Multifamily Allocation Of Kitchen Ff&e

[Michael P Jacobs MAI]

How are appraisers handling this on simple apartments (not hospitality, ALFs, etc.)?

I allocate no value, which has been protocall on my more than 400 multifamily appraisals since 1992 and accepted directly by FNMA/FHLMC as late as November 2017.

I believe since I began in 1982 the spirit of the requirement has always been about extraordinary non-market standard FF&E such as vehicles, high-value art, sculpture and architectural fixtures, or specialized equipment (like in in the obvious case of industrial plants where there is a limited market).

My "Market Value" allocation is Zero after removal, hauling, cleaning/sanitizing and then storing the ovens, refrigerators, etc. until each can be sold. The resale is all incentive/profit so nothing is left for payment. This is equal to salvage value.

Want Value in Use? Published definitions do not include a formula but I would assume depreciated value in place would work. If so I could ask the client for an inventory with cost and and approximate average age for each kitchen fixture, bed, dresser, etc. including cutlery, shower curtains, linen, etc. as well. Let me know if you believe anything less would satisfy our certification of value under a specific client's engagement condition.

Does anyone wish the "value in use" of the FF&E subtracted from "market value" of the real property (prospective and/or as-is)?

If so, since an apartment complex without at least range/ovens and refrigerators are "incomplere" and "not rentable" should an adjustment be made to each comp as well? I would certainly back down maintenance and/or reserves for a lighter expense ratio.

Reviewers, your guidance would be appreciated, and much thanks in advance,

 

[Gobears81]

I'm certainly less of a reviewer than an appraiser, but I typically include PP allocations on mid and larger-sized apartments. More often than not, I don't on the smaller ones where there is just a stove and refrigerator in each unit comprising PP. That sounds inconsistent, but the market for larger apartments typically recognizes this allocation, while smaller do not. I wouldn't be shocked if that changes in the future though. But, larger apartments often have additional PP, such as lawn mowers, maintenance equipment, and maybe a vehicle.
If there is a single value for RP and PP, then the PP allocation represents the contributory value as part of the whole. I have seen appraisers attempt to justify salvage value as how PP is valued, but don't believe that to be fundamentally correct, as the market does not analyze the PP value based on how much they can receive for it at an auction. A most simplistic method of valuing PP is a depreciated cost analysis with an age/ life method. In Illinois, I use the PP allocations made on Ptax declarations as a check, though these allocations are often excessive for tax reasons. An alternative method might be a return on/ return of analysis, which I have had the most success using on furnished apartments. The reason being that it is simplistic to isolate out the additional rents due to being furnished vs unfurnished apartments and cap out that incremental NOI at a rate that is naturally higher than that of the OAR used to value the entire property.

 

[Michael P Jacobs MAI]

<snip> I typically include PP allocations on mid and larger-sized apartments. More often than not, I don't on the smaller ones where there is just a stove and refrigerator in each unit comprising PP.

At least one of my lender-clients is going this way - allocating PP on smaller/older apartments but you and I are exactly on the same page with regard to the size of the development and the reasons for the allocation on larger projects. My feeling is that this is emerging as a mistaken understanding of the spirit of the requirement. It is intended to isolate extraordinary non-realty components of value like those I've listed above. I'd like to hear from a reviewer as to why it is suddenly becoming an issue after 40 years, however.

 

[Gobears81]

I remember doing an appraisal of a small independent living facility back in 2010 or so that was not remotely feasible so it was tabled for some time, but the guy kept on and eventually built it in 2015 (I didn't do the 2015 appraisal ). It was marketed based on a concept that no one in this area understood and the bank had the property back in a year. The developer must have felt that the cabinetry and appliances in both the central kitchen and the individual units were not real estate, and consequently, free for him to take. When I appraised the property after the bank took it back, it had none of these items, on top of some the shoddiest workmanship that I've seen on behalf of the contractor. I know that's not truly multi-family, but it might be one of those things where some renegade borrowers whose loan is going bad feel that their mortgage is exclusive to real property only and consequently, they can legally take the appliances, etc

 

[Meandering]

If you are valuing apartments as a going concern, or with the intent of being a going concern, the FF&E, may be PP, but if required by ordinance to operate as a going concern, the value is not zero from allocation. While you could remove, scrap and clean the floor where they are, they still need to be replaced if the ordinance mandates they be in place and functioning.

Some municipalities do not require refrigerators in every apartment, but most at least require a cook top. At minimum a replace could be a used appliance, which could be price estimated from ads in local news papers - instead of trying to age/life depreciate a resale market value for a used appliance. Also, when appliances are required by ordinance for the property to operate as apartments, the replacement of those appliances should be within the short-lived reserves for replacement. Be careful if the building management is looking to convert to senior living, because under some ordinances, refrigerators not required for apartments are required for senior living. So, like most things real estate, it depends.

.

 

[hastalavista]

Here's my opinion....
SR1-4(g)-



Ok, so for a small apartment, we are talking appliances and maybe window coverings. If they are included in the appraisal (and they usually are) then the "effect on value" must be analyzed.
Step #1 is to identify these items.
Step #2 is to analyze their effect on value.
Step #3 is to report that analysis.

Note that there is no "reporting requirement" to allocate the value, but what is required is to report their effect on value. In the real world, the units' personal property package may be reported but does not represent a separate allocation because it is not material. However, allocation (Value of the Going Concern or Whole, Value of the Personal Property, Value of the Real Property) may be required as an assignment condition.

Since (in my markets) most small apartment buildings trade with these items, are expected to have them, and rarely are removed prior to a sale, then buyers in the market expect them to be there. They are already baked into the comparable sale data. The income approach also considers them (otherwise one would have to do an adjustment to install the packages to the indicated value. Reserves explicitly address their replacement). On a 10-unit apartment, what is the effect on value of the property trading with its existing appliance package? Likely not material.

Items identified. Items analyzed. The only thing left to do is report the analysis and its effect on value.

The subject contains some personal property (stove, refrigerator, dishwasher, and window coverings). This is a standard package for units within this market and all of the sales evaluated trade with them. Their inclusion and effect on market value is not material; therefore, a specific allocation is not necessary or required.​

On larger projects, as GoBears indicates, or if a specific client requires an allocation, then it may or would be necessary.

My 2-cents.

 

[Terrel L. Shields]

I have always considered "fixtures" as part of real estate. "Trade fixtures" are items installed by a renter, and are personal property. Refrigerators are about the only personal property I routinely encounter in rentals, and they are usually a zero sum game as landlords rarely install top quality items, often if one fails they have a used one to replace it with.

 

[Michael P Jacobs MAI]

Here's my opinion...
The subject contains some personal property (stove, refrigerator, dishwasher, and window coverings). ... This is a standard package for units within this market and all of the sales evaluated trade with them.... Their inclusion and effect on market value is not material; therefore, a specific allocation is not necessary or required. ...On larger projects, as GoBears indicates, or if a specific client requires an allocation, then it may or would.

I looked carefully at USPAP as well as a couple of credible dictionaries defining "personal property" and did not find anything saying that stoves and refrigerators were always personalty/FF&E. The weasel-word the Appraisal Institute Dictionary uses is "generally" not attached, which is technically not the same as "always." I know that removing the refrigerator or range is as easy as unplugging but they are so integrated with value that the spirit of the requirement falls apart when you really think about what difference it can make.

But, you are right - ultimately the depreciated cost is a rounding error (less, even) especially for older MFR in higher-priced markets. So, I've taken this opportunity to add it to the template. It's automated through out and all I need to do is plug in the "average age" and update MVS appliance costs (which are high, by the way) when I think about it. When I don't need it it disappears.