Data Collection, Market Areas and Neighborhoods Basic Information Needed Before the Three Approaches Wayne Foss, MBA, MAI, CRE Foss Consulting Group Email: wfoss@fossconsult.com

Types of Real Property Fee Simple Estate Definition: Application: Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. Application: Appraisal of properties which are owner occupied. The owner has all of the bundle of rights. Can be any property type, but most often is a single family residence or condominium

Types of Real Property, con’t.. Leased Fee Estate Definition: An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the leased fee are specified by contract terms contained within the lease. Application: Appraisal of properties which are tenant occupied. The owner has given up the right of occupancy in exchange for the payment of rent from a tenant. Generally thought of as investment properties. i.e.: Apartments, Industrial Parks, Office Buildings and Shopping Centers

Types of Real Property, con’t Leasehold Estate Definition: The interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions. Application: Created when the contract rent is less that the prevailing market rent. A leasehold estate has a finite life, the length of the lease contract. Generally found in investment properties. i.e.: Apartments, Industrial Parks, Office Buildings and Shopping Centers when long term leases are involved.

Information Needed before applying the three approaches These items are needed to know what you are appraising (physically & legally) what problems are involved, and to estimate highest and best use Market Area Analysis Neighborhood, Identification of the submarket Site Analysis Improvement Analysis

Data Collection Three Broad Categories General Data Specific Data Includes information on the four forces that affect property value Specific Data Details about the property being appraised Competitive Supply and Demand Data Inventory of competitive supply Analysis of prospective demand

General Data Economic Trends Local Market Considerations International Regional Local Local Market Considerations Macroeconomic and microeconomic studies Macroeconomic studies are broad (cities and regions) Microeconomic studies are narrow and evaluate the factors that influence the market for a particular parcel of real estate Demographics Study of the changing population Government regulations and social attitudes Land Use regulations (i.e. zoning, transportation systems)

General Data, con’t... Local Market Considerations, con’t.. Purchasing power disposable income (the income that remains after deducting income taxes and all other payments to federal, state and local governments) Price levels rates of change (trends) in overall prices, rents, expenses Building fluctuations rates of change in the issuance of building permits Building costs rates of change in the prices of construction. Items such as labor rates, changes in construction technology, and public regulations Taxes trends in assessed value and real estate taxes Financing Cost, availability and terms of construction and take-out financing

General Data, con’t... Sources of General Data Government U.S. Dept of Commerce, Bureau of the Census U.S. Dept. of Labor, Bureau of Labor Statistics State and Local planning agencies Local University and College Research centers Trade Associations Appraisal Institute Urban Land Institute (ULI) Building Owners and Managers Association (BOMA) Private Sources Multiple Listing Services Computer databases Personal Appraisal Files

Specific Data The subject property Comparable Sales Comparable Rentals Description of the Land Description of the Improvements Zoning Potential legal uses allowed on the land Comparable Sales Comparable Rentals Improvement Cost Data Income and Expense Data Capitalization Rate Data Specific Data are used to: Determine the highest and best use of the property Set the stage for the application of the three approaches to value

Specific Data, con’t... Investigation of Market Transactions the degree of comparability with the subject property the quantity of information available the reliability of the data Sources of Specific Data Public records examples are recorded deeds, assessors records, zoning ordinances Published news trade publications, local business journals People in the industry brokers, bankers, property managers, developers, appraisers Multiple listing records sources of information on specific property transactions and details

Supply and Demand Data Supply Data Demand Data Sources of the Data inventory includes all properties like the subject property that is for rent, rented, sold, on the market, and properties that will likely to be developed. Demand Data analyze the prospective demand for property like the subject analysis of population trends residential and retail properties analysis of employment trends office and industrial properties Sources of the Data Interviews Public Records Building permits, development plans Demographic data

Neighborhood - Market Area Why Analyze The Market Area? To identify the submarket in which the subject competes for buyers and tenants. The property appraised is “fixed” in its location and subject to location influences (External forces) To help identify which sales are “comparable” To help forecast conditional sales price of subject; an appraisal is a conditional forecast, To help establish the submarket Helps to determine the stability of an area. May also indicate future land uses and value trends.

The Market A “Submarket” may be described in terms of: Potential users Potential buyers Price or rental amount range Product type Geographic Area Market Area defined: The defined geographic area in which the subject property competes for the attention of market participants; the term broadly defines an area containing diverse land uses.

