BUSN 120 American Public University Real Estate Principles Paper

  

Write a formal, 6 – 10 page APA research paper on the housing market crash and where we stand today. The paper should describe the scope and principal features of the field of study (such as Real Estate Broker, Agent, Appraiser, etc.), citing core theories and practices, and offer a similar explication of a related field. This means, explain how the perspective you chose relates to the field of Real Estate in general and the other areas within Real Estate.

Book Review
by Warren Klutz, MAI, SRA, AI-GRS
Chronicles of an Appraiser
T
he chronicles of Henry “Hank” J. Wise’s
thirty-five-year career as an appraiser and
witness are dispensed with humor and
humility in It’s Only an Opinion: An Appraiser
in Court. The author’s experiences are as varied
as his education, which includes an academic
background in political science and economics
and teaching for the Appraisal Institute, the
University of North Carolina, and West Georgia College. Wise’s participation in diverse
appraisal litigation assignments provide the
background for lessons learned throughout the
author’s professional life, which he candidly
shares with the reader.
One of the early lessons learned by the author
is from a seemingly innocuous factual error he
made when a lender client furnished an incomplete photocopy of a survey with a missing
dimension he understandably overlooked, which
resulted in a value error of less than one-half percent that was discovered during court testimony.
The error resulted in the lender client going
through the foreclosure process twice, and the
author’s errors and omissions insurance carrier
was obligated to pay back the appraisal fee and
about $25,000 in other costs to the lender client
as a settlement. Yes, it was the same lender client
that furnished the incomplete copy of the survey.
Wise uses this event to advise that appraisers seldom get into trouble for an error in judgment but
can get into serious trouble for a factual error.
The lesson conveyed is to check all the facts personally and trust no one to do your job.
Chapter 2 is devoted to the author’s journey in
becoming an appraiser, earning the Appraisal
Institute’s MAI designation in addition to two
master’s degrees, and the certified business
appraiser (CBA) certification. Information is
provided detailing a brief history of the Appraisal
Institute and the Society of Real Estate Apprais-
www.appraisalinstitute.org
It’s Only an Opinion: An Appraiser in Court
by Henry J. Wise
Published by Old Stone Press, Louisville, KY, 2019,
216 pages; $24.95 softcover, $7.99 Kindle
ers as well as their related designations. The
expert witness function is explained in Chapter
3. Chapter 4, “Appraisal Is a Stinking Business,”
follows, with a discussion about a condemnation
court case involving a rendering plant used for
converting dead horses, cows, spoiled meat, and
restaurant grease into marketable commodities
Winter 2020 • The Appraisal Journal 59
Book Review
used in various products. The courts in Georgia
allow testimony and awards for loss of business
value in condemnation cases, and the ruling on
the rendering plant case clarified Georgia law
when a condemnation results in the closing of a
business. Additional unique, instructive assignments are discussed in Chapter 5.
In Chapter 6, “Litigation Support,” the author
opines that the expert witness has about two
minutes of the jurors’ attention after they have
listened to a pronouncement of the appraiser’s
qualifications. He suggests the jurors are not
going to listen to the appraiser’s arguments after
the initial two minutes but will decide which
expert witness they like better. In order for the
expert witness to have a jury’s trust, the jury must
like the witness. Further, Wise maintains the jury
members must like the witness before they will
accept the opinions offered.
Wise stresses the importance of his professional
designations, advanced academic degrees, publishing, and election to office in professional
associations as avenues for gaining credibility
and distinguishing himself as an expert. Wise
notes that quite often, knowledgeable opposing
In Chapter 6, “Litigation Support,” the author
opines that the expert witness has about two minutes
of the jurors’ attention after they have listened to a
pronouncement of the appraiser’s qualifications.
legal counsel will attempt to dispense with the
expert voir dire (establishment of the expert’s
qualifications) if the qualifications of the opponent’s appraiser are far superior to those of their
witness. The opposing legal counsel will simply
accept the appraiser as a qualified expert witness
before the voir dire in order to prevent the jury
60 The Appraisal Journal • Winter 2020
from hearing the superior qualifications of the
other side’s expert witness.
The definition of an appraisal is discussed in
Chapter 7 along with different report types and
what should be included in the report. Form
reports are mentioned as the type usually used
by the Georgia Department of Transportation
and other state departments of transportation.
While much of the work performed for litigation
involved appraisals prepared for departments
of transportation and other condemning authorities, the author’s work is not limited to this
segment of the appraisal business. Chapter 8,
“Up to Our Ass in Alligators,” discusses one
of the most significant studies performed by
the author and his firm—appraisal of the Everglades. This assignment involved the study of
approximately 2,500 sales in the East Everglades
and Big Cypress swamp to be used by the Environment and National Resources Division
(ENRD) of the US Department of Justice in the
condemnation of more than 2,000 separate
parcels in the Everglades. A key point of this
chapter is “what to do when there is too much
data.” In this instance, the analysis incorporated
a stepwise multilinear regression model to determine the impact on value for ten to eleven
variables, such as location on a paved road,
proximity to a bridge to gain access, and date of
sale. (Interested readers can access the study at
http://bit.ly/ENRD_everglades.)
In Chapter 9, marketability and liquidity discounting are discussed, especially in relation to
family limited partnerships, limited liability
companies, limited liability partnerships, and
minority interests. The author’s skills in business
valuation expanded his client base. Various case
studies involving the appraisal of mines, minerals, caves, and wells will be of interest to most
real estate appraisers. Some appraisers’ appetites
for business valuation entry may be whetted by
the author’s brief discussion of business appraisal
techniques and opportunities.
www.appraisalinstitute.org
Book Review
Wise’s experiences with the appraisal of railroad right of ways, pipelines, fiber optics, and
community antenna television corridors are
presented. Eminent domain, inverse condem­
nation, and the cost of litigating are explained
in layman’s terms with examples that provide
recommended reading for parties embroiled in
such affairs. Chapter 13 offers advice to property
owners who may find themselves dealing with
condemnation authorities. An interesting and
frank discussion on percentages used for temporary and permanent easement values is presented,
and a somewhat unique discount adjustment is
suggested when temporary easements are based
on land rent for the time covered by the easement. The crux of most disputed condemnation
cases involves the difference in highest and best
use opinions of the property after the taking as
perceived by the opposing parties’ appraisers.
Usually, not much difference is found between
the dueling appraisal witnesses regarding the
value of the acquisition; however, the larger condemnation awards are attributable to the damages (loss in value after the taking), and several
examples demonstrate the point.
In Chapter 15, on senior living facilities, the
author examines units of comparison, differences
in level of services offered by segments of the
market, property tax considerations, and extracting business value of the going concern. Appraisers are cautioned to exclude values for intangibles,
such as membership payments, personal property,
a trained and organized workforce, and business
value that should not be considered in appraising
senior living facilities for real property tax purposes. Wise suggests clues that indicate a property has intangibles, including the number of
persons employed to operate the property, the
degree of a trained workforce required, the cost of
consumables, and the level of services offered.
The author also examines the types of benefits
and damages that affect valuations in condemnation. Special benefits and general benefits are
www.appraisalinstitute.org
explained through examples the author has used
in teaching, and these give the reader a clear
understanding of the terminology used in condemnation appraising. Consequential damages
and proximity damages are discussed in Chapter
16, along with business value loss available in
condemnation cases within some jurisdictions.
Eminent domain, inverse condem­nation, and the
cost of litigating are explained in layman’s terms
with examples that provide recommended reading
for parties embroiled in such affairs.
Here, Wise uses entertaining and interesting
scenarios to illustrate concepts. The importance
of highest and best use determination for condemnation appraising is demonstrated through
an example where a shopping center’s potential
use dramatically changed after a highway project
impacted the access to the property. The case
was settled when the property owner-developer
produced two competing shopping-center developers as witnesses to testify regarding the impact
on value caused by loss of adequate access to
the condemned property and how this resulted
in a change in highest and best use. Normally,
changes in access, such as installation of highway medians, are not compensable as they are
considered police actions for safety. However,
when the access after taking results in a change
in highest and best use, compensation may be
available to the property owner as exhibited in
the shopping center case.
Another example looks at the author’s
involvement with a court case dealing with the
Oceana Naval Air Station in Virginia Beach,
Virginia. This assignment is used to demonstrate
how he estimated loss in value to a number of
Winter 2020 • The Appraisal Journal 61
Book Review
properties in close proximity to increased Navy
flight operations and the accompanying noise
caused by low-flying fighter jets. Demonstration
of the use of Day-Night Level Decibel or DNL
measurement techniques by the author in the
Oceana Naval Air Station case should provide
appraisers with a model for estimating property
value loss in other scenarios where noise impacts
the market acceptance or dissatisfaction with
varying noise levels. Almost 3,700 sales and
resales of the same houses, before and after the
substantially increased flight operations, were
analyzed using SAS software.
For appraisal assignments involving hotels,
nursing homes, hospitals, and other property
types that have an element of intangible value,
about half of the states permit the property
owner to claim business damages in condemnation cases. Sometimes a property owner’s financial records do not reflect receipts that should
be estimated, and Wise encountered such a
case in appraising an adult entertainment store.
The author’s humorous experience during
cross-examination in that case provides an interesting conclusion to the subject of business value
loss in Chapter 18.
A broad appraiser audience will benefit from
the techniques, appraisal models, and life
encounters offered by Henry J. Wise in It’s Only
An Opinion: An Appraiser in Court. Wise examines a variety of appraisal subjects using his personal experiences, and the reader will certainly
relate to the perspectives he presents. New
appraisers will find it an excellent supplement
to their textbooks, and experienced appraisers
will receive a dose of motivation and stimulation
to review and delve deeper into the use of additional appraisal tools and methods.
About the Reviewer
Warren Klutz, MAI, SRA, AI-GRS, MS, MBA, CCIM,
is the principal in the firm Warren Klutz & Co., based in
Bristol, Tennessee.
To obtain books reviewed in The Appraisal Journal, please contact your local or online bookseller.
62 The Appraisal Journal • Winter 2020
www.appraisalinstitute.org
Reproduced with permission of copyright owner. Further reproduction
prohibited without permission.
Peer-Reviewed Article
Improving Market Analysis
in Commercial Real Estate
Appraisal Assignments
by David W. Koepke
Abstract
The purpose of this article is to present techniques to increase the reliability of commercial real estate appraisals.
It discusses methods to improve employment analysis and analysis of market supply and demand. The simple
analytical methods used result in a better understanding of the market in which a subject property exists and
competes. The discussion highlights the areas of strength or weakness and how this knowledge can be used
to make better valuation assumptions in the three approaches to value.
