Market/ Marketability Analysis-

Transcription

1 Market/ Marketability Analysis- Applications in Valuation Appraisals Presentation Panel: Benjamin R. Sellers, MAI Kerry M. Jorgenson, MAI Stephen F. Fanning, MAI

2 Presentation Format Presentation format Cases presented Real problems taken from our daily appraisals Panel discussion Audience discussion Questions During Presentation Send by text to Or write on card and pass to isle Questions After Presentation Raise hand, text or write on cards. Slide 2

3 There s No Magic Formula Recognize that The market analysis process is not static. It varies with the availability of data, the techniques that the appraiser chooses, and the changing conditions of the market. Source: Market Analysis for Real Estate, 2 nd Ed. Page 351 as long as you address it Slide 3

4 Objectives Recognize the importance market analysis has in the appraisal process Identify problematic scenarios requiring next level of market analysis Once recognized, apply conclusions to analysis throughout the report Role of M/M Analysis in the Appraisal Process?... Slide 4

5 Basis of Market Value Since the value of a property is equal to the present value of all of the future benefits it brings to the owner, market value is dependent on the expectations of what will happen in the market in the future ( AI Guide Note 12) Who Forecast Future Benefits? How are future benefits forecasted? How are those forecasted future benefits applied in the three approaches to value? Slide 5

6 Which Market Do We Forecast? Capital Markets (Buy/Sell) Fundamental Markets (Users) Debt Equity Owner Tenants Customers Slide 6

7 Appraisal Process Part 1- H&B Use Part 1 The Study Setting the Foundation for Highest and Best Use of Property P L Property Analysis - Look at site, legal and building to determine property s potential. Location Analysis - Look at growth in the area, linkages to demand sources and determine use potential. The Study (Foundation) P L M C M C Market Analysis - Look at surrounding competition and market demand. Capture (Marketability) Determine how much of the market demand the subject is likely to capture.

8 Six-Step Market/Marketability Process Steps 1. Property productivity Analysis ( Determine the Product) 2. Delineate the market (Determine the market) 3. Forecast Demand ( Measure Demand) 4. Supply Analysis ( Measure current and forecast future competition) 5. Market Condition Analysis ( Determine Market Environment) 6. Subject Marketability Analysis ( Determine Market Capture ) Slide 8

9 Step 1- Property Productivity Analysis Subject Rating Veto Factor High Moderate Slight Mkt Std Slight Moderate High Physical Characteristics Site Size X Land-to-building ratio X Parking Number Convenience Topography Circulation impact Drainage Landscaping Building Improvements Exterior appearance Construction quality Signage appearance Design flexibility Street visibility X X X X X X X X X X Slide 9

10 Step 1- Property Productivity Analysis cont. Subject Rating Tenant Mix and Marketing Features Anchor size Anchor s drawing power Tenant compatibility mix Image of center Shopper access: shop to shop Center s amenity feature Legal Characteristics Zoning/easements/legal characteristics Veto Factor Inferior Typical High Moderate Slight Mkt Std Slight Moderate High X X X X X X X Sub-rate no. of items Times category score Category score Total subject property score Percentage above or below average % Slide 10

11 Step -2 Delineate the Market Majority of Competition Location of Majority of Demanders Subject Property Market Area Slide 11

12 Step 3-Inferred Demand by Historical Absorption 600 Thousands Office Space Absorbed\Constructed Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr. 7 Construction Absorption Slide 12

13 Step 3 Fundamental Demand Forecast A Change in Leads to A Change in Which Leads to A Change in Demand for Employment Office jobs Office space Employment Industrial jobs Industrial space Population Households Housing units Income Effective buying power Retail space Slide 13

14 Steps 3,4 & 5- Market Condition Analysis Market Analysis Steps Current Forecast +5 Years Forecast +10 Years Step 3-Forecast of Supportable Space (Sq. Ft.) Step 4 -Less Current Competitive Supply Step 4 -Less Forecasted New Competition Step 5- Market Residual Demand - Comparing Supply with Demand (Excess) Shortage 1,800,000 1,900,000 2,100,000 1,800,000 1,800,000 2,200, , (300,000) (100,000) Slide 14

