chapter 22: valuation of distressed properties
DESCRIPTION
Chapter 22: Valuation of Distressed Properties. Introduction. Several factors can result in a distressed property Oversupplied market Poor design Improper location of improvements Inadequate maintenance Poor decisions made by owner or manager. Introduction. These problems can result in: - PowerPoint PPT PresentationTRANSCRIPT
Chapter 22:Valuation of Distressed Properties
IntroductionSeveral factors can result in a distressed
propertyOversupplied marketPoor designImproper location of improvementsInadequate maintenancePoor decisions made by owner or manager
IntroductionThese problems can result in:
Low occupancyHigher operating costsLow rent levels
The problems are sometimes curable and sometimes incurable
External obsolescenceLoss in property value resulting from negative
influence outside the property itselfAn element of accrued depreciationGenerally incurable
Two types of external obsolescence
1. Economic obsolescenceValue loss is caused by an occurrence or situation that
adversely affects the employment, quality of life or economics of an area
This problem may disappear over time2. Locational obsolescence
Value loss is caused by a negative influence outside the property because of its location, a health hazard close to the property or a change in property use close to the property
Generally considered incurable and may permanently impair property value
Occupancy obsolescenceLoss in the value of real estate improvements due to an
occupancy that is less than the stabilized occupancy that the property should achieve in the current market
It is generally the present value of income loss during the rentup of a property
It is generally curable; if not curable, it is locational obsolescence
Functional obsolescenceLoss in value due to functional inadequacies or
superadequacies due to poor design and/or change in market standards or requirements for building components
May be curable or incurable
Property Inspection and Analysis: Income ApproachThe feasibility rent must often be estimated:
Feasibility rent is the rent level needed to support the depreciated value of the property
Considers deductions for normal physical depreciation
Does not consider any adverse conditions such as external obsolescence, functional obsolescence, occupancy obsolescence, rehabilitation costs or conversion costs
Property Inspection and Analysis: Income ApproachThe difference between the value based on
feasibility rent and the value based on market rent is a measure of the loss in value due to the adverse condition such as external obsolescence
This loss in value may have to be used as an adjustment when using the sales comparison and cost approaches
Property Inspection and Analysis: Cost ApproachAppraiser must consider any loss in value due to
physical, functional, economic and occupancy obsolescence
The loss in value may have to be allocated between the land and the improvements
Two approaches to estimate loss in value:1. Loss in income2. Paired sales
Property Inspection and Analysis: Sales Comparison ApproachComparable sales may be scarceMust adjust for differences in age, condition,
quality, property rightsAlso adjust for differences in occupancy,
economic conditions and functionality of the properties
Example:Value Estimates with No Problem Summary of Value Indication
Income approach $2,142,209 Cost approach $2,146,996 Sales Comparison approach $2,160,000 Building Type - Office Gross building area 24000 sqftNet leasable area 20000 sqftLand area 38000 sqftMarket rent estimate $15/sqftVacancy and credit allowance 6%Operating expense estimate $4.10/sqft
Functional obsolescence: Income approach
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6PGI $270,000 $280,800 $292,032 $303,713 $315,862 $328,496Vacancy $16,200 $16,848 $17,522 $18,223 $18,952 $19,710EGI $253,800 $263,952 $274,510 $285,490 $296,910 $308,786Management $12,690 $13,198 $13,726 $14,275 $14,845 $15,439Property tax $11,900 $11,900 $11,900 $15,000 $15,000 $15,000Insurance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Utilities $30,000 $31,500 $33,075 $34,729 $36,465 $38,288Janitorial $18,000 $18,720 $19,469 $20,248 $21,057 $21,899Maintenance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Total expenses $80,590 $83,558 $86,658 $92,994 $96,371 $99,900NOI $173,210 $180,394 $187,852 $192,496 $200,539 $208,886 Reversion @10% cap rate $2,088,862 Value Estimate @12% $1,853,572
Functional obsolescence: Income approach
Value - optimum ratio $2,142,209
Value - actual ratio $1,853,572
Functional obsolescence $288,637
Functional obsolescence: Cost approach
Unadjusted improvements value $1,861,993
Less functional obsolescence $288,637
Value of the improvements $1,573,356
Land value 285000
Total property value $1,858,356
Functional obsolescence: Sales comparison approach
Value indication - no obsolescence $2,160,000
Less functional obsolescence $288,637
Value of the improvements $1,871,363
Summary of functional obsolescence
Value Estimate
Income approach $1,853,572
Cost approach $1,858,356
Sales comparison approach $1,871,363
Locational external obsolescence: Income approach
