Transcript The Importance of Property Appraisals Mark T. Hessel, Vice President HCA Asset Management, LLC.

The Importance of
Property Appraisals
Mark T. Hessel, Vice President
HCA Asset Management, LLC
HCA Asset Management, LLC – Intro
• HCA - Background
• In business of valuing public sector assets for 30+ years;
• Formerly Hirons & Associates – rebranded 2012;
• Specializing with Public Entities, Nonprofits;
• HQ is Florida; Midwest offices in Milwaukee, St. Louis, Indy.
• Hessel - Background
• 30+ years in the business of appraising governmental property;
• Has appraised literally thousands of public sector facilities;
• Dedicated Packer fan.
• Feel free to contact directly with questions:
» [email protected]
» 414.906.1921 (direct)
OUTLINE
• Understanding the Basics
• Complexities of Unique Properties
• Insurance Issues / Hot Topics
Common Goals of Appraisals:
 Insurance Placement (Insured’s side of the desk)
 Solid fiscal management (job security?)
 Improve rating
 Satisfying Requirements
 Pool Board policy
 Insurer/reinsurer requirement
 Stay current with recent cost changes (annual updates)
 Clean up the SOV
 Correct suspect values
 Identify missing property or improvements/additions
 Blah, blah, blah, right?
Case Study – Recent Appraisal
Pre-appraisal:
B$15.6m
P.E.$86.5m
P.I.T.O.- $- 0 - m
Post-appraisal: B $151.3m
P.E.$ 73.4m
P.I.T.O.- $ 31.7m
Subsequent loss: explosion - $250k
Goals of Appraisals (cont.):
Underwriting Objectives:
Accurately value property (ITV issues)
 Correct premium?
 Margin clause issues
 Equitable distribution of premiums (pools)
Insurers can validate offering terms (i.e. agreed amount,
blanket)
Verify the condition of the specific property
Verify separation (distance) of property issues
Provide reinsurance carriers accurate values, other
underwriting data (C.O.P.E. ~ follows later…)
Goals of Appraisals (cont.):
Definitions Of Value:
How does Replacement Cost differ from other
values (Original, Market, Reproduction, etc.)?
Replacement Cost - is defined as the cost to repair, rebuild or replace on the
same site with new materials of like size, kind and quality, or with similar
property intended to perform the same function when replacement with
identical property is impossible or unnecessary.
Why is the basis of value important?
•
•
Fundamental starting point for any appraisal;
Often defines your limit in the event of a loss.
Appraisal Methodology - Fieldwork:
 Buildings:
• Begin with thorough inspection –
• Review available plans/blueprints (as-builts)
• Measure each structure for GSFA; P’ by level
• Record major building components
• Frame
• Exterior Walls
• Thickness
• Story Height
• Roof Construction & Slope
• Building Service Systems (HVAC, Plumbing, Electrical)
• Interior Finishes (Flooring, Ceiling, Partitions)
• Life Safety/Protection Components (Sprinklers, Alarms, Emergency Power)
• Special Building Features (mezzanines, balconies, overhangs, special add-ons)
• Create sketch of building footprint for support, valuation phase
• Separate basement sections
• Take photographs and collect GPS reading
• Conduct building walk-through
Appraisal Methodology - Fieldwork:
 Contents
• Detailed Physical Inventory
• Full, wall-to-wall inventory of major assets; level of detail set at specific
dollar threshold (by insured)
• Information collected typically includes significant detail
• Benefit: Proof-of-loss determination, class schedules
• Downside: Most costly approach; requires more time
• Tally Approach
• Not as widely used, but cost-effective option
• Depending on how it is performed, may lose Proof-of-loss detail
• Modeling Approach
• Widely used with pools; developed in the industry mid-1980’s
• Great potential for error if not reviewed/adjusted during walk-through
• % of Building Value Approach
• Widely used by some insurers – virtually no cost
• Often “blind” application of value; risk of error significant
Appraisal Methodology - Fieldwork:
 Property In The Open
• Review Policy FIRST (Is it insured? Excluded / Included?)
