The Value of
Property Appraisals
Mark T. Hessel, Vice President
Hirons & Associates
Tuesday, June 26, 2012
Break-out Sessions 217-INT and 222-INT
Hirons & Associates – Introduction
• Firm – Hirons Background
•In business of valuing assets for 25 + years;
•Specializing with Public Entities, Educational Clients;
•Experience with individual entities, insurers and pools nationally
• Hessel
•26+ years in the business of appraising all varieties of property;
•Has appraised literally thousands of public sector facilities;
•Extensive experience in appraising water/wastewater facilities;
•Dedicated Packer fan; and,
•Feel free to contact directly with questions:
• mhessel@hironsassociates.com
• 414.906.1921 (direct)
I. UNDERSTANDING THE BASICS
A. Objectives of an Insurance Appraisal
B. Definitions of Value; INS. vs. ACCTNG
C. Appraisal Frequency/Updating Values
D. Methodology – Inventory/Inspection
E. Methodology – Valuation
F. Break !!!
Common Goals of Appraisals:
Insurance Placement (typically Insured’s objective)
 Improve rating
 Solid fiscal management (Job security?)
Satisfying Requirements/Requests
 Broker / Agent request
 Insurer/reinsurer requirement
 Pool Board policy
Clean up the SOV
 Correct suspect values
 Identify missing property or improvements/additions
 Stay current with recent cost changes (annual updates)
Goals of Appraisals (cont.):
Underwriting Objectives:
Accurately value property (ITV issues)
 Correct premium?
 Margin clause issues
 Equitable distribution of premiums (pools)
Insurers can validate offering terms (i.e. agreed amount,
blanket)
Verify the condition of the specific property
Verify separation (distance) of property issues
Provide reinsurance carriers accurate values, other
underwriting data (C.O.P.E. ~ follows later…)
Reinsurance Issues/Goals:
Breaking News
Data Quality Big Issue For Property Re, E&Y Finds
• Poor quality data translates to increased rate to primary co. cedants:
•90% apply surcharges (70% of these, est. 20-25% premium penalty!)
•92% said strong data controls could mean 5-15% premium credits!
• Quote 1: “When asked which data items they consider most problematic,
reinsurers pointed to insured values, complete inventory of locations and
secondary characteristics.”
• Quote 2: “…supplying better data would benefit the primary insurer’s
underwriting process as well. She said critical information, such as location
and number of buildings, could be better gathered with specific data fields.”
Source: National Underwriter P&C; NU Online News Service, Aug. 26, 2008
Definitions Of Value:
How does Replacement Cost differ from other
values (Original, Market, Reproduction, etc…)?
Replacement Cost - is defined as the cost to repair, rebuild or replace on the same
site with new materials of like size, kind and quality, or with similar property
intended to perform the same function when replacement with identical property
is impossible or unnecessary.
Why is the basis of value important?
•
Fundamental starting point for any appraisal;
• Defines your limit in the event of a loss.
Definitions Of Value (cont.):
When do I use Reproduction Cost?
•
•
•
You may / may not have a choice
Typically employed for Historic property
Review policy language, involve broker/consultant
Reproduction Cost - is defined as the cost to repair, rebuild or replace with
material of like, kind and quality compatible to those originally used, including
the cost of skilled labor and/or authentic materials necessary to restore the
property as nearly as possible to its original condition.
When do I use Actual Cash Value (ACV)?
•
•
•
Again, you may / may not have a choice
Common for physically/functionally obsolete or vacant property
Review policy language, involve broker/consultant when determining
Actual Cash Value - is defined as Replacement Cost less accrued depreciation.
Sample Report:
Reproduction Cost
• On National Register
• Ornate construction
components;
• Unique design;
• Significant variance
from standard RC value
(> 50%, in this case…)
Sample Report:
Actual Cash Value
• Built 1925; replaced
1950’s
• Originally Orphanage
• 95% vacant
• Could not operate as
Juvenile Det. Center
(needs major renov.)
Appraisal Frequency - Benchmarks:
 Individual entities vary… considerations include:
 Time since last appraisal;
 Growth/addition of new properties;
 Transfer of assets between properties;
 Geographic location and impact of local cost changes; and
 Internal policies or external (insurer) requirements.
