An Overview of Real Estate and the Appraisal Report

Presented by:

Guy J. Bourgeois, AACI P.App,

Bourgeois and Company Ltd.

Providing Real Estate Appraisal and Advisory Services to Western Canada since 1979.

Full service firm with Accredited professionals specializing in various sectors of the Real Estate market.

We have 3 divisions – Residential – Commercial and Research

What we do

Providing professional advice to every category of property owner.

Industrial, Commercial, Single and Multi Family Residential.

Appraisals, Feasibility Studies, Litigation Support, Subdivision analysis and IFRS valuations

Research Studies for Real Estate Developers, Municipal Governments and Institutional (REIT) Investors.

Lease rate studies and arbitration

Our research Division

We Research, study, and analyze individual market segments in Multi-family Residential, Commercial and Industrial Sectors in Edmonton since 1994.

We have a subscription to all real estate transactions in Alberta from land titles office.

The Edmonton and region investment, industrial, commercial and land sales transactions are extracted and researched and input into our data base.

All sales are inspected and photographed and vendors, buyers and realtors are contacted for details regarding each sale.

Any questions about us??????

Appraisal Institute of Canada

Founded in 1938 The Appraisal Institute of Canada grants the

two most prestigious real property valuation designations in Canada.

Canadian Residential Appraiser (CRA) Accredited Appraiser Canadian Institute (AACI)

AIC Designations

The AACI designation is the higher of the two designations, requiring completion of additional curriculum and experience requirements. Generally takes 5 years to achieve designation.

Many individuals begin by earning their CRA designation which takes about 2 ½ years to achieve

Difference between the CRA and AACI

CRA – Valuation of undeveloped residential dwelling sites and dwellings containing up to 4 self contained housing units.

AACI – Qualified to appraise and advise on all categories of Real Property.

Want to know more-go to “www.aicanada.ca”

Types of Property - Residential

Property zoning in Edmonton includes: RPL,- (smaller lots , affordable housing) RF 1,(this is the more traditional size lot you find in older

neighborhoods) RF 3 (allows development, duplexes and 4 plex properties.)

RF4, RF5, RF6, RA7, RA8, RA9 – (permits higher density residential development. Includes senior’s projects,

apartments and residential condos).

Zoning and the planning process

Zoning for residential is very specific and determines not only the number of units permitted but also the parking requirements and requirements for recreational amenities.

Planners determine where each zoning class will be located long before the subdivision is developed.

Types of Property - Commercial

Commercial property zoning in Edmonton includes:

CNC, CSC, CB1, CB2, CHY, CO. Allows development for retail / service stores,

shopping malls, office buildings, restaurants, and all types of commercial uses.

Again zoning dictates parking and building size requirements.

Types of Property - Industrial

Property zoning includes: IB, IM, IH

Permitted uses include Warehouses, Distribution Centers, Manufacturing Facilities, Shops, Service Bays, Equipment Storage, and Special Use Buildings.

Also includes office uses within an industrial area.

Each category is located with regard to neighboring uses..

What is a Cap Rate???

Who Knows how to calculate a cap rate???

What is involved in calculating a cap rate?

What information do we need?

Is a Cap rate a “rate of return”??

Or is it just a relationship?

A cap rate is only a rate of return if the property is purchased on an all cash basis – That’s one reason all appraisals are completed on the assumption that no financing exists.

Yet the influence of financing is always inherent in the cap rate correlation, because financing is an important part of the decision to buy and all comparables used to calculate a cap rate are bought conditional on financing.

How do we calculate a Cap Rate?

From comparables sales data……

Cap Rate = Net Income Sale Price

Pitfalls- Actual rent vs. market rent- Actual expenses vs. market expenses- Actual vacancy vs. market vacancy- How good is your data??

Multi family Residential Market Analysis

Recent analysis of apartment building sales in Edmonton.

Property zoned RA7, RA8, or RA9

Analysis consisted of more than 400 apartment building sales between June 2005 and June 2010.

Apartment Building Analysis

Current market data indicates an average price per unit of approximately $100,000.

That’s down from about $135,000 per unit in the peak of the market in June 2007.

2006/07 Price driven by speculation and condo conversion

Cap Rate Analysis Apartment Buildings

This analysis is the most indicative of the overall market in Edmonton in the last 5 years.

Although these are apartment sales both the commercial and Industrial market has reacted the same way.

