Presented by Arthur L Schwertz MAI Walter D Carney MAI Matthew Lubawy MAI CVA CMEA Senior Managing Director Senior Managing Director Senior Managing Director Valbridge Property Advisors Valbridge Property ID: 393520
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Slide1Slide2
The Unique Appraisal: Case Studies in Appraising Special Purpose Properties
Presented by:
Arthur L. Schwertz, MAI Walter D. Carney, MAI Matthew Lubawy, MAI, CVA, CMEA
Senior Managing Director Senior Managing Director Senior Managing DirectorValbridge Property Advisors Valbridge Property Advisors Valbridge Property AdvisorsSlide3
Objectives
How
do I know if I am competent to accept the assignment?How do I gain competency to complete the assignment and why should I?How do I handle special purpose properties in relation to eminent domain assignments?
How do I handle special purpose properties with complex cash flows?How do I handle the really unusual assignment?Slide4
Are You Competent?
Nuclear Reactor Simulator
Waterpark and Amusement ParkSlide5
Nuclear Reactor Simulator Facility
Am I Competent?
Initial Reaction, “Heck No!”Talk to your potential client.
In this case, they wanted the real estate appraised to its highest and best use to satisfy SEC regulators in constructing a lease between subsidiaries – Simulator equipment was all moveable (not part of real estate).Quickly became a highest and best use study in which a conclusion of a mixed-use retail/office building was reached (i.e. a pretty run-of-the-mill appraisal).Yes, we are competent.Slide6
Why go to this much trouble to land a “run-of-the mill” appraisal?
Really Cool Inspection!
Higher Fee! The fee for this assignment was 260% higher than our Typical Small Office Appraisal Fee assignment at the time of engagement.
How many people can put on their qualifications that they have appraised a “Nuclear Reactor Simulator Facility”?Nuclear Reactor Simulator FacilitySlide7
Waterpark/Amusement Park
Am I Competent?
Initial and Correct Reaction, “Heck No!”Disclosed to Client lack of Competency but also detailed steps we would take to gain competency.
Client hired us.Slide8
Waterpark/Amusement Park
How does one become competent?
Read!
Search Lum Library for articles, texts, etc.
Consult Trade Organizations
Just about every special purpose property has a related trade organization
Amusement Parks - International Association of Amusement Parks & Attractions
Water Parks – World Waterpark Association
Consult Other Appraisers - Search Appraisal Institute Directory by Property TypeSlide9
Why Take On the Special Purpose Property Assignment?
Main Reasons for taking on the Special Property Assignment
Keeps things interesting. Never boring. Never stop learning.Higher Fees.Slide10
Contact Info
A
rthur L. Schwertz, MAI
Senior Managing Director
aschwertz@valbridge.com
Arthur Schwertz on LinkedIn
504.830.3880 Phone
504.830.3870 Fax
512 N Causeway Blvd
Metairie, LA 70001Slide11
Special Use Property
In Eminent Domain
Presented to
t
he Appraisal Institute – AI Connect
August 5, 2014
Austin, TX
Prepared and Presented by:
Walter D. Carney, MAI
Valbridge Property AdvisorsSlide12
Session Objectives
Cover the standards – what determines property taken by eminent domain is special purpose/use:
Common Terms
Definitions and Rulings
Federal and State Statutes
1) Rules of Evidence
2) Rules of Civil Procedure
Federal and State Case Law
Special Statutes
Walter D. Carney, MAISlide13
Session Objectives
Explain/Discuss:
“Just” and “Fair” – why are these foundational rubrics in special purpose
The role of “Indemnity Principle” in “Just” and “Fair” and special purposeWhy the “hypothetical” buyer and seller are not quite so hypothetical in special purpose/use, eminent domain assignments
Walter D. Carney, MAISlide14
Session Objectives
Present case studies (case law) from
various jurisdictions Discuss accepted value-based doctrines and valuation approaches/methods
C
haracterize the roles of the appraiser and
the attorney in eminent domain and in the
special purpose/use property assignments
Walter D. Carney, MAISlide15
Appraisal Literature – Examples
Special Purpose Property: “A limited market property with a unique physical design, special construction materials, or a layout that
restricts its utility to the use for which it was built
; also called a special-design property.