Hirons clients tend to rotate over 3–7 yrs (samples):
 LMCIT; NIRMA; LARM
National Hotel Chain
Major City in NC; County in MD
Appraisal Updating:
 Desktop review (service bureau)
 Changes in property submitted annually to appraiser;
 Trend factors applied to unchanged Sites;
 Revised reports sent back to insured; typically timed w/renewal
 Common solution for smaller entities or those w/few changes
 Onsite Update Service
 Incorporates above PLUS an onsite component for new/changed
locations;
 Good solution for larger entities or those who are growing rapidly
w/many property transactions
Phased-in Reappraisal Schedules (combining above)
RC Trend Factor Sources:
1. Marshall & Swift Valuation Service – subscription
• Regional focus; & State/Local focus – by specific Class
CPI
2. Engineering News Record (ENR) – subscription
• Building Cost & Construction Cost Indexes (BCI & CCI)
3. Handy – Whitman Index for Public Utilities
4. Producer Price Index (PPI/US Bureau of Labor Statistics) –
http://www.bls.gov/PPI/
5. Insurers – Zurich NA http://www.zurichna.com/zna/onlineservices/online_agent/cost_trends.htm
6. Major construction companies – Example: Turner Const.
http://www.turnerconstruction.com/cost-index
Critical to distinguish between RC and Market Value!
Trend Factor Examples:
Example: Turner Const. – published rates for > 75 years
http://www.turnerconstruction.com/cost-index
WOW!
Trend Factor Examples:
Example: M&S – Regional
Marshall Valuation Service; April, 2012
Trend Factor Examples:
Example: M&S – Local/City
Ex: “B” increased 3% in
NOLA in the last year
Marshall Valuation Service; April, 2012
Trend Factors – Cost Drivers
Source: ENR 2Q
Cost Report;
June 16, 2008
Appraisal Methodology - Fieldwork:
 BUILDINGS:
• Begin with thorough inspection –
• Review available plans/blueprints (“as-built”)
• Measure each structure for GSFA; P’ by floor/level
• Record major building components
• Frame
• Exterior Walls
• Thickness
• Story Height
• Roof Construction & Slope
• Building Service Systems (HVAC, Plumbing, Electrical)
• Interior Finishes (Flooring, Ceiling, Partitions)
• Life Safety/Protection Components (Sprinklers, Alarms, Emergency Power)
• Special Building Features (mezzanines, balconies, overhangs, special add-ons)
• Create sketch of building footprint for support, valuation phase
• Separate basement, other major sections
• Take photographs and collect GPS reading
• Conduct building walk-through
Appraisal Methodology - Contents:
 Detailed Physical Inventory (This Is Your World!)
 Full, wall-to-wall inventory of major assets; level of detail set at specific
dollar threshold (by client)
 Information collected typically includes:




Full description of asset
Specific Location within Building (i.e. room, department)
Asset Classification for subsequent sorting/reporting
Manufacturer, Model, Serial Number – where applicable
 Benefit: Proof-of-loss determination, class schedules
 Downside: Most costly approach; requires more time
 Tally Approach
 Not as widely used, but still cost-effective option
 Depending on how it is performed, may lose Proof-of-loss detail
 Modeling Approach
 Widely used with pools; developed in the industry mid-1980’s
 Great potential for error if not reviewed/adjusted during walk-through
 % of Building Value Approach
 Widely used by some insurers – virtually no cost
 Often “blind” application of value; potential for error significant
Appraisal Methodology - Contents:
 REVIEW OF EXISTING FA SCHEDULES
• Recent FL Hospital Example
• Two relatively current Inventory Schedules
• Capital Asset Schedule
• Property Control / Asset Management Schedule
• Recent Manufacturing Example
• Current Inventory / Reconciliation Project
• Utilized their final inventory AND our walk-through to
estimate RC
Which Approach Is Right For You?
