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Wow, This Is A Terrible Appraisal

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Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
I just receive an assignment to appraise a retail store and gun range in a small city in New Mexico near a military base. It’s for a local bank that is a new client and apparently the loan is in distress after just a couple of years. The property started out as a bank branch and was last listed for $350,000 (about $50/SF). The buyer purchased it a couple of years ago (presumably at or below $350k) and renovated the bank branch into a retail gun store and built a new concrete tilt-up firing range behind it.

In taking to the bank I asked if they had any information on the property since public records are basically nonexistent and they sent me the prior appraisal from 2015 when the renovation/construction was going on. All I can say is wow. This might be the worst appraisal I’ve ever seen.

Sales comparison approach consists of two local sales, a national auto part store and another national retailer. Both single-tenant NNN leased investment sales at sub 7% cap rates. One sale was 10 years old the other was 8 years old and both sold for around $175/SF. No mention of adjustment for time/market condition, no mention of adjustment for leased fee/fee simple (subject is owner occupied with a non-arm’s length lease in place). The appraiser included secondary sales of gun ranges which include a new Gander Mountain in the Dallas-Fort Worth area at $250/SF (presumably another long-term single tenant NNN investment sale), a gun store in the Phoenix area with no gun range at $70/SF, and one decent comp in Utah that included a gun range but the source was CoStar and the appraiser simply estimated the purchase price based on the loan amount (assuming an 85% LTV) as CoStar hadn’t confirmed it. Oh, and CoStar mentioned that it included the business value but no allocation of course.

Then followed a LoopNet printout of a gun store sale in TN with a gun range at about $70/SF and a listing of a gun range in NY for $95/SF. He then concludes with about a paragraph of “analysis” that the value is around $135/SF plus fixed equipment and inventory adding another $600,000. No grid or other adjustments of any kind, just a range from $100 to $170/SF where he concluded $125/SF for the original building and $140/SF for the gun range, or about $2 million. This despite the total construction cost being estimated at about $1.5 million.

The income approach was even worse. His revenue was based on the owner’s estimate and includes rent for each portion at $12-14/SF with no rent comps and no other data. On top of that he adds CAM revenue of $16/SF plus property tax and property income and finally equipment lease income. All told he comes up with revenue of almost a half million which equates to about $30/SF. A shadow-anchored retail strip in front of a Walmart in town just sold and the rents for 1,200-3,000 SF in-line retail spaces were only $15-20/SF which is probably about the top of the market and yet somehow a retail store miles outside the city should be expected to generate income of $30/SF according to this appraiser.

Throughout the report the appraiser includes “inventory” i.e. the $500,000 in guns sitting inside the building as if those are in any way shape or form relevant to the real estate. I saw no mention of going concern even though it appears the appraiser decided to appraise the going concern instead of the fee simple real estate as requested by the client. I think I may need to send this report into the state as it is just terrible. Here’s a last little gem:

Market value is defined by the USPAP as follows:

“Market Value is the price which the property will bring when it is offered for sale by one who desires, but is not obliged to sell, and is bought by one who is under no necessity of buying it, taking into consideration all of the uses to which it is reasonably adaptable and for which it either is or in all reasonable probability will become available within the reasonable future.” City of Austin v. Cannizzo, 267 S.W.2d 808, 815 (Tex. 1964).
 

Michigan CG

Moderator
Staff member
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Joined
Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
An old local bank branch gets comps from Texas, TN and Utah?

$16/SF for CAM?

The bank dropped the ball on this as someone has to have the brains to figure out that old bank branches don't get comps from other states.
 

Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
An old local bank branch gets comps from Texas, TN and Utah?

$16/SF for CAM?

The bank dropped the ball on this as someone has to have the brains to figure out that old bank branches don't get comps from other states.

Well it was renovated into a retail gun store and gun range. Still, how they came up with $240,000 in CAM is beyond me. The income statement I received (for the business) shows the owner is actually paying (himself) rent of about $15,000 per month or right about $12/SF which seems reasonable based on my limited research thus far. The appraiser capped that half million in "income" at 7.6% based on band of investment only.

"The Cap Rate should be low because rate is a reflection of risk. The exceptional quality and strength of the company as a source of funds for lease income... " Yes, a brand new company based entirely on proforma's has exceptional quality and strength.
 

Gobears81

Senior Member
Joined
Nov 7, 2013
Professional Status
Certified General Appraiser
State
Illinois
"The Cap Rate should be low because rate is a reflection of risk. The exceptional quality and strength of the company as a source of funds for lease income... " Yes, a brand new company based entirely on proforma's has exceptional quality and strength.
That statement might have been an accidental copyover from the appraisal that he pulled the national retailer sales from :)
 

reviewbe

Sophomore Member
Joined
Oct 4, 2016
Professional Status
Certified General Appraiser
State
California
Love it when the property owner pays him/herself rent, and the appraiser doesn't include any rent comps. Even if it turns out to be an ok #, it still isn't credible within the report. Sounds like your boy/girl has mixed up a bunch of stuff, was in over their head, or was in cahoots with the owner. And another reason to file complaint with the state; sounds like somebody is going to lose some money based on the faulty appraisal. If that appraiser doesn't know or doesn't care about how to appraise, and yet has the seal of approval (license) from the state, they could be dangerous.
 

Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
Love it when the property owner pays him/herself rent, and the appraiser doesn't include any rent comps. Even if it turns out to be an ok #, it still isn't credible within the report. Sounds like your boy/girl has mixed up a bunch of stuff, was in over their head, or was in cahoots with the owner. And another reason to file complaint with the state; sounds like somebody is going to lose some money based on the faulty appraisal. If that appraiser doesn't know or doesn't care about how to appraise, and yet has the seal of approval (license) from the state, they could be dangerous.

They also had the qualifications and Texas license of an MAI appraiser in the addenda (who didn't sign the report and was probably leftover from some other appraisal) along with the appraisers 10 pages of qualifications listing every single continuing education class he's taken in a career stretching back a few decades.

Mortgage was for $1.27 million so at least it looks like the bank didn't go too crazy and loan at an 80% LTV on the "as complete" value.
 

timd354

Elite Member
Joined
Jan 11, 2008
Professional Status
Certified Residential Appraiser
State
Maryland
They also had the qualifications and Texas license of an MAI appraiser in the addenda (who didn't sign the report and was probably leftover from some other appraisal) along with the appraisers 10 pages of qualifications listing every single continuing education class he's taken in a career stretching back a few decades.

Mortgage was for $1.27 million so at least it looks like the bank didn't go too crazy and loan at an 80% LTV on the "as complete" value.
If the appraisal report is only 1/2 as bad you have described then I don't feel sorry for the bank...apparently nobody at the bank who knew what they were doing bothered to actually analyze the appraisal report, so they deserve to lose whatever money they are losing on that loan.
 
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