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REAL ESTATE APPRAISALS

What is an appraisal?

An appraisal is a professional appraiser's opinion of value.  The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser.   Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial buildings and land.  The reasons for performing a real property appraisal vary.  They are usually required whenever real property is sold, mortgaged, taxed, insured or developed.  For example, appraisals are prepared for mortgage lending purposes, tax assessment and appeal of assessment, negotiation between buyers and sellers, government acquisition of private property for public use, business mergers or dissolutions, lease negotiations and more. 

What is the role of the appraiser?

An appraisal is a professional appraiser's opinion of value.  The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser.   Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial buildings and land.  The reasons for performing a real property appraisal vary.  They are usually required whenever real property is sold, mortgaged, taxed, insured or developed.  For example, appraisals are prepared for mortgage lending purposes, tax assessment and appeal of assessment, negotiation between buyers and sellers, government acquisition of private property for public use, business mergers or dissolutions, lease negotiations and more. 

What is an MAI Designation?

The MAI membership designation is held by professionals who can provide a wide range of services relating to all types of real property, such as providing opinions of value, evaluations, review, consulting and advice regarding investment decisions, among others. Property types may include commercial, industrial, agricultural, residential, vacant land and others. 

To become a MAI Designated member of the Appraisal Institute, an individual must:
    1.  have good moral character;
    2.  meet standards and ethics requirements;
    3.  pass rigorous education requirements;
    4.  pass a final comprehensive examination;
    5.  submit specialized experience which must meet strict criteria; and
    6.  receive credit for the demonstration of knowledge requirement.

These individuals have the necessary commercial property valuation experience and knowledge to produce a valuation that instills confidence. MAI Designated members agree to adhere to  the Appraisal Institute code of professional ethics and standards of professional appraisal practice, underscoring their commitment to sound and ethical professional practice.

Continuing education requirements help MAI Designated members stay informed of developments pertaining to real property valuation, enabling them to provide valuations reflecting the latest in professional practice.

The MAI designation has long been recognized by courts of law, government agencies, financial institutions and investors as a mark of excellence in the field of real estate valuation and analysis.

What is market value?

The most commonly used definition of Market Value is as follows:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.  Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
the buyer and seller are typically motivated;
both parties are well informed or well advised, and acting in what they consider their own best interest;
a reasonable time is allowed for exposure in the open market;
payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and 
the sale price represents the normal consideration of the property sold unaffected by special or creative financing or sale concessions granted by anyone associated with the sale. 

Source: 12 C.F.R. Part 34.42(g); 55 Federal Register 34696, August 24, 1990, as amended at 57 Federal Register 12202, April 9, 1992; 59 Federal Register 29499, June 7, 1994.

What is the Highest and Best Use (HBU) of a property?

The highest and best use of a property is defined as the reasonable and most probable use that will support its highest present value.  The highest and best use, or most probable use, must be legally permissible, physically possible, financially feasible and maximally productive.  The highest and best use concept is based upon traditional appraisal theory and reflects the attitudes of typical buyers and sellers who recognize that value is predicated on future benefits.  This theory is based upon the wealth maximization to the owner, with consideration given to community goals.  A use which does not meet the needs of the public will not meet the above highest and best use. 

What are the Approaches to Value?

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There are three general groups of methodologies for determining value.  These are usually referred to as the "three approaches to value," which are independent of each other.

Cost Approach:  This approach is based upon the principle that the value of the property is significantly related to its physical characteristics, and that no one would pay more for a property that it would cost to build a like property in today's market on a comparable site. 

Income Approach:  This approach is based on the premise that properties similar to the subject are income producing, and that investors purchase these properties based upon their income producing ability.  In the income approach, market rents for the subject property are estimated, the applicable operating expenses are deducted and the resulting net income is capitalized into a value estimate.  This method is known as Direct Capitalization. Another method of the income approach is the Discounted Cash Flow Analysis.  This approach follows that same methodology as the direct capitalization, but project cash flows over a typical investor holding period.  This approach is particularly meaningful for properties that have multiple tenants with varying lease terms.  This approach is also useful in analyzing properties that are not stabilized, or have contract rents that differ substantially from market rent.

Sales Comparison Approach:  This approach is based on the principle of substitution. This principle states that no one would pay more for the subject property than the value of a similar property in the market.  This approach analyzes sales of comparable properties with regard to the nature and condition of each sale.  Comparisons are made for varying physical characteristics

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COMMERCIAL REAL ESTATE

What things do I need to consider in analyzing commercial space?

There are a number of considerations in selecting a commercial site. Depending on the type of business and how it operates, the following factors may be of great importance: location (near consumers, clients, interstate highways, vendors, airports, etc.), cost (base rent, triple net charges, build out cost, utilities, etc.), zoning restrictions and private covenants, traffic counts, access, visibility, available signage and parking, tenant mix and neighborhood demographics.


How are lease rates quoted for commercial property?


Typically, with commercial properties, lease rates are based on the annual cost, per square foot, of the leased space. Thus, to determine the monthly rent for a property, one would need to multiply the quoted rent per square foot by the number of square feet being leased. The resulting product is the annual rent for the leased premises. That number should then be divided by twelve to arrive at the monthly rent figure. One must then know whether the quoted rent is a gross rental rate, gross plus utilities or a triple net rate.   
Example: 500 square feet x $10 per square foot = $5,000 annual rent. $5,000 annual rent / 12 months per year = $416.67 rent per month. 