Neighborhood aka Market Area Definition: A group of complementary land uses; a related grouping of inhabitants, buildings, or business enterprises. Concepts An area of similar or compatible land uses (zoning) An area of similar building types, ages or styles An area within which any change has an immediate direct influence on the value of the appraised property. The area within which the subject competes with other properties. Population characteristics, in habitants of similar age or economic profile These concepts apply to any property type

Neighborhood aka Market Area Definition: District: A type of neighborhood characterized by homogeneous land use. Distinctions between Neighborhoods and Districts A neighborhood may contain several uses that complement one another. Example: a neighborhood may contains single family homes and commercial properties that provide services to local residents. A district contains one predominant land use An apartment or industrial district, or office park

Neighborhood Boundaries The area in which the forces that influence value operate on all surrounding properties in the same way that the forces operate on the property being appraised. Boundaries may be: Physical Natural - rivers, lakes, mountains, ocean Man-Made - streets, highways, different uses, railroads Political - city, county, district Use Change from Single family to multifamily residential use. Change from residential to commercial, industrial or agricultural use.

Identification of Neighborhood Boundaries Examine the physical characteristics of the area Look for type of structures, land use, topography, access, etc. Draw preliminary boundaries on a map. Test the preliminary boundaries against demographic data obtains information about the people living within the area Ask people who know the area Such as residents, brokers, businesspeople, other appraisers The people who live and work in the neighborhood have the best understanding of the market area.

Neighborhoods and Districts Are constantly changing (principle of change) Questions to ask regarding the changes Are there new Uses? Are there changes in density? Is there an increase in commercial influence in a residential neighborhood? Are many properties on the market? Relationship between owner and tenant occupancy. Rapid changes in one neighborhood may impact another.

Neighborhood Life Cycles Four Stages Growth A stage in a neighborhood’s life cycle in which the neighborhood gains public favor and acceptance Stability experience equilibrium without gains or losses Decline diminishing demand Revitalization renewal, modernization, increasing demand

Neighborhoods and Districts Four Broad Categories for Analysis Physical (Environmental) Consideration of any natural or man-made features Location within the community Linkages Transportation systems Proximity to employment, shopping schools, recreation Topography, soil, climate, view Land use patterns Age, type, condition and appearance of structures Adequacy, cost and quality of services

Neighborhoods and Districts Legal-governmental Taxation and special assessments Public and Private Restrictions Schools Police and Fire Protection Planning and Development Activities Economic - financial Profile of the Residents Type of financing (and terms) available Price and Rent Levels Construction, conversion, and vacant land Extent of Owner Occupancy Vacancy Rates Changes in use or economic base

Neighborhoods and Districts Social - market Relates to the status, physical environment, services affordability and conveniences of a location Population Density Age and Income Levels of occupants Crime Rate

Districts Apartment districts Commercial districts generally subject to the same influences as single-family residences emphasis on parking and vacancy rates Commercial districts 1. Central Business District (CBD) Definition: The core, or downtown area, of a city where the major retail, financial, governmental, professional, recreational, and service activities of the community are concentrated. Transportation in most communities oriented to CBD Many of the CBD’s are undergoing changes Revitalization Changes in Land Use; from commercial to office or entertainment Decline; lose business to suburbs

Districts 2. Regional Shopping center 3. Community Shopping center Definition: A shopping center that offers a variety of general merchandise, apparel, furniture, home furnishings, services, and recreational facilities and is built around one or more full (anchor) department stores of at least 100,000 square feet each. Analyze Trade Area and Competition (both existing and proposed) 3. Community Shopping center Definition: A shopping center of 100,000 to 300,000 square feet that usually contains one junior department store, a variety store or discount department store, a supermarket, and specialty stores. Trade area generally 10 to 20 minutes driving time 4. Neighborhood Shopping Center Definition: The smallest type of shopping center, generally with a gross leaseable area of less than 100,000 square feet. Anchors are generally a supermarket and drug store, and possibly a bank Trade area generally 5 to 10 minutes driving time

Districts Office Districts Industrial Districts Include planned office parks and strip developments on major arteries Sensitive to access and support services (restaurants, hotels and convention facilities Industrial Districts Many forms large old complexes with heavy industry modern new complexes with light manufacturing or distribution warehousing Availability of Labor Availability of Raw material Distribution facilities Linkages such as highway system, rail, water, air

Districts Agricultural Districts Specialty Districts Soil type, land use, crops grown and water supply Specialty Districts Medical hospitals, health care facilities, medical buildings Research and Development Parks Universities, departments of large companies High Technology Parks electronics and computer firms Education Districts Colleges, Universities, or community colleges supporting housing and services Historic Districts

Neighborhood aka Market Area example items to know Example items to consider, understand, and know about a neighborhood: Age Income Levels Rents typical equity cleanliness reputation property condition, repair status typical time on the market to sell (or lease) the property

Neighborhood aka Market Area example items to know, con’t Prices, rents Vacancy Turnover Parks Schools Government services police, fire, trash, etc. Occupant attitudes Proximity to employment, recreation, shopping Views Design, layout Zoning, use restrictions Common areas Homeowners association cost and benefits Crime Relative direction of growth

So That’s Data Collection, Market Areas and Neighborhoods Are there any Questions? Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA Phone: (714) 871-3585 Fax: (714) 871-8123 Email: wfoss@fossconsult.com