Units Of Comparison Analysis In Real Estate Appraisal By Jon M. Ripans


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Comparing apples to apples in real estate appraisal, expert witness. Defining what is the relevant apple.

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Units Of Comparison Analysis In Real Estate Appraisal By Jon M. Ripans

  1. 1. Units of Comparison in Real Property Appraisal -The Economic Basis of Intrinsic ValueBy Jon M. Ripans, J.D., M.B.A. Finance, Esq.Certified General Real Property Appraiser1Commercial real estate valuation depends upon a number of variables which assist inanswering the fundamental question: What is this asset worth? That question, in turn,depends upon what the property is worth to the person who would value it the most,whether that person is a tenant or an owner occupant. The value to that person isinherently an economic question that turns upon the relevant units of productivity.Units of ComparisonRelevant units of productivity are often spatial, although they do not have to be. What ismore valuable: A 3,000 square-foot home with four bedrooms, three full bathrooms, andone half bathroom that are all normal sizes or a 3,000 square-foot home with onemonstrously large bedroom and bathroom? The former is more valuable to mostoccupants, but maybe not for empty nesters or vacationers. According to The Appraisal of Real Estate 13th Edition, Appraisal Institute(2008), units of comparison are "[t]he components into which a property may be dividedfor purposes of comparison, e.g., price per square foot, front foot, cubic foot, room, bed,seat, apartment unit. These units usually facilitate analysis even when the properties arenot very comparable."2 The Appraisal of Real Estate 13th Edition further explains that "[r]educing saleprices to consistent units of comparison facilitates the analysis of comparable sites andcan identify trends in market behavior. Generally, as size increases, unit prices decrease.Conversely, as size decreases, unit prices increase."3 As a general matter, land that is more than one acre in size is usuallyvalued/appraised on a per acre basis while land that is less than one acre in size is oftenvalued on a per square foot basis. Most building types are also valued on a per square1 The author has appraised $1.5 billion of commercial real estate in a wide variety of contexts, and hasserved as an expert witness, court-appointed property tax arbitrator, and property tax advocate. He appearsto be the only person in the state of Georgia who is a Certified General Real Property Appraiser, Attorneyat Law and Registered Neutral (Arbitration and General Mediation).As for long titles, Jon is the current Secretary of the Property Tax Subcommittee of the Real Property LawSection of the State Bar of Georgia.Jon M. Ripans is available to serve as a mediator, arbitrator, special master, receiver, or otherjudicial adjunct, either by agreement of the parties or court appointment. Jon is approved to serveas a Property Tax Hearing Officer, a special form of neutral recently created by statute.2 Id. at p. 305.3 Id. at p. 212.Copyright 2011 by Jon M. Ripans Page 1 of 3
  2. 2. foot basis, but there are some important exceptions, some more obvious than others.Some obvious examples of non-square foot units of comparison are: 1) valuing hotels/motels by the number and mix of various room types; 2) self-storage facilities by the quantity/mix of storage lockers of various sizes; and 3) apartment complexes by the quantity/mix of one, two, three bedroom units, etc. This is not to say that there are no other relevant factors in appraising theseproperties or merely in the process of comparing them to rent comparables or salecomparables. Location, age, condition, appeal are generally important. So are certainfeatures that are specific to a particular property type, such as in-room or property-wideamenities in hospitality facilities or apartment complexes, or climate control and securityfor storage lockers, etc.A Specific Example from an Expert Witness EngagementI served as an expert witness in litigation concerning the value of an automobile servicefacility. The appraisers engaged as expert witnesses for the other side used generic metalindustrial comparables from the immediate area and appraised the automobile servicegarage at issue (the "Subject Property") by applying rent per square foot and sale priceper square foot analysis. The service garage was old enough that the Cost Approach wasunreliable due to the inherent difficulty in gauging accrued curable and incurable physicaldeterioration. So, the battle was joined using the Income Approach and the SalesComparison Approach. I felt that the key questions were: "What are the important units of comparisonfor auto service facilities/repair garages? What are the features or units of productivitythat make an auto service facility useful (and hence valuable) to an occupant?" Put yourself in the position of someone who actually had to run a repair businessin a particular building. If you were operating an auto repair business, you would need abuilding large enough to accommodate the peak number of vehicles that are beingserviced at any one time, along with office and customer reception areas, and a bit ofstorage for parts, supplies, etc. You would also want to be able to move vehicles in andout of the building safely, easily and quickly, without having to interrupt mechanicsworking on other vehicles by forcing them to stop their work and move the vehicles,tools, and equipment in their work areas. As an expert witness, I took the position that the relevant unit of comparison forauto repair facilities is not just size in square feet, but the number of service bays withtheir own garage doors because these are the "units of production" for someone in thebusiness of working on motor vehicles. Some of the comparables used by the opposingexperts had only one or two garage doors, which makes it difficult to move vehicles inand out of the building without disrupting other operations. Also important is the size, shape and topography of the lot on which anautomotive garage is located. Some of the comparables used by the opposing side werelocated on lots with inadequate parking for both customers and storing vehicles that areCopyright 2011 by Jon M. Ripans Page 2 of 3
  3. 3. not being serviced. And, some of the comparables used by the opposing real estateappraisers had sloping topography, which is not helpful when it comes to towing,delivering, or jacking up vehicles or when it comes to mechanics pushing immobilevehicles around the lot. Another important point was that the auto service facilities I canvassed had amuch different occupancy/vacancy rate than the generic industrial buildings in the subjectsubmarket. Surprisingly, location did not affect value the way it would many other propertytypes. The repair shop owner(s)/manager(s) who I interviewed felt that being located ona side street instead of a main connector road was not that important. Maybe they werebeing self-congratulatory, but the mechanics who felt this way about location explainedthat many auto repair customers choose their mechanics based upon (perceived)competence and trustworthiness as opposed to the visibility or convenience afforded bythe location. Bearing these factors in mind, I was able to identify much more appropriate rentcomparables and improved sale comparables. The other side apparently agreed becauseit chose to surrender rather than have the matter heard in court.Some General Examples and ConclusionOther relevant units of comparison include the number of seats and parking forrestaurants, theatres, auditoriums or houses of worship. Similarly, the number of boatslips in a marina. For agricultural property, the relevant unit may be acres for typicalfarmland, but board feet for timber or the number of animals that can be supported by agiven piece of ranchland or pasture land. For industrial properties used for generalwarehousing and distribution, square feet and clear ceiling height are usually veryimportant and sometimes expressed as cubic feet, but so are other factors such as overalllocation relative to labor, vendors and customers, loading bays and drive-in doors, andmaybe rail access. But, for assembly or manufacturing facilities, high power andconfigurations of material storage and production lines may be critical. Medical officebuildings and dental offices turn on location and the number of patient treatment roomswhereas hospitals may have beds and operating facilities as their key components ofproductivity. For banks, the vault, safety deposit box quantities and mix, teller windows,drive-thru lanes and ATMs may matter as much as location, access, visibility andparking. Fast food restaurants and modern pharmacies often benefit from havingmultiple drive-thru windows. Ultimately, it is essential that the appraiser, expert witness, equity investor,lender, landlord, tenant, user, tax assessor, condemnor, condemnee, litigant, jurist,judicial adjunct, receiver, administrator, liquidator, bankruptcy trustee, debtor inpossession, creditor or other stakeholder employ the appropriate unit(s) of comparison inanalyzing a particular subject property and its comparables. To do otherwise would belike valuing homes based only square footage instead of the number of bedrooms andbathrooms.Copyright 2011 by Jon M. Ripans Page 3 of 3