Thought Leadership

Industrial and Commercial Appraisal Procedures John C. Ramirez

The application of the asset-based approach to often involves the appraisal of the subject company’s industrial and commercial real estate. This discussion summarizes what valuation analysts—and the parties who rely on their business valuations—need to know about the appraisal of operating company industrial and commercial as part of the asset-based approach business valuation analysis.

ntroduction financial institutions and financial intermediaries, I government regulators, taxation authorities, and The asset-based approach is a generally accepted legal counsel and judicial finders of fact—need to approach to the valuation of both operating compa- understand and rely on the results of the industrial nies and asset holding companies. Particularly with and commercial real estate appraisal. regard to the asset accumulation (“AA”) method, This discussion summarizes the basic compo- the asset-based approach encompasses the valu- nents of a real estate appraisal report, illustrates the ation date appraisal of the following categories of typical sections presented in an appraisal report, subject company assets: working capital accounts, and summarizes the factors to look for in an apprais- owned and leased real estate, tangible personal al report. The inclusion of these components, property, and intangible personal property. sections, and factors should make the real estate Most going-concern businesses own or appraisal report a useful component to the asset- some amount of industrial or commercial real based approach business valuation process. estate. This discussion summarizes the commercial real estate appraisal process from the perspective of the asset-based business valuation approach. The Appraisal Report In the asset-based approach to business valua- tion, the value of the operating company’s industri- The Uniform Standards of Professional Appraisal al, commercial, or other real estate is frequently an Practice (“USPAP”) 2016-2017 edition, defines the important component of the valuation. Accordingly, term “report” as “any communication, written valuation analysts (“analysts”) who perform asset- or oral, of an appraisal or appraisal review that is based approach business valuations often need transmitted to the client upon completion of an to work with and rely on commercial real estate assignment.” appraisers (“appraisers”). Such analysts may need USPAP Standard 2 is titled “ to retain appraisers, instruct appraisers, work with Appraisal, Reporting.” USPAP Standards Rule 2-1 appraisers, review appraisal reports, and understand allows for the real estate appraiser to issue either and use appraisal conclusions. a written or an oral real property appraisal report. Likewise, the business valuation clients also USPAP Standards Rule 2-2 allows for two types of need to understand and rely on the results of the written appraisal reports: industrial and commercial real state appraisal. And, 1. An appraisal report—The contents of an the parties who rely on the asset-based approach appraisal report are explained in Standards business valuation—including corporate acquirers, Rule 2-2(a).

www .willamette .com INSIGHTS • WINTER 2018 49 2. A restricted appraisal report—The con- eal state ppraisal eport tents of a restricted appraisal report are R E A R explained in Standards Rule 2-2(b). Contents The description below summarizes the typical con- The selection of the appropriate type of real tents of an industrial and commercial real estate estate appraisal report to prepare in a business appraisal report. valuation assignment is influenced by the specific 1. Title Page. The title page should clear- instructions of the analyst’s client, the relevant stat- ly identify the subject of the real estate utory authority, judicial precedent or administrative appraisal report. The title page will typically rules, and the experience and judgment of the indi- identify the property address, the definition vidual analyst. For purposes of this discussion, let’s of value, and the “as of” valuation date. assume the following: And, the title page will identify the name 1. The valuation subject is the commercial and address of the real estate appraiser real estate of the client operating company. and the name and address of the subject appraisal client. 2. The valuation subject bundle of legal rights is a simple ownership interest in the 2. Letter of Transmittal. The letter of trans- subject property. mittal typically includes the following infor- mation: a. Date of letter and salutation This discussion assumes that the real estate appraiser prepares a written appraisal report for b. Street address of the property and a use in the asset-based approach business valuation brief description of the industrial and of the client operating company. This discussion assumes that the business valuation will be sub- c. Identification of the subject property ject to some contrarian review—that is, either an ownership interest administrative/regulatory challenge or a judicial d. Statement that a property inspection proceeding. and other necessary investigations and During any contrarian review regarding the analyses were made by the real estate real estate component of the business valuation appraiser (whether at an administrative or judicial level), the e. Reference that the transmittal letter is appraiser will often refer to the written appraisal an integral component of an accompa- report during both direct examination and cross nying real estate appraisal report examination. In fact, many experienced real estate f. Identification of the type of property appraisers consider the written appraisal report to appraisal and type of real estate apprais- be “the appraiser’s best friend” during expert tes- al report timony. g. Standard of value (or definition of value) concluded in the real estate appraisal report Real Estate Appraisal Report h. Effective date of the industrial and com- Outline mercial real estate appraisal Exhibit 1 presents an illustrative table of contents i. Opinion of value (or report outline) for a typical industrial and com- j. Identification of any extraordinary mercial real estate appraisal report. This illustra- assumptions and hypothetical condi- tive table of contents is consistent with the USPAP tions requirements for an appraisal report, that is, a k. Real estate appraiser’s signature report prepared under Standards Rule 2-2(a). 3. Table of Contents. The appraisal report It is noteworthy that each element in the Exhibit table of contents typically lists all of the 1 table of contents is not required for USPAP com- report sections in the order in which they pliance. For example, USPAP Standards Rule 2-2(a) are presented. does not require that the appraisal report include photographs. Rather, the Exhibit 1 table of contents 4. Certification. The certification is typically is presented to illustrate all of the topics that the presented as a separate page in the real appraiser could include in the industrial or com- estate appraisal report introduction section. mercial real estate appraisal report. The certification typically follows the final value conclusion. The real estate appraiser

