Real Estate Damage
Economics & Statistics
Randall Bell, PhD, MAI
Overview

Real Estate Damages


Loss of Use – Project Delay


Construction Defect / Delay of Sale / Delay of
Unoccupied Sale / Delay of Land Sale / Delay
of Development
Economic Waste


Overview / Bell Chart / DC Matrix
Costs vs. Benefits
Regression Modeling

Simple Regressions / Multiple Regressions
Hurricane
Damage
Bikini 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
Earthquake
Avila Beach
Chernobyl
Love Canal
Love Canal
Love Canal
Other Cases Of
Real Estate
Damage
Bell Chart
I
II
III
IV
V
VI
VII
VIII
IX
X
General
Transactional
Legal
Distress
External
Building
Site
Environmental
Conservation
Natural
DETRIMENTAL CONDITION MODEL
Unimpaired Value
F
A
Market Resistance (Risk)
E
Cost & Responsibility
On-Going Use
D
Cost & Responsibility
Repair Use
Project Incentive (Risk)
C
Cost & Responsibility
Assessment Use
B
Uncertainty Factor (Risk)
Detrimental
Condition Occurs
Time
DETRIMENTAL CONDITION MATRIX
Issues
Stages
Assessment
Repair
Cost to Assess &
Responsibility
Repair Costs &
Responsibility
Engineering
Phase I,II,III Studies
Repairs
Remediation
Contingencies
Operations &
Maintenance (O&M)
Monitoring
All Loss of Utility
While Assessed
All Loss of Utility
While Repaired
Ongoing
Loss of Utility
Income Loss
Expense Increase
Use Restrictions
Alterations to
Highest & Best Use
Project
Incentive
Market
Resistance
Financial incentive,
if any, to complete
repairs
Residual
resistance, if any,
due to situation
Disruptions
Safety Concerns
Use Restrictions
Uncertainty
Factor
Discount, if any,
where extent of
damage is unknown
Ongoing
Ongoing Costs &
Responsibility
Loss of Use - Project Delay





Area Wide Calamities
Construction Delays
Environmental Cleanup
Delayed Sale or Lease
Legal/Title Disputes
Time
Value
Of Money
The Power of Interest

The “banker’s secret” is to understand the
relationship between time and money.
The 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:
Construction
Defect
1. 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:
Delay of Sale
2. Delay of Occupied Improved Sale
Some project delays may be computed with
conventional methodologies using values at the
“target date” and the “delay date.” They should
reconcile with market trend studies.
Target Date (Escrow Date) Market Value = $1,000,000
Delay Date Market Value = $1,100,000
Case Study 3:
Delay of
Un-Occupied
Improved 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:
Delay of Land Use
4. 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:
Delay of Land
Development
Project
5. Delay of Land Development
Annual
Market Change
1 Year Delay
2 Year Delay
3 Year Delay
10 Year Delay
-2%
-19.67%
-35.47%
-48.17%
-88.81%
0%
2%
-18.03%
-32.81
-44.93%
-86.31%
-16.39%
-30.10%
-41.56%
-83.31%
Economic
Waste
Economic Waste

Costs vs. Benefits




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Cost of Repair vs. Diminution in Value
Types of Cases



Red Car vs. Blue Car
Crashed Car vs. Repaired Car
Required Repairs vs. Not Required
Geotechnical / Environmental / Construction Defects
Land Value
Legal Compensability vs. Market Realities
Regression
Analysis
Conclusions
© Randall Bell, Ph.D., MAI. All rights reserved.
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REAL ESTATE DAMAGES - Appraisal Institute