• May be included with Buildings (occasionally w/in specified distance from
structure)
• Often identified separately; inventoried individually
• Is it “Material”?
• Usually, yes
• Often high risk exposures (fencing, lighting, playgrounds)
• Inventory Approach
• Typically inventoried individually, by Site
• Values can be aggregated or scheduled in reports
Appraisal Methodology - Valuation:
 Buildings
• MSB Online System (subscription-based)
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Originally E. H. Boeckh program; acquired 2014 by CoreLogic
Web-enabled valuation tool
Widely accepted in insurance industry
Allows for more detailed input of components
• Marshall & Swift – Marshall Valuation Service (subscription)
• Book version offers two valuation approaches
• Calculator Approach
• Segregated Cost Approach
• PC-based version = Commercial Estimator 7/Agricultural Estimator
• More detailed than Calculator; less detailed than Segregated
• Other/Newer Releases – mostly online/web-enabled solutions
All require proper training & experience!
Appraisal Methodology – Valuation (cont.):
 Buildings (continued)
• Other Sources (subscription-based)
• Sweets Unit Costs Guide (BNI)
• RS Means (http://www.rsmeans.com/)
• ENR Square Foot Costbook (http://www.bnibooks.com/)
• All of the above are “unit-in-place” pricing sources
• Proprietary valuation solutions
• Primarily developed for unique, complex construction
• Water/wastewater
• Electric Utility
• Gas Utility
• Require extensive updating and research
• “Old-fashioned”, manual approach to pricing
User MUST understand what models contain!
Methodology – Original Cost Review:
 Example No. 1: City of Raleigh – Booster Pump Station
1) Total Project Cost - $1,273,000
(with estimated soft costs)
2) Estimated Building - $330,700
3) Estimated Contents - $598,400
Total Insured Amt - $929,100
(73% of total project)
 When to use (or NOT to use)
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•
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Great analysis for
• Utility projects
• Major projects with significant improvements
This should NOT be a substitute for an appraisal of new property
Not so great for additions which include renovations
Really not so great for renovation work
The older the project, the less reliable the results (trend factors…)
Methodology – Original Cost Review:
Example No. 2: Large City
Outside of Washington DC
Approx. 80,000 Square Feet
USGBC LEED Silver
 2008 Engineer’s Estimate
 $28 million ($350/SF)
 2009 Bids let; done 2011
 $18.5 m lowest responsible
 $$230/SF actual)
 2011-12 Reappraisal
Total Insured Amt. ~ $22 M
(119% of total project)
Trend Factor Sources:
1. Marshall & Swift Valuation Service – subscription
•
Regional focus – overall; and by Class
•
State/Local focus – by specific Class
2. Engineering News Record (ENR) – subscription
•
Building Cost & Construction Cost Indexes (BCI & CCI)
3. Producer Price Index (US Bureau of Labor Statistics) –
http://www.bls.gov/PPI/
4. Insurers – Zurich NA –
http://www.zurichna.com/internet/zna/sitecollectiondocuments/e
n/onlineservices/costtrendsrealproperty.pdf
5. Major construction companies – Example: Turner Const.
http://www.turnerconstruction.com/corporate/content.asp?d=20
6. Utilities – Handy-Whitman Index - Gas, Electric and Water/WW
CPI
Trend Factor Examples:
Example: Turner Const. – published rates for > 75 years
http://www.turnerconstruction.com/cost-index
From 2003 to 2008:
• Using 2% = 10.4%
• Turner = 45.6%
From 2003 to current:
• Using 2% = 24.3%
• Turner = 44.5%
WOW!
II. VALUING UNIQUE PROPERTY
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Utility Structures
•
Seeing Green
•
Historic Property
•
What do Schools Cost?
