The Missing Link

The law of averages says… well… nothing you want to hear, because it is pretty much a misunderstanding of probability. The fact something has not occurred in a series of trials does not necessarily improve the chance of occurrence in the near future.

This realization has application for Assessment Professionals when trying to make stratification decisions based on limited comparable data.

Don’t automatically assume that missing data would surely materialize given just a few more market transactions. That void in the data may not be from missing data at all, but instead could indicate market indifference or even aversion. Continue reading

Posted in Real Life

Dixie Follows the Market

The Any Municipality County assessment department enlisted Dixie’s help on a new retail development, due to her experience as Commercial Real Property Analyst. Dixie reviewed the file but no matter how many times she processed the income-based numbers, the value still did not approach the recent sale price. Her standard market research did not seem to apply to this property, at this price. Dixie knew further analysis was required.

Dixie visited the property, which appeared outwardly to be a good quality multiple tenant strip retail center. She then walked into some of the shops and found they were all relatively small in terms of square footage, yet they contained extensive branding related to interior build out. Most of the tenants were engaged in curated retail sales, described as having a narrower product focus with greater personalization and brand relevancy.

These retailers tend to focus on niche products such as kitchenware, cosmetics, fashion, artisan jewelry, etc. The tenant suites are usually small compared to the size of standard inline retail space, which in turn results in higher rents. Also, contract term lengths are generally longer compared to what is typically found. Developers of these projects seek to provide the branding-related build out, amortizing those costs in the leases over those longer multiple year terms. Continue reading

Posted in The Adventures of Dixie Phair

Crane Counts

Type “crane counts” into your search engine, and the result will be scads of articles about various regional and national birdwatching organizations, and their annual counts of sandhill cranes, blue heron, and whooping cranes.

But appearing with the reports from the birders are construction crane counts. For example, the Rider Levett Bucknall index, compiled by construction and cost management entities, tracks real property investment activity. For those of us involved in commercial real estate, this is news we can use!

What do the counts mean to assessment professionals? They reflect construction and renovation activity (supply) and portend future changes in rents and cap rates, thus impacting property values.

Consider the early 2017 general trend in crane counts from major markets: Continue reading

Posted in Market Trends

Relevant Ratio Reveal

An appraisal submitted for appeal evidence on a midwestern 144 garden-style apartment property reflected an expense ratio of 70% of Effective Gross Income (EGI). That ratio was closely supported by actual operating statements from the past two years.

For some perspective, the subject’s 70% ratio was compared to the following tabulation of median expense ratios from a well known Income & Expense Survey relevant to the matching years. The survey results reflect the same expense basis (% of EGI) for the same type of property (garden apartments):

Expense % Ratio
Survey Area 2015 2016
Same city as property under appeal 34% 38%
Same region as property under appeal 40% 42%
National 50% 48%

Note that the actual expense ratios for the appealed property, at 70%, were much higher than market. This result bears a closer look at the actual expenses of the property under appeal, to identify any outlier or rogue charges. If inflated or nonrecurring expenses have been reported, these can often be found within the following major expense categories…

Administration: Legal expenses from previous tax appeals and lawsuits, expensive vehicle and equipment leases, and higher than typical management fees and payroll.

Maintenance: Capital upgrades masked as ongoing maintenance/repair such as major appliance and recreational equipment purchases. Also look for any architectural updates such as opening up kitchen areas or the addition of laundry facilities.

Utilities: Higher than typical utility costs can (legitimately) indicate inherent obsolescence such as lack of insulation or poorly performing & outdated building systems including HVAC, electrical, or plumbing.

Fixed costs: Insurance is usually the main variable here and ownerships with multiple properties may load select projects with disproportionate expense from aggregated policies.

If you opened a fortune cookie on this topic, it would read: Reveal the details and you will be rewarded.

Posted in Case Studies

Securing Your Values

You need security at your front door, and your choices are many, ranging from a live sentry on constant duty to an effective monitor enabling you to see what’s going on. So you look into it.

The sentry is a dog, and a coupon toward dog food is offered for new customers. There is also a coupon toward obedience classes. But the dog needs walked, healthcare, grooming, and plenty of toys and attention.

So given the coupons, you may obtain a slight discount on a dog you hadn’t planned on getting, but you still must provide maintenance for his well being so he can snore by your door (the constant duty described above).

Similarly, if you really just require a good income model that protects the accuracy of your values, buying a new CAMA system will initially cost you plenty but won’t solve your need. Further, your staff must fill and maintain the empty income templates. And you’ll have ongoing maintenance fees.

Why not just obtain IncomeWorks by (annually renewable) license? It’s the only income model that reflects what is going on in your market and includes income professionals who maintain the data for you. No additional fees, affordable (no coupons needed!) and very effective in securing your values.

