Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he translates E Unum Pluribus from latin to mean “Behind The Curve”. …Jonathan Miller

A recent interview of Sam Zell in the Wall Street Journal about the sale of his Equity Office Properties Trust REIT to the Blackstone Group posed the question as to why so many REITS are being taken private? Zell gave several reasons:

  • (1) that the private market was pricing assets higher than the public market;
  • (2) the “analytical community was continually behind in their evaluations of office assets. As each transaction occurs, they tried to catch up but they were still always behind”, and
  • (3 )that this led to the “take private transactions to a large extent because the analytic community had a different perspective on value”.

As someone with rudimentary knowledge of economics I could not fathom this duality in market pricing between private and public deals considering that the market seeks its own level playing field commensurate with risk. I also was reminded of what my fellow blogger John Cicero stated in Commercial Grade last month, namely that by the time appraisers evaluate a recorded sale several months have already passed, the market has changed and therefore you must talk to the market participants. Could Zell’s comment be on the mark about the “analytical community” a/k/a “appraisers”? Could my old friend John C. be correct in his commentary and, more frightening, would his ego get bigger if I told him so?

A recent conversation with an acquaintance who deals in large CMBS packages for an international bank gave this conundrum about markets some additional perspective. I commented that I saw parallels between the late 80’s and today’s hot market in terms of money chasing deals. His comment was that today’s market not only has an excess of domestic capital but that foreign capital is plentiful and it is satisfied with low yields as long as investors do not have to fund negative cash flows and they can own “phallic” (i.e. trophy high rise) properties. This market phenomenon poses the question as to when does all this get recorded by the market? Whether its private deals buying collateralized/securitized property such as REITS or buyers of individual properties the valuation parameters of supply/emand, cap rates, discount rates, quality of income stream, etc. should all meld at the end. All of which leads perhaps to John C. maybe being correct-you’ve got to talk to the brokers and market participants which I call “market dynamics”.

“Market dynamics” is something that you will not find defined in the Appraisal Institute’s textbook but every appraiser should be instructed in Appraisal 101 as to how it should be applied. All too often appraisers will present an array of rent and sales comps and an average which then would be applied to arrive at a value. If, on the basis of market interviews the trend is up (last week’s asking price for the same property or rental space is up or down) an appraiser can correlate to the higher or lower end of the range. John’s comment that “appraisers “are impartial observers of the marketplace” and what they “think about a particular property doesn’t really matter” is mostly on the mark. But John, I must remind you that in the final analysis an appraisal of value is an OPINION and if an appraiser cannot bring that OPINION into focus in his correlation to a final value he should become an accountant.

And here, I almost thought you were the smartest guy that Jonathan knows from Mondays-Fridays.

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