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CRE Finance World, Winter 2012

Valuing Appraisals: Evidence from the CMBS Industry true, then appraisals on office and retail with longer-term leases Retail exhibited the second highest number of liquidations at 602. would be more predictive than multifamily and lodging would be The Average Gap at 35.1% was considerably more predictive than the most variable. Since this analysis also tests for loan size, it is multifamily. Two hundred twenty-six of the liquidations produced also worthwhile to consider the interplay between property type appraisals less than the proceeds while 376 had a higher appraised and loan size as measured by UPB. Larger loans should have value than proceeds realized. Thirty-six liquidations produced an certain advantages in appraisal accuracy stemming from more AV/GP exceeding 200%. — 6% of liquidations. intensive appraisals, better data from better property management and institutional sponsorship, and, to the extent that larger loans Chart 4b may tend to cluster in more active markets, greater transparency Retail AV/GP; N=602; Average Gap=35.1% into submarket lease rates, operating expenses and comparable property sales. First we consider whether certain property types produce more accurate values. Appraisal Accuracy by Property Type Not surprisingly, the data show the highest liquidation activity among multifamily accounting for 723 out of 2,076 liquidations. Of these liquidations, 223 produced an appraised value less than gross proceeds (AV/GP<1.0) while the appraisal equaled or exceeded the proceeds on 500 (AV/GP>=1.0). The average With the lowest Average Gap and most balanced split between absolute gap represents the difference between all properties’ AV/GP’s over and under 1.0, the 362 office liquidations appear to AV/GP and 1.0. If a property was appraised at $15 million and be the most accurate appraisals. One hundred sixty-nine liquidations yielded $10 million in gross proceeds, this produces a “Gap” of came in under an AV/GP of 1.0:1 and 193 were over. Only 19 50%. It represents the measurement error assuming that an liquidations were greater than 2.0:1 AV/GP — 5.2% of liquidations. appraisal should be perfectly predictive of gross proceeds. Chart 4c Office AV/GP; N=362; Average Gap=28.0% With an Average Gap of 55.8%, multifamily has the highest average measurement error among the four property types analyzed. Multifamily also has a high percentage of right-tailed outliers — 48 appraisals exceeded 200% AV/GP or 6.6% of liquidations. Chart 4a Multifamily AV/GP; N=723; Average Gap=55.8% As can be seen from Chart 4d, the distribution of lodging liquidations are the most lop-sided with 44 liquidations below 1.0:1 and 86 above. Lodging also has a high portion of right-tail outliers with 10 liquidations above an AV/GP of 2.0:1 — 7.7% of liquidations. CRE Finance World Winter 2012 38


CRE Finance World, Winter 2012
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