Question:

My client, a federally regulated lender, has requested a market value appraisal for use in financing a commercial property development project. The client’s stated loan conditions include a requirement that the property be leased before the onset of its development. The client stated they need (1) an opinion of market value for the property that actually exists as of a current date, which is the site with its entitlements and under the zoning in effect as of the current date, and (2) an opinion of value as of the future date (a prospective value opinion) when the property will be physically completed and occupied under the pre-leasing terms and conditions. Must I develop both of these opinions of value and, if so, why?

Response:

Yes. The client needs both opinions to aid in identifying its project development loan risk and respond to regulatory requirements and guidelines.

The client’s project development loan decision would typically be based, in part, on your analysis of highest and best use (See SR 1-3(b)) and the feasibility of the development project (See SR 1-2(e), Comment on (i)-(v)).

The value of the site, with its entitlements and under the zoning in effect as of a current date (i.e., without use of a hypothetical condition), is an important component in your analysis and it provides the client with information necessary to identify development risk and determine appropriate loan terms and conditions. Absent other factors, this value opinion could be developed without use of either an extraordinary assumption or a hypothetical condition. The “subject” in this appraisal is the property, in this case the site that actually exists as of a current date of value, with the zoning (including any entitlements) in effect as of that date.

The value of the property as of the future date, when it has been physically completed and leased under the pre-leasing terms and conditions, is also significant information the client would typically use in making its project development loan decision. Developing this value opinion typically requires the use of an extraordinary assumption because the “subject” in this appraisal is the property as it is expected to exist as of that future date when physical development is complete and the property is leased in accordance with the lease terms and conditions.