Securitization is a boon for valuation firms

Increased liquidity and business alliances are driving growth for the appraisal and property tax industries.

The appraisal and property tax industries are undergoing rapid changes, with a growing economy, evolving markets, consolidation of real estate services and the advent of new technology a few of the factors involved.

The rise in popularity of investing in securitized real estate is making real estate a more liquid asset. This Wall Street phenomenon has increased the speed with which decisions on the properties have to be made. Thus, the property's value at any given time takes on even greater importance, and the services of appraisers are needed more frequently as investors try to keep up with what they should sell and what they should keep.

On the property tax side, companies contemplating large mergers or acquisitions are adding tax consultants to their due diligence process to find out if potential tax savings could be part of the transaction's upside.

Regardless of the need, the increase in real estate transactions driven by growth-conscious REITs, and the return of pension funds into the real estate arena, are providing ample work for appraisal and tax consulting professionals.

"Wall Street has had the biggest impact on the appraisal business in recent years," says Raymond Cirz, a principal with Krauser, Welsh & Cirz Inc., Morristown, N.J., a member of Valuation International Ltd.

Investment in REITs and CMBS are currently very attractive to investors because of their liquidity. "In the past, real estate investment was a very long-term play, and so the effects of short-term market forces on property values were not a practical consideration," says Jim Chapman, a partner in the San Diego office of Deloitte & Touche Real Estate Services. "However, today, the more liquid nature of some real estate investments is requiring that investors keep tabs on the value of their investment properties on a more timely basis."

Appraisers need to understand the impact securitization has on the capital markets and how that affects property values. "Appraisal has to be a value-added service in today's marketplace, and they need to make sure their skill sets match the marketplace's needs," explains Joseph R. Stanfield, president of Houston-based Stanfield and Associates, an independent appraisal and consulting firm, and the 1998 president of The Appraisal Institute, Chicago.

Growth is possible as long as traditional appraisers upgrade their knowledge and abilities, particularly in the areas of public companies. Stanfield says this change has even been reflected in the Appraisal Institute's motto, which was recently reworded to state the group is striving for "excellence and leadership in valuation and consulting."

"Previously, its wording had only been related to appraising," he says.

The effects of REITs on the appraisal business is not necessarily direct. "Appraisal firms have learned that REITs are not very good clients for traditional appraisal work, but they do create a need for more peripheral types of valuation services," says James Kafes, executive managing director and national director for Valuation and Technical Services in the New York office of Landauer Services. He points out that some of these peripheral services include portfolio analysis, ratings work and litigation support work.

Most feel the current demand will continue, as securitization isn't going away any time soon. This type of financing has continued at a fast pace into 1998 and should remain so as long as interest rates are favorable, according to Frank Liantonio, co-executive managing director of valuation advisory services, Cushman & Wakefield, New York.

Pension funds are another major player driving the appraisal business. "Our company has benefited greatly from the needs of pension funds," says Donald M. Blake Jr., vice president/corporate with Joseph J. Blake and Associates, New York. "They have to report asset value each year and, as they have become more active, our business has increased."

Liantonio points out that another important group to consider in valuation is the rating agencies, because they all require appraisal reports, although these reports usually fall short of the detail included in traditional appraisals.

"It is important that these reports are accurate or they could have a negative impact on the rating of the REIT stock or the loan pool," explains Blake.

This is a particularly relevant point because appraisers are being asked to do more than ever before. Property values are affected by more than just the bricks and mortar; now, valuation professionals are often asked to go beyond the scope of the traditional appraisal.

"REITs are looking for more than just the numbers. They are interested in the durability of the income stream," says Keith M. Kramer, president of Chesterfield, Mo.-based Keith M. Kramer & Associates. "Their purchases are income driven, so they need assessments of the neighborhood, both current and future, and a long-term assessment of the property itself."

Summary reports gaining favor Sometimes a full appraisal report is not required. The client may favor a more quantitative approach dealing only with the hard numbers. This is another area of change in the appraisal industry -- the types of reporting clients want.

Modified summary reports provide more details on a property's income and less detail with regard to the community overview.

Liantonio points out that the size of the investment usually dictates the type of report needed. "Unusually complex and high value assets, such as regional malls, require more detailed, self-contained, reports," he says, "because of the large number of leases and the investment involved." On the other hand, a garden variety strip center probably lends itself to a summary report.

This shift toward summary reports has hurt the appraisal business in that valuation reports of this nature are being provided by other real estate service providers. Indeed, Kramer says the number of appraisers and appraisal firms continues to decline. Part of this could be due to efforts by Fannie Mae and Freddie Mac to refine their appraisal guidelines and that the states "seem to be more vigilant in policing the industry," he says.

Stiff competition from national firms also plays a role. Small local firms can't compete with large national firms for the growing securitization business and are being swallowed up by larger firms, switching to another area of real estate work or going out of business.

"A few smaller firms have received some of the securitization business due to the great volume of work spilling over from the larger firms," says Blake. "But a handful of large national firms are getting the vast majority of the business."

