Comparing apples to apples in real estate appraisal, expert witness. Defining what is the relevant apple.

1. Units of Comparison in Real Property Appraisal -
The Economic Basis of Intrinsic Value
By Jon M. Ripans, J.D., M.B.A. Finance, Esq.
Certified General Real Property Appraiser1
Commercial real estate valuation depends upon a number of variables which assist in
answering the fundamental question: What is this asset worth? That question, in turn,
depends upon what the property is worth to the person who would value it the most,
whether that person is a tenant or an owner occupant. The value to that person is
inherently an economic question that turns upon the relevant units of productivity.
Units of Comparison
Relevant units of productivity are often spatial, although they do not have to be. What is
more valuable: A 3,000 square-foot home with four bedrooms, three full bathrooms, and
one half bathroom that are all normal sizes or a 3,000 square-foot home with one
monstrously large bedroom and bathroom? The former is more valuable to most
occupants, but maybe not for empty nesters or vacationers.
According to The Appraisal of Real Estate 13th Edition, Appraisal Institute
(2008), units of comparison are "[t]he components into which a property may be divided
for purposes of comparison, e.g., price per square foot, front foot, cubic foot, room, bed,
seat, apartment unit. These units usually facilitate analysis even when the properties are
not very comparable."2
The Appraisal of Real Estate 13th Edition further explains that "[r]educing sale
prices to consistent units of comparison facilitates the analysis of comparable sites and
can identify trends in market behavior. Generally, as size increases, unit prices decrease.
Conversely, as size decreases, unit prices increase."3
As a general matter, land that is more than one acre in size is usually
valued/appraised on a per acre basis while land that is less than one acre in size is often
valued on a per square foot basis. Most building types are also valued on a per square
1
The author has appraised $1.5 billion of commercial real estate in a wide variety of contexts, and has
served as an expert witness, court-appointed property tax arbitrator, and property tax advocate. He appears
to be the only person in the state of Georgia who is a Certified General Real Property Appraiser, Attorney
at Law and Registered Neutral (Arbitration and General Mediation).
As for long titles, Jon is the current Secretary of the Property Tax Subcommittee of the Real Property Law
Section of the State Bar of Georgia.
Jon M. Ripans is available to serve as a mediator, arbitrator, special master, receiver, or other
judicial adjunct, either by agreement of the parties or court appointment. Jon is approved to serve
as a Property Tax Hearing Officer, a special form of neutral recently created by statute.
2
Id. at p. 305.
3
Id. at p. 212.
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2. foot basis, but there are some important exceptions, some more obvious than others.
Some obvious examples of non-square foot units of comparison are:
1) valuing hotels/motels by the number and mix of various room types;
2) self-storage facilities by the quantity/mix of storage lockers of various sizes; and
3) apartment complexes by the quantity/mix of one, two, three bedroom units, etc.
This is not to say that there are no other relevant factors in appraising these
properties or merely in the process of comparing them to rent comparables or sale
comparables. Location, age, condition, appeal are generally important. So are certain
features that are specific to a particular property type, such as in-room or property-wide
amenities in hospitality facilities or apartment complexes, or climate control and security
for storage lockers, etc.
A Specific Example from an Expert Witness Engagement
I served as an expert witness in litigation concerning the value of an automobile service
facility. The appraisers engaged as expert witnesses for the other side used generic metal
industrial comparables from the immediate area and appraised the automobile service
garage at issue (the "Subject Property") by applying rent per square foot and sale price
per square foot analysis. The service garage was old enough that the Cost Approach was
unreliable due to the inherent difficulty in gauging accrued curable and incurable physical
deterioration. So, the battle was joined using the Income Approach and the Sales
Comparison Approach.
I felt that the key questions were: "What are the important units of comparison
for auto service facilities/repair garages? What are the features or units of productivity
that make an auto service facility useful (and hence valuable) to an occupant?"
Put yourself in the position of someone who actually had to run a repair business
in a particular building. If you were operating an auto repair business, you would need a
building large enough to accommodate the peak number of vehicles that are being
serviced at any one time, along with office and customer reception areas, and a bit of
storage for parts, supplies, etc. You would also want to be able to move vehicles in and
out of the building safely, easily and quickly, without having to interrupt mechanics
working on other vehicles by forcing them to stop their work and move the vehicles,
tools, and equipment in their work areas.
As an expert witness, I took the position that the relevant unit of comparison for
auto repair facilities is not just size in square feet, but the number of service bays with
their own garage doors because these are the "units of production" for someone in the
business of working on motor vehicles. Some of the comparables used by the opposing
experts had only one or two garage doors, which makes it difficult to move vehicles in
and out of the building without disrupting other operations.
Also important is the size, shape and topography of the lot on which an
automotive garage is located. Some of the comparables used by the opposing side were
located on lots with inadequate parking for both customers and storing vehicles that are
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3. not being serviced. And, some of the comparables used by the opposing real estate
appraisers had sloping topography, which is not helpful when it comes to towing,
delivering, or jacking up vehicles or when it comes to mechanics pushing immobile
vehicles around the lot.
Another important point was that the auto service facilities I canvassed had a
much different occupancy/vacancy rate than the generic industrial buildings in the subject
submarket.
Surprisingly, location did not affect value the way it would many other property
types. The repair shop owner(s)/manager(s) who I interviewed felt that being located on
a side street instead of a main connector road was not that important. Maybe they were
being self-congratulatory, but the mechanics who felt this way about location explained
that many auto repair customers choose their mechanics based upon (perceived)
competence and trustworthiness as opposed to the visibility or convenience afforded by
the location.
Bearing these factors in mind, I was able to identify much more appropriate rent
comparables and improved sale comparables. The other side apparently agreed because
it chose to surrender rather than have the matter heard in court.
Some General Examples and Conclusion
Other relevant units of comparison include the number of seats and parking for
restaurants, theatres, auditoriums or houses of worship. Similarly, the number of boat
slips in a marina. For agricultural property, the relevant unit may be acres for typical
farmland, but board feet for timber or the number of animals that can be supported by a
given piece of ranchland or pasture land. For industrial properties used for general
warehousing and distribution, square feet and clear ceiling height are usually very
important and sometimes expressed as cubic feet, but so are other factors such as overall
location relative to labor, vendors and customers, loading bays and drive-in doors, and
maybe rail access. But, for assembly or manufacturing facilities, high power and
configurations of material storage and production lines may be critical. Medical office
buildings and dental offices turn on location and the number of patient treatment rooms
whereas hospitals may have beds and operating facilities as their key components of
productivity. For banks, the vault, safety deposit box quantities and mix, teller windows,
drive-thru lanes and ATMs may matter as much as location, access, visibility and
parking. Fast food restaurants and modern pharmacies often benefit from having
multiple drive-thru windows.
Ultimately, it is essential that the appraiser, expert witness, equity investor,
lender, landlord, tenant, user, tax assessor, condemnor, condemnee, litigant, jurist,
judicial adjunct, receiver, administrator, liquidator, bankruptcy trustee, debtor in
possession, creditor or other stakeholder employ the appropriate unit(s) of comparison in
analyzing a particular subject property and its comparables. To do otherwise would be
like valuing homes based only square footage instead of the number of bedrooms and
bathrooms.
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