Mixed-use condominium project - DCF or no?

[kbkil]

The proposed building I'm appraising has only four units, which wouldn't otherwise require a DCF. But, it's mixed-use with a commercial condo on the ground floor, which usually take longer to sell than residential condo's. Does this work still fall under the "under five units" rule and not require a bulk or discounted value? Do I need only to provide the individual unit value estimates, along with an as-is value, of course?

 

[J Grant]

The proposed building I'm appraising has only four units, which wouldn't otherwise require a DCF. But, it's mixed-use with a commercial condo on the ground floor, which usually take longer to sell than residential condo's. Does this work still fall under the "under five units" rule and not require a bulk or discounted value? Do I need only to provide the individual unit value estimates, along with an as-is value, of course?

? What is your assignment -to appraise each individual condo unit, or appraise the value of the building has a whole (or both?) If you are appraising individual units, would you provide a separate appraisal for each or 4 value opinions in one appraisal. Sounds like 4 residential units and one ground floor commercial for a total of 5?

I know in my area condos with a commercial use on ground floor can have a restriction on the kind of business run , such as light office or boutique retail use...though some perhaps have no restrictions as I've driven by condo buildings with a busy restaurant on ground floor.

 

[kbkil]

I'm appraising a four-unit new condo building -- three residential above a ground floor commercial condo. I know that five and over requires a DCF. Four and under usually doesn't -- I could give individual values per unit as well as the as-is. But does this requirement change if one of the units isn't residential?

 

[kbkil]

NM - but if anyone's interested here's what the AI has to say (from the MAI in Chicago in charge of ethics and standards:


The Interagency Appraisal and Evaluation Guidelines call for a “bulk value” (i.e., discounted for time and costs to sell) when there are 5 or more units (unless you can show that all would be sold within 1 year.)

USPAP doesn’t have 5 as a magic number here. If the assignment is to value 2, 6 or 200 (pick a number) of units as though sold together in one transaction, you must consider whether a discount (or even a premium) would be paid for acquiring them in bulk. You can’t simply value each one separately and then sum the values to get the value of the whole group as though sold in one transaction. This is in SR 1-4(e).

USPAP does permit you to provide 4 separate values of the 4 separate units. If this is what the client has asked for, yes, you can provide it.

 

[Terrel L. Shields]

I know that five and over requires a DCF

No, they require a discount calculation. That can be a singe point calculation or sinking fund or whatever. It does not require a DCF. The question is does the market suggest a discount is appropriate. In my opinion, you could parcel out the 3 residential at one discount rate and the commercial at another and prorate accordingly. Summation needs to be justified so if you can find a mixed use comp that is a key to hang your hat on.

 

[Deleted member 152047]

I would run a DCF or a DSO in all instances for what you are describing. That is what an informed market participant would likely do. You would conclude to an individual retail market value and then perform a sell out to arrive at an "as is" market value. If the H&B use is to rent them, then you could still provide an individual retail market value and perform a DCF to arrive at an "as is" market value. The "as is" market value would be considered a bulk value.

The sum of the parts does not equal the bulk value in almost all instances for a property like this. You will incur selling costs, marketing costs, lease-up costs, etc. in addition to time value of money issues.

 

[Deleted member 126639]

I would run a DCF or a DSO in all instances for what you are describing. That is what an informed market participant would likely do. You would conclude to an individual retail market value and then perform a sell out to arrive at an "as is" market value. If the H&B use is to rent them, then you could still provide an individual retail market value and perform a DCF to arrive at an "as is" market value. The "as is" market value would be considered a bulk value.

The sum of the parts does not equal the bulk value in almost all instances for a property like this. You will incur selling costs, marketing costs, lease-up costs, etc. in addition to time value of money issues.

Yeah, I agree with this. It's just so easy to do a quarterly DCF, there's really no reason not to do it. And the reality is for many market participants, the time value of money is less the retail sale, but the time to get permitting, construction, etc. I've done tons of small deals where it was a 1 year to get the point of sale, and I'd have everything sold in the last quarter. In many major cities in the northeast, the demand is huge - but if it's in a historic district, or worse, a conversion of a historic building, permitting alone could take a year.

Maybe there are markets out there where you can just grab a piece of land and throw up some condos without delay, but I'd say it's pretty rare. Even if I knew of such a market, I'd probably put in 1-2 quarters just to be on the safe side.

As well, the DCF, if you do it correctly the way developers use, can incorporate the equity return rate, which is what market participants care about.

I personally hate condo reports where they do a gross sellout, deduct construction/conversion costs, and put in an entrepreneurial incentive as no developer does that.

 

[kbkil]

I would run a DCF or a DSO in all instances for what you are describing. That is what an informed market participant would likely do. You would conclude to an individual retail market value and then perform a sell out to arrive at an "as is" market value. If the H&B use is to rent them, then you could still provide an individual retail market value and perform a DCF to arrive at an "as is" market value. The "as is" market value would be considered a bulk value.

The sum of the parts does not equal the bulk value in almost all instances for a property like this. You will incur selling costs, marketing costs, lease-up costs, etc. in addition to time value of money issues.

I would run a DCF or a DSO in all instances for what you are describing. That is what an informed market participant would likely do. You would conclude to an individual retail market value and then perform a sell out to arrive at an "as is" market value. If the H&B use is to rent them, then you could still provide an individual retail market value and perform a DCF to arrive at an "as is" market value. The "as is" market value would be considered a bulk value.

The sum of the parts does not equal the bulk value in almost all instances for a property like this. You will incur selling costs, marketing costs, lease-up costs, etc. in addition to time value of money issues.

Yeah, I agree with this. It's just so easy to do a quarterly DCF, there's really no reason not to do it. And the reality is for many market participants, the time value of money is less the retail sale, but the time to get permitting, construction, etc. I've done tons of small deals where it was a 1 year to get the point of sale, and I'd have everything sold in the last quarter. In many major cities in the northeast, the demand is huge - but if it's in a historic district, or worse, a conversion of a historic building, permitting alone could take a year.

Maybe there are markets out there where you can just grab a piece of land and throw up some condos without delay, but I'd say it's pretty rare. Even if I knew of such a market, I'd probably put in 1-2 quarters just to be on the safe side.

As well, the DCF, if you do it correctly the way developers use, can incorporate the equity return rate, which is what market participants care about.

I personally hate condo reports where they do a gross sellout, deduct construction/conversion costs, and put in an entrepreneurial incentive as no developer does that.

I agree. This is basically what I've done for at least 15 years -- discount over a period of months or quarters, based on the abosorption market data, and then deduct for marketing/advertising, general and admin, carrying costs, and profit, then discount using a reversion factor -- I've been using a reversion factor of 6% for several years as the market for condo's in Chicago is still good in stronger areas. I might go higher in areas where condo's aren't typically being built or where they're not selling well.