50 INSIGHTS • WINTER 2018 www .willamette .com Exhibit 1 Industrial and Commercial Real Estate Appraisal Report Illustrative Table of Contents

Item Topic Introduction 1. Title Page 2. Letter of Transmittal 3. Table of Contents 4. Certification 5. Summary of Important Conclusions

Identification of the Real Estate Appraisal Problem and Scope of Work 6. Identification of the Type of Appraisal and Type of Appraisal Report 7. Identification of the Client 8. Identification of Any Intended User(s) Other than the Client 9. Statement of Intended Use 10. Identification of the Subject Property 11. Identification of the Property Rights Appraised 12. Type and Definition of Value 13. Effective Date of the Appraisal 14. Extraordinary Assumptions and Hypothetical Conditions 15. General Assumptions and Limiting Conditions 16. Scope of Work

Presentation of Data 17. Legal Description 18. History, including Prior Sales and Current Offers and Listings 19. Identification of Any Personal Property or Other Items That Are Not Real Property 20. Market Area, City, Neighborhood, and Location Data 21. Description 22. Improvement Description 23. and Assessment Rates 24. Marketability Study, If Appropriate

Analysis of Real Estate Appraisal Data and Conclusions 25. Analysis of of the Land as Though Vacant 26. Analysis of Highest and Best Use of the Property as Improved 27. Land Value 28. Cost Approach 29. Sales Comparison Approach 30. Income Capitalization Approach 31. Reconciliation and Final Opinion of Value 32. Estimate of Exposure Time 33. Qualifications of the Appraiser

Addenda 34. Detailed Legal Description (if not included in the presentation of data) 35. Detailed Statistical Dates 36. or Lease Summaries 37. Other Appropriate Information 38. Secondary Exhibits

