Published in the September/October 2012 issue of REIT magazine.
Bill Garber serves as the liaison to the Appraisal Institute’ Government Relations Committee and the AI Client Advisory Board, as well as the Treasurer of the Appraisal Institute Political Action Committee. He has a B.S. degree from Oregon State University, and is currently seeking a Master’s Degree in Public Administration from Walden University.
How has the process of appraising commercial properties changed in the past decade?
We found that it’s necessary for appraisers to shift from analyzing properties primarily on a transaction basis to providing more analysis and insight in fundamental market and marketability (studies) analyses. It is mandatory that the analyst (appraiser) understand the reason why the investor purchased investment properties, and to understand why a specific property was chosen over competing investments and properties.
This assists in forecasting the reasonableness of occupancy levels and rental changes in the future based on estimates of current and future supply-and-demand relationships. This will also assist the client in risk management and in the positioning of a specific property or a portfolio of properties in the future.
Also, technology and social media have made commercial properties accessible to a world-wide audience of prospective buyers and sellers. With this advanced information availability, appraisers have to keep up with the changes in order to be as familiar with the property types they appraise as the “market.”
What are some of the challenges associated with appraising properties in difficult market conditions?
The primary challenge is data availability. Appraisers rely on sale prices and lease rates, and when there is a dearth of this information the appraiser has to widen the scope of his/her data search.
When appraising geographically or by transaction dates, the appraiser must be aware of differences that might or should require adjustment. Geographic competency is a must. Markets dominated by distressed sales are more problematic as there is divergence of opinion on whether distressed sales should be used as true “comparables.” Judgment and expertise is critical.
What are some of the top regulatory issues impacting appraisals today?
We have seen a strong move worldwide in favor of fair value financial reporting. This is different than the depreciated cost accounting model found in current U.S. GAAP accounting. Under the International Financial Reporting Standards (IFRS), fair value is encouraged, and it is used widely in many parts of the world. It’s slowly coming to the U.S.
This means for real estate valuations, oftentimes, financial statements can be supplemented with independent, third-party data and opinions of value. Often, under IFRS, the valuation reports are actually footnoted within the financial statement. This is a way for a company that invests in real estate to be more transparent about the assets held in its portfolio. Appraisal Institute members can help REITs, pension funds and other institutional investors in actually attracting capital through enhanced investor information.
How can commercial real estate owners prepare for a fair appraisal?
The owner/developer needs to realize that the appraiser is an objective third party whose goal is to develop and report an opinion of value that is reliable in the given market. This is difficult for the owner in some lending scenarios where the borrower is not the decision-maker on who is hired to do the appraisal.
The owner needs to cooperate and provide the appraiser with as much information as possible related to the cost of the project, lease rates, expenses, etc., and any special characteristics that the property has relative to competition.