1

Defending a Commercial
Assessment Using the Three
Approaches to Value

Jim Siebers Ed Martinez

 Let’s Meet the Audience!

Show of hands:
• How many of you are involved with Assessors?
• How long have you been in the appraisal industry?
– 0-5 Years? 5-10 Years?
– 10-20 Years? 20+ Years?
• How comfortable are you
with the Cost Approach?
Income Approach?
Market Approach?
– Very, Somewhat, Not at All
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 Key Takeaways from This Presentation

• How to properly collect the data required for each

approach to value and where to find it
• How to properly apply the three approaches to
value
• How the information from
the three approaches to
value can be used to
defend an assessment

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 The Property:
10001 Innovation Drive | Milwaukee, WI
Geographic Information Systems (GIS)
Use to Verify Parking Lot Size

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 Aerial Sketch

Sketch Created Using APEX

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 Sales Comparison Approach
In the sales comparison
approach, an opinion of value of
market value is developed by
comparing properties similar to
the subject property that have
recently sold, are listed for sale,
or are under contract (i.e. for
which purchase offers and a
deposit have been recently
submitted)1.

Source: The Appraisal of Real Estate, 13th edition, page 297

 Sales Comparison Approach

Definition: The process of deriving a value indication for

a subject property by comparing similar properties that
have recently sold with the property being appraised,
identifying appropriate units of comparison, and making
adjustments to the sales prices (or unit prices, as
appropriate) of the comparable properties based on
relevant, market-derived elements of comparison.

Source: The Appraisal of Real Estate, 13th edition, page 297

 Information Sources

• Property Appraisal and Assessment Administration,

IAAO
• The Appraisal of Real Estate, 13th Edition, The
Appraisal Institute
• Wisconsin Property Assessment Manual, DOR
• Loopnet
• Xceligent
• Other Assessor’s offices
 Sales Comparison Approach – Key Points
• State constitutions, statutes, and case law define
market value standards for assessments
• In the absence of a sale of the subject, sales prices of
comparable properties are usually considered the best
evidence of market value
• Comparable properties are selected for similarity to
the subject
• Sales prices are adjusted and the market value is
estimated

Source: Property Assessment & Administration, IAAO, Page 153

 Relation to Appraisal Principles
1) Supply and Demand
2) Substitution
3) Balance
4) Externalities
5) Market Analysis and Highest and Best Use
 Required Steps – per PAAA

• Definition of the appraisal problem

• Data collection
• Analysis of the market to develop units of comparison
and select attributes for adjustment (model
specification)
• Development of reasonable adjustments (model
calibration)
• Application of the model to adjust the sales prices of
comparables to the subject property
• Analysis of the adjusted sales prices to estimate the
value of the subject property
Source: Property Assessment & Administration, IAAO, Page 153
Required Steps – Per The Appr of RE 13th Ed.

• Research the competitive

market
• Verify the information
• Select the most relevant units
of comparison
• Look for differences between
comparable sale properties and
the subject property
• Reconcile the various value
indicators
 Sales Comparison Approach – How Used

The sales comparison approach may be used to value:

1) improved properties
2) vacant land or
3) land being considered as though vacant when an
adequate supply of comparable sales is available

Source: The Appraisal of Real Estate, 13th edition, page 297

 Data Sources for Sales Data

• Public Records
• Commercially available data from electronic
reporting, multiple listing and subscription
services
• Published news articles in local newspapers or
real estate periodicals
• Interviews with market participants

Source: The Appraisal of Real Estate, 13th edition, page 303

 Recommended Adjustments

• Qualitative vs. Quantitative Adjustments

• Transactional vs. Property Adjustments

• Transactional, Physical & Economic

Adjustments – per Wisc DOR
 Adjustment Examples

• Real property rights conveyed, financing terms,

conditions of sale
• Expenditures made immediately after purchase
• Market conditions
• Location
• Physical characteristics
• Economic characteristics
• Use
• Non realty
Source: The Appraisal of Real Estate, 13th edition, page 309
Example of Comparable Grid

