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Now is the time of year where many companies are cleaning
house. Auditing departments are analysing and assessing inventory, and looking for
ways to minimise losses – kicking off the New Year in stride! Unfortunately, during this process many building
owners and managers overlook the main driver of their revenue – the very square
footage upon which leases are based.
It has become increasingly common for building owners and
managers to rely on historical figures when selling or purchasing a property. Many put their trust in building and unit
sizes that have been carried forward for years, or even decades. Considering building revenues and overall property
values are directly correlated to building size, wouldn’t you want all of your
ducks in a row before purchasing or selling a property? In other words, when making an investment
decision, why rely on areas that have not been certified?
Space certification is more than just an independent, third
party confirmation of the size of an existing space. It can also be a crucial vehicle for
unlocking additional property value.
Recently one of our clients was in the process of negotiating
the purchase of a large multi-tenant industrial building. The owner provided our client with the
overall building area together with segregated unit areas. The owner had openly stated the areas had not
been measured in at least ten years and so prior to making his final investment
decision, he engaged our Lasercad® team to verify the areas with a space
certification of the building. Once the
tenant spaces were measured and the rentable areas calculated in accordance with
the appropriate standard method of measurement, we came to an astounding
conclusion. Our space certification
rendered a total rentable area which was more than 10% higher than the owner-provided
areas! The building area had been
understated for the past 10 years (or more). From an investment standpoint our client was
floored. Based on the current market
rates for the area, the owner had been losing out on approximately $35,000 per
year of additional revenue. The
potential revenues which could be realised from the previously understated
building size played a major role in determining the overall value of this multi-tenant
industrial building.
Although some building owners and managers may overlook the
source of their building and unit sizes, many others have been pro-active in
implementing space certification as a standard procedure - especially when
making investment decisions. Regardless
of whether you are buying, selling, or leasing, it is essential to know where
the underlying areas originate from. The
square footage of your building is typically the core revenue driver and often
times, these areas are understated. Now
is the time to get a grip on your inventory and ensure you’re maximising its
value. [1].jpg)
Patrick Mitchell is the Senior Manager of our Lasercad® Division and also highly involved in our Valuation Division. For further information on how to maximise your property’s value through space certification please don’t hesitate to reach out. Patrick can be reached at pmitchell@turnerdrake.comor by phone at 902-429-1811.
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It is a common misconception that a piece
of real estate has a single value. This
is simply not true. Determining which
value is appropriate likely has the biggest impact on property value.
The Royal Institution of Chartered Surveyors’
Global Valuation Standards, specify six types of real estate value (Market, Rental,
Equitable, Investment, Synergistic, and Liquidation). The Appraisal Institute
(of America) has identified ten distinct, and valid, property valuation bases in
common use in North America. Legislation, case law, and the purpose of the real
estate assignment, result in many variations of these property valuation bases.
Any conversation about valuing your property has to start therefore with
an understanding of the purpose of the valuation assignment or you can end up
with a conclusion which is worthless at best, or seriously misleading at worst.
Let’s discuss the
two most common types of value.
Market Value (Highest and Best Use) is typically quoted and understood by many (including
appraisers) to be the only type of value.
It is the highest price you would get for your property on a specific
date, if it was offered for sale, properly marketed, and exposed for a
sufficient period of time to alert and allow all potential purchasers to submit
offers. It assumes that both seller and
buyer are knowledgeable of property values, that neither are under pressure to
sell or buy, are typically motivated, and are each acting in their best
interest. It assumes a cash purchase, or typical mortgage financing, in
Canadian dollars. It also anticipates that the purchaser will be able to put
the property to its “Highest and Best” use, which may for example, include
redevelopment, if this will create a higher value than the existing use of the
property.
But beware, Market
Value is not the
price you could expect to get if the purchaser (1) was an adjoining owner, (2) was
undertaking a land assembly, (3) was a relative or business associate, (4) knew
something that the vendor should have known but did not, (5) did not know
something known to the vendor of which the purchaser should have been aware,
(6) wanted a “vendor take back” mortgage, (7) intended to lease back the
property to the vendor, (8) enjoyed a negotiating advantage because, for
example, the vendor was in dire financial straits, … and so on.
