Appraiser Valuation Expert Story #1: Significant Tax Savings

We were engaged by a US based pharmaceutical company to develop a “floor to book” inventory and reconciliation of their major assets for IFRS accounting implementation, which is a straight forward assignment. As the assignment progressed, we determined that many of the assets in the ledger were ghost assets. You saw the asset but they did not really exist. The pharmaceutical company purchased a turnkey production line 20 years prior for approximately 15 million dollars. Over the subsequent years, they slowly upgraded or changed just about every component of the production line to the point that none of the original components remained.

Our analysis showed the auditors that the even though the production line was still in existence, it’s components were not from the original production line from 20 years ago. It was actually made up of numerous entries for components and upgrades in the fixed asset ledger. Since our client was paying capital taxes on the original cost, the retirement of the original production line coupled with all other unrecorded retirements resulted in significant tax savings for that fiscal year as well as all of the following year. Our fee for this assignment was a small fraction of the savings from year 1 alone.

Appraiser Valuation Expert Story #2: Avoiding Legal Issues

We were engaged by a mid-sized oil well services firm to do a Market Value appraisal of a small light industrial property they wanted to purchase. This was to be a private all cash deal. Our client wanted the appraisal for internal purposes only to confirm to the company’s investors and auditors that the acquisition price was fair. The property was a newer light industrial building on 10 acres of land in a rural setting approximately 5 Kilometers outside a small city with a population about 15,000. The building included three bays plus a wash bay, an office block, and living quarters above the office block. We found the building and grounds to be reasonably well kept and cared for.

During our research we noted that the zoning designation was Agricultural and not Industrial, which we thought was odd. Perhaps the municipality made a mistake and did not record the re-zoning to allow the industrial use? As per a professional appraisers usual routine we decided to check by calling the Municipal Planner to inquire. The response was “That’s odd you should ask about that property. We just found out last week they put up an industrial building without a permit or a re-zoning application. The county’s lawyers are currently preparing the 90-day demolition order and will be issuing it this week.”

We advised our client that the current use of the property is non-conforming and requested instructions on if they would like us to complete the appraisal based on the property being 10 acres of undeveloped land. The client requested that work on the appraisal cease and for us to bill them for time spent. Needless to say, the client was quite pleased to have avoided proceeding with the purchase which would have inevitably lead to an expensive legal tussle.

Appraiser Valuation Expert Story #3: Property Tax Decrease

We were engaged by a bank to do a routine Market Value appraisal on a residential property. The current owner had resided in the house for many years and was refinancing their mortgage. The house was an average quality 1990’s bungalow. As is our usual routine, we obtained and reviewed numerous documents in advance of the inspection such as a title search, assessment records, subdivision plans, etc. During the inspection of the property, we measured the house, which, again, is part of our usual routine. We immediately spotted a significant error on the assessment sheets. The property was being taxed on the basis that the house measured 36ft x 48ft (1,728sf) when in fact it actually measured 32ft x 42ft (1,344sf).

Although an assessment audit was outside the scope of the assignment, we gave the property owner a copy of the assessment records and pointed out the error. We advised her to speak to her municipality and ask them to correct the error which should result in a lower property tax bill. A few weeks later the property owner phoned call our appraiser. She advised that the municipality corrected the error which resulted in her property tax bill dropping by about $600/year. Furthermore, the municipality chose to refund her the previous four years of over-assessment. She had just that day received a cheque in the mail for about $2,400 and wanted to call to thank us for the extra effort.

Appraiser Valuation Expert Story #4: Double The Rental Income

We were engaged by a landlord to assist with a land lease renewal. The land was being used by the tenant as a site for a commercial greenhouse operation. The lease was for the land only, and was a long-term lease with periodic rent adjustments. Our job was to estimate the current Market Rent of the land to assist the parties with the lease renewal negotiations.

Our first step for these types of engagements is to read the lease. We noted that the lease did not state the exact area or boundaries of the land parcel. This was odd because leases typically, and ideally, include a very exact description of what is being leased. Instead, this lease had a general reference to “…..approximately 3 acres at the north east corner of the larger parcel…” During the site inspection, we noted that the tenant had fenced the area they were using. Based on our ground observations and using Google Earth measuring tools we suspected the tenant may be using a lot more than three acres. We spoke to the client and advised her that before we continue with our work she should engage a surveyor. As it turned out, the tenant was using five acres.

We completed the Market Rent estimate based on five acres of land. We also established that the current rental rate was significantly below market levels. Our report recommended a significant increase in the rental rate, and that the new rate be applied to the entire five acre parcel that the tenant was occupying. Our client then entered lease renewal negotiations armed with the report and the survey. After a rather short negotiation, the tenant completely accepted the recommended increase, which effectively almost doubled the amount of rent payable to our client.

