Real Estate Valuation Basics 101

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Real Estate Valuation Basics 101REAL ESTATE DUMBED DOWN 2016 SERIES

Premier date: May 27, 2016

Premier Date: MAY 27, 2016

Real Estate Valuation Basics 101

REAL ESTATE DUMBED DOWN SERIES

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 2

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS


PANELISTSANDREW DORCHESTER THE DORCHESTER GROUPJEANNE PECK BERKADIANICOLE PECOULAS CORNERSTONE ADVISORS

MODERATOR FELIX SHALIT,

SILA CAPITAL, LLC

Meet the Faculty


© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

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Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

http://www.financialpoise.com/


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about this webinarAccurate real estate valuation is important to everyone involved in a real estate deal: mortgage lenders, investors, insurers, and, of course, buyers and sellers. The principal economic bases of property valuation include the cost for which a substitute property can be obtained; estimating future income of the property; how change (nearby development and other trends) affects value; how competition will affect profits; whether contemplated improvements will make a net contribution to value; whether the property’s use is in conformity with other activities in the area; supply and demand; and what the highest and best use of the land might be. This webinar also specifically dives into the three primary means of appraising commercial real estate: the cost approach, sales comparison approach, and the income capitalization approach.


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about this seriesIf you are going to enter into (or represent someone in) a commercial real estate transaction you need to understand the legal and business aspects of the deal and you need to understand the local market. This Financial Poise webinar series provides attendees with a solid overview of the issues one needs to consider when doing real estate deals.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.

Episodes in this Series

EPISODE #1 Representing the Commercial Landlord

1/19/2016

EPISODE #2 Representing the Commercial Tenant

2/26/2016

EPISODE #3 Basics of Real Estate Syndication

3/18/2016

EPISODE #4 Due Diligence in Real Estate Deals

4/29/2016

EPISODE #5 Real Estate Valuation Basics 101

5/27/2016

Dates above are premier dates All webinars also available On Demand through West LegalEd Center and

Vimeo

8© 2016 DailyDAC, LLC d/b/a/ Financial Poise™


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The ValueThe main consideration in appraising is to determine a property's value: the present worth of future benefits arising from the ownership of real property.

Estimating the value of a property is important to a variety of endeavors, including real estate financing, listing real estate for sale, investment analysis, property insurance and the taxation of real estate.


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Valuation InfluencersProperty valuation is influenced by these four elements:

• Demand • The magnitude of interest and buying power in the

market for purchasing property.• Utility • The ability of the real estate to satisfy the use or

need of prospective purchasers.


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Valuation Influencers (continued)• Scarcity • There is a limited supply of real estate

• Transferability • The ease at which the parcel of real estate can

legally be transferred to a new owner


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The Valuation Process Property valuation is the process which determines the economic value of real estate. Valuation typically is completed in the process as follows:1.Defining the problem• Identification of the real estate to be

appraised • Address, common name, legal description

• Identification of the property rights to be valued

• Use of the appraisal• Value for purchase or sale, loan, tax, lease, other


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The Valuation Process (continued) • Definition of value; market, use, investment, etc.• Date, scope, other limiting factors to the appraisal

2. Preliminary analysis, data selection and collection• General - local neighborhood, government,

environmental, etc.• Specific - the site itself, improvements,

depreciation, history of ownership and use, income and expenses

• Supply and demand - other properties around, demand studies, how long have they been on the market


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The Valuation Process (continued) 3. Highest and best use• Vacant land• With improvements

4. Legal uses5. Physically possible6. Financially feasible (with non-monetary

benefits)7. Maximum income

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An accurate appraisal depends on the method which was used to collect data relating to the property.

Specific data, covering details regarding the particular property, and general data, pertaining to the nation, region, city and neighborhood wherein the property is located, are collected and analyzed to arrive at a value.

