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Instructor Blog - Credit College - CRE

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The Appraisal Report and Approaches to Market Value


  • admin

  • 5/19/2021 9:33:05 PM

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  • Credit College - CRE
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Q: What is the difference between the attornment agreement and assignment of rents? Does a lender do both or one or the other?

A: The borrowing property owner’s assignment of rents re-directs the tenant’s rental or lease payments to the new owner (the lender) in the event of default and the resulting change in property ownership. As a result, the existing tenant’s cash flow shifts from the original borrowing owner to the new owner of the income producing property.

The attornment agreement binds the tenant to the lease contract in the event of a change in property ownership as in the case of a foreclosure. An important result from a lender’s standpoint is that by sustaining the lease obligation, the requirement is that the tenant continues making the rental or lease payments in accordance with the rental or lease agreement.

Both agreements are necessary. The attornment agreement assures that the tenant continues to be bound by the lease contract to include paying the rental or lease payment after a change in ownership. The assignment of rents assures that those payments are directed to the new owner.
 
Q: If a tenant wants to break the lease agreement because of a change in ownership as in the case of foreclosure, would the Attornment Agreement also enforce the early termination penalty clauses in the lease for breaking the lease early?

A: The attornment agreement binds the tenant to honor all provisions in the lease agreement in effect at the time of a change in ownership. With the lease being sustained in this way, any penalties in the existing lease contract for terminating a lease early would apply. The attornment simply binds the tenant to the lease agreement. The lease agreement, in turn, protects the new owner (the lender) from early termination by the tenant.

Q: What would cause a Date of Sale to be adjusted in compiling the Improved Sales Adjustments worksheet documented in the Shadelands Glen appraisal?

A: In the absence of highly unusual circumstances surrounding a comparable property’s date of sale, the sale date itself is not changed or altered by an appraiser. However, when the date of sale of a comparable property is a criterion for Improved Sales Adjustments, it can trigger an adjustment to the comparable property’s sale price. When the comparable property’s sale date is significantly earlier than the pending sale date of the subject property, the appraiser may choose to adjust the sales price of the comparable property.

This type of adjustment took place in estimating the value of Shadelands Glen. The appraiser decided to increase the sales price of Comparable Property 4 by 2.50% as one of his adjustments for that property to bring it into alignment with the subject property. The date of sale of Comparable Property 4 was in April 2018, the earliest of all four comparable properties, and roughly nine months prior to the January 2019 appraisal date. Presumably, the appraiser felt that overall market conditions had improved sufficiently in those nine months to increase the sales price of Comparable Property 4 by 2.5% as one adjustment to bring it into alignment with the subject property.

Course overview: The Appraisal Report and Approaches to Market Value

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