Time For Another Poll On The Income Approach

[Paul Ness MAI]

Ok, time for a poll on this Steve. I know Copernicus' heliocentric theory would not have faired well with a poll, but hey this isn't rocket science! I believe even the great Aristotle thought the universe revolved around the earth!

 

[Fred]

Paul,
Why the childish approach of misrepresenting my posts? Why don't you just answer the question?

How can capitalized rent be fee simple value, when fee simple means not rented?

 

[Fred]

Pat,
Actual rent capitalized is the primary way to find market value of a rented property. (Although, one might question how excellent the value indication is without a sales-supported cap rate).

How do you know that market rent capitalized is equivalent to fee simple? Is that a conclusion you reached from studying market data? Do you have years of sales of fee simple interests in commercial buildings consistently selling at market rent capitalized at market rates? Would it surprise you to learn that market data does not confirm the hypothesis that fee simple interests sell at the equivalent of market rent capitalized at market rates?

Steve

 

[Paul Ness MAI]

Sorry if you were offended. No childish approach here and no misrepresentation (your posts are visible to all). That is exactly what you stated in your first post on that long thread that started all this - that the income approach was only applicable to the valuation of a leased fee interest, and by definition that means a leased property. Sheesh, you must have got up on the wrong side of the bed this morning. I posted the poll because (1) the first thread was getting too long, and (2) I wanted some input from others on the forum, and added some levity with the third option.

As far as your second comment, creating an income approach based on market-derived potential income for an unleased property does represent the fee simple interest. The process replicates what a potential buyer may analyze in their due diligence - it's calculating a reasonable estimate of the potential future benefits of ownership, BUT there is no encumbrance on the property at the time, the buyer still is buying the entire bundle of rights. Again my apologies if you took the poll wrong.

 

[Paul Ness MAI]

Steve, if you can show me market data that refutes the "hypothesis", I'd love to see it. I think I know where you are heading now, and the answer lies more in the highest and best use than it does in the ownership interest argument, but let's see. Put it in an article. I'm sure it would be an interesting topic for The Appraisal Journal.

 

[Fred]

Paul,
I am not really headed anywhere with this. I am truly trying to learn where everyone else is headed with it. HBU might be part of it. Hypothetical conditions might be part of it, too.

As to misrepresenting posts, the part I take exception to is the insertion of words like "never, always, only" and attributing these ideas to me. I avoid always and never. Verifiable economic principles are likely to become false if one includes those conditions. The most probable price is not the one that is "always" paid.

As to the market data, there is tons of it. However, it would be my understanding that in science, valuation or rocket, the party publishing has the burden of proving the hypothesis. Generally accepted standards of appraisal practice similarly require appraisers to reach conclusions through analysis of data, reasoning, etc. The appraiser does not begin with the conclusion, leave out the facts, and argue that the burden of proof is on the reviewer to come with contradictory data.

I am open-minded. I can be convinced that the hypothesis is true, even though it sounds contradictory and seems to contradict sales prices. I may use market information to illustrate points, but for now, I am waiting to see what that school of thought has to offer. So far, its just the oft-repeated conclusion that.
"creating an income approach based on market-derived potential income for an unleased property does represent the fee simple interest."

Why wouldnt the prevailing sales prices of unleased properties (and if you prefer, with similar HBU) represent the market value of the fee simple interest?

 

[Anonymous]

Well, let's see we can complicate the picture with mineral rights. No mineral rights, no fee simple, fee is surface only.....

Now, are mineral rights (oil and gas) personal property? real property? or a business value? USPAP says BV. The courts say RP, unless produced, when they become personal property. The rights to lease means the income is therefore of a leasehold interest....but wait...the lease says the lessor takes payment in kind..oil and gas, not in cash. The lessor, on the other hand, requires the leaseholder to market any such oil at market rates not less than the lessee gets for his leasehold interest.

What is the risk rate of the lessor? No investment, but a dry hole could condemn the property from being re-leased. Long term, the property might produce a steady, howbeit small, income in bonuses and annual fees, but not be leaseable for years if the property has a dry well drilled.

The mineral rights holder has a fee interest in the minerals with the complete bundle of rights...for the subsurface. The property has value in exchange even if it is not leased. But its probable value is affected by the owner's expectation of future benefits. And a cash lease is one of the only ways one can "enjoy" one's rights in the subsurface.

 

[Fred]

Terry,
You have made the point about USPAP and BV a number of times. I have agreed with you every time you made it.

 

[Paul Ness MAI]

I have tried to explain to the best of my ability why the income approach (using estimated economic rent to calculate potential gross income, commensurate operating expenses, and a reasonable market-supported cap rate) based on the theory of anticipation (replicating what a potential buyer would do in their due diligence) is appropriate to apply to the valuation of the fee simple interest. You do not agree, and that is your choice.

Now, I am here to learn too, and have asked you to provide support for your position. In previous posts you suggested that there are reams of data to support your position and asked me at one point if I'd be willing to change my view if data was presented. But in your most recent post you basically refused to share this information with us, turning the tables, and saying something to the effect that it was up to those of us who believe the opposite of you to proove our position.

I wonder why some of the most brilliant real estate PhD's and valuation theorists in the country have not already prooven us peasants wrong. Serious question - do you have any idea why such an incorrect (in your opinion) position has been accepted by academia, widely taught, and commonly used by appraisers everywhere?

 

[Fred]

Pat,
"Facts" always precede my conclusioms. That is why I asked you;

What facts
"How do you know that market rent capitalized is equivalent to fee simple? Is that a conclusion you reached from studying market data? Do you have years of sales of fee simple interests in commercial buildings consistently selling at market rent capitalized at market rates?"

Preceded your ocnclusions:
"When the subject is rented at market levels, the leased fee and fee simple values are virtually equivalent. In that scenario, with the absence of good market sales but good income data, the income approach would be an excellent indicator of value. "