivision development
method cash flows, a discount rate derives the present
worth calculation.
The article next brings attention to compounding
when deriving yield rates and applying discount rates.
The effects of compounding in periodic cash flow yield
and discount rates must be considered as the market
participants developing cash flows often do the same.
Understanding of the relationship between
profit and yield provides significant insight on the
applicability of subdivision development valuation
methodology. Hence, the article concludes with a
discussion of the potential pitfalls and misapplication
of profit and yield in subdivision development
approach valuation.
Review of Published Literature
Considerable literature has been published on
studies of discount rates in discounted cash flow
valuation; however, study and explanation of profit
in the static method is less common.
Sevelka provides a comprehensive discussion on
subdivision development profit, including a review
of previous literature pertaining to both development
property profit and yield rates.1 Maes provides a case
study and several suggested methods for deriving an
applicable rate for developer’s overhead and profit.2
Ditchkus and Biadasz provide an excellent
overview of proper use and understanding of
subdivision yield and appropriate market-supported
rates of return.3 They point out that market makers
do not use dual rate models and do not think in
terms of bifurcated rates. The discounted cash flow
models used by developers are typically single rate
(i.e., inclusive of profit). Ditchkus and Biadasz explain
that most developers and builders have relied on static
models (e.g., gross sales less direct and indirect costs
less profit when making land purchase decisions),
and profit margins are readily available from the
market. Further, profit used in static model analysis
takes into consideration the time value of money.
Sevelka has also addressed the distinction
between all-in discount rates, hybrid discount
rates with line-item cash flow profit, and developer
profit in a static model. 4 He points out that the
expressed developer profit in a static model does not
explicitly consider the timing of either revenues or
expenditures. Indeed, this is often the case. However,
the static profit can, in fact, reflect the time cost of
money and may also inherently reflect the timing of
revenues and expenditures if market participants are
only considering static models in a particular market.
Emerson demonstrates a methodology for
extracting profit and its relationship to total costs.5
Although not identified as such, Emerson presents
a form of static land residual in which profit
is allocated to various stages of the permitting,
construction, and absorption periods. However, the
emphasis of these procedures is in building up to
bulk or retail lot value via a cost approach.6
Luzod and Mann point out appraisals should
reflect what market participants actually do, not
necessarily a particular client’s desires.7 Owens
echoes this sentiment, emphasizing that the
appraiser should estimate value in the same manner
that a typical developer would.8
This article will not address the use of hybrid, dual,
or bifurcated rate methodology in which line-item
profit is included in the discounted cash flow and a
form of hybrid discount rate is applied in the present
worth calculation. As developers and builders do not
consider hybrid rate cash flows, and there is no market
support for either line-item cash flow profit or a hybrid
discount rate, it is a moot point. Market participants
analyze residential development yield by way of true
internal rates of return that are all-inclusive of profit.
1. Tony Sevelka, “Subdivision Development: Risk, Profit, and Developer Surveys,” The Appraisal Journal (Summer 2004): 242–252.
2. Marvin A. Maes, “Subdivision Analysis: A Case Study,” The Appraisal Journal (January 1982): 100–112.
3. Larry Ditchkus and Sally Biadasz, “Rethinking Speculative Subdivision Valuation for Loan Purposes,” The Appraisal Journal (July 1996): 263–272.
4. Sevelka, “Subdivision Development,” 250.
5. Don M. Emerson, Jr., Subdivision Valuation (Chicago: Appraisal Institute, 2008), 196–201.
6. Ibid., 201–203.
7. Andrew M. Luzod and George R. Mann, “Federal Agencies Offer Guidance on Appraisals for Residential Tract Developments,” The Appraisal Journal
(Winter 2006): 88.
8. Robert W. Owens, “Subdivision Development: Bridging Theory and Practice,” The Appraisal Journal (July 1998): 275.
152
Developer (or Builder) Profit
With regard to development property, market participants most often indicate profit as the amount of
proceeds above and beyond total costs or invested capital, including the land acquisition (land basis). The ratio
of profit to total invested capital is then expressed in
percentage form, conveying the implied return (profit/
invested capital). Profit may also be expressed as a percentage of the total sale revenues (profit/sale revenues).
For example, if a developer invested a total of
$1,200,000 in development costs (including land),
and realized total net proceeds of $300,000 above
the $1,200,000 of invested capital, total profit would
be 25.00%. Likewise, if total revenues from lot sales
were $1,500,000, then developer profit could also be
expressed as 20.00% of sale revenues (Table 1). Note
that both expressions of profit, whether a percentage
of invested capital or aggregate revenues, reflect the
same amount of profit in dollars.
When considering profit, it is important to
understand assumptions with regard to revenues,
trending, absorption, and costs. Profit will, or should,
vary with development and sales duration, revenue and
cost trending, financing, risk, and other factors. So, it is
important to qualify how profit, as a ratio or percentage,
is defined in a given market and the parameters for
measurement of the entrepreneurial reward.
Static Method
Discounted cash flow analysis is the most commonly
applied valuation methodology in the subdivision
development method. Many appraisers neglect the
static method, which provides valuable insight on
return on invested capital. The static method is
essentially an upside-down cost approach utilizing
required market-supported profit (or return) and
solving for land (or lot) value.
Market participants often consider profit in
addition to yield in their acquisition, disposition, and
investment decisions. As discussed, the measurement
of profit is typically expressed as the ratio of net
revenues beyond the total costs or invested capital. It
is also commonly expressed as a percentage of retail
sale proceeds. Profit in the static method inherently
should reflect all risk and timing factors considered
in a residential development investment.
The static method is not directly presented in
Appraisal Institute instructive materials. The Appraisal
of Real Estate, 13th edition, presents traditional sales
comparison and income capitalization approaches to
Table 1Derivation of Developer (or Builder) Profit
Aggregate Retail Revenues (50 Lots)
Lot Sale Revenues
% Sales
50 Lots × $30,000 Per Lot
Total Revenues
$1,500,000
100.00%
$1,500,000
100.00%
$500,000
33.33%
$5,000
0.33%
$500,000
33.33%
Less Costs & Expenses
Land Acquisition
Land Purchase Price
Acquisition Costs
Legal, Escrow, Title, Etc.
Land Development & Fees
50 Lots × $10,000 Per Lot
General & Administrative
3% Sale Revenues
$45,000
3.00%
Sales-Closing-Legal
6% Sale Revenues
$90,000
6.00%
Advertising-Marketing
2% Sale Revenues
$30,000
2.00%
Misc.-Contingency
1% Sale Revenues
$15,000
1.00%
Property Taxes
Over Holding Period
Total Costs & Expenses
Indicated Profit
$15,000
1.00%
$1,200,000
80.00%
$300,000
20.00%
20.00%
25.00%
Profit as Percentage of Aggregate Retail Revenues
Profit as Percentage of Equity (Invested Capital)(2)
(1)
(1) $300,000 / $1,500,000
(2) $300,000 / $1,200,000
153
land and site valuation.9 Land residuals are commonly
applied in estimating highest and best use, and The
Appraisal of Real Estate rightfully points out that residual
land value can be found by estimating the value of the
proposed use (land and improvements) and subtracting
the cost of the labor, capital, and entrepreneurial
coordination expended to create the improvements.10
In addition to the traditional land or bulk lot sales
comparison approach, appraisers sometimes include
a cost approach in subdivision land valuation. In
subdivision development, few market participants
total costs and profit in estimating prospective
revenue events for bulk or retail lots. Rather, they
work the cost approach assumptions backward,
starting with revenues and subtracting out all costs
and desired profit to substantiate a feasible land price.
Given the foregoing, the traditional cost approach
is rarely applicable in subdivision land valuation
other than providing the various assumptions and
estimates in the development approach, whether the
static method and/or discounted cash flow.
Developers and builders will include the land basis
as a cost in deriving profit. However, land value is the
unknown in the subdivision development method.
Table 2 shows a reconfiguration of the previous
example in Table 1 and demonstrates a basic static
method application. In this example, land price is not
included as a cost and a 25.00% deduction is applied for
profit, resulting in the residual land value of $500,000.
Sources for Profit
Published sources for developer or builder profit are
few. The National Association of Homebuilders’ The
Cost of Doing Business Study is an annual publication
and excellent resource for gross margins, net profit,
financial ratios, profit margins, and other relevant
builder industry metrics. As will be discussed, more
prevalent are surveys for single (all-in) yield or discount rates (no bifurcation with line-item profit), which
inherently include total developer or builder profit.
Market support for profit in the static method is
provided by actual developer or builder pro formas,
surveys, and interviews with market participants.
Like capitalization rates or discount rates in incomeproducing properties, there is typically a reasonably
defined range of required rates of profit for development
Table 2Development Approach Static Method to Land Value
Aggregate Retail Revenues (50 Lots)
Lot Sale Revenues
50 Lots x $30,000 Per Lot
Total Revenues
% Sales
$1,500,000
100.00%
$1,500,000
100.00%
$5,000
0.33%
$500,000
33.33%
3.00%
Less Costs & Expenses (Excluding Land)
Acquisition Costs
Legal, Escrow, Title, Etc.
50 Lots x $10,000 Per Lot
3% Sale Revenues
$45,000
Sales-Closing-Legal
6% Sale Revenues
$90,000
6.00%
2% Sale Revenues
$30,000
2.00%
Misc.-Contingency
1% Sale Revenues
$15,000
1.00%
Property Taxes
Over Holding Period
$15,000
1.00%
Less Profit
25% Invested Capital
(Including Land)
Residual Land Value
$700,000
46.67%
$300,000
20.00%
$500,000
Profit as Percentage of Aggregate Retail Revenues(1)
Profit as Percentage of Equity (Invested Capital)(2)
33.33%
20.00%
25.00%
(1) $300,000 / $1,500,000
(2) $300,000 / $1,200,000
9. Appraisal Institute, The Appraisal of Real Estate, 13th ed. (Chicago: Appraisal Institute, 2008), 357–376; 512.
10.Ibid., 285.
154
property depending upon risk, geography, market
conditions, product type, land condition, financing, term
of development, and other factors.
Discounted Cash Flow Method
As noted previously, discounted cash flow analysis is
the most commonly applied valuation technique in
the subdivision development method, especially with
regard to extended project durations. Developers or
builders will forecast revenues, trending, absorption,
costs, and expenses over a development and sell-out
period and support land acquisition price by achieving
a desired yield or return. The most common indicator
of yield is an internal rate of return, defined as “the
annualized yield rate or rate of return on capital that
is generated or capable of being generated within an
investment or portfolio over a period of ownership.”11
An internal rate of return discounts all returns from
an investment, including returns from its termination,
to a present value equal to the original investment.12
The internal rate of return is expressed as an annual
rate. Consequently, if the cash flow is formulated on a
non-annualized basis, consideration should be given
to the effect of compounding. A common procedure
by appraisers is to apply simple division of the annual
rate for the periodic discounting, typically months or
quarters, but this does not reflect true compounding. For
example, if a cash flow is formulated on a quarterly basis,
and assuming a 20.00% internal rate of return, most
appraisers simply divide by four, resulting in a 5% rate
for periodic discounting. However, sophisticated market
participants more often incorporate compounding into
their discounting. Although it may appear a subtle
variance, the effect on indicated internal rate of return
can be significant. Likewise, there may also be significant
effect on indicated land value via a discounted cash flow.
