The Unique Appraisal: Case
Studies in Appraising Special
Purpose Properties
Presented by:
Arthur L. Schwertz, MAI
Senior Managing Director
Valbridge Property Advisors
Walter D. Carney, MAI
Senior Managing Director
Valbridge Property Advisors
Matthew Lubawy, MAI, CVA, CMEA
Senior Managing Director
Valbridge Property Advisors
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?
Are You Competent?
• Nuclear Reactor Simulator
• Waterpark and Amusement Park
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 mixeduse retail/office building was reached (i.e. a pretty run-of-the-mill appraisal).
Yes, we are competent.
Nuclear Reactor Simulator Facility
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”?
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.
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 Type
Why Take On the Special Purpose
Property Assignment?
Main Reasons for taking on the Special Property Assignment
1. Keeps things interesting. Never boring. Never stop learning.
2. Higher Fees.
Contact Info
Arthur 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 70001
Special Use Property
In Eminent Domain
Presented to the Appraisal Institute – AI Connect
August 5, 2014
Austin, TX
Prepared and Presented by:
Walter D. Carney, MAI
Valbridge Property Advisors
Session Objectives
1. Cover the standards – what determines property
taken by eminent domain is special purpose/use:
a) Common Terms
b) Definitions and Rulings
c) Federal and State Statutes
1) Rules of Evidence
2) Rules of Civil Procedure
d) Federal and State Case Law
e) Special Statutes
Walter D. Carney, MAI
Session Objectives
2. Explain/Discuss:
a) “Just” and “Fair” – why are these
foundational rubrics in special purpose
b) The role of “Indemnity Principle” in
“Just” and “Fair” and special purpose
c) Why the “hypothetical” buyer and seller
are not quite so hypothetical in special
purpose/use, eminent domain
assignments
Walter D. Carney, MAI
Session Objectives
3. Present case studies (case law) from
various jurisdictions
4. Discuss accepted value-based doctrines
and valuation approaches/methods
5. Characterize the roles of the appraiser and
the attorney in eminent domain and in the
special purpose/use property assignments
Walter D. Carney, MAI
Common Terms
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, 5th Edition)
Walter D. Carney, MAI
Common Terms
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, 14th Edition)
Walter D. Carney, MAI
Jurisdictional Definitions and Rulings
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 2nd 254, 257
(1st District 1965)
Walter D. Carney, MAI
Jurisdictional Definitions and Rulings
New York: Specialty Purpose Property Four-Part Test
1. “The improvement must be unique and must be
specially built for the specific purpose for which it
was designed;
2. There must be a special use for which the
improvement is designed and the improvement must
be so specially used;
3. There must not be no market for the type of property
and no sales of property for such use; and
4. 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.”
Walter D. Carney, MAI
Jurisdictional Definitions and Rulings
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)
Walter D. Carney, MAI
Jurisdictional Definitions and Rulings
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)
Walter D. Carney, MAI
Jurisdictional Definitions and Rulings
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)
Walter D. Carney, MAI
Federal and State Statutes
US Constitution 5th 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 14th Amendment) has
the power of eminent domain, the power to
take property for “public use.”
Walter D. Carney, MAI
Federal and State Statutes
Rules of Evidence or Evidence Code
• 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.
Walter D. Carney, MAI
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, MAI
Federal and State Statutes
Rules of Evidence or Evidence Code
• 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.
Walter D. Carney, MAI
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, MAI
Federal and State Statutes
Rules of Evidence or Evidence Code
• 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.
Walter D. Carney, MAI
Federal and State Statutes
Rules of Evidence or Evidence Code
• 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.
Walter D. Carney, MAI
Rules of Civil Procedure or
Code of Civil Procedure
• Governs civil procedures – common laws,
and pleadings and motions – in federal
courts and 50 state systems, and territorial
courts.
Walter D. Carney, MAI
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, MAI
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, MAI
Case Law and Special Statutes
• Case Law – Appellate Court Systems and
Supreme Courts
• Special Statutes – may set out additional
rules and procedures to appraise unique
properties
Walter D. Carney, MAI
Special Statutes
• 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:
(a) 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.
Walter D. Carney, MAI
Other Reference Sources
• Nichols®, The Law of Eminent Domain
Volume 4, Part 4 §12C.01 Special Use Property Defined
1. The unique value to the particular owner
involved and not to others;
2. The special attributes inherent in the
property itself and the improvements that,
while unusual, are not unique;
3. The special attributes inherent in the
property itself; or
4. The conversion to a peculiar use.
Walter D. Carney, MAI
“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, MAI
“Indemnity Principle”
• Indemnity principle ruling added context to
“Just Compensation” clause, and to the 5th
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)
Walter D. Carney, MAI
“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.2nd 539,
543 (1958)
Walter D. Carney, MAI
Fair Market Value
• 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 sales
Walter D. Carney, MAI
Commonly Treated By Courts
as Special Use Properties
•
•
•
•
•
•
•
•
•
Worship Facilities
Cemeteries
Schools
Historic Properties
Industrial Properties
Sand and Gravel Facilities
Railroad Terminals
Utility Facilities (e.g. water companies)
Non-Profit Special Use
Walter D. Carney, MAI
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, MAI
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, MAI
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, MAI
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, MAI
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, MAI
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, MAI
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, MAI
Valuation Doctrines/Methods
Unique Doctrines to Special Purpose/Use
Property:
• Substitute Facilities Doctrine
• Assembled Economic Unit Doctrine
Walter D. Carney, MAI
Valuation Doctrines/Methods
Approaches in Special Purpose/Use
• Cost Approach
‒ Replacement 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, MAI
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, MAI
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, x7145
How do I handle special purpose
properties with complex cash flows?
Presented by:
Matthew Lubawy, MAI, CVA, CMEA
Senior Managing Director
Valbridge Property Advisors
Overview of Topics to be Discussed
• Appraising gaming properties
• Gypsum mine on hillside overlooking Las
Vegas
• Vacant land with dirt piles that cost more to
remove than the market value of the land
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:
–
–
–
–
–
–
Hotel
Food/Beverage
RV Park
Bowling Alley
Gift shops
Leased Space (e.g. – shopping mall)
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 properties
Example of Gaming Control Board
Statistical Data
How to Analyze the Data
(Revenue Projection)
How to Analyze the Data
(Revenue & Expense Projection)
How to Analyze the Data
(Expense Projections)
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.
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 $72,000,000
• The size of revenue is usually indicative of the
quality of the property and the amenities it
serves.
• 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 revenue
• Coin operated devices
• Poker and Pan
• Race Book
• Sports Pool
• 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.
• 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 Debt
Comps
Commissions
Gaming Taxes and Licenses
Payroll –Taxes
Payroll – Employee Benefits
Payroll – Officers
Payroll – Other employees
Race Wire fees
Other Departmentalized Expenses
• 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.
• 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.
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.
Inputs
Discounted Cash Flow
(Absorption Analysis)
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.
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.
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.
Residential Land with Dirt Piles
• In the midst of the recession. Current cost estimates
are $16 per cubic yard, or $5,600,000
• The 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.
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.
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.
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.
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).