Appraisal Methods

Source: What You Should Know About Real Estate Valuation | Investopedia http://www.investopedia.com/articles/realestate/12/real-estate-valuation.asp#ixzz49UL7IT86


http://www.investopedia.com/articles/realestate/12/real-estate-valuation.asp#ixzz49UL7IT86



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Appraisal Methods (continued)The three basic methods are as follows:

• Sales Comparison Approach• Compares a piece of property to other properties with

similar characteristics that have been sold recently.• This approach takes into account the affect that individual

features have on the overall property value, meaning that the total value of the property is a sum of the values of all of its features.

• This is commonly used in valuing single-family homes and land.





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Appraisal Methods (continued)• Cost Approach• The cost approach can be used to estimate the value of

properties that have been improved by one or more buildings.

• It is assumed that a buyer would not pay more for an existing improved property than it would cost to buy a comparable lot and construct a building that is comparable in terms of desirability and usefulness.

• This approach is useful when the property being appraised is a type of property that is not frequently sold and is not income-producing. Examples include schools, churches, hospitals and government buildings.





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Appraisal Methods (continued)

• Income Approach• This method is based on the relationship between

the rate of return an investor requires and the net income that a property produces.

• It is used to estimate the value of income-producing properties such as apartment complexes, office buildings and shopping centers.


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Estimating Property ValueProperty Value can be estimated by taking the net operating income (NOI) and dividing it by the property’s capitalization rate.

Property Value = NOI/CAP RateCapitalization rate (CAP Rate) shows the potential rate of return on the real estate investment. Example 1 Example 2 Example 3

NOI $400,000 $250,000 $340,000CAP Rate 10% 8% 5%Property Value

$4,000,000 $3,125,000 $6,800,000


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As-Is Value vs. Stabilized ValueMost appraisals of property to be developed include one value for as-is and a separate stabilized value.

The as-is value is the value of a property in it’s current condition without having any repairs completed.

Stabilized value is the prospective value of a property after construction has been completed and market occupancy and cash flow have been achieved.


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Valuation ValidityAs a standard, most appraisals are good for between 60-90 days. While this is typical, there are a few exceptions: • Comparables • Lenders want comparable sales that aren’t just

similar to the subject property, but also represent a snapshot of the current market.

• Most lenders are reluctant to consider a loan when the comparables are more than six months old.


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Valuation Validity (continued)• Appraisal Timeline • Depending on the lender and current state of the

market, 90-180 days is usually the oldest appraisal lenders are willing to accept.

• Market Stability• When the local market isn’t stable, loan

underwriters sometimes require appraisals performed within 3 months.


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Contesting an AppraisalAn appraisal can be appealed if it is believed to contain inaccuracies. The appeal process includes these steps:• Obtain a copy of the report and review every page• Verify all property information is correct• (i.e. square footage, lot size, etc.)

• Determine if any repairs or improvements to the property were overlooked

• Look for any errors


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Contesting an Appraisal (continued)• Identify what comparables the appraiser used to come

up with the value• Were like properties in the same area used?• Were the comps within 90 days?

• After reviewing the report, contact the appraiser to request a revision or request a second appraisal


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Market Value vs. Appraised ValueThere are distinct differences between the market value and the appraised value of real estate. Market values are consumer-driven and appraised values are driven by experts. • Market Value• The price an asset would go for in the marketplace. • Buyers have influence over the market value of a

property because a property is only worth what a buyer is willing to pay.

• The market value has more variance than the appraised value.


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Market Value vs. Appraised Value (continued)• Appraised Value • The exact value of a property.• Determined through an evaluation performed by a

professional appraiser• Based on data gathered and professional judgment

More About The Faculty


FELIX SHALITFelix Shalit, Founder of Sila Capital, has experience in all of the various disciplines that are central to successful investment in real estate: acquisitions, transaction structuring, capital markets, asset and portfolio management, redevelopment and dispositions.

Sila Capital is an Indianapolis, IN based privately held real estate investment and asset management firm specializing in investing, managing and participating in joint venture opportunities. The company’s average deal size is $1-$10 million per transaction.

Sila has earned a reliable reputation as asset managers, successfully acquiring, financing, developing, leasing, owning and managing real estate assets and putting capital to work on behalf of a diverse client base.

The company is actively seeking value-add and opportunistic office, multifamily and mixed used asset acquisitions throughout the Midwest.