S
pecial servicers that handle defaulted commercial loans typically do not have portfolios full of properties operating at stabilized
occupancy rates.1 More common are properties
operating at occupancies well below such a level
and situated in markets where the forces impacting demand—population, employment, incomes,
occupancies, and absorption—are or have been
in decline. Therefore, a properly developed market analysis section in an appraisal report is critical to the accuracy of the data collected,
assumptions made in the highest and best use
section, and other sections of the valuation.
Appraisers sometimes use what could be characterized as a “Level A+” marketability study,
which is an inferred demand analysis supplemented by using a portion of the data required for
a Level B study.2 For most properties in a special
servicing portfolio, timing is a major concern.
Timing is crucial for analysis of highest and best
use and absorption of existing vacant space.
Future market strength is significant in estimates
of stabilized occupancy rate, absorption, and
rental rate growth. Despite the importance of
these issues, appraisal reports may fail to offer the
information needed to address the essential considerations. What may be lacking in the report is
key analysis of the data provided.
Fanning states in Market Analysis for Real
Estate, second edition, “The balance of supply
and demand at any given time is the key to estimating value.” 3 Without an understanding of
market supply and demand, report accuracy suffers greatly. How can an appraiser, given time and
fee constraints that do not allow for extensive
market research, improve understanding of market supply and demand, not only for himself but
the reader of the report as well?
Very basic market and submarket supply and
demand information is present in virtually all
appraisals. This information includes historical
population, current unemployment rate, surveys
of inventory, vacant space, available space, and
net absorption. Often this information is from
1. Stabilized occupancy is “an expression of the average or typical occupancy that would be expected for a property over a specified projection
period or over its economic life.” Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th ed. (Chicago: Appraisal Institute, 2015),
s.v. “stabilized occupancy,” definition 2. For a discussion of the term stabilized and its meaning in appraisal, see Stephen F. Fanning, Market
Analysis for Real Estate, 2nd ed. (Chicago: Appraisal Institute, 2014), 615–616.
2. For a comparison of the levels of marketability studies, see Table 15.6 in Appraisal Institute, The Appraisal of Real Estate, 14th ed. (Chicago:
Appraisal Institute, 2013), 315.
3. Fanning, Market Analysis for Real Estate, 2nd ed., 6.
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Winter 2019 • The Appraisal Journal 11
Peer-Reviewed Article
CoStar, REIS Inc., or one of the larger national
brokerage or valuation firms’ internal research.
Upon presenting this information, the appraiser
might stop and go no further. Yet, it is the analysis
of this information that provides the appraiser
with the needed understanding of supply and
demand, and it is what provides a clearer picture
of the market in which the subject competes.
The following pages suggest simple changes to
the way appraisers look at the market data they
are already presenting. The case study that follows shows the application of the basic analyses
found in inferred demand analyses.4 The case
study employs historical population and employment data as well as some data from an actual
appraisal report; it is used to show demographic
and supply and demand data commonly presented by appraisers.
Applying the demonstrated analysis to data
that has already been obtained will take some
additional time, but it will not involve subscribing to any additional data services. Additionally,
the data used by most appraisers is updated quarterly, so the analysis may not be unique to each
report and may be reused in subsequent reports
(with the exception of the peer group and subject
property analyses). In some cases, the data analysis can be prepared ahead and used as needed.
residential buildings, and a large amount of
vacant land suitable for additional office construction. The property is proximate to, but not
located on, a major traffic artery, and there is reasonably good access to a major freeway. Visibility
from major traffic arteries is poor. The area and
neighborhood reports show typical population,
housing, and unemployment rate information in
tabular fashion from national sources.
The appraiser in this assignment is faced with
two big questions: First, what is a reasonable stabilized occupancy that can be used to yield an “as
stabilized” market value conclusion? Second,
what is a reasonable absorption rate that can be
used to yield appropriate deductions for rent loss
as well as for the timing of new leases to adequately reflect the occurrence (timing) of tenant
improvement costs and leasing commissions? In
the actual appraisal report from which this case
study is derived, stabilized occupancy was estimated to be 85% with a sixty-month lease up
beginning in year one, with rental rates, tenant
improvements, concessions, and all other income
approach dependent assumptions based on the
broad market. The accuracy of the appraiser’s
value estimates in all approaches to value is significantly dependent upon these assumptions.
Population and Employment Analysis
Case Study Example:
Connecticut Office Market Study
The appraisal assignment is to provide both “as
is” and “as stabilized” market values5 for a fourstory office building with 162,745 square feet of
net rentable area (NRA) built in 1988 on 11.86
acres in a city in Connecticut. The property is
approximately 19.5% occupied. Two tenants
remain in occupancy, with a lease for about
12,000 square feet expiring in late 2018, and a
lease for about 19,500 square feet expiring in late
2022. Land use in the immediate area includes
similar suburban office buildings, multifamily
Basic information regarding current population
can be seen in Exhibits 1 and 2. This is historical
information available from the Census Bureau,
and it provides a picture of the county, city, and
zip code population trends. From Exhibit 1 it can
be observed that the county enjoyed steady
growth through 2010, peaked, and then retreated
slightly. Exhibit 2 shows that the population of
the city increased through 2016 and then experienced an overall decline. The graph for the subject property’s zip code reflects the same trend.6
From Exhibits 1 and 2, we can see that the overall population trend is not supportive of an indication of strong real estate demand, much less office
demand. For additional insight into real estate
4. For an in-depth look at inferred demand analysis, see Fanning, Market Analysis for Real Estate, 2nd ed.
5. The Dictionary of Real Estate Appraisal, 6th ed., defines as is market value as “The estimate of the market value of real property in its
current physical condition, use, and zoning as of the appraisal date.” The Dictionary of Real Estate Appraisal, 6th ed., states, “prospective
market value—as stabilized—reflects the property’s market value as of the time the property is projected to achieve stabilized occupancy.”
6. Due to limitations of the published information from the Census Bureau, the 2017 and 2018 zip code populations have been extrapolated
from the city population using the average percentage of the population that the zip code represented from 2010 to 2016.
12 The Appraisal Journal • Winter 2019
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Improving Market Analysis in Commercial Real Estate Appraisal Assignments
Exhibit 1 County Population
870,000
860,000
Population
850,000
840,000
830,000
820,000
810,000
800,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Year
County Population
Exhibit 2 Historical Population, City and Subject Zip Code
54,000
15,400
53,500
City Population
15,000
52,500
52,000
14,800
51,500
14,600
51,000
Zip Code Population
15,200
53,000
14,400
50,500
50,000
14,200
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year
City Population
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Zip Code Population
Winter 2019 • The Appraisal Journal 13
Peer-Reviewed Article
Exhibit 3 County Labor Force Employment
470,000
12.0
11.0
450,000
430,000
9.0
8.0
410,000
7.0
390,000
6.0
Unemployment Rate (%)
Labor Force, Employed
10.0
5.0
370,000
4.0
350,000
3.0
1
1
-0
0
1-
00
20
-0
01
20
0
1-
-0
02
20
1
1
0
1-
-0
03
20
0
1-
1
1
-0
0
1-
04
20
-0
05
20
0
1-
-0
06
20
1
1
0
1-
-0
07
20
0
1-
-0
08
20
1
1
1
0
1-
-0
09
20
0
1-
0
1-
-0
10
20
1
1
-0
0
1-
11
20
-0
12
20
0
1-
-0
13
20
1
1
0
1-
-0
14
20
0
1-
-0
15
20
1
1
0
1-
-0
16
20
0
1-
-0
17
20
1
1
0
1-
0
1-
-0
18
20
Date
County Civilian Labor Force
County Employed
demand, graphs of civilian labor force and employment (information not included in the original
appraisal) are provided in Exhibits 3 and 4.
Exhibit 3 shows that up until 2010, the county
was experiencing steady growth in the labor
force. Since that time, growth—while still positive—has been at a lower rate, and it has experienced two retreating periods and appears to have
entered a third. This basic trend is also reflected
in employment growth, and the unemployment
rate has yet to recover to 2000 levels. This information should give the appraiser some insight
into what might be reflected in sales activity,
occupancy levels, rental rates, and capitalization
and discount rates.
Employment information for the city is provided in Exhibit 4. Exhibit 4 shows an improved
County Unemployment Rate
trend in the unemployment rate, but there still is
a recent downward trend in the actual numbers
in the labor force and employed. Further, the
number of employed is still about 4,000 less than
in 2009. Employment information for the subject’s zip code is displayed in Exhibit 5.
From Exhibit 5 we can see that employment
for the subject’s more immediate area has experienced a weakening of the primary factors affecting demand for real property; the loss is not as
large as noted for the city however.7 Rather than
exhibiting a general recovery in the underpinnings of demand, we see that the improving
unemployment rate is a function of the decline
in the labor force, which is greater than the
decline in unemployment. This again is not
indicative of strong real property demand.
7. Due to limitations of the published information from the Bureau of Labor Statistics, the labor force and employment data for the subject’s
zip code for 2017 and 2018 were extrapolated from city data using the average of the city from 2010 to 2016.
14 The Appraisal Journal • Winter 2019
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Improving Market Analysis in Commercial Real Estate Appraisal Assignments
Exhibit 4 City Labor Force Employment
33,000
10.0
32,000
Labor Force, Employed
31,000
8.0
30,000
7.0
29,000
28,000
6.0
27,000
5.0
26,000
4.0
25,000
1
-0
01
8-
0
20
Unemployment Rate (%)
9.0
01
9-
0
20
1
-0
01
0-
1
20
1
-0
01
1-
1
20
1
-0
01
2-
1
20
1
-0
1
-0
01
3-
1
20
01
4-
1
20
1
-0
01
5-
1
20
1
-0
01
6-
1
20
1
-0
01
7-
1
20
1
-0
01
8-
1
20
1
-0
Date
City Civilian Labor Force
City Employed
City Unemployment Rate
Exhibit 5 Zip Code Labor Force Employment
13,000
8.0
Labor Force, Employed
7.0
6.5
12,000
6.0
11,500
5.5
5.0
11,000
4.5
4.0
10,500
Unemployment Rate (%)
7.5
12,500
3.5
10,000
3.0
2011-01-01
2012-01-01
2013-01-01
2014-01-01
2015-01-01
2016-01-01
2017-01-01
2018-01-01
Date
Zip Code Civilian Labor Force
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Zip Code Employed
Zip Code Unemployment Rate
Winter 2019 • The Appraisal Journal 15
Peer-Reviewed Article
The level of information shown in Exhibits 3,
4, and 5 was not provided in the original appraisal
report. The point is not to fault the appraiser
but to illustrate the importance of an analysis of
the information obtained as part of the basic
research and to emphasize the need to understand what lies behind the numbers. Appraisers
can obtain such information from the St. Louis
Federal Reserve (http://bit.ly/FREDhelp), the
Bureau of Labor Statistics (http://bit.ly/2s1LDSf),
the US Census Bureau (http://bit.ly/2NNf56q),
and the CCIM Institute’s Site to Do Business
(https://www.stdb.com/).8
Use of an unemployment rate as a sole indicator
of market health can lead to a false impression of
the job market, and therefore the health of the
real property market. By understanding the numbers behind the numbers, appraisers have better
insight into the job market and a more complete
picture than what is suggested from just observation of the unemployment rate. For example, a
grocery retail center recently showed declining
sales, and the decline was blamed on a newly renovated national grocery located about two miles
away. However, a review of historical population,
labor force, and employment data revealed the
county had lost population and had lost over
3,000 jobs since 2000. This indicator of market
strength was not evident by simply reviewing the
unemployment rate, but the loss of population
and employed residents had had a sizeable impact
in the county. Knowledge of this additional information affected the appraiser’s perception of the
grocer’s ability to recapture previous sales levels
and to continue to pay existing rent. As the grocery store example illustrates, additional research
and analysis are integral to understanding the factors impacting the subject property.
