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For the past several years, John Cicero, my partner in our commercial appraisal venture Miller Cicero (hands down the best commercial appraisal firm in the NYC metro area), has been laboring in fits and starts to convey his views on commercial real estate valuation in the public domain.

Largely because Miller Cicero is humming on all cylinders…

At first John’s efforts were a regular column on my former Soapbox Blog called Commercial Grade which has been merged into a stand alone blog called, surprisingly, Commercial Grade. when he revamped the Miller Cicero corporate web site.

His latest is a post on commercial rent control. Check out the blog and check it often.

Tags: John Cicero, Miller Cicero, Commercial Grade

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Guest Appraiser Columnist:
John Cicero, MAI, CRE, FRICS

John provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. He is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

Bob Knakal, Chairman of investment sales brokerage firm, Massey Knakal Realty Services, recently released an excellent commentary on a 25-year history of the New York City multifamily market. Using actual sales data from 1984 to the present (including cap rate data from 2005 to 2008 compiled by my firm, Miller Cicero, LLC).

In addition to examining historical cap rates and gross rent multipliers over time, the report analyzes cap rates relative to mortgage rates and the yields on 10-year T-bills. An excerpt:

From 1994 through 1999, we saw slow steady declines in cap rates, with slightly positive leverage and risk premiums within a range of 100 to 250 basis points…Throughout the 25 years of this analysis, this period was the most stable-and I attribute this stability directly to the very disciplined lending practices of debt providers.

It’s actually fascinating (at least for a commercial appraisal nerd like me!) to see how many NYC multifamily property was routinely purchased with negative leverage (i.e. at cap rates below mortgage rates. In fact the past five years has been the biggest period of negative leverage buying since the mid 1980’s. However, with the more stringent underwriting now in place, the NYC multifamily market seems poised for another (surprisingly rare) period of positive leverage.

Tags: Massey Knakal, John Cicero, Miller Cicero, Commercial Grade

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John Cicero, MAI provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

The Massey Knakal Income Property Report that I prepare on behalf of the brokerage firm was just released for the second half of 2008. The report is the only one of its kind that tracks cap rates, income multipliers, price per square foot and number of sales for the New York City multi-family market. As this report included only those sales (above $500,000) that closed from July 1 through December 31, it includes sales closed before and after the market turn in mid-September, when Lehman collapsed and the credit markets seized.

An excerpt:

The number of sales dropped 45% from the second half of 2007 to the second half of 2008. Relative to the prior year the greatest declines were in Manhattan and Northern Manhattan, both down 54%, and the Bronx, down 60%. Year over year there were 37% fewer sales in 2008. This suggests a turnover rate of 1.9%, down from 3.0% in 2007 (of the categories tracked).

Massey Knakal will distribute nearly 300,000 hard copies of the report over the next few months.

Massey Knakal New York City Income Property Market Report [2H08]

Report Methodology [Miller Cicero]

Tags: Soapbox Blog, Massey Knakal, Commercial Grade

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John Cicero, MAI provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

Buried in all USPAP appraisal reports is a comment on the property’s exposure period and marketing period. Simply put, the exposure period is intended to reflect the time that the property hypothetically would have been exposed on the open market prior to the effective date of value. Alternatively, the marketing period is an estimate of the time that it would take for the property to sell after the date of value.

The requirements to add exposure and marketing periods to appraisals came about during the S & L crisis of 1989. Then, as now, there was a dearth of sale transactions and to a large extent the only sales taking place were under distressed conditions. The intent of these exposure/marketing time concepts was to put the value conclusion in context. A marketing period of up to 18 months says that in the appraiser’s opinion the property could sell for X dollars within the 18 months following the effective date of value. This would differentiate a property’s inherent value in a “temporarily impaired” market, and prevent banks from being required to write down loans to liquidation value.

While the exposure period/marketing time sections became part of the boilerplate over the past five years, in the current market it has taken on new meaning. When we interview brokers for our appraisals they often comment on how values are down 30%, 40%, 50%, etc. However, these discounts reflect what the broker believes that he/she could sell the property for if he had the listing today. A broker is not thinking about a 12 to 18 month marketing period. He/she wants to list the property and sell it in 3 to 6 months. To an appraiser this may represent a liquidation or disposition value; to the broker it is reality.