It is critical the appraiser fully vet the methodology and
calculation of yield in development property valuation.
Again, the valuation methodology should reflect the
practice most commonly used by market participants in
a given market for a given property. The appraiser then
has market support for including or excluding the effect
of compounding in his or her selection of an applicable
discount rate.
Tables 3, 4, and 5 provide an example of a
development scenario with forty-eight lots and
certain revenue, absorption, trending, cost, and yield
assumptions. The cash flow allows for six months
of land development and lot sale absorption at eight
lots per quarter. Under these assumptions, the project
would be sold out in two years. Revenues and costs
were kept constant (no trending), and the analysis
was prepared on a non-leveraged basis. The target
internal rate of return was 22.00% and reflects
quarterly compounding. In this example, land price
was calculated to achieve the yield rate. As a result,
a $1,053,336 land price would achieve a 22.00% nonleveraged internal rate of return.13
Table 3Development Approach Assumptions:
8 Sales Per Quarter, No Trending
General
Total Number Lots
48
Premium Lots
10
Absorption Rate (Per Quarter)
Land Development Duration (Quarters)
8
2
Initial Delivery (Quarter)
3
Revenue Trending (Annual)
0.00%
Cost Trending (Annual)
0.00%
Target IRR (Non-Leveraged)
22.00%
Quarterly IRR (Non-Leveraged Compounding)(1)
5.10%
Quarterly IRR (Non-Leveraged No Compounding)(2)
5.50%
Revenues
Base Retail Lot Price
$75,000
Average Lot Premium
$5,000
Costs & Expenses
Acquisition Costs
$10,000
Land Development & Fees (Per Lot)
$30,000
General & Administrative (% Sales)
3.00%
Sales-Closings-Legal (% Sales)
6.00%
Advertising-Marketing (% Sales)
2.00%
Miscellaneous-Contingency (% Sales)
2.00%
Property Taxes (Tax Rate)
1.25%
(1) Proof of quarterly rate: 4 n; -1 pv; 1.22 fv; i = 5.0969
Proof of annual rate: 4 n; 5.0969 i; -1 pv; fv = 1.2200
(2) Annual IRR of 20% / 4 quarters
= 5.5000
11.Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010), 103–104.
12.The Appraisal of Real Estate, 13th ed., 545.
13.In the example, the positive and negative cash flows are discounted at the same rate of return. The author does not intend to enter into the controversy
on using different discount rates for positive or negative cash flows. The majority of market participants use one discount rate regardless.
155
Table 4Aggregate of Retail Revenues (48 Lots)
Avg. Price
No. Lots
Total
Base Lot Price
$75,000 ×
48
$3,600,000
Lot Premiums
$5,000 ×
10
$50,000
Total Revenues
Average Retail Price
$3,650,000
$76,042
Note: Aggregate of retail revenues does not represent market value.
The subdivision development method’s
discounted cash flow solves for land value. Using
the same assumptions and the Excel based = NPV
function, a subdivision development method
discounted cash flow affirms the land price and
desired yield (Table 6). Although rarely observed
in developer or builder pro formas, the same
procedure may be expressed via quarterly discount
factors (Table 7). Finally, this example may also
be presented in a static method. Under the given
assumptions, a 22.00% internal rate of return
would correlate to $654,060 in profit, or 21.83% as
a percentage of invested capital and/or 17.92% as a
percentage of total revenues (Table 8).
The example cash flows also present a comparison
of the difference in internal rate of return and land
value with and without compounding incorporated
into the yield rate. Assuming the same land purchase
price, the internal rate of return is 22.00% with
compounding versus 20.39% without compounding
(Table 5). Using a 22.00% discount rate, the indicated
land value is $1,053,336 in the compounding model
versus $1,011,416 using the simple non-compounding
formula (Table 6 and Table 7).
Sources for Discount Rates
There are a number of sources for discount rates.
The PwC Real Estate Investor Survey (previously
known as the Korpacz Real Estate Investor Survey)
is a national publication often cited as a source for
residential development property yield rates. The
survey pertains to residential land development.
Respondents include developers, builders, brokers,
and private investors. The reported non-leveraged
yield rates are for entitled and unentitled land
typically reflecting longer development durations
averaging five to ten years.
Another source of discount rates is the RealtyRates.
com Developer Survey. This survey provides ranges
156
of discount rates via a survey of developers, builders,
lenders, and appraisers. The discount rates reflect
ground-up construction projects on subdivisions,
planned unit developments, condominiums, and
co-ops. The Developer Survey does not cite land
development rates; it includes builder, or vertical
construction and sell-off, discount rates. The survey
typically reports single all-in non-leveraged discount
rates but will reflect financing if applicable. However,
the condominium and co-op survey reportedly
reflects a bifurcated rate in which profit is a cash
flow line item.
The best sources for yield or discount rates are
actual developer or builder pro formas, surveys,
and interviews with market participants. Similar to
profit, there is typically a reasonably defined range
of yield hurdle rates for development property, again
depending upon risk, geography, market conditions,
product type, land condition, financing, development
duration, and other factors.
Relationship of Profit and Internal
Rate of Return
It is very common for real estate development pro
formas and business plans to express both profit and
yield. Yield, by way of the internal rate of return, may
be expressed on a non-leveraged and/or leveraged
basis. Indicated profit and internal rate of return are
not exclusive but reflect the same land purchase basis;
hence they are reflecting the same rate of return but
it is expressed two different ways. Understanding the
relationship between profit and internal rate of return
provides substantial benefit. In some cases, both rates
of return may be garnered from market data and
market participants, testing the reliability of various
assumptions formulated in the subdivision development method. The previous example demonstrated
that under the set assumptions, a 22.00% non-leveraged internal rate of return achieved a 21.83% profit
as a percentage of invested capital.
Trended versus Non-Trended Cash Flows
It is common, especially in long-term developments,
to incorporate revenue and cost trending over time.
Trending affects yield, profit, and the land purchase
price required to achieve targeted rates of return.
Starting with the same example, cash flow trending
of 4% per annum on revenues and 3% per annum on
costs were added over the two-year duration (Table 9
157
IRR
(Non-Leveraged)
Net Proceeds
13,688
0
0
9,125
0
0
0
0
$76,042
8
8
8
16
$76,042
Qtr 4
8
24
$76,042
Qtr 5
8
32
$76,042
Qtr 6
8
40
$76,042
Qtr 7
8
48
$76,042
Qtr 8
$76,042
48
48
Trended
Totals
---
---
---
% of
Sales
$73,033
$1,063,336 $746,104 $756,533
9,125
10,429
36,500
13,688
0
0
$0
3,292
9,125
10,429
0
13,688
720,000
0
$0
$72,484
2,743
9,125
10,429
36,500
13,688
0
0
$0
$71,936
2,194
9,125
10,429
36,500
13,688
0
0
$0
$71,387
1,646
9,125
10,429
36,500
13,688
0
0
$0
$70,838
1,097
9,125
10,429
36,500
13,688
0
0
$0
20.39% IRR no compounding via simple multiplication (5.0969 x 4)
22.00% IRR w/compounding via Excel FV function: = FV(5.0969,4,0,–1))–1
5.0969% Quarterly IRR via Excel IRR function: = IRR(Net Proceeds Qtrs 0-8)
10,000
18,104
73,000
73,000
219,000
109,500
$654,060
$70,290 $2,995,940
549
9,125
10,429
36,500
13,688
0 1,440,000
0
$0 $1,053,336
17.92%
82.08%
0.50%
2.00%
2.00%
6.00%
3.00%
39.45%
0.27%
28.86%
$0 $608,333 $608,333 $608,333 $608,333 $608,333 $608,333 $3,650,000 100.00%
$0
0
0
Qtr 3
3,292
3,292
720,000
0
0
0
10,000
Qtr 2
$654,060 –$1,063,336 –$746,104 –$756,533 $535,301 $535,849 $536,398 $536,946 $537,495 $538,044
Property Taxes
18,104
Total Costs &
Expenses
$2,995,940
$0
$0
$0
$1,053,336
$0
Land
Acquisition
$1,053,336
Acquisition
Costs
10,000
Land
Development
& Fees
1,440,000
General &
Administrative
109,500
SalesClosings-Legal
219,000
AdvertisingMarketing
73,000
Misc.Contingency
73,000
$0
$76,042
0
0
$3,650,000
0
Qtr 1
0
Average Price
Qtr 0
Total Proceeds
Sales Data
Cumulative
Closings
Quarterly
Closings
Untrended
Totals
Table 5Derivation of Internal Rate of Return (IRR): 8 Sales Per Quarter, No Trending
158
8
16
$76,042
Qtr 4
8
24
$76,042
Qtr 5
8
32
$76,042
Qtr 6
8
40
$76,042
Qtr 7
8
48
$76,042
Qtr 8
$76,042
48
48
Trended
Totals
---
--
---
% of
Sales
$0
Net Present Value
(Non-Leveraged)
$1,053,336
$1,011,416
22.00% IRR (Compounding)
22.00% IRR (No Compounding)
$71,936
$71,387
1,646
9,125
10,429
36,500
13,688
$70,838
1,097
9,125
10,429
36,500
13,688
0
$0
$10,000
549
9,125
10,429
36,500
13,688
18,104
73,000
73,000
219,000
109,500
0 1,440,000
$0
0.50%
2.00%
2.00%
6.00%
3.00%
39.45%
0.27%
53.22%
$72,484
2,194
9,125
10,429
36,500
13,688
0
$0
46.78%
$73,033
2,743
9,125
10,429
36,500
13,688
0
$0
$70,290 $1,942,604
$10,000 $746,104 $756,533
3,292
9,125
10,429
36,500
13,688
0
$0
$1,942,604
3,292
9,125
10,429
0
13,688
0
$0
$1,707,396 –$10,000 –$746,104 –$756,533 $535,301 $535,849 $536,398 $536,946 $537,495 $538,044 $1,707,396
3,292
9,125
0
0
13,688
8
8
$76,042
Qtr 3
$0 $608,333 $608,333 $608,333 $608,333 $608,333 $608,333 $3,650,000 100.00%
$0
0
0
720,000
Qtr 2
Net Proceeds
0
18,104
$0
$0
$0
0
0
720,000
Qtr 1
Total Costs &
Expenses
0
73,000
0
0
Property Taxes
219,000
0
Misc.Contingency
109,500
Sales-ClosingsLegal
0
73,000
1,440,000
General &
Administrative
$10,000
$10,000
Acquisition Costs
Land
Development &
Fees
$0
$3,650,000
Total Proceeds
0
$0
$76,042
Quarterly
Closings
Average Price
0
Qtr 0
Cumulative
Closings
Sales Data
Untrended
Totals
Table 6Development Approach Yield Model: 8 Sales Per Quarter, No Trending, 22% Discount Rate (IRR)
159
$0
$3,650,000
0
0
0
0
109,500
219,000
73,000
73,000
3,292
9,125
10,429
0
13,688
720,000
$0
$76,042
8
16
$76,042
8
24
Qtr 5
8
32
$76,042
Qtr 6
8
40
$76,042
Qtr 7
$72,484
2,743
9,125
10,429
36,500
13,688
0
$0
$71,936
2,194
9,125
10,429
36,500
13,688
0
$0
$71,387
1,646
9,125
10,429
36,500
13,688
0
$0
$70,838
1,097
9,125
10,429
36,500
13,688
0
$0
---
---
---
% of
Sales
$10,000
549
9,125
10,429
36,500
13,688
18,104
73,000
73,000
219,000
109,500
0 1,440,000
$0
0.50%
2.00%
2.00%
6.00%
3.00%
39.45%
0.27%
$608,333 $3,650,000 100.00%
$76,042
48
48
Trended
Totals
46.78%
$73,033
3,292
9,125
10,429
36,500
13,688
0
$0
8
48
$76,042
Qtr 8
Net Proceeds
$1,707,396 –$10,000 –$746,104 –$756,533 $535,301 $535,849 $536,398 $536,946 $537,495 $538,044 $1,707,396
Quarterly Discount
Factor
1.0000
0.9515
0.9054
0.8615
0.8197
0.7799
0.7421
0.7061
0.6719
Quarterly Present
Value
–$10,000 –$709,920 –$684,933 $461,135 $439,221 $418,348 $398,466 $379,529 $361,491 $1,053,336
Net Present Value
(Non-Leveraged)
$1,053,336 22.00% IRR (Compounding)
Example: 4 n; 5.0969 i; 1 fv, pv = 0.81967
