A painful fresh look

Appraisers of commercial real estate in the Reno-Sparks area have seen an increase in business as banks keep a close eye on assets backed by real estate loans.

In many cases, land and property owners have had to renegotiate loan terms due to the lower values that appraisers establish.

John Wright, a vice president at Nevada State Bank and a commercial real estate appraiser in the area for more than 25 years, says Nevada State Bank has seen a 20 percent increase in the number of commercial appraisers it hires as the bank closely monitors its assets.

"We are feeing out more appraisal work now than we ever have," Wright says.

With bank regulators nervous about how current economic conditions might affect the value of commercial real estate secured by loans, commercial appraisers are busy re-assessing values that often were established before rents started falling and occupancy sank.

The demand for commercial reappraisal, says Roger Kadz, senior vice president of Plumas Bank and manager of real estate lending, stems from regulatory reforms established in 1989 in the wake of the savings and loan crisis.

"Lenders are bound by that regulation to engage appraisals in conjunction with our loans at any time we see market conditions that have changed," Kadz says.

Julie Ott of Carter-Ott Appraisal Associates in Reno says her firm has a received a growing amount of work as banks take a hard look at property values relative to the loan on a given property.

"There has been an uptick in activity because a lot of banks have portfolios of properties that they have to monitor," she says.

"Often the properties were appraised during the peak, and they have to get a feel for where value stands relative to their loans. Retail sales are down, unemployment is up, job growth is down all that impacts valuations," Ott adds.

For many multi-family properties and commercial centers, Ott says there is a likelihood of lower appraisal values because vacancies have increased, and rents have flattened or decreased. In addition, tenant-hungry developers and property owners are offering free rent and other concessions that can negatively impact effective rents and capitalization rates and lead to lower appraised values across the market.

And with falling value of the collateral they put up to support a loan, borrowers are forced under federal regulations to make up the difference.

"It may mean that the borrower might have to re-margin the loan," Kadz says. "Where we have been involved in land and land development loans, new appraisals have resulted in collateral being significantly less than when the loan was made. There have been negotiations with borrowers to make principal reduction payments so the loan remains the same loan-to-value as when the loan was made."

Wright says appraisal values depend on the type of property, its location and niche in the market. In some cases flat rents and lower occupancies have had minimal impact on the appraised value maybe a 5 or 10 percent decrease. In other cases, though, the decline has been as much as 25 to 30 percent.

Wright cautiously points out that appraised value is not the actual value of a property but rather a representation of what the property might sell for on the market.

"Appraisers are charged with representing the market," he says. "An appraiser's job is not to place value on a property but to assess how a participant in the market would value a property. We investigate the market in an attempt to derive how the market would look at a piece of property."

Lower values translate into lower sales prices and lower sales prices on comparable properties influence the values that are established by appraisers.

James Wimberly, owner of the Wimberly Company Inc. Real Estate Valuation and Consulting, says that buyers and tenants clearly have the upper hand currently.

"Historically, buyers of income properties have outnumbered the supply of available properties," he says. "Increasing capitalization rates and decreasing rents have led to a decline in property values. However, investors appear cautious and sellers are reluctant to decrease asking prices, which is evidenced by the lack of sales of income properties. This spread between the listing prices and buyers' projections will eventually be mitigated, although the market is clearly in a repricing trend for the near term."

And borrowers, many of them already pressed by harsh economic conditions on their properties, are struggling to understand why new loan terms must be negotiated.

"Borrowers have been wondering why financial institutions are needing to do all these things," Kadz says. "It is something we try to explain at the time we initially meet with prospective borrowers and consider loan applications. But these are details that usually don't come into focus unless there is a problem with the loan or an economic downturn."