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CRE Finance World, Winter 2012

Valuing Appraisals: Evidence from the CMBS Industry of nonperforming loans, were infrequent. Rare occurrences do Chart 1 not yield statistically significant data. Three years on, delinquency Histogram of Appraised Values to Gross Proceeds; N=3,276 rates approach 10% while one out of every seven loan dollars is in special servicing. Through the courtesy of Trepp,1 we can review appraisal and loss experience on a universe that exceeds 5,200 liquidations. These 5,258 liquidations aggregated an unpaid principal balance of $33.3 billion, most recent appraised values of $42.7 billion, generated gross proceeds of $20.8 billion and incurred total realized losses2 of $13.8 billion or 41% of UPB. The majority of these liquidations have occurred since 2009 (3,592 with a UPB of $24.2 billion that generated gross proceeds of $15.0 billion and realized losses of $10.7 billion or 44% of UPB). The Methodology Only liquidations that captured the elements of appraisal date3, Chart 1 buckets the 3,276 observations into ranges of Appraised appraisal value, gross liquidation proceeds and liquidation date Values to Gross Proceeds (AV/GP). As an example, 826 of the were used. This dropped the 5,258 total liquidations to 3,276. 3,276 observations produced an AV/GP between 1:0 and 1.25:1. Two adjustments needed to be made. Particularly during times of If the art of appraising is akin to the game of horse shoes and volatility, it is unfair to “ding” the appraisal if significant time has throwing grenades — close is good enough — 46% of appraisals elapsed between the appraisal and the asset liquidation. Some of stand between 0.75 and 1.25:1 in relation to gross liquidation the liquidations among the 3,276 observations used appraisals proceeds. In the case of a property that liquidates for $10 million, more than ten years old as of the liquidation date. Unless the data applying this range indicates that 46% of the time, the most recent is further limited to liquidations in reasonable proximity to the most appraisal would have produced a value between $7.5 million and recent appraisal, outcomes would need to be normalized against $12.5 million. Beyond this umbrella observation, there is also a some price index. An alternative method, used in this report, simply great deal of variability. drops all liquidations where the gap between the most recent appraisal and the liquidation is greater than one year. Secondly, Restricting observations to those where the appraisal date and liquidation proceeds should be measured as gross proceeds since the liquidation date are no greater than one year apart tightens collection and brokering expenses on defaulted assets may be the average predictive accuracy of the appraisals considerably. significant and unfairly count against what a willing buyer pays for This is shown in Chart 2. the property. In terms of market usability and predictive power, in an ideal setting, the ratio of Appraised Value to Gross Proceeds would Chart 2 equal 1.0 (AV/GP=1.0). The ratio of AV/GP is used extensively in Histogram of Appraised Values to Gross Proceeds; N=2,076 this article to test appraisals’ power to project liquidation proceeds. Summary There is considerable upward bias in appraisals as measured against gross liquidation proceeds. In aggregate, these 3,276 liquidations had an appraised value of $18.1 billion and generated gross liquidation proceeds of $13 billion. This produced an AV/ GP ratio of 1.39:1; i.e., on average, for every appraisal that valued the collateral at $13.9 million, the liquidation generated actual proceeds of $10 million. CRE Finance World Winter 2012 36


CRE Finance World, Winter 2012
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