NOTE: This is 1 of 4 courses being offered on June 10th & 11th.
Seminar Objectives
The program focuses on developing a sound market and marketability analysis that supports highest and best use conclusions. This is accomplished by building upon an inferred demand analysis that is used for commonly traded properties in a stable market where sales and rentals occur routinely. However, this program will focus on a fundamental demand analysis that is property specific. It is used when valuing complex properties in volatile markets. The nuances of the complex properties analyzed in the income capitalization approach involve a discounted cash flow model. Appraisers operating in this arena are expected to research, gather and analyze market information using peer tested and industry approved methods and techniques. A fundamental analysis is applicable for complex, nonresidential properties found in communities throughout the country and especially in New Jersey.
Marketability analysis is property specific and supports the concluded highest and best use. This program will help attendees prepare and communicate more effectively by understanding areas to research, data to gather, analysis to undertake, and presentation techniques to communicate findings.
This program will show how to quantify and support a concluded property’s maximumly productive use and how its economic characteristics may vary over time which should be simulated in the DCF model. Markets change over time. This factor must be recognized and the DCF model and should not be simply a projection of the past but a forecast of the future.
Techniques to rate and evaluate the property’s appeal in the market will be provided. The process is capsulized in the six step process. The concept of marketability analysis builds upon a market analysis and collectively this information and analysis is the underpinning of the highest and best use. The work necessary to generate a credible appraisal which hinges on a highest and best use is a Scope of Work decision and overtly required by Standard Rule 1-3(b). The current edition of USPAP focused on the responsibility of an appraiser to expound on the analysis. Presenting the four tests and concluding a highest and best use without further analysis is no longer adequate.
This educational program will benefit both seasoned practitioners as well as new appraisers on peer tested and industry accepted techniques and procedures when undertaking a market analysis that leads to a highest and best use conclusion. The program’s goal is achieved through interactive discussions with interspersed examples to practice and better understand core concepts. Meeting USPAP’s minimum requirements as well as expectations of regular uses of this service will be stressed. The program will offer guidance in generating meaningful market and marketability analyses with the focus on complex properties in volatile markets that are often encumbered by leases of varying durations. The goal is a well documented and supported analysis. To achieve this end, attendees are expected to be familiar with USPAP and general appraisal theory with an emphasis on the different types of market studies. This will allow key topics to be explored in greater detail. The program is flexibly designed to enhance communication styles and generate meaningful and well documented appraisals. This strengthens the industry and protects the general public.
A well written appraisal has many layers that are brought together by the six step process. It is critical that the appraiser understand industry approved methods, techniques and standards and provide a meaningful analysis to answer a client’s question and serve its intended users. This promotes and maintains a high level of public trust in appraisal practice.
Handout: Brief syllabus & student handout
Outline
10 minutes
- Introduction
- Overview of the program
10 minutes
Brief review of a market analysis that is necessary and needed in all appraisals. It is the underpinning that provides support for a highest and best use conclusion.
10 minutes
Address the difference between market studies which often employ an inferred analysis and marketability studies which build upon an inferred study but is property specific. Stress that the findings and conclusions in both studies are used in all three approaches to value and the reconciliation. Stress that in the current edition of USPAP, Standard Rule 1- 3(b) requires the appraiser to provide the analysis for a highest and best use conclusion when undertaking a market value assignment.
10 minutes
Review the factors that create value and the components necessary for an actual market.
10 minutes
Provide a brief introduction of techniques used to measure demand. This program builds on an inferred demand study but focuses on a fundamental demand analysis.
10 minutes Break
20 minutes
Define what is meant by a fundamental demand analysis, where, when and why it should be undertaken. Introduction to how its findings and conclusions are used in all three approaches to value and the reconciliation. Inferred studies rely on historic and current occurrences whereas, the fundamental study adds the dimension of forecasting based on anticipated market environments. A three tiered analysis will be introduced – pessimistic, most probable and optimistic.