Posted in Real Life

A Local Secret

“What’s the commercial cap rate?”

Many years ago an Assessor actually asked me that by phone as he headed into an appeal hearing.

He didn’t like my answer, because he thought it was overly complex. He wanted one ratio he could remember as a key to the correct result, an answer that would solve every income valuation dilemma; in effect the “secret code”.

Ad Valorem valuation of real property via the income approach need not be complex. In fact, the simpler the better for consistency of application and maximum understanding.

Only four components are required: achievable rent, vacancy, typical & reasonable expenses, and the overall capitalization rate. However, each of these elements could vary according to the following property attributes:

  • Property Type & Subtype
  • Tenancy
  • Condition
  • Size
  • Utility & Design
  • Appeal
  • Location

To the extent there is any “secret code” it is in locally sourcing the data.

Posted in Real Life

Unblock the Road

The road to equity often includes an appeal hearing. Similar to molten lava flowing over a road, then cooling and completely blocking the way, hearings often become heated then blocked by detail.

Follow these easy steps (taken from a successful case study) to keep things simple and keep things moving. Remember the goal: clear the road to make the Hearing Officer’s path easier.

First, use the appellant’s income & expense workup as the basis for rebuttal. Working with a single format speeds understanding.

Next, highlight your changes to appellant’s workup and clearly show the corrected valuation result.

Finally, concisely recap and restate your valuation.

Continue reading

Posted in Case Studies


I joined a stock club in the late 80s, and as a novice investor asked the group a question… What happens when the Dow Jones Industrial Average exceeds 10,000? Those present thought my question was silly, and they answered “impossible”.

At about the same time, when asked to quote an appraisal price for a 40,000 acre integrated farming operation, I replied $12,000. That same answer (impossible!) was blurted out by another appraiser in the room.

Well, the Dow Jones is currently in the stratosphere and I got that appraisal job, but most of the time I’m right there along with the naysayers. I did not appreciate the extent of the financial meltdown in 2007, but finally realized what a long slog recovery was going to be by about 2010.

So it’s a surprise to me that in 2017 we see investment grade cap rates applied to many “just above average” properties in secondary markets, and recently leased to national and regional tenants. Too much money chasing mediocre deals!

The growing bubble is leased-fee driven and is anything but impossible.

Posted in Real Life

Dixie’s Historic Value Dilemma

With 5 years experience as Commercial Real Property Analyst for Any Municipality County, Dixie Phair often helps the valuation department with new or rehabilitated income properties. They have brought her a doozie.

Here are the facts:

  • The building: a downtown historic structure completely and beautifully rehabbed to 1st floor retail (leased) and 2nd floor restaurant (vacant).
  • The neighborhood is nearly fully developed, with no offsite parking immediately available for the potential restaurant. In fact, parking is scant for the existing retail. The historic flavor overrode typical parking requirements for approval.
  • The project was finished just prior to reassessment.

Here’s the dilemma: How to now capture the improvement of the property yet measure inherent obsolescence?

Dixie’s solution:

  • Calculate the additional site area needed to accommodate required parking (including ingress/egress) per city code, and the probable value of that site plus needed paving, striping and fencing. This is functional obsolescence attributable to insufficient parking.
  • Since Dixie has benefit of IncomeWorks, she also was able to quickly evaluate the rehabbed building and set the model to auto-fill and complete the Discounted Cash Flow (DCF) analysis.
  • Dixie entered the parking site acquisition estimate, along with the all the costs of paving, striping, fencing, and more. She also entered a sufficient time span and the additional costs involved in leasing the restaurant area.

The IncomeWorks DCF instantly laid it all out. The result was printable support showing the logic, math and professionalism employed by Any Municipality County to achieve an equitable assessment of this property!

Posted in The Adventures of Dixie Phair

Here Today Gone Tomorrow

It’s my job to remind you how to regard “owner occupied” properties for assessment valuation purposes:

Treat owner occupied properties the same as tenant occupied properties!

Owner occupied facilities are no different than rentals – owners move on too!

The fact a property happens to be owner occupied is not relevant for valuation purposes because it could easily be vacant tomorrow, after being purchased by an investor and rented the next day.

Treat owner occupied properties the same as other income properties occupied by tenants, even though your appellant will insist that their property is unique, and therefore not subject to typical income valuation principles.

The entire premise of income valuation is that almost all properties have an inherent market lease rate mated with an expense structure, tied to property type and local market customs. The local customs inform us as to rental and vacancy rates, as well as to who is responsible for which expenses.

So no matter how a property is operated, valuation of that property can’t escape the local market forces that define it!

Posted in Real Life