FIRST QUARTER

2013

IN THIS ISSUECOURTING ATTORNEYS & LITIGATION WORK ❘ VALUING A BED & BREAKFAST ❘ THE BASICS OF LOBBYING

VALUATIONINSIGHTS AND PERSPECTIVES FOR REAL ESTATE APPRAISERS

APV-017

SECOND QUARTER

2013

IN THIS ISSUEVALUING HABITAT FOR HUMANITY PROJECTS ❘ INDEPENDENT CONTRACTOR OR EMPLOYEE: WHO DECIDES?

VALUATIONINSIGHTS AND PERSPECTIVES FOR REAL ESTATE APPRAISERS

ON THE

THE HIDDEN CHALLENGES OF APPRAISING MARINAS

WATERFRONT

10 VALUATION 2Q 201310 VALUATION

FRONT LINES Stories and insights from the field

BEHIND BARS

By MICHELLE TAYLOR, communications manager, Appraisal Institute

enough to support the first option so the government option — either state or federal — was the de facto choice.

“It was highly unlikely that it would be purchased by an adjacent state so that pretty much just left the federal government as the only possible buyer,” DeClark says.

A limited buyer pool wasn’t the only factor limiting the facility’s market. It was located in a rural community and there were no interstate highways providing ready access to the prison. This issue wasn’t just one of convenience, but one of security. Law enforcement would have to transport inmates to the prison using local roads and thoroughfares — certainly not the ideal setup for a massive prison complex.

Use Cost Approach for Unique PropertiesWhen developing their opinion of value, DeClark and Gathman used the cost approach, which DeClark says is the most frequently used method for hard-to-value properties.

The sales approach can be difficult to use for unusual properties because their uniqueness often makes it difficult to find relevant compa-rables — although DeClark’s research turned up two prisons built during the previous five to seven years that were used as cost comps but not as sale comps. The income approach wasn’t

“Our real challenge was understanding and defining the market for a vacant prison,” DeClark says. “Who is the likely buyer for this thing?”

DeClark specializes in hard-to-value properties and was hired by the state of Illinois to appraise the 12-year-old, but never-really-opened, maximum- security prison in 2011.

The $140 million Thomson Correctional Center was completed in Novem-ber 2001 and has remained mostly empty ever since. A few inmates eventually were moved into a small 200-bed minimum-security unit, but the prison’s 1,600 maximum-security beds were never used — the state said it couldn’t afford to staff the complex. In April 2010, the minimum-security inmates were relocated and the state officially closed the already closed facility.

DeClark was hired to perform the valuation because, surprisingly, there was an interested buyer. The federal government expressed interest in purchasing the 15-building complex with plans to house Guantanamo Bay detainees within the facility once the detention center in Cuba was closed.

It was fortuitous that the federal government was the interested party because when DeClark and Gathman set about defining the market for this moth-balled property, the list of potential buyers was short.

“Who can you add to the list right away? There’s virtually no one,” DeClark says.

In fact, DeClark identified only two possible buyers: 1) a real estate invest-ment trust if a sale-lease back with the government could be achieved, or 2) a government entity. DeClark didn’t consider the market for REITs to be strong

Gary DeClark, MAI, managing director of Integra Realty Resources — Chicago Metro, remembers well his work on the Thomson Correctional Center in Carroll County, Ill. It was

one of the trickiest valuation assignments he and his associate, Denis Gathman, MAI, undertook.

Challenges abound when appraising a maximum-security prison

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A cell block in the Thomson Correctional Center in Thomson, Ill. Thomson was built in 2001, but budget troubles kept it from fully opening.

Gary DeClark, MAI, managing director of Integra Realty Resources — Chicago Metro, has more than 35 years of commercial real estate valuation experience. His specialties include unusual real estate and complicated valuations.

11www.appraisalinstitute.org 11www.appraisalinstitute.org

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applicable for this assignment because a prison is not run as an economic engine like most commercial properties.

Working on the valuation over a two-month period, DeClark and Gathman visited the prison (what struck them the most, DeClark says, was the massive kitchen — designed to serve up to 9,600 meals each day), and employed experts to verify the building area and to confirm costs. Eventually they configured four differ-ent cost scenarios.

In the end, the Obama administration’s plan to transfer refugees from Guantanamo Bay to Thomson Correctional Center was rejected but the Fed closed the deal for $165 million in Octo-ber 2012 — with the caveat that it would not be used to house military prisoners. Instead, it will be operated by the Federal Bureau of Pris-ons and house the bureau’s own inmates.

Filling a NicheDeClark says there are two main reasons he specializes in hard-to-value properties. The

first is the intellectual stimulation — excite-ment mixed with some frustration — that comes with doing something unusual and challenging. “I do my homework and learn as much about a market as I can,” he says. “That’s just a good business technique regardless of who you are and what project you’re working on.”

The second reason is word-of-mouth. “I always seem to hear about the unusual ones,” he jokes.

DeClark says the hard-to-value proper-ties typically require an extensive amount of preliminary research — much more than traditional building types — in order to get a thorough understanding of the project. And when an opinion of value is finally developed?

“More often than not, it isn’t necessarily that your opinion is deemed correct because it’s just that — your professional opinion — but it’s whether or not your opinion can logically be defended.”

Unusual properties also can complicate DeClark’s approach to appraisal fees. “The more unusual a project, the less concrete you can be and the less concrete your associated fees can be,” he says. At the start of each project, his strategy is to examine the stages a project should follow, establish targets he must hit and then assign a fee for each target once it’s reached. He says this arrangement makes him more of a consul-tant who just happens to be working on a valuation assignment.

“ The more unusual a project, the less concrete you can be and the less concrete your associated fees can be … I always seem to hear about the unusual ones.”

—GARY DECLARK, MAI