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Financially Distressed Asset Valuation and Pricing. Thomas O. Jackson, Ph.D., AICP, MAI, CRE, FRICS Texas A&M University and Real Property Analytics, Inc. 979-690-1755 tjackson@mays.tamu.edu tomjackson@real-analytics.com. Concepts. Market value

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financially distressed asset valuation and pricing

Financially Distressed Asset Valuation and Pricing

Thomas O. Jackson, Ph.D., AICP, MAI, CRE, FRICS

Texas A&M University and Real Property Analytics, Inc.

979-690-1755

tjackson@mays.tamu.edu

tomjackson@real-analytics.com

concepts
Concepts
  • Market value
    • The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgably, and assuming the price is not affected by undue stimulus.
    • Source: Office of the Comptroller of the Currency
concepts3
Concepts
  • “As is” market value
    • The price at which a third-party purchaser could acquire the property in its “as is” condition and then cover all the remaining costs associated with completing construction, sellout, or lease up and earn a market-based level of profit for doing so.
    • Acknowledges that entrepreneurs demand compensation for purchasing distressed real estate.
    • Source: Appraisal Institute, Appraising Distressed Commercial Real Estate
concepts4
Concepts
  • Liquidation value
    • The most probable price which a specified interest in real property is likely to bring under all of the following conditions:
      • Consummation of a sale will occur within a severely limited future marketing time specified by the client.
      • Actual market conditions are those currently obtained for the property interest appraised.
    • Source: Dictionary of Real Estate Appraisal, 4th Edition
concepts5
Concepts
  • Liquidation value (continued)
      • The buyer is acting prudently, knowledgably, and is typically motivated
      • The seller is under extreme compulsion to sell
      • The buyer is acting in what he or she considers his or her best interests
      • A limited marketing effort and time will be allowed for the completion of the sale
      • Payment will be made in cash in U.S. Dollars or in terms of financial arrangements comparable thereto
concepts6
Concepts
  • Disposition value
    • The most probable price that a specified interest in real property is likely to bring under all of the following conditions:
      • Consummation of a sale will occur within a limited future marketing period specified by the client
      • The actual market conditions currently prevailing are those to which the appraised property is subject
      • The buyer and seller are each acting prudently and knowledgably
      • The seller is under compulsion to sell.
      • The buyer is typically motivated
concepts7
Concepts
  • Disposition value (continued)
      • Both parties are acting in what they consider their best interests.
      • An adequate marketing effort will be made in the limited time allowed for the completion of the sale.
      • Payment will be made in U.S. dollars or in terms or financial arrangements comparable thereto.
      • The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
    • Source: Dictionary of Real Estate Appraisal, 4th Edition
concepts8
Concepts
  • Distressed real estate
    • In general, distressed real estate represents those properties suffering from higher than typical vacancies
    • Properties where effective rents of prices have declined significantly in order to attain lease up or sale
    • Source: Appraisal Institute, Appraising Distressed Commercial Real Estate
concepts9
Concepts
  • Net realizable value

SP = Pr (X<=1) x MV

NRV = SP – (C – R) / (1+ r)n

SP = selling price

MV = market value

Pr (X>=1) = probability of one or more offers in holding period

C = carrying costs

R = effective gross income

r = market discount rate

valuation issues
Valuation Issues
  • As is market value
    • High vacancies
    • Lower net income
    • Below market rents
  • As though stable
    • Assumes stabilized occupancy
    • Assumes market rents
    • Current date of value (hypothetical condition)
  • When stabilized
    • Market analysis to determine future date when stabilization may occur (extraordinary assumption)
    • Future date of value
valuation issues11
Valuation Issues
  • Lease up adjustment
    • Difference between current (as is) occupancy and rents and stabilized occupancy
    • Projection of rent loss until stabilization
      • Difference between hypothetical as if stable and as is scenarios until stabilization is reached
    • Present value of rent loss
      • Adjustment to current as if stable value
      • Adjustment to sale and cost approach estimates
valuation issues12
Valuation Issues
  • Income capitalization approach
    • Yield capitalization (DCF analysis)
  • Estimating buyer’s or market segment’s yield can be complex
    • Few or no transactions
    • Little market activity
    • Constrained capital markets
valuation issues13
Valuation Issues
  • Market simulation
    • Simulated transactions
    • More emphasis is placed on how people make decisions rather than what they decided because no transactions have transpired in the current market
    • DCF analysis given its explicit input format might be most appropriate model to simulate buyer behavior
    • Source: T. Grissom, Appraising without Comparables, 1988, Texas A&M Real Estate Center)
valuation issues14
Valuation Issues
  • Yield and income capitalization rates
  • Income capitalization rates composed of the yield rate yield rate and expectations of property value and income growth
  • Property models

RO = YO - A

RO = YO - ΔO a

RO = YO - ΔOSFF

RO = YO - ΔO1/n

RO = YO - CR

valuation issues15
Valuation Issues
  • Built up or blended rates

RO = ( E x RE ) + (M x RM)

RE = (RO - (M x RM)) / E

  • Ellwood

RO = (YE – M(YE + P 1/SFF – RM) Δo 1/SFF) / (1 + Δi J or K)

  • Ellwood in Akerson Format

Weighted average of mortgage and equity requirements adjusted for equity buildup due to loan paydown and appreciation

valuation issues16
Valuation Issues
  • Final thoughts
    • Is this a dilemma in which the value cannot be estimated without knowing the capital structure and the capital structure cannot be known without knowing the value?