Condo Sell-out Analysis

[hastalavista]

Denis-if my posts were any indication, I am a little ambivalent about the entire concept. Here are a couple questions for you-
What does this mean in terms of property rights reduction? Say that you have X number of condos. They have a certain market value if sold on the open market individually and obviously, the deposits doesn't change that. Yes, there is a differential in cash flows, but if the bundle of rights are not altered, wouldn't the value be DCF+current value of deposits? Howard mentioned leased fee/ leasehold as an example. Though the example wasn't 100% synonymous, there is some relevance, based on the partitioning of rents to the whole property based on a ground lease, etc.
On the flip side, adding the current value of deposits opens its own can of worms-do you use the past deposits and bring them to current value by some risk-free interest rate. That would suggest a market value of less than 100% is appropriate.
If there is one thing that I feel strongly about, it is in reference to the effective date and whether the deposits are non-refundable or not. Making a refundable deposit nullifies this concept, as it becomes guaranteed at closing.

I definitely feel as if I'm walking between two titans in this discussion; I acknowledge Ken's significant experience, and Howard is my go-to person when I have a tough nut to crack; the time Howard has been willing to spend with me has been like a concentrated AI course, ranging from the atypical kinds of scenarios to the most basic and fundamental. I have found that as my fundamental knowledge has increased, my ability to deconstruct the atypical problems into fundamental components and solve them have increased.

In regards to the ownership rights, here's what I posted earlier:

It would seem to me that the rights being appraised are fee simple, subject to pre-sell contract terms.

I said that because I read Howard's reference to the fee simple/leased fee scenario.

 

[Gobears81]

It would seem to me that the rights being appraised are fee simple, subject to pre-sell contract terms.

I guess that I missed that comment. Regardless, that is the part that doesn't sit with me. If the MV is less due to deduction of deposits, it HAS to be a reduction of property rights. If you read up on fee simple bundle of rights, nowhere does it say anything like pre-sell contract terms. That probably comes across as a little sarcastic, but I don't really mean it that way. If they are requesting market value, it doesn't necessary need to be subject to anything. How about market value that is not subject to pre-sell contract terms?

Either way, I am envisioning some sort of investing value-added opportunities that are somewhat akin to this type of thing. If I lived in a hot market like California or Florida I'd be looking pretty closely at it.

 

[Ken B]

I'm just a newbie compared to some.

 

[Howard Klahr]

If the MV is less due to deduction of deposits, it HAS to be a reduction of property rights.

It is - what the developer is selling to the hypothetical investor is the as completed improvements that are subject to the terms of the pre-sale contracts. As I have stated previously in this thread, the unit buyers obtain an equitable interest in the property upon executing the purchase contracts. The hypothetical investor has to honor the terms of those contracts.

If you read up on fee simple bundle of rights, nowhere does it say anything like pre-sell contract terms.

Part of the bundle of rights is the ability to sell/transfer an interest in the property. That interest in the subject property has been acquired from the developer by the hypothetical investor but is subject to restrictions that are imposed by the pre-existing purchase contracts.

As I tried to explain earlier, it is somewhat like purchasing a property that is subject to the terms of an existing lease. The price paid is based on the value of the rights that are transferred. Both are market value and both only represent the property rights available at the time due to the existing contracts/lease.

The reason it is not investment value is it is not the value to a specific purchaser in that any potential buyer can be in the shoes of the hypothetical investor under the same terms - which are restricted by the existing unit buyers' purchase contracts

The reason developers have moved to this type of deposit arrangement is that in the market decline throngs of unit buyers defaulted on contracts and walked away. This modifcation makes that scenario less likely by having the unit buyers have more "skin" in the game.

 

[Ken B]

Out of curiosity, assuming that the cost approach value indication is consistent with the sell-out analysis value indication utilizing 100% of contract prices for the end units, what adjustment would be made to the cost approach if the sell-out analysis utilizing 80% of contract prices results in a lower value indication? External obsolescence? Can't be. Functional obsolescence? Don't think so. What then?

Bump

 

[Gobears81]

It is - what the developer is selling to the hypothetical investor is the as completed improvements that are subject to the terms of the pre-sale contracts. As I have stated previously in this thread, the unit buyers obtain an equitable interest in the property upon executing the purchase contracts. The hypothetical investor has to honor the terms of those contracts.


Part of the bundle of rights is the ability to sell/transfer an interest in the property. That interest in the subject property has been acquired from the developer by the hypothetical investor but is subject to restrictions that are imposed by the pre-existing purchase contracts.

As I tried to explain earlier, it is somewhat like purchasing a property that is subject to the terms of an existing lease. The price paid is based on the value of the rights that are transferred. Both are market value and both only represent the property rights available at the time due to the existing contracts/lease.