04/30/2014 02/01/2014 10/18/2013

Comparable Grid (continued)
Indicated Value by Comparable Sales Approach

Comparable Sales Valuation $6,152,600 $1,631,600 $4,521,000

Total Land Building

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 Reconciliation of Value by the
Comparable Sales Approach

After adjustments have been made:

• Weigh each comparable to determine its relative
contribution to the final value estimate
• Determine sales comparison value

Source: The Appraisal of Real Estate, 13th edition, page 175

 The Income Capitalization Approach

In the income capitalization

approach, an appraiser analyzes
a property’s capacity to
generate future benefits and
capitalizes the income into an
indication of present value.

Source: The Appraisal of Real Estate, 13th edition, page 445

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So everyone wants to know: What is the “Magic
Formula” for performing an Income Approach?

This segment of the class will teach you what it is.

For those that are too impatient to wait,

I will give it to you now.

But, it is like reading the last chapter of a book

before you know what exactly happened
to get you to this point.
Take PGI and subtract V&C Losses
and add miscellaneous income
to get to EGI.

Then take EGI subtract expenses

to get to NOI.

If you use IRV where NOI is I and

divide that by R you will get V.
 Or, if the previous formula was
too complicated …

Take Rent and multiply it by the GRM

to get V that way…
 So what does this all mean?

I invite you to pay attention

to the next ½ hour.

Reference Materials from: The New York State Board of Equalization & Assessment, now known as The New
York State Department of Taxation & Finance.
 Income Approach

Direct Capitalization:
The conversion of anticipated net income into
present value by dividing the income of an
appropriate rate which reflects the prevailing
relationship of net income to selling price for
comparable properties being sold in the open
market.

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The Basis for the Income Approach
 Types of Rent

• Historical Rent: Rent paid in past years

• Contract Rent: Rent presently paid by agreement
between the user (tenant) and the owner
• Economic Rent: The rent which a property should
command on the open market at any given time

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 Information Sources - Income

• Newspaper-Business Journal, Ads in local paper

• Owners / Tenants
• Income/Expense Statements
• Sales Surveys-buyers/sellers
• Revaluation Surveys

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 Types of Income

• Potential Gross Income (PGI)

• Effective Gross Income (EGI)
EGI = PGI – (Vacancy + Collection Loss)
• Miscellaneous Income
• Net Operating Income (NOI)
NOI = EGI - Expenses

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 Potential Gross Income (PGI)

A property’s economic rent at 100% occupancy

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 Effective Gross Income (EGI)

The economic rent of gross income reduced by normal

vacancies and uncollectable rents, plus other
miscellaneous (service) income.

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Miscellaneous Income (Services)

• Parking Fees
• Laundry Room Income
• Vending Machine Receipts
• Late Fees

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 Sources of Income Information

• The owner
• The property manager
• The real estate agent-M.L.S.
• Craigslist / Ads in the paper
• Tenants
• Personal property returns
• Income/expense surveys
• Internet web sites

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 Operating Expenses

• All expenses necessary to maintain the

production of income to operate a property; the
difference between Effective Gross Income and
Net Operating Income.
• Also used to denote a category of expenses that
doesn’t include fixed expense such as debt
service, depreciation allowance and reserves for
replacements.

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 Information Sources - Expenses

• Assessors
• Appraisers
• Brokers
• Dept. of Development
• Lending Institutions
• Industry & Trade Association Publications
• Sales Surveys-Buyers & Sellers
• Revaluation Surveys

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Information Sources - Income and Expense

• Loopnet / Internet Sources

• Multiple Listing Service
• Xceligent/CoStar
• Appraisal Institute/Appraisers
• Commercial Brokers

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 Proper Operating Expenses

• Heat/Utilities • Exterior Repairs

• General Maintenance • Landscape
• Insurance Maintenance
• Trash Collection • Legal & Accounting
• Hardware & Supplies • Exterminating
• Snow Removal • Management
• Advertising • Supplies
• Salaries
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 Improper Operating Expenses

• Debt Service
• Owner’s Business Expense
• Income Taxes
• Additions to Buildings

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 Operating Expenses to Watch

These operating expenses need to be treated differently

than the previous allowable expenses.