(
Dictionary of Real Estate Appraisal
, 5
th
Edition)
Common Terms
Walter D. Carney, MAISlide16
Appraisal Literature – Examples
“Many
limited-market properties
[examples stated] …include structures with unique designs, special construction materials, or layouts that restrict their functional utility to the use for which they were originally built. These properties usually have limited conversion potential and, consequently, are also called specialized, special-use, special purpose, or special design properties.(The Appraisal of Real Estate
, 14
th
Edition)
Common Terms
Walter D. Carney, MAISlide17
Illinois:
“Special-purpose”
buildings are designed for a particular or specific use,
whereas “special use” were not so designed originally, but at the time of valuation were put to “special use.”
City of Chicago v George F. Harding Collection,
70 Illinois App 2
nd
254, 257 (1
st
District 1965)
Jurisdictional Definitions and Rulings
Walter D. Carney, MAISlide18
Jurisdictional Definitions and Rulings
Walter D. Carney, MAI
New York: Specialty Purpose Property Four-Part Test
“The improvement must be unique and must be specially built for the specific purpose for which it was designed;
There must be a special use for which the improvement is designed and the improvement must be so specially used;
There must not be no market for the type of property and no sales of property for such use; and
The improvement must be an appropriate improvement at the time of the taking and its use must be economically feasible and reasonably expected to be replaced.” Slide19
Jurisdictional Definitions and Rulings
Walter D. Carney, MAI
New York: Specialty Purpose Property Four-Part Test
“Further, the specialty must be a structure uniquely adapted to the business conducted on it or use made of it, and it cannot be converted to other uses without the expenditure of a substantial sum of money.”
County of Suffolk (NY) v Van
Bourgondien
, 47 N.Y. 2d 507, 419 N.Y.S. 52 392 N.E.2d (1979)Slide20
Jurisdictional Definitions and Rulings
Walter D. Carney, MAI
California
: “Special use or special purpose property is property that, because of its uniqueness, has no relevant market for purpose of comparable sales.”
(Condemnation Practice in CA)Slide21
Jurisdictional Definitions and Rulings
Walter D. Carney, MAI
California:
“
’Non-profit,’ special purpose
property means property which is operated for a special nonprofit, tax-exempt use
such as a school, church, cemetery, hospital, or similar property.
‘Non-profit, special use property’
does not include property owned by a public entity
.
”
(California Code of Civil Procedure 1235.155)Slide22
Federal and State Statutes
US Constitution 5
th
and 14th Amendments
The “Just Compensation Clause”
“…nor shall private property be taken for
public use, without just compensation.”
The U.S. Supreme Court has held that the federal government (together with each state by Due Process of the 14
th
Amendment) has the power of eminent domain, the power to take property for “public use.”
Walter D. Carney, MAISlide23
Federal and State Statutes
Governs rules of evidence in federal, state, and territorial court systems: if, when, how, and for what purpose the legal case may be placed before the trier of fact.
Rules of Evidence or Evidence Code
Walter D. Carney, MAISlide24
Federal and State Statutes
Rules of Evidence or Evidence Code
California Evidence Code, Div. 7, Ch. 1, Articles 1 to 3
Division 7. Opinion Testimony and Scientific Evidence
Chapter 1
.
Expert and Other Opinion Testimony
Article 1
. Expert and Other Opinion Testimony Generally
(800-805)
Article 2
.
Evidence of Market Value of Property
(810-824)
Article 3
. Opinion Testimony on Particular Subjects
(870)
Walter D. Carney, MAISlide25
Federal and State Statutes
California Evidence Code, 823
Notwithstanding any other provision of this article,
the value of property for which there is no relevant, comparable market
may be determined by any method of valuation that is just and equitable.
Rules of Evidence or Evidence Code
Walter D. Carney, MAISlide26
Federal and State Statutes
California Evidence Code 824
(a)
Notwithstanding any other provision of this article, a just and equitable method
of determining the value of nonprofit, special use property,
as defined by
Section 1235.155 of the Code of Civil Procedure
, for which there is no relevant, comparable market,
is the cost of purchasing land and the reasonable cost
of making it suitable for the conduct of the same nonprofit, special use,
together with the cost of constructing similar improvements
.
