Health Care Real Estate Blog
From The Tenant Advisor
Coy Davidson, Sr. VP Office & Health Care Services - Colliers
Past Issues of The Commercial Valuation Advisor
by David J. Abraham, MAI SRA
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Why the Appraisal was 24% higher than the Transaction Price
Consider this, a purchaser is interested in buying a suburban full-service hotel property and enters into a purchase agreement for $16.1 million. The seller eagerly accepts this offer and the deal is set to close. Of course, the purchaser needs to finance the transaction and seeks out a CMBS transaction - an appraiser is engaged. Happily, the appraiser arrives at a market value of $20 million. Immediately, worried phone calls ensue regarding the difference between the appraised value and the purchase price. What could’ve caused such a difference? How could a seller possibly agree to a transaction where their property is undervalued by almost $4 million?! The appraiser must be way off…
Now consider the background of this property. The current seller was once a buyer, and purchased the property in late 2009 (the depth of the great recession) as part of a bulk-sale that involved $300 million of office properties and this lone hotel asset. The current seller is re-positioning the portfolio and has the opportunity to purchase a $16 million office building, which will fit nicely into the management, maintenance, location and tenant mix of their other assets. The buyer, on the other hand, is a professional hotel owner that has $260 million of full and limited-service hotel assets in the eastern part of the United States, primarily positioned in large growing suburbs of major metropolitan areas. To the buyer, the property represents a new asset that can be mined for its upside potential, given its lackluster management over the past five years. To the seller, the property is a white elephant that doesn’t fit into its current mix of assets. Relative to their full portfolio, the hotel and associated opportunity cost represents a significant disadvantage when positioned in a hotel property.
The appraiser is analyzing this hotel property (or any other property) based on the definition of market value. Inherent in this definition is the understanding of who the "typical" buyer for this property actually is. In this case, the typical buyer for properties such as the subject would be an investor – or investment group – that owned other hotels and was involved in professionally managing them for the greatest return. Therefore, the market is comprised of participants that look at hotels in-bulk based on the maximization of profits. The appraiser, will analyze the property based on the typical purchaser, or “market”. In the case of the underpriced hotel, the appraised value was further supported by a market in which new supply has been added at a rate of around 1.5% for the last five years, and the total proposed and in-the-pipeline new inventory represented less than 2% of the total market. Demand, on the other hand, even if measured only by airport enplanements and office growth, has been increasing at a rate of around 4% annually. In addition to this, the subject property had a penetration rate of around 90% in the four years while under the office REIT ownership, when historically (before purchased by the office REIT) it had been a competitor able to garner 105% of market share.
In conclusion, gaining an understanding of the background and history of a property is an integral part of the appraisers value analysis, and is critical to explaining the appraiser’s conclusions in relationship to the subject’s recent market transactions. No parcel of real estate exists in a vacuum, separated from its history and the history of the previous owners as well as the willing purchaser. An understanding of who is the likely buyer, as well as the motivations of the seller is critical to an appraiser’s conclusions.
The Case of the Overvalued Hotel
A Real Estate Appraisal Blog
David J. Abraham, MAI SRA
Valuation Services Director - Detroit
Colliers International Valuation
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