Commercial Market Analysis

Recent analysis of commercial buildings and condominiums.

Analysis focused on sales of commercial buildings between 10,000 – 30,000 sq. ft. and commercial condominium units between 2005 and 2010.

Sample consisted of 115 sales for buildings, and 158 sales for condominiums.

Commercial Building Analysis

Definitive rise in building values during 2006 – 2007 ‘Boom’ period.

Post recession data shows a ‘flattening’ of prices.

Commercial Office style Condominium Analysis

The trend continues with condominiums

Prices ranging from $200 - $300 sq. ft.

As lease rates downtown increased, condo prices increased.

As lease rates decline, condo prices decline.

Industrial Market Analysis

Recent analysis of industrial buildings and condominiums.

Analysis focused on sales of industrial buildings between 10,000 – 30,000 sq. ft. and industrial condominium units.

Sample consisted of 239 buildings, and 380 condominiums.

Industrial/Warehouse Analysis

Median Prices ranging from $75 - $150 / sq. ft.

Wider range of values due to unique features of industrial buildings.

Industrial Condominium Analysis

Prices range from $50/sq. ft. $250 / sq. ft.

Trend is consistent with other market segments under analysis.

Cap Rates Industrial & Warehouse

Note the consistent reaction of cap rates

Some of the Factors That Influence Value

Location Size Age Externalities Market Activity Highest and Best Use zoning Construction Costs Depreciation Income Utility Any Questions on Data Analysis??

Lets talk about the Appraisal Report

What is the first thing you look at when you get an appraisal?

Do you read it? Do you read parts of it? What is most important to you? What is least important?

Understanding an Appraisal Report

Letter of Transmittal – Contains summary of Subject Property, Appraisal Techniques, Estimates of Market Value, and Correlation of Market Value.

Summary of Salient Facts – Summarizes Location, Legal Description, Brief Description of Improvements, Land Use Criteria, Highest and Best Use, Estimate of Market Value by Each Approach

Purpose of Appraisal

Understanding an AppraisalReport continued…

Assumptions and Limiting Conditions Extraordinary Assumptions and Limiting

Conditions Scope of Appraisal – Covering the Extent of

Research Completed Within a Report, Approaches Applied to Estimate Market Value

Economic, Regional, and Neighborhood Analysis

Understanding an Appraisal Report continued…

Description of Improvements – Type of construction, building area, net leasable area, building age, interior and exterior finishing, effective age and remaining economic life, site improvements, and photographs.

Depreciation, items that need repair. Property Tax and Land Use Highest and Best Use

Methods of Valuation

Cost Approach Income Approach Direct Comparison Approach

Cost Approach

Principle of Substitution Total Value = Building New – Depreciation +

Improvements + Land Value Requires an estimation of Land Value, the cost of the

Building and Depreciation. Reproduction vs. Replacement Cost Most applicable in New / Proposed properties, ‘Special-

Use’ type properties, and properties with limited comparable market information.

Income Approach

Valuation method based on the present worth of all the net income the property would produce during its remaining useful life.

Involves analysis of leases, actual or market rents, and pro-forma operating statements.

Direct Capitalization Technique. Cap Rate = NOI / Sale Price Reconciling ‘Market Value’ Utilizing Direct Capitalization or

General Cap rate correlation. Market Value = NOI / Cap Rate Discounted Cash Flow Analysis

Direct Comparison Approach

Estimation of value using direct market evidence. Assembling sales information regarding similar

properties Establishing method of comparison (price per sq. ft. or

per acre, or price per suite, gross income multiplier) Identifying elements of comparison (property rights,

conditions of sale, time, location, physical characteristics, economic characteristics, zoning) and performing the appropriate adjustments

Direct Comparison Approach continued…

Correlation of all information gathered from comparable sales.

Correlate an appropriate value range for the subject.

This approach is limited by the activity in the market, and is difficult to apply for special use properties for which there are few comparable sales.

Reconciliation of Final Value

Examine estimated market value by cost, income and direct comparison approaches.

Correlate market value in accordance to the best approach applicable to the subject property.

Thank you!!!

Questions?Contact Information:

Guy Bourgeois, AACI P.App, CRP Bourgeois and Company Ltd.

14207 – 115 Avenue NWEdmonton, AB

Phone: 780-452-8000Fax: 780-452-8069

Email: guyb@bourgeois.ab.caWebsite: http://www.bourgeois.ab.ca