Navigating the Appraisal Process
- 1. Navigating the Appraisal Process Mitchell Simonson, MAI Managing Principal Chadwick Appraisals mitch@cwrea.com 952-881-1181
- 2. My goal today is to share some ideas to enable you to get more done in less time and eliminate many of the pain points of the appraisal process so that your clients/borrowers are satisfied and you achieve your expected outcome. That’s why we are here today so let’s get started! Objective
- 3. Insights will be shared from the appraiser and bank appraisal review perspectives to help lenders communicate with the borrower at the onset of the real estate financing process. Lenders – How Does This Help You?
- 4. I believe it’s important for appraisers to communicate with their clients to avoid surprises and ensure the appraisal process is as smooth as possible. My core passion is helping our clients make sound investment decisions and solve real estate problems to achieve their financial and business goals. Lenders, what’s in it for you?
- 5. Lenders work with real estate investors and owners of small, medium and large businesses (borrowers) to help them secure financing to purchase and refinance real estate that fit their investment criteria and fulfill their business needs. As investors and owners of businesses, these individuals carry many responsibilities, of which financing real estate is one component. The lender can help the borrower ease this process in several ways. Lenders, what’s in it for you?
- 6. Lenders have a desire to get the appraisal completed in a timely manner to assist the borrower in focusing on their business or other investment needs. Lenders are in communication with the bank reviewer/credit analyst from the onset and want to ensure the appraisal is proceeding without any major setbacks. If something comes up that may impact delivery or information is missing, it is important for the lender and appraiser to inform the bank reviewer/credit analyst. Lenders, what’s in it for you?
- 7. An appraisal is an objective, impartial, and unbiased opinion about the value of real property prepared by a State Licensed or Certified professional appraiser. What is an appraisal?
- 8. The role of the appraiser is to provide arm’s length, third party, neutral, and unprejudiced opinions about the value of real property — provide assistance to those who own, manage, sell, invest in, or lend money on real estate. Appraisers assemble a series of facts, statistics, and other information regarding specific properties, analyze this data, and develop opinions of value. What is the Role of the Appraiser?
- 9. A. Lenders B. Property Owners C. Accountants D. Property Managers E. Brokers and Salespersons F. Attorneys G. Land Planners H. Surveyors and Engineers Other Experts Appraisers work with
- 10. This is a decision where the lender can help the bank appraisal reviewer/analyst. In solving any problem including an appraisal problem, there are three basic steps to the process: Identify the problem, Determine the solution (or scope of work), and Apply the solution. Defining the Scope of Work
- 11. USPAP requires that intended users be identified at the time of the assignment, not after it's completed. For SBA loans, the U.S. Small Business Administration needs to be included as an intended user. USPAP states adding an intended user after agreeing to the scope of work is a new assignment. Intended Use/Users
- 12. Does the collateral match what’s included in the appraisal? The borrower may own multiple properties, sometimes in close proximity to one another. It is very helpful and can save time and avoid later questions and scope of work revisions to identify the actual property to be appraised. It is important to clarify if adjacent parcels are owned by the borrower and if they are to be included in the appraisal. Helpful information includes tax parcel numbers, legal descriptions, number of buildings, building size, etc. What property should be appraised?
- 13. Fee Simple - The fee simple interest is the most complete form of property ownership. Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. Examples: Owner occupied properties don’t have a lease in place and so the property is appraised based on market rents. Some building owners may structure a lease with a separate related entity that operates the business. These leases are not considered arm’s length and generally not relied upon. A requirement for SBA – EPC & OC. Key Appraisal Items to Communicate Fee Simple Interest
- 14. Leased Fee Interest - The ownership interest held by the landlord, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires. Examples: A building owner has a single lease or multiple leases with tenants. When a property has leases in place, even at market rates and terms, the interest appraised is typically leased fee. The value may be the same as fee simple, but the interest is identified as a leased fee. Leased Fee Interest
- 15. Sometimes, a building will have all short-term (less than 12 month) leases. Most lenders will request the fee simple interest be appraised. The understanding here is the tenants could vacate and a more reliable value is provided by the fee simple analysis based on market rents. Fee Simple/Leased Fee cont.