The method for determining compensation for improvements shall be set forth in subdivision (b).
Walter D. Carney, MAISlide27
Federal and State Statutes
California Evidence Code
824(b) Notwithstanding any other provision of this article,
a witness providing opinion testimony
on the value of nonprofit, special use property, as defined by Section 1235.155 of the Code of Civil Procedure, for which there is no relevant, comparable market,
shall base his or her opinion on
the value
of reproducing the improvements
without taking into consideration
any depreciation of obsolescence of the improvements.
Rules of Evidence or Evidence Code
Walter D. Carney, MAISlide28
Federal and State Statutes
California Evidence Code 824
(c)
This section does not apply
to actions or proceedings commenced by a public entity or public utility to acquire real property or any interest in real property for the use of water, sewer, electricity, telephone, natural gas, or flood control facilities or rights-of-way
where those acquisitions neither require removal or destruction of existing improvements, nor render the property unfit for the owner’s present or proposed use.
Rules of Evidence or Evidence Code
Walter D. Carney, MAISlide29
Governs civil procedures – common laws, and pleadings and motions – in federal courts and 50 state systems, and territorial courts.
Rules of
Civil Procedure or Code of Civil Procedure
Walter D. Carney, MAISlide30
Rules of
Civil Procedure or
Code of Civil Procedure
California Code of Civil Procedure, 1263.320(a) The
fair market value
of the property taken is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other
with full knowledge of all uses and purposes for which the property is reasonably adaptable and available.
Walter D. Carney, MAISlide31
Rules of
Civil Procedure or
Code of Civil Procedure
California Code of Civil Procedure 1263.320(b) The
fair market value
of property taken for which there is no relevant, comparable market is its value on the date of valuation
as determined
by
any method
of valuation
that is just and equitable
.
Walter D. Carney, MAISlide32
Case Law – Appellate Court Systems and Supreme Courts
Special Statutes – may set out additional rules and procedures to appraise unique properties
Case Law and Special Statutes
Walter D. Carney, MAISlide33
California Public Resources Code, Section 5405
“The amount of compensation or land, or both, required…for the taking of the parkland and facilities shall be equal to one of the following:
The cost of acquiring
substitute parkland of comparable characteristics and of substantially equal size...and the cost of acquiring substitute facilities of the same type and number,
plus the cost of development of such substitute parkland, including the placing of such substitute facilities thereon.
Special Statutes
Walter D. Carney, MAISlide34
Other Reference Sources
Nichols®, The Law of Eminent Domain
Volume 4, Part 4 §12C.01
Special Use Property Defined
The unique value to the particular owner involved and not to others;
The special attributes inherent in the property itself and the improvements that, while unusual, are not unique;
The special attributes inherent in the property itself; or
The conversion to a peculiar use.
Walter D. Carney, MAISlide35
“Just Compensation”
“Such compensation means the full and perfect equivalent in money of the property take.”
“The owner is to be put in as good position
pecuniarily
as he would have occupied if his property had not been taken.” (so-called “Indemnity Principle”)
United States v Miller
, 317 U.S. 369, 373-374 (1943)
Walter D. Carney, MAISlide36
“Indemnity Principle”
Walter D. Carney, MAI
Indemnity principle ruling added context to “Just Compensation” clause, and to the 5
th
Amendment
“Focuses exclusively on the owner’s loss,” “not on the gain to the
condemnor
”
“Thus we have held that fair market value does not include the special value of the property to the owner arising from its adaptability in his particular use”
United States v Miller,
317 U.S. 369, 373-374 (1943)
United States v General Motors
, 323 U.S. 373, 378 (1945)
United States v 564.54 Acres of Land
, 441 U.S., 506 (1979)Slide37
“Indemnity Principle”
“If the land owner has adopted a peculiar mode of using the land…and he is to be deprived of that use,
justice requires that he be compensated for the loss to himself.”