15 Step 6- Subject Capture Analysis ID Rating Criteria Subject Description Oak Description Vista Description Size of Center 110,000 65,000 90,000 Location Factors Current household density in 1 mile Average household income in 1 mile Slide 15 Rank of Factor 2 moderate 2 similar 1 inferior 13 1 $55,952 1 $55,952 2 $63, yrs. household density in 1 mile 1 moderate 1 similar 1 similar 12 Proximity to roads 1 average 1 similar 2 adj. to freeway Traffic volume by site 1 average 1 similar 2 freeway 8 Ease of access to site 1 average 1 similar 1 similar 9 Proximity to other demand sources 1 good 1 similar 1 similar 6 Center Factors Size of center 3 110, , ,000 5 Exterior appearance bldg. and site 3 very good 2 good 1 fair 2 Visibility from street 1 good 1 good 1 good 7 Adequacy of parking 2 average 1 fair 3 very good 4 Image of center 2 good 1 average 1 good 3 Bldg. design flexibility 2 good 2 good 1 big box 1 Anchor drawing power 2 good 1 across street 3 very good 14 Tenant/product variety 2 grocery no major 1 anchor anchor 3 significant mix 15 Total Score % of scores 34% 25% 41% Pro rata by building size 42% 25% 34% Total competitive space 265,000 10

16 Subject Marketability Conclusions Mid-range forecast Occupancy. Improving to 90% occupancy between Years 5 and 10, and then leveling off Rents. Remain level or decline slightly over the next five years and increase can be expected in years 6-10 after citywide residual demand appears positive in about year 6

17 Levels of Market/Marketability Analysis Level A: Demand Forecast Inferred from General & Descriptive Data and Sales and Rent Comps Level B: Demand Forecast Inferred from General data, historical sales, rent comps, plus market trend analysis Level C: Demand forecast from inferred data, plus Fundamental analysis of subject specific submarket and competition and subject capture Slide 17

18 M/M is the Basis of H&B Use Conclusions Use Time (probable use date or occupancy forecast) Market participants User of space Most probable buyer Slide 18

19 Appraisal Process Part 2-Measure Value Part 2 Measure the Property s Market Value using three different methodologies. The H&B Use Conclusions sets the foundation for: 1 Cost 2 Sales 3 Income The Study (Foundation) P L M C Selecting Comparable Sales & Rents Adjustments to the Comparable Rent & Occupancy Forecast Property Obsolescence

20 Application Example #1- Vacant Land Where do you start the land valuation? With sales of similar physical size, zoning and location OR With user demand for sites like the subject? Slide 20

21 Application Example #1- Land Value Slide 21

22 Application Example #2 - Income Approach Case study showing Market/Marketability study application in the income approach for a proposed Assisted Living Center Slide 22

23

24

25

26

27 Primary Market (10-Minute Drive Time) Secondary Market Combined General Market (Greater Ogden Area) Market Area Population Projections 2010 Census STDB 2015 STDB 2020 Average Growth % All Ages 88,060 90,691 93, % Age ,142 18,881 18, % Age ,693 5,890 7, % Age ,307 3,119 3, % Age 85+ 1,641 1,683 1, % All Ages 353, , , % Age ,833 74,791 75, % Age ,895 20,418 24, % Age ,001 9,386 10, % Age 85+ 3,094 3,384 3, % All Ages 441, , , % Age ,975 93,672 93, % Age ,588 26,308 31, % Age ,308 12,505 14, % Age 85+ 4,735 5,067 5, %

28 Facility Name Street Address City Current Supply Greater Ogden (General Market Area) Year Built Drive Time Total Units Vacant Units Occupancy Rate Primary Market Harrison Regent 4481 Harrison Boulevard Ogden % Mountain Ridge Assisted Living 1885 East Skyline Drive South Ogden % Legacy House of Ogden 5526 South Adams Avenue South Ogden % Apple Village 2600 East Hobbs View Circle Layton % Stoney Brooke 4390 South 700 West Riverdale % Primary Market Total % Secondary Market Aspen Assisted Living 2325 Madison Avenue Ogden % Gardens Assisted Living th Street Ogden % Legacy Village of Layton 1201 North Fairfield Road Layton % Pheasant View Assisted Living 1242 Pheasant View Drive Layton % Beehive Homes of Ogden 931 East 1225 North Ogden % Quail Meadow Assisted Living 786 East 2100 North North Ogden % Emeritus Estates 1340 North Washington Blvd North Ogden % The Villas at Baer Creek 770 South Main Kaysville % Apple Tree Assisted Living 565 North 300 West Kaysville % Peach Tree Place West Haven 4607 South Midland Drive West Haven % Beehive Homes of Roy 4965 South 3500 West Roy % Lotus Park Care Center 3520 South 2639 West West Haven % Chancellor Gardens Clearfield 1425 South 1500 East Clearfield % Family Tree of Morgan 862 East Mahogany Ridge Morgan % Beehive Homes of Layton 59 North King Street Layton % Country Pines Retirement 1748 West 1800 North Clinton % Beehive Homes of Clearfield 2221 South 100 West Clearfield % Family Tree of West Point 421 North 3150 West West Point % Beehive Homes of Eden 2547 N Valley Junction Dr Eden % General Market Area Total 1, %

