By Ken Ashley
ATLANTA (November 8th, 2010)
In one of the most successful viral marketing campaigns online to date, kitchen blender manufacturer Blentec has created a series of infomercials featuring founder Tom Dickson. The spots which run in a variety of forums have become an online phenomenon with over 120 million hits on YouTube. Dickson has blended golf balls, cell
phones, iPads/iPhones, frozen chickens, Bic lighters and any number of seemingly unblendable items in his device. During every episode, he places the improbable item in the blender and utters the now famous phrase “Will It Blend?” with the words “Don’t Try This At Home!” flashing on the screen.
In the world of commercial real estate, we sometimes feel like Dickson when trying to figure out what land or buildings are worth. With pending changes to accounting rules encouraging corporations to “mark to market,” the big question in commercial real estate circles is “What’s it worth?”
The gold standard of what things are currently valued at has for generations been a professional appraiser’s opinion of value. The MAI (Member of the Appraisal Institute) designation symbolizes a professional who has achieved the highest level in the commercial appraisal field. MAIs prepare research in designated market areas; then assemble an analysis of information pertinent to a property; and through knowledge, experience, and professional judgment of the MAI issue a formal report.
The role of the appraiser is to provide an objective, impartial, and unbiased opinion about the value of real property—providing assistance to those who own, manage, sell, invest in, and/or lend money on the security of real estate. MAI or not, thousands of commercial appraisers work every day to assemble a series of facts, statistics, and other information regarding specific properties, analyze this data, and develop opinions of value.
Looking in the Rear View Mirror
One of the major “approaches” to determining value is the sales approach which uses comparable sales as it’s basis. But by the very nature of this method, professionals are looking at historic transactions in order to develop an opinion. In normal markets this isn’t an issue, but in recent times, determining value is a formidable task. Partially, this is because of the scarcity of transactions over the past two years. With banking problems and economic malaise, many are on the sidelines. The product that has traded is, in many cases, a distressed sale which clearly is not normal and is hard to use in determining value for non-distressed assets.
Brother, Can You Spare Some Data?
Appraisers and brokers who are asked to provide estimates of value are in a tough spot these days. Combine the dirth of valid historical sales data and the fact that the market is finally beginning to trade again, and you have one frustrated industry. And don’t even get an appraiser started on capitalizing income or replacement cost approaches (both have data that is all over the board).
But for the fact that property trades have been so nominal in the past 18 months, all cycles are like this. When they return, many will question or try to adjust historical data up or down depending on their point of view.
The rubber meets the road in the coming months as the log jam that is commercial real estate begins to break loose little by little. We have been involved in several situations recently where companies are trying to dispose of fee simple assets. Executives and boards of directors want appraisals to validate the sales prices and in years past, they would take a quick peak at the summary page and nod knowingly. “Yes or no” would be the immediate feedback after just a minute of staring at the first few pages.
In this odd time in the market, we counsel caution in simply cracking open an appraisal and looking at the highest (or lowest) number on the summary sheet for validation on your deal. This is clearly not the appraisal industry’s fault, but instead the fact that we are in a data desert.
In any case, consumers of the reports should not be hesitant to have a conversation with the professional preparing the report to discuss the data and the methods of calculation. Use common sense in evaluating the report that the professional has assembled for you and your team. If he or she is an MAI or similar professional, the analysis will be thorough. However, it is your responsibility as the consumer of the data to take the time to understand how the appraiser drew the conclusions of value in the report and not simply take the Clif’s notes version and plug that into your project memo.
Otherwise, you might as well buy yourself a blender and see if the machine will eat the report. And yes, you shouldn’t try that at home either!