Market Supply and Demand Analysis
From the initial analysis of the basic demographic
information, an analysis of supply and demand for
the case study office building can begin. The supply and demand data presented in the initial
appraisal will be restated and then analyzed in the
discussion on market supply and demand analysis.9
To understand supply and demand forces, a
number of fair share analyses are presented. The
simple fair share analyses are a method of analyzing actual capture rates and are couched in the
assumption that, all things being equal, a submarket, micromarket, peer group, and subject property should be able to capture occupancy and
absorption equivalent to its percentage of the
larger market(s) in which it exists. The fair share
(FS) percentage is expressed mathematically as,
Subject Net Rentable Area (NRA)
Market NRA or Submarket NRA or Peer Group NRA
Any deviations in actual capture rate from the fair
share reflect some type of enhancement or impairment within the market (economic conditions) or
with the subject property itself (physical, functional, and/or locational conditions). The data
also can be used to develop the market share (MS)
estimate, which is expressed mathematically as,
Subject Absorption Rate
Market Absorption Rate
Market share then is divided by fair share to yield
a penetration ratio (PR = MS/FS).
Any ratio above 1 would indicate a superior
advantage for the subject. In practical application, using tables to present historical fair share
percentages adequately illustrates the subject’s
ability to perform above, at, or below the market
norms without the additional mathematical steps
of market share or penetration ratio computation. Therefore, while it would be beneficial to at
least model these additional market indicators
and become familiar with their use, they will be
omitted from this discussion.
The case study supply and demand analysis
begins with a presentation of the Greater County
office market and the West submarket data, as provided in the appraisal and shown here in Exhibits
6 and 7. In Exhibit 6, the trend in office occupancy
and absorption for the Greater County relates to
the population and employment analyses exactly
as should be anticipated from the prior demo-
8. For discussion of additional data sources, see Dan L. Swango, “Resource Center,” The Appraisal Journal (Fall 2015): 226–236; Dan L.
Swango, “Resource Center,” The Appraisal Journal (Spring 2017): 142–157; and Dan L. Swango, “Resource Center,” The Appraisal Journal
(Summer 2017): 231–241.
9. Although the published average rental rates would be part of the analysis of an office building, these were omitted to simplify the
presentation as the intent is to focus on demand analysis.
16 The Appraisal Journal • Winter 2019
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Improving Market Analysis in Commercial Real Estate Appraisal Assignments
graphic trend analysis. In Exhibit 7, the West submarket information is shown. The data seem to
indicate that the West submarket is, in some ways,
performing at an improved level in comparison to
the overall office market. This might lead an
appraiser to believe the subject’s submarket is in
some way superior to the overall market. The lack
of any direct comparison or analysis of the two
markets, however, increases the difficulty in making accurate assumptions about the market. The
fair share analysis of the two markets, shown in
Exhibit 8, helps provide that comparison.
Exhibit 6 Greater County Office Market—All Classes
Year
Inventory
Available Sq. Ft.
Actual % Available
1993
11,523,376
3,515,970
30.5
—
1994
11,392,376
2,874,678
25.2
510,292
1995
11,384,376
3,109,813
27.3
(243,135)
1996
11,498,481
3,015,023
26.2
208,895
1997
10,886,896
2,621,685
24.1
(55,969)
1998
10,838,596
1,905,927
17.6
569,992
1999
10,439,037
1,538,075
14.7
319,007
2000
11,325,245
2,075,353
18.3
554,976
2001
12,516,128
2,189,794
17.5
415,299
2002
12,781,587
1,997,560
15.6
198,666
2003
12,815,815
2,340,530
18.3
(25,242)
2004
12,824,030
2,268,336
17.7
181,675
2005
12,561,518
2,148,071
17.1
38,831
2006
12,041,126
1,855,402
15.4
281,926
2007
12,039,894
2,052,541
17.0
(159,543)
2008
11,993,137
1,886,678
15.7
88,772
2009
11,914,769
1,824,958
15.3
(17,992)
2010
12,231,337
1,972,971
16.1
168,555
2011
12,229,369
1,824,452
14.9
148,519
2012
12,385,905
1,799,553
14.5
37,699
2013
12,377,654
1,799,553
14.5
(256,785)
2014
11,550,334
1,790,302
15.5
176,566
2015
11,548,132
1,928,538
16.7
(182,641)
2016
11,669,136
2,154,123
18.5
(166,183)
2017
11,758,556
2,353,607
20.0
(154,326)
Q2 2018
11,698,767
2,353,607
20.1
(45,355)
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Net Absorption
Winter 2019 • The Appraisal Journal 17
Peer-Reviewed Article
Exhibit 7 West Office Market—All Classes
Year
Inventory
Available Sq. Ft.
Actual % Available
1993
2,066,551
771,221
37.3
—
1994
2,066,551
754,659
36.5
16,562
1995
2,066,551
735,943
35.6
18,716
1996
2,069,762
767,263
37.1
(28,109)
1997
1,643,403
777,822
47.3
30,867
1998
1,643,403
430,654
26.2
324,966
1999
1,643,403
212,367
12.9
218,287
2000
1,649,163
309,122
18.7
75,738
2001
1,674,763
311,788
18.6
16,260
2002
1,674,763
309,049
18.5
2,739
2003
1,637,698
440,021
26.9
(110,305)
2004
1,666,841
356,888
21.4
32,801
2005
1,661,841
427,865
25.7
19,747
2006
1,701,385
418,945
24.6
36,835
2007
1,734,565
360,960
20.8
57,985
2008
1,705,518
379,479
22.3
(33,746)
2009
1,705,518
313,444
18.4
66,035
2010
1,695,266
339,589
20.0
(36,397)
2011

1,693,298
347,627
20.5
(8,038)
2012
1,693,298
370,238
21.9
(22,611)
2013
1,693,298
482,735
28.5
(112,497)
2014
1,694,310
448,992
26.5
126,357
2015
1,694,310
438,826
25.9
9,673
2016
1,694,310
431,880
25.5
6,860
2017
1,688,288
519,993
30.8
(88,925)
Q2 2018
1,688,288
494,668
29.3
6,116
18 The Appraisal Journal • Winter 2019
Actual Net Absorption
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Improving Market Analysis in Commercial Real Estate Appraisal Assignments
Exhibit 8 Fair Share Comparison of West Office Market to Greater County Office Market
K
L
M
1993
11,523,376
3,515,970
30.5
—
2,066,551
17.934
771,221
630,538
37.3
30.5
—
—
1994
11,392,376
2,874,678
25.2
510,292
2,066,551
18.140
754,659
521,460
36.5
25.2
16,562
92,566
1995
11,384,376
3,109,813
27.3
(243,135)
2,066,551
18.153
735,943
564,509
35.6
27.3
18,716
(44,135)
1996
11,498,481
3,015,023
26.2
208,895
2,069,762
18.000
767,263
542,713
37.1
26.2
(28,109)
37,602
1997
10,886,896
2,621,685
24.1
(55,969)
1,643,403
15.095
777,822
395,750
47.3
24.1
30,867
(8,449)
1998
10,838,596
1,905,927
17.6
569,992
1,643,403
15.163
430,654
288,986
26.2
17.6
324,966
86,425
1999
10,439,037
1,538,075
14.7
319,007
1,643,403
15.743
212,367
242,137
12.9
14.7
218,287
50,221
2000
11,325,245
2,075,353
18.3
554,976
1,649,163
14.562
309,122
302,209
18.7
18.3
75,738
80,815
2001
12,516,128
2,189,794
17.5
415,299
1,674,763
13.381
311,788
293,013
18.6
17.5
16,260
55,570
2002
12,781,587
1,997,560
15.6
198,666
1,674,763
13.103
309,049
261,739
18.5
15.6
2,739
26,031
2003
12,815,815
2,340,530
18.3
(25,242)
1,637,698
12.779
440,021
299,090
26.9
18.3
(110,305)
(3,226)
2004
12,824,030
2,268,336
17.7
181,675
1,666,841
12.998
356,888
294,834
21.4
17.7
32,801
23,614
2005
12,561,518
2,148,071
17.1
38,831
1,661,841
13.230
427,865
284,182
25.7
17.1
19,747
5,137
2006
12,041,126
1,855,402
15.4
281,926
1,701,385
14.130
418,945
262,164
24.6
15.4
36,835
39,836
2007
12,039,894
2,052,541
17.0
(159,543)
1,734,565
14.407
360,960
295,706
20.8
17.0
57,985
(22,985)
2008
11,993,137
1,886,678
15.7
88,772
1,705,518
14.221
379,479
268,300
22.3
15.7
(33,746)
12,624
2009
11,914,769
1,824,958
15.3
(17,992)
1,705,518
14.314
313,444
261,230
18.4
15.3
66,035
(2,575)
2010
12,231,337
1,972,971
16.1
168,555
1,695,266
13.860
339,589
273,454
20.0
16.1
(36,397)
23,362
2011
12,229,369
1,824,452
14.9
148,519
1,693,298
13.846
347,627
252,617
20.5
14.9
(8,038)
20,564
2012
12,385,905
1,799,553
14.5
37,699
1,693,298
13.671
370,238
246,020
21.9
14.5
(22,611)
5,154
2013
12,377,654
1,799,553
14.5
(256,785)
1,693,298
13.680
482,735
246,184
28.5
14.5
(112,497)
(35,129)
2014
11,550,334
1,790,302
15.5
176,566
1,694,310
14.669
448,992
262,618
26.5
15.5
126,357
25,900
2015
11,548,132
1,928,538
16.7
(182,641)
1,694,310
14.672
438,826
282,950
25.9
16.7
9,673
(26,797)
2016
11,669,136
2,154,123
18.5
(166,183)
1,694,310
14.520
431,880
312,770
25.5
18.5
6,860
(24,129)
2017
11,758,556
2,353,607
20.0
(154,326)
1,688,288
14.358
519,993
337,930
30.8
20.0
(88,925)
(22,158)
Q2 2018
11,698,767
2,353,607
20.1
(45,355)
1,688,288
14.431
494,668
339,657
29.3
20.1
6,116
(6,545)
26-Period Avg. 11,854,830
2,199,888
18.6
103,700
1,740,244
14.680
459,694
322,935
26.4
18.6
25,037
15,223
12-Period Avg. 11,949,749
1,978,407
16.6
(30,226)
1,698,356
14.212
410,703
281,181
24.2
16.6
(2,432)
(4,296)
8-Period Avg.