29 Current Supply and Occupancy by Level of Care Greater Ogden Independent Living Level I Level II Memory Care Total Licensed Number of Beds ,325 Total Units ,404 Available Units (Vacant) Weighted Average Vacancy 5.2% 20.5% 5.7% 9.9% 8.3%

30 Weighted Average Rates (Base Rates) Greater Ogden Unit Type Independent Living Level I Level II Memory Care Semi Private $3,127 Private - $2,257 $2,784 $3,591 Studio with Kitchenette $2,245 - $2,753 - One Bedroom $2,405 $2,317 $3,351 - Two Bedroom $3,203 - $4,000 -

31 Competitive Property #3 Legacy House of Ogden Identification: Legacy House of Ogden Services Included in Base Rate Location: 5526 South Adams Avenue Washington Terrace, Utah Meals and Snacks: Utilities Included (3/day) Included Number of Beds/Units: 91/78 Housekeeping: Included Level of Care: AL-2 & Alzheimer s Recreation Program: Included Year Built/Condition: 2000/average Scheduled Transportation: Included Features and Amenities: Emergency call/intercom, beauty shop, library, covered porch/patio. Linen Laundry: Personal Laundry: Included Vacancy: 3.2% Cable TV in Room: Included Source of Information: Marketing Director ( ) Telephone in Room: Included Comments: This is a good quality facility located just east of the Ogden Regional Medical Center. Medication Reminders: Dressing/Grooming Assist: Bathing Assistance: Available ($ charge) Included Included Included No. Unit Type SF Size AL-2 Base Rates Alzheimer 28 Studio with Kitchenette 400 $2, One Bedroom Apartment 600 $3, Two Bedroom Apartment 774 $3, Vacant 2 Semi Private Beds $3, One Bedroom Apartment $4, Total Second Person Charge -- $

32 Primary Competition Comp Facility Name Units IL Level I Level II Mountain Ridge Assisted Living 1885 East Skyline Drive South Ogden, Utah Harrison Regent IL 4481 Harrison Boulevard South Ogden, Utah Legacy House of Ogden 5526 South Adams Avenue Ogden, Utah Apple Village Assisted Living 2600 East Hobbs View Circle Layton, Utah Stoney Brooke 4390 South 700 West Riverdale, Utah Total/Weighted Average Vacant Units Vacancy Rate 31 Studio with Kitchenette - - $3, One Bedroom - - $3, Two Bedroom - - $4, Semi Private ALZ - - $3, Private ALZ - - $3, Subtotal % 42 Studio with Kitchenette $2, One Bedroom $2, Two Bedroom $3, Subtotal % 28 Studio with Kitchenette - - $2, One Bedroom - - $3, Two Bedroom - - $3, Semi Private ALZ - - $3, Private ALZ - - $4, Subtotal 3 3.2% 53 Studio with Kitchenette - - $2, One Bedroom - - $3, Private ALZ - - $3, Subtotal 1 1.4% 2 Private Half Bath - - $3, Private Full Bath - - $3, Subtotal % - Semi Private - 2 Private Half Bath $3, Private Full Bath $3, Studio with Kitchenette $2, $2, One Bedroom $2, $3, Two Bedroom $3, $3, Semi Private ALZ $3, Private ALZ $3, Total $2, $3, %

33 Pipeline Projects (Developing Inventory) Pipeline Projects Units # Beds Type Probable Supply Primary Market (10-Minute Drive Time) Former Ogden BHI (Subject) ±45 ±45 AL-2 Preliminary proposal Ogden Unnamed Project Ogden Unnamed Project South Ogden Subtotal Primary Market Pheasant View Expansion Layton Syracuse Assisted Living Syracuse Our House of Ogden Ogden Creekside Assisted Living Marriot-Slaterville Seasons of Farr West Farr West Quail Meadow - Expansion North Ogden Clinton Alzheimer s Special Care Clinton Unnamed Project Roy Subtotal Secondary Market Total Pipeline (Greater Ogden Area Overall) AL AL-2 MC Have concept approval. In the process of getting site plan approval. This is a very preliminary project. The city has not yet heard of it and no approvals in place. Secondary Market (Greater Ogden Area) MC These have already been approved and should be completed by summer AL-2 Construction is nearly complete and the opening is scheduled for end of August AL-2 This project has final approvals and is in the process of obtaining a building permit AL-2 All approvals are in place. Construction is MC expected to begin soon AL-2 Construction is underway. Grand opening is scheduled for October 1, MC Under construction. Completion expected by early MC This group is in the process of resubmitting a site plan IL This project has final approvals and is in the process of getting a building permit

