Loft Condominium - Residential Condo Or Commercial Mixed-use Property?

[Arizona Bob]

I received a unique assignment and wanted your opinion whether I should proceed or not. I received an order to appraise a loft condominium on a 1073 form, for a purchase transaction. The strange part is that the purchase contract specifies that the purchase price also includes a main level retail space. The unit is part of an old downtown 1905 red brick structure, and the main level has been leased on a 5-year lease as retail space, but the second level unit above it is a residential condo. The broker said that a Declaration of Condominium was obtained, but that there is no HOA and there are no other units. I have never appraised a condo that didn't have any HOA, common areas, or anything. But the plat shows two units, and public records show the use as a condo.

In discussions with the listing agent, the transaction is a 1031 exchange, and so there is just one lump sum sales price for both units together. The zoning is a downtown historic district zoning which allows both residential and commercial uses and focuses primarily on historic preservation. The second level residential unit is currently managed by a property management firm who rents it as a nightly rental for $280 per night, and it is usually full.

Since both properties are income properties, were marketed together and are selling together, it seems to me that this is more of a mixed-use commercial properties, rather than a retail condo unit and a residential condo unit. However they are platted individually, they were marketed as loft condos on MLS, and the zoning allows residential uses. The second floor residential unit that I have been assigned to appraise is very spacious, completely remodeled with high-end appliances, flooring, etc. and the location is exceptional. It even has a large view deck making it a very desirable property. It is a two-bedroom, two-bathroom unit with very high ceilings.

It seems like I could do it either as a single loft condo unit, or as part of a mixed-use commercial property. The loan is a business loan, not a mortgage loan, so I am really not sure whether I should proceed with the assignment or not. The unit appears to be either a great rental or primary residence and there are plenty of other loft condos to compare it with, but I have never seen a condo without an HOA. Any help on how to treat this assignment would be appreciated.

 

[Howard Klahr]

A) is this a frt? If so, and the transaction amount exceeds $250k it might be outside the scope of resid license

B) is it classified as a live/work unit?

 

[gregb]

Based on what the OP states it would seem the subject property or properties are mixed use, with a narrative report the best option although a form appraisal could be devised. I see the poster has a CG license, no problema with proceeding onward. A discussion with the client would be necessary before this assignment is completed.

 

[Arizona Bob]

Based on what the OP states it would seem the subject property or properties are mixed use, with a narrative report the best option although a form appraisal could be devised. I see the poster has a CG license, no problema with proceeding onward. A discussion with the client would be necessary before this assignment is completed.

That was my impression that the property appears to be a mixed use, but I have only received the assignment to appraise the second level unit. Another appraiser is working on a narrative report for the main level unit. It is definitely a weird assignment.

 

[Meandering]

The second level residential unit is currently managed by a property management firm who rents it as a nightly rental for $280 per night, and it is usually full.

If your zoning allows nightly rentals as a residential use, well, that's a discussion we had here a few months ago, because here they're cracking down on this type of use of a residential property, making them get hotel inspections and pay hotel taxes.

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[J Grant]

That was my impression that the property appears to be a mixed use, but I have only received the assignment to appraise the second level unit. Another appraiser is working on a narrative report for the main level unit. It is definitely a weird assignment.

That is weird assignment ! I presume that apart from this combo deal, the commercial unit could be sold separately and the loft residential unit can be sold separately? Lets assume yes...in which case you can appraise the value of the res loft unit alone as a sale taking factoring in its rental value. The combined purchase price for your buyer may be less than each unit sold separably, or more than that, or equivalent. But the market value of the loft unit would depend on an EA that it could be sold or independently, but is bundled together with the commercial unit for this particular transaction. IF they can only be sold together it's a more complex assignment.

Would be helpful to get a copy of the other appraiser's report at some point to see what they appraised the commercial unit for.

(regarding lack of HOA, ask for condo docs, make sure it is still a condo, is the word condo in legal description? It might be what is called a site condo...which I am not that familiar with but some other here are.

 

[J Grant]

The broker said that a Declaration of Condominium was obtained, but that there is no HOA and there are no other units. I have never appraised a condo that didn't have any HOA, common areas, or anything. But the plat shows two units, and public records show the use as a condo.

This might be the hard part...if developer filed for a declaration of condo and has been obtained I might want more than the broker's word for it...such as ask for a copy or check with the city. Is a declaration of condo the final process, or is another step needed to finale the process? Perhaps ask client to do a title search to make sure no weird developer stuff going on aka retaining part ownership or a lien etc...or perhaps that is built into the EA a clear title.

 

[Arizona Bob]

This might be the hard part...if developer filed for a declaration of condo and has been obtained I might want more than the broker's word for it...such as ask for a copy or check with the city. Is a declaration of condo the final process, or is another step needed to finale the process? Perhaps ask client to do a title search to make sure no weird developer stuff going on aka retaining part ownership or a lien etc...or perhaps that is built into the EA a clear title.

That is good advice thanks. The more I think about this issue, the more I think there are two possible solutions: 1) Decline the assignment and recommend to the client that the other appraiser to expand his scope of work to include the loft in his narrative, because it has a commercial character, or 2) Accept the assignment and provide a 1075 condo report, as assigned, but document the "condo-tel" nightly rental aspect of the unit. I don't like this option because I don't really know how to do an income approach on variable rental income, especially when I haven't received any financials. It would be weird to use a cap rate in a residential form report, and I don't think I would be comfortable using a market rent multiplier on variable nightly rental income.

I'm not sure which option is better, or which is compliant with USPAP. *Sigh*

 

[J Grant]

Whoa...why is there a condo-tel aspect to the loft unit? Unless there is a rental desk and management of the condo facilitating nightly/short term rentals it does not sound like that is in play ( unless I am missing something). Look up condo hotel on internet/other posts here see what the parameters are

It sounds to me like the loft unit would either be owner occupant or normal investor owned rented annually . I presume for client purpose the 2 units can be appraised separately with the loft unit on a 1075 form, though if it is not for mortgage/fannie use you might want a general purpose condo form....assuming the units can be sold separately, but just happen to be sold as a package to this particular buyer. The unknown part might be whether the building has been approved by city as a legal condo?

If the assignment personally makes you uncomfortable nothing wrong in declining it...perhaps take a bit more time with it to decide.

 

[Arizona Bob]

Whoa...why is there a condo-tel aspect to the loft unit? Unless there is a rental desk and management of the condo facilitating nightly/short term rentals it does not sound like that is in play ( unless I am missing something). Look up condo hotel on internet/other posts here see what the parameters are

It sounds to me like the loft unit would either be owner occupant or normal investor owned rented annually . I presume for client purpose the 2 units can be appraised separately with the loft unit on a 1075 form, though if it is not for mortgage/fannie use you might want a general purpose condo form....assuming the units can be sold separately, but just happen to be sold as a package to this particular buyer. The unknown part might be whether the building has been approved by city as a legal condo?

If the assignment personally makes you uncomfortable nothing wrong in declining it...perhaps take a bit more time with it to decide.

OK thanks. The loft is being rented on a nightly basis for $280/night, so that's why I mentioned the nightlyy rental aspect being like a "Condo-tel." It isn't a true Condo-tel because, like you mentioned, there is no rental desk and it does not appear to be a hotel, but it is in fact being rented by a management company as a nightly rental currently.