Chapter 22: Valuation of Distressed Properties

1. Chapter 22:Valuation of Distressed Properties

2. Introduction • Several factors can result in a distressed property • Oversupplied market • Poor design • Improper location of improvements • Inadequate maintenance • Poor decisions made by owner or manager

3. Introduction • These problems can result in: • Low occupancy • Higher operating costs • Low rent levels • The problems are sometimes curable and sometimes incurable

4. External obsolescence Loss in property value resulting from negative influence outside the property itself An element of accrued depreciation Generally incurable

5. Two types of external obsolescence • Economic obsolescence • Value loss is caused by an occurrence or situation that adversely affects the employment, quality of life or economics of an area • This problem may disappear over time • Locational obsolescence • Value loss is caused by a negative influence outside the property because of its location, a health hazard close to the property or a change in property use close to the property • Generally considered incurable and may permanently impair property value

6. Occupancy obsolescence Loss in the value of real estate improvements due to an occupancy that is less than the stabilized occupancy that the property should achieve in the current market It is generally the present value of income loss during the rentup of a property It is generally curable; if not curable, it is locational obsolescence

7. Functional obsolescence Loss in value due to functional inadequacies or superadequacies due to poor design and/or change in market standards or requirements for building components May be curable or incurable

8. Property Inspection and Analysis: Income Approach • The feasibility rent must often be estimated: • Feasibility rent is the rent level needed to support the depreciated value of the property • Considers deductions for normal physical depreciation • Does not consider any adverse conditions such as external obsolescence, functional obsolescence, occupancy obsolescence, rehabilitation costs or conversion costs

9. Property Inspection and Analysis: Income Approach The difference between the value based on feasibility rent and the value based on market rent is a measure of the loss in value due to the adverse condition such as external obsolescence This loss in value may have to be used as an adjustment when using the sales comparison and cost approaches

10. Property Inspection and Analysis: Cost Approach • Appraiser must consider any loss in value due to physical, functional, economic and occupancy obsolescence • The loss in value may have to be allocated between the land and the improvements • Two approaches to estimate loss in value: • Loss in income • Paired sales

11. Property Inspection and Analysis: Sales Comparison Approach Comparable sales may be scarce Must adjust for differences in age, condition, quality, property rights Also adjust for differences in occupancy, economic conditions and functionality of the properties

12. Example:Value Estimates with No Problem Summary of Value Indication

13. Functional obsolescence: Income approach

14. Functional obsolescence: Income approach

15. Functional obsolescence: Cost approach

16. Functional obsolescence: Sales comparison approach

17. Summary of functional obsolescence

18. Locational external obsolescence: Income approach

19. Locational external obsolescence: Income approach

20. Locational external obsolescence: Cost approach

21. Locational external obsolescence: Sales comparison approach

22. Summary of external locationalobsolescence

23. Economic external obsolescence: Income approach

24. Economic external obsolescence: Income approach

25. Economic external obsolescence: Cost approach

26. Economic external obsolescence: Sales comparison approach

27. Summary of external economic obsolescence

28. Economic and occupancy external obsolescence: Income approach

29. Economic and occupancy external obsolescence: Income approach

30. Economic and occupancy external obsolescence: Cost approach

31. Economic and occupancy external obsolescence: Sales comparison approach

32. Summary of occupancy and economic obsolescence