Appraisers' Free Forum

Hi, guys, long-time, no talk. Hope everyone is doing well.

I’d like to use this as a sounding-board for a problem I am working on. And, yes, I have a supervisor (commercial licensed since the start of licensing); before I present my position to him I wanted to use the benefit of the group’s wisdom first!

Here is the deal:

My client has a leasehold interest (20-year lease) in a medical office condo unit. This is a Class-A medical building, just built (2008) with 70% leased and located on the main campus of a large regional hospital. The configuration of the larger office building is multi-story (8) with a one-story “wing” (approximately 30,000sf) attached to the mid-rise.

The mid-rise is “finished” space- finished means all walls, cabinets, flooring, lighting and fixtures are in-place. Potential buyers have a limited choice of finishes for these spaces or can finish it to their own specs (and on their own dime). So, the finished space is ready-to-occupy. Bring in your furniture and equipment, and you are ready to start examining patients.

The one-story wing is unfinished. It consists of a “shell” (concrete walls and roof) but inside the shell is unfinished area (dirt ground). A potential tenant can get build-to-suit or contract to finish him/herself.

My client has a condo unit (approximately 6,000sf) on this one-story wing. It occupies a corner and he is building (self-contracting) a high-tech radiation surgery center. Fortunately, his special-use valuation is not part of my assignment (otherwise I’d definitely pass; the thing is built like a nuclear reactor).
My client is building its improvement within the condo shell. In other words, my client’s surgery center will be located within the one-story wing but is separated from the exterior walls and the roof (except for some skylight cut-outs) by 4-6 inches. Because of the nature of the use (radiation surgery), my client’s power source and HVAC are located not on the roof but located outside the exterior wall of the condo shell. This center will be self-contained within the condo shell (exterior walls and roof). Also, because of the radiation use, this type of improvement would be limited to one-floor (one cannot build anything above it).

My client is negotiating with the HOA to purchase the lot where its unit is located.
If the purchase occurs, my client will own the lot below its improvement, the airspace above the improvements, but with the limitations of having the pre-existing shell (exterior walls and roof) in-place.
My client will be paying a maintenance fee (TBD) for the exterior wall and roof maintenance, and will be paying the HOA for use of the common area parking lot.

So, my assignment is to value the subject’s lot as-if it were vacant and could be developed to support a 6,000sf Class-A medical office.

So far, here’s what I’ve considered:
A. Ideally, if I can find a similar-type vacant lot, end of story. So far, no dice. Most of the parcels I’ve found are much larger (can support a larger building than 6,000sf). However, I have a few more resources to chase down.
B. Likewise, I’m looking at sales of existing medical buildings. The problem I’m running into is that it is difficult to find such a small building for sale in such close proximity to the hospital; most Class-A buildings are larger.
C. And, I’m also trying to find land-leases of similar properties.
D. I can do a land residual analysis.
E. I could (I suppose) do a development analysis, starting out at what a finished property would sell for and then working backwards to the land value.

There are a couple of other ideas I need to consider:
1. Although the physical size of the improvement is limited to 6,000sf, the ideal lot-size for this project would be based on a FAR that resulted in a 6,000sf improvement.
2. The HOA dues for exterior wall/roof maintenance is an operating expense that would be somewhat offset by normal maintenance charges if the building were free-standing.
3. Parking would be a necessary cost in developing this project if it were free-standing. However, the maintenance of the lot is taken care of in a separate agreement and would offset parking-lot maintenance costs.


So, that’s my issue. Any and all suggestions, criticisms, or observations are appreciated!

Well, this is way over my head, but I just wanted to say hi and that I am glad you are posting!

Thanks, Annemieke. I took a long hiatus, mostly because I went back to school to finish my degree (done, I'm happy to say).

I've only promised Otis for the last year I would be back. I'm a little slow!

Took you long enough - LOL

Welcome back - it's beyond my abilities too - However, based on the fact that it's new then I'd think the cost approach would be more applicable. Another however is you situation with the them purchasing the outside site for the electrical - that's something that, IMHO, you can't value until it's approved, without invoking HC.

BTW - glad you got that degree and welcome back - test messages get attention. LOL

Otis wrote:Took you long enough - LOL

Welcome back - it's beyond my abilities too - However, based on the fact that it's new then I'd think the cost approach would be more applicable. Another however is you situation with the them purchasing the outside site for the electrical - that's something that, IMHO, you can't value until it's approved, without invoking HC.

