The Appraisal Report and Approaches to Market Value
Q: The use of stabilized vs. historical performance figures is a constant topic of debate. Arguments for using stabilized values are best supported by the credibility of the appraiser. Yet another path forward is driven by the plans of a seasoned investor with a solid history of purchasing similar assets, making improvements, and in fact generating projected revenues. In this context, the historical performance and stabilized values simply don't support, or easily trend, to the future plan. Is it acceptable to use owner-projected performance in lieu of stabilized or historic values in these circumstances?
A: It is certainly acceptable to use historical or owner-projected performance indicators if one or the other matches what you believe will actually come to pass.
The selection of which indicators to use should be driven by what you as the lender believe is a reasonable scenario within the context of past performance, new strategies employed by management, and actual market conditions. Recognize that stabilized values are generally derived from basic calculations employing uncertain information or assumptions tempered by the appraiser’s experience and expectations. Adjust stabilized information in the appraisal when you are convinced that your adjustments better depict and will closely approximate actual results in the next and following years.
Course overview: The Appraisal Report and Approaches to Market Value