34 Pipeline Projects Units Probability Projected Construction High Scenario Mid Scenario Low Scenario Probable Units Primary Market Probability Probable Units Probability Subject % % % 45 Unnamed Project 37 25% 9 50% 19 75% 28 Unnamed Project 80 0% - 25% 20 50% 40 Subtotal Primary Market % 54 52% 84 70% 113 Secondary Market Pheasant View Expansion 15 75% 11 90% % 15 Syracuse Assisted Living % % % 49 Our House of Ogden 40 50% 20 75% % 40 Creekside Assisted Living % 90 90% % 120 Seasons of Farr West % % % 24 Quail Meadow Expansion % % % 20 Clinton Alzheimer s 66 25% 17 50% 33 75% 50 Unnamed Project - Roy 31 50% 16 75% % 31 Subtotal Secondary Market % % % 349 Probable Units Total General Market % % % 461

35 Percent needing help with ADL s Percent needing help with personal care from Others (US, 1997 to Present, Source NHIS) Age Age Age % 7.9% 21.3% % 7.5% 19.2% % 8.0% 17.9% % 7.4% 19.1% % 7.6% 18.9% % 7.4% 19.5% % 6.6% 22.6% % 7.4% 18.2% % 6.8% 19.1% % 6.2% 17.3% % 7.7% 21.5% % 6.7% 19.3% % 7.1% 19.5% % 7.9% 19.1% % 8.0% 22.4% % 7.6% 18.5% % 10.5% Average 3.3% 7.3% 19.4% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Trend of % Needing Help with ADL's Age Age Age 85+

36 Year Population Potential Market (Persons Needing Assistance with Activities of Daily Living) Age Age Age 85+ Total % ADL's Persons with ADLs Population % ADL's Primary Market Persons with ADLs Population % ADL's Persons with ADLs Persons with ADLs , % 194 3, % 228 1, % , % 201 3, % 232 1, % , % 209 3, % 237 1, % , % 216 3, % 241 1, % , % 224 3, % 246 1, % , % 232 3, % 250 1, % Secondary Market , % 674 9, % 685 3, % 660 2, , % 700 9, % 706 3, % 671 2, , % 727 9, % 728 3, % 681 2, , % , % 750 3, % 692 2, , % , % 773 3, % 703 2, , % , % 797 3, % 714 2,324 Combined General Market , % , % 913 5, % 988 2, , % , % 938 5, % 996 2, , % , % 964 5, % 1,003 2, , % , % 991 5, % 1,011 2, , % 1,008 13, % 1,019 5, % 1,018 3, , % 1,046 14, % 1,047 5, % 1,026 3,119

37 Senior Care Demand/Utilization Independent Living Assisted Living Skilled Nursing Total Senior Care Year Units Occupancy Occupied Occupancy Occupied Occupancy Occupied Occupied Units Beds Rate Units Rate Units Rate Beds Units/Beds % % 490 4,948 6, % % 490 4,923 6, % % 584 6, % 4,862 6, % % 608 6, % 5,183 6, % % 672 6, % 5,519 7, % % 757 6, % 5,609 7, % 814 1, % 954 6, % 5,690 7, , % 979 1, % 1,157 6, % 5,655 7, , % 1,037 1, % 1,229 6, % 5,634 7, , % 1,081 1, % 1,413 6, % 5,406 7, , % 1,081 1, % 1,593 6, % 5,386 8, , % 1,081 2, % 1,863 6, % 5,308 8, , % 1,334 2, % 2,067 7, % 5,339 8, , % 1,410 3, % 2,547 7, % 5,175 9, , % 1,364 3, % 2,934 7, % 5,169 9, , % 1,518 3, % 3,156 7, % 5,123 9, , % 1,538 4, % 3,508 7, % 4,967 10, , % 1,627 4, % 3,690 7, % 4,953 10, , % 1,627 4, % 3,816 7, % 4,993 10, , % 1,627 4, % 3,941 7, % 5,171 10, , % 1,706 4, % 4,067 7, % 5,194 10, , % 1,706 4, % 4,192 7, % 5,267 11, , % 1,649 5, % 4,651 7, % 5,005 11, , % 1,695 5, % 4,753 7, % 5,166 11, , % 1,741 5, % 4,855 7, % 5,154 11, , % 1,665 5, % 5,380 7, % 5,122 12, , % 1,770 6, % 5,748 8, % 5,128 12,646