www .willamette .com INSIGHTS • WINTER 2018 51 will sign and date the certification. The state and define the particular rights of certification will indicate whether the real interests being valued. estate appraiser has personally conducted 12. Type and Definition of Value. The definition the appraisal in accordance with USPAP. of the concluded value should be presented. According to USPAP Standards Rule 2-3, USPAP requires a citation or source for the each written real estate appraisal report definition of value presented. should contain a signed certification. 13. Effective Date of the Appraisal. The real 5. Summary of Important Conclusions. The estate appraisal conclusion may be stated summary of important conclusions page, as of a current date, a retrospective date, or sometimes called the executive summary a prospective date. page, typically includes the following items: 14. Extraordinary Assumptions and a. Brief identification of the subject indus- Hypothetical Conditions. USPAP defines an trial and commercial property extraordinary assumption as follows: b. Estimate of the highest and best use of An assumption, directly related to a the land as if vacant specific assignment, as of the effec- c. Estimate of the highest and best use of tive date of the assignment results, the industrial and commercial property which, if found to be false, could as improved alter the appraiser’s opinions or conclusions. d. Age of the improvements USPAP defines a hypothetical condition e. Abbreviated site description as follows: f. Land value opinions A condition, directly related to a g. Value indication from the cost approach specific assignment, which is con- h. Value indication from the sales compari- trary to what is known by the son approach appraiser to exist on the effective i. Value indication from the income capi- date of the assignment results, but talization approach is used for the purpose of analysis. j. Reconciliation and final value opinion 15. General Assumptions and Limiting Conditions. The general assumptions deal k. Description of any extraordinary with such issues as legal and title consider- assumptions or hypothetical conditions ations, liens and , property 6. Identification of the Type of Appraisal and management, information furnished by oth- Report Format. The real estate apprais- ers, hazardous substances in the property, al report format—that is, either apprais- and compliance with regulations and al report or restricted appraisal report— other state and local laws. should be stated. 16. Scope of Work. USPAP requires that the real 7. Identification of the Client. The client is the estate appraisal report include sufficient party who engages the real estate appraiser information to allow the intended users (or, in the case of the asset-based approach to understand the scope of work that the business valuation, the analyst). appraiser performed. 8. Identification of Intended User(s) Other 17. Legal Description. The industrial and com- than the Client. If the names of any intend- mercial real estate is identified so that it ed users are withheld from the real estate cannot be confused with any other piece of appraisal report, that fact should be dis- real estate. closed. 18. History. USPAP requires that current his- 9. Statement of Intended Use. The real estate tory and prior sales of the industrial and appraisal report reader should understand commercial property within three years of the intent of the property appraisal. the effective date be disclosed and analyzed 10. Identification of the Subject Property. A in the real estate appraisal report. legal description is commonly used to iden- 19. Identification of Any Personal Property or tify the subject industrial and commercial Other Items That Are Not Real Property. property. The real estate appraisal report should iden- 11. Identification of the Property Rights tify any tangible personal property, intan- Appraised. The real estate appraiser should gible personal property, or other intangible

52 INSIGHTS • WINTER 2018 www .willamette .com business value that may be included with the real estate appraisal. 20. Market Area, City, Neighborhood, and Location Data. Real estate appraisers often indicate that no other aspect of appraisal is as important as the market area, city, neighborhood, and loca- tion analysis. However, defining the subject neigh- borhood is sometimes dif- ficult in the appraisal of an industrial or commercial property. Four categories of fac- tors affect the market area analysis: physical factors, economic factors, social factors, and political fac- decisions, such as the number of city tors. Each of these factors is summarized services provided, rates, and the below: quality of the schools. a. Physical and Locational Factors. The d. Political Factors. The level of taxes, physical factors that affect market area assessment fairness, police and fire pro- desirability and quality include the nat- tection and other city services provided, ural features of location, as well as those public education, and protective zoning created by people. Natural features or planning all have an effect on neigh- include topography, trees, lakes, and borhood desirability. Governmental other visual amenities. Natural features positions on air, soil, and water pollu- that affect market areas also include tion, job safety, social programs and climate and geological conditions such noise, odor, and ecological controls can as weather, soil quality and flood, slide, also be noted. Many political factors are and earthquake zones. the result of social attitudes, whether b. Economic Factors. An important eco- regional or local. nomic factor to consider is whether the Exhibit 2 presents a listing of data that income level of the area occupants is the real estate appraiser typically considers sufficient to maintain existing struc- in a market area, city, neighborhood, and tures. This factor strongly relates to location analysis. employment opportunities available, as 21. Land Description. Land that has been grad- well as the stability of existing employ- ed and prepared for a specific purpose is ment. Other economic factors include typically referred to as a site. A site has growth rate, trend of property values, features that are classified as physical, supply and demand, marketing time for locational, legal, and economic. Land is and land-use changes. immobile, and, therefore, it is significantly c. Social Factors. Area or location desir- influenced by its surroundings. The value ability is influenced by the many of land is a function of its ability to satisfy a social characteristics of the occupants. market need and to serve as a site for either Neighborhood desirability depends on existing or proposed improvements. the effort and money that neighborhood In addition, land value is determined by occupants put into the maintenance and its highest and best use under current mar- modernization of buildings. Community ket conditions. The common factors that support for the existing legal and politi- the real estate appraiser should consider in cal order is also a factor, since neighbor- the land description include size and shape, hood attitudes can influence political

www .willamette .com INSIGHTS • WINTER 2018 53 Exhibit 2 Industrial and Commercial Real Estate Appraisal Typical City, Neighborhood, and Location Data

