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Accounting Real Estate Tax Policy

How to Tackle Out of the Ordinary Valuations

This article explores two unique and complex appraisals and how finding and managing the right data was key to determining value.

Your clients rely on you as a trusted financial advisor for their real estate transactions whether it be a single site or multi-property portfolio. But what do you do when the property does not fit into a nice neat bucket?  You need a real estate appraiser you can trust to diligently work through every detail of the property.

Collaborating with an experienced valuation professional allows you to fully understand every aspect of the property so you can confidently guide your clients in real-estate decisions.

Having an experienced and responsive appraiser on your team, one who thrives on a unique challenge, is crucial. 

Appraising a Downtown Suburban Historic Development

This complex appraisal came in the form of a quaint downtown suburban historic development. The property was the first “planned shopping center” in the United States and is listed in the National Register of Historic Places. The development was bursting with character but had one feature that was less than charming when it came to a standard appraisal process.

With a unique property comes unique features, and this one was no different – a unique mixed-use property sat nestled in a Central Business District. Seven buildings were sited on three separate parcels of land, separated by a central park area with a fountain owned by the City.

At the time of its construction, this property was truly a one-of-a-kind development. It was so unique that there was not one single comparable property. While this increased the appeal of the property to tenants, it posed challenges when it came to appraisal. Finding and managing data would be the key to success in this appraisal.

Income Capitalization Approach

The Income Capitalization Approach, a key method for valuing income-producing properties of all types was used to tackle the appraisal. Tenant contract terms and conditions were collected including details as to individual lease agreements and historical operating expense statements. Market demand was measured, and findings formulated and entered into the Argus Discounted Cash Flow Model.

From there, a microanalysis of the property was completed, resulting in income and expenses projections for the property over the next five years. Finally, Cash Flow Before Debt Service (EBITA) was processed into a single present value figure.

Although initially considered a challenge, a step-by-step / multi-tiered process simplified the effort. The process began with obtaining public records and identifying additional sources, interviewing market buyers and sellers, analyzing demographic information and analyzing the market.

Multi-building, Multi-property Special Purpose Valuation on the Illinois River

A family-owned river barge facility needed a valuation and report completed on a multi-building and multi-property assignment spanning shores with rights out into the waterway/channel. Understanding the complexity of valuating a barge facility that operated as a major thoroughfare for commerce and shipping was imperative. Being knowledgeable about Inland Waterway Systems, infrastructure costs and logistics involved with the facility would be key to knowing the true value of the property.

Identify Nuances

The first step in the process was to understand the nuances of the property, the history, and where the ownership saw the property’s future. The barging facility’s operations commenced nearly 100 years ago.  Now in its fourth generation, the facility offers stevedoring services (loading and unloading services). No one understands a property like this as well as its owners. Knowing the right questions to ask was key to uncovering the information necessary to provide the most reliable and data supported appraisal. 

A value was assigned to the main barge facility along with fleet rights associated with other properties sited along the Illinois River’s embankments, with ultimate passage to the Mississippi River down to the Port of New Orleans and then, the Gulf of Mexico.

Location, location, location.

The subject’s location near rail, interstate, and waterways, coupled with infrastructure improvements at exactly the right points in the waterway, were of great strategic importance. The valuation expert needed the knowledge and experience to identify all property rights involved. There was a lot more to the project than simply estimating land value and adding the cost of support structures and improvements, as infrastructure costs can easily run in the millions of dollars.

The barge facility was sited along the shorelines of the river’s deepest portion (depth estimated at 30 feet), with the impact of strong current to be considered. Critically important was that barges must have sufficient clearance (barge draft) to leave the dock after they have been loaded and weighted down with materials.

Additional costly infrastructure ensured that the facility would sustain operations for many years including reinforced cement seawalls, rail lines that connect to major arterial rail shipping, cement/steel dolphins, industrial-scale grain elevators and storage bins, and underground conveyor belts that delivered product to the barges. Further strategic considerations included a property’s proximity to docking and turnaround basins.

Also valued was a fleet facility (these properties/property rights are usually proximal to barge loading sites, with river rights and mooring dolphins and allow for staging).

Need for Specific and Specialized Knowledge

An appraiser that understands barge and fleet operations was imperative. As is so often the case in valuation sciences, one cannot provide competent services if an understanding of industry operations is lacking. In addition to the value the property possesses, the business or going concern operation also feathers into the value.

Barge property appraisal reports need to tell the real story – for example waterway proximity to river locks, river terminals, and port facilities, consideration of weather risks, pipeline access, etc. Knowing to ask these types of questions is crucial in giving a credible evaluation of a barge facility. And because owners for this property type integrate the real estate with complex services/operations, they needed an expert team.

Barriers of Successful Valuations

The first barrier to successfully completing the appraisal was knowing how all the pieces of the properties connected and served each other. The cost approach valuation method was used for this property which is a great method to use for special purpose properties, like a barge facility, that typically have limited available comparable sales data.

This approach is often used by a potential owner in deciding whether to commit capital to build a new property versus acquiring an existing facility. Because of laws and regulations including Army Corp of Engineers Waterway Restrictions (permits, licenses, and easements), there is much more to these valuations than meets the eye. The cost approach valuation method can help buyers and sellers understand the value in an older barge facility like this one.

The Devil is in the Details

Accounting firms and CPAs are sticklers for the details. So, when you work with an appraiser it is important to find one that is just as focused on the details and discovering as much data as possible to provide the most favorable appraisal possible.

Be sure to visit our specific pages for real estate and tax policy related articles.

About the Author: Charles G. Argians

Charles G. Argianas is founder and President of Argianas & Associates. With more than 30 years of experience working in the appraisal and consulting business, Charles is regarded by his peers and clients alike as an industry leader. His company has completed more than $15 billion (and counting) in real estate valuations for commercial, special purpose, and residential properties across the country.

Charles is the name you will hear time and time again as the one to call for the challenging projects like the large institutional, industrial, and special purpose properties ranging from power plants to salt mines, from performing arts centers to movie complexes, from campgrounds to college campuses.

Some of his most notable projects include iconic buildings such as: Water Tower Place Shopping Mall located on the famous Magnificent Mile in Chicago, the ABC Headquarters Tower which is home to the American Broadcasting Company in New York City, City National Plaza known for being an Art-deco twin tower complex located in downtown Los Angeles, and the Wanamaker Building which was home to the first department store in Philadelphia.

You can read more about Argianas & Associates and the projects their valuations at www.argianas.com

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