11,902,232
2,000,467
16.8
(55,313)
1,692,425
14.219
441,870
284,454
26.1
16.8
(10,383)
(7,865)
4-Period Avg.
11,668,648
2,197,469
18.8
(137,126)
1,691,299
14.494
471,342
318,510
27.9
18.8
(16,569)
(19,876)
Fair Share
Net Absorption
(Column G * Column E)
Fair Share % Available
(Column I / Column F)
J
Actual % Available
(Column H / Column F)
I
Fair Share Available
(Column G * Column C)
H
Available Sq. Ft.
G
Fair Share Inventory (%)
(Column F / Column B)
F
Actual Net Absorption
West Office Market Fair Share of Greater County Office Market—All Classes
Inventory
E
Actual % Available
D
Available Sq. Ft.
C
Inventory
B
Year
A
Net Absorption
Greater County Office Market—All Classes
Fair Share of Inventory = West Office inventory / Greater County inventory. This percentage is used to calculate all other fair share amounts for the West Office market.
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Winter 2019 • The Appraisal Journal 19
Peer-Reviewed Article
In Exhibit 8, the fair share analysis of each
year’s data and the averages over different periods
are displayed for comparison. The results of the
data analysis suggest the following:
1. A stabilized vacancy rate for the Greater
County market appears to be around 17.5%.
The averages of the periods analyzed support this rate.
2. A stabilized vacancy rate for the West submarket appears to be around 25%. The averages of the periods analyzed support this rate.
Exhibit 9 Supply and Demand Data by Radius
from Subject Property
Year
Inventory
Available
Sq. Ft.
Actual %
Available
Actual Net
Absorption
One-Mile Radius Class A Office Market
2015
603,612
212,331
35.2
(17,514)
2016
603,612
177,417
29.4
34,914
2017
603,612
206,559
34.2
(29,142)
Q2 2018
603,612
220,471
36.5
13,912
4-Period Avg.
603,612
204,195
33.8
543
Three-Mile Radius Class A Office Market
2015
952,315
241,643
25.4
(17,514)
2016
952,315
206,729
21.7
34,914
2017
952,315
206,559
21.7
(29,142)
Q2 2018
952,315
220,471
23.2
13,912
4-Period Avg.
952,315
218,851
23.0
543
Five-Mile Radius Class A Office Market
2015
3,503,357
488,326
13.9
4,885
2016
3,503,357
425,880
12.2
62,446
2017
3,503,357
345,045
9.8
80,835
Q2 2018
3,503,357
355,225
10.1
(10,180)
4-Period Avg.
3,503,357
403,619
11.5
34,497
20 The Appraisal Journal • Winter 2019
3. The West submarket has historically underperformed the Greater County market
in occupancy. Comparing the averages
of the periods’ actual vacancy to the fair
share occupancy, the West sub­market obviously has a higher vacancy rate
4. The West submarket has historically performed at about its fair share of absorption.
Comparing the averages of the periods’
actual net absorption to the fair share of
absorption, the West submarket appears to
underperform some periods and outperform
in others. A generalization would be to
assume that the submarket will perform at
approximately its fair share.
These four points, combined with the population and employment data, suggest the West
office market is probably operating at a stabilized
level with no population or employment growth
to alter demand. It also suggests that the West
market experiences less demand in relation to
the Greater County market. These observations
from the fair share analysis should be considered
in comparable selection as well as analysis of the
subject itself.
In the case study appraisal, the appraiser provided supply and demand data relative to distance from the subject using one-, three-, and
five-mile radiuses; this information is restated in
Exhibit 9.
Note that in Exhibit 9 the micro supply and
demand data is for Class A office buildings,
which is the class the appraiser designated for the
subject. In the Greater County and West office
supply and demand data, all classes of office
buildings are presented. While there is a disconnect in this data, it is generally observed that
Class A buildings typically outperform Class B
and Class C buildings. In analyzing the appraiser’s data, therefore, one would anticipate fair
share analyses of the data to reflect a higher capture rate for Class A properties. (A penetration
ratio analysis might be added due to the difference in the data.)
The fair share analysis of the Greater County
and West office markets in comparison to the
one-mile micromarket is presented in Exhibit 10.
It appears indeed that Class A office space captures more than its fair share of absorption, based
on the comparison of actual versus fair share, and
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the most recent trend (Q2 2018) is quite encouraging. However, Class A in the immediate area
of the subject significantly underperforms the
Greater County market and underperforms the
West office submarket in regard to occupancy,
again as noted in the comparison between actual
and fair share. Further, while the Class A space
has been performing at an anticipated improved
capture rate of absorption, that rate is still
extremely low as a percentage of either total
space or available space. This further indicates
that demand for office space in the subject’s area
is weak, as initially predicted by the population
and employment analysis.
With a baseline of demand developed, the
analysis can then turn to the subject property
itself. Actual performance of the subject property
is shown in Exhibit 11. This data demonstrates
that the subject property’s performance has continued to deteriorate over time. Note that there
has been very little occurrence of net positive
leasing activity for several years.
Greater County
Office Market—All Classes
Fair Share
Net Absorption
Actual Net Absorption
Fair Share % Available
Actual % Available
Fair Share Available
Available Sq. Ft.
Fair Share Inventory
(%)
Inventory
Net Absorption
% Available
Available Sq. Ft.
Inventory
Year
Exhibit 10 Fair Share Comparison of One-Mile Class A Market to Greater County and West Office Markets
One-Mile Radius Class A Office Market
Fair Share of Greater County Office Market
2015
11,548,132
1,928,538
16.7
(182,641)
603,612
5.23
212,331
100,803
35.2
16.7
(17,514)
(9,547)
2016
11,669,136
2,154,123
18.5
(166,183)
603,612
5.17
177,417
111,427
29.4
18.5
34,914
(8,596)
2017
11,758,556
2,353,607
20.0
(154,326)
603,612
5.13
206,559
120,820
34.2
20.0
(29,142)
(7,922)
Q2 2018
11,698,767
2,353,607
20.1
(45,355)
603,612
5.16
220,471
121,437
36.5
20.1
13,912
(2,340)
4-Period Avg.
11,668,648
2,197,469
18.8
(137,126)
603,612
5.17
204,195
113,674
33.8
18.8
543
(7,093)
One-Mile Radius Class A Office Market
Fair Share of West Office Market
West Office Market—All Classes
2015
1,694,310
438,826
25.9
9,673
603,612
35.63
212,331
156,335
35.2
35.6
(17,514)
3,446
2016
1,694,310
431,880
25.5
6,860
603,612
35.63
177,417
153,861
29.4
25.5
34,914
2,444
2017
1,688,288
519,993
30.8
(88,925)
603,612
35.75
206,559
185,913
34.2
30.8
(29,142)
(31,793)
Q2 2018
1,688,288
494,668
29.3
6,116
603,612
35.75
220,471
176,858
36.5
29.3
13,912
2,187
4-Period Avg.
1,691,299
471,342
27.9
(16,569)
603,612
35.69
204,195
168,218
33.8
27.9
543
(5,913)
Fair Share of Inventory = One-Mile inventory / Greater County or West Office inventory. This percentage is used to calculate all other fair share amounts for the one-mile market.
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Winter 2019 • The Appraisal Journal 21
Peer-Reviewed Article
Exhibit 11 Subject Property Historical Vacancy and Absorption
Year
Inventory
Actual
Available Sq. Ft.
Actual
% Vacant
2007
162,745
13,020
8.00
—
2008
162,745
13,020
8.00
0
2009
162,745
13,020
8.00
0
2010
162,745
13,020
8.00
0
2011
162,745
18,390
11.30
(5,371)
2012
162,745
34,665
21.30
(16,275)
2013
162,745
42,151
25.90
(7,486)
2014
162,745
122,221
75.10
(80,071)
2015
162,745
131,172
80.60
(8,951)
2016
162,745
116,525
71.60
14,647
2017
162,745
131,172
80.60
(14,647)
Q2 2018
162,745
131,172
80.60
0
12-Period Avg.
162,745
64,962
39.92
(10,741)
8-Period Avg.
162,745
90,934
55.88
(14,769)
4-Period Avg.
162,745
127,511
78.35
(2,238)
From this point, fair share analyses of the subject in comparison to the Greater County, West,
and one-, three-, and five-mile markets can all
be developed to provide insight into how the
subject competes within each of those markets.
For brevity, the fair share analysis of the onemile micromarket is the only analysis presented.
This is likely the most important analysis, as it
best illustrates how the subject property competes against its peers. For some properties a
wider area would make sense; however, expanding the market too much can result in conclusions that are misleading.
The fair share comparison of the subject and
the one-mile market is provided in Exhibit 12.
There is 220,471 square feet of space available
in the one-mile radius micromarket as of Q2
2018. The subject’s vacant space (131,172 square
feet) represents 59.5% of this micromarket’s
available space. If we assume the subject’s available space is similar to the West office market’s
eight-period average of 26.1% (Exhibit 8), the
available square feet in the one-mile radius
would drop to 21.8%:
22 The Appraisal Journal • Winter 2019
Actual
Net Absorption
Subject available 162,745 sq. ft. × 0.261
= 42,676 – 131,172 = –88,696 sq. ft.
One-mile radius available 220,471 sq. ft.
– 88,896 sq. ft. from subject / 603,612 sq. ft.
= 21.8% availability
This rate is actually better than that of the West
office market and is indicative of the anticipated
result for Class A buildings. However, this observation also raises a question about the overall
economic viability of the subject property. A
summary of all fair share comparisons of the subject is found in Exhibit 13.
From these analyses, where the subject significantly underperforms in all comparative fair
share periods, it appears there is some physical or
economic problem with the subject. A reader of
this information would be curious as to what is
happening to this property that it is performing
so poorly. An experienced appraiser should foresee any number of topics that potentially need
to be researched and discussed in the report to
explain the cause of the abnormal performance.
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Improving Market Analysis in Commercial Real Estate Appraisal Assignments
Exhibit 12 Fair Share Comparison—Subject Property to One-Mile Micromarket
One-Mile Radius
Class A Office Market
Year
Inventory
Actual Available Sq. Ft.