Water/Wastewater Valuation
• Complexity of Construction ~ Valuation Challenges
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No dedicated valuation tools for specific values
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Technical (and EXPENSIVE) process equipment
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Recent advancements in controls systems
Technological variances for treatment styles
• Significant Increases in Cost of Materials
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Dramatic swings in costs over last 5-10 years
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Example: water storage tanks, transformers
• Unique, One-of-a-kind Design
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Facilities generally not cookie-cutter
Fees are often overlooked/underestimated
Wastewater Valuation (example)
• $450m TIV
• $138m M&E
(31%)
• $312m Bldg
(69%)
• 26 individual
buildings/structures
• Rated capacity 54
MGD
Water Plant Valuation (example)
• >$85m TIV
• $27m M&E (32%)
• $58m Bldg (68%)
• 26 individual
buildings/structures
• Rated capacity 20
MGD
•LEED (Silver)
Certified
Which LEEDs me to our next topic…
Certification Process (old)
• US Green Building Council (USGBC) – LEED Ratings:
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Certified (26-32 of 69 total points)
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Silver (33-38)
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Gold (39-51)
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Platinum (52-69)
LEED = Leadership in Energy & Environmental Design
• How to Score Points:
1. Sustainable Sites (14 Points / 20%)
2. Water Efficiency (5 Points / 7%)
3. Energy & Atmosphere (17 Points / 25%)
4. Material & Resources (13 Points / 19%)
5. Indoor Environmental Quality (15 Points / 22%)
6. Innovation & Design Process (5 Points / 7%)
Source: http://www.usgbc.org
LEED Continued…
2009 Update (v3):
• US Green Building Council (USGBC) – LEED Ratings:
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Certified (40-49 of 100 total points)
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Silver (50-59)
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Gold (60-79)
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Platinum (80+)
• How to Score Points:
Commercial
School
1. Sustainable Sites
26
24
2. Water Efficiency
10
11
3. Energy & Atmosphere
35
33
4. Material & Resources
14
13
5. Indoor Environmental Quality
15
19
6. Innovation & Design Process
6
6
7. (new) Regional Priority
4
4
Source: http://www.usgbc.org
Seeing Green ($$$?)…
Valuation Issues – Green Buildings
• Separating out uninsurable factors (land improvements;
brownfield redevelopment; site development)
• Often unique design, materials – soft costs may be
relatively higher
• Proliferation has helped reduce costs in recent years
• Increased costs? Early estimates range from
approximately 2 – 10% compared to non-green buildings;
however, there are still extreme cases…
Breaking News: LEED v.4 Out 12-2014!
•
Approximately (18) Models; Schools model has nearly 90 criteria
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Designed for online access/input to expedite process.
Did I mention proliferation??? 2008 to Today
Update: US Only
5/2012 ~ 31,000
8/2012 ~ 32,000
10/2013 ~ 40,350
4/2015 ~ 59,800
KS: 49 ~ 417
MO: 167 ~ 726
Source: http://www.usgbc.org
Seeing Green (Sample 1)
https://www.usgbc.org/ShowFile.aspx?DocumentID=3940
Trended:
~$250/sf
$179/sf
Seeing Green (Sample 2)
https://www.usgbc.org/ShowFile.aspx?DocumentID=3943
• $386/SF Project Total (2006)
• Trended > $500/SF (2015 est.)
• Platinum Rating (57/69)
• Renovation/Addition project
• Notice (some obvious) features:
• Windows (natural light in
“passive solar” design)
• Minimal finish using
recycled and rapidly
recyclable materials
• Extensive use of recycled
materials on exterior… all
added to costs.
Seeing Green (Sample 3)
http://www.usgbc.org/projects/northside-elementary-school?view=overview
• $18.3M Project Total (2013)
• $195/SF (2015 trended est.)
• Platinum Rating (1 of 20 only
schools in US)
• Material features:
•Rainwater cistern
supplies toilets and
cooling tower
• Windows, Skylights /
tubes and Light Shelves
•Partial Rooftop Garden
• Estimated by District to have
cost less than 5% additional
for Platinum design / rating.
• BTW – just passed bonds for
similar Middle Sch. ($236/SF)
Historic Property Valuation
VALUATION CHALLENGES:
• Complexity of Construction ~
• Limited valuation tools for specific values
• Reproduction vs. Replacement
• Models PLUS Additional Features
• Appraiser must specifically identify inclusions/excl.