Thanks, Otis!

Invoking HCs will be necessary on a number of fronts because the parcel does not legally exist yet (although I can identify it sufficiently for purposes of the assignment).
The intended use is for purchase negotiations, not for a loan or finance by a financial institution. I've worked for the primary client ( a medical doctor) on a residential litigation and on a residential purchase negotiation before- he wants to know is how much is the land worth if it were vacant so he can start his negotiation process with the Condo HOA. It is a great assignment in that there are no lending or finance issues; just develop a credible result (USPAP Compliant) and he will take the appraisal, give it to the Condo HOA, the Condo HOA gives my client its appraisal, and then the negotiations begin.

Denis,
Welcome back. It's good to have you around again.

And, Otis, he's doing dirt. Cost approach? You've been in the tequila again.

W/R/T your assignment:
Forget the radiation, fancy gadgets, double-walls on the improvement, external parking, outside maintenance, etc. You're valuing dirt, not the planned improvements, nor the existing improvements. Do a proper HBU analysis, and compare dirt to dirt. If the HBU is for high-volume retail, then compare it to high-volume retail land.

Your HBU analysis should show the client the amount of functional obsolescence they'll experience by using the land below its HBU. Show that with a cost-benefit analysis on each of the feasible uses, and for each use show the residual land value. (Yes, it's a lot of work. That's why commercial appraisals come with invoices that have four or more figures before the decimal.) Highest residual land value is the indisputable winner of the HBU sweepstakes. After that, you know exactly what kind of land to use for comps.

From your description, HBU may be multi-story, mixed-use (e.g., retail on first floor, offices on top floors. Or maybe a multi-level parking facility for the hospital.). But zoning will tell you whether you can build anything besides a medical facility on the land. If the hospital is a mid-rise, then it may be possible to build a 6,000 sf footprint midrise. If your client wants to use it for a purpose below HBU, that doesn't change the fact that property must be valued at its HBU. And it's the as-vacant, fee simple value they have asked for. Maybe not what they want, though. Sounds like they may have to pay through the nose for single-level use.

You aren't likely to find sites with the same area, or even close to the same. Find every piece of dirt that's sold in similar zoning and similar situs over the last five years. Run graphs of $/sf vs. time; and $/sf vs. size to look for relationships. Use the proper unit of comparision, too. If $/Front-foot is better than $/sqft, then use it. Most of the work is in the HBU analysis, and most of that is in the cost-benefit analyses of the various feasible uses. Once that's settled, select the comps, reconcile the $/unit, and multiply by the subject's units.

The income approach is done like any other income approach. Find leases of similar land. Interview parties to get maintenance and management expenses; tax rates are available, and so are insurance costs (but ask the parties anyway. You never know what that'll turn up. Keep'em talking). Extract cap rates from the comps. Use direct capitalization if that's what typical buyers do. If yield cap is needed, though, write back and I'll see if I can help. Most of my stuff responds well to direct cap, so I don't get much practice at that.

Oh, and if the assignment has a consulting component, don't forget to use and certify USPAP Std 4 and Std 5

Denis,
First, I’d say don’t bother with the yes-I-have-mentor apologetic garbage. Just deal with the idiots who project their own idiocy onto you, AFTER they post.

Second, you say
So, my assignment is to value the subject’s lot as-if it were vacant

If that is true, then your prior five paragraphs describing the improvements and the actual rights owned by anyone is irrelevant, and you could have saved yourself a bunch of typing.
If that is true, your real question seems to be the perpetual and painful one – how do I appraise unimproved land for market value without comps? If it is, then post again, and ask me that question.

As to the hypothetical – In appraising and consulting for buy-sells, you must often throw out much if not the entire assumption base employed in standard (fee simple or so-called “leased-fee”) market-value appraising. In the circumstances you describe, both parties have an interesting in the “property” involved (and that property seems to be real, personal and intangible).

It is perfectly legitimate (unless you don’t think common sense is an underpinning of “credible”), to appraise to a hypothetical benchmark that might satisfy both parties. That is, since these parties might agree in principle that the market value of the (hypothetical) fee simple of the land as if vacant is a reasonable basis of exchange, then an independent appraiser is the likely candidate estimate that value for them. You just have to make it clear in your engagement documents and report, that you are not advising either of them that this is the “right” amount to pay or accept; that this is, in your opinion, the the amount that reflects such an agreement in principle (or to support an opening offer, as you said).