Even so, some in the industry still feel there is a place for small firms. "The securitization business is only a small portion of the total value of real estate transactions across the country," says Chapman. "So boutique firms that deal with local concerns can be successful."

However, appraisal firms that are seeking to grow are heeding two other trends in the industry -- diversification in the types of services they offer clients and specialization in property types.

The firms that provide the most services in the most markets often attract the most business.

Partnerships are a growing trend National firms usually have the resources to maintain all of these services in-house, but smaller firms are gaining more capabilities by forming alliances or partnerships with other firms that provide services they do not.

"These types of affiliations enable smaller appraisers and consulting firms to offer these services and still be competitive with larger accounting firms and brokerage houses," says Stanfield.

"If a company can't offer the same amount of services as others it can't compete," says Cirz.

Liantonio points out the clear advantage of added services without added overhead. In particular, he says engineering and environmental services are being received well by clients.

As well as adding more service options, many firms are also adding expertise in the various property types.

In addition to office and industrial, Cushman & Wakefield has founded specialty practices for retail, hospitality and affordable housing properties and will soon do likewise for seniors housing and healthcare properties.

Technology simplifies research Another factor that has had a major impact on the appraisal industry in recent years is technology. The use of computers and the Internet to enhance the speed and efficiency with which information is passed among appraisers, records offices and clients has greatly benefited the industry.

"Data gathering has been greatly streamlined, which is all in response to what the market is demanding," says Stanfield.

"Greater access to information has made it much easier to coordinate data with clients," says Cirz. "You still need the market expertise to use the data, but it has speeded the process."

"Since 1994," says Liantonio, "our production per professional has increased by 25%, and it is due to our ability to access information from data bases that we can reuse." He thinks this access to information will eventually allow more people to enter the industry.

Blake adds that technology has also led to better formatting of reports making them easier for clients to understand and use.

The Internet has also allowed firms to widen their scope of business from local to national and even international markets.

For all of the advantages, there does appear to be at least one downside brought on by technology: "On a per appraisal basis we have seen downward pressure on fees," says Chapman. He does admit that has leveled off recently.

Blake adds that fees have started to move back up, and he expects that to continue in 1998.

Attention to taxes has appeal Another area of increasing business for valuation professionals is property tax consulting. "Clearly, valuation companies are trying to get into the business," reports Bob Dunlap, a partner and national director of property tax services with KPMG Peat Marwick.

While the idea of just how much savings companies can realize from this service has yet to take hold with all members of Corporate America, more and more firms are seeing the light. "The corporate world is not very sophisticated on a tax level," says Dennis Neilson, president of American Appraisal and Property Tax Services, Chicago. "But they are coming around."

Tax reduction work basically entails finding reason for tax appeals and pursuing reduction for the property owner on individual properties or entire portfolios. He adds that institutional clients ask them to do pro forma work on portfolio acquisitions, an area where he expects increasing business.

"We look for an argument that the property is overvalued, on which we can base an appeal to the tax assessors office," states Dunlap. "But you have to make a credible case."

"Typically the income approach is used by tax assessors for commercial properties," explains W. Ken Parsons, senior vice president with Dallas-based Marvin F. Poer & Co. "So it is a matter of proving the income stream for the property does not justify the current tax valuation."

These tax appeals often result in reduced assessment and, as a result, less taxes paid by clients. The savings can still be substantial, but usually not to the extent possible earlier this decade. These assessments can be based on a variety of factors including equity (is firm being taxed the same as its competitors), neighborhood changes (has decline in area led to devaluation of property), environmental contamination (has this news tainted value) and, of course, normal depreciation.

Neilson says now companies are less leery of bringing environmental problems out in the open, and one of the reasons is that they can receive tax relief.

In the early 1990s, Dunlap says, tax consultants could often provide tax reductions of 10% per year, but today the figure is more in the 5% to 6% range.

Goal has shifted In the current growing economy the goal of the tax consultant has shifted. "In today's rising real estate market the challenge is often to limit rises in assessments and to ensure the client remains fairly assessed," says Liantonio.

"Valuation is not an absolute science, if you asked 10 [appraisers] the value of a property, you will probably get 10 different answers," says Parsons. "But our job as tax consultants is to figure out the range the property falls between and get the property assessed on the low-end of that range."

The appeals usually result in the client receiving a reduction in assessed value, but not all of what they were asking for. "Practically speaking, it is a negotiating process," says Liantonio. "The side that is best prepared will win."

Along these lines, Joseph J. Blake and Associates has devised an interesting partnership strategy. "We have aligned ourselves with prominent law firms in many cities," says Blake. "Lawyers are advocates by nature and take the data we provide and present the case."

Technology is also making its presence known in the tax consulting field. "It is still in its embryonic stages," says Neilson. "But, for instance, you can access tax assessment rolls of many cities on the Internet and get a variety of other data, often from sources that are provided for other purposes."

Parsons says technology not only helps with research but also can be used to file tax appeals, an ability which can be critical in filing a large volume of appeals within the time window allowed under the law.

"Companies need to be aggressive with regard to their property taxes," he says, "because they can be sure that their competitors are."

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