• Significant Costs to Reproduce/Replace Materials
• Unique, One-of-a-kind Design (and Materials)
• Facilities definitely not cookie-cutter
• Extra fees often overlooked/underestimated
Historic Property Valuation (example)
• Historic Register
• 25” Stone walls
• Solid brick walls
• Copper cupola – 48’
• Seth Thomas clock
• Rotunda w/
• Stained glass
• Detailed plaster
• Painted ceiling
• Vaults – dbl door,
solid brick part. walls
Historic Property Valuation (example)
What do Schools Cost?
K-12 Schools:
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Graph A: $/SF, by type of Building
Nationally, last 10 years:
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HS’s up 57% ($235/SF)
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MS’s up 62% ($243/SF)
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Elem’s up 41% ($212/SF)
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Compare: M&S (KC) ~ 33% up
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Compare: Turner ~ 31% increase
Regional Review:
Data – School Planning & Management 2015 School Construction Report.
What do Schools Really Cost (K-12)?
Data – School Planning & Management 2015 Annual Construction Report - Sample of
approximately 232 K-12 buildings completed in 2014.
III. (re)INSURER ISSUES:
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Current Trends/Concerns – CAT
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Underwriting Data – COPE’ing with
much change
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Changes in Data Collection
Insurer Issues / Concerns:
Trends / CAT:
Increased Technology – CAT Modeling Data/Research
 Coastal considerations (wind/hurricane); Flood; Quake; Hail; other
 Outcomes include: PML, AAL
 Sample of Modeling Tools (not all-inclusive):
1. Risk Management Solutions (RMS)
2. AIR Worldwide Corp.
3. EQECAT – recently acquired by CoreLogic
All vary, but offer comprehensive, location specific reports
Trends / CAT:
Recap of article:
• From 1990 to 2014 (US) losses from severe thunderstorms
have averaged $8 billion annually.
• 2011 was worst year with over $28B insured ($39B total).
• Since 2008 insured losses have exceeded $10B each year.
COPE - What is it?
COPE – definition *:
An acronym that stands for the four property risk characteristics an
underwriter reviews when evaluating a submission for property insurance:
construction (e.g., frame, brick, masonry, masonry veneer); occupancy (how
the building is being used); protection (e.g., quality of the responding fire
department, adequacy of water pressure and water supply in the community,
the presence or absence of smoke alarms, etc.); and exposure (risks of loss
posed by neighboring property or the surrounding area, taking into
consideration what is located near the property, such as an office building, a
subdivision, or a fireworks factory).
* - International Risk Management Institute, Inc. (IRMI) - Glossary of Insurance & RM Terms
(www.IRMI.com)
Reinsurance Issues:
Breaking News
Data Quality Big Issue For Property Re, E&Y Finds
• Poor quality data translates to increased rate to primary co. cedants:
•90% apply surcharges (70% of these, est. 20-25% premium penalty!)
•92% said strong data controls could mean 5-15% premium credits!
• Quote 1: “When asked which data items they consider most problematic,
reinsurers pointed to insured values, complete inventory of locations and
secondary characteristics.”
• Quote 2: “…supplying better data would benefit the primary insurer’s
underwriting process as well. She said critical information, such as location
and number of buildings, could be better gathered with specific data fields.”
Source: National Underwriter P&C; NU Online News Service,
Aug. 26, 2008
Trends – Data Collection for Insurers:
Revised Data post-RMS v.11
• Typical pre-v.11 data, PLUS info like:
Standard Data pre-RMS v.11
• Wind Tier/Hazard Zone
• Typical COPE data, including:
• Quake Seismic Zone
• Specific Address
• Construction Quality
• All Relative Values
• Roof Sheathing Attachment
• Full Building Narrative Desc.
• Roof Anchor Type
• GPS Coordinates
• Opening Protection
• Elevation
• Roof Age; Roof Condition
• In all, ~ 40 fields of data
• Roof Geometry
• Envelope / Exterior Cladding
• Frame – Foundation Connection
• In all, > 90 potential fields of data
Final Thoughts/Questions?
Thank You!
Trivia question: Jordy Nelson – KSU