MAP Training Valuation Prepared by Mary Ann Barnett, MAI BBG

SLIDE TITLE C ONCLUSION OF N ET O PERATING I NCOME Need Balance between:  Income  Vacancy  Expenses  Capitalization Rate No single input can be discussed in a vacuum without the others

SLIDE TITLE C ONCLUSION OF N ET O PERATING I NCOME ( CONT.) Forces impacting each input to NOI  Supply  Demand  Location  Quality/Appeal  Age  Condition  # of units  Extras (amenities, finishes)

SLIDE TITLE C ONCLUSION OF N ET O PERATING I NCOME ( CONT.) Conclusion of Rental Income 223f – look at Contract Rents (RR) and Market  Renovation?  Change in Operations Planned?  Expectation of Market Changes? 221d(4) – Reliant on Market Data  Stand alone operations (always)  Expectations of Market Changes?  Central 60% for adjusted rent not required any longer

SLIDE TITLE C ONCLUSION OF N ET O PERATING I NCOME ( CONT.) Vacancy & Collection Loss Physical vacancy Collection loss/Bad debt Rent loss Concessions Model/Employee/Non-Revenue unit loss  Include in VCL?  Income as expense?  Be consistent in treatment in both history and proforma

SLIDE TITLE C ONCLUSION OF N ET O PERATING I NCOME ( CONT.) Expenses Real Estate Taxes – Biggest scrutiny and risk factor today  What is practice in state?  What is practice in local district?  % of market value?  Income Approach or Sales Approach?  Some other method of assessment Assume stand alone operations Need consistent categorization of line items Do expenses make sense in relation to each other and the operation? What is expectation of change in operation/management?

SLIDE TITLE C ONCLUSION OF N ET O PERATING I NCOME ( CONT.) Capitalization Rate Support & Conclusion Comparable sale indications  Similar income basis?  Similar expense basis?  Similar reserve level?  Consider the adjustments and weight applied in SCA (same impact here) Broker surveys  Always useful  Especially helpful in markets with disparate sales  Especially helpful in markets with older or few sales  Reveals current indications of market participants

SLIDE TITLE C ONCLUSION OF N ET O PERATING I NCOME ( CONT.) Capitalization Rate (cont.) Band of Investment  Does not really reflect market expectations today due to interest rates Debt Coverage Method  Does not really reflect market expectations today due to interest rates

SLIDE TITLE S ALES C OMPARISON A PPROACH Choice of sales data Try to get:  Most recent date of sale (this is relative to size of market and product type)  Most similar location (city v. suburban)  Most similar design (garden v. high rise)  Avoid REO sales  Similar condition – value add or renovated or original?  Try to bracket subject in most ways Want to have reasonable adjustments, but adjustments are OK

SLIDE TITLE S ALES C OMPARISON A PPROACH ( CONT.) Question for the audience Subject Property  High rise  Senior  Corridor  1965 YOC  Secondary town location

SLIDE TITLE S ALES C OMPARISON A PPROACH ( CONT.) Which comparable is best?  1970s, garden property in same city?  1990s, high rise property in same city?  1960s, high rise property in larger city? It Depends Support and Explain

SLIDE TITLE S ALES C OMPARISON A PPROACH ( CONT.) Adjustments are based on: Paired sales to derive adjustments Market indications to derive adjustments Appraiser experience and discussion with market participants Calculations to derive adjustments (cost to cure, etc.) No required maximum % of adjustment per USPAP, MAP Guide, market standards

SLIDE TITLE USPAP Uniform Standards of Professional Appraisal Practice Contains:  Definitions  Preamble  Ethics Rules  Record Keeping Rule  Competency Rule  Scope of Work Rule  Jurisdictional Exception Rule  Standards and Standard Rules  Statements on Appraisal Standards

SLIDE TITLE USPAP ( CONT.)  USPAP does not establish who or which assignments must comply.  Neither The Appraisal Foundation nor its Appraisal Standards Board is a government entity with the power to make, judge, or enforce law.  An appraiser must comply with USPAP when either the service or the appraiser is required by law, regulation, or agreement with the client or intended user.  Individuals may also choose to comply with USPAP any time that individual is performing the service as an appraiser.

SLIDE TITLE USPAP ( CONT.) In order to comply with USPAP, an appraiser must meet the following obligations:  An appraiser must act competently and in a manner that is independent, impartial, and objective.  An appraiser must comply with the ETHICS RULE in all aspects of appraisal practice.  An appraiser must maintain the data, information and analysis necessary to support his or her opinions for appraisal and appraisal review assignments in accordance with the RECORD KEEPING RULE.  An appraiser must comply with the COMPETENCY RULE and the JURISDICTIONAL EXCEPTION RULE for all assignments.  When an appraiser provides an opinion of value in an assignment, the appraiser must also comply with the SCOPE OF WORK RULE, the RECORD KEEPING RULE, the applicable development and reporting Standards and applicable Statements.  When an appraiser provides an opinion about the quality of another appraiser’s work that was performed as part of an appraisal or appraisal review assignment, the appraiser must also comply with the SCOPE OF WORK RULE, the RECORD KEEPING RULE, applicable portions of STANDARD 3 and applicable Statements.  When preparing an appraisal or appraisal review that is a component of a larger assignment with additional opinions, conclusions, or recommendations, the appraisal or appraisal review component must comply with the applicable development and reporting Standards and applicable Statements, and the remaining component of the assignment must comply with the ETHICS RULE, the COMPETENCY RULE, and the JURISDICTIONAL EXCEPTION RULE.

SLIDE TITLE USPAP USPAP does not give directions on how to appraise  Does not tell how many comps to use  Does not guide on cap rate application  Does not give inspection requirements

SLIDE TITLE USPAP USPAP guides appraisers in ethics and business management  Don’t be misleading  Be impartial  No predetermined values  Recordkeeping rules  No contingent fees based on a predetermined outcome  Maintain confidential information/conclusions  Maintain written work file even if oral value given  Competency is required  Define scope of work

SLIDE TITLE USPAP Statements 1 & 2 – Real Property Appraisal Development and Reporting  OLD formats defined:  Self Contained Format  Summary Format  Restricted Format  CURRENT formats defined:  Appraisal Report  Restricted Appraisal Report

SLIDE TITLE USPAP Statement 3 – Appraisal Review, Development & Reporting Statements 4 & 5 – Real Property Appraisal Consulting, Development & Reporting - RETIRED Statement 6 – Mass Appraisal, Development & Reporting Statements 7 & 8 – Personal Property Appraisal, Development & Reporting Statements 9 & 10 – Business Appraisal, Development & Reporting