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Archives for September 2014

Why is a Phase I the best money you can spend ??

September 25, 2014 by Shari

Risk Management

An ASTM E1527-13 Phase I Environmental Site Assessment (Phase I) enables buyers to qualify for the innocent landowner’s defense to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) for a property purchase.  Commonly known in Michigan as “Polluter Pays,” buyers will own any historical impacts on a property once they close, unless they complete a thorough environmental due diligence starting with a Phase I.

 

A Phase I includes a review of aerial maps, chain of title, Sanborn maps, underground storage tank databases and a walk-thru of the property, but what buyers are actually purchasing is the expertise of the Environmental Professional conducting the work and their ability to find Recognized Environmental Conditions (RECs)* associated with the property.  The most valuable information comes from former employees, sellers and municipalities and the best Environmental Professionals are relentless in order to mitigate their client’s risk and expense.  In other words they basically become “detectives.”

 

Accelerates Real Estate Transactions

Buyers need to identify deal killers early on before significant capital is at risk.  For the expense of a Phase I (a few thousand dollars), buyers can screen the property for valuable site information, position for future negotiations with the seller (e.g. have the seller discount the asking price should RECs be discovered), manage any impacts that are identified to optimize the site and potentially qualify for incentives.

A Phase I provides cheap insurance if you will.

 

Conversely, ASTI is seeing more and more sellers doing Phase Is to differentiate their properties and to accelerate the real estate transaction process.  As with demolition of blighted and obsolete structures and infrastructure improvements, some sellers are procuring Phase Is to proactively streamline the property acquisition process by day lighting impacts and managing potential objections that might be raised by prospective buyers.

 

An interesting aside;  a strategy to accelerate the real estate transaction process was adopted by the Michigan Suburbs Alliance in 2003.  Their Redevelopment Ready Communities program gave municipalities the tools necessary to accelerate the zoning and approval process to position properties as “open for business.”

 

Mitigate Expense

All too often a buyer will want to skip the Phase I and proceed directly into a soil and/or groundwater investigation known as a Phase II.  We cringe when we hear, “I know it’s contaminated so just take some borings.” This can be a costly strategy particularly if there is no available history for the property which forces the environmental consultant to conduct an estimated sampling program which may not be warranted and can drive fees up unnecessarily.

Summary

It is highly recommended that a Phase I be completed as a key part of due diligence for CERCLA liability protection and to ensure your property is “a silk purse and not a pig in a poke.”

 

*So What is a REC ??

The presence, or likely presence of hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release or the material threat of a release into structures on a property or into the ground, groundwater or surface water of the property is known as a Recognized Environmental Condition. RECs are not intended to include de minims conditions that generally do not present a material threat of harm to public health or the environment and that generally would not be subject to an enforcement action if brought to the attention of regulators.

 

In laymen’s terms, RECs can be vent pipes indicating the potential presence of a storage tank, gas stations, stressed vegetation, a lumber yard with treated wood, a random soil pile of unknown origin, printing companies, auto body and repair facilities, pits, ponds and lagoons, stained soil or pavement, dry cleaners, open drums or storage containers, transformers, capacitors and waste storage areas.

 

The final determination of what is or is not a REC rests with your Environmental Professional and some are more conservative than others.

 

For more information please contact:

Mr. Joe Beutler

ASTI Environmental

660 Cascade West Parkway SE
Suite 210

Grand Rapids, MI 49546

616/540-7464

jbeutler@asti-env.com

Filed Under: Industry News

Congratulations, CAR Members Sam Cummings and Dennis VanDam

September 22, 2014 by Shari

Commercial Alliance of REALTORS members Sam Cummings and Dennis VanDam have been appointed by Governor Snyder to serve on the following state boards:

Natural Resources Trust Fund Board
Sam CUMMINGS, of Grand Rapids, was reappointed. He is principal and managing partner of CWD Real Estate Investment with more than 20 years of experience in the industry. Cummings will serve a four-year term expiring Oct. 1, 2018.

Michigan Community Corrections Board
Dennis VAN DAM, of Hudsonville, is a broker with Visser Development, where he has more than 30 years of experience and is also an Ottawa County commissioner. He represents county commissioners and replaces Jon CAMPBELL. Van Dam will serve the remainder of a four-year term expiring March 31, 2015

 

Congratulations!

Filed Under: Announcements

Commercial Real Estate State Legislative Priorities

September 12, 2014 by Shari

Members of the Commercial Alliance of REALTORS® met with Senate and House leaders on Wednesday, September 10, for COMMERCIAL REALTOR DAY.  The statewide event included members of the Commercial Board of REALTORS (based on the east side of the state), and offered the opportunity to discuss real estate issues with legislators.

Topics that were discussed:

State Budget and Business Taxes – We thank Governor Snyder and the Michigan Legislature for passing four consecutive balanced budgets ahead of schedule that promote certainty for the business community. Commercial REALTORS® know better than anyone that a structurally balanced state budget is vital, not only for the daily operation of those working within real estate, but to sell economic opportunity in Michigan’s commercial markets.  We are grateful for the elimination of the Michigan Business Tax, its 22% surcharge, and the passage of the phase out of the Personal Property Tax.  These reforms remove barriers to Michigan being a competitive state for job providers and it helps commercial REALTOR® sell Michigan opportunity to clients.