Actual % Available
Actual Net Absorption
Inventory
Fair Share Inventory
(%)
Actual Available Sq. Ft.
Fair Share
Available Sq. Ft.
Actual % Available
Fair Share % Available
Actual Net Absorption
Fair Share
Net Absorption
Subject Fair Share of One-Mile Class A Office
2015
603,612
212,331
35.2
(17,514)
162,745
26.962
131,172
57,248
80.6
35.2
(8,951)
(4,722)
2016
603,612
177,417
29.4
34,914
162,745
26.962
116,525
47,835
71.6
29.4
14,647
9,413
2017
603,612
206,559
34.2
(29,142)
162,745
26.962
131,172
55,692
80.6
34.2
(14,647)
(7,857)
Q2 2018
603,612
220,471
36.5
13,912
162,745
26.962
131,172
59,443
80.6
36.5
0
3,751
4-Period Avg.
603,612
204,195
33.8
543
162,745
26.962
127,511
55,055
78.4
33.8
(2,238)
146
Exhibit 13 Fair Share Analysis Summary
Fair Share
of Greater County Market
Subject
Fair Share
%
Available
Fair Share
Net
Absorption
Fair Share
%
Available
Fair Share
Net
Absorption
Fair Share
One-Mile Radius
Year
Actual
%
Available
2007
8.0
—
17.0
(2,157)
20.8
5,440
2008
8.0
0
15.7
1,205
22.3
(3,220)
2009
8.0
0
15.3
(246)
18.4
6,301
2010
8.0
0
16.1
2,243
20.0
(3,494)
2011
11.3
(5,371)
14.9
1,976
20.5
(773)
2012
21.3
(16,275)
14.5
495
21.9
(2,173)
2013
25.9
(7,486)
14.5
(3,376)
28.5
(10,812)
2014
75.1
(80,071)
15.5
2,488
26.5
12,137
2015
80.6
(8,951)
16.7
(2,574)
25.9
929
35.2
(4,722)
2016
71.6
14,647
18.5
(2,318)
25.5
659
29.4
9,413
2017
80.6
(14,647)
20.0
(2,136)
30.8
(8,572)
34.2
(7,857)
Q2 2018
80.6
0
20.1
(631)
29.3
590
36.5
3,751
12-Period Avg.
39.9
(10,741)
16.6
(412)
24.2
(233)
8-Period Avg.
55.9
(14,769)
16.8
(756)
26.1
(998)
4-Period Avg.
78.4
(2,238)
18.8
(1,614)
27.9
(1,322)
33.8
146
www.appraisalinstitute.org
Actual
Net
Absorption
Fair Share
of West Market
Fair Share
%
Available
Fair Share
Net
Absorption
Winter 2019 • The Appraisal Journal 23
Peer-Reviewed Article
Rather than looking at bulk information—
with no immediately discernible patterns relating to the subject property—the data analysis
demonstrated in this article gives the appraiser
some direction as to the market research and
analysis that will answer the “why” questions of
the subject’s performance in relation to the market. The appraisal report can focus the descriptive and valuation discussion to answer the
“why” questions suggested by the fair share analysis. Some possible causes to investigate include
the following:
Physical Factors
Location
• Is the subject’s location less desirable?
• Has the office market shifted to another location?
• Is there enough vacant land for any large user to build their own building? (This is usually a more
desirable option among single-tenant users.)
Construction
• Is there adequate parking?
• Is the property’s age less desirable in the market?
• Is the property’s curb appeal poor?
• Are the building’s systems out of date?
• Does the property’s age give rise to any functional obsolescence? Is it curable?
Condition
• Does this property have significant deferred maintenance that needs to be addressed immediately?
• Does this property have large capital items that need to be addressed over the short term?
Economic Factors
Underlying demand based on jobs
• Are there indications that jobs will be moving into or out of the submarket or micromarket?
• Have governments enacted or proposed incentives to attract new businesses?
Changes in supply and/or location of supply
• Is there a large amount of new supply in a competing market?
• Are any demolitions planned that might reduce supply?
Management’s competency/financial condition
• Is management actively attempting to lease-up the property?10
• Can ownership/management afford to (or does it have the desire to) pay tenant improvement and
leasing commission costs? Inability or unwillingness to pay decreases leasing activity.
Rental rates
• How do the subject’s rents compare to the current market? Is its occupancy or absorption due to
above- or below-market rent?
• What are competing properties doing to induce leasing—concessions? lower rental rates? higher
tenant improvement allowances? nothing?
• What could be done at the subject property to induce leasing activity?
Absorption of vacant space
• What is a reasonable absorption rate?
• Historical averages reflect what length of time?
Valuation Factors
• What are the trends in capitalization and discount rates?
• How active is the market?
• What properties sell—only well occupied? only Class A? only credit tenant? only “value add”? only in a
specific few micromarkets? only redevelopment with a change in use?
10. The property rent roll may indicate a large amount of space is leased even when it is vacant if the tenant is still paying rent. There is little
incentive to lease space in this scenario unless the remaining term is very short.
24 The Appraisal Journal • Winter 2019
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Improving Market Analysis in Commercial Real Estate Appraisal Assignments
As can be seen, an incredible number of questions have arisen from the fair share analysis of the
market, submarket, micromarket, and subject
property. Yet, having identified how the subject
competes in its market, the appraiser can focus on
identifying which questions are applicable to the
subject property and how the answers affect the
selection of comparable data, thereby improving
appraisal report credibility. What if the market,
submarket, micromarket, and subject analyses
indicated exactly the opposite of the data presented? The comparison of the subject’s operating
performance would still have relevance, as it would
still indicate whether or not the subject is performing at its expected level. Even if the subject is performing above the expected level, the discussion
of “why” still needs to be presented, understood,
and considered in the valuation process.
At the beginning of the case study the question was posed as to acceptable estimates of
stabilized occupancy and absorption. After
reviewing these analyses, does it appear that the
appraiser’s estimate of stabilized occupancy of
85% is reasonable? The answer seems to be no.
Even correcting the one-mile market for the
subject’s atypical vacancy, the micromarket
would still be around 80% occupied. This is
assuming the subject does not have any type of
location or functional issues. The analysis shows
the West market average occupancy from 2007
to Q2 2018 was 75.8%. What about absorption?
The appraiser assumed a sixty-month absorption
rate beginning in year one. However, is there
any indication in the population, employment,
or absorption data that would lead to an assumption that significant leasing is likely to occur
over the next twelve months? Again, the answer
appears to be no. What about the estimated
sixty-month total absorption? The 26-period
actual absorption rate for the West office market
(Exhibit 8) is 1.13% of the total average inventory per year (25,037 sq. ft. net absorption/
2,199,888 sq. ft. = 1.13%); this equates to a fair
share of about 1,840 square feet per year at the
subject property. To reach 80% occupancy
(about 98,450 square feet to absorb, assuming no
additional losses) at this rate would take over
fifty years. Clearly, something must happen in
the market or must be done to property economics to induce leasing activity—sixty months does
not appear to be supportable without it.
How might these analyses influence the
appraiser’s assumptions in the income approach
and appraisal report? The valuation and the
report discussion could possibly consider the
following scenarios:
• Below-market near-term rent and
above-market concessions to bring occupancy up to a reasonable level at a more
rapid absorption rate
• No lease up in at least the first twelve
months
• Little or no near-term market rent growth
• Significantly higher tenant improvement
allowances to attract tenants and obtain
a more rapid absorption rate
• Low tenant retention rates over the near
term without concessions similar to new
leases
• A location adjustment to comparable leases
executed outside the micromarket
• A much higher equity return requirement
in development of the band of investment
technique11
• Capitalization rates from sales only located
in similarly weak markets or poorly occupied properties
• Discount rates that reflect a higher return
compared to markets performing at their
fair share or better
• A property tax appeal and its impact on
value if the assessed value is well above
the appraiser’s concluded “as is” value, and
certainly if above the appraiser’s concluded
“as stabilized” value
• Omission of the income approach from
any weighting (but not from the appraisal
entirely) in the appraisal reconciliation
Conclusion
A simple presentation of market and submarket
information from published sources is inadequate
to truly understand supply and demand forces
affecting a subject property. A more detailed anal-
11. It is not an uncommon problem for poorly occupied properties to have difficulty obtaining market financing, especially properties with
significant actual or pending vacancy or probability of near-term vacancy. This could influence the allocation of debt and equity as well as
the equity return rate in the band of investment presentation.
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Winter 2019 • The Appraisal Journal 25
Peer-Reviewed Article
ysis of population and employment along with use
of fair share tables can provide a much clearer picture of the actual competitiveness of the subject
in its market. Additional dissection of information in the market analysis section of the report
can help the appraiser identify and focus on areas
requiring additional discussion. It also will
increase the accuracy of the many assumptions
required to complete an appraisal assignment.
The briefest definition of market value is “the
present value of future benefits.” A clear under-
standing of the trends, competitiveness of the
subject, and the subject’s submarket and micromarket are key to predicting the future. Simple
graphs and tables comparing population, employment, and existing supply and demand trends
help provide this clarity. Users of appraisal services are employing these analyses as a check of
appraisers’ selection of sales, adjustments in the
sales comparison approach, and assumptions
made in the income approach. The provider of
appraisal services should use them as well.
About the Author
David W. Koepke is a due diligence specialist for the purchase of commercial real estate loans and a third-party vendor
relations manager and consultant to the C-III commercial loan special servicing group of C-III Asset Management LLC, a
vertically integrated commercial real estate firm. Koepke has a bachelor of science degree from Texas A&M University–
Kingsville, and he is an MAI candidate with the Appraisal Institute. Contact: dkoepke@c3cp.com
Additional Resources
Suggested by the Y. T. and Louise Lee Lum Library
Appraisal Institute
• Education—Advanced Market Analysis and Highest and Best Use
https://www.appraisalinstitute.org/education/
• Practice Standards and Guide Notes
http://bit.ly/2SUkPMB
• Lum Library, External Resources [Login required]
Information Files—Economic data
•
Publications
https://www.appraisalinstitute.org/store/books-and-ebooks/
• The Appraisal of Real Estate, fourteenth edition
• Market Analysis for Real Estate, second edition
26 The Appraisal Journal • Winter 2019
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Reproduced with permission of copyright owner. Further reproduction
prohibited without permission.
Peer-Reviewed Article
Timeshares, Market Value,
and the Real Estate
Appraisal Process
by Richard J. Roddewig, MAI, and Charles T. Brigden, MAI
Abstract
This article explores five key issues in timeshare appraising that may be of greater significance than in other types of
residential or resort appraisals. First and foremost is identifying the nature of the timeshare interest being appraised
and determining whether that type of interest requires an appraisal license in the state where the timeshare resort is
located. The second issue is understanding the two-tiered marketplace—the primary marketplace involving sales by
resort developers and the secondary marketplace involving resales by those who previously bought directly from the
resort. Third, the appraiser has to understand how the central components of the definition of market value affect
the comparable sale prices that should be considered given the purpose of the assignment. Fourth, appraisers must
understand how to find reliable sources of sales data and properly utilize and adjust listings when closed sale prices
are not readily available. Fifth, appraisers should be cognizant of central issues associated with the appraisal of charitable donations of timeshare interests, a frequently used technique for the disposition of difficult-to-sell timeshares.
