Land auction: Appraiser justifies value placed on prized parcel

An appraiser's job sounds pretty straightforward: assign a dollar value to a property. How complex can it be?

Pretty hairy it turns out, especially when the parties who have a financial stake in the outcome of the appraisal stand ready to scrutinize. Such was the case when the Bureau of Land Management commissioned Lubawy and Associates to appraise the fair market value of its prized 1,905-acre parcel in North Las Vegas for a public auction on May 9. Civic, federal and private parties all had a keen interest in the figure Matthew Lubawy produced.

The local real estate appraiser came back with a simple, round figure: $40 million. The accompanying justification proved much more complicated. Lubawy spent more than a month interviewing local developers, reading through massive federal regulatory tomes, investigating the site, and combing through engineering and market analysis reports. An appraisal for a typical parcel of raw land, say 20 to 40 acres, usually takes less than a week.

Many parties eagerly awaited the appraisal. The owner, the BLM, wants to sell it for as much as it can and generate funds for its projects in Nevada. For the federal agency, fair market value represents the lowest bid it will accept. Officials with North Las Vegas sought a realistic price that would ensure a bid from a high-quality builder, so the city may begin developing the site as soon as possible. Prospective developers, of course, want to pay as little as possible to acquire the land and sell more houses at a greater profit.

"The biggest issue here is that (the BLM) starts the bidding at appraised fair market value," Lubawy said. "There's a lot of pressure on the appraisers to come in at fair market value. We have to make sure we come in right with the price."

By law, the BLM may not accept less than this appraised value for lands it controls. In previous auctions, local land brokers and longtime developers complained that the fair market value prices are too high. Instead, they say, the BLM should offer low starting prices to draw interest and then let bidding wars raise the price to "let the market determine the price."

Lubawy understands these interests, but can't ignore federal mandate. Federal appraisals are based on the Uniform Appraisal Standards.

Any number of events can bring a landowner to request an appraisal. The most common is when a home buyer obtains financing and the lender wants to know whether or not the home is adequate collateral. Other common reasons are the death of the owner, abandonment, divorce and sales negotiations.

Lubawy has calculated values for all kinds of properties: residential, commercial, retail, industrial, land and quite a few casinos -- everything but agriculture, as he puts it. Lubawy's hung a price on airport hangars and a car dealership, custom homes and tract homes. His work has been used for expert testimony in court for estate and divorce cases.

"Sometimes, people just want to know what it's worth," Lubawy said.

On a simpler job, say a tract home, an appraisal is usually determined by a sales comparison: Look at similar homes that have sold, adjust for their differences and you arrive at the going rate.

The same concept works for bigger jobs, but it becomes less reliable as the differences among comparable properties become too great. For instance, land in the Las Vegas Valley sells for $100,000 per acre or more, much more than Lubawy's $21,000-per-acre valuation in North Las Vegas. But most land that is sold is closer to utilities and access roads. Most such parcels are also closer to existing development, and their physical conditions are generally better understood.

Possible uses really affect value. Obviously, if the city or county were to allow a casino on a site, its value would be greater than if they were to allow only a supermarket and some houses. Similar considerations are at work with the acreage in North Las Vegas because no one knows exactly what will, or even can, eventually be built.

Lubawy considered a development pattern based on a report commissioned by the BLM and compiled by Restrepo Consulting Group. The report, which developers are not obliged to follow, shows a hypothetical Summerlin-style development with two residential villages, each with several neighborhoods. One-third of the land is occupied by public facilities and parks.

Lubawy crunched his numbers based on two approaches, development and sales comparison, and determined which one fit the situation better.

"There's a number of approaches to appraisal and there's going to be some variance in those approaches," Lubawy said. "It depends on which is the most appropriate. You normally have a range of value. We're looking at the most probable price it will sell for based on the date of the inspection."

Lubawy spoke with developers who have acquired large tracts in the Las Vegas Valley, as well as several who are planning to bid on the parcel. They said infrastructure issues, such as when the northern segment of the Las Vegas Beltway would be completed and how much it would cost to bring utilities to the area, were the chief concerns. They also had lingering doubts about how soon the city and BLM would release the balance of the 7,500 acres in the area that the BLM has slated for public auction.

Even the timing of the appraisal can affect its price, not unlike news and reports affect the stock market. Possible soil problems? Value drops. Beltway construction to parcel accelerated? Value rises. Infrastructure costs may be exorbitant? Price goes down. Home builders run low on developable land? Price goes up.

"There's probably nothing as complex or having as many variables as this on the market."

And with all of these variables, timing is everything. Lubawy said announcements that construction would be hastened on the northern leg of the beltway leading into the North Las Vegas parcel had a positive effect on its value.

"It's not just if access is coming, but when, and also the quality," he explained. "Access adds value."

Lubawy also had to estimate likely development density, soil quality, the cost of bringing utilities to the somewhat remote parcel, and likely market conditions.

"This piece was a difficult piece to appraise. The required infrastructure, the cost of that infrastructure, all the major roadways, the beltway, the soil issues ..., the Restrepo report, some developers may want and get more residential than is anticipated, all that has to be factored.

"We had to investigate the piece and have discussions with experts regarding soil, analysis, issues like that."

The most complicated task was studying the land itself. A crucial aid for this was an engineering and land-use report by Post, Buckley, Shuh & Jernigan. Though extensive, the report leaves open questions of soil quality and how much it will cost to make the land developable.

"We had to rely on the infrastructure cost based on the engineer's report," Lubawy said.

In his report, Lubawy noted his appraisal assumes there are no serious problems and no dramatic market changes will occur in the next few months. Other assumptions also are spelled out for review.

While completing a business degree at UNLV in the 1980s, Lubawy worked briefly as a realty agent before realizing his true calling. He has obtained the trade's highest designation, Master, Appraisal Institute, which he said takes about five to seven years including education, apprenticeship and exams.

While the scope and attention of this appraisal are unusual, Lubawy sees it as just another assignment. It's notoriety is similar to that of the Lester "Benny" Binion estate, which included a downtown casino with 12 leases, all affecting its use -- and therefore its fair market value.

"Every appraisal assignment has its own little quirks, twists and turns," he said. "You just have to do an adequate amount of research so you'll know how it compares to the market."

Lubawy points out the ultimate appraiser is an interested buyer armed with a check. In conducting his appraisal, Lubawy asked experienced developers about their market opinions: how they would assess the piece, how they would break it down, and -- dancing around the issue -- how much profit a developer could reasonably expect. The developer's eventual profit margin, often referenced as the discount rate, is based on how much the developer pays for land, how much is spent on the land, how much money the developer will expect to receive for the land, and how long it will take.

The final factor is risk: The more there is, the bigger the profit the developer will expect. "It's like putting your money into a bond. If you put it into a junk bond, you're going to expect a higher rate of return."

Because the discount rate is factored into the calculation of fair market value, the price tag on the land will essentially tell developers what kind of return they may expect based on their own cost estimates.

"Developers will look at the discount rate and determine if they are satisfied with the return they can make based on their own assumptions," Lubawy said.

"People willing to take a lower return will pay more for the property."S U N D A Y , A P R I L 1 , 2 0 0 1

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