Budget usually dictates…
Appraisal Methodology - Valuation:
 BUILDINGS – Tools of the Trade:
• Marshall & Swift – MSB System (subscription-based)
•
•
•
•
Originally E. H. Boeckh program
Web-enabled valuation tool
Widely accepted in insurance industry
Allows for more detailed input of components
• Marshall & Swift – Marshall Valuation Service (subscription)
• Book version offers two valuation approaches
• Calculator Approach
• Segregated Cost Approach
• PC-based version = Commercial Estimator 7/Agricultural Estimator
• More detailed than Calculator; less detailed than Segregated
• Other/Newer Releases – mostly online/web-enabled solutions
•
•
•
•
RS Means CostWorks
e2Value Suite
Xactware Xactimate program
Others…
All require proper training & experience!
Appraisal Methodology – Valuation (cont.):
 BUILDINGS
• Other Subscription-Based Sources (“units-in-place”)
• Sweets Unit Costs Guide (BNI)
• RS Means (http://www.rsmeans.com/)
• ENR Square Foot Costbook (http://www.bnibooks.com/)
• Proprietary valuation solutions
• Primarily developed for unique, complex construction
• Water/wastewater
• Electric Utility
• Gas Utility
• Require extensive updating and research
• “Old-fashioned”, manual approach to pricing
• All are valuable when applied correctly!
• User MUST understand what models contain!
Sample Screen Shot - MSB
Highlights:
•Dozens of Bldg “models”
•Component entry
•Calculates Exclusions
•Ability to adjust by
• % of material
•Perimeter
•Story Height
•Allows for Quality adjustments
•Applies local costs by Zip code
Sample Screen Shot – M&S Calculator
Highlights:
•Dozens of Bldg “models”
•Selection by Class, Quality for base
Cost per SF
•Manual Calculations
•Ability to adjust for
•Perimeter
•Story Height
•Diminished ability to adjust for
components, especially interior finish
•Applies local costs by Region/City
Appraisal Methodology – Exclusions:
 What are they????? (DON’T ask the appraiser this…)
• Review your policy or ask your broker/agent/pool/insurer
• Underwriting issue; not valuation
• Policy language should clearly spell out what IS included
vs. what is NOT included in coverage.
• Typical Exclusions
• Foundations & Footings (below lowest level of slab)
• Site Prep & Excavation
• Underground Portions of Plumbing
• Are these costs material?
• Variables include:
• Geographic region (higher N; lower S)
• Building Characteristics (# stories, perimeter, etc…)
Methodology – RC vs. Contractor Cost:
 “But we paid $$$.00!” (Steps for analyzing contract cost)
• Ask questions regarding the bid process:
• Unusual circumstances in the bidding / timing of the work?
• Contractor bids reasonably spread?
• How low was the lowest bid?
• Obtain final (or last monthly) progress pay request (AIA document)
• Assemble applicable “soft” costs (generally not in contractor costs…)
• Engineering, design
• Legal
• CM fees
• Other (non-bond related) costs
• Remove interest/bond costs
• Identify “allocable” hard costs from detail, and set aside
(“mobilization” or “start-up”)
• REMOVE all land costs and related land improvements (paving,
utilities, curb/gutter, etc…)
Appraisal Methodology – Original Cost:
 Example: City of Raleigh – Booster Pump Station
1) Total Project Cost - $1,273,000
(with estimated soft costs)
2) Estimated Building - $330,700
3) Estimated Contents - $598,400
Total Insured Amt - $929,100
(73% of total project)
 When to use (or NOT to use)
•
•
•
•
•
Great analysis for
• Utility projects
• Major projects with significant improvements
This should NOT be a substitute for an appraisal of new property
Not so great for additions which include renovations
Really not so great for renovation work
The older the project, the less reliable the results (trend factors…)
Results (drum roll, please…):
3 POTENTIAL SCENARIOS
 Little or no change???
 Overvalued Property:
• Property has been incorrectly adjusted for renovations;
• Additions have been incorrectly added to values;
• Over-inflation of trend values
 Undervalued Property:
• Lack of annual adjustments to Replacement Cost;
• Incorrect valuations
• Wrong SFA calculations;
• Wrong model assumptions;
• Incorrect component determinations;
• Poor valuation assumptions & judgments.
