Hypothetical Conditions and FIRREA

[BigBlueGA]

My understanding is that FIRREA requires an as-is value, not an as-if value. Due to this a hypothetical condition can not be exercised in a federally related transaction appraisal.

Lender for a current assignment has asked me to appraise a mini-warehouse facility which has a flex-industrial building (no prior occupancies that would indicate environmental concern) on site which is suitable for leasing. The property owner however intends on tearing down the flex-industrial building at some point in the future to add more storage and has told the lender this. Due to this, the lender is requesting that the facility be appraised without giving the flex building any consideration towards the value.

Can this be done in a way that is in compliance with FIRREA? I understand the intent of the limitation... it would be unethical to overlook some issue with a property (such as site contamination, etc.) to increase the value under a hypothetical condition, however this situation does not seem to match the intent of that restriction.

 

[Michael P Jacobs MAI]

If you believe that it has reached the end of physical and/or economic life your HBU would conclude no value and use the "yard" for open storage. If demo is significant you would have to deduct that. Adjust the comps for land:building ratio if warranted. Sound right? I don't see the necessity for a hypothetical unless it has significant value. in many markets open storage land is more valuable than the same land with an old building on it.

 

[BigBlueGA]

If you believe that it has reached the end of economic life your HBU would conclude no value. If demo is significant you would have to deduct that. Sound right?

Hasn't reached the end of it's economic life and I don't anticipate that the HBU would be to tear it down... it's just what he plans to do. Market probably wouldn't see it and think "more mini-storage could go there", property owner just wants to expand his current facility.

 

[J Grant]

the client is a moron, what does what an owner plans to do in the future to their property, have to do with current as is value?

 

[PL1957]

the client is a moron, what does what an owner plans to do in the future to their property, have to do with current as is value?

You don’t think future plans for the property impact the current value?

 

[BigBlueGA]

the client is a moron, what does what an owner plans to do in the future to their property, have to do with current as is value?

Removing a portion of the improvements could have a significant negative effect on the value of the collateral. Seems like good lending practice.

 

[J Grant]

You don’t think future plans for the property impact the current value?

No.
I go to many appointments where an owner talks about a new pool or kitchen they plan to put in - like how does that impact today's value ?

Though the answer might be different for commercial or a special circumstance, such as if an owner got a variance or permit or change of zoning done that allows for a future use - but then if they got it done, it is in place and affecting HBU today also.

 

[J Grant]

Removing a portion of the improvements could have a significant negative effect on the value of the collateral. Seems like good lending practice.

Lending is not appraising.
But this poster needs to consult with their client. If the client wants an HC for lending use to get an appraisal value without the storage unit it can be done,. Whether that meets a Firrea guideline idk, but not all loans go through Firrea -imo the appraiser needs to talk with client further.

 

[Terrel L. Shields]

I don't see FIRREA requiring anything per se. Yes, they want an "as is" value, but that does not preclude providing a prospective value nor a "subject to" value. In other words they want the bank to know its current "as is" value in addition to the value as proposed.

You are being asked to provide the value of a segment. You can discuss the existence "as is" but you can provide a value "as is" and value less the flex space

 

[andrew81]

Interagency Appraisal and Evaluation Guidelines allow for properties where improvements are to be constructed or rehabilitated. In addition an institution would generally request an appraiser to provide the property’s current market value in its “as is” condition, and, as applicable, its prospective market value upon completion and/or prospective market value upon stabilization.