Quarterly Discount
1.0000
0.9479
0.8985
0.8516
0.8072
0.7651
0.7252
0.6874
0.6516
Factor
Quarterly Present
Value
–$10,000 –$707,208 –$679,709 $455,869 $432,546 $410,416 $389,418 $369,494 $350,589 $1,011,416
Net Present Value
(Non-Leveraged)
$1,011,416 22.00% IRR (No Compounding)
Example: 4 n; 5.5000 i; 1 fv, pv = 0.80722
$10,000 $746,104 $756,533
3,292
9,125
0
0
13,688
720,000
$0
$76,042
8
8
Qtr 4
$0 $608,333 $608,333 $608,333 $608,333 $608,333
$0
0
0
Qtr 3
53.22%
$1,942,604
0
0
1,440,000
18,104
$10,000
$10,000
$0
Qtr 2
$70,290 $1,942,604
Property Taxes
Total Costs &
Expenses
Acquisition Costs
Land
Development &
Fees
General &
Administrative
Sales-ClosingsLegal
Misc.Contingency
0
0
$0
0
Qtr 1
0
$0
Qtr 0
$76,042
Total Proceeds
Average Price
Sales Data
Cumulative
Closings
Quarterly
Closings
Untrended
Totals
Table 7Development Approach Yield Model: 8 Sales Per Quarter, No Trending, 22% Discount Rate w/Quarterly Discount Factors
Table 8Development Approach Static Model: 8 Sales Per Quarter, No Trending, 17.92% Profit
Non-Leveraged
Aggregate Retail Revenues
% Sales
Base Lot Revenues
$3,600,000
Lot Premiums
Total Revenues
98.63%
$50,000
1.37%
$3,650,000
100.00%
$10,000
0.27%
Acquisition Costs
$1,440,000
39.45%
$109,500
3.00%
Sales-Closings-Legal
$219,000
6.00%
$73,000
2.00%
Misc.-Contingency
$73,000
2.00%
Property Taxes
$18,104
0.50%
$1,942,604
53.22%
Less Land Basis (See DCF)
$1,053,336
28.86%
$654,060
17.92%
Indicated Profit
Equity Requirement
Costs & Expenses
$1,942,604
Land Basis
$1,053,336
Total
$2,995,940
Indicated Rates of Return
Profit as Percentage of Aggregate Retail Revenues(1)
17.92%
Profit as Percentage of Equity (Invested Capital)
Non-Leveraged Internal Rate of Return (See DCF)
21.83%
22.00%
(2)
(1) $654,060 / $3,650,000
(2) $654,060 / $2,995,940
and Table 10). In this example, the quarterly trending
factors were based on 1.00% for revenues and 0.75%
for costs. The compounding factors, as discussed in
the calculation of yield and application of discount
rate, might apply if appropriate in a particular market. As demonstrated, a developer would be able
to purchase the land at a higher price than in the
non-trended scenario and still achieve a 22.00% nonleveraged internal rate of return. A higher land price
results in a lower profit rate of 17.65% on invested
capital in the static method. So, although the profit
as a percentage of invested capital is lower than in a
non-trended cash flow, the required yield of 22.00%
is still achieved due to trending.
Leveraged versus Non-Leveraged Cash Flows
Most published surveys report non-leveraged
internal rates of return, or all-in yield rates before
160
financing. However, most developers and builders
will pursue the benefit of leverage to reduce capital
requirements and increase yield. Leverage can have
a significant impact on yield and profit.
Continuing with the previous example,
acquisition and development financing are
incorporated into the cash flow to demonstrate the
effects of leverage on both yield and profit (Table 11,
Table 12, and Table 13). For this example, assume
financing reflects a maximum total loan-to-value
(revenues) of 65.00% and an initial land draw not
exceeding 50.00% of land value. The acquisition loan
is only funded subsequent to funding an interest
reserve and land development. An accelerated loan
pay-down provision of 110.00% of the loan (on a per
lot basis) is made during the sell-off period. Finally,
the loan is priced at 7.50% interest and requires 2.25%
in points and end fees.
The cash flow is formulated to express both
leveraged and non-leveraged yields. Targeting the
non-leveraged yield rate of 22.00%, the leveraged
yield rate is 72.85%. Just as significant is the effect
on profit. As the capital requirement is much lower
with financing, the profit rate on invested equity
capital is 32.11%, substantially higher than 17.65%
in the non-leveraged model. The higher yield and
profit are indicative of the benefit of leverage. As
the cost of financing is incorporated into the static
model, the profit rate on sale revenues is 9.49%,
substantially lower than 15.00% in the non-leveraged
model (Table 13). Note that the sum of the leveraged
model profit and cost of financing (interest and fees)
would equate to 15.00% of revenues, similar to the
non-leveraged model.
It is important to keep like-kind profit and/or
discount rates in the applications. If a leveraged rate
of profit (as a percentage of sale revenues) is used in
a non-leveraged static model, the land value could be
substantially overstated. Likewise, if a non-leveraged
rate of profit (as a percentage of sale revenues) is
used in a leveraged static model, the land value could
be substantially understated.
Absorption and Development Duration
The estimated development duration reflected
in the total development and sell-off period for a
project must also be considered in selecting profit
and discount rate. Up to this point, the examples
have reflected a total development duration of two
years based on absorption of eight lots per quarter.
To demonstrate the impact on both yield and profit,
sensitivity analyses were prepared with various rates
of absorption and subsequently, total development
duration. The cash flows and static models were
formulated on a non-leveraged basis.
The first sensitivity cash flow reflects a much
longer development duration when incorporating
absorption at three lots per quarter (Table 14 and
Table 15). In this scenario, the total development
duration would be eighteen quarters. Again, a 22.00%
non-leveraged discount rate was applied in the cash
flow resulting in a lower land value than in the twoyear development duration example (Table 9 and
Table 10). To achieve the 22.00% threshold over four
and one-half years versus two years, profit must be
substantially higher in the static method. Static profit
as a percentage of invested capital would need to be
36.10% versus 17.65% in the two-year scenario.
The second sensitivity cash flow reflects a much
shorter duration in a very strong and active market.
All forty-eight lots were assumed presold during
development and delivered in the third quarter. A
22.00% non-leveraged discount rate was used in the
cash flow, resulting in a much higher land value
than in the two-year development duration (Table
16 and Table 17). In this example, static profit as a
percentage of invested capital would need to be only
8.72% compared to 17.65% in the two-year scenario.
The results of the static method, although
accurately depicting the time cost of money and 22.00%
yield rate, begs another question. Is the total dollar
amount of profit, approximately $293,000, adequate
for the time and risk in developing and selling off
forty-eight lots? Even with strong presales activity
and short development duration, it is unlikely that a
developer would take on this project if only receiving
an 8.72% return on its capital investment of $3,357,189.
In fact, the mere assumption of such rapid sales may
in itself be a source of risk. Hence, it is suggested
that the 22.00% yield rate is not applicable in such a
short-term development. Appraisers commonly apply
the same discount rate for long-term and short-term
development cash flows; however, the land value
indicated from the short-term cash flow may be
overstated if the profit requirement is not satisfied.
To further the understanding of development
duration on both yield and profit, similar scenarios
were formulated with quarterly absorption rates
from four to twenty-four lots per quarter. Using a
22.00% non-leveraged discount rate, seven cash
flows and static models were developed with the
resulting profit requirements to achieve the stated
yield. As exhibited in Figure 1, the profit requirement
increases substantially with time.
As there is less prevalent market support
for the higher profit rates required for long-term
developments, using the static method as the primary
basis for valuation becomes less reliable. Investment
in long-term developments are driven more by yield
as measured by the internal rate of return. The
profit is simply the expression of total dollars (nontrended) returned on capital.
A similar sensitivity was prepared holding profit
constant at 20.00% of invested capital, or 16.67% of
the aggregate sale revenues. Seven cash flows and
static models were developed with the resulting yield
requirements to achieve the stated profit (Figure 2).
161
162
Net Proceeds
Net Present Value
(Non-Leveraged)
3,619
9,193
10,507
0
13,790
725,400
$0
1.0000
1.0000
1.0075
$10,000 $746,431 $762,509
3,619
9,125
0
0
13,688
720,000
8
8
$77,570
Qtr 3
8
16
$78,346
Qtr 4
8
24
$79,129
Qtr 5
8
32
$79,921
Qtr 6
8
40
$80,720
Qtr 7
8
48
$81,527
Qtr 8
$79,535
48
48
Trended
Totals
$1,158,067
22.00% IRR
% of
Sales
---
---
---
1.0151
$74,594
3,619
9,262
10,586
37,234
13,894
0
$0
1.0201
1.0227
$74,616
3,016
9,332
10,665
37,606
13,998
0
$0
1.0303
1.0303
$74,644
2,413
9,402
10,745
37,982
14,103
0
$0
1.0406
1.0381
$74,678
1,809
9,472
10,826
38,362
14,209
0
$0
1.0510
1.0459
$74,717
1,206
9,543
10,907
38,745
14,315
0
$0
1.0615
$10,000
19,904
74,945
75,223
229,062
112,418
1.0537
$74,762 1,966,953
603
9,615
10,989
39,133
14,422
0 1,445,400
$0
1.0721
48.48%
51.52%
0.52%
1.96%
1.97%
6.00%
2.94%
37.86%
0.26%
$0 $620,561 $626,766 $633,034 $639,364 $645,758 $652,216 $3,817,700 100.00%
$0
0
0
1.0100
Qtr 2
$1,705,596 –$10,000 –$746,431 –$762,509 $545,967 $552,150 $558,390 $564,687 $571,041 $577,454 1,850,747
$1,944,404
0
19,904
Property Taxes
Total Costs &
Expenses
Cost Trending
Factor
0
0
0
73,000
219,000
Sales-ClosingsLegal
0
73,000
109,500
0
Misc.Contingency
1,440,000
General &
Administrative
$10,000
Acquisition Costs
Land
Development &
Fees
$0
1.0000
1.0000
$10,000
$0
0
$0
$0
Average Price
Total Proceeds
$3,650,000
Revenue Trending
Factor
0
0
$0
Quarterly
Closings
Qtr 1
$76,042
0
Qtr 0
Cumulative
Closings
Sales Data
Untrended
Totals
Table 9Development Approach Yield Model: 8 Sales Per Quarter, Trending, 22% Discount Rate
Table 10Development Approach Static Model: 8 Sales Per Quarter, Trending, 15.00% Profit
Non-Leveraged
% Sales
Base Lot Revenues
$3,600,000
Lot Premiums
Total Revenues
98.63%
$50,000
1.37%
$3,650,000
100.00%
$10,000
0.27%
Acquisition Costs
$1,440,000
39.45%
$109,500
3.00%
$219,000
6.00%
$73,000
2.00%
Misc.-Contingency
$73,000
2.00%
Property Taxes
$19,904
0.55%
$1,944,404
53.27%
$1,158,067
31.73%
$547,529
15.00%
Indicated Profit
Equity Requirement
Costs & Expenses
$1,944,404
Land Basis
$1,158,067
Total
$3,102,471
15.00%
Profit as Percentage of Equity
Non-Leveraged Internal Rate of Return (See DCF)
17.65%
22.00%
As exhibited, the internal rate of return decreases
over time from 50.57% to 13.83%.14
Similar to profit, required hurdle rates for yield,
expressed as internal rate of return, will vary due to
a variety of factors. However, few market participants
will suggest targeting yield rates at the higher end
of the range as a standard underlying hurdle rate.