Typical City, Neighborhood, and Location Data Typical Types of Information Area topography Typical utilities or improvements available (streets, curbs, sidewalks; water; electricity; telephone; gas; sewers) Available public transportation: Neighborhood percent built up Air Neighborhood boundaries Rail Predominant types of buildings Bus Typical age of buildings Subway Typical condition of buildings Route maps Price range of typical neighborhood properties Area expressways Typical marketability Area traffic patterns Neighborhood land value trends Regional population trends Location of facilities: churches, schools, shopping, recreational, cultural Zoning types Neighborhood avenues of approach Typical building codes Area availability of personnel Regional employment level Neighborhood employee amenities (shopping, eating, and banking facilities) Area average family income Neighborhood competition for subject property Typical rents and lease features Typical types of industry (light, heavy) Typical percentage of vacancies Sources of raw materials Neighborhood new buildings Neighborhood hazards and nuisances (amount and kind) Number of building permits issued restrictions structure and rates Changing use of area

topography, frontage, drainage and water a. Use runoff, soil conditions, environmental con- b. Size ditions, site access and transportation pat- c. Architectural style terns, visibility, and neighboring property d. Construction type users. e. Site preparation and foundation 22. Improvement Description. This section of the industrial and commercial real estate f. Frame appraisal report presents a description of g. Floor structure the physical improvements, which include h. Floor covering any structure on the site as well as any i. Ceiling improvements added to the site, such as j. Interior constructions parking lots, utility lines, storm drainage, and landscaping. Each improvement has k. Plumbing its own specific characteristics that should l. Sprinkler system be analyzed by the real estate appraiser. m. Heating, ventilation, and air conditioning Structural improvements consist of a com- n. Electrical system bination of physical components designed o. Exterior walls to serve a specific purpose. p. Roof The typical factors included in the q. Insulation improvements description are listed below:

54 INSIGHTS • WINTER 2018 www .willamette .com 23. Taxes and Assessment Data. The current that results in the highest present property property tax assessment is typically report- value. ed and the current property tax expense is That present value is the present worth typically calculated. of all projected net cash flow discounted 24. Marketability Study. In the real estate at a market-derived rate of return. If the appraisal of an income-producing commer- value of the improvements, based on their cial property, a marketability study may be highest and best use, is less than the performed to find out how the subject prop- value of the land based on its highest and erty fits into the overall market in terms of best use, minus the cost of demolition of supply and demand levels and absorption the improvements, then the improvements rates. would contribute no value. The highest and 25. Analysis of Highest and Best Use as If best use would be to remove the improve- Vacant. The analysis and conclusion of ments. the subject property highest and best use 27. Land Value. The land value can be a major is a standard procedure in any real estate component of the total industrial or com- appraisal. Concluding highest and best use mercial property value. Real estate apprais- is not only a generally accepted procedure, ers typically estimate land value separately, it is a USPAP requirement. even when valuing properties with exten- USPAP Standards Rule 1-3 provides the sive improvements. The real estate apprais- following instruction with regard to highest er can use several methods to estimate land and best use: value, including the following: When necessary for credible assign- a. Sales comparison method ment results in developing a mar- b. Extraction method ket value opinion, the real estate c. Allocation method appraiser should: d. Subdivision development method a. identify and analyze the effect e. Land residual method on use and value of existing land use regulations, reason- f. Ground rent capitalization method ably probably modifications of In real estate appraisals performed as such land use regulations, eco- a component of the asset-based approach, nomic supply and demand, the the most common method to estimate physical adaptability of the real land value is the sales comparison method. estate and market area trends; However, when few sales are available or and when the value indications of the sales com- b. develop an opinion of the high- parison method need additional support, est and best use of the real the other land valuation methods may be estate. used. In a highest and best use analysis, 28. Cost Approach. The principal procedures in the real estate appraiser determines a cost approach analysis are summarized as the property use that fulfills the fol- follows: lowing four tests: a. Estimate the highest and best use of a. physically possible the site. This initial procedure provides a basis for selecting comparable site b. legally permitted sales. In addition, this procedure pro- c. economically feasible vides a basis for setting a benchmark d. maximally productive against which accrued depreciation of 26. Analysis of Highest and Best Use as the improvements is measured. Improved. The real estate appraiser first b. Estimate the current dollar cost of concludes highest and best use of the site as either reproducing or replacing the if vacant and ready for development. Next, subject improvements. In addition to the real estate appraiser analyzes the high- direct costs and indirect costs, current est and best use of the industrial or com- cost estimate typically includes both mercial property as currently improved. a developer’s profit and an entrepre- The highest and best use of the industrial or neurial incentive based on local market commercial property as improved is the use evidence.

