Transcript Real Estate Appraisal

An Overview of Real Estate and
the Appraisal Report
Presented by:
Guy J. Bourgeois, AACI P.App,
Bourgeois and Company Ltd.
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Providing Real Estate Appraisal and Advisory Services
to Western Canada since 1979.
Full service firm with Accredited professionals
specializing in various sectors of the Real Estate
market.
We have 3 divisions – Residential – Commercial and
Research
What we do
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Providing professional advice to every category of
property owner.
Industrial, Commercial, Single and Multi Family
Residential.
Appraisals, Feasibility Studies, Litigation Support,
Subdivision analysis and IFRS valuations
Research Studies for Real Estate Developers,
Municipal Governments and Institutional (REIT)
Investors.
Lease rate studies and arbitration
Our research
Division
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We Research, study, and analyze individual market segments in
Multi-family Residential, Commercial and Industrial Sectors in
Edmonton since 1994.
We have a subscription to all real estate transactions in Alberta
from land titles office.
The Edmonton and region investment, industrial, commercial and
land sales transactions are extracted and researched and input
into our data base.
All sales are inspected and photographed and vendors, buyers
and realtors are contacted for details regarding each sale.
Any questions about us??????
Appraisal Institute of Canada
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Founded in 1938
The Appraisal Institute of Canada grants the
two most prestigious real property valuation
designations in Canada.
Canadian Residential Appraiser (CRA)
Accredited Appraiser Canadian Institute (AACI)
AIC Designations
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The AACI designation is the higher of the two
designations, requiring completion of additional
curriculum and experience requirements.
Generally takes 5 years to achieve designation.
Many individuals begin by earning their CRA
designation which takes about 2 ½ years to
achieve
Difference between the CRA and AACI
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CRA – Valuation of undeveloped residential
dwelling sites and dwellings containing up to 4
self contained housing units.
AACI – Qualified to appraise and advise on all
categories of Real Property.
Want to know more-go to
“www.aicanada.ca”
Types of Property - Residential
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Property zoning in Edmonton includes:
RPL,- (smaller lots , affordable housing)
RF 1,(this is the more traditional size lot you find in older
neighborhoods)
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RF 3 (allows development, duplexes and 4 plex properties.)
RF4, RF5, RF6, RA7, RA8, RA9 – (permits higher
density residential development. Includes senior’s projects,
apartments and residential condos).
Zoning and the planning process
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Zoning for residential is very specific and
determines not only the number of units
permitted but also the parking requirements
and requirements for recreational amenities.
Planners determine where each zoning class
will be located long before the subdivision is
developed.
Types of Property - Commercial
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Commercial property zoning in Edmonton
includes:
CNC, CSC, CB1, CB2, CHY, CO.
Allows development for retail / service stores,
shopping malls, office buildings, restaurants,
and all types of commercial uses.
Again zoning dictates parking and building size
requirements.
Types of Property - Industrial
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Property zoning includes: IB, IM, IH
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Permitted uses include Warehouses, Distribution Centers,
Manufacturing Facilities, Shops, Service Bays, Equipment
Storage, and Special Use Buildings.
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Also includes office uses within an industrial area.
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Each category is located with regard to neighboring uses..
What is a Cap Rate???
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Who Knows how to
calculate a cap rate???
What is involved in
calculating a cap rate?
What information do we
need?
Is a Cap rate a “rate of
return”??
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Or is it just a
relationship?
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A cap rate is only a rate of return if the
property is purchased on an all cash basis –
That’s one reason all appraisals are completed
on the assumption that no financing exists.
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Yet the influence of financing is always
inherent in the cap rate correlation, because
financing is an important part of the decision
to buy and all comparables used to calculate a
cap rate are bought conditional on financing.
How do we calculate a Cap Rate?
From comparables sales data……
Cap Rate = Net Income
Sale Price
Pitfalls
- Actual rent vs. market rent
- Actual expenses vs. market expenses
- Actual vacancy vs. market vacancy
- How good is your data??
Multi family Residential Market
Analysis
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Recent analysis of apartment building sales in
Edmonton.
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Property zoned RA7, RA8, or RA9
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Analysis consisted of more than 400
apartment building sales between June 2005
and June 2010.
Apartment Building Analysis
$300,000.00
Price per unit - sales from June 2005
to current day
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$250,000.00
$200,000.00
$150,000.00
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$100,000.00
$50,000.00
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Current market data
indicates an average
price per unit of
approximately
$100,000.
That’s down from
about $135,000 per
unit in the peak of the
market in June 2007.
2006/07 Price driven
by speculation and
condo conversion
Cap Rate Analysis
Apartment Buildings
This analysis is
the most
indicative of the
overall market in
Edmonton in the
last 5 years.
12.00%
Cap Rate -sales from June 2005 to
current day
10.00%
8.00%
Although these
are apartment
sales both the
commercial and
Industrial market
has reacted the
same way.