As there is less prevalent market support for the
substantially higher yield rates required in shortterm developments, using a discounted cash flow as
the primary basis for valuation becomes less reliable.
Investments in short-term developments are driven
more by profit as measured by return on invested
capital. In short-term developments and providing
appropriate profit is considered, the internal rate of
return will be considerably higher as recapture of
the investment is accelerated.
Conclusion
These analyses call into question the applicability
of employing discounted cash flows for short-term
developments. Published surveys rarely provide
support for such high internal rates of return in
short-term projects. Builders and developers of
smaller and/or short-term projects are more typically driven by profit expressed as dollars and return
on their capital investment. In many situations
market participants do not even consider discounted
cash flows and yield or understand its application
in purchasing decisions. Some appraisers apply
the bifurcated profit-discount rate methodology
14.The sensitivity analyses and graphics presented communicate the relationship between profit, yield, and project duration rather than a market-supported
sensitivity analyses that might be employed in estimating land value.
163
Table 11Development Approach Assumptions:
8 Sales Per Quarter, Trending, Leveraged
General
Total Number Lots
48
Premium Lots
10
Absorption Rate (Per Quarter)
8
Land Development Duration (Quarters)
2
Initial Delivery (Quarter)
3
Revenue Trending (Annual)
4.00%
Cost Trending (Annual)
3.00%
Target IRR (Non-Leveraged)
Quarterly IRR (Non-Leveraged - Compounding)
22.00%
5.10%
Revenues
Base Retail Lot Price
$75,000
Average Lot Premium
$5,000
Costs & Expenses
Acquisition Costs
$10,000
Land Development & Fees (Per Lot)
$30,000
General & Administrative (% Sales)
3.00%
Sales-Closings-Legal (% Sales)
6.00%
Advertising-Marketing (% Sales)
2.00%
Miscellaneous-Contingency (% Sales)
2.00%
Property Taxes (Tax Rate)
1.25%
Acquisition & Development Loan
Maximum Overall Loan-To-Value (Revenues)
Maximum Loan
Maximum Development Loan-To-Cost
Maximum Acquisition Loan-To-Value
65.00%
$2,372,500
100.00%
50.00%
Interest Rate
7.50%
Points & End Fees
2.25%
Release Price (Accelerated Loan Paydown)
164
110.00%
in short-term cash flows to substantiate valuation
conclusions. However, this may appear an attempt
to make a cash flow “work” in a situation where a
cash flow is not applicable. In these situations, the
static method may be most appropriate.
On the other hand, larger and/or long-term
development properties are almost entirely driven
by yield via a discounted cash flow and expressed
in the internal rate of return. The profit rate in the
static method needs to be much higher, and these
figures are typically not in the traditional range
indicated via surveys. Therefore, the static method
is less applicable.
Potential problems arise in the subdivision
development method of valuation via inappropriate
application of profit and yield. For example, surveys
may suggest a 20% discount rate is the average and
typical rate for a standard subdivision. However,
applying this rate in short-term developments may
very well understate the profit necessary to attract
investment and overstate the land value. Likewise, a
survey may suggest 20% profit on invested capital is
reasonable. However, applying this rate of profit in
long-term developments may very well understate
the yield necessary to attract investment. It is obvious
that these considerations can have a dramatic impact
on the indicated land value from either the static
method or discounted cash flow. Hence, development
duration is a significant consideration, along with
other factors such as trending and leverage, when
analyzing and applying profit and/or discount rates.
This study presents a lot sales scenario for the
various analyses. The considerations apply just as
well in a home sales static model and discounted cash
flow to land valuation. Appraisers should qualify the
proper methodology—whether a lot and/or home
sales development approach—to reflect the most
probable buyer for the property appraised. Clients
may ask appraisers to include discounted cash flow
valuation methodology when it may not be market
supported. As Luzod and Mann point out, appraisals
should reflect what market participants actually
do, not necessarily a particular client’s desires.
Therefore, appraisers should attempt to educate
and inform clients on proper application of the
subdivision development methodology. Appraisers
reflect the market; they do not set the market.
165
73,000
19,904
$1,944,404
Misc.-Contingency
Property Taxes
$50,080
$50,080
$0
$629,113
$0
–$2,225,756
--$151,243
Interest Carry
Loan Paydown (110%)
Loan Balance
$629,113
$0
$0
$579,034
$2,225,756
$151,243
$1,445,400
$579,034
Total Draws
Interest (7.50%)
Development Draws
Acquisition (50.00% ltv)
Pts & Fees (2.25%)
Loan Draws
72.85% IRR
22.00% IRR
$1,158,067
$1,158,067
$619,113
$1,850,747
Net Proceeds AFT Financing
Net Present Value
(Non-Leveraged)
Net Present Value
(Leveraged)
Development Loan
$0
$629,113
–$2,225,756
$2,225,756
–$10,000
1.0000
0
0
0
Release Price (Paydown)
Loan Draws
Loan
Net Proceeds BEF Financing
Cost Trending Factor
$1,705,596
$10,000
73,000
0
219,000
0
109,500
0
$10,000
1,440,000
Acquisition Costs
$10,000
$0
1.0000
$3,650,000
Total Proceeds
Revenue Trending Factor
$0
$76,042
0
Average Price
0
Qtr 0
Quarterly Closings
Untrended Totals
Cumulative Closings
Sales Data
$0
$0
0
0
$25,296
$1,349,113
$0
$720,000
$0
$720,000
$0
$0
–$26,431
$0
$720,000
–$746,431
1.0000
$746,431
3,619
9,125
0
0
13,688
720,000
$0
1.0000
Qtr 1
$0
$0
0
0
$39,371
$2,099,809
$0
$750,696
$25,296
$725,400
$0
$0
–$11,813
$0
$750,696
–$762,509
1.0075
$762,509
3,619
9,193
10,507
0
13,790
725,400
$0
1.0100
Qtr 2
8
8
$32,305
$1,722,923
–$416,257
$39,371
$39,371
$0
$0
$0
$169,081
–$416,257
$39,371
$545,967
1.0151
$74,594
3,619
9,262
10,586
37,234
13,894
0
$0
1.0201
$620,561
$77,570
Qtr 3
8
16
$25,028
$1,334,808
–$420,420
$32,305
$32,305
$0
$0
$0
$164,035
–$420,420
$32,305
$552,150
1.0227
$74,616
3,016
9,332
10,665
37,606
13,998
0
$0
1.0303
$626,766
$78,346
Qtr 4
8
24
$17,535
$935,212
–$424,624
$25,028
$25,028
$0
$0
$0
$158,794
–$424,624
$25,028
$558,390
1.0303
$74,644
2,413
9,402
10,745
37,982
14,103
0
$0
1.0406
$633,034
$79,129
Qtr 5
8
32
$9,823
$523,877
–$428,870
$17,535
$17,535
$0
$0
$0
$153,352
–$428,870
$17,535
$564,687
1.0381
$74,678
1,809
9,472
10,826
38,362
14,209
0
$0
1.0510
$639,364
$79,921
Qtr 6
8
40
$1,885
$100,541
–$433,159
$9,823
$9,823
$0
$0
$0
$147,705
–$433,159
$9,823
$571,041
1.0459
$74,717
1,206
9,543
10,907
38,745
14,315
0
$0
1.0615
$645,758
$80,720
Qtr 7
8
48
$0
$0
–$102,426
$1,885
$1,885
$0
$0
$0
$476,913
–$102,426
$1,885
$577,454
1.0537
$74,762
603
9,615
10,989
39,133
14,422
0
$0
1.0721
$652,216
$81,527
Qtr 8
Table 12Development Approach Yield Model: 8 Sales Per Quarter, Trending, 22% Non-Leveraged Discount Rate, Leveraged
$151,243
---
–$2,225,756
$2,225,756
$151,243
$1,445,400
$579,034
$50,080
$1,850,747
–$2,225,756
$2,225,756
$1,850,747
$1,966,953
19,904
74,945
75,223
229,062
112,418
1,445,400
$10,000
$3,817,700
$79,535
48
48
Trended Totals
48.48%
–58.30%
58.30%
48.48%
51.52%
0.52%
1.96%
1.97%
6.00%
2.94%
37.86%
0.26%
100.00%
---
---
---
% of Sales
Table 13Development Approach Static Model: 8 Sales Per Quarter, Trending, Leveraged
Non-Leveraged
Base Lot Revenues
Lot Premiums
Total Revenues
Leveraged
% Sales
% Sales
$3,600,000
98.63%
$3,600,000
98.63%
$50,000
1.37%
$50,000
1.37%
$3,650,000
100.00%
$3,650,000
100.00%
Acquisition Costs
$10,000
0.27%
$10,000
0.27%
$1,440,000
39.45%
$1,440,000
39.45%
$109,500
3.00%
$109,500
3.00%
$219,000
6.00%
$219,000
6.00%
$73,000
2.00%
$73,000
2.00%
Misc.-Contingency
$73,000
2.00%
$73,000
2.00%
Property Taxes
$19,904
0.55%
$19,904
0.55%
$0
0.00%
$50,080
1.37%
Loan Points & Fees
$0
0.00%
$151,243
4.14%
$1,944,404
53.27%
$2,145,727
58.79%
$1,158,067
31.73%
$1,158,067
31.73%
$547,529
15.00%
$346,207
9.49%
Interest Carry
Indicated Profit
Equity Requirement
Costs & Expenses
$1,944,404
$2,145,727
Land Basis
$1,158,067
$1,158,067
Subtotal
$3,102,471
$3,303,793
$0
–$2,225,756
$3,102,471
$1,078,037
Less Loan Proceeds