• Missing property – new items not on SOV
II. VALUING UNIQUE PROPERTY
A. Water & Wastewater Utility Property
B. Manufacturing Concern
C. Historic Property
D. Educational Structures
E. Seeing Green
Water/Wastewater Valuation
VALUATION CHALLENGES:
• Complexity of Construction ~
• No dedicated valuation tools for specific values
• Technical process equipment
• Recent advancements in controls systems
• Technological variances for treatment styles
• Significant Increases in Cost of Materials
• Unique, One-of-a-kind Design
• Facilities generally not cookie-cutter
• Fees are often overlooked/underestimated
Water/Wastewater Valuation (example)
• $450m TIV
• $138m M&E
(31%)
• $312m Bldg
(69%)
• 26 individual
buildings/structures
• Rated / designed
capacity = 54 MGD
Manufacturing/Industrial Property
Valuation Challenges – Manufacturing
• Higher Ratio of M&E to Building Value
• Highly Technical Machinery
• Ex: $175m TIV; $71m = B (40%) / $104m = C (60%)
Historic Property Valuation
VALUATION CHALLENGES:
• Complexity of Construction ~
• Limited valuation tools for specific values
• Reproduction vs. Replacement
• Models PLUS Additional Features
• Appraiser must specifically identify inclusions/excl.
• Significant Costs to Reproduce/Replace Materials
• Unique, One-of-a-kind Design (and Materials)
• Facilities definitely not cookie-cutter
• Extra fees often overlooked/underestimated
Historic Property Valuation (example)
• Historic Register
• 25” Stone walls
• Solid brick walls
• Copper cupola – 48’
• Seth Thomas clock
• Rotunda w/
• Stained glass
• Detailed plaster
• Painted ceiling
• Vaults – dbl door,
solid brick part. walls
Educational Property Valuation
• Valuation Challenges – Higher Ed
• Space/Campus Restrictions
• Models PLUS Additional Features
• Labs/Research Buildings
• Other Unique Architecture
• Valuation Challenges – K-12
• Life Safety Considerations
• Perimeter – Area Ratios
• Need to Carefully Assess/Select Models
Higher Ed Property Valuation (example)
• Research Facility
• Admin Offices
•Clinical Research
•Labs
• Connected to
Teaching Hospital
• Standard Models??
K-12 Property Valuation (example)
• Originally four (4)
separate buildings
• Admin Offices
• Shops
• Classroom wing
• Gymnasium
• Addition/new gym tied
all sections together
• New gym featured
“green” components
Which LEEDs me to our next topic…
Certification Process (old)
• US Green Building Council (USGBC) – LEED Ratings:
•
Certified (26-32 of 69 total points)
•
Silver (33-38)
•
Gold (39-51)
•
Platinum (52-69)
LEED = Leadership in Energy & Environmental Design
• How to Score Points:
1. Sustainable Sites (14 Points / 20%)
2. Water Efficiency (5 Points / 7%)
3. Energy & Atmosphere (17 Points / 25%)
4. Material & Resources (13 Points / 19%)
5. Indoor Environmental Quality (15 Points / 22%)
6. Innovation & Design Process (5 Points / 7%)
Source: http://www.usgbc.org
LEED Continued…
2009 Update (v3):
• US Green Building Council (USGBC) – LEED Ratings:
•
Certified (40-49 of 100 total points)
•
Silver (50-59)
•
Gold (60-79)
•
Platinum (80+)
• How to Score Points:
Commercial
School
1. Sustainable Sites
26
24
2. Water Efficiency
10
11
3. Energy & Atmosphere
35
33
4. Material & Resources
14
13
5. Indoor Environmental Quality
15
19
6. Innovation & Design Process
6
6
7. (new) Regional Priority
4
4
Source: http://www.usgbc.org
Seeing Green ($$$?)…
Valuation Issues – Green Buildings
• Separating out uninsurable factors (land improvements;
brownfield redevelopment; site development)
• Often unique design, materials – soft costs may be
relatively higher
• Proliferation has helped reduce costs in recent years
• Increased costs? Early estimates range from
approximately 2 – 10% compared to non-green
buildings; however, there are extreme cases…
Did I mention proliferation???
