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RESEARCHED
CAPITALIZATION RATES
The
relationship between "earning power" by an income-producing
property and the respective market value is very similar, if not the same.
The greater the earning power, the greater the profit and, therefore,
the higher the value of the income-producing property. This is the essence
of the income capitalization approach to value and all related theory
and techniques. Thus, Value = Income divided by the Capitalization Rate;
Income = Value multiplied by the Capitalization Rate; and Capitalization
Rate = Income divided by the Value.
An
accurate Income Approach and resulting market value can only be accomplished
by monitoring market conditions, specifically any changes in national
and local capitalization rate tendencies. Because monitoring of capitalization
rate movements is critical to Income Approach, Crown Appraisal continuously
researches capitalization rates on a quarterly basis for the various types
of commercial properties (i.e., CBD Office, Suburb. Office, Manufacturing,
Warehouse, Retail, Strip Mall, Apartment, etc.) Please contact us directly
for the most up-to-date cap rates for your real estate needs.
DIRECT
CAPITALIZATION
The
Income Approach employs two factors to obtain an indicated value for the
subject; namely, a stabilized net operating income (NOI) and a capitalization
rate. The stabilized net operating income considers the actual income
and expenses for the subject and modifies this calculation for market
conditions such as comparable rental rates and vacancy rates, and for
expense items which an owner/operator may not include but which are necessary
for an investor/purchaser; like replacement reserve expenses and management
fees. A capitalization rate is then developed and divided into the stabilized
operating income. The quotient will yield an indicated value for the subject
according to the Income Approach, which is particularly essential with
"business opportunity" properties that rely on a cash flow basis
to establish value.
ENVIRONMENTAL
DUE DILIGENCE
We have always heard talk of environmental due
diligence, but have never considered that it has a major effect on the
real estate sales industry. If you believe that statement, then your job
is about to change as of mid-2005.
Environmental due diligence is on the brink of
change and the real estate industry is right in its path. On January 11,
2002, President Bush signed the Small Business Liability Relief and Revitalization
Act (Federal Brownfield's Law). This law directed the Environmental Protection
Agency (EPA) to write the nation's first federal standards for conducting
"All Appropriate Inquires (AAI)" for assessing the environmental
health of a property prior to the purchase.
The
proposed AAI ruling follows typical standards for Phase I Environmental
Site Assessments in most areas (including Michigan); however, it does
require new levels of investigative efforts. The basic components of the
Phase I Environmental Site Assessment include 1) local/state/nationwide
database research, 2) historical records search (previous property uses)
and 3) physical site inspection, which will still be the main focus but
with increased levels of investigation (please contact Crown Appraisal
for further details).
YOU
MUST KNOW THIS:
1) The new AAI rule applies to all commercial property
types (not just Brownfield's).
2) It also applies to residential properties used
for commercial purposes (i.e. retail down and apartment up, or multiple
dwellings over four units), and residential properties under government
ownership.
Therefore, all three property types (commercial,
residential used for commercial, and government owned property) will require
an environmental site assessment prior to the closing, which in most cases
will be a Phase I Environmental Site Assessment (using new AAI requirements),
unless an environmental problem is known to exist and then an environmental
baseline assessment will be required (active testing for existing contamination
levels).
As you might expect, as of the middle of 2005 when
the new AAI rule goes into effect, the environmental assessment companies
will be backed up with orders. We expect that at least six to seven weeks
should be appropriated from the signing of a buy/sell agreement until
the scheduled date of closing. To be sure, several potential transactions
will be jeopardized due to the new AAI ruling.
It is the responsibility of real estate agents
to become familiar with this new ruling as well as advise your clients
for qualification into the "innocent landowner defense fund",
pertaining to the three property types noted above. The new AAI requirements
add two beneficial clauses that protect an innocent landowner, who is
knowingly purchasing contaminated properties, facilitating and mitigating
potential sales of Brownfield properties by real estate agents. These
clauses are:
1) The "bone fide prospective purchase defense"
provides protection for an owner who knowingly purchases a contaminated
property, provided the owner can demonstrate that contamination on-site
occurred prior to purchase.
2) The "contiguous property owner defense"
provides protection for the owner of a site that is contiguous to a contaminated
property, provided that the owner can provide evidence that they did not
know of contamination on the property at the time of purchase.
The route to qualify into the bona fide prospective purchase defense or
the contiguous property owner defense is to submit the appropriate environmental
assessment into the MDEQ and receive a document authorizing the acceptance.
Many of your clients will attempt to by/sell and submit to the MDEQ an
environmental assessment that was completed more than six months prior
to the property transaction. You must be aware that under the new AAI
ruling the effective date of a typical Phase I Environmental Site Assessment
cannot be more than six months prior to submission to the MDEQ to be accepted,
however, an environmental assessment under the new AAI ruling will be
accepted by the MDEQ up to one year from the effective date of the report.
In the same respect, a typical Phase I Environmental Site Assessment will
not be valid when the effective date is more than six months prior to
a title transaction, or one year for an environmental assessment under
the new AAI ruling guidelines.
In
addition, if a property transaction has taken place and a new company
has been occupying the property for more than six months following an
environmental assessment, the MDEQ will not accept the report. And finally,
updates to environmental assessments will no longer be accepted by the
MDEQ unless the original effective date of the report is within six months
from the date of submission to the MDEQ.