38 Penetration Ratio 80.0% Penetration Ratio Trend 75.0% 70.0% 65.0% 60.0% 55.0% 50.0%

39 County Occupied IL/AL Units Senior Care Supply and Demand Analysis (Utah Counties 2014) Occupied NF/SNF Beds Total Senior Care Occupancy Seniors With ADLs Penetration Ratio Ratio to Expected (at 70.4%) Population Ages Ratio to Seniors With ADLs Cache, Rich % 118.5% 19, Box Elder, Weber, Morgan, north Davis 1, , , % 100.3% 107, Salt Lake, Tooele, south Davis 3,766 2, , , % 112.1% 256, Summit, Wasatch % 35.9% 17, Utah, Juab 1, , , % 109.2% 80, Millard, Sanpete, Sevier, Wayne, Piute % 71.2% 14, Beaver, Garfield, Iron % 56.8% 11, Daggett, Duchesne, Uintah % 80.0% 11, Carbon, Emery, Grand, San Juan % 70.9% 13, Washington, Kane , % 72.4% 30, Total/Average 7,759 5, , , % 100.0% 563,

40 Market Capture (% of Natural Demand) Local Market Capture Rate Vs. Age Population 120.0% 100.0% 80.0% 60.0% 40.0% y = x % 0.0% Ratio of Age Population to Seniors with ADLs

41 % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Senior Care Market Distribution Skilled Nursing Assisted Living Independent Living

42 IL/AL Proportion of Total Senior Care Demand IL/AL Proportion of Total Senior Care Demand IL/AL Proportion of Total Senior Care Demand IL/AL Demand Compared to Household Income 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% y = x % R² = % 80.0% 0.0% $35,000 $45,000 $55, % $65,000 $75, % Median Household Income 50.0% IL/AL Demand Compared to Age 75+ Income 40.0% 30.0% 20.0% y = x % R² = % 80.0% $25,000 $27,500 $30,000 $32,500 $35,000 $37,500 $40, % Median Household Income for Age 75+ Households 40.0% IL/AL Demand Compared to Age 75+ Net Worth 20.0% 0.0% y = x $90,000 $140,000 R² = 0.74 $190,000 $240,000 Median Net Worth of Age 75+ Households

43 Fundamental Analysis of Supply and Demand - Mid Scenario General Market Area - Greater Ogden Population Age ,308 27,307 28,343 29,419 30,536 31,695 % With ADL Limitations 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% Subtotal ,008 1,046 Population Age ,505 12,853 13,210 13,577 13,955 14,343 % With ADL Limitations 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% Subtotal ,019 1,047 Population Age 85+ 5,067 5,105 5,144 5,183 5,222 5,262 % With ADL Limitations 19.5% 19.5% 19.5% 19.5% 19.5% 19.5% Subtotal ,003 1,011 1,018 1,026 Total With ADL Limitations 2,769 2,835 2,903 2,973 3,045 3,119 Senior Care Penetration Ratio 69.7% 70.0% 70.5% 71.0% 71.0% 71.0% Natural Senior Care Demand 1,930 1,984 2,046 2,111 2,162 2,215 Adjustment for In-migration/Outmigration Total Senior Care Demand 2,043 2,104 2,169 2,237 2,291 2,347 Proportion Captured by IL/AL 63.0% 64.0% 65.0% 66.0% 67.0% 68.0% IL/AL Demand (Occupied Beds) 1,287 1,346 1,410 1,477 1,535 1,596 Adjustment for Frictional Vacancy Supportable Supply (Units) 1,430 1,496 1,567 1,641 1,706 1,774 New IL/AL Construction (Units) Projected IL/AL Supply (Units) 1,404 1,672 1,789 1,789 1,789 1,789 Residual Demand (Oversupply) 26 (176) (222) (148) (83) (15) Projected IL/AL Occupancy (Demand Supply) 91.7% 80.5% 78.8% 82.5% 85.8% 89.2%