Later, you could take on what is, in the stirring rhetoric of AO-3, “simply a new assignment” to appraise some other interest in some other property that is part of what one of them owns in part or in total. For example, they may later ask for the present value of HOA fees, or the use of some common area, etc., which they might add to or subtract from you first estimate. Or, you may later take on what is simply a new (consulting) assignment, to tell one them, in your opinion, paying land value is a steal or a gift.

Also, watch out for Jim's advice. Common sense and my experience tell me that cost may a a motivating factor for someone, like your client , for whom "cost" represents what they already have in this deal. In such casis you might find that a reasonable party is willing to exchange at cost-plus, not cost-minus (the basis of what many refer to as "the" cost approach). Your client is, as they say in the poker rooms, "pot-committed," (and stands to lose, among other things, the present value of operating and benefitting from the use of this property from year 21 to perpetuity, when junior will be ready to take over the family business).

Jim-

First, thanks for the feedback.

You hit the nail on the head (and refocused me on the problem) with your comment

You're valuing dirt, not the planned improvements, nor the existing improvements.

H&BU is as a medical office.
One other consideration: As I mentioned, my client is negotiating to purchase the land that is contained within the "shell" of the existing condo walls & roof. Although my client will own the airspace above, development (building "up") is restricted due to the existing condo roof (as well as the specific use- radiological surgery requirements) but regardless of what my client's specific use is, the roof creates what I would call a restrictive development easement. They cannot build above the roof for as long as the roof is in existence. So, I would think, regardless of the actual lot size, my best match is that which reflects a similar improvement capability (as calculated by FAR or LTB ratio).

I also appreciate this advice:

You aren't likely to find sites with the same area, or even close to the same. Find every piece of dirt that's sold in similar zoning and similar situs over the last five years. Run graphs of $/sf vs. time; and $/sf vs. size to look for relationships. Use the proper unit of comparision, too. If $/Front-foot is better than $/sqft, then use it. Most of the work is in the HBU analysis, and most of that is in the cost-benefit analyses of the various feasible uses. Once that's settled, select the comps, reconcile the $/unit, and multiply by the subject's units.

And, as you and PC point out, the other stuff about what is being built or is intended to be built is not significant to the problem at hand. I thought that may be the case after I read how I wrote about the assignment in my post, but decided to leave my post as-is to get the full benefit of everyone's advice.

Thanks!

Pina Colada wrote:Denis,
First, I’d say don’t bother with the yes-I-have-mentor apologetic garbage. Just deal with the idiots who project their own idiocy onto you, AFTER they post.

I hear you. A learned habit which I will break.

Second, you say
So, my assignment is to value the subject’s lot as-if it were vacant

If that is true, then your prior five paragraphs describing the improvements and the actual rights owned by anyone is irrelevant, and you could have saved yourself a bunch of typing.

Both you and Jim point this out and I see it now.

If that is true, your real question seems to be the perpetual and painful one – how do I appraise unimproved land for market value without comps? If it is, then post again, and ask me that question.

That may be a follow-up post. I have a meeting a broker who specializes in medical offices in this area (greater San Francisco Area). With luck, I'll get some good data from this source.

As to the hypothetical – In appraising and consulting for buy-sells, you must often throw out much if not the entire assumption base employed in standard (fee simple or so-called “leased-fee”) market-value appraising. In the circumstances you describe, both parties have an interesting in the “property” involved (and that property seems to be real, personal and intangible).

It is perfectly legitimate (unless you don’t think common sense is an underpinning of “credible”), to appraise to a hypothetical benchmark that might satisfy both parties. That is, since these parties might agree in principle that the market value of the (hypothetical) fee simple of the land as if vacant is a reasonable basis of exchange, then an independent appraiser is the likely candidate estimate that value for them. You just have to make it clear in your engagement documents and report, that you are not advising either of them that this is the “right” amount to pay or accept; that this is, in your opinion, the the amount that reflects such an agreement in principle (or to support an opening offer, as you said).

You've outlined what the engagement agreement with the client is really about. I'm providing an opinion of the land as-if it were vacant with the H&BU as a 6,000sf medical office. My client explicitly has acknowledged that this value is a starting point (benchmark) for his negotiation process. The rest of the influences (existing roof, maintenance agreements, HOA dues for parking, etc.) are all negotiable and outside of my current assignment.

