Construction Defects May Reduce Property Values in an Entire Neighborhood

By: Brad Dulas

Over the last five years, Shenehon Company has had the opportunity to value several residential developments, including both single-family and multifamily residential dwellings, with significant construction defects. Construction defects to real property are often so complex that market participants rarely understand or fully appreciate the ramifications of such defects to the value of the defective property or neighboring properties. As a given property loses value, the property and neighboring properties become less desirable to potential buyers and investors, and the size of the pool of potential buyers shrinks, oftentimes, dramatically.
In the case of residential dwellings, a large percentage of market participants refuse to purchase homes with either existing or remediated construction defects. The small percentage of market participants with an interest in purchasing affected residential dwellings may be further limited due to the inability to secure mortgages or find other means of financing. The inability to secure financing would require a potential buyer to enter into an all-cash transaction, further depleting the potential pool of buyers. As a result, sellers of defective and damaged real property are often forced to offer significant discounts in sale price or other incentives to entice interested parties.
In many instances, owners may simply abandon the affected property. The abandonment of a property may have a detrimental effect on neighboring properties, resulting in a loss of value for other units in a development or neighboring properties simply by association. This loss of value has the potential to set the ripple effect in motion. As residential units decline in value, nearby commercial properties, including retail establishments, may experience a drop in overall business activity as well as revenue. Thus, the economic and social structures of an entire neighborhood have the potential to change relatively quickly; the direct result of a defective or damaged property in the area.
Neighborhoods blighted by abandoned buildings suffer from a variety of problems connected with commercial and residential structures that have fallen into disuse or disrepair. Although these issues are commonly associated with inner cities, the problems presented by abandoned buildings are not confined to urban areas. Issues often resulting from the abandonment of buildings include a decrease in property values, an increase in criminal activity, and a loss of neighborhood pride, vandalism and vagrancy. Blight and abandonment are akin to the broken windows theory, which suggests that a broken window, if left unrepaired, leads to others being broken and sends a clear signal that nobody cares.
Although neighborhood blight is not an objective condition, a blighted area, loosely defined, is an area that in its present condition and use, substantially impairs or reduces anticipated growth, stunts housing accommodations, constitutes an economic or social liability and/or is a menace to public health, safety or welfare. While neighborhood blight remains a subjective condition, the effects are quantifiable. According to a report published by the National Association of Home Builders, abandoned buildings in a neighborhood reduced the value of a standard new home in the same neighborhood by approximately $28,000. This reduction in value could be multiplied many times over based on the composition of the affected neighborhood.

Minnesota Ranks High

By: John T. Schmick

Minnesota ranked 7th in the nation for business according to CNBC’s recently -released “America’s Top States for Business 2011”. With low unemployment, a high quality of life, and an educated workforce, it is not surprising that Minnesota is one of the top ten states. 33 of the nation’s top 1,000 publicly-traded firms are headquartered in Minnesota, giving the state a broad, diverse economic base. According to Site Selection Magazine (Jan. 2012), Minnesota is one of six states where over 20% of the workforce hold a Bachelor’s degree. Of these same six states, three rank in the top ten states for low unemployment and have an economy where 7% – 13% of jobs are in the manufacturing sector.

It’s a well-known fact that economic diversity and high levels of education are the key factors in maintaining a successful business environment. Minnesota is not dependent on any one industry. Rather, the state has developed strong components of medical, financial, service, and research/development sectors. Combined with its economic stability, Minnesota offers a variety of opportunities for higher education through its many colleges, universities, and technical institutions. As a result, Minnesota is capable of withstanding economic downturns. The effects of the most recent housing downturn were much less dramatic for Minnesota than for many other states, and Minnesota is likely to rebound more quickly. Currently, there are numerous ongoing commercial and residential projects in Minnesota. Most noteworthy is the number of apartment projects in the Twin Cities Metro area, with 83 projects proposed, approved, and/or under construction, representing 11,819 new apartment units.

Even as the local economy improves, our clients may be dealing with business and real estate issues relating to the recent recession. Valuation professionals can provide guidance on the economic contribution, or potential, of business and real estate components within a management structure and a given market. With over 75 years experience valuing commercial real estate and business, Shenehon has the knowledge and skill to address a wide range of client concerns regardless of the economic environment.

America’s Top States for Business 2011 – #7 Minnesota
10 States with Ridiculously Low Unemployment — And Why

The Run Up in the Dow: Is it Sustainable?

By: Joshua Johnson

Even the most casual observer of the markets cannot help but notice that the Dow Jones Industrial Average (DIJA or the Dow), experienced an overall increase between 2011 and August 2012. Although a few setbacks occurred, particularly in summer 2011 amid talks of the European debt crisis, the Dow has generally trended upwards. Increasing from roughly 11,500 in early 2011 to the present 13,000, the Dow experienced an approximate 11.5% gain over that time period.

A number of groups have publicly expressed their opinions of where the Dow is headed. Most predictions fall into one of two categories. In one camp are the ever-indomitable bulls, who believe the markets are getting ready for continued upward growth as evidenced by improving corporate profits. On the other hand, there are the bears who tout current employment and personal income figures as evidence that continued growth will be difficult to sustain. While there is evidence to support both hypotheses, only time will tell which way the Dow will go.

Relevant analysis is one of the key elements of a top-notch business valuation. This is especially true in times of economic instability. Valuation experts, such as those at Shenehon Company, constantly analyze companies, industries, and the economy to develop a sense of which way the pendulum will swing.

Questions or comments? Please email Joshua Johnson at

Ten Important Legal Issues in a Commercial Lease

Our colleagues at Lapp, Libra, Thomson, Stoener, & Pusch, Chartered recently published “Ten Important Legal Issues in a Commercial Lease” (Winter 2012)

Shenehon Company’s next newsletter, Valuation Viewpoint (Spring 2012), describes another aspect of commercial leases: the renewal lease. Bob Strachota answers client questions and describes the process of negotiating renewal leases. In times of economic unrest, determining “fair market rent” is difficult. A link to Bob’s article, “Defining Market Rent for the Renewal Lease”, will be available following publication.

Ten Important Legal Issues in a Commercial Lease

2012 Release: The Family Law Financial Deskbook out this Spring!

William C. Herber and Robert J. Strachota recently updated their chapter “Real Estate and Partial Interest Valuations“, a general review of real estate appraisal in divorce for the 2012 Edition. The Deskbook is published by the Minnesota State Bar Association.

National Jury Verdict Review & Analysis feature

Robert Strachota was the appraiser on the recent case between a Rochester real estate developer and the state of Minnesota that was featured in the National Jury Verdict Review & Analysis. Larkin Hoffman attorneys Gary Van Cleve and Rob Stefonowicz represented the developer who received a $7.845 million jury award. The verdict is featured on page 34 in the issue.

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