Like everything else in this market that has come full circle, the exposure/marketing period is once again an integral part of the appraisal. I think it’s time to dust off that section of the report and break it out from the rest of the boilerplate.

Tags: Soapbox Blog, Appraisal Process, USPAP, Commercial Grade

2 Comments

John Cicero, MAI provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

My firm is quite busy with “updates” these days. More and more lenders are being asked to extend or renew loans for projects, or their loans are ending up in “special assets” (or whatever term the bank uses for their loan workouts.) So we find ourselves more and more being asked to “just go back and update what we did a year or two ago”.

There seems to be an expectation amongst some lenders that since we had been out to the property within the past two years (or had previously reviewed plans for a proposed property) that we can just bang out a new appraisal in no time and at a nominal cost. They often fail to recognize that in order for the new valuation to be meaningful, the same appraisal process must be followed.

According to USPAP (Advisory Opinion 3):

regardless of the nomenclature used, when a client seeks a more current value or analysis of a property that was the subject of a prior assignment, this is not at extension of that prior assignment that was already completed-it is simply a new assignmentThe same USPAP requirements apply

Now, more than ever, focused market research is required for any appraisal. The most recent comps and/or, in the absence of empirical market data, broker interviews are critical. For new construction projects, it is imperative that the new plans (or project that was eventually constructed) are the same as what was originally submitted.

That is not to say that having some familiarity with the project won’t expedite the process, and in many cases my fee for the “new assignment” of a prior appraisal will be 25% or more below the original fee. Just as often, however, I find that because I know the complexity of the project, a discount off the original fee is not warranted.

Tags: Soapbox Blog, USPAP, Commercial Grade

1 Comment

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

There is no shortage of villains in this market meltdown (see CNN’s 10 Most Wanted Culprits of the Collapse). Henry Waxman, Chairman of the House Committee on Government Oversight and Reform, even got a concession from Alan Greenspan that he was “partially wrong in opposing regulation of derivatives” and acknowledged that financial institutions didn’t protect shareholders and investments as well as he had expected.”

Though there has been lots of finger pointing, I think that the rating agencies are getting off way to easily. Sure, they’ve been scolded, but considering the extent of the fallout and their role, more than a slap on the wrist is in order. Today’s New York Post reports how the credit rating analysts saw the collapse coming years ago, but did nothing because it was such profitable business.

Over the years, I couldn’t understand how so many inflated appraisals prepared for the investment banks got by the rating agencies, the supposed watchdogs. As I’ve said in past posts, my firm sat on the sidelines when it came to CMBS appraisals because we didn’t play the game, and the rating agencies, who were supposed to be the game referees, were on the take. Where is the outrage over their conduct and why haven’t those senior executives been shown the door?

Tags: Soapbox Blog, Commercial Grade

1 Comment

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

The semi-annual market report that I prepare on behalf of investment sales brokerage firm Massey Knakal Realty Services is available for download. This report was particularly interesting in that it reflected the multi-family and mixed-use sales market in New York City post “credit crunch.” We found that the number of sales was down significantly, 31% overall from the same period last year, with the biggest declines in Northern Manhattan and the Bronx. The median price per square foot was $222/SF, down 5% from the prior period, while the median cap rates increased to 5.8% and the median GIM declined to 11.5.

Download full report

Tags: Soapbox Blog, Massey Knakal, Commercial Grade

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Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.

…Jonathan Miller

Six years ago today Miller Cicero, LLC was born!

From the minute that I put out my shingle, it’s been a great ride. The synergy created between me and the Millers has been dynamic and from day one…my biggest problem has been getting all of our work done in time. (We always did, but it often took a lot of midnight-oil burning!!).

I’m fortunate to say I’ve got one of the best appraisal staffs in the profession and a terrific roster of clients as well. Though the market is clearly changing I am confident that we will be able to ride the roller coaster to come (I’ve got toI start paying my first college tuition bills for my daughter this fall!)

