Appraisal Institute President 2/16/2019 Prospective Values James L. Murrett, MAI, SRA Appraisal Institute President TEGoVA Fall Meeting Oct. 18-20, 2018

Presentation Highlights 2/16/2019 Presentation Highlights U.S. perspective as embodied in U.S. valuation standards and body of knowledge European perspective Prospective value and valuation standards It’s always a pleasure as Appraisal Institute leaders to meet with real estate professionals from around the world. To tell you the truth, it’s probably one of my favorite duties. Today, I will address a few very important topics: The U.S. perspective, as embodied in U.S. valuation standards and body of knowledge; European perspectives; and Prospective value and valuation standards.

2/16/2019 U.S. Perspective, as Embodied in U.S. Valuation Standards and Body of Knowledge

Valuation Problem What is to be valued? What type of value is to be developed? On what date does the valuer believe the property holds that value? Every valuation problem includes certain elements, including: What is to be valued (“the subject property”)? What type of value is to be developed (value definition)? On what date does the valuer believe the property holds that value (date of value, or effective date )?

Date of Value The date of value (effective date) may be a: Current Past Future The date of value (effective date) may be a: Current date; Past (retrospective) date; or Future (prospective) date.

Date of Value Date of value Valuations involving current values mortgage lending acquisition lease renegotiation The selection of the date of value (current, retrospective, prospective) depends on the question being asked by the user of the valuation. Most valuations involve current values because the user of the valuation has a question about what the value is currently, as may be in the case of: mortgage lending; acquisition; or lease renegotiation.

Retrospective Values Estate tax reporting purposes Resolving damage claims Disputes over property taxes Retrospective values are needed when the question to be answered relates to what the property was worth in the past, as may be in the case of: Estate tax reporting purposes (the date of death is always in the past). Resolving damage claims (what was the property worth before the damage occurred vs. after?). Disputes over property taxes in prior years.

Prospective Values Financing of proposed construction Feasibility analyses Financial planning Prospective values are needed when the question to be answered relates to what the property will be worth in the future, as may be in the case of: Financing of proposed construction: give lender idea of value upon completion upon construction give lender idea of value upon reaching a certain level of occupancy Feasibility analyses Financial planning

2/16/2019 European Perspective

European Perspective Prospective values not provided by valuers EVS restrictions Prospective values are not commonly provided by valuers in Europe. EVS does not permit the date of valuation to be after the date of report.

European Perspective Current property characteristics Current values Prospective values Reasons why they are not commonly provided could include: Current property characteristics (physical and economic) are known, whereas they must be assumed for prospective values. Current values are generally easier for the user of the valuation to understand. Prospective values require the valuer to make projections about market trends that may be difficult to substantiate, such as: The valuer is providing an opinion of what “the market” thinks the value will be as of the future date. But “the market” is not always easy to read. Market participants are often unclear in their projections.

Prospective Value and Valuation Standards 2/16/2019 Prospective Value and Valuation Standards

Prospective Value and Valuation Standards Where prospective value fits Date of valuation not later than date of Valuation Report Where might prospective value might fit with European Valuation Standards? Currently EVS 5.54 states “The date of valuation will not be later than the date of the Valuation Report.” EVS in effect forbids prospective values except under limited circumstances.

Prospective Value and Valuation Standards Defining valuation date Estimate of value Market or income approach So, where is prospective value is addressed in International Valuation Standards? IVS uses the term “valuation date” throughout, but doesn’t define the term and doesn’t specifically say it can be a current, prospective or retrospective date. The first step requires an estimate of the value of the relevant interest in the real property following notional completion of the development project, which should be developed in accordance with IVS 105 Valuation Methods and Approaches. Regardless of the methods adopted under either the market or income approach, the valuer must adopt one of the two basic underlying assumptions: The estimated market value on completion is based on values that are current on the valuation date on the special assumption the project had already been completed in accordance with the defined plans or specification,; or The estimated value on completion is based on the special assumption that the project is completed in accordance with the defined plans and specification on the anticipated date of completion.

Prospective Value and Valuation Standards Market practices Estimated gross development value Consistent assumptions Market practices and availability of relevant data should determine which of these assumptions is more appropriate. However, it is important that there is clarity as to whether current or projected values are being used. If estimated gross development value is used, it should be made clear that these are based on special assumptions that a participant would make based on information available on the valuation date. It is also important that care is taken to ensure that consistent assumptions are used throughout the residual value calculation, i.e., if current values are used then the costs should also be current and discount rates derived from analysis of current prices.

Questions?

Appraisal Institute President 2/16/2019 Prospective Values James L. Murrett, MAI, SRA Appraisal Institute President TEGoVA Fall Meeting Oct. 18-20, 2018