www .willamette .com INSIGHTS • WINTER 2018 55 c. Estimate the total dollar amount of d. Project management accrued depreciation from all causes. e. Land lease rent, if appropriate This total accrued depreciation typi- f. Real estate taxes cally includes three categories of depre- cation: g. Project promotion charges i. Physical deterioration h. Any other interim carrying costs ii. Functional obsolescence The common construction cost estima- tion methods include the following: iii. External obsolescence a. Quantity survey method d. Subtract the dollar amount of total accrued depreciation from the esti- b. Unit-in-place construction method mate of the current reproduction or c. Comparative unit method replacement cost new. This difference, d. Historical cost indexing method if computed accurately, approximates The real estate appraisal report should the current value of the subject major improvements. also describe the analyses related to esti- mating depreciation. Accrued depreciation e. Estimate the replacement (or repro- is typically defined as a loss in value from duction) cost new less depreciation for any cause. The three types of accrued any minor buildings and other on-site depreciation are as follows: improvements, such as landscaping, fencing, and driveways. An important a. Physical deterioration component of this procedure is to esti- b. Functional obsolescence mate the value (rather than the cost) c. External obsolescence that these improvements add to the The real estate appraisal report should overall value of the property. distinguish the concept of cost from the f. Add the site value to the depreci- concept of value. Cost is typically a mea- ated cost of (i) the building major sure of a past expenditure either of labor or improvements and (ii) the other on-site materials or both. That is, cost represents improvements. The resulting sum is the a measure of past expenditures. Value, on estimated value of the subject property the other hand, is influenced by the future. according to the cost approach. This is because value, by definition, consti- In the estimation of current cost, all cost tutes the present worth of future right sand components should be considered. Total benefits. Therefore, cost is the amount of current construction costs (either repro- money necessary to acquire or to create an duction or replacement) are often identified item, while value represents its worth. as direct and indirect costs. Direct costs are labor and materials and typically include 29. Sales Comparison Approach. The compa- the following: rability of the selected sale transactions may be a controversial aspect of the sales a. Labor hired by the general contractors comparison approach analysis. Therefore, and subcontractors market sale transactions are typically not b. Materials used, beginning with site to be used unless the sales data have been clearance to the final cleanup confirmed by the real estate appraiser or c. Equipment, leased or owned by a reliable delegate. This confirmation d. Temporary electric service process may include inquiries into the circumstances causing the sale or affecting e. Developer’s overhead and profit the transaction price. Price represents the Indirect costs typically include the fol- amount paid for the real estate in terms of lowing: dollars. a. Professional service fees, including Before accepting the price as evidence legal, appraisal, financial feasibility, of value, the real estate appraiser may verify engineering, architectural, and survey- the transaction for the following conditions: ing a. Relationship of the parties b. Construction and possibly permanent loan charges b. Date of sale c. commissions c. Financial terms of sale

