Illegal Unit In Apartment Building

[CANative]

The original questions in this thread were: Give it full value, give it less value due to risk, give it no value or less than that.

Your response was sort of a mix of the last two options (less value due to risk and less than no value due to possible removal.)

I went with the middle option but sort of went with the increased cap rate thinking "excess rent" might be one notion. There are many answers to this puzzle and that's why this thread is so long.

 

[NachoPerito]

I agree with that. However, in a MV purpose assignment the HBU as a stand alone question exists and then must be reconciled with the valuation aspect when there is a conflict between the two.

Specifically, a 12 unit building, the 13th unit is illegal per zoning only allows 12. That does not mean someone has to bulldoze the whole building, or demolish the 13th unit. But the HBU would have to be legal use as 12 units, correct? (if you disagree, how does one get around that)

Okay, so HBU is legal use 12 units. But let's say you ask around, look at comps etc and see the market will pay more for the 13th unit because it does exist, enforcement is lax, and a buyer is hoping they can rent it out and collect income and not get caught (or at least not get caught for a very long time). So how to reconcile the HBU as 12 units and market reaction of value for 13th unit? As I said originally, imo I would not count the income from the 13th unit in cap rate/income stream as it is from a unit that is illegal per HBU. But I would reconcile the value on SCA higher end if market is paying more for a 13th unit for reasons mentioned. And of course disclose and explain. If lender wants to make report subject to removing the 13th unit that would be lender decision. I could see the case for an appraiser making report subject to removing the 13th unit as well, not sure if I would do it .

With H&BU we have to distinguish between H&BU 'as improved' or 'as vacant'. The highest and best use 'as vacant' is to build a 12-unit building, but that is not relevant because there are already 13 units on the site. The highest and best use 'as improved' is to continue the existing use because 13 units is worth more than 12. The fact that it is illegal is not relevant unless the current owner is facing fines that are in excess of the value of the 13th unit or if the if the current owner is being forced to demo the unit.

Edit: removed CANative sentence

 

[Meandering]

Should be a sticky

With H&BU we have to distinguish between H&BU 'as improved' or 'as vacant'. The highest and best use 'as vacant' is to build a 12-unit building, but that is not relevant because there are already 13 units on the site. The highest and best use 'as improved' is to continue the existing use because 13 units is worth more than 12. The fact that it is illegal is not relevant unless the current owner is facing fines that are in excess of the value of the 13th unit or if the if the current owner is being forced to demo the unit.

 

[CANative]

The quote makes it look like I said what J said.

 

[NachoPerito]

Update on this one: Bank client is telling me to ignore the illegal unit entirely even thought the buyer is giving the illegal unit 50% value. I suppose I will be putting in a hypothetical condition or extraordinary assumption.

 

[Mark K]

Update on this one: Bank client is telling me to ignore the illegal unit entirely even thought the buyer is giving the illegal unit 50% value.

I suppose I will be putting in a hypothetical condition or extraordinary assumption.

You are being directed to ignore reality; HC applies.

 

[J Grant]

Ask the lender client if they will accept an HC (they may want as is, no HC)
Are they asking you to ignore the illegal unit as if it does not exist (which would require an HC or lying), or are they asking you to recognize that it exists but not count it toward any contribution to market value?

I questioned the the HBU as vacant site legal use (12 units) but existing HBU is the illegal 13 units. doesn't HBU have to be legal use whether occupied or vacant? (correct me if I am wrong I thought one of HBU tests is legal use, with no differential on legal whether vacant or improved)

A way to handle it with no HC: acknowledge the 13th unit exists, photo and describe it. Say that market participant/this buyer is willing to pay additional $ for the 13th unit due to VALUE IN USE for buyer as potential additional income. However, since market value HBU must be legal use, which is limited to 12 units, the 13th unit is not accorded any contributory value and rental income from 12 units and not 13 is used in the income approach.

It would be up to lender if they want to take it a step further and demand the 13th unit be removed as a condition of appraisal.

 

[Mike Kennedy]

Update on this one: Bank client is telling me to ignore the illegal unit entirely even thought the buyer is giving the illegal unit 50% value. I suppose I will be putting in a hypothetical condition or extraordinary assumption.

Bill the lender asking you to commit fraud for "time served" and walk away.

 

[CANative]

Update on this one: Bank client is telling me to ignore the illegal unit entirely even thought the buyer is giving the illegal unit 50% value.

I suppose I will be putting in a hypothetical condition or extraordinary assumption.

I assume this is an FRT. So even if you "ignore" the 13th unit under an HC wouldn't you also have to provide an "as is" without the HC?

 

[The Warrior Monk]

You think there is a difference between the methodologies used in tax appeal and the types of assignment we do in our fee practices?

Sometimes, yes.

As a specific example, certain residential properties here in NY, notably certain residential condominiums, have commercial property classifications for the purposes of assessment. For tax assessment purposes, these condominiums would be would be valued by the income approach using certain cap rates, and the value concluded is not what the market would pay.