If My Grandmother Had Wheels, She'd Be a Bicycle

Rationalizing the irrational to protect our financial institutional clients

protecting the bank | if it doesn’t make sense, explain why

When you’ve worked in commercial real estate appraisal as long as we have it’s fair to say that you’ve seen your fair share of interesting deals. Argianas and Associates treat all assignments with a critical mind, attention to objectivity, and the uniqueness that they deserve.

In one such instance following the submittal of our report the bank called upon Argianas to review comments from a borrower. As is expected, when we receive comments, we take them seriously and take extra care to ensure we address them completely. Why? Because both the bank and the bank’s client deserve transparency and honesty in the process. That means responses with honesty, integrity, and an open perspective.

just because someone says it, doesn’t make it true

The property in question was a vintage office building purchased by ownership in recent years. The property was to be purchased for twice the purchase price from several years ago. As the borrower was unable or unwilling to provide complete property details, we completed our efforts assuming market-level rents. Our valuation came in below the borrower’s letter of intent for the property despite the multiple approaches we applied for this appraisal.

Following the submittal of our work to the bank, the property contact finally provided the missing property details/information. However, despite this new information, our value conclusions via sales comparison and income capitalization approaches remained unchanged.

Digging into the weeds | explaining misconceptions about real estate

When is a comparable comparable? When it is of course! When we receive comments from our client about the comparable sales we used or our reconstructed financials, the process dictates that the appraiser must take the time to review and rationalize the objections.

While this takes time, it is part of the process and maintains the public’s trust in real estate appraisal. We owe it to all stakeholders to provide that additional rationalization for why we did what we did. In the end, it ensures that the process and value conclusion can be replicated even when challenged.

In our follow-up efforts, we identified the following disconnects between what the property contact understood his property to be vs. what his property was:

Vacancy & Collection Loss Allowance

  • The borrower took exception with the vacancy and collection loss in our reconstructed income statement; however, the subject was located in a corridor that has historically experienced stabilized vacancy rates/data for the last 20 years. Due to the vintage nature of the subject, the vacancy and collection loss was market-supported. The borrower didn’t make any deductions for vacancy and collection loss allowance in his analysis.

Reported Financials

  • There was concern that income for the property was underreported. When Argianas was provided the missing details, it was revealed that the subject’s leases were written with Base Year Expense Stops (with the borrower paying the base year real estate taxes and CAM above the base year). While this is typical, the borrower was comparing rents for buildings with net leases even though his building had base year expense stop reimbursements, which of course helped explain why our pro-forma net operating income projections were different than the borrowers.

Stability of Rents & Tenants

  • Reported figures for leased square footage did not include the recently vacated space which resulted in a net occupancy figure below that reported by ownership. Additionally, when the new tenant took occupancy of the space the base year expense stop was reset resulting in a decrease in rent per square foot after base expenses were subtracted from rent.
  • The subject’s largest tenant occupied a considerable amount of space, therefore, the space user’s expense reimbursements were negligible. We also requested but were not provided details of tenant improvement costs paid by the property owner (to speak to ownership’s amortization of buildout costs).

Capitalization Rate

  • The capitalization rate selected for the property was in-line with the subject’s particulars, and the property owner was quoting cap rates from sales involving properties with national credit tenants with long-term leases. The subject’s tenants were mostly local mom & pop space users with shorter lease durations.

Comparable Sales

  • As a final point of contention, the borrower provided numerous sales to contest those used in our report. Multiple properties were offered for our review, however, there were nuances that negated their applicability. For example, some of the ‘comparables’ involved bulk portfolio pricing. With such sales, it’s not uncommon to see bulk sale prices at higher numbers than one would expect for the sale of an individual property. Put differently, sometimes bulk sale prices are established via purchase price allocations ascribed by the buyer or their accountant.


we answer to objectivity

“You meet many personalities in commercial real estate, and it can be sensitive when a borrower has a different view of their property’s fundamentals,” shared Vice President Alexander Argianas. “Regardless of all stakeholders our goal is always to include enough information in our reports to lead the reader to the conclusion before they get to the reconciliation; in other words, the value conclusion should not be a surprise.”

Ultimately, there was no cause to change our value conclusion, we remained true to the process, and the bank understood our reasoning. Are you seeking an appraisal that is objective, or looking to quantify fact from fiction? Call the team of experts at Argianas today.