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Posts Tagged ‘Commercial Grade’

[Commercial Grade] Analyze This

April 6, 2006 | 12:01 am |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John opted to talk about how the proliferation of data has changed the appraiser’s role to an analyst (without the couch).

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursday afternoons, one of the smartest guys I know. …Jonathan Miller

In their book Freakonomics, Steven Levitt and Stephen Dubner point out that Information is the currency of the internetit has vastly shrunk the gap between the experts and the public.

This is true. Information is everywhere, and the appraiser’s challenge has evolved into sifting through the volumes of data available on the Internet, rather than finding it in the first place. The Internet has enabled the solo practitioner working out of his/her kitchen the same tools as the national firms with extensive market research departments.

With information so readily available, clients no longer put much of a premium on it. The usual retort to my (incessant) complaints about the declining fees for our services is that, with the Internet, we can research markets much quicker and, therefore, deliver an appraisal more efficiently.

However, I have never viewed my role so much as a purveyor of market data, but rather as a real estate analyst. In the valuation class I teach at NYU, I introduce the above pie chart to illustrate what appraisal typically consists of.

Yes, you need good market data to begin with, but that’s only a portion of what we do. The real value of a good appraiser is the proper analysis of that data and effectively communicating the property’s risk factors to the client.


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[Commercial Grade] Slicing Up The Pie Really Fast

March 31, 2006 | 9:45 am |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John talks about how the compensation formula is, in all reality, based on speed. Thats why the post is a day late – he had to get a flurry of assignments out the door yesterday.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, when its not raining, one of the smartest guys I know. …Jonathan Miller

Imagine hospital interns getting paid a percentage of the fee for every patient they sawor associates in major law firms paid 40% of their gross billings. Take it a step further, your mail deliverer getting a cut of the postage for every house he delivers toengineers getting paid based on how quickly they can churn out new plans and designs.

The “fee split” compensation system has become the standard for commercial appraisers. Under this system, professional staff appraisers are paid a percentage of their gross billings, usually on a sliding scale.the higher the gross billings, the higher the compensation. So there is a built-in incentive to do it fastoften very fast. As a result, there are junior appraisers able to churn out appraisal reports who earn in the six figures; the irony is that the professional who is thorough, cautious and methodical in his research and analysis will put out a much better appraisal, and serve his clients interests far better, but earn only a fraction of what the appraiser that churns out reports earns.

According to Salary.com, the median salary plus bonus of the commercial real estate appraiser is $76,237, nationally. Though they call this a “salary” to my knowledge, the only appraisers (excluding trainees) paid on a salary basis work for financial institutions or accounting firms.

Salesman, of course, get paid on a commission basis, and partners and principals of professional practices will benefit from both their professional and entrepreneurial skills in running their practices. But I can think of no other “profession” in which junior or mid-level staff are paid essentially on a commission basis.

In other professions associates are paid based on their experience and knowledge, often with a merit bonus at year end. In the appraisal business, a 3-year associate could earn well in excess of the 20-year professional.

What’s wrong with this picture?

[More importantly, where’s my slice? -ed]


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[Commercial Grade] An Education of Value

March 23, 2006 | 1:51 pm |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John talks about the declining enrollment in valuation studies.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays, one of the smartest guys I know. …Jonathan Miller

The New York University Real Estate Institute is one of the most respected institutions of real estate education in the country. In fact, its reach is international, attracting students from throughout the world. It has a distinguished faculty (of which I’m proud to say I’m a member) largely drawn from the professional real estate community.

The graduate program offers a MS in Real Estate with a concentration in either Finance & Investment, Asset Management, International Real Estate, Development or Valuation. For the past four years that I’ve been an adjunct there, the number of students graduating with a concentration in Valuation has been about one or two a semester, out of hundreds of graduates. The vast majority tend to concentrate in Finance & Investment or Development.

The Real Estate Valuation and Analysis class that I teach is a required class for all students, regardless of concentration; administration’s philosophy (and rightly so) is that anyone in any real estate discipline should have a basic understanding of valuation. Last spring I also taught an advanced Seminar in Valuation class, which is a requirement for those concentrating in Valuation. I had four students in that class which was apparently large relative to past classes; at times this class has run with only one student.

