#MAIAppraiser - FRG Consultants

The Price of Contamination

An Ohio village of less than 5,000 people became the epicenter of an EPA disaster. On February 3^rd (2023) a Norfolk Southern train with 150 cars derailed on the outskirts of East Palestine, Ohio. East Palestine is approximately 90 miles from metro Cleveland and 50 miles from metro Pittsburgh. Eleven cars containing hazardous materials were a part of the derailment. The EPA along with multiple local, state and national offices immediately began working to remove the contaminated soil and water.

The US is averaging a hazardous material spill on land and waterways every day and a half impacting residents, natural resources, and property values. This statistic does not consider intended and naturally occurring contaminations from mineral extraction, flooding, illegal dumping, and agricultural chemical use.

Contaminated property can pose significant health, financial, and legal risks. Working with experienced professionals, including environmental consultants, attorneys, and appraisers, can help to develop a comprehensive plan for remediation and minimize the impact of the contamination. Although the EPA and federal government are tracking contaminants to humans, the impact of depreciation to property values before and after remediation are not specifically quantified and can affect the use and development of the property.

Valuing contaminated property can be a complex process that requires a specialized understanding of environmental regulations, remediation costs, and market conditions.

The cost approach considers the cost of cleaning up the contamination and restoring the property to a usable condition.
The sales comparison approach compares the contaminated property to similar properties that have sold in the same market. The appraiser adjusts the sale prices of comparable properties based on the extent and type of contamination and other factors, such as location and property condition, to estimate the value of the contaminated property.
The income approach is used for income-producing properties, whereby the appraiser estimates the potential income that the property could generate if it were not contaminated, and then subtracts the costs of remediation and other expenses to arrive at an estimated value.

In addition to these three approaches, appraisers may also consider other factors, such as the property’s zoning, development potential, and legal liabilities, when valuing contaminated property. Valuing contaminated property can be challenging due to the complexity and uncertainty involved in estimating remediation costs and other factors. Thus, it’s important to work with an appraiser who has experience and expertise in valuing contaminated properties.

FRG’s appraisers have extensive experience valuing contaminated properties, as well as completing due diligence. For almost ten years, FRG has assisted the state of Ohio in identifying the owners of abandoned underground storage tanks (e.g. fuel tanks) who are responsible for removal of the tanks and as needed remediation efforts.

So, remember, if you buy contaminated property, you might be responsible for the remediation of the property. The extent and type of remediation required will depend on the nature and extent of the contamination, as well as any regulatory requirements. Be informed and seek professional help before you buy.

Where’s the Rent?

According to Moody’s 10 million Americans are behind on their rent. And as of December 2020, according to the National Low Income Housing Coalition renters owe ~$30-70 billion in back rent to landlords.

The Center for Disease Control and Prevention (CDC) extended the federal moratorium on rental evictions due to a tenant’s failure to pay rent through June 30, 2021. This decision is both good and bad.

The eviction moratorium is a vital protective public health measure. The obvious positive impact of the moratorium is that millions of people who are unable to pay their rent can stay in their homes and out of crowded congregate settings, or worse. Research has shown that it is easier to keep someone from becoming homeless than attempting to get them out of homelessness.

However, with each extension of the moratorium there is an increase in the number of landlords struggling to find cash to pay mortgages, taxes, utilities, and maintenance cost. ~10 million individuals own one or two rental units and these individuals account for 22.1 million, or over 50% of the rental housing stock in the U.S. The hardship of no rental payments disproportionately impacts the small landlord. Many of these small landlords are providing housing to the lower income market and the risk of these landlords filing bankruptcy or facing foreclosure could have a significant impact on the availability of affordable rental housing.

The passed COVID Relief (December 2020) and American Rescue Plan (March 2021) set aside a combined $50 billion in funds for state and local agencies to distribute to renters in arrears to pay their rent. And as of now less than half of landlords and a third of tenants are aware of the rental assistance.

The federal government’s goal is to get the funds to renters before the eviction process starts in July. To meet this goal local agencies will need to make both landlords and tenants aware of and encourage the use of the resources. As with most things, success is found in the execution.

COVID-19

Feasibility Research Group (FRG) is a privately-owned real estate services company specializing in commercial real estate appraisal, inspection, and research. Like many small businesses, FRG has been impacted by COVID-19.