• Reserve for Replacements

• Property Taxes
 Reserves for Replacements

A Provision for recapturing future depreciation by

making an allowance in the annual operating
statement to provide for the replacement of
shorter lived items necessary in order to sustain a
projected level of income (e.g. Roof replacement,
refrigerators, carpeting, furnaces, air conditioning
units).

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 Property Taxes

• Assessors, unlike most owners, should not

consider real estate taxes to be allowable
expenses and do not usually subtract from the
NOI, even though taxes are a valid charge against
the property.
• The assessor or appraiser working with an
assessor should instead account for property tax
expense by including a percentage for property
taxes in the capitalization rate.

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 Net Operating Income (NOI)

Annual net income after operating expenses are

subtracted from effective gross income. Does not
include payments for principal or interest.

NOI
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Tips for Accurate Income/Expense Statements

• Get last three years statements

• Watch reserves for replacements when including
in expenses
• Check that capital expenditures are not included
in expenses
• Ask for an itemized list of expenses in generic
categories such as general maintenance

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 Capitalization Rate

Any rate used to capitalize Types include:

income. It reflects the • Overall Cap rate
relationship between income • Summation-
and value. It is calculated by mortgage equity
the IRV formula, in which:

• Rate = Income / Value

• Value = Income/Rate
• Income = Rate/Value

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 Information Sources - Cap Rates

• Your or other Assessor’s Database

• Appraisers/Appraisals
• Appraisal Institute - National Market Indicators
• Price Waterhouse Coopers Korpacz –
Real Estate Investor Survey
• Insurance Companies
• Bank/Lending Institutions
• Brokers- CARW

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Industry Trade Associations & Publications
• Natl. Assoc. of Industrial & Office Prop.(naiop.org)
• International Association of Assessing Officers
• Urban Land Institute (uli.org)
• Building Owners & Managers Assoc. (boma.org)
• Institute of Real Estate Management (irem.org)
• International Council of Shopping Centers (icsc.org)
• Society of Industrial & Office Realtors (sior.com)
• Appraisal Institute

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Search Tips
Keep Digging!
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 IRV

• Income: Either Gross, Effective Gross,

or Net Operating Income (NOI)
• Rate: Either Gross Income Multiplier
(GIM) or Capitalization Rate
• Value: Market Value

I
R V

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Income Valuation $6,189,000 $1,631,600
$4,557,400 Total
Land Building
 Sale/Lease Internet Sites
• www.loopnet.com
• www.carw.com
• www.mlswis.com

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 Key Economic Indicators & Industry
Links to Real Estate

• John Lohre www.JWLohreLLC.com

• Pension Real Estate
Association –
Links to many major real estate
associations
• www.prea.org
• Bloomberg Investments
• www.bloomberg.com
• Bond Rates, Key Economic Indicators
• www.smartmoney.com 63
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 Miscellaneous Tips
• Know your Industry/Market
– What vacancy & collection loss are you using?
– What expense rates are you using?
– Is Property management a necessary expense?
• Being Uniform doesn’t mean being the same
• Develop Your Contacts-i.e. appraisers, banks, other
assessors, brokers
• Does your sales-validation process include inspections?
• Commercial neighborhoods not always bounded
geographically
• Work smarter not just harder - get involved
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 Commercial Lease Terms Defined
• Full Service Gross: (Owner) pays all operating
expenses including janitorial
• Gross Lease: The landlord (owner) pays all
operating expenses except janitorial
• Modified Gross Lease: Same as above with a tax
stop clause for example
• Net Lease: The tenant (lessee) pays all taxes,
insurance, and operating expenses (longer term)
• Percentage Lease: Usually a fixed minimum rent
plus a % rent based on gross sales in excess of a
certain amount
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 Space Measurements

