Rule books for appraisers still being rewritten

The role of real estate appraisers even in the best of times can be a thankless one. Their job is to provide an independent analysis of a what a property is worth, and chances are either the buyer, seller or lender will have some kind of bone to pick with what they come up with.

Much like a baseball umpire, their impartiality, judgment, professionalism and even their sanity can be called into question by fierce competitors with a vested interest in the outcome, even when there's a general agreement on the ground rules.

Now imagine that these umpires are trying to call a game in which the rule book has been tossed out and replaced with ... well, nothing. The game has changed in ways the players are either unable or unwilling to grasp and it's up to appraisers to supply values at a time when the traditional underpinnings of a commercial property's real worth have been decimated.

At least that's how some appraiser-members of the North Star Chapter of the Appraisal Institute see it. They say their jobs have been made much more difficult by the traumas of the real estate crash, in which value and debt bubbles inflated, then popped, resulting in the worst recession since the 1930s.

Now in its aftermath, the most obvious ways of determining the value of a commercial property have largely become things of the past. For instance, when times were better, many more properties were being bought and sold, resulting a in rich database of "comparable sales" through which it could be fairly easily determined what a building's market value was at a given point in time.

Now there are far fewer sales and far more distressed properties skewing the market, rendering it much harder to come up with a value that's acceptable to buyer, seller and lender, said Everett Strand of Nicollet Partners Inc., a past president of the local Appraisal Institute chapter.

"What some people don't realize is that real estate is an asset, and the value of assets can change very quickly," he said. "It's no different than the stock market. Real estate crashed. We're trying to figure out what the market is doing on a daily basis. If it's an extreme market, then values will reflect that."

"You have to do far more research and look at older transactions," he said. "I try to stick with sales that came after the crash -- sales made in 2009 and 2010. And I'm looking prior to that."

Some lenders are now requiring appraisers to include current listings in their deliberations as a way to arrive at a fair value, but that is also fraught with peril due to the presence of so many desperate, overleveraged sellers in the market, he said.

"You have to be careful with using listings. Sellers list their properties high so they can get out of their bank debt. Buyers and sellers are separated because sellers need cash, and they're hoping and praying to get enough."

Another basic underpinning of determining the value of commercial real estate value -- lease income flow from tenants -- also has been largely thrown out the window due to the recession and the sluggish, selective recovery.

In a market where so many tenants have gone out of business and those who remain are demanding big concessions on rents, the "real values" of all but the most gold-plated Class A commercial properties are basically whatever the buyer and seller can agree they are, the appraisers say.

"Central Bank has been acquiring failed banks, and most of those banks had a ton of distressed assets in their portfolios," Lesicka said. "As we're sorting those out, we'll see that they made loans based on an appraisal that took pro forma projections of incomes into account, rather than actual, in-place income."

Needless to say, those kinds of practices for determining a property's value are out. Even a building's occupancy rate, which once was a no-brainer in figuring a market value, is now suspect, the appraiser said. Just because it may have low vacancy numbers, the property's value may not be higher as result because the lease deals, perhaps signed three years ago, may now be above the market average.

All of these changes and market uncertainties make it imperative that qualified appraisers be sought out and used in seeking financing for commercial property sales, both men said, adding that professionals who have all of the tools and experience to cope with a vastly changed and oftentimes incomprehensible market are now a must.

"They must be able to support their conclusions in the appraisals and they have to be sophisticated enough to accomplish this," Lesicka said.