44 Fundamental Analysis of Supply and Demand - Mid Scenario General Market Area - Greater Ogden IL/AL Demand (Occupied Beds) 1,287 1,346 1,410 1,477 1,535 1,596 Adjustment for Frictional Vacancy Supportable Supply (Units) 1,430 1,496 1,567 1,641 1,706 1,774 New IL/AL Construction (Units) Projected IL/AL Supply (Units) 1,404 1,672 1,789 1,789 1,789 1,789 Residual Demand (Oversupply) 26 (176) (222) (148) (83) (15) Projected IL/AL Occupancy (Demand Supply) 91.7% 80.5% 78.8% 82.5% 85.8% 89.2% Projected Subject Occupancy (stabilized) 83.0% 81.0% 85.0% 89.0% 93.0% Subject Capture (% of pro-rata share) 103% 103% 103% 104% 104%

45 Residual Demand Conclusions (2019) Low Scenario Mid Scenario High Scenario Primary Market Demand, Occupied Units (10-Minute Drive Time) Adjustment for Frictional Vacancy (10%) Supportable Supply in Primary Market Forecasted Supply Residual Demand in Primary Market (82) (35) 13 Secondary Market Demand 1,115 1,166 1,217 Adjustment for Frictional Vacancy (10%) Supportable Supply in Secondary Market 1,239 1,295 1,352 Forecasted Supply 1,391 1,343 1,289 Residual Demand in Secondary Market (152) (48) 63 Total Residual Demand for General Market Area (234) (83) 77 Occupancy Forecast for the General Market Area 80.2% 86.8% 94.4%

46 Developing a DCF that Reflects Market Cycles 1. Over what time frame should the fundamental demand forecast be made? (5/10 years, typical projection period, or just until end of cycle) 2. What is the likely trend in rents through the real estate cycle? 3. What is the proper way to handle fixed and variable expenses through market cycles? Slide 46

47 Major Issues in M/M Application in Appraisals 4. What should be the proper relationship of discount rates and cap rates through the four stages of the real estate cycle? 5. What should be done if market participants are not yet recognizing foreseeable changes in market conditions? Slide 47

48 Major Issues in M/M Application in Appraisals 6. Should the cash flow forecast be what the market participants expect, or what the appraiser/analyst predicts? 7. In extracting discount rates from a comparable sale, should an appraiser use the buyer s estimates or make an independent forecast consistent with fundamental demand analysis? Slide 48

49 Major Issues in M/M Application in Appraisals 8. If the forecasts and discounting are based on typical buyer expectations, what is the value of fundamental demand analysis? Slide 49

50 Application Example #3 - Building Obsolescence Market/ Marketability Analysis in Litigation Valuation A Parking Analysis Case study Slide 50

51 Market Analysis Conclusions Why is Market Analysis important? The data and conclusions generated through market analysis are essential components in other portions of the valuation process. Source: The Appraisal of Real Estate, 14 th Ed. Page 42 Slide 51

52 Highest & Best Use A typical appraisal report states: As Vacant is commercial As Improved is commercial Analysis is required by standards Does this provide needed/required analysis? If you don t get the market analysis/hbu right, you don t get the value right Slide 52

53 Identifying Depreciation Depreciation Exists Depreciation Exists Too Little Ideal Improvement Too Much Slide 53

54 Identifying Depreciation Comparison to ideal improvement Any difference in value between the existing improvement and the ideal improvement would be attributable to depreciation Source: The Appraisal of Real Estate, 14 th Ed. Page 345 Slide 54

55 Subject Property Description Location Neighborhood: Established suburban office/industrial district Secondary office location within the market area Subject Office Building Site: Improvements: Age/Condition: Current Occupancy: Historical Occupancy: Rental Rates: Current Tenants: Competition: 0.18 acres 2 stories; 5,042 SF (2,521 SF each level) 35 years with recent renovation/average 50% (Owner occupies 2 nd level) High turnover on main level Typical/Below market on main level Engineering firm (owner) Offices ranging from 5 to 35 years old with significant similar user space in close proximity. Slide 55

56 Subject Property Slide 56

57 Subject Property Slide 57

58 Subject Property Slide 58

59 Productivity Analysis Step1: Identification of subject attributes What are market expectations? How does each factor affect potential tenants? Legal What is required by zoning? Physical What is required by market? Slide 59