The University is now considering the elimination of Valuation as a concentration option. To me this is perhaps one of the clearest signs that the new generation of bright motivated young real estate professionals do not see a career in valuation as worth pursuing.


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[Commercial Grade] The Appraiser Brain Drain

March 9, 2006 | 9:10 am |

[Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John talks about the brain drain of appraiser talent the current licensing law and lender-appraiser client structure has created.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on a good day, one of the smartest guys I know. …Jonathan Miller]

In Jonathan’s recent post When Machines Take Over The Earth, Or At Least The Appraisals [Soapbox], he talks about some of the problems facing our profession today. I would like to expand on one of themthe drain of competent appraisers to other fields.

Having been doing this a long, longlong time, I look at where some of my colleagues are nowthose that started with me as an appraiser trainee in the mid-80’s. I am happy to say that many of them are doing very well – but most are not in this profession anymore.

A large number of my fellow appraisers were ripe for the picking when the CMBS field opened up, and scores of bright, talented and hard-working professionals left appraisal to find fortune with the investment banks. And fortune they found! The appraisal profession cannot compete with the compensation of the investment banks (no, I’m not going to start complaining about fees again, but clearly that is part of the problem). And all they needed was their honed appraisal skills and a strong work ethic. Other appraisers have “crossed the line” to become lenders and underwriters, asset managers and development.

Fee shops and institutions alike complain about the difficulty in finding talented, competent appraisers to employ. Many trainees that I interview talk about getting into the field because they understand it’s good training to become a developer, or a good stepping stone for the investment banks. (I applaud their honesty, but I am only going to take the time to train someone if I think that they’re going to stick around a little while.)

Though I don’t know the statistics, I understand that membership in the Appraisal Institute is down dramatically over the past decade. The challenge for the professsion is to retain the appraiser before he/she goes off to greener pastures.


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[Commercial Grade] Construction Costs Expand, Profit Margins Contract

March 2, 2006 | 11:30 am |

This is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he has the potential to be one of the smartest guys I know._ Jonathan Miller

Construction costs in New York are going up [BW], way up quickly. We appraise numerous proposed projects throughout the City and the cost increases reflected by the developers’ submitted construction budgets are quite striking. A year or two ago, most cost budgets for “luxury” condominium buildings generally ranged from $350 to $450 per square foot, so far this year all of the cost budgets that we’ve reviewed have been over $500 per square foot.

There are a number of reasons for the cost increases, but the increased cost of steel production and simple demand for contractors’ services [philly.com] in the wake of so much development are the main reasons. (Why this hasn’t translated into a similar increase in appraisal fees is beyond me, and a topic for a future post.)

Add that to a land cost of $400 per square foot and now you’ve got a minimal average sellout of $1,200 per square foot to make the project worthwhile. In fact, the sellout often needs to exceed $1,300 psf, since the cost budget and land costs are based on gross building area, while the sellout is based on net saleable area, typically a 10% to 15% difference.

Clearly, with the rise in development costs, the developers’ profit margins are getting squeezed, and there is little room for erroron either the development side or the sales side.

I suspect that in this type of environment, we’ll begin to see some projects falternot for lack of demand, but for inexperience on the part of the developer to manage costs and bring the project in on budget. The cost increases will serve to thin out the development field, and send the new generation of developers back to their day jobs.


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[Commercial Grade] Takes A Break

February 16, 2006 | 8:33 am |

Our Commercial Grade author John Cicero will be back in full form on March 2nd, assuming he doesn’t break something on the ski slopes. Lets hope he doesn’t.


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[Commercial Grade] Korea Considers Revising Its Appraisal System: The US Is No Role Model

February 9, 2006 | 3:51 pm |

Webmaster’s Note: This is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is usually one of the smartest guys I know. Jonathan Miller

Yesterday I had the honor of meeting with a high level delegation from Korea. This group was comprised of economists, professors, government officials and appraisers, and was sent by the government to study the appraisal fee system in the United States. In Korea, the government is the largest buyer of appraisal services, and fees are set by the government. Fee are, essentially, a function of the property value. Low fee assignments are very low and are done by the appraisal firms at a loss, with the high fee assignment making up for them. Overall, though, the appraisal community seems satisfied with the current system and their compensation.

