"How is Real Estate being appraised?" by Stan Belenky, MAI, CTA

With more than two decades of experience, East Hanover, New Jersey resident Konstantin (Stan) Belenky has been actively involved in the NJ real estate market since 1997. Experienced in appraising various types of properties, he is the chief appraiser of Pyramid Consulting Group, LLC where he supervises a team of appraisers working on different projects. Konstantin “Stan” Belenky utilizes various types of property appraisal methods to effectively perform his duties. How is real estate being appraised?

There are three (3) approaches to the problem of finding market value. All data utilized in these approaches must come from the marketplace. The approaches are commonly referred to as the Cost, Income, and Sales Comparison.

The Cost Approach is utilized by estimating, utilizing market costs, the replacement cost of a building and other improvements, deducting depreciation, which is a loss in value from all causes, and adding this depreciated value to the value of the land upon which the improvements are constructed. Depreciation may come from actual physical deterioration, loss in value due to functional inutility, or through a loss in value resulting from economic reasons such as factors in the market place which would cause the property to rent for an amount not adequate to justify the investment in the improvements.

The Income Approach to value is utilized by estimating potential gross income, deducting an amount for vacancies and other rent loss, and deducting all expenses in order to apply an appropriate capitalization rate to the resulting net income in order to find the market value. All income estimates, expense items, and capitalization rates must be obtained from the market.

The Sales Comparison is sometimes referred to as the Direct Comparison Approach to value. Sales of similar properties are compared to the property under appraisal in order to arrive at an estimate of value. Units of comparison in appraising income-producing property include location, age, time of sale, and other characteristics of the property that may influence value. Adjustments made in making this comparison must have a basis in market experience.

In essence, all approaches to value (particularly when the purpose of the appraisal is to establish market value) are market data approaches since the data inputs are presumably market derived.

Corona Virus and Commercial Real Estate by Stan Belenky, MAI, CTA

The Chinese Virus, AKA Corona Virus or Covid-19 Global Pandemic, that has thrown the United States, as well as over 180 other countries into a healthcare and economic crisis, at a level never experienced in modern times. Posted unemployment rates for the United States have reached levels greater than those seen during the Great Depression. That does not take into consideration persons that are underemployed, or not seeking employment. All businesses deemed “non-essential” have been ordered to shut down, violation of which may result in fines, incarceration, or both. Commercial real estate sectors hit particularly hard are the office and retail sectors, which contain huge swaths of businesses deemed to be non-essential. The federal government has been forced to inject trillions of dollars into the economy in an attempt to keep many of these businesses from closing permanently, with another round planned by the administration and congress.

Given the foregoing discussion, it is clear that the Covid-19 has not just affected investor attitudes, it has effectively left this sector in a near virtual state of limbo, indecision, and concern. This equates to risk (both perceived and actual). Increased risk equates in increase return requirements, and logically highest capitalization rates reflecting investor concerns. Investors have no idea if the effects will be somewhat short term, say 6 months to a year, or long term, for many years to come, essentially in perpetuity based upon typical investment holding periods. It is clear that the selection of capitalization rates must take this into strong consideration, resulting in a higher overall capitalization rate.

Commercial lending has also diminished to close to a standstill. Clearly, lenders will most like to seek lower loan-to-value ratios, along with increased interest rates and shorter amortization terms. On the equity investment side of the equation, the equity investor must compensate for the risk and uncertainty in these most affected sectors, by significantly increasing their equity return requirements.

Dear Clients and Friends of Pyramid Consulting Group, LLC,

As COVID-19 continues to spread, and Governor Murphy has declared a state of emergency, we want you to know that we remain open for business and ready to assist you. With the health and safety of our employees, their families, and our clients in mind, we have closed our office and enabled our remote work platform. We will be utilizing virtual meetings and other technologies to ensure we continue providing outstanding service to our clients. We will update you as the situation evolves.

We wish you and your families all the best as we work through this difficult time.

Stan Belenky, MAI, CTA 
State Certified General Real Estate Appraiser 
Pyramid Consulting Group, LLC 
P.O. Box 586 
East Hanover, NJ 07936 
Phone: 973.887.6877
Fax: 973.887.5133