Source: http://www.usgbc.org
Update: 5/2012
LA Only –
• C = 32
• R = 190
400% increase!
Update: 5/2012
US Only –
• C = 9,749
• R = 21,185
Seeing Green (Sample 1)
https://www.usgbc.org/ShowFile.aspx?DocumentID=3940
Seeing Green (Sample 2)
https://www.usgbc.org/ShowFile.aspx?DocumentID=3943
• $386/SF Project Total (2006)
• Trended ~ $475/SF (2012 est.)
• Platinum Rating (57/69)
• Renovation/Addition project
• Notice (some obvious) features:
• Windows (natural light in
“passive solar” design)
• Minimal finish using
recycled and rapidly
recyclable materials
• Extensive use of recycled
materials on exterior… all
added to costs.
III. INSURER ISSUES:
A. Current Trends/Concerns – CAT
B. Underwriting Data – COPE’ing with
much change
C. Changes in Coverage
Trends/Concerns:
RMS - http://www.rms.com/Publications/Cat_Risk_Maps.asp
Trends/Concerns:
US Insured Cat Losses ($billions)
Source: AIR Currents – December, 2011
Trends/Concerns - 2011:
US Insured Cat Losses
($billions):
Source: Munich Re – January 4, 2012
2011 ranked second only to
2005 for total US Insured
Losses; $35.9.B
Global Ins. Losses - $108B
Source: Swiss Re – News
Release, December 15, 2011
Trends/CAT:
Increased Technology – Cat Modeling Data/Research
 Coastal considerations (wind/hurricane); Flood; Quake; Hail; other
 Emphasis on viewing the total exposure, predicting PML
Sample Risk Assessment / Modeling Tools (not all-inclusive):
1. Risk Management Solutions multiple tools; v.11 RMS Hurricane Model
2. AIR Worldwide – “CLASIC/2” (individual risks); “CATRADER” (reins.)
3. EQECAT, Inc. - RQE software; Solvency II Model
4. CoreLogic GIS Portal / “CATUM” software
All vary, but offer comprehensive, location specific reports
Trends/CAT:
Source: CoreLogic CATUM
Useful for documentation of other data, including:
• Flood Zone
• Elevation
• Specific GPS Coordinates
COPE - What is it?
COPE – definition *:
An acronym that stands for the four property risk characteristics an
underwriter reviews when evaluating a submission for property
insurance: construction (e.g., frame, brick, masonry, masonry veneer);
occupancy (how the building is being used); protection (e.g., quality of
the responding fire department, adequacy of water pressure and water
supply in the community, the presence or absence of smoke alarms,
etc.); and exposure (risks of loss posed by neighboring property or the
surrounding area, taking into consideration what is located near the
property, such as an office building, a subdivision, or a fireworks
factory).
* - International Risk Management Institute, Inc. (IRMI) - Glossary of Insurance & RM Terms (www.IRMI.com)
Trends – Data Collection for Insurers:
Revised Data post-RMS v.11
• Typical pre-v.11 data, PLUS info like:
Standard Data pre-RMS v.11
• Wind Tier/Hazard Zone
• Typical COPE data, including:
• Quake Seismic Zone
• Specific Address
• Construction Quality
• All Relative Values
• Roof Sheathing Attachment
• Full Building Narrative Desc.
• Roof Anchor Type
• GPS Coordinates
• Opening Protection
• Elevation
• Roof Age; Roof Condition
• In all, ~ 40 fields of data
• Roof Geometry
• Frame – Foundation Connection
• In all, > 90 fields of data
Trends/Concerns - Insurers:
Coverage Changes
 Shift in focus – geographic concentration of exposures
(specific location becomes critical)
 Heartland vs. Coastal pricing
 The disappearing blanket
 Higher deductibles
 Implementation of Margin Clauses
 Multiyear deals
 Expansion of coverage for “green” issues
 Geothermal heat/cooling;
 Roofing systems (i.e. vegetation)
Final Thoughts/Questions?
Thank You!
Trivia question: January 2, 2012 – last regular season game…
Which Packer QB set franchise records with 480 passing yards &
6 TD’s in our 45-41 win over the Lions?