Later, you could take on what is, in the stirring rhetoric of AO-3, “simply a new assignment” to appraise some other interest in some other property that is part of what one of them owns in part or in total. For example, they may later ask for the present value of HOA fees, or the use of some common area, etc., which they might add to or subtract from you first estimate. Or, you may later take on what is simply a new (consulting) assignment, to tell one them, in your opinion, paying land value is a steal or a gift.

I understand.

Also, watch out for Jim's advice. Common sense and my experience tell me that cost may a a motivating factor for someone, like your client , for whom "cost" represents what they already have in this deal. In such casis you might find that a reasonable party is willing to exchange at cost-plus, not cost-minus (the basis of what many refer to as "the" cost approach). Your client is, as they say in the poker rooms, "pot-committed," (and stands to lose, among other things, the present value of operating and benefitting from the use of this property from year 21 to perpetuity, when junior will be ready to take over the family business).

(my bold)
Yes. I believe that is the reason why he is in the negotiation now; to secure the property in perpetuity. His pot is his tenant improvements he has constructed so far (and is on schedule to be completed by the end of the year). One would think that the HOA has all the high cards in this hand? Interestingly enough, the HOA is obtaining their own appraisal. The agreement is when both appraisals are completed, each party will exchange appraisals and the negotiations then begin. As I understand it, both the HOA appraisal and mine are operating under the same set of conditions/assumptions about the assignment problem. It will be interesting to see how the hand is played out.

Thanks for your help!

Thanks for your help!

Doesn't really sound like you need it any more.

Denis DeSaix wrote:H&BU is as a medical office.

Have you proven that? Is it a zoning/CC&R restriction? Or are you simply accepting the client's finding and desires as an assignment condition?

If the latter, once again, forget the improvements, and ignore the client for a moment. Can that dirt be used more profitably? Can you prove it? It's awfully easy to let the client sidetrack you into an HBU finding that can't be supported from the market. The reason I keep beating this horse is because your description makes it appear physically and legally possible to construct more than one story without going above the adjoining roof.

You wrote:development (building "up") is restricted due to the existing condo roof (as well as the specific use- radiological surgery requirements) but regardless of what my client's specific use is, the roof creates what I would call a restrictive development easement. They cannot build above the roof for as long as the roof is in existence.

You stated earlier that the adjoining building was an 8-story midrise. Could seven stories be built? Higher density usually equates to lower cost/sqft and higher overall value due to economy of scale. If it is physically and legally possible to construct more than one story, your HBU might be for a multi-story medical office--if your market analysis indicates sufficient demand for more such space. Ignore that specific use involving radiation, or you'll end up finding value in use rather than market value.

You can use the "feel" technique if you're experienced. Some of the old hands around these parts simply look the property over, then "feel" that the HBU is whatever the client wants to do with it, based on their vast experience as appraisers. That sends me into an irrational frenzy of cussing every time I see it.

One other thing: Stop referring to the association as an HOA. This isn't residential work. That association might be better referenced as a Property Owners' Association (or perhaps a Condo Association) rather than a Home Owners' Association. It's a small nit to pick, but little things can make you look like you don't know what you're doing.

Jim-

This is why I posted the question- to get meaningful and helpful feedback!

Yes, I have verified that the H&BU is Medical Office. The project is part of an existing (but newer) hospital's footprint with its own PD (Planned Development) zoning designation. The allowable PD zoning states:

Allowable Uses: Those Medical related uses identified as Permitted in the CO Zoning District, including
Hospital
Medical Clinics
Trauma Center
Emergency Helipad (temporary and permanent)
Mobile Imaging Unit (MRI, C.T., Scanner, etc.)
Medical Offices

This particular site is located within the shell of a larger medical office building. The larger medical building is located on what I would call the "campus" of the regional hospital- the entire campus is regulated by the above referenced zoning (the zoning also allows for some "incidental uses" such as gift shops, flower shops, cafeteria, etc.). The medical office building has medical offices for patient walk-in examinations and treatment. The likely buyer is the likely user (either an individual practitioner or part of a larger doctor's medical group). In addition, the current condo documents prohibit occupancy by anyone other than a licensed medical doctor or firm (no dentists or chiropractors). The set-up is what one would expect at any modern regional hospital: the traditional hospital facility and surrounding buildings used by doctors, specialists and out-patient practitioners.