However, the government is contemplating a free market, competitive fee system such as we have here in the US. We discussed our system at great length. They were fascinated by the email solicitations for fee quotes, and the on-line bidding systems such as RIMS used by most major lending institutions. They were equally intrigued that, in the vast majority of cases, the appraisal assignment is awarded to those that are, in essence, simply willing to sell their labor cheapest; not who is the most qualified for the assignment. (In an attempt to be fair, I explained that many lenders would not agree with this point. The typical lender response is that “all appraisers on my approved list are competent, so why not select the lowest fee.”)

In Korea, the appraisal profession is highly respected, and they explained that the process of entering the profession is not unlike becoming a lawyer. So when I showed the group that New York State licenses appraisers together with beauticians and notary publics, they seemed genuinely horrified. (I couldn’t understand what they were saying amongst themselves, but it sounded heated!)

The delegation will be reporting their recommendations to their government later this year. I am anxious to see if they can come up with a better system than we have in the US.


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[Commercial Grade] Misleading Appraisal Reports Can Be Treated As The Cost Of Doing Business

February 2, 2006 | 12:59 pm |

This week John Cicero discusses the disparity in fines for administrative versus substantive violations.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is one of the smartest guys I know (although I don’t get out much).

-Jonathan Miller

I just received my January 2006 newsletter from the New York Department of State [DOS]. Picture of Pataki on the cover…very official looking. Nearly two pages of the four page newsletter are devoted to identifying individuals who have violated some aspect of our state licensing laws. Here are some of the punishments meted out:

  • A fine of $750 for failure to provide evidence of continuing education
  • A fine of $300 for failure to confirm a closed sale
  • A fine of $750 for failure to retain appraisal reports and supporting data within the prescribed period
  • A fine of $750 for communicating a misleading appraisal report
  • A fine of $1,500 for failing to exercise “reasonable due diligence in developing and preparing an appraisal report”

I find this fascinating
To the DOS, a violation is a violationdoesn’t seem to matter that one violation refers to maintaining files and another refers to doing low quality work and violating ethics rules. In my opinion, the fines for the first three examples above are probably appropriate, a fine to remind the culprit that as professionals we are obligated to abide by a certain administrative process…

But $750 for communicating a misleading appraisal? That’s about as serious as it gets in our business. And while there are appraisers who do get their licenses/certifications revoked, I suspect that the vast majority of the violators get off with a similar fine.

I know that the State Licensing board works hard but has limited resources at their disposal, in fact, I believe that funds generated from license fees are earmarked to other areas of the government. I think the licensing laws needs to be revised to separate out the adminstrative errors from those that are negligent.

Of course, I don’t know the details of these violations and I am not singling out New York as I can imagine there are other states with the same license law structure, however…

…to the impartial observer the implementation of the licensing law seems to give a green light to those appraisers that would bend their ethics when convenient. Chances are, if caught, they’ll only have to pay a fine that amounts to nothing more than a fraction of the appraisal fee…its simply the cost of doing business.


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[Commercial Grade] The Best And The Brightest

January 26, 2006 | 5:15 pm |

Webmaster’s Note: This is the first in a series of weekly posts by John Cicero, MAI who will provide commentary on issues affecting real estate appraisers, with specific focus on commercial valuation.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is one of the smartest guys I know.

We commercial guys like to think that we are sophisticated financial analystswe analyze real estate as an investment vehicle, similar to an equities or bond analyst would. We spend our days cash flow modeling wirh Argus and Dyna. Our training includes advanced capitalization theory, in order to understand the relationship between cap rates and yield rates, and we need to understand theories that, frankly, we’ll never use again (remember the J-factor and the Hoskold premise?). We analyze assets worth hundreds of millions of dollars, and advise clients on managing their real estate risk.

That’s why it’s particularly disheartening that, in these days of appraiser licensing, the state doesn’t quite know what to do with us. I recently went onto the New York State Department of Licensing web site and found the other “professions” that are similarly licensed:

Don’t get me wrong. I have the utmost respect for notary publics, cosmetologists and telemarketers, all of whom work hard to make an honest living. But if this is the public perception of the commercial real estate appraiser, I suspect that attracting bright and talented people to this field will continue to be a struggle.


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