60 Step 1: Legal Analysis Identifying the problem Existing (10 Spaces) Zoning Requirements GBA 5,042 SF 5,042 SF 300 SF Spaces per 300 SF 0.60* 1.0 *Subject is a legal non-conforming use Grandfathered use is legal But value is based on market Slide 60

61 Definition Legal-nonconforming use defined as: A legally nonconforming use is a use that was lawfully established and maintained but no longer conforms to the land use regulations of the zone in which it is located. Zoning changes may create under-improved or overimproved properties. Zoning ordinances usually permit a preexisting, or grandfathered, use to continue but may prohibit expansion or major alterations of any structures that support the nonconforming use. Source: The Appraisal of Real Estate 14 th edition, page Slide 61

62 Step 1: Physical Analysis Market Demands: What are the characteristics of the expected end users? Comp Parking Spaces GBA Spaces per 300 SF of GBA , , , , , , Average 1.22 Median 1.20 Subject 10 5, Slide 62

63 Productivity Conclusions Step 1 Conclusion: Identify the problem Subject Zoning (Required) Market (Demanded) Spaces per 300 SF % Deficiency 40% 50% Slide 63

64 H&B Use As Vacant Physical & Legal Market demanded parking requirements 1.20 per 300 SF of GBA Maximum GBA based on physical and legal (keeping with market demands for parking) Divided by 300 SF Equals 1.00 spaces per 300 SF 2,500 SF 300 SF = 8.33 spaces Times 1.20 spaces per 300 SF x 1.20 Equals market demanded parking Ideal Improvement = 10 spaces One story 2,500 SF office with 10 surface parking spaces Slide 64

65 H&B Use as Vacant Ideal improvement ' 5' SB 2,500 SF 70.85' 16' SB 60' 4.29' 45' SB 79.23' 40' 5' SB ' Slide 65

66 Existing Improvements Existing improvement ' 5' SB 2,500 SF 5,042 SF 70.85' 16' SB 60' 4.29' 45' SB 79.23' 40' 5' SB ' Slide 66

67 H&B Use As Improved HBU Improved Maximally Productive Existing improvements = over improvement to site Efficiency of improvements are negatively affected by insufficient parking Functional obsolescence exists Depreciation must be measured and applied within the approaches to value Slide 67

68 Methodology Solution Capitalization of Income Differences Differences in net operating income can be capitalized to derive an adjustment when the income loss incurred by a comparable property reflects a specific deficiency in the property. Source: The Appraisal of Real Estate, 14 th Ed. Page 402 Slide 68

69 Capitalized Income Differences Capture loss in value attributed by the capitalized difference in rent loss. Rent and broker surveys reveal: Deficiency property rents range 35% lower Deficiency property vacancy levels range 50% higher Slide 69

70 DCF Input Conclusions No Parking Deficiency Rent Vacancy Upper Level 201 $ % Main Level 101 $ % Main Level 102 $ % Parking Deficiency Rent Vacancy Upper Level 201 $ % Main Level 101 $ % Main Level 102 $ % Slide 70

71 Application Application Solution A discounted cash flow analysis to measure loss Rental rate reduced from $12.00 to $8.00 per SF for bottom level (half of space) to account for the parking deficiency. Vacancy increased to weighted average 11% to account for parking deficiency Longer marketing period in acquiring tenants due to the parking deficiency. Slide 71

72 DCF without parking deficiency Slide 72

73 DCF with parking deficiency Slide 73

74 Calculation Calculation of Functional Obsolescence for Parking Deficiency Slide 74

75 Application Final Opinion Conclusions Income Approach Slide 75

76 Application Final Opinion Conclusions Sales Comparison Approach Slide 76

77 Application Example #4 - Cap Rates Use of Market /Marketability Analysis in Cap Rate Selection, Comparison and Adjusting the Cap Rate Slide 77

78 Location Subject Property Description Neighborhood Retail Center in a small (30,000 pop) older town on the northern outskirts of a major metropolitan area. The metro area northern growth is starting to impact the town with new growth. Subject Retail Center Size: Age: Condition: 110,000 square feet 10 years Good Current Occupancy: 80% Historical Occupancy: Rental Rates: Current Tenants: 95% (an electronics store left last year) Good - some of the highest in town Regional Grocery, drug store, restaurants and auto parts, dry cleaning etc. Competition: Moderate currently but new Super Walmart Coming within 2 miles Slide 78

