9 Feet Under: Some Thoughts About Valuing Basements and Cellars

Posted by Jonathan Miller - Friday, June 22, 2012, 2:16 PM

I’m not sure what’s in the water these days but I am receiving a growing number of emails and calls about the valuation of basement space from real estate agents so I thought I collect my thoughts and cobble together a post to point people to.

First, a few definitions for the sake of clarity and in order of depth:

At Grade Ground level
English Basement Brownstones in New York City (and perhaps elsewhere) where the first floor is partially below grade on the street side of the building and opens at grade in the rear.
Basement The area underneath a building that is partly or fully below grade.
Cellar Usually the lowest part of a building. Located below an English Basement
Sub-Cellar Rare but when exists it becomes the lowest part of a building. Located below a cellar.

The valuation of below grade space, whether its a co-op, condo or house uses the same principals we use when appraising outdoor space. I see it as an amenity “add on” because not all properties have them.

When appraising, we attempt to establish the value of the above grade space on a per square foot basis. The below grade space, ie a basement or cellar, can be viewed as a portion or percentage of the value of the above grade space – “cents on the dollar”. In other words, the value of basement area is proportional to the value of the residence that sits above it. It’s worth more in a home that is of high value than a home with a lower relative value.

“Technically” Below Grade, The “English Basement”
Many of the old brownstone floorplans in NYC public record refer to the first level as the “basement” and the floor below it as the “cellar.” That is because many brownstones were constructed with a stoop from the street to the “parlor” (2nd) floor which was the entertaining space with the highest ceiling height and most decorative detail. The first floor is usually a few steps down from the sidewalk yet it opens at grade to the rear and contains the kitchen and has the same finishes and ceiling height as the upper floors of the building. Market participants see English Basements as equivalent to the above grade space and therefore it should be included in the square footage. Here’s a recent Q & A:

Question is it legal to count basement space as part of the sq. footage when selling a town home? This particular house has a 9-ft ceilinged finished basement but no windows. My buyer wants to know for resale purposes.

Answer For suburban homes, a traditional basement is below grade and would not be included in overall square footage even if it is finished and has rooms. In NYC brownstones, the same rule applies EXCEPT a basement could be included if it is a few steps below grade in the front and opens at grade in the rear (aka “English Basement”) AND the space has the same finishes, ceiling height as the floor above and includes a key room like a kitchen. If the space isn’t considered the equivalent to living area on the floor above it is NOT included in total sq ft but adjusted for separately. In the case of a brownstone with an “English Basement”, the space below is referred to as a “cellar” and is never included in the sq ft.

Condos and Co-ops With Basements
Many ground floor loft and non-loft apartments and tenement walk-ups have direct access to the building basement. I can’t tell you how many wrought iron circular stairways I walked (aka squeezed) down while appraising ground floor co-op walk-ups with below grade space during the 1980s co-op conversion boom. It was a great way for developers/sponsors to maximize the value of underutilized space, calling them “recreation rooms” even thought they are used as bedrooms. Here’s a recent Q & A:

Question I’m the sellers broker for a ground floor duplex loft space. We are currently in contract and we marketed the space as a one bed because the lower level is used as just that. The lower level is beneath ground without windows. The appraiser tells me that the C of O for the space calls for the lower level as a recreation space not a bedroom. Should this have a significant impact on the value of the apartment. Can’t is be viewed as loft space, period. Thank you for any insights you may have.

Answer Technically, the below grade area shouldn’t be called a “bedroom” and the sqft should not be included in the total sqft in an appraisal. However it contributes value and is handled as a separate line adjustment in the appraisal. The value of the space is usually something less than the ppsf of the ground floor if there was no basement. That applies to room count as well. The logic follows that if this space was a 1st and 2nd floor duplex instead of ground floor + basement, it would be worth more, everything else being equal. I’m not sure about “significant impact” but it makes it worth less than a fully above grade similar sized space. If the selling price is consistent with that relationship of competing properties, then there should be no problem with purchase price. The appraiser problem is really what you are referring to. Unfortunately, there is nothing you can do at this point since they have already inspected the property and are impossible to contact. Hopefully it will work out.

How Appraisers (Should) Handle It
As a rule, ie Fannie Mae guidelines (page 564), appraisers can’t include below grade space in the total square footage of a building (or the room count). In other words, the location, quality and configuration of the space is viewed by consumers as something less than above grade space in the same property.

Here’s Fannie Mae’s take (May 2012):

Basement Sleeze During Boom
During the housing boom when banks and mortgage brokers (well, really everyone) lost their minds, it was quite common for unethical appraisers, working in conjunction with mortgage brokers or lenders, to include basement space in the square footage because the space opened to grade in the rear of the house and was finished. A 2-story house that was 2,000 square feet when purchased, suddenly was 3,000 square feet when subsequently refinanced.

The Math (Market Derived)
Here a some possible ways (there are always exceptions and outliers) to approach the valuation of below grade space (in order of literal depth):

English Basement No adjustment – I’ve never observed an impact on a brownstone’s “English Basement” square footage – it is simply part of the gross building area of the brownstone.
Basement 50%-75% of the above grade ppsf – In our NYC experience, below grade space, whether it is within a brownstone, co-op or condo, their basement areas are often worth 50% to 75% of the above grade space on a per square foot basis. In a typical suburban detached house, the value is often worth less than that.
Cellar 50%-75% of the above grade ppsf – A NYC cellar (located below an “English Basement”) is handled same way an actual (i.e. suburban) basement is, something like 50% to 75% of the above grade space because it is basically the same thing.
Sub-Cellar 20%-35% of the above grade ppsf – A sub-cellar (usually located below the cellar located below an “English Basement”) is usually valued at 20% to 30% of the above grade space but this obviously depends on what the market data shows.

That’s all the dirt I can think of. Hope this helps clarify things.

[Terra Logic] Understanding The Value of Manhattan Apartment Outdoor Space [Matrix]
Fannie Mae Selling Gude “Appraisal Guidelines” [eFannieMae]