Tax Records – Preserving the affordability and quality of public tax record data. REALTORS® know better than anyone that access to basic public information relating to property tax records is vital for the daily operation of those working within the real estate industry and the public at large.  As businesses look toward starting and expanding operations in Michigan, having consistently accessible tax information for properties is key.  The association will work with the Michigan Legislature to keep the cost of tax record data reasonable.  We will help Governor Snyder and all interested parties incentivize accurate, transparent, online information that is beneficial to everyone.  Representative Bruce Rendon will be introducing legislation this week to begin this discussion.

Patent trolls – Preventing frivolous lawsuits and promoting certainty for Michigan businesses.  We support legislation that streamlines patent infringement claims to prevent costly litigation to smaller businesses.

Infrastructure and Roads – Supporting Governor Snyder and Legislative efforts to improve the health of Michigan’s roads.  The Michigan Realtors® appreciate the efforts of the Legislature to improve our infrastructure and roads, making Michigan attractive to additional economic investment.

Filed Under: Industry News

Cost versus Value – an Appraiser and Realtor Dilemma

September 11, 2014 by Shari

There has been an on-going discussion for as long as I have been in the real estate business as to why cost may not equal value. It can certainly be argued that if something costs X to build, why is in not worth X? The cost may be factual and well supported and the property owner may be willing to pay it, but the appraisal comes in lower than the cost. Why does this happen? It might be helpful to look at some definitions.
Cost is defined as: 1) The total dollar expenditure to develop an improvement(structure); applies to either reproduction of an identical improvement or replacement with a functional equivalent, not exchange (price)
2) the amount required to create, produce or obtain a property. (USPAP 2010-2011 ed.). In USPAP, the term cost is used either as a historical fact or as an appraisal estimate of current future or historic reproduction or replacement cost.
Price is defined as: The amount asked, offered, or paid for a property. Once stated, price is a fact, whether it is publicly disclosed or retained in private. Because of the financial capabilities, motivations, or special interests of a given buyer or seller, the price paid for a property may or may not have any relation to the value that might be ascribed to the property by others. (USPAP, 2010-2011 ed.)
The definition of Market Value that is used by the agencies that regulate federally insured financial institutions in the United States is: The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specific date and the passing of title from seller to buyer under all conditions whereby:
a) Buyer and seller are typically motivated;
b) Both parties are well informed or advised, acting in what they
consider their best interest;
c) A reasonable time is allowed for exposure in the open market;
d) Payment is made in terms of cash in U.S. Dollars or in terms of
financial arrangements comparable thereto; and
e) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted
by anyone associated with the sale. ( 12C.F.R. Part 34.42(g); 55 Federal
Register 34696, August 24, 1990, as amended at 57 Federal Register
12202, April 9, 1992; 59 Federal Register 29499, June 7, 1994)

Of course, there are some classic examples as to why cost does not equal value, and some of those are image or ego buildings where there are many custom design features or special use buildings that are built for a specific tenant/owner and have costs that are not able to be fully recaptured in the market by another purchaser. These would be examples of “Functional Obsolescence” and are specific to the property itself.
Often what we find is “Economic Obsolescence” present, which is not specific to the property itself, but is caused by outside influences. With residential properties, this is established primarily from a sales comparison approach, when you can purchase a relatively new existing home for less than the cost to build new. This was very apparent during the recent recession and one of the reasons new home construction suffered as much as it did. Many newer homes were foreclosed on and could be purchased for much less than the cost new.
With commercial and industrial properties, this approach is also relevant, but one method used to measure the amount of Economic Obsolescence present is to estimate the difference between what the market rent is and what the rent would need to be in order to give a reasonable rate of return to the investor. The difference between these two rental rates is the amount of Economic Obsolescence present, that will need to be deducted from the cost new to arrive at the current market value, assuming there is not also some functional obsolescence.
For example, if the going rate for a lease on a typical 20,000 S/F industrial building is $3.50 per S/F with triple net terms and the Net Operating Income, after deducting for vacancy and credit loss, management and reserves, is $60,500, and the going Cap. rate is 9%, a value of $672,222 is indicated.
Let’s say that building cost $800,000 to build. Working backwards, this would require a Net operating income of $72,000, which would require an Gross Income of approximately $83,000, which relates to a rental rate of $4.15 per S/F of building. That may not be achievable in the market. Therefore, if we divide $3.50 by $4.15 we have a difference of approx. 15.7%, say 16% which would be the amount of Economic Obsolescence present. If we then deduct the 16% from the cost to build of $800,000 we have an indicated value of $672,000.
All of this is market driven. If rents move up through supply/demand, they will be able to support a higher cost and more building may take place, which could then lead to an over-supply and the cycle begins again. Basically Economics 101.
I hope this helps and at least gives some rational to what may be the difference between the cost of a building and its market value.

By John Meyer, SRA, GAA, John Meyer Appraisal Company

Filed Under: Industry News

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