I was recently contacted by an
existing client looking to secure financing for their property located on the
Halifax Peninsula. Their property was
improved with an older, single storey commercial building. The underlying land was worth considerably
more than the building and property under its current use. After discussing the purpose of the
assignment with the client and their bank, it became clear that the bank was
interested in more than just the Market
Value (Highest and Best Use) of the property in this instance. The bank’s goal was to determine if the
income generated by the property, under its current use, was sufficient to keep the lights on and pay the existing mortgage. However, the bank also wanted to know what
they could expect to sell the property for if they ended up taking possession
of it and selling it on the open market. Effectively, the bank had two different
goals which gave rise to two different values.
We completed a thorough analysis of
the property and provided the owner, and their bank with two values (1) Market Value (Highest and Best Use), which in this
case was for redevelopment of the property, and (2) Market Value (Value in Use) as it currently exists
without regard to redevelopment potential.
Market Value (Value in Use) is similar to Market Value (Highest and Best
Use) but is based on the assumption that your property could only be utilised
for its existing purpose.
Difference in Value
In this instance the
difference in value was significant: $1.5 million (Market Value - Value in Use)
versus $2.3 million (Market Value – Highest and Best Use). Both values were included and supported in
the report, allowing the bank to make an informed decision on lending.
Looking for explanations on the different types of values listed
above? Visit our Valuation and Advisory
Services site https://www.turnerdrake.org/WhichValue for more information on the various types of values.
Nigel Turner, Vice President of our Valuation Division, can be reached at nigelturner@turnerdrake.com
Property tax is by far the most important source of revenue for municipalities in Canada, accounting for 49.5% of revenue in 2008 with an annual average growth rate of 1.6% (1988-2008). As reliance on property tax increases, so does the complexity of administering this regressive but necessary evil. Increased computing power in the mid-1960s prompted a shift towards automation of property tax systems, beginning with simple tasks and culminating in today’s fully automated assessment, notification, and payment systems. Modern Automated Valuation Models (AVMs) allow for rapid processing of data with minimised human-bias… but (and this is a large but) real estate appraisal is a nuanced trade: reducing the role of Appraiser to AVM Technician can have significant negative repercussions.
Service New Brunswick’s ongoing cleanup of their attempt at an AVM is a prospective case study in the dangers of a “hands-off” approach to the valuation process. Massive value errors were created by a computer-driven system with insufficient checks in place to alert users to suspicious results. When reviewed by human appraisers many of the shockingly incorrect valuations were easily overturned based on traditional market comparison valuation. Autopilot replaced the flight crew and actual appraisers are left cleaning up the crash, while their political and bureaucratic colleagues deal with the rightful public outcry.
While seemingly seductive, potential time and cost savings offered by an AVM should never mask the fact that, in order to operate successfully, an AVM must integrate human expertise throughout the valuation process. At Turner Drake the “A” in our in-house AVM stands for Accelerated to reflect the role that expert opinion plays in our two-stage computer-assisted mass appraisal model. Stage One combs through real property sales to select comparable properties based on locally relevant, value-defining attributes such as size, location, and design. Stage Two adjusts and weighs a unique set of comparable sales to create a market-based value estimate for each subject property in an assessment area. Throughout each stage of the model, a professional appraiser defines the selection criteria and adjustment values for comparable properties based on market evidence and local expertise. The model does the heavy lifting but certified appraisers evaluate and refine the results.
Outliers - which no system can avoid - can wreak havoc on the results of an AVM unequipped to handle the inherently diverse nature of real estate. It is critically important to flag potential outliers for review so the model can be adjusted for future assessments. During the initial rollout of an AVM model, refinement is time consuming but absolutely necessary for creating reliable, equitable assessments in successive years. In developing our Accelerated Valuation Model, we put the time in up front so the system flags out of the ordinary results, and the professional appraiser, made aware of the potential issue, is able to quickly and easily account for them.
In a Case Study of condominiums on the Halifax Peninsula, the Turner Drake AVM out-performed PVSC assessment values by a margin of up to 45%. That is, 86% of TDP value estimates were within 5% of an actual time-adjusted sale price versus PVSC’s 41% and 98% of TDP values were within 15% of actual sale price versus PVSC’s 84% in the same pool of properties. Our combination of custom programs and a traditional direct-comparison valuation can produce a list of unique comparables with adjustments for 1,000 properties in about two seconds.
Property tax administration systems are as diverse as the municipalities they serve and every region relies to a degree on the convenience of computers and automation. However, no matter the size or complexity of a property tax system it is important to follow best practices, and learn from the success - or failure - of others. When the pursuit of speed comes at the expense of quality there is a significant risk to the accuracy of valuations and the credibility of the property tax system as a whole.