Appraiser Valuation Expert Story #5: Hyperinflation Accounting

We were engaged to estimate the replacement costs of the municipal assets of mid-size City for insurance coverage purposes. One of the locations was a large apartment complex, which was a basic four story, wood frame/vinyl clad building. When we first ran the numbers for the building, it became very apparent that the costs being generated were nowhere near what our independent research was showing for local construction costs. As per a professional appraisers regular routine we surveyed local developers and contractors to determine actual local construction costs. Based on the research we established that costs in this City where approximately double that of the closest metropolitan City. We therefore incorporated the market data into our analysis to establish an accurate replacement cost.

Following completion of the report, we knew that this mid-size City was experiencing “hyperinflation” and as an added service to our clients, we updated the costs on all their properties on a quarterly basis. This proved to be an incredibly valuable exercise as approximately three years later this particular building was destroyed by fire. Our original estimated cost of the building came in around the $10 million mark. However, with our quarterly updates over the few short years the building was currently insured for over $27 million. When the claim was settled the total loss came in around the $26 million figure saving our client significant co-insurance penalties.

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

For questions or comments, please Contact Us.

With many North American jurisdictions legalizing cannabis, we see inquiries from our clients as to what will be the impact of legalization on Real Estate. Will it affect the rents that can be charged on property? Will it affect the value of residential homes? What if you don’t want a cannabis retailer in your building, what options do you have? As an investor, are there opportunities in Real Estate given these changes? The predominant answer at this time is “only time will tell”.

What’s Happening with Real Estate in Colorado?

Given that the legalization is federal legislation with provincial regulations coming, we have no basis of comparison in Canada. The closest example we can reference is select States in the US that have moved to legalization in recent years and the information from their Real Estate Markets is still relatively fresh. Economists in the US have studied the impact that legalization had in Colorado (January 2014) relative to residential Real Estate. The results paint an interesting picture of higher than average increases in residential home values in areas near cannabis retailers, however, the exact reasoning is hard to quantify given the vast number of market dynamics in play and the limited window of time to analyze.

What we do know at this time is that many areas across North America are looking at or moving to legalization. As per the Colorado experience this means there will be real estate demand brought on by industry players such as wholesalers, retailers and home growers. We know that wholesalers and retailers will have a demand for space.

Owning Property in the Proximity of Cannabis Retailers

Property owners who choose to participate in the industry at some level will be tested as there will be unique regulations and limitations around all aspects of the space, including considerations for location, zoning, security, etc. We would also suggest that significant “fit-out” to these spaces may be required to make spaces both compliant for use in addition to being functional and inviting. There may be opportunities for property owners to capitalize if their properties meet the requirements for use by cannabis retailers as the level of investment required by the tenant might give assurances of longevity with relocation being expensive to tenants. Even more likely is that these retailers and wholesalers will want to own spaces versus rent given the anticipated investment to have the space meet requirements, which might mean owners of Real Estate in highly desired areas, could see motivated parties knocking.

Change is Coming. Property owners can profit taking the high road

Those who know the local regulations combined with some opportune luck in having a property that meets the requirements will have an advantage in capitalizing. Whether you stand for or against the legalization, change is coming and there will be those in the Real Estate investment sphere who are “high” on making the most out of the new rules.

Does this subject interest you? For more information, contact Devin Baker, B.Comm., Manager, Business Development at Devin.Baker@suncorpvaluations.com

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

For questions or comments, please Contact Us.

Learning Objective: Understanding the requirements of a Fire Safety Plan

In simple terms, a Fire Safety Plan involves the sounding of a fire alarm, the notification of the fire department and instructing occupants on how to exit the building safely. The requirements & recommended practices for the development and maintaining of Fire Safety Plans in buildings are found in the various National and Provincial Fire Codes. A building owner and/or agent is responsible to develop and implement the provisions of a Fire Safety Plan and should include specific information on the building and its contents.

Fire Safety Plans – Design

1. A full risk assessment should be provided for each building to determine the potential risk exposures and/or emergency situations.
2. The Fire Safety Plan for a building must itemize all fire protection equipment, emergency lights, shut-offs, evacuation routes, etc. in place at each facility.
3. The building safety or management committee should be involved to assist with the design and implementation of an emergency fire safety response plan.
4. The Fire Safety Plan should be designed based on the requirements of the local Fire Department and may require to be approved by them once complete.
5. The Fire Safety Plan should be reviewed on a regular scheduled basis.
6. Documented practices/drills should be completed as required by the Fire Code.
7. A de-brief discussion should take place with all involved after a practice or drill to answer any questions or make any changes if required.

Fire Safety Plan – Performance Objectives

1. The Fire Safety Plan should include documented/practiced procedures to follow in the event of a fire emergency.
2. The Fire Safety Plan development & implementation should account for all local emergency services including fire, police, ambulance, municipal, utilities (gas, power & water), etc.
3. Keep up-to-date on all Code, Standards and Regulation changes.
4. Update changes to the Fire Safety Plan as required.

For additional information, contact: Doug Taylor, CRM, CCPI, Managing Director, Risk Management Group
doug.taylor@suncorpvaluations.com or 1-800-764-4454

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

For questions or comments, please Contact Us.

