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Advice for Appraisal of new Retail construction

MikeMaraghy

Thread Starter
Freshman Member
Joined
Nov 1, 2019
Professional Status
General Public
State
Minnesota
Good morning, and first of all, I've wanted to thank everyone on this board for years. While it's an uncomfortable situation that's caused me to activate an account to post a thread, I am thankful for the opportunity to say thank you. Thank you, thank you, thank you! Your guidance has been invaluable.


I have a rather unique situation that I'm looking for some advice on please.

We worked with a consultant on CRE advice for a few months at the start of this year. There is a new, seven unit, retail strip that will be delivered as Cold Grey Shell. We plan to purchase 3 of the units. The reason for the consultations was to learn more specifics about the local CRE market: Rents, vacancies, traffic patterns, the market's average tenant improvements, etc. This half of the city is only 15-20yrs old so there's very little data. We spent about 5 hours together.

It turns out most units are being sold to owner-occupants, but we are not. We do have a potential tenant that's been alongside us all year and is ready to occupy the space. The consultant has been aware that we have a potential lessee (a restaurant) and also that we've been in quite a battle with the developers over who's occupying the other units. Here's the problem:

This firm was the firm chosen to appraise the property by our bank. We had no idea about that until we received the appraisal - $500k under purchase price. Here are some facts:

- They assumed we were owner occupants
- They included information from our private sessions in notes areas. Here's one of them: "The subject is comprised of (3) contiguous retail/condo units. The owner is planning to occupy 1-2 of the units with a pizza restaurant. The remaining units have an uncertain future use. The buyer reportedly was interested in the units to prevent another restaurant from occupying the units."
- This is false information
- The Income Approach valued the building at a great number - and then proceeded to deduct the cost of building out the space. They used a blended rate of $100/sf for all 3 of the units' total square footage, resulting in one single deduction of over $415k.

It is our opinion that this firm's assumption of owner occupancy is why they believe we'd be responsible for such an egregious build out expense.

Since most of my natural questions would require speculation as to the behavior of the appraiser during our next steps, I’ll instead lay out our plans to move forward. I would love to hear any opinions on what other measures we could/should take. We’re aware we can go to a new lender and begin the process with a new appraiser, but we’d like to stay with this lender and have already been instructed by their Board that the same appraiser must be used if we wanted to take another run at it. We believe the below measures would be suffice.

We will have an executed lease with the restaurant’s tenant for 1 unit.

The lease will naturally include detailed information on the responsibility of build out and expenses.

The lease requires significant documentation of costs and funds. (signed GC agreement, proof of deposit paid to GC, proof of funds available for the balance of the project, proof of funds for operating capital, and a significant security deposit of 50k to be held for 24months)

We will have a detailed GC bid to complete the other 2 units – bringing them from dark grey shells to completed state – running HVAC, lighting, flooring, painting, completed bathroom, etc. This bid amounts to $32.50/sf to complete.

We have an executed Listing Agreement with our leasing brokers, Colliers International.

All of this documentation will be provided to the appraiser.

Please tell me we’ll be ok! Thank you in advance for any help. Your time is already immensely appreciated in just having read this.

Michael
 

DREA Dean

Sophomore Member
Joined
Apr 16, 2015
Professional Status
Certified General Appraiser
State
Pennsylvania
I know you think the appraiser did an exceptionally poor job, but in your post:

We will have an executed lease with the restaurant’s tenant for 1 unit.
We do have a potential tenant
Without a signed lease with a credit-worthy tenant, it may or may not be inappropriate to value the property based on owner-occupancy. It sounds like you don't have a signed lease yet, and it may or may not be with a credit-worthy tenant.

To me, the real question is whether the appraiser properly considered build-out costs for all comparable sales and rents. For example, in the sales comparison approach, did he/she use sales of similar retail condos, and properly consider what condition (cold dark, warm lit, etc.) the properties were in at the time of sale, and/or who paid to have them completed and ready for retail occupancy? What about actual completion of flooring, HVAC, etc.? Are you paying more than buyers of the other units in your project? Were these sales included in the appraisal?

In the income approach, did the appraiser analyze the build-out and age/condition of each property? Are his rent comps appropriate, and is his market rent conclusion reasonable?
 

MikeMaraghy

Thread Starter
Freshman Member
Joined
Nov 1, 2019
Professional Status
General Public
State
Minnesota
I know you think the appraiser did an exceptionally poor job, but in your post:





Without a signed lease with a credit-worthy tenant, it may or may not be inappropriate to value the property based on owner-occupancy. It sounds like you don't have a signed lease yet, and it may or may not be with a credit-worthy tenant.

To me, the real question is whether the appraiser properly considered build-out costs for all comparable sales and rents. For example, in the sales comparison approach, did he/she use sales of similar retail condos, and properly consider what condition (cold dark, warm lit, etc.) the properties were in at the time of sale, and/or who paid to have them completed and ready for retail occupancy? What about actual completion of flooring, HVAC, etc.? Are you paying more than buyers of the other units in your project? Were these sales included in the appraisal?

