COVID-19: Assessing the Impact on Real Estate Values

By: Mark W. Norris, CPA/ABV, CVA, MAFF, ASA 

Based on our conversations with real estate appraisers, there is no doubt that real estate values will change as a result of COVID.  Although Vallit does not perform real estate appraisals, we do utilize these appraisals when performing a business valuation for a real estate holding company or an entity that has real estate on its balance sheet.  When valuing a real estate holding company, the adjusted net asset value method is the valuation method (an asset-based approach) typically utilized.  In this method, the historical cost/book value of the real estate and improvements is replaced by the appraised value provided by the real estate appraiser.  This adjustment and any other balance sheet adjustments are also accounted for in the equity on the balance sheet.  The resulting adjusted equity (adjusted net assets) represents the fair market value of the entity on a control, marketable basis.  Our job is then to perform the necessary research and analysis to apply a discount for lack of control (minority interest discount), if applicable, and a discount for lack of marketability to produce the fair market value of the entity on a non-controlling (minority) basis, if applicable, and on a non-marketable basis.  Accordingly, many times, most of our analysis involves determining the appropriate discounts to be applied. 

Any time a valuation analyst relies on another expert when performing a business valuation, such reliance not only must be documented in the valuation report but, the valuation analyst must read, understand and agree with the conclusion cited in the appraisal report. This historically has been a straight-forward process for the valuation analyst.  Enter COVID-19.  

As a result of the economic shutdowns imposed across the country by state governors to control the spread of the virus, much of the real market has been negatively impacted.  In addition to evaluating the impact of specific regions/states, it is important to understand the impact of the various real estate sectors, i.e., office, industrial, flex, retail, and residential.  A few examples of how these sectors has been impacted include: 

• Retail tenants not paying monthly lease payments as a result of being either partially or entirely shut down. 
• Office tenants not paying monthly lease payments as a result of being either partially or entirely shut down. 
• Office tenants/businesses not paying monthly lease payments because their customers/clients have been partially or entirely shut down thereby negatively impacted revenue earned by the tenant/business. 
• Residential properties not being listed for sale due to the fear of potential buyers entering the premises and the related fear of transmitting the virus. 

As a result of the economic impact of COVID-19 and the related economic shutdowns and the impact on real estate, the business valuation analyst is tasked to thoroughly understand how the real estate appraiser has accounted for these issues.  Care must be taken to not duplicate any assessment of risk or marketability in the business valuation analysis that has already been accounted for in the real estate appraisal. 

The team at Vallit has the ability and experience to identify and understand the relevant issues that impact the dispute advisory, business valuation, and forensic accounting service offered to their clients.