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Value Thru Dcf - As Is Or As Complete?

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Scott.A

Sophomore Member
Joined
Dec 17, 2013
Professional Status
Certified General Appraiser
State
Iowa
Last week, I had my meeting with the Appraisal Review Board. Here in Iowa, the last step to getting the General license is to sit in the hot seat and get the third degree about selected cases. And I'm done... HOORAY!

Back to my question... One of my cases used discounted cash flow to get the Net Present Value of a new subdivision. I described the value of the property as "As Is", because DCF produces the current value of future cash flow. The reviewer suggested I should have used "As Complete" because DCF value is based on future events.

I can see his point, but this seems like a bit of a gray area with merit for both time frames. What say you? Is DCF an "As Is" value or an "As Complete" value?
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
A DCF can be used to conclude a value at any point along the time-line?
However, the closer to the end-point (sell-out or stabilization), there can be better techniques.
 

Pittsburgh Pete

Elite Member
Joined
May 6, 2008
Professional Status
Certified General Appraiser
State
Pennsylvania
Last week, I had my meeting with the Appraisal Review Board. Here in Iowa, the last step to getting the General license is to sit in the hot seat and get the third degree about selected cases. And I'm done... HOORAY!

Back to my question... One of my cases used discounted cash flow to get the Net Present Value of a new subdivision. I described the value of the property as "As Is", because DCF produces the current value of future cash flow. The reviewer suggested I should have used "As Complete" because DCF value is based on future events.

I can see his point, but this seems like a bit of a gray area with merit for both time frames. What say you? Is DCF an "As Is" value or an "As Complete" value?
Depends on where you are in the process. We typically value subdivisions starting from the raw land and having projected developments costs, etc. If the infrastructure is not yet in place, your DCF will be the value "as completed." If the infrastructure is already in place, you DCF will be the value "as is."
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
What he said,
However, if the value sought, is market,
and the intended use of the report is lending,

The argument will be made that buyers will consider the value reflective of the full occupancy level, so if more build out is available, as-if, will be what they are looking for in addition to as-is. There is no real right or wrong answer without a specific property, or a specific market supply and demand, so, you can't go wrong with both.

.
 

leasedfee

Member
Joined
Oct 14, 2007
Professional Status
Certified General Appraiser
State
Colorado
DCF value is based on future events

DCF as generally applied discounts to today (t=0) and hence reflects present value, As Is. Sounds like the gentleman doesn't know their DCF very well.

{{What I'm saying isn't TARE orthodoxy, but it is true: Direct income capitalization is based on the anticipation of future events. You stabilize vacancy, income, expenses, and the selection of the cap rate, which can be deconstructed using The Property Model to be more dynamic. The direct cap reflects thinking (pricing) about the future. The cost approach is based on future events too (at least portions),and arguably all cost is expended with the anticipation of future use/benefit without obsolescence. The buyers in the sales comparison approach base their purchase today based on future use, value trends, ratios, etc. It's all loaded in there, all future thoughts.}}
 

Pittsburgh Pete

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May 6, 2008
Professional Status
Certified General Appraiser
State
Pennsylvania
And when is "full occupancy level" achieved in a residential subdivision?
 

Pittsburgh Pete

Elite Member
Joined
May 6, 2008
Professional Status
Certified General Appraiser
State
Pennsylvania
DCF as generally applied discounts to today (t=0) and hence reflects present value, As Is. Sounds like the gentleman doesn't know their DCF very well.
Not sure how you can say that without knowing details the OP didn't provide. The value by the DCF is an "as completed" value if the appraiser begins with vacant land, unimproved land that is to be developed with the infrastructure of a subdivision. If all infrastructure of the subdivision (and we're talking a subdivision here) is in place, your DCF reflects the value "as is."

Suggest folks read the OP before responding.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
And when is "full occupancy level" achieved in a residential subdivision?

The term I see applied to subdivisions is "stabilized" (which I think is the same thing as you are saying, "full occupancy"). IMO "stabilized" is the wrong term to use for subdivision analysis.
Ask me how much the project is worth at any point along the timeline, but if you ask me for the stabilized value, then I'm going to ask you, "OK; where along the timeline is that? Because if it as at the point when the developer sells the last house, I'll give you that answer now: Zero."
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
The term I see applied to subdivisions is "stabilized" (which I think is the same thing as you are saying, "full occupancy"). IMO "stabilized" is the wrong term to use for subdivision analysis.
Ask me how much the project is worth at any point along the timeline, but if you ask me for the stabilized value, then I'm going to ask you, "OK; where along the timeline is that? Because if it as at the point when the developer sells the last house, I'll give you that answer now: Zero."
Yes,
that is correct when looking at industrial parks.

But we're seeing subdivisions for medical spaces "medical parks" if you will, full occupancy seems to fit them better, than stabilized, that, and the push for tax incentives to move in, and then move out when the tax incentives expire, well, stabilized just doesn't seem to cover the real picture anymore.

..
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Yes,
that is correct when looking at industrial parks.

But we're seeing subdivisions for medical spaces "medical parks" if you will, full occupancy seems to fit them better, than stabilized, that, and the push for tax incentives to move in, and then move out when the tax incentives expire, well, stabilized just doesn't seem to cover the real picture anymore.

..

Here's what I think and tell me if it fits the the medical park property-type...

First, let's define a few things:
As-is (whatever condition exists now)
As-complete (whenever construction is complete)
As-stabilized (full occupancy- if leased, when it is leased to market occupancy at market rates; if it is not leased, when it is purchased by the end user or the owner occupies it).

If I have an office building (or any property where i'm going to lease it out) then I know what stabilized is. My as-complete may not be my as-stabilized. Could be (pre-leased) but maybe not. Bigger projects, likely not.
If I have a vertical residential improvement, I may have some ability to occupy some space before the project is fully complete (usually not, but sometimes, yes). If that is the case, then my as-complete includes some occupied space. My as-stabilized would be when I get to my market level (occupancy and rates).
I could have a condo project where I'm not leasing, but selling the units. I might sell some and they can be occupied before the project is completed. Ditto for a subdivision; I'm building 50 homes; I've pre-sold 10 so when they are complete, they get occupied as I continue to build the remainder (so on and so forth). In these last two examples, what is "full occupancy" or "as-stabilized"? In deed, what is "as complete"? As a builder, I'm always going to pre-sell when I can. Closings might not happen until that unit is complete and ready for occupancy, but that can happen on the same day; I've sold 10 and I still have 40 in various stages of development.

I can always give the client an as-is. But depending on the property type, "stabilized" or "full occupancy" may not fit the definition those terms are best applied to. So, for those properties, those terms have to be better defined so I know at what point along the timeline I'm going to value the property. And, I've seen it where clients want a "stabilized value" of the project when all the homes are done, but expect it to reflect that none of the homes have been pre-sold or sold along the way (the way the ask for the value, it presumes all 50 homes sprout from the ground at the same time... or, the first home that has been ready for 8 months doesn't sell until the last home is built).

Where do the medical park properties fall into that mix (or, do they fall somewhere else)?
 
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