real estate damage economics & statistics randall bell, phd, mai
TRANSCRIPT
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Real Estate Damage
Economics & Statistics
Randall Bell, PhD, MAI
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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
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Hurricane Hurricane DamageDamage
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Bikini AtollBikini Atoll
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Marshall Islands - Nuclear Weapons Testing
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Marshall Islands - Nuclear Weapons Testing
Nuclear Testing – Bikini Atoll
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Marshall Islands - Nuclear Weapons Testing
Nuclear Testing Crater
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Marshall Islands - Nuclear Weapons Testing
Nuclear Testing – Bikini Atoll
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“Bravo Crater” - Bikini Atoll
Bravo Crater – Bikini Atoll
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Measuring Radioactive Fallout
Testing for Radiation
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EarthquakeEarthquake
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Avila BeachAvila Beach
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ChernobylChernobyl
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Love CanalLove Canal
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Love CanalLove Canal
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Love CanalLove Canal
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Other Cases Of Other Cases Of
Real Estate Real Estate DamageDamage
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Bell ChartBell ChartII General GeneralIIII Transactional TransactionalIIIIII Legal LegalIVIV Distress DistressVV External ExternalVIVI Building BuildingVIIVII Site SiteVIIIVIII Environmental EnvironmentalIXIX
ConservationConservationXX Natural Natural
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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)
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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
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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
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TimeTimeValueValue
Of MoneyOf Money
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The Power of InterestThe Power of Interest The “banker’s secret” is to understand
the relationship between time and money.
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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.
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Case Study 1:Case Study 1:
Construction Construction DefectDefect
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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)
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Case Study 2:Case Study 2:
Delay of SaleDelay of Sale
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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
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Case Study 3:Case Study 3:
Delay of Delay of Un-Occupied Un-Occupied Improved SaleImproved Sale
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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
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Case Study 4:Case Study 4:
Delay of Land Delay of Land UseUse
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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
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Case Study 5:Case Study 5:
Delay of LandDelay of Land DevelopmentDevelopment
ProjectProject
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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%
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Economic Economic WasteWaste
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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
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RegressionRegression AnalysisAnalysis
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ConclusionsConclusions© Randall Bell, Ph.D., MAI. All rights reserved.© Randall Bell, Ph.D., MAI. All rights reserved.