Historic Propert Values & A Land Lease Reversion Questio

[David C. Johnson]

<span style='color:darkblue'>Got a couple of unrelated questions for the brave and willing:

Question 1:

Any "rules of thumb" for historic properties (say, on the Registry) when using the Cost Approach (whether advisable for the assignment or not) regarding market value? Yes, I realize the question is not well defined, and is a little wacky, but I am interested in any thoughts on the subject. I realize any time you use this approach (well, with the major cost manuals anyway), one will more often apply Replacement costs rather than Reproduction costs (and thus eliminate functional issues including superadequacies and "superliabilites" -- but also eleminate "historic value" largely regardless of which you use). For sure there are "issues" with many or most elderly improvements -- not just for the ancient & esteamed. But Historic properties seem to introduce a bit of a new dynamic into the Cost Approach equation. From a practice standpoint in appraising, maybe the best thing to do for an office highest & best use property is to just forget abut the National Registry, and use replacement costs to derive its value for its estimated highest and best use as leased office space, and then add a premium at the very end of all calculations for the market advantage of being historic, or the disadvantage for its being historic.(?). Does the market (i.e., owners and renters) appreciate "historic," or is it just almost everyone else who does -- particularly those who do not have any bundle of rights interest in such properties? Any rule of thumb for such a premium or liability, or a rule of thumb for determining it? Any thoughts and suggestions besides "extract it from the market"?

Earlier I found a thread discussing historic properties in this sub-fourm, and visited a hyperlink included in a post there, which was interesting, but did not address this issue. Any improvement of these structures are generally partly or entirely regulated, which might be limiting in terms of construction project scope and also more expensive sometimes. However, there are often tax credits involved (while less so since 1986). How does the market perceive the regulations and/or tax credits? How do they factor into the market value of these properties?

Maybe a simpler way to put my main question is: How do you treat (theoretically or technically) the issue of "historic" when using the Cost Approach -- if you are hell bent on including this approach?
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Question 2:

I had an out-of-state CPA call this week (one of my younger brothers) looking for a "sounding board" for thinking through an issue for a potential client. Without getting into the specifics or the larger issues in question, a "sub-issue" came up that I would like to get some opinions on if possible from those who may have had the opportunity or necessity to think through all the dynamics. The issue is reversionary values for long-term land leases where the property is in a prime intra-CBD location with rising land values. I am mainly interested in the land component right now as opposed to the reversion of the leasehold improvements plus land (while comments in that case are fine too). Assuming a lack of good relevant sales and leasing data for this type of analysis, what is the best / correct way to calculate such reversionary values to the land mathematically, and how does this exercise translate into actions by market participants? In other words, do investors or land owners use such calculations for their leasing decisions on their properties -- particularly vacant lots -- and how do they go about it?

I have just written a response in another thread that may demonstrate some of my general thinking regarding lease rate to market value calculations which can be found here:

http://www.appraisersforum.com/forums/view...p?p=29519#29519

Thanks for your thoughts!

dcj</span>

 

[airphoto]

David,

Only skimmed your posts, as it's early morning and my thinking cap isn't really functional. However, let me feed this thought into the equation:

Many of those self-storage facilities found in growing areas are really just inexpensive means to develop income on a land parcel over it's holding period pending further, more permanent development. In other words, to generate some income pending development to a future higher-and-best use. Many of those self-storage facilities were sold as limited partnerships, thus documents were created under SEC rules for selling partnership shares.

Find some of those docs and you may find some support for your line of questioning ..

 

[Anonymous]

When we use the Cost Approach we are estimating the Replacement cost for the subject, that is a building with similar size and ammenities. We are not using a Reproduction cost to produce an exact copy of the subject. With that in mind the Cost Approach should have little or no weight in a final estimate of value.

 

[David C. Johnson]

Some good thoughts, guys.

Thanks,

dcj

 

[The Bob]

I will only address your first question. I've done a number of historic properties in central Virginia. I believe the cost approach, or any approach for that matter, is only valid if it represents market action. In other words, if someone is in the market for a historic property, do they have the option of building one? I think not. To me, the cost approach is totally irrelevant in historic properties.

 

[Mountain Man]

To me, the cost approach is totally irrelevant in historic properties

I can agree, new may not mean a thing. The more it is altered or "remodeled", the less appealing it may be for the true collector/buyer. If the windows were ripped out and replaced with new energy efficient windows ..... OOPS! Vinyl siding, :evil: Sand blasted the brick house to remove paint :evil: :evil: :evil:

From a practice standpoint in appraising, maybe the best thing to do for an office highest & best use property is to just forget abut the National Registry, and use replacement costs to derive its value for its estimated highest and best use as leased office space

Yeah, but many historic areas have regs for use or have facade protections. There is a silly 10+ year battle over a brick facade in Macon, now being held up with re-bar. :roll: Check with you local histerical society.

Does the market (i.e., owners and renters) appreciate "historic," or is it just almost everyone else who does -- particularly those who do not have any bundle of rights interest in such properties?

My experience is that the owner is the most proud. 8) But it depends on your market and which building it is. Is it a promiante land mark? Or just another old building?

Gettin' late and will think more later.