Introduction
Although the appraisal of timeshare interests
presents unique valuation issues, the topic has
seldom been covered in the publications of the
appraisal profession.1 This article discusses the
following critical questions that arise in every
timeshare valuation assignment:
• What is the nature of the timeshare property interest being appraised?
•
What guidance for appraising timeshares
is there in the standards of practice and
published professional literature of the
appraisal profession?
• Do state laws require appraisals of timeshare
interests to only be performed by state
licensed real estate appraisers?
•
How does the definition of market value
or fair market value affect the timeshare
appraisal process and govern the selection
of the appropriate valuation method/
technique?
• How does the purpose of the assignment and
the use to which the appraisal report will
be put affect the process for selection of
comparable sales?
• What is the marketplace of buyers and sellers in which the particular timeshare interest being appraised would sell?
• Is there a difference between the market
value of a timeshare interest being offered
by the developer of a timeshare property
and the market value of a timeshare interest being offered by current timeshare
1. See, for example, Kathleen Conroy, Valuing the Timeshare Property (Chicago: American Institute of Real Estate Appraisers, 1981); Mark S.
Thompson and Eggert Dagbjartsson, “Market Discounting of Partial Ownership Interests,” The Appraisal Journal (October 1994): 535–541;
Alan J. Ziobrowski and Brigitte J. Ziobrowski, “Resort Timeshares as an Investment,” The Appraisal Journal (October 1997): 371–380; Edgar
B. Madsen, “Timeshare Tax Assessment: Price Versus Market Value,” The Appraisal Journal (January 1999): 1–6; and Atupele Powanga and
Luka Powanga, “An Economic Analysis of a Timeshare Ownership,” Journal of Retail and Leisure Property 7, no. 1 (January 2008): 69–83.
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Spring 2019 • The Appraisal Journal 95
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owners in the resale market involving timeshares at the same property?
• How does the opportunity to trade weeks or
accumulate points in a timeshare resort network affect value and the valuation process?
• How reliable are the various online sources
reporting sale prices for timeshare interests?
• Is it appropriate to consider online listings
of timeshare interests for sale, and if so,
what are the data sources for the necessary
adjustments for the difference between list
price and sale price?
• What are some of the special points to be
considered when appraising the charitable
donation of a timeshare interest?
The Timeshare Industry:
A Brief History
Over the past hundred years, the real estate
industry in the United States, in cooperation
with the legal profession, has devised a variety of
new ownership concepts in addition to fee simple title to meet the changing demands of the
marketplace for residential property. In the
1920s, cooperative apartment housing began to
be developed in New York City and in the ensuing decades the co-op concept spread slowly to a
few other cities, including Chicago and Miami.
For a variety of reasons, however, the co-op form
of ownership had only limited appeal in those
other markets. The condominium form of ownership, after the enactment of enabling legislation across the United States in the 1960s,
quickly surpassed the co-op as the preferred way
for someone living in a multiunit downtown
building to own a legal interest in their apartment. The high-rise condominium concept was
quickly extended to townhouse complexes and
later modified to apply to planned developments
and gated communities in which single-family
homes on individual lots are owned separately in
fee but the common areas surrounding the homes
and recreational and social amenities for the
homeowners are owned in common by an association of homeowners.
Another trend has been a steady rise in the
number of Americans owning second homes. In
1950, the US Census Bureau reported that only
2.3% of all housing units were in “seasonal” use,2
but by the turn of the twenty-first century,
about 6.0% of all homeowners and 8.0% of
those aged 65 to 74 owned a second home.3 Many
second-home purchasers only use their second
homes on weekends or during part of the year. In
the 1970s, the growing interest in owning a home
or condominium at a tourism destination—for
use on only a few days or during a few weeks per
year—combined with an over­
supply of unsold
condominium projects in major vacation markets
led to the establishment of a solid marketplace for
the interval ownership, or timeshare, concept.
A 1981 publication of the American Institute
of Real Estate Appraisers summarized the early
history of the timeshare concept as follows:
The application of the timesharing concept to real estate
first appeared in resort areas of Europe during the
1960s. The concept was subsequently transplanted in
the beginning of the 1970s to the United States where
timesharing was initiated at several resort properties. By
1975, the timesharing of real estate was being offered
at some 70 properties within the country. At this writing,
the number of U.S. timeshare properties approximates
300 with a corresponding sales volume for 1980 estimated at $1 billion. Although timeshare projects exist
from Maine to Hawaii, to date the largest concentrations
of properties exist in New Hampshire, South Carolina,
Florida, Texas, Colorado, Utah and Hawaii.4
During those early years, timesharing was an
unregulated industry and marketing abuses by
some marred its reputation among consumers and
caused concern among reputable developers as to
the image of the developing industry. As a result, a
group of timeshare pioneers worked to establish
a legislative framework to protect consumers while
allowing legitimate developers to prosper. The
result was the creation of the American Land
Development Association, which in 1989 became
the American Resort Development Association
(ARDA). Members approved the Model Timeshare Act in 1983, establishing a foundation of
2. US Census Bureau, “Historical Census of Housing Tables: Vacation Homes,” http://bit.ly/2EQJbmr.
3. Peter Francese, “The Coming Boom in Second-Home Ownership,” AdAge (October 1, 2001), http://bit.ly/2HW6IEF.
4. Conroy, Valuing the Timeshare Property, 1.
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Timeshares, Market Value, and the Real Estate Appraisal Process
Sales ($ billions)
Exhibit 1 US Timeshare Five-Year
Sales Trend, 2014–2018*
8.7
9.2
9.6
10.2
7.9
2014
2014
2015
2015
2016
2016
2017
2017
2018
2018
Year
*6% compounded annual growth rate
Source: ARDA/Ernst & Young
credibility from which ARDA has been able to
work with legislators and regulators on issues that
affect both developers and consumers. In the
1980s, ARDA established the Code of Ethics of
the American Resort Development Association,
which serves as an industry statement on ethical
sales practices. Every ARDA member must agree
to abide by this code as a condition of membership.
Marriott marked the entrance of major hospitality brands into the timeshare industry in 1984.
In response to consumer demand, fractional
interests and private residence clubs were introduced in the 1990s. As of 2017, there were over
1,500 timeshare resorts in the United States.5
Globally, there are more than 7,000 timeshare
resorts in 100 countries.
According to a study conducted by Ernst &
Young on behalf of the ARDA, the US timeshare industry in 2018 increased for the ninth
straight year, growing by nearly 7% from $9.6 billion in 2017 to $10.2 billion in 2018. (Exhibit 1)
The study reports that timeshare sales volume
over the 2014–2018 period increased by more
than 26%—an average of 6% annually according
to the study.6
Types of Timeshare Interests and
the Major Industry Players
In 1974, RCI7 entered the industry as the first
exchange company; in 2018 it was purchased by
the Wyndham Worldwide hotel affiliation. In
1976, Interval International, another exchange
company, was founded in Miami; it was later purchased by Marriott Vacation Group in 2018.
Timeshare exchanges added a level of flex­
ibility to timeshare vacations in terms of both
time and location. Another timeshare product
enhancement came in the form of the floating-time alternative, where owners were no
longer locked into a specific week and unit.
Next came the points program approach,
which added even more flexibility. This evolution in the timeshare industry has resulted in
the following five types of currently marketed
timeshare interests:
1. Deeded interests in specific weeks at specific
timeshare resorts
2. Deeded interests in floating weeks at specific
resorts or combination of resorts
3. Deeded interests in specific weeks or floating weeks at specific resorts or combination
of resorts that are accompanied by “points”
in specific “vacation clubs”
4. Deeded or nondeeded points-only interests
that can be utilized at various resorts in a
proprietary network or at resorts affiliated
with a specific vacation club system
5. Nondeeded right-to-use interests for a specific week or series of weeks at resorts or
network of resorts
The Appraisal Profession and
Timeshare Valuation Methods
The first mention of “timeshares” in The Appraisal
of Real Estate is found in the eighth edition,
published in 1983. It included the following
discussion:
In recent years, a new real estate partial interest has
been marketed extensively, with reasonable success.
It is called timesharing, or interval ownership, and is
a variation of the condominium. Timesharing is the
sale of limited ownership interests in residential apartments or hotel rooms. The ownership is described
as limited because a purchaser receives a deed con­
veying title to the unit for a specific part of a year. For
5. ARDA, “Timeshare Industry in U.S. Sees Eighth Straight Year of Growth” (June 12, 2018), http://bit.ly/2IgGjQH.
6. ARDA, “Timeshare Industry in U.S. Sees Ninth Straight Year of Growth” (June 4, 2019), http://bit.ly/2Id5aF0.
7. RCI, which originally stood for Resort Condominiums International, was founded as a timeshare membership exchange in Indianapolis
and opened offices in Mexico and the United Kingdom in its first few years of existence; http://bit.ly/2WmfyEo.
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Spring 2019 • The Appraisal Journal 97
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example, a person might purchase the first two weeks
in July or the last two weeks in December.
Certain timeshare projects are marketed on the basis
of the right to use a specific unit for a particular time
interval. This form of timeshare equates to a long-term
lease on, for example, Unit 3-A for the last two weeks
in December for a period of 20 years. The purchaser
does not have an equity interest in the property, but,
in effect, has a leasehold interest for a specified
time. Other characteristics are similar to interval ownership timeshares…
Timeshare owners receive a title in fee that covers exclusive use of a specific apartment for the agreed-upon
interval, along with rights to use public spaces and common areas. The title is recordable and the interest is
mortgageable.8
The 1983 edition of The Appraisal of Real Estate
said only the following about the appropriate
method for the valuation of timeshare interests:
The valuation of such partial interests is accomplished
through sales comparison. Because the practice of timesharing is relatively new, an appraiser may not find comparable sales in certain areas. However, comparables
are abundant in resort and vacation areas. An appraiser
must give appropriate weight to (1) the time required
for sellout; (2) seasonal variations that affect sales; (3)
true costs, both direct and indirect, necessary to create
a facility that will command the price envisioned; and,
most important, (4) the element of competition.9
The obvious focus of that paragraph is the valuation of timeshare interests that are being offered
by the developer of a timeshare property. Note
the phrases “time required for sellout” and “costs
… necessary to create a facility” are clearly references to the development process.
