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Negative Market Value?

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Kevin_B

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Illinois
I work at a bank that recently took back a vacant parcel of land. There is a recapture agreement for road improvements from 10 years ago that states that if the parcel is sold or developed, a one-time payment of $500,000 is due. We just had the parcel appraised, the value came back at $300,000 “as if unencumbered by the recapture agreement” and -$200,000 “as is”. It was sent out for the review and the review appraiser agrees with the original value of $300,000 but stated that a property can’t have a negative value. He said that the parcel has no market value as it is currently unmarketable. Can someone provide some insight into which one is correct as neither appraiser will budge. Thank you.
 

Michigan CG

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There was a long discussion about this about two years ago. I am in the boat that says it can have a negative value and your example is a perfect example. Others said what the reviewer said. There were many smart people on both sides of the discussion.
 

Mark K

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You're not going to get a consensus about the concept of 'negative market value' on this forum. That question has been argued to death with neither side budging.

Personally, I agree with your reviewer; others won't.

From an accounting standpoint, I tend to agree with the negative idea; from an appraisal, no.
 

gregb

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California
Can the OP post the recapture agreement?
 

Kevin_B

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Illinois
Can the OP post the recapture agreement?

Since this will likely end up in court, I don't believe that I can. I know that our lawyers have contacted the government lawyers to see if we could amend the agreement to decrease the amount or break up the payments over a number of years and they declined to even negotiate. They are pretty firm that are owed the full amount upon the sale of the property.
 

J Grant

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Florida
There was an epic debate about this topic with split views. Here is my view: A property can have negative value, (from accounting standpoint, the seller takes a loss on sale.) but a property can not have a negative market value.
A property can have NO market value, meaning the property is so unsaleable that there is no market for it,/ no buyers for it. Market value is about what price a property should bring ( sell for) , not the loss (or profit) a seller might take. .

DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
 
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J Grant

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I inserted comments below:

'Kevin_B, post:I work at a bank that recently took back a vacant parcel of land. There is a recapture agreement for road improvements from 10 years ago that states that if the parcel is sold or developed, a one-time payment of $500,000 is due. We just had the parcel appraised, the value came back at $300,000 “as if unencumbered by the recapture agreement” and -$200,000 “as is”.

Tthe appraiser made a Hypothetical condition that if the recapture agreement (RA) did not exist, it would be worth 300k . Fair enough. However the RA does exist, meaning your bank as seller must pay it. Which means, as long as your bank at closing will pay off the 500k RA, the property is worth 300k to a buyer. Your bank takes a 200k loss. That is not a 200k negative market value. (-200k as is)

The market value ( what the property brings on sale ) is 300k. The bank seller takes a loss of 200k. (example: bank takes a loss at a short sale)


" It was sent out for the review and the review appraiser agrees with the original value of $300,000 but stated that a property can’t have a negative value. "

Agree

"He said that the parcel has no market value as it is currently unmarketable. "

Regarding above statement: The property is marketable,as long as your bank agrees to pay the 500k RA at closing. A giant lien if you will. So to state the property is unmarketable might not be correct.
However, if your bank refuses to pay off the RA and you expect a buyer to purchase the property, even for $1 as long as they take on paying off the RA ( a 200k loss to them), I doubt it would appeal to any typically motivated buyer, thus would agree under that circumstance the property would be unmarketable with no market value.
 
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Gobears81

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Illinois
Hopefully, this does not start a 50-page thread.

I am of a mind that negative market value is a sound concept, although it is rare. There are appraisers that could go their entire career without valuing a property for a negative number, even if they agree with the concept. So far in my career, I've appraised two properties for negative numbers, and both were related. Both were condemned apartments in a depressed market-the cost to remodel to a habitable level was not feasible and the demolition costs exceeded the land value. Doing nothing (ie letting them sit in hopes of the land values increasing, etc.) was not an option. The larger one was about 80-units, if memory serves me correct, and it sold at an auction for $7,000, but after the buyer saw the properties, he backed out. With that said, the client was a governmental agency, the apartments have since been demolished, and the governmental entity most likely added concessions in the form of paying for demolition, etc.
I have only HEARD of one property selling for a negative number, and don't believe that I have seen one. The instructor for my last class said that the owner paid $1,000,000 to a municipality to take a golf course from him.
My ever-developing theory is that governmental restrictions (and perhaps deed restrictions) are, in itself, a primary driver of negative market values. Perhaps there are other issues that could spur negative market values, but in the first example, the government was not allowing a "hold for future development" strategy to negate the implied market value. I do not know the ins and outs of the second example, but if the property was not required to be used as a golf course, it most likely would not have negative value.
OP-Hopefully, the transfer from the borrower to the bank's name in ownership did not, in itself, trigger that $500,000 payment. However, while a highest and best use analysis is based on the market's response, one could utilize the same HBU model for a specific owner. I understand that banks aren't typically in the property management business, and I also don't know the income and expense potential of the property in question, but what prudent owner of a property would say yes, I AM going to sell this property for $300,000 and pay $500,000 to the city? Very few, or possibly none. If I had a property like this, I would hold it in hopes that it would eventually be worth more than $500,000, and I think essentially any owner would act the same. Making assumptions here, but I'm guessing that the value in use is most likely not a negative number, or at least not -$200,000. We do not have enough information to go off of here on where the as-is market value should be, but outside of possible accounting issues, I question the relevance of the -$200,000 number, due to the aforementioned discussion.
 

Kevin_B

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Banking/Mortgage Industry
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Illinois
If I had a property like this, I would hold it in hopes that it would eventually be worth more than $500,000, and I think essentially any owner would act the same.

The problem is that the amount owed grows by 8% per year for up to 20 more years. I didn't state it before but it is a 20 acre parcel of commercial land that is a few miles away from the nearest subdivision and on a local road with low traffic. It may be awhile before anyone develops the site into a commercial development. The town has shot down any rezoning discussions.
 

gregb

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Sep 3, 2011
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Certified General Appraiser
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California
The problem is that the amount owed grows by 8% per year for up to 20 more years. I didn't state it before but it is a 20 acre parcel of commercial land that is a few miles away from the nearest subdivision and on a local road with low traffic. It may be awhile before anyone develops the site into a commercial development. The town has shot down any rezoning discussions.

In the meantime, since the property is not sold or developed, the $500,000 recapture payment is on hold. That should provide some leverage to the current owner. Btw, who or what type of entity owns the recapture interest?
 
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