Appraisal data lags the market. Appraisers rely on detailed market data, which often takes months to compile. In a rapidly falling market, rents as reported from traditional sources therefore will be substantially below real-world conditions. The simple remedy is to visit similar properties and inquire about rental terms. If you are visiting a loan prospect and the building across the street has vacancies, just stop by.Comparable sales occur with less frequency. In the early stages of a downturn, sellers tend to hold to historical price expectations and the volume of property sales therefore drops dramatically. This phenomenon, in turn, leads to stale comparables, which reflect historical but not current market rents. Challenge your appraisers to produce recent sales data to support their valuation assumptions. If such support is not available, require appraisal modifications or take other appropriate defensive steps such as lowering advance rates.Landlord concessions may not always be visible. To attract tenants under weakening market conditions, property owners offer a variety of concessions such as free-rent periods, funding of unusual improvements sought by tenants, and/or absorption of extraordinary expenses. The sums involved may be quite significant and should be factored into any calculation of net effective rent.

Posted on 01/17/2009 at 2:22 AM