Two years prior to that first discussion of
timeshare interests in the eighth edition of The
Appraisal of Real Estate, the American Institute of
Real Estate Appraisers, the predecessor organization to the current Appraisal Institute, published
a booklet entitled Valuing the Timeshare Property.10
Like the above-quoted language, the discussion
in that publication focused entirely on the developer market and offered no meaningful methodology for determining the value of a timeshare
interest in the resale market. Instead, and because
it was written during the early years of US timeshare development, it presented a method for
calculating or supporting a retail price for a timeshare interest from the perspective of a developer
and did not include a discussion of how to analyze resales of timeshare interests.
The Appraisal of Real Estate, fourteenth edition,
includes the same basic definition of a timeshare
interest as the eighth edition, but it adds the following language to reflect the industry’s development of additional variations on the non-fee
timeshare concept:
The three types of non-fee timesharing are leasehold
interest, vacation license, and club membership. The
leasehold interest type of timesharing is essentially a
prepaid lease arrangement. A vacation license involves
the transfer of a license from the developer to the purchaser, giving the latter the right to use a given type of
unit for specified time periods over the life of the vacation license contract. In the club membership form of
ownership, timeshare patrons purchase memberships
for a specified number of years in a club that owns,
leases, or operates the timeshare property. The purchaser receives the right to use a particular type of unit
for a specified period during each year of membership.11
Surprisingly, the fourteenth edition of The
Appraisal of Real Estate does not include the language from the eighth edition related to the use of
the sales comparison approach. In fact, the fourteenth edition of The Appraisal of Real Estate says
nothing about the appropriate methods for determining the value of a timeshare interest. The
only statement related to valuation methodology
is as follows: “There are two forms of timesharing,
and it is imperative that the appraiser distinguish
between them when appraising timeshare projects or analyzing timeshare comparables.” 12
8. American Institute of Real Estate Appraisers, The Appraisal of Real Estate, 8th ed. (Chicago: AIREA, 1983), 543.
9. The Appraisal of Real Estate, 8th ed., 544.
10. Conroy, Valuing the Timeshare Property.
11. The Appraisal of Real Estate, 14th ed. (Chicago: Appraisal Institute, 2013), 86.
12. The Appraisal of Real Estate, 14th ed., 85.
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Timeshares, Market Value, and the Real Estate Appraisal Process
In addition to the above, the Appraisal Institute’s literature on valuation of timeshares
includes three articles in The Appraisal Journal in
the 1990s. However, they do not offer meaningful
guidance on the proper methodology for determining the market value of a timeshare interest
after it is sold from a developer to a consumer.13
Timeshare Appraising and
State Licensing Requirements
Are timeshare interests real or personal property? The answer to that question is important
for those involved in the appraisal of timeshares. If the timeshare interest is real rather
than personal property, then the appraiser must
check laws and regulations in the state in which
the timeshare resort is located to determine
if an appraisal license is required to value a timeshare interest.
The laws and regulations related to the timeshare industry as well as laws and regulations
related to licensing of appraisers may contain relevant provisions. As noted, some timeshares are
deeded interests and some are nondeeded interests. However, the laws and regulations related to
the timeshare industry in some states do not
clearly explain whether a timeshare interest is to
be treated as a real or personal property interest
and do not clearly specify whether the appraisal of
a timeshare interest requires a real estate appraisal
license or not. As a result, an inquiry to state
licensing agencies may be necessary before undertaking a timeshare appraisal. The licensing agencies will confirm whether a license would be
required to appraise both deeded and right-to-use
or points-based timeshare interests.
Timeshares and the Definition
of Market Value
Central to every appraisal assignment to determine timeshare market value14 or fair market
value15 are the following requirements:
• identification of the “competitive market” or
marketplace in which the real property interest would typically be marketed and sold;
• determination of the “most probable price”
that would be obtained in that particular
competitive marketplace;
• use of transaction prices between only “well
informed or well advised” 16 buyers and sellers who have “reasonable knowledge of relevant facts”; 17
• use of transaction prices in which neither
party is “under undue duress” or “compulsion to buy or sell”; 18 and
• utilization of prices that are not affected by
special financing or sales concessions.
In timeshare valuation assignments, all of these
requirements can play out in a fashion quite different from what is encountered by a typical valuation assignment of a hotel or condominium
interest in a resort location.
Identification of the Marketplace and
the Competitive Timeshare Market Segment
Generally accepted appraisal principles require a
real estate appraiser to identify the particular market in which the appraised property will sell. The
fourteenth edition of The Appraisal of Real Estate
defines a real estate market as a “group of individuals
or firms that are in contact with one another for
13. See the previously cited 1997 article by Ziobrowski and Ziobrowski, “Resort Timeshares as an Investment,” and the 1999 article by Madsen,
“Timeshare Tax Assessment,” both of which eschew analysis of resale transactions of timeshare interests. Although the 1994 article by
Thompson and Dagbjartsson,“Market Discounting of Partial Ownership Interests,” does not specifically address timeshares, it highlights the
role of liquidity and the need for an active market; it states, “For interests for which there have been numerous recent arm’s-length sales,
trading prices represent fair market values. When only limited trading occurs, care must be taken.”
14. The Appraisal of Real Estate, fourteenth edition, states that the “most widely accepted” definition of market value is as follows: “The most
probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified
property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and
seller acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.” (page 58)
15. As explained later in this article, the term fair market value is used in the Treasury regulations applied by the Internal Revenue Service and
the Department of Justice in determining the value of charitable donations.
16. These words are used in the definition of market value utilized by federally regulated financial institutions making mortgage loans; see
12 CFR §34.42. The Uniform Appraisal Standards for Federal Land Acquisitions (UASFLA) applies the term reasonably knowledgeable to
buyers and sellers; see §4.2.1 UASFLA.
17. See 12 CFR §34.42 UASFLA.
18. See 12 CFR §34.42 UASFLA.
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Spring 2019 • The Appraisal Journal 99
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the purpose of conducting real estate transactions”;
it defines a submarket as “a division of a total market that reflects the preferences of a particular set
of buyers and sellers.” The text then says the following about delineation of a market and segmentation into submarkets for the same product:
Real estate markets are divided into categories based on
property types and their appeal to different market participants. The markets for various categories of real
estate are further divided into submarkets, which correspond to the preferences of buyers and sellers.
***
A market segment is delineated by identifying the market participants likely to be interested in the subject
real estate and the type of real estate product or service
it provides. Product disaggregation includes both the
subject property and competitive and complementary
properties. Thus, market analysis combines market segmentation and product disaggregation.19
The Appraisal of Real Estate, fourteenth edition,
emphasizes that an important step in the delineation of the market is an investigation of “available substitute properties—i.e., equally desirable
properties competing with the subject in its market area, which may be local, regional, national,
or international.” (page 165)
There is a two-tiered market in the timeshare
industry: the original (primary) marketplace consisting of sales by resort developers/owners to
individual buyers, and the resale (secondary)
marketplace consisting of resales by individuals
who have purchased from the resort developers
(or in the secondary marketplace) to other individuals.20 The market participants and the process by which timeshare properties are sold are
quite different in each of those submarkets, as
discussed in more detail below.
The Treasury Regulations’ definition of fair
market value—which is important in appraisals of
charitable donations of timeshare interests—recognizes that there are various market tiers (and
prices) for the same type of real property. Those
regulations recognize that the price (and therefore the value) obtained by someone “in the ordinary course” of a real estate business can be
different than the price/value obtained by someone not in the real property business.21
The Resort Owner (Primary) Marketplace. Most
major timeshare resorts have highly organized
marketing operations consisting of sales staff and
sophisticated marketing presentations targeted
to first-time buyers (often those renting a unit)
and previous buyers of timeshare interests at the
same or an affiliated resort. As an example, consider Diamond Resorts International, which
owns 99 timeshare resorts worldwide. A 2016
New York Times article22 reported that the majority of its sales are made either to first-time buyers
who attend one of its sales presentations at one of
its resorts or to existing owners of timeshare
interests, typically when they visit a resort either
by utilizing their own week or points, or by renting the week from the owner of the timeshare
interest or from the resort itself.23 According to
the New York Times article, in November of 2015
“Diamond said that over the last 12 months it
had conducted about 221,000 tours at its 53 sales
offices around the world” and that “the company
says that 15.1 percent of tours result in sales.”
Diamond Resorts International also stated that
“60 percent of the company’s sales came from
existing customers.”
The Individual Owner Resale (Secondary) Marketplace. The timeshare primary marketplace
exists separate and apart from the marketplace
involving owners of timeshare interests seeking
to sell or dispose of their existing interests. While
some such timeshare owners may use the services
19. The Appraisal of Real Estate, 14th ed., 164.
20. It is possible to also identify at least two other strata within the secondary market: resales back to the resorts by individuals and resales
by recipients of timeshare donations. The motivations of sellers (and buyers) in each of those submarkets may be quite different from the
motivations of sellers and buyers in the primary market (resort developers) and the secondary market of individuals selling to individuals.
Another possible strata involves bulk purchases by timeshare holding companies that then rent out timeshares in a secondary rental market
not connected with the resort owner/resort management companies. In some cases, these bulk purchasers are affiliated with the resort/
owner management companies.
21. See 26 CFR 1.170A-1(b).
22. Gretchen Morgenson, “The Timeshare Hard Sell Comes Roaring Back,” New York Times, January 22, 2016, available at https://nyti.ms/2QP3sO2.
23. Most major timeshare resorts will offer an owner’s timeshare week(s) for rent to the general public and retain a portion of the rental fee in
exchange for providing that service.
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Timeshares, Market Value, and the Real Estate Appraisal Process
of the resort itself in an attempt to resell their
units,24 most individual owners of timeshare
interests do not resell their interests through the
resort’s developers/operators. Instead, they sell
directly on the internet through sites such as the
Timeshare Users Group, Craigslist, or eBay, or
through timeshare resale brokers or websites that
charge either a brokerage or advertising/sales
commission fee and have highly organized marketing operations. Sometimes the brokerage
entities are affiliated with the particular resort at
which the timeshare is located.
The prices paid in this secondary market of
individual owner resales are significantly lower
than prices paid in the primary resort developer
marketplace, as discussed in detail below.
The Most Probable Price in the
Relevant Competitive Market
Because market value is “the most probable
price” that the property will bring in its distinctive
competitive submarket of buyers and sellers, the purpose of the assignment—and the use and user of
the appraisal report—is critical to the selection
of the sales transactions and comparables to be
considered and analyzed.
If the appraisal is for a potential seller/buyer
in the individual-to-individual timeshare resale
submarket, the appropriate sales to analyze as
potential comparables should not be the sales
between a timeshare resort owner/developer/
management company and those attending
sales presentations. Instead, only after-market
sales (resales) of the timeshare interests should
be considered.