6.00%
4.00%
2.00%
0.00%
2005-06-02
2006-06-02
2007-06-02
2008-06-02
2009-06-02
2010-06-02
Commercial Market Analysis
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Recent analysis of commercial buildings and
condominiums.
Analysis focused on sales of commercial
buildings between 10,000 – 30,000 sq. ft. and
commercial condominium units between 2005
and 2010.
Sample consisted of 115 sales for buildings,
and 158 sales for condominiums.
Commercial Building Analysis
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Definitive rise in
building values
during 2006 – 2007
‘Boom’ period.
Post recession
data shows a
‘flattening’ of
prices.
Commercial Office style
Condominium Analysis
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The trend
continues with
condominiums
Prices ranging from
$200 - $300 sq. ft.
As lease rates
downtown
increased, condo
prices increased.
As lease rates
decline, condo
prices decline.
Industrial Market Analysis
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Recent analysis of industrial buildings and
condominiums.
Analysis focused on sales of industrial
buildings between 10,000 – 30,000 sq. ft. and
industrial condominium units.
Sample consisted of 239 buildings, and 380
condominiums.
Industrial/Warehouse Analysis
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Median Prices
ranging from
$75 - $150 /
sq. ft.
Wider range of
values due to
unique features
of industrial
buildings.
Industrial Condominium Analysis
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Prices range from
$50/sq. ft. $250 /
sq. ft.
Trend is
consistent with
other market
segments under
analysis.
Cap Rates Industrial & Warehouse
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Note the consistent reaction of cap rates
Cap Rate - Industrial /Warehouse property
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2005-06-06
2006-06-06
2007-06-06
2008-06-06
2009-06-06
2010-06-06
Some of the Factors That
Influence Value
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Location
Size
Age
Externalities
Market Activity
Highest and Best Use
zoning
Construction Costs
Depreciation
Income
Utility
Any Questions on Data Analysis??
Lets talk about the Appraisal Report
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What is the first thing you look at when you get
an appraisal?
Do you read it?
Do you read parts of it?
What is most important to you?
What is least important?
Understanding an Appraisal Report
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Letter of Transmittal – Contains summary of Subject
Property, Appraisal Techniques, Estimates of Market
Value, and Correlation of Market Value.
Summary of Salient Facts – Summarizes Location,
Legal Description, Brief Description of Improvements,
Land Use Criteria, Highest and Best Use, Estimate of
Market Value by Each Approach
Purpose of Appraisal
Understanding an Appraisal
Report continued…
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Assumptions and Limiting Conditions
Extraordinary Assumptions and Limiting
Conditions
Scope of Appraisal – Covering the Extent of
Research Completed Within a Report,
Approaches Applied to Estimate Market Value
Economic, Regional, and Neighborhood
Analysis
Understanding an Appraisal
Report continued…
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Description of Improvements – Type of
construction, building area, net leasable area,
building age, interior and exterior finishing,
effective age and remaining economic life, site
improvements, and photographs.
Depreciation, items that need repair.
Property Tax and Land Use
Highest and Best Use
Methods of Valuation
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Cost Approach
Income Approach
Direct Comparison Approach
Cost Approach
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Principle of Substitution
Total Value = Building New – Depreciation +
Improvements + Land Value
Requires an estimation of Land Value, the cost of the
Building and Depreciation.
Reproduction vs. Replacement Cost
Most applicable in New / Proposed properties,
‘Special-Use’ type properties, and properties with
limited comparable market information.
Income Approach
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Valuation method based on the present worth of all the net
income the property would produce during its remaining useful
life.
Involves analysis of leases, actual or market rents, and pro-forma
operating statements.
Direct Capitalization Technique.
Cap Rate = NOI / Sale Price
Reconciling ‘Market Value’ Utilizing Direct Capitalization or
General Cap rate correlation.
Market Value = NOI / Cap Rate
Discounted Cash Flow Analysis
Direct Comparison Approach
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Estimation of value using direct market evidence.
Assembling sales information regarding similar
properties
Establishing method of comparison (price per sq. ft. or
per acre, or price per suite, gross income multiplier)
Identifying elements of comparison (property rights,
conditions of sale, time, location, physical
characteristics, economic characteristics, zoning) and
performing the appropriate adjustments
Direct Comparison Approach
continued…
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Correlation of all information gathered from
comparable sales.
Correlate an appropriate value range for the
subject.
This approach is limited by the activity in the
market, and is difficult to apply for special use
properties for which there are few comparable
sales.
Reconciliation of Final Value
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Examine estimated market value by cost,
income and direct comparison approaches.
Correlate market value in accordance to the
best approach applicable to the subject
property.
Thank you!!!
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Questions?
Contact Information:
Guy Bourgeois, AACI P.App, CRP
Bourgeois and Company Ltd.
14207 – 115 Avenue NW
Edmonton, AB
Phone: 780-452-8000
Fax: 780-452-8069
Email: [email protected]
Website: http://www.bourgeois.ab.ca