[email protected]

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[email protected] DORCHESTER

Andrew Dorchester, FRICS, CRE is a valuation economist. Unlike appraisers who develop estimates of value, he more squarely focuses on the economic underpinnings of influences that drive value. In this capacity serves as an arbitrator, litigation support specialist, advisor, expert witness, and forensic investigator. His "bent" is in ensuring that valuations and other expert work involving economic questions are developed in a way that are meaningful, not misleading, properly supported and developed, and are understandable. He has been involved in over $1-trillion worth of litigated claims where valuations are contested, working on matters such as the land damage claims from the Exxon Valdez oil spill, alleged plutonium contamination from the Rock Flats nuclear weapons plant, multiple ground water contamination cases involving hundreds of thousands of residential properties, valuations disputes with involving transactions as far back as 1795, and other complex matters. He has also worked as forensic appraisal investigator for multiple departments and agencies in the federal government and has examined thousands of appraisals in that capacity. He has developed and taught courses on appraisal fraud for the FBI Academy and lectured multiple times at the FBI headquarters in Washington, DC. He served for five years as the Managing Director of Cushman & Wakefield's Dispute Analysis & Litigation Support practice, overseeing the largest litigation team of real estate appraisers in the United States. He is a former commissioner for District of Columbia's Real Property Tax Appeals Commission, the appellate body for all property tax appeals in Washington, and presided over 550 hearings, issuing opinions in each of those matters, involving value disputes during his tenure.

mailto:[email protected]




JEANNE PECK

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[email protected] Darrow Peck joined Berkadia in 2011 and is a mortgage originator in the retail Loan Production group. Berkadia is one of the largest Fannie Mae DUS, Freddie Mac and HUD multifamily lenders and serves as a correspondent to over twenty life insurance company lenders. Jeanne has financed nearly $3.5 billion in her career through acquisitions, permanent / construction loan originations and joint venture / preferred equity placements.

Prior to her start at Berkadia, Jeanne was Vice President of Finance with Fifield Companies where she was charged with risk management, asset management and construction loan closings. Jeanne also spent five years as an Investment Associate at Prudential Real Estate Investors charged with acquisitions throughout the Midwest.

Jeanne serves as a Director with the Real Estate Capital Institute, a leading source of debt and equity underwriting information established in the mid 1980s. With the Institute, she monitors debt pricing and trends impacting current financing structures.

Jeanne earned an undergraduate degree in Real Estate Finance at the University of Illinois at Urbana-Champaign and a Masters in Business Administration from DePaul University’s Kellstadt Business School. She is on the CREW Chicago Board and a delegate to CREW Network, is a mentor for the Goldie B. Wolfe Miller Women Leaders in Real Estate Initiative at Roosevelt University, the Urban Land Institute, Real Estate Finance Forum and the International Council of Shopping Centers. Jeanne is a licensed Illinois Real Estate Sales Broker.




NICOLE [email protected]

Nicole Pecoulas is a member of Cornerstone Real Estate Advisers’ Commercial Mortgage group, a wholly owned subsidiary of Massachusetts Mutual Life Insurance Company. She is responsible for placing portfolio mortgage financing within the Midwest on commercial property through various products; including low leverage loans, multi-property portfolios, A/B structures, bridge loans, construction or construction to permanent loans, mezzanine financing and acquisition facilities.

Prior to joining Cornerstone, Nicoleworked as a Vice President and Producer with NorthMarq Capital, a national mortgage brokerage company, where she placed both debt and equity. Nicole began her career in commercial real estate twenty eight years ago with Heitman Financial, a pension fund advisory firm. While at Heitman, Nicole worked in the leasing, management, asset and portfolio management for distressed properties and dispositions departments. Nicole earned a Bachelor of Arts degree with and Economics major from Clark University in Worcester, Massachusetts.


EisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

space in the financial services marketplace. As companies grow we help them reach their goals every step of the way. With offices in New York (NY), New Jersey (NJ), Pennsylvania (PA), California (CA), and the Cayman Islands, and as an independent member of Allinial

Global, EisnerAmper serves clients worldwide.

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.