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Yet, the problem appraisers face is the pressure to trade-off the due diligence required for thorough lease analysis with the need to produce valuation advice to clients at the ever-increasing speed of business.
My goal in this article is to offer tips for appraisers to reduce the risk of errors in lease analysis by avoiding some common traps and still achieving a manageable balance between research and report production.
We have all made mistakes in lease analysis and I am willing to put up my hand up first.
The key is whether we learn from our mistakes, grow from our experiences, and continue to advance our professional development. I have hired appraisers and reviewed their appraisal reports, some the size of a phone book. Believe me, size does not matter when comes to appraisal reports.
Here are the most common lease analysis errors that I have encountered. Reliance on the rent roll or lease abstract without a review of the lease documents. This may seem like a no-brainer.
Relying only on the rent roll is high risk and contrary to the direction in our education program, standards and every appraisal text.
The test is pretty simple. Talk to five or six appraisers who value this property type and ask them what level of due diligence they feel is appropriate — this will be your research benchmark.
A common sense approach I have used is to rely on a combination of sources: This approach should be adequate when valuing a building with fairly uniform lease documents.
My advice in this scenario is to quote a decent fee — there is a lot of work in reviewing documents and adjusting all rents to net for consistent analysis. A belief that the lease consists of only one document.
Did you know that the lease is actually a number of documents including the original agreement, addendums, modification agreements, assignments, and other documents that modify the lease terms? When you contact the landlord or property manager for the building leases, ensure you ask for all the related documents.
You will also want to see Offers to Lease a conditional contract for new deals that have not yet been solidified in a formal lease agreement. Some appraisers may feel that a lease abstract or detailed summary of the lease is sufficient for valuation purposes.
Here is the problem with this shortcut. In addition, the lease abstract may not identify all the lease clauses that impact value. Landlords may also relax rent or other lease conditions through an informal letter to the tenant.Valle Crucis Log Cabin Rentals is the one of the oldest vacation rental companies in the High Country.
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