• Gross Area: Measured from outside wall to

outside wall.
• Usable Area (Leasable Space): Area occupied
exclusively for individual tenants. Public area like
restrooms and lobbies are excluded
• Rentable Area: Includes usable area plus
restrooms, lobbies, public corridors and utility
closets but excludes stairs, elevators & air shafts.
• Load Factor: Rentable Area/Usable Area

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 Gross Income Multipliers (GIM) - Outline

• Defined
• Assumptions
• Benefits
• Limitations
• Converting GIM’s Into Income Approach & Vice Versa

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 Gross Income Multiplier Defined

• The relationship (ratio) between sales price (value)

and either Potential Gross Income or Effective Gross
Income in income producing properties. It is used to
estimate value as a multiple of annual gross income
• These relationships are not to be intermingled
i.e. consistency in the method of computing

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 Gross Income Multiplier Assumptions

• Highest & Best Use of the property will not change

over the remaining economic life
• Property will remain rented at a constant rate with
no unusual vacancy factor
• Comparable market influences
• Competitive with one another
• Have similar operating expenses & utility.
• Need a sufficient amount of sales and rental data on
the same property type

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 Gross Income Multiplier Benefits

• Relatively easy to use

– Divide sale price by annual income
• Works well in an area of homogeneous properties
• Provides easy to analyze benchmarks

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 Gross Income Multiplier Limitations

Does not allow for:

• Abnormal physical deterioration
• Unusual operating expenses
• Significant differences in age & zoning
• Makes no adjustments for land area and time

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 Valuing using GIM’s

• Market Rent

• Market GIM

• Market Value

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 Cost Approach
In the cost approach, a property
is valued based on a comparison
with the cost to build a new or
substitute property. The cost
estimate is adjusted for the
depreciation evident in the
existing property.

Source: The Appraisal of Real Estate, 13th edition, page 377

 Cost Approach

Definition: A set of procedures through which a value

indication is derived for the fee simple interest in a
property by estimating the current cost to construct a
reproduction of (or replacement for) the existing
structure, including an entrepreneurial incentive;
deducting depreciation from the total cost; and adding
the estimated land value. Adjustments may then be
made to the indicated fee simple value of the subject
property to reflect the value of the property interest
being appraised.

Source: The Appraisal of Real Estate, 13th edition, page 378

Cost Service Tools

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 Cost Methodologies

Calculator “Square Foot Method”

• Average square meter, square foot and cubic foot costs
for typical buildings.
• Costs are classified by class and quality of construction.

Segregated Cost Method

• Separate consideration to all of the major construction
assemblies or systems (groups of components) of a
building
• Vary the quality level for individual components

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 What the Costs Contain

Calculator “Square Foot Method”

• Final Cost to the owner from the general contractor

• Represents completely finished buildings in the
physical or hard construction sense, but not
necessarily completely finished projects
• All material and labor costs include all appropriate
local, state and federal sales or GST taxes, etc.

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 How is data collected?
Marshall & Swift
• Monitors the factors that drive the cost of construction
and tracks actual building component
• Gathers wage rates from all major labor trades and
studies crew sizes and productivity rates for the
personnel necessary for the installation of
components.
• We collect specific costs for labor, materials and
installed components, establishing the “Building by
Component” and “Building by Example” methods of
estimating.
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 Who uses it?
• Independent appraisers
• Insurance companies
• Savings and loan associations
• Banks
• Architects,
• Developers,
• Accountants
• Assessors
• Engineers

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 Determining Occupancy
Office buildings are buildings designed for general
commercial occupancy, including administrative
government and corporate uses, and are normally
subdivided into relatively small units.

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 Determining Building Class
Class C buildings are characterized by masonry or
reinforced concrete (including tilt-up) construction.

The walls may be load-bearing, i.e., supporting roof

and upper floor loads, or non-bearing with open
concrete, steel, or wood columns, bents or arches
supporting the load.