Sorry for getting sappy, but once a year on my anniversary I’m entitled to get a little maudlin, aren’t I?

Tags: Soapbox Blog, Commercial Grade

3 Comments

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.

…Jonathan Miller

By definition appraisers are supposed to stand for independence and objectivity. However s recent article in the New York Times highlights yet another avenue where pressure is borne on appraisers..those providing litigation support and expert testimony. The appraiser’s role in the mortgage lending process has the focus of much attention over the past months, with the appraiser once again being held responsible for lack of spine and flexible ethics in the face of pressure from banks and mortgage brokers. In the article, In US, Expert Witnesses are Partisan, author Adam Liptak highlights the process of retaining “neutral” experts in US courts. He writes,

In most of the rest of the world, expert witnesses are selected by judges and are meant to be neutral and independent. Many foreign lawyers have long questioned the American practice of allowing the parties to present testimony from experts they have chosen and paid.

Hmm, this sounds familiara potential conflict of interest in providing an impartial opinion to the person paying your fee.?…where have I heard that before??

The American system becomes somewhat of a farce, or is at least perceived to be. Each side picks a “hired gun” to advocate its side and then the judge, after listening to hours, or days, of technical talk, ends up deciding something in the middle. The presumption is that both sides have already exaggerated their positions to an extreme and therefore the real answer lies somewhere in the middle.

Mr. Liptak continues in his article,

Juries often find it hard to evaluate expert testimony on complex scientific matters, many lawyers say, and they tend to make decisions based on the expert’s demeanor, credentials and ability to present difficult information without condescension. An appealingly folksy expert, lawyers say, can have an outsize effect in a jury trial.

The same is clearly true for judges as well as juries. Judges cannot differentiate a “good” appraisal from a “bad” one so it all comes down to how the expert comports himself/herself on the stand. Being a good witness is for the most part, a different skill set than being a good appraiser. Being a good appraiser and a good witness is rare and a winning combination.

I recently learned a new term that I think should become the law for all valuation related disputes, baseball arbitration. In baseball arbitration, the arbitrator or judge ultimately sides with one party or the other, no splitting the baby down the middle. This would be a powerful incentive to get it right and not conclude to anything too extreme.

In the meantime, for those appraisers who give testimony, don’t forget to speak clearly and make eye contact!

Tags: Soapbox Blog, Commercial Grade

3 Comments

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

Remember the Ouija Board you played with as a kid? It used to be so comforting to know that you could tell the future. With the local real estate market in transition, and everyone trying to understand just what the heck is going on, it may be time to break out the Ouija board again.

Our market, New York City, seems to be somewhat insulated from the woes being experienced by the rest of the country, but experts throughout the City (and the Country) seem to disagree on whether our market fundamentals are just so different from the rest of the country that we will escape the pain, or if it’s just been delayed and around the corner.

Lenders in particular seem to be scratching their heads. Over the past six months or so I’ve received a flurry of phone calls from a number of major lenders interested in retaining us for a market study so that they could, essentially, figure out if it’s safe to continue making loans in the near future.

The conversation usually goes something like this:

Lender: We’d like you to do a market study for us. What would you charge?

Me: Let’s talk about the scope of the study. What questions, specifically, do you want us to address?

Lender: We’d like to know if there’s still demand for new development and what the saturation point is. We’d like to know every project that has come on line and is in marketing, what it’s selling for, and the absorption rates. In addition to what’s currently marketing, we’d like to know every project in the pipeline. We’d like to have that broken out by condo, co-op, rental and by neighborhood.

Me: I see. You realize that there is no central database of such info. It would require all original research with the various community districts, Buildings Department, Attorney General’s office and lots of calls to brokers and developers. This is a large and very complex market and at the end of the day, I’m not sure that this data or any data is really going to answer the demand question for you. We can do the research but it’ll be very expensive and take a couple of months. (I know, I’m quite the salesman!)

Lender: (long pause) OhI have approval for $5,000.

Me: (long pause) Wellmaybe we can revise the scope somewhat

I understand wanting to get your arms around the situation, but the bottom line is that no market study or econometric analysis is going to tell a lender that it’s safe to continue building and making construction loans in this environment. I’ve seen analysts put together pages of formulae and algorithmic theorems trying to quantify demand, but there are so many variables and assumptions incorporated into these models so as to render them (in my opinion) meaningless.

