Property Valuation: Why Do You Need It?

Property valuations or appraisals are commonly used when we consider buying or selling a property, lending on a property, buy out a partner, buy or sell partial interests (such as the remaining years on a lease), reposition or repurpose the property, in estate settlements and in a myriad of other uses and purposes.

In general, the result sought in a formal appraisal assignment is the answer to an essential question: “what is it worth?” But the question of valuation and the worth of the property is generally part of a larger issue that the client is trying to solve. As noted real estate teacher and appraiser William M. Kinnard, Jr. said, “Real estate appraisals are made because someone has a problem.”

Often, based on the nature of the problem and defined scope of the assignment, the results of an appraisal may not be restricted to the value of the specified interest, but geared more to guiding the client on alternatives available to address a particular situation involving full or partial interests in the property.

Snapshot #1 – Current Leasehold Value of a Professional Office Lease

Space: 5,000 SF professional office space in Manhattan; leased in 1970’s

Situation: Tenant selling business with remaining below-market lease

Problem: Landlord wants share of the positive leasehold value!

Parties: Tenant, landlord and new subtenant dispute the leasehold value

Solution: Leasehold value determined by independent appraisers

Outcome: Amicable settlement between parties based on appraised value

Appraisers use historic data and look at the conditions of the market to make projections about future performance of the property, and arrive at a well-informed current value of the property, which is used to address the particular problem of the client.

Yet there are no ideal appraisal conditions where the appraiser has all the relevant data to form a well-informed opinion of value within the prescribed time. Given the nature of the industry, a good appraiser uses the most reliable market data and a few assumptions to conduct analysis and arrive at a credible opinion that is defensible to the client, industry peers and the general public.

Snapshot #2 – Fair Market Rent for Renewal of a Bar & Restaurant Lease

Space: 9,000 SF of bar & restaurant space in Manhattan; leased in 1980’s

Situation: Lease is due for renewal; Tenant wants to renew at a fair rent

Problem: Landlord is asking the highest going market rent in the area!

Parties: Tenant, landlord and local broker with a potential new tenant

Solution: Fair market rent determined by independent appraisers

Outcome: Arbitration and settlement of rent based on appraisers’ opinion

The client, i.e. the user of the appraisal, is the ultimate decision-maker. The appraiser has to work within the scope of the assignment and choose the appropriate methods and approaches to valuation. The methods are tools and the approaches used are simulations of alternative solutions available to the client.

Ultimately, all appraisal assignments are about problem-solving and finding the right solutions for a client to make good decisions which maximize economic benefits (e.g., value creation or tax savings). Opinions of value are important, but the approach and solving the larger problem are key.

Tony D. Kamath

MAI, AI-GRS