However, the services that we provide are deemed essential by most states and thus we remain willing and able to assist you with your appraisal services and market research needs.

FRG practices social distancing. Currently, all employees are working from remote locations. Further, if an FRG appraiser is conducting an on-site inspection he/she will practice social distancing during the subject property inspection.

The FRG appraiser conducting the inspection will:

Maintain six feet distance from all property contacts
Request that only one person accompany the appraiser on the inspection
Not touch any fixtures, door handles, light switches, etc in the facility
Require unobstructed access and views of the interior of the building
Wear protective covering including but not limited to gloves and face masks

Further, as much as possible FRG appraisers will seek to conduct virtual interior inspections leveraging technology such as Skype and/or FaceTime*.

FRG will continue to monitor the coronavirus and its impact very carefully and provide updates as needed.

*NOTE: USPAP does not require a physical inspection. Appraisal Foundation Statement

The Appraisal Foundation, Fannie Mae, Freddie Mac and the Appraisal Institute have deemed virtual inspections to be acceptable.

The Struggle to Find Home Sweet Home

As our MAI appraisers complete multifamily housing commercial appraisals and rent comparability studies (RCS) for HUD and private clients, FRG has extensive multifamily housing knowledge. And as a result FRG has a great deal of interest in remedies to the affordable housing shortage.

I can still remember signing my first apartment lease. I was 19 years old and excited to move into my very own 500 sq-ft, one bedroom, one-bathroom home. Well it wasn’t all mine, because I could not afford the apartment, thus I had a roommate. Even with a roommate, this was the first time I felt like a responsible adult.

Unfortunately, many today are struggling to find a place to call home. Nationally, the number of renters has reached historic highs, and as a result it is becoming increasing difficult for many to find safe, quality affordable housing. In fact, according to a Harvard University Housing Study the availability of affordable rental housing is being affected by:

High rental demand and low vacancy rates, which allow landlords to continually increase rental rates
Demand from higher income renters is driving the construction of luxury vs affordable multifamily rental housing

A recent Ohio Housing Finance Agency report that assessed the state’s housing needs noted that lower income Ohioans are struggling to pay for housing as they spend more than 30% of their income on housing. The agency discovered that there are only 43 available and affordable rental units for every 100 extremely low-income renter. And these extremely low-income renter households are typically made up disproportionately with seniors and/or small children.

My 1st Leadership Development and Advisory Council Session

For more than 85 years, the Appraisal Institute (AI) has been a global professional association of real estate appraisers. AI works to develop real estate industry leaders and establish an appraiser presence in the United Stated Congress through its Leadership Development and Advisory Council (LDAC). The Council is a group of dedicated appraisers who together once a year in Washington DC to generate solutions to challenges facing the appraisal profession.

Last month, I had the pleasure of attending my first LDAC session in Washington DC. I entered with no expectations other than using it as an opportunity to learn more about the Appraisal Institute and offer up a thought or two on promoting our industry. By the end of the week, I walked away from LDAC exceeding those expectations.

The LDAC discussion sessions afforded the opportunity to engage and brainstorm with appraisal professionals from all around the country. The sessions served as opportunity for us to come together to generate actionable ideas to solve some of the appraisal industry’s toughest problems. Serving as a member of the Ohio Chapter’s education committee I was very passionate about the education discussions. Based on my experience, I know that AI’s educational offering is superior to other competitive offerings. Our group discussed ideas on how to not only get non-AI members to take AI courses but to also use our education offering to entice non-members to become members.

Adventures in Property Inspections

As a MAI designated commercial appraiser, over the past 10 years, I have conducted a couple of thousand commercial property inspections, and each inspection is as unique as the commercial property appraisal. During an inspection I am typically accompanied by the owner or the owner’s agent. Most times the inspections are uneventful, and the owner/agent is helpful in providing insightful property, neighborhood and market area information needed to complete a comprehensive appraisal of the subject property. However, there have been occasions when the inspection becomes eventful –

The Helpful Owner

I do occasionally encounter owners who want to point out all the subject property’s current or planned amenities that they believe will significantly impact the value. Earlier this year I appraised an office park complex located parallel to a major highway in central Ohio. I was advised by the lender that the complex was fully leased and thus the income approach would be required. During the inspection, the owner shared that he thought it was vital that I consider the fact that he could have a billboard on his property which would generate additional income. Further, the owner spent a considerable amount of time sharing his marketing brochures to clearly demonstrate the type of tenants he would soon have in the complex. At the time of the inspection, the owner was the only tenant in the office complex, while the lender thought the property was fully leased.

