Appraising investment properties which are incomplete is complicated in the best of times. Developing a reliable valuation in the current economic downturn requires attention to detail and methodology. Shenehon Company has provided fair market values of partially completed residential, industrial, office and retail projects in various stages of development ranging from footings-only-in-place to a nearly finished state. The methods we’ve been using for a number of years are consistent with those recently proposed by the International Valuation Standards Council for accounting for investment property under construction.
When valuing real property, most appraisers rely on the three basic valuation techniques (cost approach, income approach and market approach) to arrive at a reasonable range of value. The market approach is based on sales of comparable properties. Since very few investment properties transfer among market participants during the construction phases, using the market approach to determine the value of partially completed projects is precluded.
Likewise, if the appraiser relies exclusively on costs (the cost approach), the value estimate is artificially low because this technique does not take into consideration the entrepreneurial risks and incentives of the marketplace. The risks associated with a partially completed project are much higher than those associated with a completed one.
To adequately value unfinished construction projects, the appraiser assumes that the project is complete as of the valuation. Using this hypothetical situation, the appraiser now applies the three standard valuation techniques adjusting, as necessary, to account for the unfinished nature of the subject. It is common to adjust for: remaining construction and financing costs; the costs of leasing the property to a stabilized occupancy; and the development profit requirement necessary to attract a buyer to assume the risks inherent in the successful completion of a project.