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Extraordinary Assumptions

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Helpless

Freshman Member
Joined
Nov 12, 2014
Professional Status
Certified General Appraiser
State
California
I am hearing different perspectives from experienced MAI's about when to employ or not to employ an extraordinary assumption.

It would seem standard procedure to say that a historic building being converted from one use (say office) into another use (say apartments) could have an impact on value.

That said, I am hearing from some experienced MAI's that they might not use an E.A. in that case because it may not be extraordinary for buildings to be converted in that particular market area. In other words, it happens all the time and there is nothing extraordinary about it. From their perspective they would just call this a general assumption and clearly note it in the report; however, they would not label it an E.A.

I talk to other MAI's and they say cover yourself and they will make so many E.A.'s in an appraisal that the list can go on and on.

Anyone come across this issue...? Thank you.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
If Use "A" is being routinely converted to Use "B" in the market, and the subject is Use "A" and fits the conversion profile (technically called a "remodel" which means change in use) and would be purchased by the typical buyer based on that, and (implied) it is financially feasible to change the use, then I would say that an EA isn't necessary.

This is no different from a fixer-property or high-vacancy property. An investor would purchase it to renovate/re-position it. That is who buys it and that's how they price it and that's what is going to reasonably happen. Most don't use an EA that the buyer will eventually fix it or try to lease-it-up to market in that valuation analysis.

Appraisers, in some cases, use EAs to hedge their bets. While some EAs are prudent and warranted, others are not.

In the big scheme of things, if something is likely going to happen (reasonably), qualifying that by using an EA, while unnecessary, probably doesn't make a difference except for purists.
On the other hand, using an EA for something that is not likely going to happen would be incorrect.

Naturally, assignment-conditions may have an impact on what/when EAs are acceptable to be used for a particular assignment.
 

Helpless

Freshman Member
Joined
Nov 12, 2014
Professional Status
Certified General Appraiser
State
California
Denis, Thank you!

For the same assignment I have a reviewer (MAI) telling me I should have used Extraordinary Assumptions for all of the following: 1) renovation completion date; 2) stabilization date; 3) renovation budget, etc.

Do you think all of the above require EA's? This is crazy...I could create a million EA's in the report. I have noted all of the above as general assumptions.
 
Joined
Jun 2, 2007
Professional Status
Certified General Appraiser
State
Florida
It would seem standard procedure to say that a historic building being converted from one use (say office) into another use (say apartments) could have an impact on value. That said, I am hearing from some experienced MAI's that they might not use an E.A. in that case because it may not be extraordinary for buildings to be converted in that particular market area. In other words, it happens all the time and there is nothing extraordinary about it.
Just for reference: an EA is "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property such as market conditions or trends; or about the integrity of data used in an analysis."

As usual the answer is Sometimes! Yes, in most cases market activity will suggest feasibility and an EA would be unnecessary. An EA will be necessary in this case if the Highest & Best Use analysis is not reasonably definitive, leasing to the ASSUMPTION that the conversion is maximally productive.

Without market evidence in favor of the conversion or a reasonably well supported financial analysis, an appraiser is forced into admitting, "I don't have enough market information but it will look reasonable to most market participants or at least not too unreasonable." The appraiser may be lazy, incompetent or there might not be any evidence either way, but the EA serves its purpose when HBU is not well defined. We will start seeing these "pioneering efforts" without market support when stupid-money begins to enter the commercial loan pipeline again.
 
Joined
Jun 2, 2007
Professional Status
Certified General Appraiser
State
Florida
...For the same assignment I have a reviewer (MAI) telling me I should have used Extraordinary Assumptions for all of the following: 1) renovation completion date; 2) stabilization date; 3) renovation budget, etc. Do you think all of the above require EA's? This is crazy...I could create a million EA's in the report. I have noted all of the above as general assumptions.
Do what your supervisor tells you to do and - most importantly - understand the point. You can decide for yourself when yous is the only signature in the report. Otherwise, pass on signing. If this is coming from a review appraiser then I'll suggest you do it, get it off of your desk, and move on. It's not illegal, unethical or in any way going to harm you. Arguing with them is just going to cost you time/money.
 

Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
Denis, Thank you!

For the same assignment I have a reviewer (MAI) telling me I should have used Extraordinary Assumptions for all of the following: 1) renovation completion date; 2) stabilization date; 3) renovation budget, etc.

Do you think all of the above require EA's? This is crazy...I could create a million EA's in the report. I have noted all of the above as general assumptions.

Have you ever seen a renovation occur exactly on time and on budget? If you're dealing with the future, it's typically a good idea to use an extraordinary assumption.

You ASSUME the renovation will be complete on such and such a date. If the renovation never even got started because there was an issue with the permit then obviously your prospective value will be pretty far off. A general assumption is that the rent roll you were provided is accurate. If that rent roll is written on a piece of paper and every tenant is at 2-3x market rent then you would probably want to use an extraordinary assumption because you're not certain it's accurate.

Any prospective value I'll use an extraordinary assumption that whatever event (renovation, construction, lease-up, etc.) occurs between the current date and the future date. After all, that' the basis of providing a prospective value usually.
 
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