SITE
ASSESSMENT REPORT
Crown Appraisal and Environmental Services is offering
an environmental site assessment service which will potentially save your
client money, avoid any potential environmental issues with respect to
the new AAI ruling, and qualify a potential purchaser for the "Innocent
Landowner Defense Fund" when applicable.
Crown Appraisal & Environmental Services can
offer the "Site Assessment Report" to either a potential seller
or purchaser that will give detailed evidence of any public reported information
(local, statewide and/or national) on contamination on the subject property,
as well as neighborhood properties, including radius maps in color (see
Sample Report).
This report will tell the owner or purchaser 1)
if there is any recorded information on environmental contamination, 2)
if potential contamination is expected to affect the value of the property,
and 3) what environmental report will be required prior to the closing,
potentially saving your client over $2,000. This report will also qualify
a potential purchaser for the "Innocent Landowner Defense Fund",
which should be explained to a purchaser by the Realtor. As well, this
report will more than cover all aspects of due diligence, required by
Realtors.
The
cost of Site Assessment Report is $375, and will be completed within 48
hours from the time of ordering, and in most cases within 24 hours. Since
Crown Appraisal receives a significant discount on this information as
a "Certified" and "Designated" environmental inspector
with an account at "Environmental Data Resources, Inc.", it
is our belief that the retail value of this report is $1,200 to $1,600,
since the content is 60% of a full Phase I Environmental Site Assessment
at the comparative cost of $2,000 to $2,800. This report covers all contents
of a Phase I Environmental Site Assessment except for a property inspection,
phone calls and consultations with several local officials (building inspector,
fire chief, etc.), and a history of the subject property. Typically a
Phase I Environmental Site Assessment will take 4 to 6 weeks to obtain
after the time of placing the order, as compared to 48 hours for our environmental
Site Assessment Report.
RECAP:
DUE DILIGENCE OF ENVIRONMENTAL RISK TO THE REALTOR
What Should the Michigan Realtor Know About Environmental
Due Diligence?
A. "Due Diligence" relates back to the
framework of the federal law: Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA), as amended, of the Natural Resources and Environmental
Protection Act.
1) Realtors should strive to qualify their clients
(buyers and sellers) for the "Innocent Landowner Defense Fund"
through CERCLA
a) The Innocent Landowner Defense Fund exempts
property owners from environmental liability "if the property owner
did not know or have reason to know of contamination", which also
means that the property owner undertook "all appropriate inquiry"
pertaining to potential environmental contamination.
b) The Environmental Assessment that our office
can supply will more than qualify the property owner under the Landowner
Defense Fund.
2) If contamination is discovered on the property,
the next step is to determine the level, or "baseline" of each
contaminate that is present by performing a Baseline Environmental Assessment
(BEA), which must be performed within 45 days from the title transfer
and accepted by the MDEQ. At that point the new property owner is only
liable for contamination over and above the baseline level of each contaminate.
3) The Realtor should know that there should be
a contingency on the sales agreement that calls for either the property
being warranted by the seller that it is free from any and all environmental
contamination, or a BEA is to be accepted by the purchaser and the MDEQ
prior to the closing.
4) The Realtor should know that a previous environmental
report (Site Assessment, Phase I, or BEA cannot be relied on past 6 months).
Thank you for your attention to this serious matter
and should you have any further questions, please contact us at 269-329-2607.
PLEASE NOTE: It must be made clear that the environmental Site Assessment
Report cannot be relied on to base a property transaction or federally
related loan.
EMINENT
DOMAIN / CONDEMNATION
Crown
Appraisal is an expert appraisal firm in eminent domain and property condemnation
cases. The appraisal procedures pertaining to eminent domain are very
detailed and subject to constant change. The appraisal firm that represents
your business interest should be a specialist in the field, however, it
is essential that the final appraised market value of your property is
non-biased, which is mandatory in eminent domain litigation.
As
an appraisal firm that specializes in eminent domain, we are aware that
the determination of the market value of your property in this potential
litigation is vastly different than the market value for the intended
use of a loan from a lending institution. The definition of market value
for a bank loan reads, "The most probable price which a property
should bring in a competitive and open market under all conditions requisite
to a fair sale, the buyer and seller, each acting prudently, knowledgeably
and assuming the price is not affected by undue stimulus."
In
contrast, the market value determination for eminent domain states:
"The
market value of land or real-estate is the highest price estimated in
terms of money that the property will bring if exposed for sale in the
open market with a reasonable time allowed to find a purchaser buying
with knowledge of all the uses and purposes to which it is adapted and
for which it is capable of being used; the amount which property would
bring if it were offered for sale by one who desired, but was not obligated
to sell, and was bought by one who was willing, but not obligated to buy;
what the property would bring in the hands of a prudent seller, at liberty
to fix the time and conditions of sale; what the property will sell for
on negotiations resulting in a sale between an owner willing but not obligated
to sell and willing buyer not obligated to buy;…"
Hence,
the resulting market value for eminent domain is significantly higher
than the appraised market value for the purpose of a loan.
We
pride ourselves in thorough market research producing appraisal reports,
appraisal reviews and consulting assignments in which the valuation procedures
are clearly substantiated. In addition, we have highly developed skills
in litigation procedures and verbal communication that can represent and
defend the appraised market value in deposition or court.
Crown
Appraisal looks forward to working with you in your eminent domain litigation
case. If you have any questions or comments on the role of a commercial
appraiser in eminent domain, please contact us at 269-329-2607 or e-mail
.
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