79 H&B Use Conclusion Use: Timing: Neighborhood Retail Subject entering a down market cycle with rebound not expected for about 10 years. Rents stable to declining over next 5 years with rents rebounding slightly year Market Participants: Occupancy over the next ten years ranging from current 80% to 60% and then rebounding by about year 10 back to the low 80% range. Most Probable Buyer: Investor /Operator Most Probable Users: Moderate income households Slide 79

80 Comparable Sales Data Location Size Age (yrs) Major Tenants Rents Competition In 1.5 Mile Market Area HH- Pop. 1.5 Mile Avg. HH $ in 1.5 Mile 5 Yr. HH/ Pop. Growth Com 1 Com 2 Com 3 Adj Metro 129,995 4 Adj Metro 97, Subj. City #3 125, Subj 110, National grocery; Restaurants; Men s Warehouse National grocery; Restaurants, Rack Room Shoes Regional grocery; Hardware; Jr. Dept. Regional grocery; Restaurants; Jr. Dept. $21 - $28 $18- $23 $15- $19 $15- $20 Average not oversupplied Average not oversupplied Moderate supercenter will impact Extensive new super center coming 24,325 $126,015 4,105 11,119 $85,032 1,499 12,378 $46, ,759 $53, Slide 80

81 Sales Comps Description Comparable Sales Sale Date Occupancy at Sale Actual Seller Cap Rate Buyer Expected 1st Year Occupancy Buyer Expected 1st Year NOI Cap Rate Comp #1 Comp #2 Comp #3 2 Years Ago 95% 6.50% 95% 6.8% 3 Years Ago 85% 7.20% 95% 7.9% 2 Years Ago 80% 8.00% 90% 9.0% Avg. 87% 7.2% 93% 7.9% Slide 81

82 Line No Buying Power and Supportable Retail Sales Comparison Current Year Subject Comp #1 Comp #3 Total number of households in 1.5 miles* Average household income Total household income in primary market area Percentage income spent on retail 2,781 10,135 5,157 $53,882 $126,015 $46,311 $149.M $1,277.1M $238.8M 37% 37% 37% 16 Total demand for occupied sq. ft. of retail and service/office space from primary and secondary trade area 103, , ,386

83 Sales Ranking Analysis ID # Improved Sales Ranking Comparison Sale ID #-> Subject Rank Sale Price Per Sq. Ft. $ $ $ Market Conditions (Date of Sale) Property Factors Describe Rating Describe Rating Describe Rating Describe Rating Current 1 2 Yrs Ago 2 3 Yrs Ago 2 3 Yrs Ago Occupancy at sale 80% 1 95% 3 85% 2 80% Design Quality/Age Condition Land to Building Ratio Good/ 10 yrs old 2 Good/4 yrs 3 Good/ 10 yrs. Old 2 Avg/15 yrs Tenant Quality/Mix 6 Exposure/Traffic By Site Avg. Regional Anchor 1 Excel National Anchor 3 Good National Anchor 2 Avg Regional Anchor 1 12 Good 1 Good 1 Good 1 Good Access Corner Two Major Thoroughfares 2 Corner Two Majors 2 Front one Majors 1 Average Corner 1 9 Slide 83

84 Sales Ranking Analysis, cont. Location Factors 8 Character and Compatibility with Adjacent Land Uses Average good neighborhood growing to the west 2 Good newer subdivisions 4 Avg /Good 3 Avg. but Slightly Older Neigh Proximity and Linkages (cumulative attraction ) to Current Retail Average Some complimentary land uses 1 Very Good 3 Good 2 Average Proximity and Linkage to Current residential Average but most new growth at west edge of market area 1 Good in Four Directions 2 Good in Four Directions 2 Average Population of Residential in 1.5 mile Radius Avg. HH Income in 1.5 Miles 6, , , , $53,882 2 $126,015 4 $85,032 3 $46, Employment in 3 Miles Limited 1 Good 3 Average 2 Limited 1 5 Population Growth Forecast in 1.5 miles for next five years , , Total Score Slide 84

85 OAR Cap Rate Comparison By Rating Score Rating Score Slide 85

86 Market/Marketability Analysis In Appraisals The Conclusion An appraisal requires forecasting in the H&B Use and in the three approaches. Forecasting in any enterprise is fraught with hazards.but forecasting the appraiser must, or change his profession to another in which he can search the annals of history, looking backwards with reasonable certainty rather than forward in a realm of economic uncertainty ( source: Chapter 14 : Income Forecasting and Analysis Alfred A. Ring, The Valuation of Real Estate, 2 nd Edition (Englewood Cliffs, N.J. : Prentice-Hall Inc., 1970) 205 Slide 86