Eisenring v Kansas Turnpike Authority,
183 Kan. 774, 779, 332 P.2
nd
539, 543 (1958)
Walter D. Carney, MAISlide38
Fair Market Value
Walter D. Carney, MAI
Willing buyer and willing seller
Neither is compelled to transact
Each fully knowledgeable of all of the uses and purposes of the property is reasonably adaptable
Assumes the existence of a market of comparable salesSlide39
Commonly Treated By Courts
as Special Use Properties
Walter D. Carney, MAI
Worship Facilities
Cemeteries
Schools
Historic Properties
Industrial Properties
Sand and Gravel Facilities
Railroad Terminals
Utility Facilities (e.g. water companies)
Non-Profit Special UseSlide40
Special Purpose/Use Case Studies
Social, Fitness and/or Recreational Facilities (Profit and Non Profit)
Denied
: Fitness/Recreation Facility (YWCA)
Illinois
:
People ex rel. Director of Finance v Young Women’s Christian Association of Springfield
(State Supreme Court 1981
)
Denied:
Recreation Facility (Private Beach and Cabana Club)
New York:
Matter of the County of Nassau
(Town of Hempstead), (State
Supreme Court
1971)
Walter D. Carney, MAISlide41
Special Purpose/Use Case Studies
Social, Fitness and/or Recreational Facilities
(
Profit and Non Profit)Held: Social Club
New York:
St.
Angello
Abate of Amsterdam, New York., Inc. v State,
(NY App. Div. 1979)
Held: Social Club
Massachusetts:
Benevolent and Protective Order of the Elk, Lodge No. 65 v Lawrence Redevelopment Authority,
(State
Supreme Court
1992)
Walter D. Carney, MAISlide42
Special Purpose/Use Case Studies
Worship Facilities
Denied: Church
Oregon:
State v First Methodist Church of Ashland,
(State Court of Appeals, 1983)
Held: Church
California:
Redevelopment Agency of Long Beach v First Christian Church,
(State Court of Appeals, 1983)
Walter D. Carney, MAISlide43
Special Purpose/Use Case Studies
Historic Properties
Denied: Historic Commercial
US (Arkansas, Hot Springs National Park):
Fordyce v United States,
(United States Court of Claims, 1981)
Held: Historic Commercial
Arkansas:
Scott v State,
(Arkansas State Supreme Court, 1959)
Held: Historic
Residential
New Hampshire:
Portsmouth Housing Authority v
Fusegni
,
(State Supreme Court, 1974)
Walter D. Carney, MAISlide44
Special Purpose/Use Case Studies
Industrial Properties
Held: Adhesive Manufacturing Facility
California:
City of Commerce v National Starch and Chemical Corp,
(State Court of Appeals, 1981)
Unique or Peculiar, Vacant Land
Denied: Vacant Land (Suitable Use)
California:
County of San Diego v Rancho Vista Del Mar, Inc.,
(State Court of Appeals, 1993)
Held:
Vacant Land (Suitable Use)
Illinois:
Central Illinois Light Co. v Porter
(State Court of Appeals, 1968)
Walter D. Carney, MAISlide45
Valuation Methods
By Market Data (Comparable Sales)
Analysis of comparables, of sales in particular:
“…has an external validity which makes it a fair measure of public obligation to compensate the loss incurred by an owner.”
United States v Toronto, Hamilton & Buffalo Navigation Co., 338 U.S. 396, 402 (1949)
Walter D. Carney, MAISlide46
Valuation Methods
By Other Approaches/Methods
However, “When market value has been too difficult to find, or when its application would result in manifest injustice to the owner or public, courts have fashioned and applied other standards.”
United States v Commodities Trading Corp., 339 U.S. 121, 123 (1950)
Walter D. Carney, MAISlide47
Valuation Doctrines/Methods
Unique Doctrines to Special Purpose/Use Property:
Substitute Facilities Doctrine
Assembled Economic Unit Doctrine
Walter D. Carney, MAISlide48
Valuation Doctrines/Methods
Approaches in Special Purpose/Use
Cost
ApproachReplacement
Costs New
Reproduction Costs New
Depreciation
Developer’s Profit
Land Value – Market
Value
Income
Capitalization Approach
Sales Comparison Approach
“Modified Market Data Approach
”
Developers Approach (Land Residual)
Walter D. Carney, MAISlide49
Appraiser and Attorney Roles
Simultaneously a specialized valuation assignment and a specialized legal matter/case.