- 16. Title work Environmental Information Purchase Agreement Income Information – More detail later New construction – Actual cost statements, plans, material specifications, etc. Typical Request For Information Appraisal checklist Helpful Items to Provide
- 17. What is the actual occupancy of the property? Lenders, prior to sending the loan request to the review appraiser, find out what the building occupancy is. If a building has significant vacancy (above market), more than one value is generally required. This simple step ensures the proper bid request is made. Prospective Values
- 18. Is the borrower planning to make substantial renovations or occupancy changes to the property or is the property proposed new construction? Upon Completion and Stabilization What items seem to provide greater ROI? Items that help lower the effective age, useful for multiple parties Items that are difficult to support? Super improvements As Is and Prospective Values
- 19. The Appraisal Institute Defines Highest and Best Use as - the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legally permissible, physically possible, financially feasible, and maximally productive. Highest and Best Use
- 20. Key factors to consider, outstate locations, property types, etc. Employment – want access to the proper labor force Housing – Selecting a location where current and future employees can find housing can be crucial to attracting and retaining talent. Logistical Accessibility – Each property type has different needs CRE: Finding the Right Location for Your Business
- 21. Cost Approach Estimated by adding the value of the land to the current cost of constructing a replacement for the improvements and then subtracting the amount of depreciation in the structures from all causes. Most relevant for new and special use properties. Approaches to Value
- 22. Applied by comparing the subject property with sales of similar properties. SBA Requirement – Sales Comparison Approach is always required. Location, physical characteristics, etc. Analyzed based on best unit of comparison Sales Comparison Approach
- 23. Arm’s length vs. related party leases Historical Income & Expense Statements – Verify the owner’s consolidated statements match up with tax returns Signed lease documents, detailed rent roll, etc. Income Approach – Items to note
- 24. This approach converts the anticipated net income from ownership of a property into a value indication through capitalization. Income-producing real estate is typically purchased as an investment, and earning power is the critical element affecting property value from an investor’s point of view. Potential Gross Income - Vacancy and Collection Loss Effective Gross Income - Operating Expenses = Net Operating Income / Capitalization Rate = Value Income Approach
- 25. A property’s condition can impact the value. A structure can have a functional utility and above average design, but poor workmanship and inferior materials will affect value. Deficiencies such as inferior materials increase annual maintenance and utility costs and adversely affect the property’s marketability. Conversely, properties designed or built with materials that exceed market expectations make it difficult to fully recapture the cost. Most buyers will not pay for these excess costs. Part of the original investment may be recaptured by the original owner through lower maintenance expenses. To help achieve the greatest return on investment, a careful selection of building materials and construction methods must be chosen and used. From an appraisal perspective, the character, quality and appearance of building construction are reflected in each of the three approaches to value. Property Quality and Condition – Impact on Value
- 26. Reliance Letters - Per USPAP, appraisers are not allowed to assign an appraisal over to another bank. This is considered a new assignment. However, Can lenders accept appraisals transferred from another lender? I have seen some banks assign the appraisal over to another bank. A lender may accept an appraisal from a different lender if the appraisal is obtained in a manner consistent with Appraiser Independence Regulations. Reliance Letter/Transfers
- 27. What documentation is required during an appraisal transfer to demonstrate that the lender transferring the appraisal to another lender is complying with AIR? Each lender must develop its own documentation requirements to ensure compliance with AIR, based on its business model and processes. AIR allows Lender B to originate a loan using an appraisal transferred by Lender A. Lender B determines with written assurances that the appraisal was obtained in a manner consistent with AIR. This conforms to Lender B's requirements for appraisals and is otherwise acceptable. Appraisal Transfers
- 28. Retail – Cap rates initially compressed in early 2016 then stabilized and have ticked up slightly in the past 30 to 90 days. For strong credit, triple net tenants, cap rates are about 5.0% to 6.0% and about 6.0% to 7.0% for moderate credit tenants. Multi-tenant retail centers cap rates tend to be slightly higher in the range of about 7.0% to 8.5%. Class C properties, particularly in outstate MN exhibit a wide cap rate range and can approach 10% or higher, depending on the tenant mix, location, etc. 2017 Minneapolis/St. Paul Retail Quick Overview
- 29. Industrial - Continued growth of ecommerce is helping fuel industrial development and change space need requirements. Limited supply exists for owner user buildings less than 25,000 square feet. 2017 Minneapolis/St. Paul Industrial Quick Overview
- 30. Office - Bifurcated submarkets continue to exist in the Twin Cities. Some very strong submarkets and buildings with good rent growth and other markets or buildings remain challenged. Several build-to-suit office buildings, impacts multi- tenant space, good for long term commitment to Twin Cities 2017 Minneapolis/St. Paul Office Quick Overview
- 31. Multi-Family - Cap rates for Class A properties were pretty flat in 2016. Cap rate compression continued for Class B and C properties, particularly with the wider rent spread. Cap rates for urban core Class A apartments have been in the approximate range of 4.5% to 5.0% and 5.0% to 5.5% for suburban Class A product. Cap rates for stabilized Class B range from about 5.5% to 6.25%. Cap rates for Class C properties saw even more compression and are about 6.0% to 6.75%, with some dipping below 6%. 2017 Minneapolis/St. Paul Multi- Family Quick Overview
- 32. Communicate with bank analyst “what property should be appraised” Detail scope of work – think Fee simple vs. Leased Fee and type of value(s), Provide the information, income statements, actual cost statements, plans, material specifications, etc. Recap
- 33. Want to learn more about the latest real estate trends? Email mitch@cwrea.com to join our monthly newsletter to receive the latest market trends and updates! Questions
- 34. Mitchell Simonson, MAI Chadwick Appraisals 952-881-1181 mitch@cwrea.com Thank You!