Retrospective Values And Prospective Values

[George Hatch]

Q1: you have an assignment to provide a retrospective value on a property with a prior effective date of 2005. When you express that value conclusion in your report it will be in terms of:

a) 2015 dollars, as a result of adjusting the 2005 sale prices of the comps to 2015 dollars
b) 2005 dollars with no adjusting for present value

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Q2: you have an assignment to provide a prospective value on a property with a future effective date of 2017. When you express that value conclusion in your report it will be in terms of:

a) 2015 dollars, as a result of adjusting the projected 2017 sale prices of the comps to 2015 dollars
b) 2017 dollars with no adjusting for present value


How would you answer these questions, and why?

(BTW and before someone asks - do not assume any other instructions from your client or intended users in reference to the above beyond providing opinions of retrospective or prospective values with effective dates that are not contemporaneous with the engagement and report dates.)

 

[Terrel L. Shields]

B

 

[hastalavista]

Q1: b
The value reflects the most probable price as of the retrospective date. The data analyzed is (usually) contemporaneous with the value date. Market-condition adjustments would address implicitly any difference in the value of a $1 from 2004 vs. the value of a $1 from 2005.

Q2: b
Just as in the retrospective analysis, in the prospective analysis, market condition adjustments implicitly address any difference in the value of $1 now vs. the value of $1 two years from now.

By definition the value (market value, at least) of a property on the effective date is expressed in terms of U.S. Cash or its equivalent for which it would sell for on that effective date.

At least, that's what I say.

 

[J Grant]

Retropsective to 2005 would be what it would have sold for in 2005, which means in those dollars , whatever the $ was worth then would be baked into the prices.

Prospective in 2017 only 2 years from now how could we possibly foresee what value the dollar will be then, if there is inflation etc....I'd leave that up to the client/user to adjust for if they want to . How could you do a prospective value 2 years out not knowing interest rates what they will be...that seems to have a far larger impact on prices..

Since my expertise is an appraiser and not an economist, I would not want to project what the dollar would be worth in 2 years ... retrospective whatever the $ was worth in 2005 was reflected in prices at that time.

 

[George Hatch]

AFAICT, no appraiser actually WANTS to try to foretell the future. There are a lot of assignments that call for forecasting to be done anyway, though. More assumptions = more limitations, so it really only becomes a problem if/when the appraisers fail to adequately disclose those assumptions and limitations.

BTW, I only posed the question to get people who may not have previously considered the situation to start thinking about the "why".

 

[CANative]

B - for the reason Denis already posted.
A or B depending on assignment conditions. IMO.

 

[Terrel L. Shields]

It behooves me to point out that confusion exists over "prospective" value and proposed construction valuation where the assumption is that the building has already been constructed as of the date of (current) appraisal even when clearly the property isn't built (thus is a hypothetical condition).

Prospective appraisals would have the extraordinary assumption that the property as of THAT date in the future will be built thus is not contrary to what (will) exist and therefore is an extraordinary assumption, not a hypothetical condition. That is not an intuitive interpretation, but clearly is the case by most folks who address the matter.

Prospective, by its very nature, requires forecasting. Thus it must be carefully caveated to avoid being misleading.

 

[Tim The Enchanter]

B, since I never thought of A before.
If they want 2015 dollars, they can crunch their own numbers on that bit.
Shouldn't be hard, apart from picking your data source maybe.

 

[George Hatch]

I do not consider the characterization of that prospective value as hinging on an EA to be settled science.

Inasmuch as some "subject to completion" projects never get completed at all, much less on time, I really don't see how that prospective value hinges on an EA as of that date instead of an HC.

If you start off with an existing structure as of your assignment date and it involves a prospective value THEN you would have reason to believe - in lieu of information to the contrary - that it will still exist in the future.

"I think it has a permit" is a typical example of an EA. "I think the property attributes in effect 12 months ago are basically similar to what I saw in my inspection today" is an example of an EA.

But IMO "I think it might be built by that time" is still an HC in my book. That value is still contingent on whether or not that project gets built per the HC, which may or may not ever occur.

I finished an assignment a couple weeks ago involving a Prospective Value on a proposed construction deal that I KNOW won't get built by that date because I already told the client the project as proposed wasn't economically feasible (by like 15%). How in the world can I say my Prospective Value conclusion in that assignment was based on an EA?

 

[hastalavista]

I do not consider the characterization of that prospective value as hinging on an EA to be settled science.

Inasmuch as some "subject to completion" projects never get completed at all, much less on time, I really don't see how that prospective value hinges on an EA as of that date instead of an HC.

"I think it has a permit" is a typical example of an EA. "I think it might be built by that time" is still an HC in my book. That value is still contingent on whether or not that project gets built per the HC, which may or may not ever occur.

I think the differentiation between using an EA vs. an HC in a prospective valuation assignment is simply this:
A. Is it reasonable to assume, based on what is known, that the subject will exist as proposed on the prospective date? If so, then an EA is appropriate. One might want to argue that an EA isn't needed, but I wouldn't agree with that. The assumption that it will be built, reasonable as it is, is significant and critical; the client/intended user must be made aware that the use of the EA can affect assignment results.
B. If it is not reasonable to assume, based on what is known, that the subject will exist as proposed on the prospective date, then the EA is not appropriate (IMO). I might explain that rationale in the report like this:

I've concluded that "X" isn't likely going to happen; I cannot use an EA to make what I don't think will happen... happen. I can use an HC and explain why I think that is appropriate- I don't think this is going to happen for A, B, and C reasons; such that it isn't reasonable to assume it will; rather, It is reasonable to assume it won't. Since X's existence is a future event, we cannot say definitively it will or it won't occur as we can with the same certainty for a current event; the current event either is or isn't while the future event is always it might or might not. For a future event, we must consider if the occurrence is likely and if that assumption is reasonable. If the event does not meet this threshold, it is unreasonable to assume it will occur and therefore an EA is not the appropriate mechanism to use in the valuation analysis.
For this assignment, I do not consider "X" to be a reasonable assumption for the reasons stated at this time. As such, my prospective valuation is based on the hypothetical condition that condition "X" exists on the prospective date of value.
The use of an HC can affect assignment results.​

Now, the only remaining problem with using an HC in that case is to make sure it meets the HC's usage-requirements. I cannot HC an impossible or implausible event unless the HC is "clearly required" for (a) purposes of reasonable analysis, (b) legal reasons, or (c) purposes of comparison.

If Toll Bros. is planning a 20-lot subdivision of luxury homes in 4-years and has the necessary parts of that project in-place that would be expected to be in-place 'now' if the project is to be finished in 4-years, then it is reasonable to assume (EA) that they will be finished.
If DeSaix & Boyd Luxury Homes, Inc., has the same parts in place "now", it probably isn't reasonable to assume they will be able to finish on-time (or at all). And in those guys' case, I'm not sure an HC would salvage their project either!