I think the legally permissible uses narrow the possible uses for this specific site down to one: Medical office (or similar-related use).

I think I have my bases covered on H&BU- what say you (or others)?

Thanks!

Denis,
Sounds like the feasible uses are under proper legal constraint. But narrowing the specific site down to one use: Medical office, serves only to narrow the field of feasible uses to a single general use. Now you have only to address how many medical offices could be leased out on this site.

I understand that there's a building shell already in existence, but we need to support whether the new owner can remove that shell (or part of it) and construct, for example, a five- to seven-story structure to house many more medical offices and realize much more lease income. This option as well may be foreclosed by deed restrictions or condo by-laws. If you can eliminate all other feasible uses by deed restrictions or by-laws, you cut down the amount of support work you have to do.

Something just occurred to me. Could your client, instead of purchasing the dirt, simply purchase an easement for the air and subsurface rights? Seems to me that if the air rights are already constrained by the by-laws or deed restrictions, he'd save money by merely purchasing a subsurface rights easement to the depth necessary to protect against injury from radiation. I realize this goes beyond appraising dirt and reaches far into the consultation bag, but I thought I'd mention it as an alternative. Execution of this option lies in lawyer country, though.

Jim Plante wrote:I understand that there's a building shell already in existence, but we need to support whether the new owner can remove that shell (or part of it) and construct, for example, a five- to seven-story structure to house many more medical offices and realize much more lease income. This option as well may be foreclosed by deed restrictions or condo by-laws. If you can eliminate all other feasible uses by deed restrictions or by-laws, you cut down the amount of support work you have to do.

(my bold for emphasis)

Jim-

The bolded part is the case. The existing shell that covers the site my client wants to purchase represents approximately 15-20% of the total single-story enclosed area. So, the seller has an interest to maintain its ownership and control of the shell as it is part of a larger structure which it will operate.
An additional factor to how this purchase negotiation evolved is this: The radiological treatment area is encased in a significant concrete (actually, it is "shotcrete") bunker that is lead-lined as well. The mass of this structure required that it be set-back from the existing exterior concrete walls by at least 4-inches. The set-back was due to the earthquake potential: if the bunker were to shake and was directly connected to the exterior walls or roof, the shell could not withstand the force of the bunker shaking and it would collapse.
So, in essence, the seller is requiring the roof/wall easement as part of the conditions of the sale; building "up" is therefore not an option.

Something just occurred to me. Could your client, instead of purchasing the dirt, simply purchase an easement for the air and subsurface rights? Seems to me that if the air rights are already constrained by the by-laws or deed restrictions, he'd save money by merely purchasing a subsurface rights easement to the depth necessary to protect against injury from radiation. I realize this goes beyond appraising dirt and reaches far into the consultation bag, but I thought I'd mention it as an alternative. Execution of this option lies in lawyer country, though.

An interesting idea and one I would not have thought of, but now if brought up, will not come as a surprise to me (thanks to you).
I think the issue is, as PC commented on, that my client wants to secure fee simple ownership rights to the property to eliminate leasehold re-negotiation risk down the road (due to the significant special-use investment in tenant improvements he is making).
If the fee simple negotiations breakdown, I'll bring up this as a potential alternative for consideration (which would move it so "far into the consultation bag" that it would be moved out of my area of comfort! But that would be OK with me! ).

Yeah, appraising a subsurface easement is not a project on which to lose your commercial virginity. I speak from experience. Easement appraising and corridor appraising are so full of BS and outright fiction that reading the literature with a critical eye will infuriate you.

How the hell do you find the "market value" of something for which there is no market? Answer; You don't. Best you can get is value in use. Sales of comparable easements don't meet the test of normal exposure to market, and they don't meet the test of absence of pressure to buy or sell. Yet it's done all the time by people with letters after their names--people the rest of us look to as examples of excellence.

Now, you *can* appraise the diminution in market value due to the grant of an easement; the before-after methodology will work for that. But the diminution of the servient estate is not the MV of the easement.

Like I said, this is lawyer country for your situation. If you suggest the easement as an option, try to have the name of a good property lawyer handy. It would be worth losing the appraisal assignment to get the "smart guy" credential among that crowd.