For more information on how our AVM can benefit you, call James Stephens at 902-429-1811 ext. 346 or email jstephens@turnerdrake.com
The Real Estate Appraisal Profession is viewed in different ways by different people. Market value estimates are seen as everything from a financial assurance to a necessary evil. Personal views are typically reflective of the benefits or consequences of the end result; negative views are often the result of misinterpretation or confusion stemming from a lack of direct involvement in the process coupled with the absence of proper explanation. Unfortunately, this has led to several common misconceptions, or myths, about Real Estate Appraisal.
Myth 1: Real Estate Valuation is the same as Real Estate Appraisal
Real Estate Valuation and Real Estate Appraisal, although similar, are not analogous in nature and, contrary to popular belief, should not always be used interchangeably. The term Real Estate Appraisal is a more general term that covers a broad spectrum of value estimates. An appraisal can be anything from an estimate of price provided by a real estate agent to a written value estimate (report) provided to a financial institution by a certified appraiser. Real Estate Valuation, however, is a systematic process which provides an independent or impartial opinion of actual market value that frequently has full legal standing. It’s a complex process that can only be performed by professionally accredited individuals. Although it’s not common practise to point out the misuse of these terms to a potential client, I always like to capitalize on the opportunity to educate my audience and differentiate between the product being offered and the process involved.
Myth 2: Assessed Value = Current Market Value
Although most assessed values are purported to reflect market value, these figures are not necessarily current. For example, in Nova Scotia the assessed value of a property for the 2016 tax year is actually determined by the market value of the property at a base date of 1st January 2014, reflecting the state of the property as of 1st December 2015 (state date). As a result, the current market value of a property could in fact be significantly different than the Assessed Value.
Myth 3: Cost to build or renovate translates into Market Value
Although the cost approach is one of the three traditional methods of valuing real estate (see Myth 7), it is not without limitations. The cost approach can provide a reliable indicator of value for properties where the buildings are fairly generic, relatively new, and have very little depreciation. In this case, the building and improvements likely reflect newer construction trends and support the level of utility demanded by current market participants. However, this approach is less reliable when the building is older and begins to suffer from depreciation, or if the building is not of a typical design or style. The misconception here is that the cost to renovate will be recovered upon sale of the asset. Unfortunately, this is not always the case. In some instances, a retrofit does not necessarily add value to the property; it simply aligns the product with current demand or economic/functional requirements. Similarly, inflated costs due to atypical building designs are not always realized by the local market. In fact, the level of “uniqueness” can actually limit the pool of potential purchasers, therefore lengthening marketing times, and potentially decreasing the achievable value.
Myth 4: Market Value varies depending on who the report is prepared for
Market value is an impartial, unbiased opinion of value. The Appraiser/Valuer has no vested interest in the final outcome of the analysis, and therefore, the final figure should be the same no matter who commissions the report (i.e. borrower, lender, etc.).
Myth 5: A paying client can share a Valuation Report with anyone, and anyone can rely on it
A customer can share the results of a valuation with anyone they please, however the only individuals or organizations that may rely on the conclusions are expressly documented within the report.
Myth 6: A Property Valuation is the same as a building inspection
Although most valuations include an onsite examination of the subject, the Valuer’s task is to render an opinion of the market value for the property. A building inspection typically constitutes a structural survey of the building in order to determine the actual condition of the structure and its major components.
Myth 7: Market Value is based solely on comparable sales
There are three traditional approaches to valuing real estate: the Direct Comparison, the Cost Approach, and the Income Approach. Only the most appropriate combination of the three approaches is utilized in order to properly value a property.
1. The Cost Approach can provide a reliable indicator of value for properties that are fairly generic, relatively new, and have very little depreciation.
2. The Income Approach can provide a reliable indicator of value for properties which are acquired as investment vehicles. The value of the property is determined by its ability to generate revenue. This approach is less reliable when applied to properties which are not likely to be rented to a tenant.
3. The Direct Comparison Approach can provide a reliable indicator of value when comparable sales data are available. This approach is less reliable when sales data is sparse or when the various sales are not truly comparable to the subject thereby requiring extensive adjustments.
Written by Mark Farrow, Senior Consultant in our Valuation Division. For more information about our valuation services, feel free to contact Mark at (902) 429-1811 or MFarrow@turnerdrake.com.
