real estate damage economics & statistics randall bell, phd, mai

Real Estate Damage

Economics & Statistics

Randall Bell, PhD, MAI

OverviewOverview Real Estate Damages

Overview / Bell Chart / DC Matrix Loss of Use – Project Delay

Construction Defect / Delay of Sale / Delay of Unoccupied Sale / Delay of Land Sale / Delay of Development

Economic Waste Costs vs. Benefits

Regression Modeling Simple Regressions / Multiple

Regressions

Hurricane Hurricane DamageDamage

Bikini AtollBikini Atoll

Marshall Islands - Nuclear Weapons Testing

Marshall Islands - Nuclear Weapons Testing

Nuclear Testing – Bikini Atoll

Marshall Islands - Nuclear Weapons Testing

Nuclear Testing Crater

Marshall Islands - Nuclear Weapons Testing

Nuclear Testing – Bikini Atoll

“Bravo Crater” - Bikini Atoll

Bravo Crater – Bikini Atoll

Measuring Radioactive Fallout

Testing for Radiation

EarthquakeEarthquake

Avila BeachAvila Beach

ChernobylChernobyl

Love CanalLove Canal

Love CanalLove Canal

Love CanalLove Canal

Other Cases Of Other Cases Of

Real Estate Real Estate DamageDamage

Bell ChartBell ChartII General GeneralIIII Transactional TransactionalIIIIII Legal LegalIVIV Distress DistressVV External ExternalVIVI Building BuildingVIIVII Site SiteVIIIVIII Environmental EnvironmentalIXIX

ConservationConservationXX Natural Natural

DETRIMENTAL CONDITION DETRIMENTAL CONDITION MODELMODEL

Unimpaired Value

A

Val

ue

Time

BDetrimental

Condition Occurs

Stages of Recovery and Value Effects

C

AssessmentCost & Responsibility Use Uncertainty Factor (Risk)

D

RepairCost & Responsibility Use Project Incentive (Risk)

E

On-GoingCost & ResponsibilityUse

FMarket Resistance (Risk)

DETRIMENTAL CONDITION MATRIX

StagesAssessment Repair Ongoing

Issu

es

Co

stU

seR

isk

Cost to Assess & Responsibility

Engineering Phase I,II,III Studies

Repair Costs & Responsibility

Repairs Remediation Contingencies

Ongoing Costs & Responsibility

Operations & Maintenance (O&M)

Monitoring

All Loss of Utility While Assessed

Disruptions Safety Concerns

Use Restrictions

All Loss of Utility While Repaired

Income Loss Expense Increase

Use Restrictions

OngoingLoss of Utility

Alterations to Highest & Best Use

Uncertainty Factor

Discount, if any, where extent of

damage is unknown

Project Incentive

Financial incentive, if any, to complete

repairs

Market Resistance

Residual resistance, if any,

due to situation

Loss of Use - Project Loss of Use - Project DelayDelay

Area Wide CalamitiesArea Wide Calamities Construction DelaysConstruction Delays Environmental Environmental CleanupCleanup

Delayed Sale or LeaseDelayed Sale or Lease Legal/Title DisputesLegal/Title Disputes

TimeTimeValueValue

Of MoneyOf Money

The Power of InterestThe Power of Interest The “banker’s secret” is to understand

the relationship between time and money.

The Power of InterestThe Power of Interest The “banker’s secret” is to understand the

relationship between time and money.

If the Indians had taken the $24 in trinkets that they received in 1688 for the Island of Manhattan, and traded to obtain a 6% annual return, today they would have nearly $3 trillion dollars, enough money to not only buy back all of Manhattan, but much of the entire real estate in the United States.

Case Study 1:Case Study 1:

Construction Construction DefectDefect

1. Construction Delay Case1. Construction Delay Case

With a construction delay case, the calculation may be straight forward. If a setback causes a

$1,000,000 project a 60 day delay, and the appropriate return is 12%, then the project

delay could be estimated. 

$1,000,000 @ 60 days @ 12% = $20,000

($1,000,000 x (2/12) x .12)

Case Study 2:Case Study 2:

Delay of SaleDelay of Sale

2. Delay of Occupied 2. Delay of Occupied Improved SaleImproved Sale

Some project delays may be computed with Some project delays may be computed with conventional methodologies using values at the conventional methodologies using values at the “target date” and the “delay date.” They should “target date” and the “delay date.” They should

reconcile with market trend studies. reconcile with market trend studies.

Target Date (Escrow Date) Market Value = $1,000,000Target Date (Escrow Date) Market Value = $1,000,000

Delay Date Market Value = $1,100,000Delay Date Market Value = $1,100,000

Case Study 3:Case Study 3:

Delay of Delay of Un-Occupied Un-Occupied Improved SaleImproved Sale

3. Loss of Use of Unoccupied Improved Property

A property has a construction defect whereby it must be vacated while repaired. In terms of use and occupancy, the damages could be

benchmarked to the rental rate,

16 Months @ $2,600/Month = $41,600

Case Study 4:Case Study 4:

Delay of Land Delay of Land UseUse

4. Delay of Land Use4. Delay of Land Use

Engineers assess the underlying problems and the project delay is one year.

Land Market Value, $1,000,000

@ 10% Ground Lease Rate

@ 1 Year Delay =

Project Delay, $100,000

Case Study 5:Case Study 5:

Delay of LandDelay of Land DevelopmentDevelopment

ProjectProject

5. Delay of Land 5. Delay of Land DevelopmentDevelopment

Annual

Market Change -2% 0% 2%

1 Year Delay-19.67% -18.03% -16.39%

2 Year Delay-35.47% -32.81 -30.10%

3 Year Delay-48.17% -44.93% -41.56%

10 Year Delay -88.81% -86.31% -83.31%

Economic Economic WasteWaste

Economic WasteEconomic Waste Costs vs. Benefits

Red Car vs. Blue Car Crashed Car vs. Repaired Car Required Repairs vs. Not Required

Cost of Repair vs. Diminution in Value Types of Cases

Geotechnical / Environmental / Construction Defects

Land Value Legal Compensability vs. Market

Realities

RegressionRegression AnalysisAnalysis

ConclusionsConclusions© Randall Bell, Ph.D., MAI. All rights reserved.© Randall Bell, Ph.D., MAI. All rights reserved.