Opportunity to be informed
Statutes, cases, and challenges
Current legal thinking and insights; and the case
Opportunity to inform
What’s “Relevant” and “Not Relevant” about the subject property and the market data
Current appraisal methods and insights; and the assignment
Invite and welcome challenges…and reciprocate
Walter D. Carney, MAISlide50
Thank You!
Walter D. Carney, MAI
Senior Managing Director
Valbridge Property Advisors
1 N. Market Street
San Jose, CA 95113
wcarney@valbridge.com
(408) 279-1520, x7145Slide51
How do I handle special purpose properties with complex cash flows?
Presented by:
Matthew Lubawy, MAI, CVA, CMEASenior Managing DirectorValbridge Property AdvisorsSlide52
Overview of Topics to be Discussed
Appraising gaming
propertiesGypsum mine on hillside overlooking Las VegasVacant land with dirt piles that cost more to remove than the market value of the landSlide53
Appraising Gaming Properties
Most gaming properties have a mixture of uses. The cash flow is more than just casino revenue and expenses. Examples of other uses include:
HotelFood/BeverageRV ParkBowling AlleyGift shopsLeased Space (e.g. – shopping mall)Slide54
What is Needed?
Ask for 5 years of Income Statements
Ask for gaming authority tax documents. For example Nevada Gaming Control Board has NGC-17 and NGC-31 reports.Nevada Gaming Control Board publishes statistical data on gaming propertiesSlide55
Example of Gaming Control Board Statistical DataSlide56
How to Analyze the Data
(Revenue Projection)Slide57
How to Analyze the Data
(Revenue & Expense Projection)Slide58
How to Analyze the Data
(Expense Projections)Slide59
Nevada Gaming Valuation
You will first need to define the type of property you are appraising by the amenities and the income stream. The income and expenses can vary significantly. In Nevada, I analyze the property based on their location first, then by revenue.
The revenue and expenses vary significantly by area. I break down the areas in Southern Nevada by:Las Vegas Strip,Downtown Las Vegas,Laughlin,Boulder Strip, and then Balance of Clark County. These areas are distinct from each other. For example, the Downtown Market caters to lower-end gamblers, while properties on the Las Vegas Strip cater to high-end gamblers. Slide60
Nevada Gaming (cont.)
Analyze the property based on the market and the size of the revenue.
For example:Las Vegas Strip is broken down into 3 areas:Gaming Revenue of $1,000,000 and over,Gaming Revenue between $1,000,000 and $72,000,000, and Gaming Revenue over $72,000,000The size of revenue is usually indicative of the quality of the property and the amenities it serves. Slide61
Once
you
pick the property type (location and size of gaming revenue), then you will need to analyze each department such as hotel, banquet facilities, food, beverage, leased property, bowling, etc. Below is an example of how gaming is broken down.Gaming Revenue:Pit revenueCoin operated devicesPoker and PanRace BookSports PoolSlide62
Depending on the property, you will need to determine how many types of table games there are in the pit and how much revenue can be generated by each gaming device (e.g., baccarat, poker, keno, roulette, etc.). You need to also determine what the drop and take is for each game. I usually analyze the averages on a daily basis
.
Tax Authority keeps a record of how many gaming devices have been in service for the property.Slide63
Once all of the departmentalized revenue has been analyzed, then
analyze
the expenses associated with each department. For example gaming would include the following:Gaming Expenses:Bad DebtCompsCommissionsGaming Taxes and LicensesPayroll –TaxesPayroll – Employee BenefitsPayroll – OfficersPayroll – Other employeesRace Wire feesOther Departmentalized
ExpensesSlide64
These are just a few of the expenses associated with this department. You will also need to analyze the revenue and expenses for the other departments (i.e., hotel, food, beverage, etc.). Each department should have its own revenue and expense analysis.
Once
you have calculated your revenue and expenses, then you should have a good idea of the net operating income. It is hard to find cap rates these days, but there is data available in SEC filings for properties that have sold across the U.S. Another method you can use to derive a cap rate is by way of CAPM. Nevada’s largest casino’s suffered a combined loss of $1.35 billion in 2013, the fifth year of consecutive losses. If you come across this scenario, then you may want to use a gross revenue multiplier to value the property
.Slide65
The sales comparison approach is usually analyzed based on price per room and price per square foot. There is a lot of variation between sales of properties, so your adjusted range will most likely be very wide.