What is the difference between a net lease and a gross lease?
Net and gross are different ways of quoting rent. A gross lease means that the stated rental rate includes the major expenses from real estate taxes, property insurance and common area maintenance, and that no additional rent for those items is required to be paid. In an absolute gross or full service lease, the quoted rate will include basic utilities such as electricity, gas, water and sewer. A triple net or NNN lease is one where the rent is quoted as a base rent net of, or not including, the expenses for real estate taxes, building insurance and common area maintenance. These three expenses, as well as the utilities, are an extra charge over and above the base rent. Under a NNN lease, the tenant will also be responsible for utilities in addition to the NNN expenses. In between a gross rental and a NNN rental is a gross plus utilities rental where the quoted rent covers the taxes, insurance and maintenance expenses but does not include utility charges for the leased premises such as gas, electricity, sewer and water. Typically, a tenant will pay for its own telephone and internet services under any of these lease types.


What is a typical amount for NNN charges?


The amount of NNN charges will vary depending on the type of property, its location, its size and how fastidious or frugal the property owner is in managing the property. In years of heavy snow fall, for example, the NNN charges will be higher. There may also be repairs or updates required for common areas that increase NNN charges. Real estate tax and insurance rate variations can also impact the amount of NNN charges. Essentially, a gross lease places the risk of increases in these expenses on the landlord while a NNN lease places the risk of increase in these costs on the tenant(s). In most situations, the landlord will estimate the total amount of the NNN expenses for the year and the tenants of the building will pay estimated monthly installments of the NNN expenses as additional rent during the year. At the end of the year, the actual expenses will be reconciled with the estimated expenses and the account will be trued up and any over-payments by the tenant will be credited to rent while any under-payments are to be paid within thirty days by the tenants. In a multi-tenant building, the tenants will pay these expenses proportionately in the same ratio that their square footage of space bears to the total square footage held out for rent in the building. In the event some of the space in the building is vacant, the property owner will generally have to bear that proportionate amount of the NNN expenses.
 

What are CAM charges?

CAM stands for common area maintenance and typically includes the costs of snow removal, lawn mowing, common utilities, janitorial services for common areas, etc. Landlords and tenants should be careful to note all the things that can be included in CAMi charges and whether it can include things such as management fees, administrative costs, seasonal shopping center decorations, etc. How can using a broker help me if I am looking for space to lease? A competent real estate broker can be of great assistance to a prospective tenant in helping the client to understand and recognize all of the factors that should be considered when making a leasing decision. A broker will also likely have knowledge of past transactions and future trends that can help in making a leasing decision. The broker will provide advice on site selection, rental rates, build out issues and a myriad of other issues facing a prospective tenant.


What is a letter of intent?

A letter of intent is a non-binding document signed by a prospective tenant or buyer and expressing the primary deal terms of the transaction such as price, term, build out, etc. It is generally not considered to be a binding document and does not contain the level of detail of a final binding contract document such a lease or a purchase agreement. It is simply a good faith statement that the tenant or buyer is willing to lease or buy the property on the terms stated if all other conditions can be agreed upon. Often a letter of intent will be signed subject to various contingencies such as licensing, financing or agreement on terms that cannot yet be solidified.  
Typically, a letter of intent is just that - a statement of intent and not a binding contract. However, the exact language of the letter of intent should be reviewed to make sure that the language used is not that of a binding contract.

What are tenant improvements?


Tenant improvements are the improvements or remodeling tasks that need to be completed before the tenant can use the leased premises as intended. This can be a moot issue if the space is move in ready, or can involve construction of an addition to a building or a significant structural change to the building. 

Who pays for tenant improvements?

The cost of tenant improvements is typically negotiable as are other portions of a lease agreement. Often, a property owner will offer a stated build out allowance with new construction property ranging from $10 to $30 per square foot to assist the tenant with build out expense. With space that has previously been built out, the property may or may not offer an allowance to the tenant. The amount of money that a property owner will be willing to offer to a tenant may depend on a number of factors including the length of the lease term, the rental rate the tenant is paying, the nature of the improvements the tenant wants to build and how usable they will be by subsequent tenants, and the financial strength of the tenant. When a tenant is evaluating a build out allowance, the tenant should be clear as to what improvements, if any, will be made by the owner prior to the allowance figure being applicable. In other words, will the allowance apply to a dirt floor with no interior walls, or will it apply to space that already has a concrete floor, constructed demising walls and plumbing and electrical utilities brought to the Leased Premises.

What is a 1031 Exchange and how does it work?

A 1031 exchange is a method of trading properties that, under Section 1031 of the Internal Revenue Code, is done without the current payment of tax on the capital gain. Rather, the owner's tax basis in the property is transferred to the replacement property received in the exchange. When a property is exchanged in accordance with the rules promulgated by the IRS, the tax on the gain is not eliminated, but is deferred until the replacement property is subsequently sold or transferred. By continuing to elect Section 1031 treatment on subsequent real property exchanges, a property owner can defer taxes indefinitely. Another section of the tax code allows heirs of a deceased property owner to inherit the property at a stepped up date of death fair market value tax basis, thus eliminating the capital gains tax entirely and leading to the strategy of swap 'til you drop transactions. Under the IRS rules, once a taxpayer sells a property, he or she is allowed a specified time period to identify the replacement property and then to close on its acquisition. At no time during this process, however, can the taxpayer have access to the sale proceeds from the first transaction. Thus, those funds need to be held by the title company or other qualified intermediary until used to acquire the replacement property. There are many technical requirements for this type of exchange, and we can help connect with the right people to prepare the necessary paperwork and guide you through the process