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 Determining Quality
• First, to judge quality, it is suggested that the
cheapness or expensiveness of materials or
components be observed.
• Second, see if workmanship is at a level normal
to the type and grade of material used.
• Third, and most important, the user should
consider the amount of the various components
typical for its class.

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 Determining Quality con’t
• Observe cheapness or expensiveness of materials

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 Determining Quality con’t
• See if workmanship is at a level normal to the type
and grade of material used.

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 Determining Quality con’t
User should consider the amount of the various
components typical for its class.

• Look for more than the average number of windows, doors and
plumbing fixtures

• An asphalt cover on a hip roof with large overhangs may be

average, however the extra quantity causes the building to have
above average cost.

• Overall size and complexity of the structure should be

considered. Small structures will tend to have higher unit costs
than very large ones.

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 Selecting Initial Cost
• Define your class of construction followed by quality. Use
descriptions to best identify ingredients used in your structure.

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 Refinements
• These adjustments influence costs to a greater degree than
other components.

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 Refinements con’t
• Current Cost Multiplier adjusts for time

• Local Cost Multiplier adjusts for local labor and materials.

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 Depreciation
• Select the correct Life expectancy followed by the effective
Age to determine Physical depreciation of structure

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 Simple Calculator Report
• Basic entries used to generate cost report

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 Detailed Segregated Cost Report
• Detailed entries used to generate cost report

Cost Valuation $6,781,400 $1,631,600

$5,149,800 Total Land
Building

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 Final Reconciliation of Values
Reexamine the entire appraisal process to confirm:
• Consistent application of the approaches applies
(comparables used and adjustments calculated)
• The highest & best use conclusions upon which each
approach is based
• The defined value estimated in each approach
• The real property interests being appraised
 Final Reconciliation of Values

• Appraisal judgment and proper application of

appraisal techniques are critical in final reconciliation
• The appraiser uses reconciliation criteria to form a
meaningful, defensible, and credible final value
conclusion. The appropriateness of the approaches,
the accuracy of the data and calculations, and the
quantity of sufficiency of the evidence presented are
considered relative to the specific appraisal problem.
 Reconciliation Criteria

• Reexamine appraisal for accuracy, consistency and

logic
• Appraiser relies on professional experience and
judgment
• Appraiser weighs the relative significance, applicability
and defensibility of each value indication
• Relies most heavily on most appropriate approach
 Reconciliation Criteria - continued

Reconciliation requires:
• Appraisal judgment
• Careful, logical analysis of procedures that lead to
each valuation indication
• Appropriateness, accuracy and quantity of evidence
are the criteria with which an appraiser forms a
meaningful, defensible final opinion of value.
 Final Defense of Value
• All approaches can be explained to Board, Court etc.
after reconciliation
– Preparing the reconciliation will be helpful when
summarizing the case
• All three approaches may or may not point to the
same value conclusion
– If they do not, the appraiser should explain why
and present additional evidence if applicable
 Value Conclusion
Comparable Sales Valuation $6,152,600 $1,631,600 $4,521,000
Total Land Building
Income Valuation $6,189,000 $1,631,600 $4,557,400
Total Land Building
Cost Valuation $6,781,400 $1,631,600 $5,149,800
Total Land Building

1/1/14 Value
 Board of Review

• If you have “open book” keep it open as long as

possible
• Talk to Other Assessors during preparation
• 70.47 (7) (af) Use it to your advantage
• Prepare each case as if you’re going to Circuit
Court
• Markarian Hierarchy - Wisconsin
• Go with confidence - you usually have better
information than the objector
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Contact Information – Jim Siebers

• james.siebers@msbinfo.com
• (262) 780-3212
• Former Assessor – 29 years of
experience
Contact Information – Ed Martinez

• emartinez@marshallswift.com
• (213) 253-4844
• Marshall & Swift employee 19
years experience
Thanks for participating!