Individuals wishing to resell their timeshare
interests after purchase from the resort owner
compete with other individuals who have also
previously purchased from the resort owner—
that is the competitive marketplace for individual-to-individual transactions. An article on the
Money Talks News website said the following
about the two-tiered marketplace for timeshares:
Getting in? Easy. Getting out? Not so much.
The simple fact is that recovering even a fraction of your
money when selling a time-share can be nearly impossible. The reasons for this include an inactive secondary
market, high monthly maintenance fees, and a supply
that eclipses demand.
But when you boil it down, the real reason it’s hard to
sell a time-share is because most lose a huge chunk of
their value the instant they’re purchased.25
The Timeshare Users Group (TUG) is one of the
most important sources of information about
resales of timeshare interests. TUG has stated
the following about the difference between prices
in the primary resort owner marketplace and in
the secondary resale market:
With few exceptions, owners of timeshares purchased
from a developer can expect to take a beating on resale.
Although it’s not what you want to hear, most timeshares sell on the resale market for only 0% to 15% of
the price you likely initially paid to the developer when
you purchased. Shocked? Please believe it!
The key is to bury forever any thoughts that because
you paid (let’s say) $12,000 for your week, someone
else will be willing to pay the same amount. They
might, if you were putting on the same glitzy sales
presentation that some high-pressure salesperson did
when you bought, including giving free incentives for
attending the presentation. But you don’t have that
luxury. So do your homework and set the price at the
right level. It will sell.26
A New York Times article on the timeshare industry observed the following about the timeshare
secondary market:
Owners of timeshares in desirable resorts with unusual
attributes, like a private beach, can often sell their ownership interests on the secondary market. But in areas
24. See Resort Owners’ Coalition discussion at http://bit.ly/2KvcVZy.
25. Stacy Johnson, “Ask Stacy: How Can I Get Out of My Timeshare without Being Robbed?” Money Talks News (September 2, 2016),
http://bit.ly/2We54SB.
26. Timeshare Users Group (TUG), “How to Sell Your Timeshare,” http://bit.ly/2Z9fBAc.
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Spring 2019 • The Appraisal Journal 101
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glutted with condos for sale or rent, selling a timeshare
can be almost impossible. In these cases, timeshare
ownership can become an almost perpetual liability. …
A recent search on eBay, for example, showed more
than 700 timeshare listings for sale. Many, from Pennsylvania to Hawaii to Florida, can be purchased for $1.27
Commentary in Money Talks News puts it as
follows:
Time-shares are a product that’s often foisted on the
gullible with high-pressure sales tactics. And when it’s
time to sell, there’s often no way to do it, especially
when there’s a loan involved. Like a new car, timeshares depreciate radically the moment they’re purchased. But at least a car dealer will buy back the car at
some price. Buy a time-share at retail from a developer,
and odds are good you’ll be left twisting in the wind.28
However, some timeshare companies will offer to
buy back previously sold timeshare interests from
owners wishing to avoid the ongoing maintenance
or financing expenses associated with previously
purchased timeshare interests. As the New York
Times has reported, however, the prices paid in
the repurchase can be significantly lower than
the original purchase price and in some cases, the
timeshare interest must be relinquished with an
additional payment for maintenance costs.
This “inventory-recapture model” is industrywide and
allows companies to acquire units far more cheaply
than it costs to build properties or buy resorts. In a company presentation last November, Diamond said it typically pays $1,500 to the homeowners’ association to
take back a timeshare week. Then it sells the space for
an average of $27,434, it said.
Last year, the company introduced a “relinquishment
option” for members of its European resorts. If they
agree to pay two years of maintenance costs, they can
escape their obligations.29
The New York Times also reported that Diamond’s
average timeshare transaction price in 2015 was
$21,700, up from $12,510 in 2012. However,
our research found that the average price was
only $422 in 1,876 individual-to-individual
secondary-market resales between January 2010
and August 2016 at three Diamond Resorts affiliated timeshare properties30 in Osceola County,
Florida, near Disney World. At three Diamond
Resorts–affiliated timeshare properties31 in Orange
County, also near Disney World, the average price
was $3,039 in 285 transactions that occurred
between October of 2008 and October of 2015.
Well-Informed, Well-Advised, and
Reasonably Knowledgeable Buyers
and the Timeshare Marketplace
A number of articles in The Appraisal Journal have
discussed the history and evolution of the definition of market value over the past five decades.
Those articles include helpful explanations of the
meaning of “well informed and well advised” buyers and sellers who are “acting prudently and
knowledgeably.” Three articles in particular help
explain the amount of knowledge that the “typical” “knowledgeable” buyer is assumed to have
under the definition of market value.
Harold Albritton in 1980 pointed out that the
definition of market value accepted by appraisers in
the 1950 edition of the Appraisal Terminology and
Handbook, published by the American Institute of
Real Estate Appraisers, stated that the purchaser
only had to have “knowledge of all uses to which
it (the property) is adapted and for which it is
capable of being used.” Knowledge of all information in the marketplace was not necessary—only
knowledge of all uses for the property.32
Richard Marchitelli and Peter F. Korpacz in
1992 traced the history of the development of
the concept of market value in the appraisal
literature.33 They note the 1935 definition of
market value was “the amount expressed in terms
27. Gretchen Morgenson, “The Timeshare Hard Sell Comes Roaring Back,” New York Times, January 22, 2016, https://nyti.ms/2QP3sO2.
28. Johnson, “How Can I Get Out of My Timeshare?” Money Talks News, http://bit.ly/2We54SB.
29. Morgenson, “The Timeshare Hard Sell,” New York Times.
30. The three resorts are Barefoot in the Keys, Polynesian Isles, and Mystic Dunes.
31. The three resorts are Grand Villas, Grand Beach Resort, and Cypress Pointe.
32. Harold D. Albritton, “A Critique of the Prevailing Definition of Market Value,” The Appraisal Journal (April 1980): 199–205, 200.
33. Richard Marchitelli and Peter F. Korpacz, “Market Value: The Elusive Standard,” The Appraisal Journal (July 1992): 313–322.
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Timeshares, Market Value, and the Real Estate Appraisal Process
of money which a purchaser would be justified in
paying for a property.” 34 (Emphasis added) By
1975, however, the Institute’s definition had
incorporated the concepts of “typically motivated” buyers and sellers, “well informed or well
advised” buyers and sellers, and buyers and sellers
“acting prudently, (and) knowledgeably.” 35 However, the 1975 definition created enormous controversy by introducing the postulate that market
value was also the “highest price in terms of
money which a property will bring.” When the
savings and loan industry collapsed in the early
1980s, lawmakers in Congress blamed it in part
on inflated appraisals based on estimates of “the
highest price” for which a property should sell. In
response, the appraisal profession by 1981 and
federal regulators by 1989 had restated the definition of market value as “the most probable
price” for which the appraised property will sell
in its particular competitive market.36
Determining the “most probable price” requires
a look at actual past market behavior. Probability
is based on analysis of actual prior buy/sell decisions by actual market participants in the particular market in which the property would sell.
The need to look to actual past actions of actual
buyers in the particular market in which the
property would sell was addressed in the 1984
award-winning Appraisal Journal article by Jared
Shlaes.37 Among Shlaes’s more significant and
relevant explanations of the meaning of market
value are the following:
An appraiser’s job is to make reasonable predictions
about the price obtainable for a specific property or properties, based on patterns of behavior observed in the market, the source of information on which all such
predictions are based… This knowledge allows us to talk
about value in terms not of justice or ultimate truth but of
observable market behavior, making only one assump-
tion: that the future will continue to follow the patterns
encountered in the past, an assumption for which humans
appear to be hard wired.” (page 508, emphasis added)
Only “sufficient” knowledge—not full or complete
knowledge—to make a transactional decision a “rational” decision is expected of the typical buyer: “They
(transactions) must be made by people whose behavior
is not aberrant, who are competent to do business and
have sufficient information to behave rationally in the
market.” (page 509, emphasis added)
The fool in the market teaches us nothing about value,
only about foolishness. To be useful as market evidence
the price must reflect an exchange between two reasonably capable and informed beings. Strictly speaking, prudence is not required, at least not if the imprudent are
setting the prices … Access to relevant information,
though, is essential. (page 513, emphasis added)
USPAP Advisory Opinion 22 (AO-22), related
to the Scope of Work Rule in the Uniform Standards of Professional Appraisal Practice, says the
following about the importance of understanding
the “reasonable competition” for the property
interest being appraised:
The “knowledge” referred to in a market value definition is knowledge about the property appraised, about
the market for that property, and about alternatives
available in the marketplace that the appraiser concludes
are reasonable competition for the property appraised.
An appraiser is expected to be at least as knowledgeable as the typical market participant is about the market for the type of property to be appraised. By
completing research and verification steps while performing the assignment, the appraiser is expected to
become as knowledgeable about the subject property
and its comparables as the typical market participants.38
34. American Institute of Real Estate Appraisers, Appraisal Terminology (Chicago: American Institute of Real Estate Appraisers, 1935), 55. This
early definition was used partly in response to the lack of a market for many kinds of properties during the Great Depression. Appraisers
often had to create hypothetical situations of a market in the absence of actual market transactions.
35. American Institute of Real Estate Appraisers and Society of Real Estate Appraisers, Appraisal Terminology (Chicago: American Institute of
Real Estate Appraisers and Society of Real Estate Appraisers, 1975), 137.
36. The Appraisal of Real Estate, 8th ed.
37. Jared Shlaes, “The Market in Market Value,” The Appraisal Journal (October 1984): 494–518. Shlaes received the Robert H. Armstrong
Award for the “year’s most outstanding contribution” to The Appraisal Journal for this article.
38. Appraisal Standards Board, Advisory Opinion 22 in USPAP Advisory Opinions, 2018–2019 ed. (Washington, DC: Appraisal Foundation,
2018), Lines 121–127.
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Spring 2019 • The Appraisal Journal 103
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As discussed above, there is a well-established
secondary marketplace of timeshare interests
bought and sold by individuals who previously
purchased from the resort owners, and those
prices are significantly lower than the prices paid
in the primary marketplace of purchasers from
resort owners. This gives rise to questions about
the buyers in the primary market. Are those who
buy in the primary market paying higher prices
because they do not have reasonable knowledge
of the relevant fact that they could purchase the
same timeshare interests in the secondary market
at a fraction of the price they pay the resort
owner? Why don’t visitors to timeshare resorts
shop the secondary market rather than pay the
higher prices? Are those who buy directly from
resort developers and management companies
“well informed” and “well advised” if they pay the
higher prices? Are they acting “prudently” and
“knowledgeably” and in their “best interest”?
Many, if not most, first-time timeshare buyers
visiting a resort and attending a sales presentation
session sponsored by…
Purchase answer to see full
attachment