Commercial Properties Broker opinions sought to help pinpoint values
October 22, 2009
By: Terry Sheridan
Jonathan Kingsley
s the commercial real estate market continues to seek bottom, beleaguered owners, loan servicers and institutional investors are asking brokers to help determine property values.
But brokers are balking at providing free work, and critics say the pricing can be skewed as the brokers hope they’ll be chosen to sell the property.
With sales scarce and troubled loans plentiful, brokers are sought out for their feet-on-the-street outlook. Who better to know a building’s value than insiders with direct knowledge of tenant comings and goings, or unannounced deals in the pipeline that could affect sales and prices, the thinking goes.
Opinions differ dramatically from formal appraisals, which take longer to complete, cost thousands of dollars and must meet certain statutory standards. Appraisers take courses to earn industry trade group designations and certifications. Federal legislation is pending that would define a “qualified” appraiser and appraisal.
Lenders require appraisals for new loans or refinancings. But opinions are increasingly in demand by lenders, loan servicers and owners to get the most up-to-date reading of valuations in a market that has seen considerable volatility since the recession started.
“The seeking of brokers’ opinions has increased substantially since the beginning of the year,” said Mark Gilbert, executive vice president of Southeast Capital Markets Group of Cushman & Wakefield in Miami.
Largely, that’s because most property values “are less by a wide margin than the balance owed on them,” he said.
Jonathan Kingsley, managing director and executive vice president of Grubb & Ellis in Miami, received calls within the past month from potential investors and loan servicers asking for values on a group of Corus Bank-owned condos, a major Miami-Dade shopping mall and a Class A office building in Miami’s central business district. Kingsley declined to identify the callers or the properties.
“We get calls from groups bidding on a pool of loans or a specific loan to determine if it makes sense to buy at a discount and the risk of having to own the real estate,” he said. “And we get calls from others, on behalf of lenders, to determine if the loan is in compliance based on current values.”
A lender, for example, that loaned $100 million based on a mall’s $80-per-square-foot lease rates at a 5 percent vacancy would want to know if the vacancy rate was now 12 percent and if rents have dropped to $65 per square foot. That drop-off makes for greater risk.
“The name of the game today is how to value buildings,” said Sylvan Rothschild, senior vice president of Capmark Finance in Dallas.
“A formal appraisal deals with such historical data that it’s of almost no value. In some markets, appraisal data goes back two years because nothing has traded. But a broker’s opinion is real-time data.”
A special servicer for the 227,447-square-foot Palm Springs Plaza in Palm Beach County asked for a price opinion after a $24.8 million loan was threatened by the property’s 65 percent vacancy rate, according to a broker who spoke on condition of anonymity.
That vacancy rate, and accompanying effect on the property’s net operating income, dropped the as-is value to $12 million to $13 million. If occupancy could be stabilized to about 85 percent to 95 percent, the value would increase to about $18 million, according to the broker.
But while the market downturn has created a heightened interest in brokers’ opinions, it’s also created a dilemma.
In the previous market cycle, brokers would willingly give opinions because they’d be almost guaranteed the job of handling the subsequent sale, said Robert Kaplan, principal of Olympian Capital Group in Miami.
“Today, there’s much less certainty that deals will close,” he said. “So each [opinion] request has become a burden.”
Growing numbers of brokers are charging for opinions they once offered for free. Fee estimates range from less than $1,000 to more than $10,000, depending on how many properties are involved and the expected turnaround time.
“Compensation is in [relation] to the likelihood of a transaction,” Kaplan said. “So where the lender is asking for a favor but there won’t be a transaction, there’s more and more resistance from brokers.”
The practice also raises questions from some industry experts, who wonder whether opinion-givers are more interested in the potential of future brokerage business from lenders or investors seeking their advice. Longtime appraiser Michael Cannon believes the use of broker price opinions could skew market values.
“It’s a very serious matter,” said Cannon, executive director of Integra Realty Resources in Miami. “An [opinion] is either a ride-by or a back-of-the-envelope hypothetical … prepared at a fraction of the cost of a full appraisal.”
Cannon said opinions are considered more authoritative than they really are, and believes state regulators should review the practice.
Marty Busekrus, senior investment sales associate at NAI/Rauch Weaver Norfleet Kurtz in Fort Lauderdale, said brokers’ opinions and appraisals are problematic, largely because the indicated values may reflect the client’s desired outcome.
“There probably aren’t as many [broker opinions] as there should be because if banks really marked their assets to market value, 60 percent of the banks would be out of business,” said Busekrus, who will moderate an Oct. 29 panel discussion on market evaluation. The discussion, to be held from 6 to 7:30 p.m. at the Fort Lauderdale Museum of Art, will be sponsored by the National Association of Industrial Office Properties
Busekrus reviewed a 200-page appraisal that valued a Class B office building in Miami at $14 million with $15 million debt. But the highest offer he could get from an investor was $9 million.
But, countered Kingsley, opinions are all about getting a problem property or loan quickly resolved. A purchase contract or financing will result in a formal appraisal anyway, he said.
Opinions are intended to be casual services to give a market range for valuation today, Kingsley said. “The spirit in which they are done is to provide a service because, if there is a deal on the back end, you could get it.”
Terry Sheridan can be reached at (954) 468-2614.
Reader's comments Tom Blazejack said:Hi Terry Interesting subject. I've been a commercial appraiser here in Miami for 30 years. Here are a few observations. First, although formal appraisals include historical facts, the value estimates should be rooted in current market thinking and those done by thoughtful professionals generally are. Second, I agree that often the broker has a great "on the street" sense of the market. But not every street. They tend to "farm" locations and property types and develop specialties. So the key to getting a good broker opinion is hiring the broker who knows that particular street. Problem with that, of course, is that the broker will almost certainly have an interest in being involved in a future transaction involving the property. Even if they do the work in the "spirit" of providing a service, it's hard to imagine an aggressive commercial broker declining a chance to market a property because they did an opinion letter for a few hundred dollars. The best appraisers have relationships with the brokers on the street and know which ones to call to gain current market insight. So similarly, getting a good appraisal depends on hiring the right appraiser. A chronic problem with the process is the issue of "competency". If I am not intimately familiar with a particular market, shouldn't I let the client know that getting familiar will take more time (hence, more money). On the residential side of the business this is a huge issue right now, because appraisal management companies are more interested in providing the cheapest appraisal they can from someone who is credentialed - not necessarily "geographically" competent. Hence you have residential appraisers from Palm Beach working in Kendall and vice versa. Third, appraisers actually can do cheap, quick opinions. Meeting the USPAP standard is not all that complicated. The reports are labeled "restricted" and the caveats are spelled out in a section called "Scope of the Appraisal". We tend to shy away from that work because of the danger that such reports will be misused. Thanks, Oct. 22 at 11:52 a.m.
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