Leading up to the birth of our second little one, I found myself going over the list of what to bring to the hospital to ensure we were fully prepared. Some of the most important items included diapers, as our almost two year old daughter would say… Momma and Dadda’s clothing, and the ever so important, highly analysed, overly scrutinised… take-home outfit. While I had originally second guessed my completed to-do list and fully packed, yet functional “go bag” (as I like to call it), the planning and comprehensive process paid off with a stress free stay at Hotel IWK. Looking back at my eight years with Turner Drake & Partners Ltd.’s Valuation Division, I can recall multiple instances where a small detail had a big impact on the overall assignment. If not for checking off my due-diligence list, these details may have gone overlooked.
Below is a list of the areas I spend extra time on when valuing a property:
Zoning/Planning Information
Typically when valuing a property, a zoning map and accompanying Land Use By-Law can be found on the city or town’s website. Once the existing use is deemed permitted under the current zoning by-law, the next step should not be to move on and consider this section of the report complete. Instead, the next step is to be speak with the local planner to determine if the existing Planning Strategy is either currently, or will soon be, under review and if that could affect the property in the near future. An example that I came across was a commercial building with a limited commercial zoning designation. The property was located on a highly desirable corner; however its maximum height was limited and the redevelopment potential was restricted. After speaking with the Town Planner, I not only uncovered the zoning designation was in the process of being changed to allow high density residential apartment buildings, but also that the maximum height would be increasing substantially as this street was designated for revitalising the immediate commercial area. You can surely bet the property owner was pleasantly surprised.
Comparable Sales
I have come to realise that this old saying does hold true with any real estate transaction … “every sale has a story”. While I would like to assume that all transactions satisfy the criteria of a fair sale, sadly I have been mistaken. I consistently come across different situations that have impacted the sale price. If not for speaking to one of the parties involved in the transaction, the sales information may have been misleading. An example is selling a property to an existing tenant. The tenant indicated they were willing to pay above market value as their business was established at its current location and this would save them the costs and hassle of moving. Another example is a sale between two related parties. While the Deed Transfer appeared to be between unrelated parties, an investigation on the Registry of Joint Stocks may determine otherwise. I sometimes pat myself on the back, envisioning that Sherlock Holmes himself may not have uncovered this convoluted sale. Unfortunately, this means another cup of coffee for me and further research for that ever desirable perfect comparable sale.
Easements and Right-Of-Ways
Sometimes reading a Legal Description is as complex as reading Shakespeare… “thence, North at a stone’s throw distance to the old birch tree…”. While this description sounds like poetry, it proves troublesome when the property has since been fully improved with no birch tree for miles. A nearby oak tree was noticed from the subject property; however is located within the sidewalk’s planter box so I assumed that was not the reference point. Nevertheless, a Legal Description should always be read (sometimes deciphered) and the easement and right-of-way portion should be verified on every assignment. I recently came a across a property owner looking to redevelop their property. While the property looked good on paper (i.e. large level site with good access from the road and redevelopment occurring in the area), I discovered that a public sewer line bisected the middle of the property which restricted any development above this easement. This had a large impact on the possible buildable area, overall design, and likelihood of the redevelopment occurring.
Conclusion
While no two valuations are ever the same, by creating a standardised to-do list that covers some of the essential components of a valuation assignment, no small detail should ever go unnoticed (or take-home outfit left behind!).
Our Valuation Division never overlooks the details. For more information on our valuation services, feel free to contact Matthew Whittleton, the author of this blog post, a Consultant in our Valuation Division and Manager of our Saint John, NB operations, at (902) 429-1811 or MWhittleton@TurnerDrake.com.
There is a common misconception that valuing unimproved parcels of land (i.e. not built on or cultivated land) is fairly straightforward. Although there is no shortage of land sales to draw from … the sheer number of variables involved with value and mixed nature of the sales makes valuing unimproved property, which includes islands, one of the most challenging exercises in real estate valuation and appraisal. Over my career I have become familiar with the most important variables to consider when valuing land and briefly share them below. This is by no means a complete list but does demonstrate the complexity involved with valuing land.
It all begins with a conversation with a client regarding their unimproved property. A typical conversation will usually go something like this:
“I am looking to have a valuation completed on my property for sale purposes. I have received an offer and I want to know if it’s reasonable. They are offering me $375,000 for 250 acres which is $1,500/acre. Does that sound reasonable to you?”