Try as we might to understand the current market, it’s still anyone’s best guess as to where we are in the cycle and how much pain we’ll experience before it’s over. No examination of past performance or theoretical demand projections are going to definitively answer that for us. Back to my original question.

Anyone have a Ouija board that I can borrow?

Tags: Soapbox Blog, Absorption, Commercial Grade

4 Comments

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

I think that I finally understand what the problem is.

We just need to go back to basics and make sure that the real estate lenders are being property educated. I recently came across a textbook written for lenders: The Complete Guide to Financing Real Estate Developments (Hardcover) by Ira Nachem ( 2007, McGraw-Hill, New York), List price $79.96. Seemed like a respectable enough book, which is why my jaw dropped and I had to read the following section three times to make sure that I wasn’t imagining things

A section in Chapter 5 with the heading “Influencing the Appraisal”,

Since appraisers want to continue to receive assignments, they generally have a desire to satisfy you, their client. You sometimes can play on that desire and get the appraiser to produce a report with values a bit higher (or lower) than he otherwise would report.If you want to make sure that the appraiser is not undervaluing the property, you should tactfully indicate your concern up front

Do you believe this stuff?!

As I was reading this I kept on waiting for Alan Funt to jump out and tell me that the whole thing was a joke. He didn’t. (I guess he couldn’t since he died in 1999.)

It gets better

A third reason to go against a conservative valuation involves market conditions and competition among lending institutions. When more lenders are in the market, competition for business increasesTo be more competitive, loan officers who receive higher appraised values can make larger loans

Over the years I’ve spoken to numerous loan officers that truly don’t have a clue as to how the appraisal function is supposed to fit into the underwriting process. Unfortunately books like this do little to educate them.

I look forward to reading future books in this series: “Shmearing the Building Inspector” and “Tax Evasion for Dummies”.

Tags: Soapbox Blog, Appraisal Process, Commercial Grade

11 Comments

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

On June 12, 2008 the Court of Appeals of the State of New York decided a lease dispute case, 936 Second Avenue, L.P. v. Second Corporate Development Co.

The issue, according to the New York State Bar Association, was

whether the net lease itself must be considered by appraisers in valuing the demised premises for purposes of establishing the net rent for a renewal term of the lease. The lease encumbering this property specified that upon exercising a renewal option the new net rent would be equal to 7% of the “value of the demised premises.”

For the purpose of setting this new rent lessor and lessee each retained an appraiser. Lessor’s appraiser concluded to a value that was more than double lessee’s opinion of value. Apparently the primary difference was that lessee’s appraiser took into account the renewal lease terms (i.e. appraised the leasehold interest) while the lessor’s did not. The Supreme Court had ruled that the lease should not be considered in estimating the property value for the purpose of determining the new rent, however this was overturned on appeal. The Appeals Court essentially decided that since the lease did not specifically state that the lease encumbrance should be excluded from consideration, it should not be.

I am not a lawyer, but to me this is a completely illogical decision based on circular reasoning.

To say that the parties must base a lease rate on the value of a property that is presumed to be encumbered by a lease defies common sense and real estate economics. I am fairly certain that when the lease was drafted in the 1960’s it did not specifically state that the lease be excluded from consideration because it was just unfathomable to both parties that it would not be.

The irony is that the Court concluded that

absent an agreement to the contrary, the effect of a net lease must be considered in valuing property for the purpose of setting rent for a renewal lease term. Such a rule comports with precedent, appraisal practices and common sense.

Well, I can’t speak to precedent, but as far as appraisal practices and common sense, I’d have to respectfully disagree with our esteemed Justices.

Webmaster’s note: I have experience with circular reasoning as well. On family vacations via car, my sons have a song that goes like this:

I know a song that gets on everybody’s nerves,
everybody’s nerves,
everybody’s nerves,
I know a song that gets on everybody’s nerves
and this is how it goes…
(repeat).

Tags: Soapbox Blog, Commercial Grade

2 Comments