56 INSIGHTS • WINTER 2018 www .willamette .com Another issue in the real estate appraisal may be the appraiser’s adjust- ments to the comparable sales to account for differ- ences between the com- parable properties and the subject property. Any adjustments related to dif- ferences due to variations in age, size, and quality of comparable versus sub- ject building construction should be identified and quantified in the appraisal report. Real estate apprais- ers may use either the detailed property analy- sis method or the overall property rating method to justify these market com- parison adjustments: b. Price per square foot of net rentable area a. Detailed Property Analysis Method. After confirming the sale prices and c. Price per including land terms of sale with respective buyers, investment sellers, or brokers, the appraiser may d. Price per room or price per floor inspect comparable properties for size e. Gross annual or monthly income multi- and details of construction. This allows plier the appraiser to make price adjust- f. Its use as a special purpose property ments to make each sale as comparable (for example, hospital, per bed; restau- as possible to the subject property. rant and theater, per seat) b. Overall Property Rating Method. Under The sales comparison approach is well this method, market comparison is adapted to situations in which there are an based on an overall judgment as to the adequate number of similar properties that percentage value adjustment called for have recently sold. In using these sales, the in order to make each sale comparable real estate appraiser attempts to verify each with the subject property. The overall sale in order to confirm the relationship of percentage applied to each comparable the parties, date of sale, and any financing property in turn is justified by the terms. In analyzing comparable sales, it appraiser’s explanation that the subject may be necessary to adjust a price if prices property is better, poorer, or the same have changed between (a) the time that the in relation to its construction as to comparable property sold and (b) the sub- type, size, features, age, and building ject appraisal date. condition. By adjusting the comparable sale prices upward or downward in Also, an adjustment is typically accordance with the characteristics of required if a comparable sale property’s the subject property, a price was influenced by financing terms. estimate is derived. The cash equivalency method is often used to adjust for this price influence. The pur- For industrial/commercial properties, pose of this adjustment is to reveal the price sale price adjustments are often made by that a comparable property would have the unit comparison method based on one brought without the influence of atypical or more of the following: financing. a. Price per square or cubic foot of build- There are two methods to analyze com- ing volume parable sales properties: (a) the detailed

www .willamette .com INSIGHTS • WINTER 2018 57 property analysis method and (b) the over- such as overall , land all property rating method. The first meth- capitalization rate, and building capitaliza- od requires the real estate appraiser to tion rate. make a detailed analysis of all features The industrial or commercial property in the industrial or commercial property value is commonly estimated by dividing that influenced the price paid as well as one period of net operating income (“NOI”) transactional, location, and time influences. by an overall capitalization rate. The rate The second method allows the real estate is estimated by (a) extracting overall rates appraiser to make an overall price adjust- from comparable property sales; (b) com- ment to the comparable sale price. The paring the comparable property attributes overall property rating method is more (physical, locational, financial) to the sub- commonly used in real estate appraisals ject property; and (c) selecting an appropri- performed as a component of an asset- ate overall rate. based approach valuation. As with the PGIM, EGIM, and NIM, 30. Income Capitalization Approach. The an implied assumption is that the future income capitalization approach converts performances of the comparable properties the property’s expected income or cash flow and the subject industrial or commercial into a present value. There are two catego- property will be similar. ries of income capitalization methods: (a) Values are often estimated by project- direct capitalization and (b) yield capital- ing cash flow over a typical holding period ization. and discounting the cash flow to a present Direct capitalization methods rely on value estimate using a discount rate. This direct capitalization rates typically extract- valuation method is called yield capitaliza- ed from comparable sales. Yield capitaliza- tion (or a discounted cash flow analysis). tion methods rely on yield capitalization The discount rate directly addresses the rates that are typically derived as the inter- expected profitability of the property. nal rate of return required by the typical The cash flow components typically investor. projected in an industrial or commercial Value estimates may be calculated by appraisal are (a) NOI and (b) the net pro- applying an appropriate multiplier or capi- ceeds from the property resale. The dis- talization rate to the subject property’s count rate is sometimes called the property expected income or cash flow. The term yield rate or the overall yield rate. direct capitalization is sometimes used to All income approach methods are cat- refer to the procedure of extracting income egorized as either direct capitalization or multipliers or capitalization rates from yield capitalization. Direct capitalization comparable sales. uses a one period measure of income or Capitalization rates and income mul- cash flow to estimate value. This procedure tipliers derived from comparable sales do includes the use of income multipliers not explicitly address profitability. Rather, such as the potential gross income multi- they are simply observed ratios of income plier, multiplier, and to value. Nonetheless, such market-derived net income multiplier. This procedure also capitalization rates can provide reliable includes the use of capitalization rates such estimates of value if: as the overall capitalization rate, the land a. the expected cash flow is a representa- capitalization rate, and the building capital- tive income projection and ization rate. b. the income multiplier or capitaliza- Yield capitalization requires a projec- tion rate is derived from comparable tion of the estimated future income of the sales with the same potential for future industrial or commercial property. Value income. is estimated by discounting this income, Common direct capitalization multipli- including any proceeds from reversion, at ers or rates include (a) income multipliers an appropriate yield rate. A specific proce- such as potential gross income multiplier dure of the yield capitalization method is (“PGIM”), effective gross income multi- the discounted cash flow analysis. plier (“EGIM”), and net income multiplier When estimating value using yield (“NIM”) and (b) several capitalization rates capitalization, the first year NOI is explicitly

