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  #1  
Old 03-19-2013, 12:56 PM
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tsiegel tsiegel is offline
 
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Default H&BU as proposed

I just had a thought provoking H&BU conversation with a reviewer. He had just put an assignment out to bid of an existing restaurant facility built in 2008 that is proposed to be converted into professional office space. He wanted an as is and an as proposed value. However, he told me that if the H&BU was determined to be continued use as a restaurant facility, then just provide a valuation of the property as a restaurant and leave the as proposed analysis in the H&BU.

This seemed like a problem to me. This assumes that the H&BU of the property upon completion is still as a restaurant, however, once renovations have taken place, it may be no longer feasible to renovate it back to a restaurant.

I argued that if I don't provide a H&BU of the property as proposed, then I will not be providing an as proposed value at all. He disagreed and said that my as proposed value would be contained within the H&BU analysis. He also argued that there is only ever one H&BU analysis not a separate analysis for as is and for as proposed.

This didn't feel right... am I wrong on this? I tried to look it up in the 13th Edition, but did not find my answer.
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  #2  
Old 03-19-2013, 01:22 PM
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Marion Rhodes Marion Rhodes is offline
 
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Highest and Best use as vacant and ready for development.

This is a based on an HC that the land is vacant if it is already improved.

Highest and Best use as improved.

If the H&B use "as vacant" is different than what the existing improvements will support, it becomes a reconciliation under economic feasibility to convert the existing improvements to meet the highest and best use of the land if vacant. The current improvements may represent an interim H&B use of the land until it becomes economically feasible to to raze or remodel them to meet the H&B use as vacant.

So if the land were vacant, the H&B might be as a restaurant. However there is now an office building on the land. The costs to convert the office building to a restaurant are not economically feasible as the office building is a newer structure, generating income and the potential income difference between the land being used as a restaurant or as a office building is not sufficient to warrant a conversion of the office building. However, if the office building was old, run down and near the end of it's economic life with little income generation, it might be economically feasible to raze and replace it with a restaurant.

Two considerations, one analysis.

.
  #3  
Old 03-19-2013, 02:39 PM
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Though in practice this is not commonly done, we test all possible uses in the H&BU analysis. Everything. Then we start ruling them out. In the financial feasibility section you'd look at how much each possible use creates value. For example, you could calculate its converted use as a church or apartment or house or alternative retail use (even if they would have been ruled out in the Legal or the Physically possible use). In these situations, I've told my appraisers to get out one blank sheet of paper for each possible use. On each sheet, pencil out all of the reasoning and numbers for that specific use. . . so they don't get confused as they inevitably do when they try to write a jumbled H&BU.

The maximally productive use is the conclusion: That use which is best from the prior three tests. (Maximally productive use is not the time to introduce new arguments or data.)

So it is many appraisals within the H&BU of one appraisal. (Most of the time this isn't necessary as the conclusion is obvious, and appraisers are lazy.)

You then apply the applicable approaches to value to the one that is maximally productive. . . . Nevertheless, this wouldn't preclude fully flushing out in all the painful detail the As Proposed use, demonstrating that it results in the creation or destruction of value. This reviewer is being purist and saving you some narrative writing, but I wouldn't hold it against you in developing the valuation. Hypothetical conditions don't per se always result in higher value; it is a hypothetical and hence need not be the H&BU.
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Last edited by leasedfee : 03-19-2013 at 02:46 PM.
  #4  
Old 03-19-2013, 02:56 PM
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I guess where I get hung up is in the concept that I am providing an analysis as is and another analysis as proposed as of a future date.

Let's say as is, the highest and best use of the property is continued use as a restaurant.

However, as of the date of the as proposed valuation the improvements will have been altered and then represent professional office space. If it is not feasible to then convert the improvements back to restaurant use, the highest and best use, as proposed, should be a different conclusion.

I feel like I should be completing one H&BU for the as is valuation and one for the as proposed valuation.

Am I just confusing myself?
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Last edited by tsiegel : 03-19-2013 at 03:01 PM. Reason: added a sentence
  #5  
Old 03-19-2013, 03:15 PM
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You're over complicating it. For the moment simplify the problem by ignoring future vs. present.

Retail vs. Office:

Would they both be legal? Yes, proceed to next question.

Is it physically possible to be converted to office? Yes or no.

Financially feasible:
  • What's its value as retail?
  • What's its value as office?
Max. Productive:
  • Which one is higher? Which is most likely? Boom you're done.
You likely don't need to get into conversion costs, just yet. You're just doing a hypothetical of the value as if already office.