In the income approach, did the appraiser analyze the build-out and age/condition of each property? Are his rent comps appropriate, and is his market rent conclusion reasonable?

We take all of the fault for not having these documents prepared for the first round. I'm not blaming anyone for anything and we greatly value all lessons learned. We will have all of this documentation finalized before re-presenting the property to the same appraiser. They are a credit worthy tenant. They also have over 500k in cash that they're ready to plow into our space!

My apologies for not mentioning these: In the Sales Comp approach, they reduced the value of each comp by 15-40% to compensate for it being unfinished. There was no reference at all to condition at time of sale, nor what differentiated a comp being reduced by 15% vs ones that were reduced by as much as 40%. There was no reference to whose responsibility those costs were. All 3 approaches came out very close to each other.

We had the earliest closing date. That's long gone now of course and 1 other unit has since been closed on. The others will close very soon as well. We are paying less than the others.

The rent comps are appropriate.

Thank you!!!
 

DREA Dean

Sophomore Member
Joined
Apr 16, 2015
Professional Status
Certified General Appraiser
State
Pennsylvania
With closed sales and firm contracts on the other units, that should make the sales comparison approach easier and better for you. Same with having an actual signed lease that spells out the rent and who pays for build-out in the income approach.

TI/build-out is a fairly tricky part of the income approach. Not because it's hard to analyze, but because data is often incomplete regarding all of the comparable sales and rents an appraiser uses. Each sale and rent involved negotiations, and getting the complete picture on build-out is often difficult. Good luck!
 

Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
As you indicated your focus should be who pays build-out since this is where the beating comes. If you obtain a signed lease where tents are taking on paying for much of this, it would be hard for the appraiser to ignore the most significant market evidence as to who pays what (at this location). When you obtain the lease you should be okay, because if the appraiser ignores this you have a very good argument to your lender that they are either forgoing the facts or intentionally trying to sink the deal.

Most appraisers will do the right thing when presented with market evidence, but like any profession, there are exceptions. Just stay polite, which I see you can do elegantly, and provided the facts. Regularly, when no data exist, or where there is scrambled information appraisers welcome clarity. Things will work out if all that you say is accurate.
 

PL1957

Senior Member
Joined
Jul 19, 2004
Professional Status
Certified General Appraiser
State
Illinois
I'm going to be a little contrarian on this ... in my experience, it's unlikely that the appraiser will move the value significantly, regardless of the information you provide. Most appraisers are, by nature, highly opinionated and tend to be very defensive of their opinion. Rightly or wrongly, they feel a significant change in value will damage their credibility with the client.

I would check with the lender as to whether they were aware of the prior service you had received from the appraiser; it's a required disclosure. If they weren't, you may be able to convince them to get a new appraisal, otherwise, you're probably going to have to look for a new lender ...

Just trying to provide realistic advice ...
 

DREA Dean

Sophomore Member
Joined
Apr 16, 2015
Professional Status
Certified General Appraiser
State
Pennsylvania
.
Rightly or wrongly, they feel a significant change in value will damage their credibility with the client.

I would check with the lender as to whether they were aware of the prior service you had received from the appraiser; it's a required disclosure. If they weren't, you may be able to convince them to get a new appraisal, otherwise, you're probably going to have to look for a new lender ...
/QUOTE]

Not bad advice.
 

Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
I'm going to be a little contrarian on this .
I am not sure you are being contrary because I would, most likely, do the same if someone wanted it for free. However, new information means a new assignment and while it may have a similar scope, during the last report germane data, that could have an effect on the value, was excluded. That is not the appraisers' fault! You're right if someone wants a freebee under such conditions. No one will take the job (or at least very few). But again, I would assume most of us would consider this a new assignment. If anyone wants to decline the new assignment, that is a business decision, but if they are writing reports (regardless) why should someone care when fairly compensated? An appraisal is an appraisal, does it make a difference here? I am thinking there is no significant risk above and beyond what was taken in the first place. I do not believe you are saying appraisers won't change it because they are stubborn.....so I have to believe more exist in the thought pattern that I am not understanding?

If you are saying some appraisers are stupid, you'll get little argument from most of us, but the bulk of them do not mind working. That is apparent in the bidding process. Just some thoughts
 

NP_MAI

Member
Joined
Apr 10, 2018
Professional Status
Certified General Appraiser
State
Florida
It sounds like the appraiser's fit out costs were significantly higher than your expected costs. $32.50 PSF is pretty low for most retail space to go from gray shell to finished retail space. $100 PSF may be high for most retail, but not for all retail.

I think if you provide the appraiser with a signed lease, detailed fit out budget, and copies of the purchase contract you will be fine. I would also add that you should let your lender know that you are happy to pay additional fee for the appraisal given that the scope of work has changed.
 
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