58 INSIGHTS • WINTER 2018 www .willamette .com estimated. The property income after the and designations. For real estate apprais- first year is either (a) explicitly estimated for als performed as part of an asset-based each year of the investment holding period approach analysis, this statement should or (b) projected to change according to a emphasize the appraiser’s experience with particular mathematical process. Several regard to similar industrial or commercial common alternative property income properties. patterns include level income, compound 34. Addenda. The following items may be incor- change, and straight-line change. porated in the real estate appraisal report 31. Reconciliation and Final Opinion of Value. addenda: The final procedure is the reconciliation of a. Building specifications the various value indications into the final opinion of value. For real estate appraisals b. Charts and graphs performed for many purposes, it may be c. City, neighborhood, and other maps reasonable to conclude a range of values d. Detailed estimates of the replacement as the final value opinion. For real estate or reproduction cost appraisals performed as part of an asset- e. Historical income and expense data based approach analysis, however, it is more common to conclude a point estimate f. Lease and lease abstracts as the final value opinion. g. Photographs of properties referred to in The nature of the reconciliation proce- the report dure depends on: h. Plans and elevations of the buildings a. the purpose and objective of the indus- i. Plot plan trial or commercial property appraisal, j. Sales and listing data b. the individual valuation approaches and methods used, and c. the real estate appraiser’s estimate of Summary and Conclusion the reliability of each of the value indi- cations derived. The asset-based approach business valuation involves the appraisal of all of the assets of either an When all three property valuation operating company or an asset-holding company. approaches are used, the real estate apprais- For the typical operating company, these asset er typically considers the relative depend- categories often include working capital assets, ability and applicability of each approach owned and leased real estate, tangible personal given (a) the subject property type as well property, and intangible personal property. as (b) the quantity and quality of data used. In the reconciliation section of the This discussion focused on the appraisal of property appraisal report, the real estate an operating company’s industrial or commercial appraiser may explain variations among the real estate—as part of the asset-based approach to value indications of the different approach- business valuation. This discussion summarized es used and account for differences between what the valuation analyst needs to know about the value conclusions derived. the industrial and commercial real estate appraisal process. Analysts have to work with—and under- 32. Estimate of Exposure Time. USPAP defines stand—commercial real estate appraisers. exposure time as follows: Estimated length of time that the This discussion also summarizes what the par- property interest being appraised ties who rely on the business valuation need to would have been offered on the know about the industrial and commercial real market prior to the hypothetical estate appraisal process. These parties have to consummation of a sale at market rely on the contributions of commercial value on the effective date of the real estate appraisals to the asset-based appraisal. approach business valuation. 33. Professional Qualifications of the Appraiser. The statement of the professional quali- fications should describe the appraiser’s John Ramirez is a vice president in our Portland, education and training, experience and Oregon, practice office. John can be reached at (503) expertise, and professional credentials 243-7506 or at [email protected].

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