We're going to ignore (for the moment) the introduction of functional obsolescence caused by alternative uses (like an excessive or deficient parking ratio, etc.) This would factor into your adjustments.

The underlying land's H&BU is irrelevant unless it results in a greater value -- unless you do a Cost Approach.

Right now my colleague and I are valuing an office building near downtown that I've done several times since 1998. We've always concluded that the land's H&BU was office. This year we're switching land to multi-family as the H&BU. But who cares! The improvement has much more value than vacant. We're not doing a cost approach on this mid-century building.

Now, the building has storefront windows so it physically could be occupied by a retail user(s). It doesn't have visibility, traffic, parking ratio, or surrounding uses to support a retail user. Hence, retail is unlikely -- I don't need to crunch numbers for this opinion. Hence, the building remains office "as improved" H&BU.
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Last edited by leasedfee : 03-19-2013 at 03:21 PM.
  #6  
Old 03-19-2013, 03:30 PM
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Quote:
Originally Posted by leasedfee View Post
Now, the building has storefront windows so it physically could be occupied by a retail user(s). It doesn't have visibility, traffic, parking ratio, or surrounding uses to support a retail user. Hence, retail is unlikely -- I don't need to crunch numbers for this opinion. Hence, the building remains office "as improved" H&BU.
What if you were asked to provide a prospective value of the property specific to proposed conversion to retail? Obviously the as improved H&BU of the property as is is still office, but once the building is converted to retail, let's say it is no longer feasible to convert it back to office.

What then? How do you report that?
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Old 03-19-2013, 03:51 PM
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Usually our clients want to only know what it is worth if such n' such use.

Physically it is almost always possible to convert a use. I've been amazed at what architects can do. To use my example, in the financial feasibility section you can report that As Is office is $125/sf and that retail (with necesary renovations is (to fabricate #s) hypothetically $200/sf for a functional stable occupied building. But lacking parking, retail traffic, etc., analysis adjusts down to $180/sf. Conversion cost is $15/sf and retail renovation is $65. Thus the hypothetical value as if vacant retail building is $100/sf. The $125 trumps the $100, so the status quo as office remains. . . . As a general philosophical observation, the status quo usually endures in life because the forces of change (like capital costs, entrepreneurial incentive) are too great.

If it turns out that the as is retail value increases from $100 to >$125, then H&BU switches and you'd report the $180+ retail as H&BU as proposed/hypothetical/stable, and of course the As Is..

Most clients have already made up their minds about a conversion, so they often want to see the $125 As Is for FIRREA compliance and the $180 for lending.
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Last edited by leasedfee : 03-19-2013 at 04:06 PM.
  #8  
Old 03-19-2013, 10:37 PM
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I hate to peg myself as a moron here, but I can't find the answer in your example. I understand the mechanics if a H&BU analysis. The part where I get tripped up is on whether or not to complete a H&BU analysis as of a future date given a prospective valuation. Are you saying that the H&BU analysis should never be as of a future date?
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  #9  
Old 03-19-2013, 11:19 PM
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Absolutely consider time. I wanted to simplify it.

I think this answers your question. The value as of Today may be $xx for X use. The prospective value hypothetical value in 2 years from now may be $yy for Y use. The client may just want the stable everything-in-place hypothetical value.

Alternatively, the client may want you to consider conversion/lease-up costs. In considering time, add the income from current transitional uses until it switches to the new use. Subtract any discounts like demolition, conversion, or rent loss for lease-up.

Another way to look at it is the value Today for a gentrifying neighborhood or interim use could be, say,
(i) 5 years of NOI cash flows as an office,
(ii) year 6 as conversion cost and re-lease-up loss (and zero rent revenue), and
(iii) then perpetuity (years 7+) for a retail use.
You would throw all of this onto a time line. Many would start to use a DCF model, but it could alternatively be done as the present value of the future value of the building values (for year 7's retail use is the PV of all cash flows occurring from years 7+). You'd discount year 7 future value back to time =0. I don't think this is last method is what you're looking for, however.

You can see values and cap rates start to go funny in a gentrifying or interim use property as these increased/decreased rents and conversion costs become important, and over-ride the interim use's remaining cash flows. . . . . As an adjustment to a vacant parcel comp, tonight I was looking at a comp with some old houses generating interim rent, so I make a $1 to $2/sf downward adjustment to the land value for this extra interim income before it's razed (another adjustment) to estimate the alternative use's land value.
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Last edited by leasedfee : 03-20-2013 at 12:28 PM.
  #10  
Old 03-20-2013, 09:45 AM
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Thanks for staying with me on that.
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