Total
Non-Leveraged
Leveraged
15.00%
9.49%
Internal Rate of Return (See DCF)
17.65%
22.00%
32.11%
72.85%
166
167
$10,000
73,000
24,026
$1,948,526
Misc.-Contingency
Property Taxes
73,000
24,026
$1,948,526
Misc.-Contingency
Property Taxes
Net Proceeds
$1,701,474
$31,941
73,000
1,001
219,000
$222,571
1.0857
4,403
4,662
15,271
6,604
109,500
0
$0
$10,000
1,440,000
Acquisition Costs
1.1157
$254,512
$3,650,000
Total Proceeds
$84,837
$76,042
3
Average Price
30
Qtr 12
22.00% IRR
Quarterly Closings
Untrended Totals
$733,265
–$10,000
1.0000
0
Cumulative Closings
Sales Data
Net Proceeds
Net Present Value
(Non-Leveraged)
$1,701,474
0
73,000
0
219,000
0
0
109,500
0
$10,000
1,440,000
Acquisition Costs
$10,000
$0
1.0000
$3,650,000
Total Proceeds
$0
$76,042
Average Price
0
0
Qtr 0
Cumulative Closings
Untrended Totals
Quarterly Closings
Sales Data
0
$0
$0
0
3
33
$224,989
1.0938
$32,068
858
4,436
4,697
15,423
6,654
0
$0
1.1268
$257,057
$85,686
Qtr 13
–$732,427
1.0000
$732,427
2,288
4,056
0
0
6,083
720,000
$0
1.0000
Qtr 1
0
$0
$0
0
3
36
$227,430
1.1020
$32,198
715
4,469
4,732
15,578
6,704
0
$0
1.1381
$259,628
$86,543
Qtr 14
–$742,229
1.0075
$742,229
2,288
4,086
4,326
0
6,129
725,400
$0
1.0100
Qtr 2
3
3
3
39
$229,894
1.1103
$32,330
572
4,503
4,768
15,733
6,754
0
$0
1.1495
$262,224
$87,408
Qtr 15
$201,809
1.0151
$30,901
2,288
4,117
4,359
13,963
6,175
0
$0
1.0201
$232,710
$77,570
Qtr 3
6
3
3
42
$232,381
1.1186
$32,465
429
4,537
4,803
15,891
6,805
0
$0
1.1610
$264,846
$88,282
Qtr 16
$204,030
1.0227
$31,008
2,145
4,147
4,391
14,102
6,221
0
$0
1.0303
$235,037
$78,346
Qtr 4
9
3
3
45
$234,893
1.1270
$32,602
286
4,571
4,839
16,050
6,856
0
$0
1.1726
$267,495
$89,165
Qtr 17
$206,271
1.0303
$31,116
2,002
4,179
4,424
14,243
6,268
0
$0
1.0406
$237,388
$79,129
Qtr 5
Table 14Development Approach Yield Model: 3 Sales Per Quarter, 22% Discount Rate
3
12
3
48
$237,428
1.1354
$32,741
143
4,605
4,876
16,210
6,907
0
$0
1.1843
$270,169
$90,056
Qtr 18
$208,534
1.0381
$31,227
1,859
4,210
4,458
14,386
6,315
0
$0
1.0510
$239,762
$79,921
Qtr 6
3
15
$0
$0
0
48
$0
1.1440
$0
0
0
0
0
0
0
$0
1.1961
Qtr 19
$210,819
1.0459
$31,340
1,716
4,242
4,491
14,530
6,362
0
$0
1.0615
$242,159
$80,720
Qtr 7
3
18
$0
$0
0
48
$0
1.1525
$0
0
0
0
0
0
0
$0
1.2081
Qtr 20
$213,125
1.0537
$31,456
1,573
4,273
4,525
14,675
6,410
0
$0
1.0721
$244,581
$81,527
Qtr 8
3
21
3
24
$83,668
48
48
Trended
Totals
$217,803
1.0696
$31,694
1,287
4,338
4,593
14,970
6,506
0
$0
1.0937
$249,497
$83,166
Qtr 10
24,026
77,845
78,130
240,965
116,768
1,445,400
$0 $2,022,949
1.1612
$0 $1,993,134
0
0
0
0
0
0
$0
$10,000
$0 $4,016,083
$0
0
48
1.2202
Qtr 21
$215,453
1.0616
$31,574
1,430
4,305
4,559
14,822
6,458
0
$0
1.0829
$247,027
$82,342
Qtr 9
50.37%
49.63%
0.60%
1.94%
1.95%
6.00%
2.91%
35.99%
0.25%
100.00%
---
---
---
% of Sales
$220,176
1.0776
$31,816
1,144
4,370
4,627
15,120
6,555
0
$0
1.1046
$251,992
$83,997
3
27
Qtr 11
Table 15Development Approach Static Model: 3 Sales Per Quarter, 26.53% Profit
Non-Leveraged
Base Lot Revenues
Lot Premiums
Total Revenues
% Sales
$3,600,000
98.63%
$50,000
1.37%
$3,650,000
100.00%
$10,000
0.27%
Acquisition Costs
$1,440,000
39.45%
$109,500
3.00%
$219,000
6.00%
$73,000
2.00%
Misc.-Contingency
$73,000
2.00%
Property Taxes
$24,026
0.66%
$1,948,526
53.38%
$733,265
20.09%
Indicated Profit
$968,209
26.53%
Equity Requirement
Costs & Expenses
Land Basis
Total
$1,948,526
$733,265
$2,681,791
Non-Leveraged
26.53%
Internal Rate of Return (See DCF):
36.10%
22.00%
168
169
Net Proceeds
Net Present Value
(Non-Leveraged)
Cost Trending
Factor
4,436
24,516
36,774
0
36,774
725,400
$0
1.0100
$1,419,382
22.00% IRR
$0
1.0075
$0
0
0
0
0
0
0
$0
1.0303
$1,712,193 –$10,000 –$785,269 –$827,899 $3,396,729
1.0000
$326,636
4,436
24,700
37,050
223,402
37,050
0
$0
1.0201
$0
$0
0
48
Qtr 4
1.0227
1.0000
$77,570
48
48
Qtr 3
$0 $3,723,365
$10,000 $785,269 $827,899
4,436
24,333
0
0
36,500
720,000
0
0
$0
Qtr 2
1.0151
$1,937,807
0
13,307
Property Taxes
Total Costs &
Expenses
0
73,000
0
0
0
0
Misc.-Contingency
73,000
219,000
109,500
Sales-ClosingsLegal
1,440,000
Land Development
& Fees
General &
Administrative
$10,000
Acquisition Costs
$0
1.0000
1.0000
$10,000
$0
$0
Total Proceeds
$3,650,000
Revenue Trending
Factor
Average Price
$0
0
0
$0
0
Quarterly Closings
Qtr 1
$76,042
0
Qtr 0
Cumulative
Closings
Sales Data
Untrended
Totals
$0
1.0303
$0
0
0
0
0
0
0
$0
1.0406
$0
$0
0
48
Qtr 5
Table 16Development Approach Yield Model: 48 Sales Per Quarter, 22% Discount Rate
$0
1.0381
$0
0
0
0
0
0
0
$0
1.0510
$0
$0
0
48
Qtr 6
$0
1.0459
$0
0
0
0
0
0
0
$0
1.0615
$0
$0
0
48
Qtr 7
$77,570
48
48
Trended
Totals
---
---
---
% of
Sales
$10,000
13,307
73,549
73,823
223,402
110,323
$0 $1,773,561
1.0537
$0 $1,949,804
0
0
0
0
0
0 1,445,400
$0
1.0721
47.63%
52.37%
0.36%
1.98%
1.98%
6.00%
2.96%
38.82%
0.27%
$0 $3,723,365 100.00%
$0
0
48
Qtr 8
Table 17Development Approach Static Model: 48 Sales Per Quarter, 8.02% Profit
Non-Leveraged
Base Lot Revenues
Lot Premiums
Total Revenues
% Sales
$3,600,000
98.63%
$50,000
1.37%
$3,650,000
100.00%
Acquisition Costs
$10,000
0.27%
$1,440,000
39.45%
$109,500
3.00%
$219,000
6.00%
$73,000
2.00%
Misc.-Contingency
$73,000
2.00%
Property Taxes
$13,307
0.36%
$1,937,807
53.09%
$1,419,382
38.89%
$292,811
8.02%
Costs & Expenses
$1,937,807
Inadequate?
Land Basis
$1,419,382
Total
$3,357,189
Indicated Profit
Equity Requirement
Internal Rate of Return (See DCF):
170
Non-Leveraged
8.02%
8.72%
22.00%
Figure 1 Development Duration Impact on Profit
40%
36.10%
35%
28.63%
Yield or Profit
30%
25%
21.28%
20%
17.65%
10%
5%
22.26%
14.05%
15%
8.72%
8.02%
0.75
10.49%
26.53%
17.55%
15.00%
12.32%
9.49%
1.00
1.50
2.50
2.00
3.50
4.50
Development Duration (Years)
IRR Non-Leveraged
Profit (% Sales)
Profit (% Equity)
Figure 2 Development Duration Impact on Yield
55%
50%
50.57%
45%
41.21%
Yield or Profit
40%
35%
30.49%
30%
24.59%
25%
20.86%
20%
15%
16.40%
10%
13.83%
5%
0.75
1.00
1.50
IRR Non-Leveraged
2.00
2.50
Development Duration (Years)
Profit (% Sales)
3.50
4.50
Profit (% Equity)
171
Brian J. Curry, MAI, SRA, CRE, FRICS, is executive managing director and national practice leader
of the Residential Development Practice Group with
Cushman & Wakefield Valuation & Advisory. Curry
has been providing valuation and counseling services involving residential development property for
thirty years. He is a nationally recognized expert
with regard to all types of residential development
property, including detached housing, attached housing, condominium product, military reuse plans, urban
redevelopment, mixed-use and master-planned communities. His experience includes valuation, highest
and best use analyses, marketability and feasibility
studies, business plan counseling, acquisition and
disposition strategies, litigation support, arbitration,
investment strategy, and other advisory services
related to residential development property. Curry has
been published in Korpacz Real Estate Investor and
Real Estate Issues. He has served on numerous panels, presentations, and online seminars with regard
to the housing markets and residential development
real property. He has taught real estate courses with
the Society of Real Estate Appraisers, the Appraisal
Institute, California community colleges, and the
University of California.
Contact: brian.curry@cushwake.com
Web Connections
Lincoln Institute of Land Policy: Land and Property Values in the U.S.
http://www.lincolninst.edu/subcenters/land-values/land-prices-by-state.asp
McGraw Hill Construction—Dodge Reports
http://www.construction.com/dodge/
National Association of Home Builders—The Cost of Doing Business
http://secure.builderbooks.com/cgi-bin/builderbooks/965?id=mdad9Dqb&mv_pc=1039
PricewaterhouseCoopers PwC Real Estate Investor Survey
http://www.pwc.com/us/en/asset-management/real-estate/publications/pwc-real-estate-investor
-survey.jhtml
RealtyRates.com Developer Survey—Market Commentary and Financial Indicators
http://www.realtyrates.com/learnmore.html
172
NOTES AND ISSUES
Appraisal Institute Releases Guide Note 13:
Performing Evaluations of Real Property Collateral
for Lenders
by Christina Austin
T
he marketplace today contains an array of
valuation services beyond the traditional appraisal.
In an effort to diversify their practices, many
appraisers have explored these other services.
