As Is Value For A Project

[runner52]

Typically for new construction, I determine a property's "As Is" value by taking the stabilized value and deducting remaining construction costs and a contingency percentage (around 5%.). The remaining costs do not include profit or land value. That normally yields for me a reasonable estimate of the property's "As Is" Value which may have a structure, a foundation or even just cleared land.

For this project, it is a conversion/renovation project. An existing synagogue is being converted to a restaurant. As I normally do, I took the stabilized value and I deducted the developer's remaining costs, a contingency (5%) and then added back in the depreciation (of the existing improvements). My resulting As Is value didn't make sense. The buyer is buying the synagogue for $340,000. Whether it is worth it or not I don't know because I was not asked to evaluate that purchase. I would think that the purchase price would equate to the property's "As Is" value but maybe not?

Here is what I did:
At Stabilization Fee Simple Market Value $970,000
Less: Owner’s remaining build-out costs ($895,122)
Less: Contingency / Profit (5% of cost to complete) ($44,756)
Plus: Depreciation of existing building (at completion) $159,846
Estimate of As-Is Value $189,968
Rounded $190,000

My questions as to whether I have done this accurately are:
1) Do I use the correct owner remaining build out costs? I arrived at this number by looking at the total development costs. I included soft costs (title, escrow, etc.) also. Do I include these costs or eliminate them? The developer costs include hard costs, contingency, developer profit and permits. What number do I use to determine "remaining build out costs"? ALL COSTS?
2) I depreciated the existing improvements in the Cost Approach. Is it accurate to add these back to get the "As Is" value?

The buyer is purchasing the property as is for $340,000. Does that play in at all with As Is Value? I have no idea if his purchase was evaluated but I was not asked to do so. I only talked to the broker who sold it. I look at "as is" of $190,000 and his purchase price of $340,000 and it doesn't look right. Help.

Thanks.

 

[hastalavista]

Was the original purchase as a functional synagogue? If so, what was the value as-was (functional synagogue)?
I understand that isn't your valuation problem but it might provide an indication of why the purchase price was what it was.

 

[Terrel L. Shields]

he buyer is purchasing the property as is for $340,000. Does that play in at all with As Is Value?

Well, it could and I think is easier to evaluate the purchase vs. trying to estimate a market reaction to partial construction 'value'. But your way will work, and likely as accurate as any because no one is going to know what the "real" value is when the developer has a single unique project.

 

[Gobears81]

OP-I'm not sure if I understand the thought process behind adding in the depreciation of the building for the property, as is. With that said, not including that would suggest an as-is value of about $25,000, based on your formula, which I'm guessing would immediately strike you as not correct.

I've found in some similar cases that, if the project isn't feasible, deducting the cost to complete will understate the as-is value. It sounds like this is a partially completed project - what would the market's reaction be to the improvements made thus far if all work ceased? If the project is not, in fact feasible, you might have to get into a separate analysis to determine the as-is value, rather than a simple cost to complete deduction.

 

[runner52]

Was the original purchase as a functional synagogue? If so, what was the value as-was (functional synagogue)?
I understand that isn't your valuation problem but it might provide an indication of why the purchase price was what it was.

 

[runner52]

The restaurant owner purchased the synagogue. It was vacant although there was someone running a business from the basement. He purchased it for conversion.

 

[runner52]

OP-I'm not sure if I understand the thought process behind adding in the depreciation of the building for the property, as is. With that said, not including that would suggest an as-is value of about $25,000, based on your formula, which I'm guessing would immediately strike you as not correct.

I've found in some similar cases that, if the project isn't feasible, deducting the cost to complete will understate the as-is value. It sounds like this is a partially completed project - what would the market's reaction be to the improvements made thus far if all work ceased? If the project is not, in fact feasible, you might have to get into a separate analysis to determine the as-is value, rather than a simple cost to complete deduction.

 

[runner52]

The project does not appear to be financially feasible. I thought to add the depreciated value back in but I'm not sure that is correct. But you are right. Not doing that leaves me a value of $25,000. eek. I think a separate analysis may be accurate but I don't know what that looks like. The project has not started yet other than architectural and engineering plans completed. The broker noted that there were multiple interested parties; all interested in purchasing for a conversion. The location is great; right downtown and amongst government buildings and the capital. So location I'm sure plays into a lot of the interest.

 

[Howard Klahr]

Here is what I did:
At Stabilization Fee Simple Market Value $970,000
Less: Owner’s remaining build-out costs ($895,122)
Less: Contingency / Profit (5% of cost to complete) ($44,756)
Plus: Depreciation of existing building (at completion) $159,846
Estimate of As-Is Value $189,968
Rounded $190,000

1) The depreciated value of the existing improvements is irrelevant

2) What is the value of the land as if vacant and available for development?

3) Your reported As Complete-Stabilized Value is $970,000 less the renovation cost ($895,122) results in a remaining value of $74,878 which does not even account for other costs associated with this project. I'd bet the land value as if vacant is greater than $75,000. If so, how confident are you in your as completed value? If there is strong support that $970,000 is correct then you need to question the feasibility of the proposed project.

 

[Gobears81]

I think a separate analysis may be accurate but I don't know what that looks like. The project has not started yet other than architectural and engineering plans completed. The broker noted that there were multiple interested parties; all interested in purchasing for a conversion.

That sounds like a highest and best use question, but could other sales analyzed as "shells" by prospective buyers and purchased for conversion in the market be good comps for the as is value?