Quadplex being developed to be rented solely as short-term rental units. Residential or Commercial?

[R0ck3tMan]

Our office just got handed an assignment to perform a residential appraisal on a new development quadplex. So far so good. We do plenty of those, and know the market for long-term tenant rentals well in the subject's market area.

The problem is, the developer is adamant that the units are going to be rented on a per-day/week/month basis, ala AirBnB, and as a result, any appraisal performed must approach appraising said property based on per-day/week/month rental prices, market cap rates, etc. rather than as long-term rentals.

Both our team and the underwriting team for the loan are uncertain if this property therefore requires a commercial appraisal, rather than a residential appraisal, given this information and the significant difference in utilization and expected rental income compared to a standard long-term lease. It seems to me as though the property should fall under a commercial appraisal rather than a residential appraisal, as its highest and best use per projected income rates would be as a short-term rental, thus putting it in direct competition with other commercial hospitality services. If it is commercial, then we need to pass on the order as we only handle residential orders.

We are hoping someone here has dealt with this issue previously and might be able to shed some light on how to proceed. Has anyone dealt with this? Would this fall under a commercial appraisal umbrella rather than a residential one?

 

[Mark K]

In spite of what the developer says...what is the HBU? Anyone can make the same short-term rental claim for any property, SFR, Duplex, etc. and it would likely result in a higher appraised value. If the lender took the property back, what use would a typical buyer have for the property? Daily or annual rental?

I'd ask the client for guidance and if they defer to the developer's demands, I'd pass on the assignment. I've never allowed a builder/developer/owner to determine my scope of work.

 

[Terrel L. Shields]

I'd weight the cost approach if new....and anything comparable that was new and sold...if there is a true financial benefit to same, it will readily be reflected in sales. And if I did consider it, then I would show vacancy to be 50% or more (based at least on here what B & B's are commonly doing) and the cap rate would reflect a higher risk.

 

[Elliott]

It is my opinion that the lender should be notified the property's intended use is as 4-vacation rentals and much more commercial in use than a typical residential 4-plex which would qualify for standard residential loan programs. When I've done this is the past the assignment is usually canceled. I'd rather lose an assignment than produce a report which is misleading or a report form which misrepresents the property use.

 

[TerryRohrer]

Is there anything similar in the subject market area that relies solely on short-term rentals? If not, it will be hard to make the case that highest and best use is other than a more typical fourplex for month to month residential occupancy. The developer's opinion really doesn't matter. Like Mark, I would walk before allowing the borrower to dictate how the appraisal will be completed.

 

[George Hatch]

The definition of MV is based on the actions of the typical buyer and seller for the property; which for what we're doing will usually be limited to the realty rights we're appraising. How any one of those buyers chooses to occupy the property doesn't enter into it unless they put a lease on it. So they can occupy the property as an ashram or a sober living facility or a cult compound all they want - what we're trying to do is identify the typical buyer and how THEY would commonly proceed to use the property.

It's a virtual certainty that if this business doesn't perform and the borrowers stop making their payments that all a lender is going to get back is the realty. They won't be getting the business, they won't be getting the website, they won't even be getting the FF&E.

The valuation of a hospitality property is a whole different ball of wax that will include consideration of the non-realty rights, the heavy management and expense load, the occupancy rate, seasonality in the rents, and so forth. THOSE interests will not fit the criteria of most conventional residential and even some of the commercial lending programs.

Just as an example, the C-19 lockdowns put a lot of these businesses on their ***, so that's an example of something that's happened in the past and can happen again.

 

[George Hatch]

Depending on where the project is located the development of a new 4-unit residential property might not even be economically feasible from an income standpoint; the HBU for the project might be to map as condos and sell the units off individually to owner-users.

 

[J Grant]

Our office just got handed an assignment to perform a residential appraisal on a new development quadplex. So far so good. We do plenty of those, and know the market for long-term tenant rentals well in the subject's market area.

The problem is, the developer is adamant that the units are going to be rented on a per-day/week/month basis, ala AirBnB, and as a result, any appraisal performed must approach appraising said property based on per-day/week/month rental prices, market cap rates, etc. rather than as long-term rentals.

Both our team and the underwriting team for the loan are uncertain if this property therefore requires a commercial appraisal, rather than a residential appraisal, given this information and the significant difference in utilization and expected rental income compared to a standard long-term lease. It seems to me as though the property should fall under a commercial appraisal rather than a residential appraisal, as its highest and best use per projected income rates would be as a short-term rental, thus putting it in direct competition with other commercial hospitality services. If it is commercial, then we need to pass on the order as we only handle residential orders.

We are hoping someone here has dealt with this issue previously and might be able to shed some light on how to proceed. Has anyone dealt with this? Would this fall under a commercial appraisal umbrella rather than a residential one?

The developer instructing how to value the property is an unacceptable assignment condition.

 

[spittman]

The problem with finding data on comparable short-term rental properties is that it's not posted in any reliable source that I know of. Most don't even give you the addresses of anything potential on their website unless you actually rent them therefore you can't verify anything other than the few details they show you. You can try to track down the owner or the property manager and just hope they will share all the information you need. Good luck!

Sounds like you have a competency issue. If you can't get past rule #2 then you should decline.

 

[Michigan CG]

Short-term rental properties involve a business aspect and I think a CG should do the report. This CG would turn it down as it sounds like it is a pain in the rear.

The management expenses, cleaning expenses, advertising, etc. are all things to consider and the research would be very time-consuming. Add in the developer is insisting on the short-term rental valuation it sounds like more of a pain in the rear.