20 minutes
Review the six step process that provides a rational procedure to describe and analyze the Subject, forecast demand supply factors, understand their interaction and forecast subject capture. The goal is to identify the Subject’s probable use, users and timing.
10 minutes
Step 1 assesses the property’s physical characteristics, legal controls and locational attributes. While such elements are addressed earlier in the appraisal, it is in Step 1 that such factors are analyzed in an effort to conclude if they lead to or detract from the Subject’s appeal to probable buyers and users. This sets the stage for accrued depreciation in the Cost Approach, considered among the ten elements of comparison in the Sales Comparison Approach, and reconciling and forecasting revenue, expenses and risk in the Income Capitalization Approach.
10 minutes Break
15 minutes
The presentation of Subject elements will be discussed and how the use of rating charts and comparison tables helps bring the information together and allows the reader/user to view the analysis and its conclusion on a integrated basis. The use of a density chart template will be introduced to organize the analysis.
15 minutes
Examples of rating grids should be designed by the analyst. Its purpose helps emphasize accrued depreciation and super-adequacies, recognize and evaluate buyer/user preferences, and consider risk.
10 minutes
Concepts of market standard and competitive differential will be introduced, defined and discussed. When undertaking a fundamental analysis it is essential for the analyst to understand current relationships but also anticipate future changes and how a future change may impact the Subject and its ultimate market capture.
10 minutes
Step 2 delineates the market area and its competitive market area. In an inferred study, generalities are identified and considered. In a fundamental analysis, the generalities are built upon by recognizing the unique features of the Subject but also the stationary reality of its geographic location.
10 minutes Break
10 minutes
Step 2 will address the importance of defining and understanding a property’s market area because location is important to buyers and users. Factors affecting market area boundaries will be presented and discussed. Understanding the market area leads to recognizing the competitive supply which competes with the Subject for buyers and users. The density chart template helps to organize the analysis.
15 minutes
Step 3 focuses on demand. Elements of demand are identified for various property types. These are factors that should be addressed in the appraisal report. They include the Subject’s direct competition and significant characteristics present or absent in the Subject when compared to its competing properties.
10 minutes
The concept of segmentation will be introduced and stressed. These are demand characteristics. The goal is to quantify and forecast demand. The density chart template helps to organize the analysis.
10 minutes
Step 4 seeks to quantify, evaluate and forecast supply. Areas that comprise supply will be addressed as well as the significant characteristics noted in the Subject and observed in properties it directly competes with for buyers and users. It will be stressed that the existing supply provides alternatives to the Subject and that both strengths and weaknesses should be addressed in the appraisal.
5 minutes
A county’s planning department often publishes annual reports which are a good source of what has occurred and what is in the pipe line.
10 minutes Break
10 minutes
Step 5 quantifies the relationship between supply and demand. It calculates residual demand. The term will be defined and discussed to a level where all attendees understand it. The goal is to evaluate both the existing situation between supply and demand as well as forecast anticipated changes. The density chart template helps to organize the analysis.
10 minutes
While the future is unknown, those analysts undertaking multi-year discounted cash flows must anticipate the future and not solely project the past into the future. This responsibility will be discussed and stressed. While change is inevitable, the analyst must employ recognized techniques and methods that are peer tested and approved. This includes the six step process.
10 minutes
There is a need to recognize when the market is not in balance or there is potential for imbalance in the near term or over the forecasted holding period. While equilibrium is the ideal, disequilibrium is more often encountered. How to deal with such periods will be discussed.
20 minutes
Step 6 brings the process together. It concludes with how the Subject is perceived in its market and what is its expectation of market capture both currently and forecasted over a holding period. It will be stressed that the findings and conclusions developed in a sound market and/or marketability analysis support a highest and best use and this conclusion sets the stage for the three approaches to value and the appraisal’s reconciliation.
10 minutes Question & answer period.