This is a difficult question to answer without knowing the details of the property. In our profession the accepted method for valuing land is to determine an appropriate per unit rate, which is based on similar properties that have sold, and then applying that to the property being valued. However, this approach is often flawed due to the number of input variables involved with value. For example, you could have two parcels of land that are the same size located adjacent to one another, with one of those parcels having extensive waterfrontage and the other having very little. So does it make sense to value both of these parcels using an overall per acre rate? Let’s take a look at the most crucial variables …
Access
The type and amount of access can be a large contributory factor to value. The property, for example, might have enough linear road frontage to be subdivided thus creating several lots. However, if the road is only maintained and accessible for a portion of the year it can have a significant impact on value. Alternatively, the property may be accessible by way of a right-of-way. If that’s the case it would be necessary to review the right-of-way documents to understand what the restrictions are for use of the right-of-way.
Size, Shape and Topography
The overall size, shape and topography of the parcel are also variables which need to be considered. The parcel may be very long and narrow, short and wide, or have steep terrain or be fairly level, which can have a significant impact on its use and value.
Location
Location, location, location … If the parcel sits adjacent to a developing residential area it would likely attract a higher value than a property situated in a more rural setting with little development. Location of the property is very important to consider.
Waterfrontage
Does the property have extensive waterfrontage to a river, a lake or the ocean? If so, is it susceptible to flooding during certain times of the year? Is the shoreline badly eroding or is it permanently in a state of wetland? What is the depth of the adjacent water and does the water level drop significantly during the summer months? All of these factors affect value and must be explored.
Cover Type
Another critical variable is the type of land cover. If the likely use of the property is for forestry harvesting than the cover type would be a critical input variable. Often times we are asked to value property which contains unique cover types including old growth forests or hemlocks.
Zoning and Other Restrictions
Even in rural areas where properties are not typically subject to the same level of land controls, there are often restrictions on the use of the property. For example, the property may be located within a designated wilderness area or within an area designated as a watershed. These types of restrictions can severely limit the use of the property and thus impact its value.
Conclusion
Back to the original question; is this offer reasonable? Well that all depends on a number of factors that need to be investigated before providing any input ... The morale of my blog post: Nothing is ever as straightforward as it seems, especially when it involves valuing land.
If you have questions regarding the value of your property or are interested in learning more, feel free to contact Nigel Turner, Senior Manager of our Valuation Division, at (902) 429-1811 or NigelTurner@TurnerDrake.com.
I joined Turner Drake in 1981, just about the same time the Space Shuttle successfully returned from its inaugural flight to usher in the use of manned reusable spacecraft to return to Earth. Upon landing, I believe astronaut John Young hyped on adrenaline, proclaimed “that was a ride of a lifetime”. While my time with my colleagues at Turner Drake has been more grounded, I also consider it a ride of a lifetime; ushering in new challenges, adventures and innovations along the way.
Operating throughout Atlantic Canada and beyond, we have valued a diversity of properties from airports to smelters; pulp mills to fish plants; convents to quarries and vast tracts of moose pasture … and just about everything in between. Valuation of real estate is not a simple task or an exacting science: it has always been a combination of art and science. With a predominance of the former in the years gone by, giving way to the latter as a plethora of data and technology has, and continues, to become available. As the saying goes … everyone has an opinion on value. However it is certainly more than just producing fluff and a leap of faith. As valuers, we have to use the tools developed to capture, analyse and make sense of demographic, economic and market factors that drive real estate values. Clients of real estate practitioners expect and deserve accurate conclusions based on sound analysis and interpretation of the evidence available.
To meet this expectation, it is incumbent on valuers to be leading the wave, not just riding it. As more and more real estate data becomes available, i.e. published sales data, online property zoning, assessment data, financial analytical tools, etc., the valuer’s time is not so much spent working as an old time private investigator travelling the region and unearthing spotty evidence but more so assimilating the available data and recognising what is relevant and applying the correct analytical tools to interpret it to produce a creditable result. The tools we use at Turner Drake include our Compuval® Database assembled over the past 35 years comprising over 200,000 detailed property records including sales, assessment, income and expense data on properties throughout Atlantic Canada and across the country; Geographic Information Systems (GIS) databases that focus on demographic trends, land use, spatial connectivity, development patterns and the physical aspects of property; and financial analysis and projection software. These tools together with the knowledge and skill sets of my colleagues at Turner Drake make the challenge of valuing properties a rewarding experience and as I indicated at the onset … a ride of a lifetime.
Rick Escott, Vice President of our Valuation Division and Newfoundland Operations, reflects on his last 34 years at Turner Drake. To find out more about Rick and his adventures, check out our Facebook page!
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