One service in particular, the evaluation, seems
to generate much interest and many questions:
What is an evaluation? When are they used? Who
can prepare them? Is it possible for an appraiser
to prepare an evaluation and still comply with the
Uniform Standards of Professional Appraisal Practice
(USPAP)? The questions and confusion on this topic
led to the development and publication of Guide
Note 13: Performing Evaluations of Real Property
Collateral for Lenders.
Evaluations, as explained in the Interagency
Appraisal and Evaluation Guidelines, are market
value opinions that may be provided by individuals
who are not state licensed or certified appraisers.
The interagency guidelines also state that an
evaluation must be based on a valuation method
that is appropriate for a transaction, rather than the
method that renders the highest value, lowest cost,
or fastest turnaround time.
Guide Note 13 explains that licensed and certified
appraisers are allowed to provide evaluations. In fact,
appraisers are often called upon for this service
because of their independence and their education
and experience in providing real estate valuations.
When the appraiser providing an evaluation per
the interagency guidelines is subject to USPAP,
the appraiser must be sure that the report meets
both sets of requirements. Guide Note 13 provides
information on the relevant developing and reporting
Notes and Issues
requirements that an appraiser must meet to satisfy
both the interagency guidelines and USPAP.
As with all the other Guide Notes, Guide Note 13
does not provide step-by-step directions to perform
a particular methodology or analysis; the Guide
Notes offer a synopsis of the Appraisal Institute
body of knowledge and provide guidance on how
the Standards of Professional Appraisal Practice may
apply in particular situations.
Drawing on the Appraisal Institute body of
knowledge and member expertise in this area,
Proposed Guide Note 13: Performing Evaluations of
Real Property Collateral for Lenders was developed
and released for member comment in late June of
2012. During the 30 day exposure period, members
were invited to review the document and offer
comments and feedback. After reviewing the
feedback and making some edits to the original
document, the Appraisal Institute’s Board of
Directors adopted the new Guide Note at their
meeting on October 31, 2012.
Guide Note 13: Performing Evaluations of Real
Property Collateral for Lenders includes a summary
of the applicable USPAP rules and an overview of the
Interagency Appraisal and Evaluation Guidelines to
answer many common questions about evaluations.
Additionally, a sample outline of an evaluation is
provided to illustrate how appraisers can complete
these reports in compliance with both USPAP and
interagency requirements.
Guide Note 13, along with all other Guide Notes,
is available for download at www.appraisalinstitute.
org/PPC/guide-notes.aspx.
173
Christina Austin is the manager of peer review
programs for the Appraisal Institute and acts as staff
liaison to the Appraisal Standards and Guidance
Committee and the Appraisal Guidance Panel. During
her seven years at the Appraisal Institute, she has held
positions in the Admissions and Professional Practice
departments. Austin received a bachelor of arts degree
in political science from Monmouth College and a master of public administration degree from the University
of Illinois. Contact: caustin@appraisalinstitute.org
Appendix
Guide Note 13: Performing
Evaluations of Real Property
Collateral for Lenders
Introduction
Federally insured lending institutions in the
United States are subject to regulations regarding
real estate appraisals. For lending transactions
involving real estate, a lender must obtain
an appraisal from a state licensed or certified
appraiser. There are twelve exemptions from this
requirement. For three of these twelve exemptions, in lieu of an appraisal by a licensed/certified
appraiser the lender may obtain an evaluation.1
An evaluation provides a market value of the real
estate collateral. The preparer must be appropriately qualified and sufficiently independent from
the transaction, but need not be a state licensed or
certified appraiser. Even so, appraisers are often
called upon to provide them.
How can an appraiser prepare an evaluation for a
lender and comply with the Uniform Standards of
Professional Appraisal Practice (USPAP)?
Basis for Proper Practice
The Interagency Appraisal and Evaluation
Guidelines issued by the federal agencies2 in
December 2010 provide full details about when
appraisals and evaluations are required, who can
provide them, and how they must be performed.
Section V (pp. 20–22) addresses the independence requirements for both appraisals and
evaluations. Section VI (pp. 22–23) addresses the
selection, evaluation and monitoring the performance of those providing these services. Section
XI (pp. 28–29) addresses when evaluations are
required. Section XII (p. 30) addresses the development process for an evaluation, and Section XIII
(pp. 31–32) addresses the required content of an
evaluation report. Section XV (pp. 32–33) addresses
the review of appraisal and evaluation reports.
Portions of USPAP that are relevant to this topic
include the DEFINITIONS section, the SCOPE OF
WORK RULE, and STANDARDS 1 and 2.
The DEFINITIONS establish the application
of certain terminology in USPAP. See especially
the definitions of appraisal and report.
The S COP E OF WOR K RU LE presents
obligations related to problem identification,
research and analyses.
STANDARDS 1 and 2 establish requirements
for the development and communication of a real
property appraisal.
Additional guidance from the Appraisal
Standards Board can be found in Advisory
Opinions 11 and 12 concerning the reporting
options and Advisory Opinion 21 concerning
USPAP compliance.
What is an Evaluation?
An evaluation is defined in the Interagency
Appraisal and Evaluation Guidelines as “a
valuation permitted by the Agencies’ appraisal
regulations for transactions that qualify for the
appraisal threshold exemption, business loan
exemption, or subsequent transaction exemption.”3
1. For the remaining 9 exemptions, the lender is not required to document the collateral value with either an evaluation or an appraisal from a
state licensed or certified appraiser.
2. These agencies include the Office of the Comptroller of the Currency, Treasury (OCC); the Office of Thrift Supervision, Board of Governors of the
Federal Reserve System (FRB); Federal Deposit Insurance Corporation (FDIC); and the National Credit Union Administration (NCUA).
3. Interagency Appraisal and Evaluation Guidelines, December 2010, 60.
174
Notes and Issues
When are Evaluations Used?
A lender may obtain an evaluation in lieu of an
appraisal when the loan transaction:
•Has a transaction value equal to or less than
$250,000;
•Is a business loan with a transaction value
equal to or less than the business loan threshold of $1 million, and is not dependent on the
sale of, or rental income derived from, real
estate as the primary source of repayment, or
•Involves an existing extension of credit at the
lending institution, provided that:
•There has been no obvious and material
change in market conditions or physical
aspects of the property that threaten the
adequacy of the institution’s real estate collateral protection after the transaction, even
with the advancement of new monies; or
•There is no advancement of new monies
other than funds necessary to cover reasonable closing costs.4
Who Can Prepare Evaluations?
According to the Interagency Appraisal and
Evaluation Guidelines, persons performing
evaluations should be independent of the loan
production and collection processes and have no
direct, indirect or prospective interest, financial or
otherwise, in the property or transaction. In addition, the Guidelines stipulate that an institution
should have criteria for selecting, evaluating, and
monitoring the performance of persons who perform evaluations. The criteria should ensure that:
•The person selected possesses the requisite
education, expertise, and experience to competently complete the assignment.
•The work performed by persons providing
evaluation services is periodically reviewed
by the institution.
•The person selected is capable of rendering an
unbiased opinion.
•The person selected is independent and has
no direct, indirect, or prospective interest,
financial or otherwise, in the property or the
transaction.
•Persons who perform evaluations should possess the appropriate appraisal or collateral
valuation education, expertise, and experience
relevant to the type of property being valued.
Such persons may include appraisers, real
estate lending professionals, agricultural extension agents, or foresters.5
Individuals who perform evaluations need
not be state licensed or certified appraisers.
However, state licensed and certified appraisers
are not precluded from providing them. Because
appraisers are independent and qualified to
provide valuations of real property, they are often
called upon to provide evaluations.
The Guidelines state that an institution
should review evaluations (and appraisals) to
ensure they comply with the Agencies’ appraisal
regulations and are consistent with supervisory
policies and the institution’s own internal policies.
The review should ensure the evaluation contains
sufficient information and analysis to support the
decision to engage in the transaction.6
What are the Development
Requirements for Evaluations?
The Interagency Appraisal and Evaluation
Guidelines establish parameters for the development of an evaluation. An evaluation must:
•Be consistent with safe and sound banking
practices,
•Support the institution’s decision to engage in
the transaction,
•Provide a reliable estimate of the collateral’s
market value as of a stated effective date prior
to the decision to enter into the transaction,
•Be based on a valuation method that is appropriate for a transaction rather than the method
that renders the highest value, lowest cost, or
fastest turnaround time,
4. Interagency Appraisal and Evaluation Guidelines, December 2010, 28–29.
Notes and Issues
175
•Address the property’s actual physical condition and characteristics,
•Address the economic and market conditions
that effect the estimate of the collateral’s market value, and
•Not be based on unsupported assumptions,
such as an assumption that the property is in
average condition, the zoning will change, or
the property is not affected by adverse market
conditions.7
While the Guidelines do not state that a
property inspection is necessary in all cases, they
do say the institution should “establish criteria for
determining the level and extent of research or
inspection necessary to ascertain the property’s
actual physical condition and the economic and
market factors that should be considered in
developing an evaluation.” If a property inspection
is not performed, “the institution should be able
to demonstrate how these property and market
factors were determined.”8
The Guidelines further clarify that broker
price opinions (BPOs), automated valuation
models (AVMs), and tax assessment values (TAVs)
do not suffice in themselves as evaluations.
However, they can be used to assist in the
development of an evaluation.9
What are the Reporting
Requirements for Evaluations?
According to the Interagency Appraisal and
Evaluation Guidelines:
An evaluation should contain sufficient information
detailing the analysis, assumptions, and conclusions
to support the credit decision. An evaluation’s
content should be documented in the credit file or
reproducible. The evaluation should, at a minimum:
1. Identify the location of the property.
2.Provide a description of the property and its
current and projected use.
3.Provide an estimate of the property’s market
value in its actual physical condition, use and
zoning designation as of the effective date of the
7.Interagency
8.Interagency
9.Interagency
10.Interagency
176
Appraisal
Appraisal
Appraisal
Appraisal
and
and
and
and
Evaluation
Evaluation
Evaluation
Evaluation
Guidelines, December
evaluation (that is, the date that the analysis was
completed), with any limiting conditions.
4.Describe the method(s) the institution used to
confirm the property’s actual physical condition and the extent to which an inspection was
performed.
5.Describe the analysis that was performed and
the supporting information that was used in
valuing the property.
6.Describe the supplemental information that was
considered when using an analytical method or
technological tool.
7.Indicate all source(s) of information used in the
analysis, as applicable, to value the property,
including:
a.External data sources (such as market sales
databases and public tax and land records);
b.Property-specific data (such as previous sales
data for the subject property, tax assessment
data, and comparable sales information);
c. Evidence of a property inspection;
d. Photos of the property;
e. Description of the neighborhood; or
f. Local market conditions.
8.Include information on the preparer when an
evaluation is performed by a person, such as the
name and contact information, and signature
(electronic or other legally permissible signature) of the preparer.10
How Can an Appraiser Provide an
Evaluation and Comply with USPAP?
USPAP addresses the development of a real property
appraisal in STANDARD 1 and the communication (reporting) of a real property appraisal in
STANDARD 2. The SCOPE OF WORK RULE
allows considerable flexibility in the development
process. The scope of work for an assignment may
be adjusted as appropriate for the intended use. The
degree of property inspection, the extent of the data
collection process, and the type and level of analysis
can vary as needed, as long as the resulting opinions
and conclusions are credible in light of the intended
use. For purposes of preparing an evaluation per the
Interagency Appraisal and Evaluation Guidelines,
consideration may be given to these factors.
