It is prudent to determine in the early stages of your new buiding purchase what your total exposure is prior to making any commitments, whether purchasing land for new construction of a building or purchasing an existing building and making changes to suit your business operation, here’s why;
Based on what I have recently observed, the banks have the money and want to lend, but the appraisers are running scared, rightfully so. Their fear is a result of the highly leveraged lending zeal of this most recent financial debacle! Appraisals are coming in at about 2/3 actual cost and the banks are willing to lend in some cases up to 90% of appraised value, in essence lending 60% of actual cost and asking the Owner to put up 40% cash. I have seen more construction projects die on the vine because the required equity.
These high contributions by our prospective clients would cripple their operating cash and put their business in jeopardy. So they are leasing existing space or making do with what they have right now. Interestingly many industries are reporting record profits and maximum production, but are skeptical as to whether this can continue. Comparative building sales analyses in many cases are using existing buildings that are over 20 years old without consideration for depreciation of building systems and building envelope, and disregarding necessary upgrade costs to comply with today’s storm water management and building code requirements which add significant expenditures to enable the occupancy of the buildings on the market.
The income approach analysis is taking regional base rental rates and not factoring in the amortization of tenant improvements over the period of the lease therefore not using a realistic rental rate when calculating property values using the income approach. The only accurate appraisal approach being used these days is the replacement costs analysis which becomes null and void since many of the lending institutions require that the lowest of three approaches be used to determine the projected value of the property. This may continue to deter new construction until Regulators re-evaluate current appraisal standards and adjust them to consider the improvement costs of old buildings to meet today’s standards, and adjust regional rental rates to reflect the cost regulatory upgrades necessary.