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
PGI$260,00
0$270,40
0$281,21
6$292,46
5 $304,163$316,33
0Vacancy $15,600 $16,224 $16,873 $17,548 $18,250 $18,980
EGI$244,40
0$254,17
6$264,34
3$274,91
7 $285,913$297,35
0Management $12,220 $12,709 $13,726 $13,217 $14,296 $14,867Property tax $11,900 $11,900 $11,900 $15,000 $15,000 $15,000Insurance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Utilities $30,000 $31,500 $33,075 $34,729 $36,465 $38,288Janitorial $18,000 $18,720 $19,469 $20,248 $21,057 $21,899Maintenance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Total expenses $80,120 $83,069 $86,658 $91,936 $95,822 $99,328
NOI$164,28
0$171,10
7$177,68
5$182,98
1 $190,091$198,02
2 Reversion @10% cap rate
$1,980,222
Value Estimate @12% $1,757,39
8
Locational external obsolescence: Income approach
Value - optimum ratio $2,142,209
Value - actual ratio $1,757,398
Locational external obsolescence $384,811
Locational external obsolescence: Cost approach
Land value - no obsolescence $285,000
Land value - with obsolescence $200,000
Land value obsolescence $85,000
Unadjusted improvements value $1,861,993
Less allocated obsolescence $299,811
Value of improvements $1,562,182
Plus land value $200,000
Total property value $1,762,182
Locational external obsolescence: Sales comparison approach
Value indication - no obsolescence $2,160,000
Less locational external obsolescence $384,811
Value of the improvements $1,775,189
Summary of external locational obsolescence
Value Estimate
Income approach $1,757,398
Cost approach $1,762,182
Sales comparison approach $1,775,189
Economic external obsolescence: Income approach
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6Market rent $13 $13.25 $14.50 $16.25 $17.55 $18.25
PGI$260,00
0$265,00
0$290,00
0$325,00
0 $350,958 $364,996Vacancy $15,600 $15,900 $17,400 $19,500 $21,057 $21,900Concessions $40,733 $41,517 $45,433 $0 $0 $0
EGI$203,66
7$207,58
3$227,16
7$305,50
0 $329,901 $343,096Management $10,183 $10,379 $11,358 $15,275 $16,495 $17,155Property tax $11,900 $11,900 $11,900 $15,000 $15,000 $15,000Insurance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Utilities $30,000 $31,500 $33,075 $34,729 $36,465 $38,288Janitorial $18,000 $18,720 $19,469 $20,248 $21,057 $21,899Maintenance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Total expenses $78,083 $80,739 $84,290 $93,994 $98,021 $101,616
NOI$125,58
4$126,84
4$142,87
7$211,50
6 $231,880 $241,480 Reversion @10% cap rate
$2,414,802
Value Estimate @12% $1,951,15
9
Economic external obsolescence: Income approach
Value - optimum ratio $2,142,209
Value - actual ratio $1,951,159
Economic external obsolescence $191,050
Economic external obsolescence: Cost approach
Land value - no obsolescence $285,000 Land value - with obsolescence $200,000 Land value obsolescence $85,000 Unadjusted improvements value $1,861,993 Less allocated obsolescence $106,050 Value of improvements $1,755,943 Plus land value $200,000 Total property value $1,955,943
Economic external obsolescence: Sales comparison approach
Value indication - no obsolescence $2,160,000
Less economic external obsolescence $191,050
Value of the improvements $1,968,950
Summary of external economic obsolescence
Value Estimate
Income approach $1,951,159
Cost approach $1,955,943
Sales comparison approach $1,968,950
Economic and occupancy external obsolescence: Income approach
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6Market rent $13 $13.25 $14.50 $16.25 $17.55 $18.25 PGI $260,000$265,000$290,000$325,000 $350,958 $364,996Vacancy $130,000 $79,500 $34,800 $19,500 $21,057 $21,900Concessions $21,667 $44,167 $42,533 $0 $0 $0EGI $108,333$141,333$212,667$305,500 $329,901 $343,096Management $5,417 $7,067 $10,633 $15,275 $16,495 $17,155Property tax $11,900 $11,900 $11,900 $15,000 $15,000 $15,000Insurance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Utilities $30,000 $31,500 $33,075 $34,729 $36,465 $38,288Janitorial $9,000 $13,104 $17,135 $20,248 $21,057 $21,899Maintenance $4,000 $4,120 $4,244 $4,371 $4,502 $4,637Total expenses $64,317 $71,811 $81,231 $93,994 $98,021 $101,616NOI $44,016 $69,522$131,436$211,506 $231,880 $241,480 Reversion @10% cap rate
$2,414,802
Value Estimate @12% $1,824,49
0
Economic and occupancy external obsolescence: Income approach
Value - optimum ratio $2,142,209
Value - actual ratio $1,824,490
Economic and occupancy obsolescence $317,719
Economic and occupancy external obsolescence: Cost approach
Land value - no obsolescence $285,000 Land value - with obsolescence $200,000 Land value obsolescence $85,000 Unadjusted improvements value $1,861,993 Less allocated obsolescence $106,050 Less occupany obsolescence $126,669 Value of improvements $1,629,274 Plus land value $200,000 Total property value $1,829,274
Economic and occupancy external obsolescence: Sales comparison approach
Value indication - no obsolescence $2,160,000
Less economic obsolescence $191,050
Less occupancy obsolescence $126,669
Value of the improvements $1,842,281
Summary of occupancy and economic obsolescence
Value Estimate
Income approach $1,824,490
Cost approach $1,829,274
Sales comparison approach $1,842,281