Valuation professionals working in eminent domain and real property taxation matters disagree about which sales and rentals in the market are comparable and if or how those sale and rent amounts should be adjusted. There are highest and best use concerns, if rents are at market or based on financing terms, as well as the basic question of whether “fee simple” as used in pertinent statutes means vacant and available or leased at market rates.
Another area of disagreement is whether entrepreneurial incentive should be included in the cost approach in all circumstances.
“The appraiser needs to understand when, how and why certain types of commercial real estate developed into a separate and distinct asset class equivalent to stocks, bond, commodities, currency and other financial instruments,” Sellers & Associates principal Leslie Sellers told an audience at the 2018 Appraisal Institute conference in Nashville. “This change was driven by the needs of the institutional investment markets (also known as capital markets) to include commercial real estate in their investment portfolios. Traditional commercial real estate was transformed into investment grade with reduced and managed risk by three changes.”
Sellers brought up three points, including the adding of a lease guaranteed by a credit tenant (defined as a company with BBB- or better Standard and Poor’s Ratings). Guaranteed leases of this type are called bonded leases. The structure of the lease with no management responsibilities (triple net, whereby the tenant pays all expenses) should be emphasized. Finally, the lease structure and guarantee provide an investment that significantly increases liquidity.
Appraisers, Sellers said, often are asked to appraise a commercial piece of real estate which has a credit tenant in place as if that lease does not exist. When doing so, it is important to understand guidance exists within the appraisal body of knowledge on the theory behind the appraisal and that investment grade buyers’ motivation is the lease and what it brings with it transforming the risk.
“These buyers would not even consider the purchase of the same property without the lease and what it adds to the investment. The lease is the motivation for purchase,” Sellers said.
“One of the critical factors to consider is that any comparable sale has a similar highest and best use with regard to the location of the property. Is the comparable sale property location suitable for a similar credit tenant? This can be established by a demographic study of each comparable sale location,” he added.
Paula Konikoff, a sole practitioner, spoke to the pitfalls associated with appraisers assessing value and determining worth of such complex properties, and its effect in terms of reliability with clients and the general population.
“One of the unintended consequences of opposing valuation experts providing opinions of value of the same asset as of the same date that are very far apart, $2 million versus $20 million for example, is that public trust in the appraisal profession is eroded,” Konikoff said