The Fearful Tenant

Affordable Multifamily Housing

According to the United States Department of Housing and Urban Development (HUD), today there is nowhere in the U.S. where a full-time, minimum wage worker can afford the local fair-market rent for a two-bedroom apartment.[i] Communities across the nation are reporting high levels of evictions, homelessness, and a lack of affordable housing.

So, let’s talk about affordable multifamily housing.

Affordable housing means different things depending on if you are an investor, property manager, tenant or government agency. For me, a commercial appraiser, affordable housing represents complex property types with a myriad of funding, ownership, and rental structures that require careful consideration to define property values, fair market rents, or physical conditions. Or put more simply, affordable housing can be very complicated!

And lining up the financing for affordable housing can seem more insurmountable than trying to convince your wife Valentine’s Day is a made-up holiday– what’s the point in even trying? There are several available sources of funding including bank loans, municipal loans, Low-Income Housing Tax Credits (LIHTC), Community Development Block Grants, tax abatements, and other local subsidies or support provided by Community Development Corporations, and other specialized subsidies, tax credits and financing such as assistance by the USDA Rural Development Office (in rural areas).

While there are a lot of possible funding sources, there are often not enough to cover the development costs and it can be tricky to qualify or take a long time to get approved.

As a commercial appraiser, I understand the financial hurdles overcome by developers and providers of affordable housing and in my work, I strive to support the financial well-being of these developments in several ways:

Growth on the Lake: The Power of Green Technology

Over the last couple of years Cleveland has really done a lot to change outsiders’ perception of the city. No longer is the city referred to as the ‘Mistake on the Lake’. In fact, recently I was on an Amtrak train traveling from Washington DC to Baltimore, and in the seat pocket was “The National”, Amtrak’s onboard magazine. And on the front cover of the National was a gorgeous plate of food and the caption “Next Stop: Cleveland – A booming food scene is helping this postindustrial city shake off the rust”. The six-page cover story featured Cleveland’s hippest neighborhoods, celebrity chefs and their restaurants.

After reading the article, I thought to myself, Cleveland really has a lot going for it – exceptional museums, cool neighborhoods, world class healthcare, it has the 2nd largest theater district in the country, stellar higher educational institutions, home of big budget film productions and a championship sports team. And on top of all that, Cleveland is becoming known for making real advances in green technology.

Cleveland, like most metropolitan cities has its environmental issues, whether that be runoff from urban fields or commercial sites contaminated by prior use or contaminated sediments at the bottom of Lake Erie. Cleveland is starting to find unique solutions for these issues.

One of the region’s greatest assets is the Great Lakes, which provide freshwater for drinking, transportation, power and recreation. And 21% of the world’s supply of freshwater comes from the Great Lakes.

So, I am happy that the U.S Army Corps of Engineers (ACE) and the Ohio EPA are working together to find a better solution for where to put the sediment dredged from Lake Erie, a solution that does not include dumping the sediment back into Lake Erie. Recently, it was reported that they are exploring the solution that the Port of Cleveland is using to re-purpose sediment. The Port contracts with a supplier that recycles the dredged sediment and uses some to restore wetlands near the harbors being dredged and sells some of the clean sediment to construction companies to use on their sites. Re-purposing prevented the need to build a containment dike, thus saving the Port of Cleveland $150 million.

Another green technology project in development is the placing of six (6) 3.45-megawatt wind turbines eight miles off the shore of Lake Erie. The goal of putting wind turbines in Lake Erie is to funnel renewable energy into Cleveland’s Public Power infrastructure, enough to generate energy to power 7,000 homes.

Initiatives like these are exciting to see as they build on Cleveland’s strong science and technology competency and continues to diversify the area’s economy. A diversified economy attracts diverse talent from all over the world. The need for more talent can help to increase the area’s population and ultimately increases the need for housing, retail and infrastructure development. All of which are things needed for a thriving city. It’s nice to see ‘Growth on the Lake’.