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Is Profit Required For An As Is Value In A Federally Regulated Transaction

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Helpless

Freshman Member
Joined
Nov 12, 2014
Professional Status
Certified General Appraiser
State
California
The appraisal assignment is a historic building which will be extensively renovated for use as a hotel.

These are made up numbers but we concluded as follows:

Upon Completion: $22.0 million
(Developer's acquisition price: $8.0 million and renovation costs are: $12.0 million)

The As Is value conclusion is:
Upon Completion Value: $22.0 million
Less Acquisition/Renovation Costs: $20.00 million
= As Is Value: $2.0 million

The developer's renovation budget of $12.0 million does not include a profit line item.

The reviewer is arguing we need to include Profit in the "As Is" value per "federal guidelines"

Any input would be appreciated.
 

NachoPerito

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Joined
Jul 25, 2012
Professional Status
Certified General Appraiser
State
Washington
I don't understand how you got to $2.0M.

In your example the 'as is' value = $22M - $12M - $2M(profit) = $8M
 

Helpless

Freshman Member
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Nov 12, 2014
Professional Status
Certified General Appraiser
State
California
NachoPerito ^ You are right. My mistake.
 
Joined
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Professional Status
Certified General Appraiser
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I won't take the time to look but there is no "federal requirement" for profit unless the market requires one. Your client may require it, which makes it mandatory when you've agreed to the engagement conditions.

You know, most of these historic renovations are labors of love and the only profit is the intangible benefit of achieving "art."

I don't think I've seen one that would break even short-term and I think I remember only one that came through a normal lending source. CRA historic projects are always subsidized and even then frequently fail to meet initial projections.

Good luck! Let us know what happens.
 

hastalavista

Elite Member
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May 16, 2005
Professional Status
Certified General Appraiser
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California
Based on Nacho's re-working of the numbers, it looks like there is $2,000,000 available for EI.

I'm not aware of the federal rule that specifically identifies EI must be included. The rules I'm aware of require that the cost approach reflect what occurs in the market (as Michael points out).

Converting a historic property to become a hotel sounds like a for-profit endeavor to me. EI would be the expectation.
In this case, it sounds like it is financially feasible (using the made-up numbers). In another scenario, with EI, it may not be financially feasible. Non-feasible projects get financed all the time. Market value, as-proposed, is $22 million.
If acquisition cost is at market, then the as-is value is $8 million.
If the development costs (including EI) are greater than $14 million, then the project is not financially feasible. The cost approach will have to account for that with some form of obsolescence.

This is information the client needs to know. But it won't necessarily stop a loan from happening. The lender will just include this information in how it structures the loan and ensure there are adequate funds in excess of the loan amount to complete the project. Or, it will pass on the project.

Edit to add: There may be some small difference which wouldn't trigger a "it isn't feasible" conclusion. But if the development costs (all in, including land & EI) is higher than market value by a non-trivial/beyond-a-reasonable-margin-of-error amount, it is what it is (not financially feasible).
 
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Helpless

Freshman Member
Joined
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Professional Status
Certified General Appraiser
State
California
Thank you for the replies. Very helpful.

@Michael Jacobs: I am surprised to hear you say a profitable project of this sort is rare. I have seen some go way over budget and become a headache. But others have been homeruns.

This is a "historic" building in the sense that it is over 100 years old (which is old for most U.S. cities). That said, there are no onerous regulations about retaining the interior of the structure. The façade will need to be kept to its original form.
 
Joined
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Professional Status
Certified General Appraiser
State
Florida
@Michael Jacobs: This is a "historic" building in the sense that it is over 100 years old (which is old for most U.S. cities). That said, there are no onerous regulations about retaining the interior of the structure. The façade will need to be kept to its original form.
OK, I was thinking Antebellum here in the SE.
 
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