Act III: The Conflict
When the markets were stronger and values were increasing rapidly, no one noticed or cared that appraisers and lenders often used class-A cap rates to value class-B and -C facilities. Unfortunately, this sting of confusion will be felt by many in the current clime:
- Tax assessors who use sales of superior quality facilities (those achieving the highest rents in central business districts) to derive the assessed values of facilities with functional obsolescence located on secondary streets in the suburbs.
- Facilities being underinsured because appraisers based their values on inferior quality construction of single-story frame structures to value high-rise masonry structures.
- Owners whose facilities are undervalued by lenders using sales of inferior facilities with higher risk, not reflective of the subject’s high-barriers-to-entry and superior quality of construction.
- Appraisers using the expense comparables derived from sales of investment-grade facilities in major cities (which have much higher expense ratios) to value an owner/operated facility in the suburbs or even rural locations.
- A consultant who determines a proposed project is feasible because he assumes that all facilities are created equally.
For these and a host of other reasons, all other real estate sectors have recognized the need to classify properties by type and location. For instance, many are familiar with office buildings ranked as class A, B or C, or the difference between luxury, standard and economy lodging facilities. There is no confusion about the difference in value of a regional shopping mall and a neighborhood center. Nor would anyone would expect a garden-office complex to be comparable to a high-rise office located in the heart of the city. For the same reason, why should an investor in self-storage think all self-storage facilities perform in a comparable manner and reflect the same risk?