The real estate business, by its nature, is complex and therefore ripe for misunderstanding and disagreement.  When there is a dispute, the parties have a choice.  They can go through the public courts which are expensive, time consuming, rigid, and offers no privacy.  Or they can engage the services of a qualified and skilled Real Estate Arbitrator.

POP QUIZ:  You are a busy business owner.  You are ten years into a 20 year lease for the building that your business operates out of.  The lease has a clause that the rental rate renews at “Market Rent” every five years.  It is renewal time.  Your landlords’ appraiser says that your rent is to go from $15,000/month, to $21,000/month plus all occupancy and common area costs, for the next five years.  But your appraiser says that Current Market Rent is actually $17,000/month plus utilities only.  What do you do?

WHAT ARE THE BENEFITS OF ARBITRATION?

Arbitration is a private dispute resolution service.  As compared to the public courts, arbitration has five significant advantages including speed, cost, privacy, flexibility, and expertise.

Faster:  Disputes going through the public court system can often take many years.  The courts are a public institution that typically has a backlog of cases with long wait times.  An arbitration on the other hand is much faster, often completed within a few months.  That is important, because time is money.

Cheaper:  Arbitrations are very cost effective as compared to the expense of a public trial which may often cost in the tens to hundreds of thousands of dollars.  The cost of a particular arbitration depends on the scope and complexity of the issues, however it is often a fraction of the cost of a court action.

Private:  The privacy advantage of an arbitration is often very attractive to many parties especially when the nature of the dispute is sensitive, or some evidence is confidential or proprietary.  The arbitrator is bound by confidentiality and ethics rules to not disclose any details of the dispute, or even that there is a dispute.

Flexible:  The public courts have rigid procedures including the rules of court and the rules of evidence.  The procedures for an arbitration however can be custom designed for the particular nature of each dispute.  For example, for some disputes a fast track “documents only” arbitration may be appropriate.

Expertise:  In the public court system judges are assigned at random.  However, with an arbitration the parties choose the decision maker.  Parties often engage a qualified arbitrator (Q.Arb or C.Arb) that also has additional specialized qualifications, such as an professional appraiser (AACI or CRA) to arbitrate real estate disputes.

ENFORCEABILITY

Arbitration awards are enforceable.  Provided that all procedures were correctly followed by the arbitrator an arbitration award is often legally enforceable by the courts, very much like a judgement.

POP QUIZ:  You are an investor and you have hired a general contractor to build an apartment building for you.  Your payments to the general contractor are due at certain stages of completion.  The contract says that “a payment of $175,000 is due once the project reaches 25% complete.”  The general contractor says they are at 26% and they want their money now.  You say no, it is at 15% because it isn’t correct to include the delivered but uninstalled material in the percent complete calculation.  Construction has stopped until this dispute is settled.  What do you do?

WHAT KIND OF REAL ESTATE DISPUTES CAN BE ARBITRATED?

A Real Estate Arbitrator can help with just about any type of real estate dispute, such as:

• Lease disputes including interpretation of clauses, rental rate renewals and terms, common area expense allocations, etc.
• Disputes regarding the interpretation and enforcement of condo/strata rules and regulations.
• Disputes involving market value, market rent, or other types of value or cost estimates.
• Issues relating to the allocation of value or cost, such as during creation or dissolution of partnership agreements or other types or shared equity arrangements.
• Disputes relating to tangible or intangible real estate or property damages and claims.
• Family disputes over the shared ownership of assets such as cottages, farmland, or revenue properties.

HOW DO I GET STARTED?

If all parties to the dispute are open to arbitration then the first step is to engage a qualified and skilled Real Estate Arbitrator.  A professional with the Q.Arb or C.Arb designation is trained and qualified in all aspects of arbitration services.

It is recommended that your Real Estate Arbitrator also has expertise in the real estate industry.   For example, a qualified real estate appraiser (AACI or CRA) has in-depth training and years of experience in all types of real property valuation issues, as well as expertise in a wide variety of real estate consulting and advisory services.  AACI’s and CRA’s are bound by very strict ethical standards which ensure objectivity and confidentiality.

Once you have engaged a qualified and skilled Real Estate Arbitrator the next step is for the parties and the arbitrator to develop an Arbitration Agreement which establishes the scope, jurisdiction, and procedures for the arbitration.

POP QUIZ:  You are a tenant in a condo/strata strip mall.  Your unit is open storage space only, and all the other units are fully developed offices.  The leases say each tenant must pay “…a proportionate share of the total property tax…”  You think “proportionate” means that the tax bill is divided up based on the assessed value of each unit, and on that basis your share of the tax bill is $3,500/year.  However your landlord and all the other tenants say no, the total tax bill is divided up equally based on occupied square feet, and on that basis your share of the tax bill is $7,500/year.  What do you do?

Real estate disputes are often very complex and can involve a lot of money.  Do you have the time and patience to wind your way through the public courts for all to see?  Or would you be better served to engage the services of an objective, qualified and skilled Real Estate Arbitrator from Suncorp Valuations that has expertise in the real estate industry and speaks your language?

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

For questions or comments, or to be added or removed from this distribution list please Contact Us.