Real estate appraisal reports, crafted by seasoned professional real estate appraisers, are widely regarded as precise and reliable. Nonetheless, perfection is not guaranteed. Inaccuracies and logical inconsistencies can occasionally surface. Therefore, it is highly recommended to perform comprehensive reviews or seek second opinions to ensure the utmost accuracy and integrity of the appraisal.
- Asset Type: Hotel
- Purpose of Appraisal: Examination of the expected disposal amount of collateral real estate
- Discovered Issues: According to the appraisal report, the highest and best use of the subject property is as the current hotel, and market participants as buyers particularly emphasize the investment profitability and earnings derived from the subject property. For such properties, it is considered that the income approach should be emphasized. However, in the appraisal report, the appraisal value was derived by taking a weighted average of 50% from the cost approach and 50% from the income approach, resulting in an appraisal value approximately 10% higher than the income approach value. Additionally, the following issues were identified in the income capitalization approach.
- - In the business revenue analysis, the review was not based on the business revenue of the subject property alone, but on the total business revenue of multiple properties with different uses, potentially using revenue that includes other properties.
- - For long-term use, capital expenditures, which are normally considered necessary to account for, were set to zero.
- - A significantly lower discount rate than surrounding J-REIT properties was used.
- Review Results: Multiple inquiries were made to the appraisal firm regarding the above issues, but no reasonable responses were obtained. Therefore, we received the business revenue data for the subject property alone and conducted a verification based on the revenue data, referencing J-REIT properties and published materials. As a result, it was confirmed that the appraisal value was approximately 40% overvalued.
- Asset Type: Commercial Facility
- Purpose of Appraisal: Examination regarding impairment recognition
- Discovered Issues: In the appraisal report, both the cost approach and the income capitalization approach were applied, with the cost approach value being adopted to determine the appraisal value. In the evaluation of commercial facilities as business real estate, profitability is emphasized, and it is common to form prices based on the income approach. The subject property is a building based on a business use fixed-term land lease (requiring land return as vacant upon contract expiration), and the level of the income capitalization approach was considered particularly important (since the land is based on a business use fixed-term land lease, the impact of cash flows during the period on the price is greater than the land price itself as the land will be returned and disappear upon contract expiration). Additionally, regarding the content of the income capitalization approach, by comparing the market level of similar-sized stores, it was possible that the set rent was set at a high level (also, due to the nature of impairment-related matters, it was difficult to verify the rent-paying ability based on the current business revenue performance of the subject property).
- Review Results: Inquiries were made to the appraisal firm regarding the rent under the income capitalization approach, but no similar-sized rental examples were collected for the subject property, and only small-sized store examples were provided. No agreeable responses were obtained regarding adjustments to the estimated prices. Therefore, we set the rent using rental examples from other stores operated by the client and other published examples, and conducted a verification based on the income approach. As a result, a significant discrepancy from the appraisal value was confirmed.