The reason it is not investment value is it is not the value to a specific purchaser in that any potential buyer can be in the shoes of the hypothetical investor under the same terms - which are restricted by the existing unit buyers' purchase contracts

The reason developers have moved to this type of deposit arrangement is that in the market decline throngs of unit buyers defaulted on contracts and walked away. This modifcation makes that scenario less likely by having the unit buyers have more "skin" in the game.

I like it.

Bump

I'm just brainstorming here, but leasehold interests are typically less than fee simple, but that doesn't in itself equate to economic obsolescence. Just as a property rights adjustment does not equate to obsolescence in itself. A partial interest and obsolescence are two different concepts. Personally, if I reviewed a report that gave 100% of the price, I wouldn't object. Conversely, I think that something like this could be objected to on the basis of simply having inadequate discussion. With that said, Klahr makes a strong case

 

[Ken B]

You are correct that a leasehold interest would typically be less than fee simple. And the way you estimate the leasehold interest is to deduct the value of the leased fee interest from the value of the fee simple estate. (Let's not get sidetracked into an argument that 1+1 doesn't always equal 2.) And the indication of value for the fee simple interest as indicated by the cost approach could be adjusted by the value of the leased fee interest to provide an indication of value for the leasehold interest.

But that is irrelevant to this situation. The investor is going to receive the fee simple interest in the project and will convey the fee simple interest to the end users when they close on their purchases. The investor needs no one else's permission or signature to convey the fee simple interest in those units to the end users.

So this example is moot to the situation.

The investor will receive, upon completion, the fee simple interest in the project. What is the market value of that fee simple interest? It MUST include the percentage of the revenue earned upon completion and transfer of units to end users which is being retained by the developer. And since it must include that percentage of the revenue earned, the value represented by the 80% of the revenue earned upon completion and transfer of end units to those purchasers CANNOT be market value.

That the developer is playing accounting tricks by somehow convincing end unit purchasers to allow a portion of the deposits paid for a unit to be used towards the construction of that unit, rather than retaining the deposit in an escrow account, is irrelevant to the market value of the property upon completion. The investor could insist that they receive 100% of the price paid for each end unit. Since a portion of those deposits would not be in an escrow account, the developer would have to pay that portion to the investor out of pocket. But the developer doesn't want to do that. The developer is telling the investor that the developer is going to keep 20% of the price paid for the end units and the investor can have the remaining 80% of the revenue from the units.

The investor is paying something less than market value of the project for the right to receive 80% of the gross revenue generated from the sale of end units.

 

[Gobears81]

One example that I keep thinking of is the purchase of the rights to tax credits in a LIHTC project. That is a partitioning of a fee simple (in the context that multi family is fee simple) interest. It is probable that there are other examples that I can't think of at the moment where one purchases a portion of the cash flows to perpetuity. Maybe one purchases the remaining lease term and another has the rights to the reversion? Could an appraiser not ascertain an MV opinion of solely the reversion? I agree that these examples are not entirely synonymous with this case, but partial interests are the crux of the debate at hand.

 

[hastalavista]

Ken-

I disagree with you.
The investor is paying market value for the rights it is acquiring, Those rights are "fee simple" subject to the pre-sale purchase contracts. In the pre-sale purchase contracts, the retail buyers of the units have already paid money to the developer that the investor is not entitled to when it purchases the project with those pre-sales.
It isn't purchasing the project as-if it will get the pre-sale down payments. It is purchasing the project as-is, with those pre-sale down payments already paid out. The project, as-is, fee simple, is worth what it is, as-is, fee simple, subject to those contracts.

The way to handle this in the cost approach is not to handle it within the cost approach (it isn't obsolesence, etc.).
The way to handle this in the cost approach is to make an adjustment to the concluded indicated value by cost approach.
Complete the cost approach; conclude an indicated value; adjust that value to reflect the impact of the pre-sale payments already made. That will provide the as-is market value, fee simple, subject-to the pre-sale purchase contracts.



If this isn't accounted for, then the value opined is fee simple, but not "as is".

I assume the assignment requires an as-is market value?

 

[Gobears81]

In Ken's defense, a prospective buyer could potentially be purchasing the (nonrefundable) deposits in addition to the remainder, which would yield a more straightforward sale and avoid the partial interests issue. As previously mentioned, if the effective date is further in the future than the deposit payments, that would probably require bringing the deposits forward at a risk-free rate. Is there market evidence that indicates that a buyer would more frequently purchase a partial interest in this type of scenario? I'm wondering if this is a case where there is more than one right answer.