Once
you have completed the valuation of the property, you will need to separate out the tangible assets and the intangible assets. Break this down into real estate, FF&E, and business value (goodwill). Make sure to get an itemized list of FF&E. Keep in mind, this is a business
valuation. Therefore, you need to go through the steps to determine what the real estate is worth.Slide66
Gypsum mine on hillside overlooking Las Vegas
This assignment was the valuation of a gypsum mine that sat high on top of a mountainside overlooking the Las Vegas Valley.
The property had gypsum reserves that could last for several decades.The property was at the edge of development.The property could be rezoned to residential uses and commercial uses (master-planned community)Utility Infrastructure was a couple of miles away.Slide67
InputsSlide68
Discounted Cash Flow
(Absorption Analysis)Slide69
Highest and Best Use Analysis
Value of the proposed master-planned community was $112,538 per acre.
Reserve Study was conducted to determine the amount of reserves and quality of mineral rights.An appraisal of another gypsum mine was conducted (outsourced to another appraisal firm the year before). Sales of properties with mineral rights were available. We contacted the appraiser to value the minerals rights of the subject. Value was substantially lower than the value as a master-planned community.Slide70
Conclusion
After analyzing all of the data, the highest and best use conclusion was to wait a few years to develop the property. This was due to the fact that the infrastructure could be brought in closer to the subject due to another development that was proposed nearby.
Aside from one potential development close to the subject, the only land nearby was federally owned. Potential to get paid back for brining in infrastructure was very low.Slide71
Residential Land with Dirt Piles
Subject property consists of 25 acres of vacant land.
The property had 15 to 20 foot high dirt piles on the property.Estimates were prepared to determine how much dirt needed to be removed. 450,000 cubic yards, but 100,000 could be used (350,000 cubic yards to be removed)Cost estimates were at $5.00 per cubic yard several years earlier. Slide72
Residential Land with Dirt Piles
In the midst of the recession.
Current cost estimates are $16 per cubic yard, or $5,600,000The market value of the land as though vacant was $150,000 per acre, or $3,750,000$3,750,000 value less cost to cure of $5,600,000 is negative $1,850,000.Highest and best use is to develop when the market returns (projected to be 5 to 7 years). Cost to remove dirt piles is projected to be $10.00 per cubic yard in 5 years.Slide73
Appraisal Methodology
The subject was valued based on discounting the cost of removing the dirt piles 5 years in the future at $10.00 per cubic yard for 350,000 cubic yards.
Discount rate was estimated at 25% based on investors that purchased partially finished lots and their discount rates that ranged from 20% to 30%.Present Value of removing the dirt piles is approximately $1,150,000.Market value equals $3,750,000 less $1,150,000.Slide74
Reviewer’s Comments
The appraisal was reviewed and the reviewer stated that the discount rate should be a “safe rate” of 3.5% since the cost of dirt piles is known. Sinking fund should be used.
The concept of a “safe rate” has come out of accounting practice to save money at a safe rate for a future date when cost is to be expended to pay for a future obligation. This does not reflect market practice. (Hoskold Premise used to value income stream of a wasting asset using safe rate).An investment is based on the cost paid today and future cash flows in the future. If the cash flows are bifurcated with different yield rates, then the investors overall yield will not be met.Slide75
Conclusion
In this assignment, the current market value of the land as though vacant was easily supported by market data. Rather than estimating the projected market value of the land 5 years in the future and subtracting the present value cost of the dirt piles, only the cost of the dirt piles was estimated, then subtracted from the current market value of the land as though vacant.
Apply discounts to cash flows based on market-derived data.The use of a “safe rate” in this assignment was not be used to calculate the present value of the cash flows as this does not reflect market actions.Slide76
Update (Current Value)
The subject of this case study is now in escrow. Land values doubled in the past five years (flat for two, doubled in past three years).
The appraisal we prepared projected that values would increase 20% per year on average over the next 5 to 7 years, but that the market would be flat for the first two years. Discount of 25% at 5 years was used to value the property. Contemplated 7 years (with cost increase) with 20% discount rate (similar results would have been attained).