2010, 30.
2010, 30.
2010, 30, 51–54, 59.
2010, 31–32.
Notes and Issues
For example, in some cases it may be possible
to rely on a prior appraisal report for information
about the property, such as its size and physical
attributes. When this is done, the report must
clearly state the source of the information, that it
was assumed to be accurate, and that the value
conclusion might be different otherwise.
In other cases, an “at least” conclusion might
be all that is required. USPAP permits a value
conclusion to be stated as a single number, a range,
or a relationship to some amount11—for example,
“not more than,” “not less than,” or “at least” some
benchmark amount. The benchmark amount
could be a prior appraised value, sale price, or
other amount that is relevant to the intended use.
Narrowing the scope of work could also mean
omitting one or more of the three approaches
to value. For example, if the sales comparison
approach is the primary approach (as is often
the case for single family residences and owner
occupied commercial properties), it may be
appropriate to omit the cost and income approaches.
If the income approach is the primary approach (as
is often the case for income-producing properties),
it may be appropriate to omit the sales comparison
and cost approaches. While all three approaches
are generally helpful, not all three are critical to
every valuation problem, given the intended use.
Under STANDARD 2, three reporting options
are available for written appraisal reports. The
minimal report option is the Restricted Use
Appraisal Report. This option is permitted only
when the client is the sole intended user of the
report. A Restricted Use Appraisal Report is
not required by USPAP to include the data and
analysis used to arrive at the value opinion, or
a detailed property description, though it can
be supplemented to include that information.
Because the Interagency Appraisal and Evaluation
Guidelines require this detail, a Restricted
Use Appraisal Report that meets the minimum
requirements of USPAP would not be sufficient
to serve as an evaluation. However, a Restricted
Use Appraisal Report that is supplemented so it
includes all of the information required by the
Guidelines should be sufficient.
The following outline is intended to assist in
creating a Restricted Use report format that meets
minimum requirements of USPAP as well as the
Interagency Appraisal and Evaluation Guidelines
for an evaluation. While additional elements may
be added, none should be deleted, as deleting
elements might cause the report to fail to meet
US PAP’s reporting requirements and/or the
Interagency requirements for an evaluation. Note
that editing is required for the italicized items.
Outline for an Evaluation
Client/intended user:For the sole use of Lender ABC.
This report is not intended for use by other parties.
Intended use: To assist the client in establishing collateral value in a lending transaction that requires
an “evaluation” as set forth in the Interagency
Appraisal and Evaluation Guidelines. This report
is not intended for any other use.
Assignment objective: T
o develop an opinion of the
Market Value, as defined by the federal financial
institution regulatory agencies, of the stated interest in the subject property.
Effective date of value opinion:DD/MM/YYYY
Real property interest valued: Fee simple/leased fee/
leasehold/other
Identification of real estate:100 Main St., City, State
C urrent listing / contract information The subject
property is/is not currently listed/under contract
for $XXX,XXX. This asking/contract price is/is not
consistent with the appraiser’s opinion of market
value. (If not consistent, explain discrepancy.)
Previous sale data:Include data and analysis of any
transaction within the last 3 years involving the
subject property.
Assignment conditions:Clearly state any extraordinary
assumption(s) on which the analysis is premised
and state that the use of the extraordinary assumption might have affected the assignment results.
Date of report:DD/MM/YYYY
Scope of work: I n preparing this appraisal, I:
•Describe level of inspection. Include the date of
property inspection, if applicable.
•Describe process of gathering information on
comparable land and improved sales, rents
11.Uniform Standards of Professional Appraisal Practice, DEFINITIONS. See Comment to the entry for appraisal.
Notes and Issues
177
operating expenses, construction costs, accrued
depreciation, capitalization and/or yield rates.
•Describe how comparable sales and/or rental
information was confirmed.
•Describe valuation approaches used and
address the exclusion of any of the typical
approaches (sales comparison, cost, income).
R eport option : T
his report is a Restricted Use
Appraisal Report in accordance with Standards
Rule 2-2(c) of the Uniform Standards of
Professional Appraisal Practice. Additional
supporting documentation is retained in the
appraiser’s workfile. The appraiser’s opinions
and conclusions set forth in this report may
not be understood properly without additional
information in the appraiser’s workfile. However,
in order to meet the requirements for an “evaluation” according to the Interagency Appraisal
and Evaluation Guidelines, this report has been
supplemented with additional information about
the subject property and its market, as well as the
data, reasoning, and analyses that were used in
the valuation process.
Location description:Describe the property’s location
and discuss local market conditions.
P roperty description :P rovide a description of
the property and its current and projected
use. Discuss the property’s physical condition.
Attach photographs.
Tax assessment data:Assessed land value: $XXX,XXX
Assessed improvement value: $XXX,XXX Tax
year: YYYY
Highest and best use conclusion:Current use/other (if
other, describe).
Valuation analysis:Describe the analysis that was
performed (approaches) and the supporting information that was used in valuing the property.
For example, if a sales comparison approach was
performed, include an adjustment grid showing
comparable analysis. If an income approach
was performed, show development of income
and expense estimates, capitalization rate and/
or discount rate. Include sources of comparable
sales information. Include external data sources
(such as market sales databases and public tax
and land records).
Value conclusion:$XXX,XXX
178
Estimated exposure time:(amount of time the subject
property would have been on the market to bring
a sale as of the effective date of the value opinion):
1 month
Certification:
I certify that, to the best of my knowledge
and belief:
•The statements of fact contained in this report
are true and correct.
•The reported analyses, opinions, and conclusions are limited only by the reported
assumptions and limiting conditions and is my
personal, impartial, and unbiased professional
analyses, opinions, and conclusions.
•I have no (or the specified) present or prospective interest in the property that is the subject
of this report and no (or the specified) personal
interest with respect to the parties involved.
•I have performed no (or the specified) services, as an appraiser or in any other capacity,
regarding the property that is the subject of this
report within the three-year period immediately preceding acceptance of this assignment.
•I have no bias with respect to the property that
is the subject of this report or to the parties
involved with this assignment.
•My engagement in this assignment was not
contingent upon developing or reporting predetermined results.
•My compensation for completing this assignment is not contingent upon the development
or reporting of a predetermined value or
direction in value that favors the cause of the
client, the amount of the value opinion, the
attainment of a stipulated result, or the occurrence of a subsequent event directly related to
the intended use of this appraisal.
•My analyses, opinions, and conclusions were
developed, and this report has been prepared,
in conformity with the Uniform Standards of
Professional Appraisal Practice.
•I have /have not made a personal inspection of
the property that is the subject of this report.
(If more than one person signs this certification, the certification must clearly specify which
Notes and Issues
individuals did and which individuals did not
make a personal inspection of the appraised
property.)
appraiser subject to USPAP can prepare an
“evaluation” that meets both the Guidelines
and USPAP.
•No one provided significant real property
appraisal assistance to the person signing this
certification. (If there are exceptions, the name
of each individual providing significant real
property appraisal assistance must be stated.)
3. USPAP allows an appraiser to adjust the scope
of work for a valuation assignment as long as
the resultant value opinion is credible, given
the intended use. When preparing an “evaluation” the appraiser may consider narrowing
the scope of work as appropriate.
•The reported analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the
Code of Professional Ethics and Standards of
Professional Appraisal Practice of the Appraisal
Institute.
•The use of this report is subject to the requirements of the Appraisal Institute relating to
review by its duly authorized representatives.
(Please Note: The purpose of the Guide Notes to
the Standards of Professional Appraisal Practice
is to provide Members, Candidates, Practicing
Affiliates and Affiliates with guidance as to how
the requirements of the Standards may apply in
specific situations.)
•(Designated Members Only) As of the date
of this report, I have/have not completed the
continuing education program of the Appraisal
Institute.
•(Candidates Only) As of the date of this report,
I have/have not completed the Standards and
Ethics Education Requirement of the Appraisal
Institute for Candidates.
•(Practicing Affiliates only) As of the date of
this report, I have/have not completed the
Standards and Ethics Education Requirement
of the Appraisal Institute for Practicing
Affiliates.
Signature
Summary of Standard Practices
1. “Evaluations” per the Interagency Appraisal
and Evaluation Guidelines are market value
opinions that may be provided by individuals
who are not state licensed or certified appraisers. However, state licensed and certified
appraisers may provide them.
2.The Interagency Appraisal and Evaluation
Guidelines set forth development and
reporting requirements for “evaluations.”
The reporting requirements do not exactly
align with the reporting requirements for
an appraisal under USPAP. However, an
Notes and Issues
179
About the appraisal institute
Summary of Requirements for General Candidates
for Designation
Status
Must be a general Candidate for Designation in good standing for at least 12 months prior
to applying for MAI Designated membership
Good Moral Character
Must have good moral character
Ethics and Standards
Education Requirements
Must provide proof of passing an applicable USPAP course/exam* and complete AI
Business Practices and Ethics course
*Note: C
andidates who practice solely outside the United States may take the International Valuation Standards
course instead of the USPAP course.
Course/Exam Requirements
Obtain general state certification (or equivalent) OR, the following exams are required:
•
•
•
•
•
•
•
•
Basic Appraisal Principles
Basic Appraisal Procedures
General Appraiser Income Approach/Part I
General Appraiser Income Approach/Part II
General Appraiser Sales Comparison Approach
General Appraiser Site Valuation & Cost Approach
General Market Analysis and Highest and Best Use
Real Estate Finance, Statistics, and Valuation Modeling
Credit must be received for the required Appraisal Institute course and exam:
• General Appraiser Report Writing & Case Studies
Must pass the following examinations:
• Advanced Income Capitalization
• Advanced Market Analysis and Highest and Best Use
• Advanced Concepts & Case Studies
• Quantitative Analysis
College Degree Requirement
Must have attained at least a four-year college degree from an accredited college or
university or alternative (alternatives expire 12/31/13)
Comprehensive Exam
Requirement
Must pass the Appraisal Institute General Comprehensive Examination
Appraisal Experience
Requirement
Must receive credit for 4,500 hours of Specialized Experience logged over at least a
36-month period
Demonstration of Knowledge
Requirement
Must receive credit for the General Demonstration of Knowledge Requirement
Designation Application
Must completed final MAI Designated membership application
For full requirement details, please refer to Regulation No. 1 and the MAI Procedure Manual. For more information on these requirements and alternatives,
please see the Path to Designated Membership page under the AI Resources section on www.appraisalinstitute.org.
