How to Lose $ 500,000 in Las Vegas Real Estate
http://www.appraisalarticles.com/articles/2003/1/How-to-Lose--500000-in-Las-Vegas-Real-Estate/Page1.html
Glenn Rigdon
The author, Glenn J. Rigdon, MA, MRICS, ASA is a commercial appraiser / broker. He was the Economist AZ State Land Department and Staff Specialist ROW - Legal for NDOT. See http://www.horizonvillageappraisal.com/ and our sister site at http://www.nevadacommercialrealproperty.com for more information or call 1-702-568-6699. By Glenn Rigdon
Published on March 6, 2011
A short discussion of some real property pitfalls in 2011 from a Las Vegas / Henderson commercial appraiser
It's not often that I am surprised by the results of my appraisal analyses, but there are times when I am, and I just wanted to pass along information on a recent assignment . . maybe it will save someone from financial disaster. Recently I completed a report on a nearly new, vacant (grey shell) office building. Without disclosing too much, I can say that it was a building with above average construction quality and it had a good location just off of a major arterial roadway. Most real estate agents would describe it was an impressive structure that has a lot of potential.
What made the assignment and its results different were the conclusions that I reached after analyzing the property. I discovered some great comparable sales information available on similar sold office properties in a similar unfinished state. Let's say for this article that the figure concluded based on the sales comparison was $ 60 per square foot. A portion of the office building was already finished, but each of the office units required conisderable build-out, and to finish the office units in keeping with the quality of the office building and competitive space it was going to require an additional investment by the owner of say $ 60 per square foot.
Appraising the property in its "as is" state, which is what the Client specifically asked for, would lead most appraisers and potential buyers to the conclusion that $ 60 per square foot was a reasonable price for the property. The building couldn't produce income in its current state and the sales comparables were compelling.
The problem with the $ 60 per square foot conclusion was that once the $ 60 per square foot build-out is added, and $ 120 per square foot was invested in the office property, both a sales approach analysis and an income approach analysis indicated that the value of the subject was $ 100 per square foot and not $ 120 per square foot. That may seem impossible, but I'm here to tell you that the analysis was correct. The 22% vacancy rate, the huge decreases in office rental rates, abnormally high cap rates and the large discounts being taken on finished properties couldn't lead most to conclude that you could get back to the $ 120 investment.
So following logic in this instance is a quick way to lose $ 20 per square foot and on a 25,000 square foot building and that is $ 500,000, and a quick way to mislead a Client into a bad investment. Just shook my head and provided my Client with all of the details . . . just another day in the life of an appraiser.
What made the assignment and its results different were the conclusions that I reached after analyzing the property. I discovered some great comparable sales information available on similar sold office properties in a similar unfinished state. Let's say for this article that the figure concluded based on the sales comparison was $ 60 per square foot. A portion of the office building was already finished, but each of the office units required conisderable build-out, and to finish the office units in keeping with the quality of the office building and competitive space it was going to require an additional investment by the owner of say $ 60 per square foot.
Appraising the property in its "as is" state, which is what the Client specifically asked for, would lead most appraisers and potential buyers to the conclusion that $ 60 per square foot was a reasonable price for the property. The building couldn't produce income in its current state and the sales comparables were compelling.
The problem with the $ 60 per square foot conclusion was that once the $ 60 per square foot build-out is added, and $ 120 per square foot was invested in the office property, both a sales approach analysis and an income approach analysis indicated that the value of the subject was $ 100 per square foot and not $ 120 per square foot. That may seem impossible, but I'm here to tell you that the analysis was correct. The 22% vacancy rate, the huge decreases in office rental rates, abnormally high cap rates and the large discounts being taken on finished properties couldn't lead most to conclude that you could get back to the $ 120 investment.
So following logic in this instance is a quick way to lose $ 20 per square foot and on a 25,000 square foot building and that is $ 500,000, and a quick way to mislead a Client into a bad investment. Just shook my head and provided my Client with all of the details . . . just another day in the life of an appraiser.