Appraisal Methods Used For Facade Preservation Easement Valuations: Valuing Facade Preservation Ease
By Robert Plotka Managing Director, CityScape Capital Group | July 29, 2010
Based upon generally accepted appraisal practices, real property appraisals should be supported by adequate market data analysis using one or more of the three traditional appraisal approaches: Sales Comparison, Income Capitalization and Cost. The two-step "before and after" approach for valuing a facade preservation easement involves estimating the fair market value of the historic property and then using this historic property valuation as a basis for valuing the facade preservation easement.
Step 1: Property Valuation.
The first step is estimating the fair market value of the historic property at its highest and best use under current conditions. In arriving at an opinion of market value, one or more of the three traditional appraisal approaches are considered.
The Sales Comparison Approach estimates market value by analyzing sales of similar properties and making logical adjustments for dissimilar characteristics. Comparing factors such as location, time of sale, physical characteristics, conditions of sale and terms of financing, adjustments are made to the sale price of each selected comparable property. Then, these adjusted sale prices, usually converted into price per square foot of building area, are correlated into an opinion of market value for the historic property.
Since the Sales Comparison Approach utilizes the sales of reasonably similar properties as a basis for comparison, it is most effective when relevant and reliable comparable sales market data is available which can then be analyzed on the basis of pertinent appraisal indicators. Also, the Sales Comparison Approach is most applicable in understanding the fee simple interest of owner-occupied properties whereas, for leased buildings, it tends to be considered a secondary, but still useful, methodology for estimating market value.
The Income Capitalization Approach estimates market value based upon the future cash flows expected to be generated from the historic property. Using property specific information as well as available market data, net operating income is calculated by deducting anticipated expenses from projected gross income. These annual cash flows, plus the reversionary property value, are discounted at an appropriate rate that is commensurate with the investment's expected return and risk level, which is typically an estimate of the yield currently being sought by real estate investors in the market. In this context, the resulting present value of future cash flows is an opinion of market value for the historic property.