180
About the Appraisal Institute
Summary of Requirements for Residential
Candidates for Designation
Status
Must be a residential Candidate for Designation in good standing
Good Moral Character
Must have good moral character
Ethics and Standards
Education Requirements
Must provide proof of passing an applicable USPAP course/exam* and complete AI
Business Practices and Ethics course
*Note: C
andidates who practice solely outside the United States may take the International Valuation Standards
course instead of the USPAP course
Course/Exam Requirements
Obtain general or residential state certification (or equivalent) OR, the following exams are
required:
• Basic Appraisal Principles
• Basic Appraisal Procedures
Must pass the follow examination:
• Residential Equivalency Exam
A residential Candidate who holds an active general or residential state certification will be eligible to take and
pass this equivalency examination for credit towards the following examinations
a. Residential Appraiser Site Valuation and Cost Approach
b. Residential Sales Comparison and Income Approaches
c. Residential Report Writing and Case Studies
Must pass the following examinations:
• Residential Market Analysis and Highest and Best Use
• Real Estate Finance, Statistics, and Valuation Modeling
Credit must be received for the required Appraisal Institute course and exam:
• Advanced Residential Applications and Case Studies/Part 1
College Degree Requirement
Must have attained at least a two-year college degree from an accredited college or
university or alternative (alternatives expire 12/31/13)
Appraisal Experience
Requirement
Must receive credit for 3,000 hours of Residential Appraisal Experience (logged over at
least a 24-month period)
Demonstration of Knowledge
Requirement
Must receive credit for the Residential Demonstration of Knowledge Requirement
Designation Application
Must completed final SRA Designated membership application
For full requirement details, please refer to Regulation No. 2 and the SRA Procedure Manual. For more information on these requirements and alternatives,
please see the Path to Designated Membership page under the AI Resources section on www.appraisalinstitute.org.
Erratum
“The Directory of 2012 New Designees,” published in The Appraisal Journal, Winter 2013, omitted the
name of new designee Troy D. Van Drimmelen, MAI, Kaysville, Utah. The Journal regrets the error.
About the Appraisal Institute
181
PUBLICATIONS
of the Appraisal Institute
Appraisal Institute E-Books
Valuation by Comparison: Residential Analysis and Logic
The Valuation of Apartment Properties, second edition
Shopping Center Appraisal and Analysis, second edition
The Valuation of Office Properties: A Contemporary
Perspective
Appraising the Appraisal: Art of Appraisal Review,
second edition
An Introduction to Green Homes
An Insider’s Guide to Home Buying
In Defense of the Cost Approach
Convenience Stores and Retail Fuel Properties: Essential
Appraisal Issues, second edition
The Appraisal of Water Rights
Exceeding Expectations
Scope of Work
Fraud Prevention
Coming soon to digital
Applications in Litigation Valuation: A Pragmatist's Guide
Appraising Partial Interests
Real Estate Damages: Applied Economics and Detrimental
Conditions, second edition
Subdivision Valuation
Self Storage Economics and Appraisal
Interested in the real estate valuation profession? Stay up-to-speed on all the
latest news, products and developments from the Appraisal Institute and around
the profession! To order publications and view our education offerings visit
Find us on Facebook www.facebook.com/AppraisalInstitute
Follow us on Twitter www.twitter.com/AI_National
182
Publications of the Appraisal Institute
Article Topics in Need of Authors
S
ince
ince 1932,
1932,The
TheAppraisal
AppraisalJournal
Journal
has
has
been
been
thethe
leading
leading
peer-reviewed
peer-reviewed
forum
forum
for appraisal
for appraisal
professionals.
professionals.
Consider
Consider
becoming
becoming
an author
an author
for the
for Journal
the Journal
and and
use your
use your
professional
professional
knowledge
knowledge
and
experience
and experience
to benefit
to benefit
yourself
yourself
and your
and profession.
your profession.
a r t i c l e s
n e e d e d
T
hhe
e Journal
Appr a i is
s aespecially
l Jou r n a linterested
welc omeins
receiving
manuscripts
manuscripts
on all topics
on related
the following
to real
real
estate
estate
valuation.
appraisal topics:
Appraisal Jour nal is especially
•The
Sustainability
interested in receiving manuscripts on
•
Carbon credits
• Adjustments
in markets in recovery
• Distressed properties
• Timeshares
•
Residential
• properties
Residential appraisal
• Recreational facilities
• Parking
facilities
•
Special purpose
• Observable value impacts of energyproperties
efficient, green, or sustainable features
Case
study
analyses are encouraged.
•
Partial
interests
i n c e n t i v e s
Awards
The
The Appraisal
AppraisalJournal
Journalpresents
presentsthe
theArmstrong/Kahn
Armstrong/KahnAward,
Award,the
theSwango
Swango
Award,
Award,
and
and
the
the
Appraisal
Richard
Journal
U. Ratcliff
Academic
Award each
Award
year
each
for year
exceptional
for exceptional
articles articles
published
published
in the Journal.
in the Journal;
Each of these
each of
awards
these
carries
a
$3000
honorarium.
awards carries a $1000 honorarium.
Continuing Education Credit
Continuing
Education
Credit
Appraisal Institute
members
receive up to 25 hours of continuing education credit for an article
publishedInstitute
in the Journal,
with
a maximum
of 50
hours in each
five-year
continuing
education
cycle.
Appraisal
members
receive
20 hours
of continuing
education
credit
for an article
published
in the Journal, up to a maximum of 50 hours in each five-year continuing education cycle.
Please
Please consult
consult the
the Manuscript
Manuscript Guide
Guide for
for specifics
specifics about
about the
the article
article submission
submission process.
process.
Article Topics in Need of Authors
183
Manuscript guide
200 W. Madison, Suite 1500
Chicago, IL 60606
T 312-335-4445
F 312-335-4222
taj@appraisalinstitute.org
The Appraisal Journal retains its preeminence in real
estate appraisal by keeping abreast of the latest issues
of importance and interest to appraisers. Fresh ideas
are always welcome. We invite you to write for The
Appraisal Journal.
The Appraisal Journal presents three article awards:
the Armstrong/Kahn Award for the best article published in the previous year, the Swango Award for the
best article written by a practicing appraiser, and the
Ratcliff Award for best article written by an academic
author. Authors of articles published in The Appraisal
Journal are eligible for continuing education credit in
the year of publication.
Manuscript Review
Each submitted manuscript is considered in a doubleblind review. Manuscripts are reviewed by members of
the Editorial Board, Review Panel, Academic Review
Panel, and by outside specialists when appropriate.
Manuscripts written by academic authors are reviewed
by members of the Academic Review Panel, as well as
practitioner reviewers.
A manuscript may be returned to the author with
specific recommendations for revisions if the reviewers
believe it has the potential for being published. Making
such revisions does not guarantee publication. Authors
of manuscripts will receive notification of the decision
by letter, e-mail, or telephone.
The Manuscript
Style and Content
•Writing is always best received when it is interesting,
lucid, and succinct. Successful articles are relevant
and meaningful to readers of the Journal. Authors
should cast their articles with the interests of real
property appraisers and other valuation and real
property professionals in mind.
•In most instances, articles should include a review
of published literature and texts related to the topic.
Authors should cite relevant passages to demonstrate
knowledge of established concepts and practices
184
and specify how they agree or disagree with such
concepts and practices. Where applicable, cite the
most recent edition of The Appraisal of Real Estate
and The Dictionary of Real Estate Appraisal.
•The author is responsible for providing accurate
mathematics and statistics, including proper documentation of specific software used. Editorial staff
may request copies of relevant data, spreadsheets,
regressions, or computations used.
•Articles should be a maximum of 21 double-spaced
pages (approximately 5000 words).
•Editorial staff will make revisions in the manuscript
as needed for conformance to the Appraisal Institute
style of capitalization, punctuation, spelling, and
usage. The editorial staff also will edit for clarity of
presentation and for grammar. Manuscripts may
be accepted for publication pending completion of
revisions suggested by reviewers.
Required Elements
❏ A cover letter with complete address, phone, fax,
and e-mail of each author. Author names should
not appear on any pages of the manuscript.
❏ An abstract of 75–100 words. The abstract should
not be a repeat of the first paragraph.
❏ Six key words for indexing, i.e., words that best
describe the content of the manuscript.
❏ Brief major and secondary headings to emphasize
divisions.
❏ Clearly written introduction and conclusion sections explaining the purpose of the article and
significance of the research results.
❏ A brief professional biography for each author,
including present employment, title, degrees,
designations, publishing accomplishments and
preferred method of reader contact.
❏ Footnotes, numbered consecutively, providing all
facts of publication for sources used.
❏ Footnote numbers should appear in superscript
at the point of reference in the article. Do not use
Manuscript Guide
the author-date style of citation; citations such
as (Brown 1990) should not appear in the article
text. Examples of footnote forms are shown at the
end of this guide.
❏ Tables and figures in both printed and electronic
form. Tables and figures should be titled and
numbered in the order in which they appear in the
article. The article text should specifically refer to
each table and figure.
Submission Requirements
❏ Manuscripts must be submitted in electronic form
(Microsoft Word). The electronic files may be
e-mailed to taj@appraisalinstitute.org. Please title
the e-mail “Article Submission.”
❏ Please also submit one hard copy of the article to
The Appraisal Journal, 200 W. Madison, Suite 1500,
Chicago, Illinois, 60606. Your article should be typed
in double-spaced format (including quoted matter
and footnotes) on plain white 8 1/2–by–11- inch paper
with page numbers on each sheet.
Confidentiality
Authors of manuscripts submitted to The Appraisal
Journal for possible publication must have specific
authorization from their clients before disclosing (a)
confidential factual data received from a client or (b)
the analyses, opinions, or conclusions of an appraisal.
Copyright
Authors are requested not to submit manuscripts that
are being reviewed for publication in other journals.
All articles accepted for use become the property of
the Appraisal Institute and cannot be reproduced
elsewhere without the specific permission of the
Appraisal Institute.
Examples of Footnote Forms:
Books
1. Appraisal Institute, The Appraisal of Real Estate, 12th ed. (Chicago: Appraisal Institute, 2001), 49–50.
2. Arthur R. Gimmy and Michael G. Boehm, Elderly Housing: A Guide to Appraisal, Market Analysis, Development, and Financing (Chicago: American Institute of Real Estate Appraisers, 1988), 102.
Articles
3. John B. Corgel, Paul R. Goebel, and Charles E. Wade, “Measuring Energy Efficiency for Selection and Ad-
justment of Comparable Sales,” The Appraisal Journal (January 1982): 71–78.
4. Robert H. Zerbst and William B. Brueggeman, “FHA and VA Mortgage Discount Points and Housing Prices,”
The Journal of Finance (December 1977): 1776–1773.
5. Ibid., 1773. [Same article as in immediately preceding note, different page]
6. Corgel, Goebel, and Wade, 77–78. [Reference to note 3, but interrupted by a different source reference]
Legal Citations
7. Suess Builders Co. v. City of Beaverton, 656 P.2d 306 (1982).
8.United States v. Blankinship, 543 F.2d 1272 (9th Cir. 1976).
9.United States v. 1735 North Lynn Street, 676 F. Supp. 693 (E.D.Va. 1987).
10. United States v. Blankinship. [Second reference to note 8]
Colloquiums, Working Papers, and Dissertations
11. Kenneth T. Rosen, “Creative Financing and Housing Prices: A Study of Capitalization Effects” (working paper,
Center for Real Estate and Urban Economics, University of California, Berkeley, August 1982), 82–85.
12. James R. DeLisle, “Toward a Formal Statement of Residential Appraisal Theory: A Behavioral Approach”
(PhD diss., University of Wisconsin, 1981), 55–60.
Online Sources
13. University of Minnesota Center for Sustainable Building Research, “Sustainable Design,” http://www.
csbr.umn.edu/sustainability.html. [If online material is time sensitive and subject to change, indicate in
parentheses the date the material was accessed.]
Additional information on accepted manuscript style and organization may be found in The Chicago Manual of
Style, 16th ed. (Chicago: University of Chicago Press, 2010).
Manuscript Guide
185
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