0:00 beml and we are here every Monday morning at 10: a.m. Pacific Time bright and early to start off the week here and we're having a wonderfully rainy day in California which I always like to highlight because rarely do I get to say that it it never rains in California as the song goes and my guest is is is here locally with me um and and so he can confirm that that's the case and it's probably good for your work Matthew because being out in the field in the rain doing appraisals is is is no fun uh at least it wasn't in my day but uh um my guest
0:36 today is Matthew renolds and um Matthew oh shoot I was GNA have your company name handy but anyway I'll Matthew is a um an maai appraiser Mai is a member of appraisal Institute it's it's um one of the highest professional designations you can get in the real estate apprais actually in the appraisal World totally um he's also um a certified General uh real estate appraiser here in California that is the highest um uh license
1:12 appraisal level um in in in all the states um it's a state-by-state licensing regimen but uh that's the highest level you can get and um I I don't want to spend a lot of time talking I want to I want to let Matthew have as much time so so Matthew if you would um just share with us a little bit of your background and and do me the favor of sharing the name of your company I went up on it yeah thank you Kevin thank you for having me here on your show um yes my name is Matt Reynolds and I'm with Vanguard realy advisers and we're a commercial real estate appraisal firm um we started in
1:48 2011 um but going back to that I started appraisal in 2003 with the cers international or original company was bought by I was worked at pgp the I work for the big company colar great experience and in 2011 I started my own with a business partner and we've grown to have multiple offices uh but we're still you know a small Regional firm uh but we know we do have an office in Charlotte and several offices uh Las Vegas uh but our our main
2:23 most of our work is in Southern California and in San Diego and Los Angeles and Inland Empire Orange County so okay in Charlotte Charlotte North Carolina or yes wow Charlotte Vegas and Phoenix so we small small presences we have like a One MA out in Charlotte and but our main brunt of our work those in Southern California um I think last year we did over a thousand appraisals wow just within Southern California you know appraisals and we do a lot of outside appraisal outside appraisal review
2:59 assignments as well uhuh so um when you when you you're a commercial real estate appraiser so talk a little bit about the kinds of properties that you deal with just so you know the viewers understand because most you know many people probably have um familiarity with an appraiser because you know someone came out to appraise their home right um but but you're in the same vein of work that I used to do so if you wouldn't mind just share a little bit about that so people can understand what it is you do yeah we appraise everything most
3:34 commercial real estate appraisal um commercial real estate property types uh we do a lot of office retail shopping centers uh industrial Apartments uh Apartments five units and more is considered commercial so we do a lot of apartment deals but Pro probably say if there's one p particular property type we do the most more of is probably IND industrial if anything okay interesting industrial I always thought industrial is the most fun because you get to see how stuff is made yeah I I was able to go to um like
4:13 downtown LA or or in Vernon we're in these crazy uh cold storage spots and over 100,000 square feet of just Warehouse you're walking around and you get to see a lot of interesting things you get to meet interesting people so I kind of like the inspections for industrial versus going to like a medical office or something like that you can't take certain pictures of for you know and all that but uh it's industrial is definitely my My Vibe yeah um buck knives used to be located in
4:49 Santi down in the San Diego area and I had a client who was lender and I'd have to go appraise the property every year and one year I was I was getting ready to go go down there and I was talking to a friend of mine and I'm like yeah I'm going to go down and walk through the buck I factory he's like can I come I'm like yeah sure why not you know so we and we got a tour the factory and it they since have moved to Idaho but uh it was it was always a lot of fun to see what what people do so oh yeah so I I'm considered a jist there's no I don't do the specialized like assist of living
5:24 and gas stations but just the general retail shopping centers Industrial um that's the type of work we do okay great great so talk to us if you would um about how how you work your valuation process number one and then how is that how is it different when you're doing an appraisal for an estate versus say doing an appraisal you know for a lending situation ah well there's in the state world there's different you canot have different types
6:00 of appraisals you could do a a restricted appraisal you could do a full appraisal uh report uh from what I've seen uh clients they do both but uh if there's like a a really um complicated property or high dollar property you know I think they want the full appraisal so the difference between the two uh a restricted appraisal you just State um you just State your facts or you just State your conclusions but uh in a regular appraisal you summarize how you got there so um and and a lot of
6:37 times when you're doing appraisals for Lending versus appraisals for the IRS uh there's little things that uh in the lending world we use like the definition of market value on the inter agency guidelines that they typically use that definition for market value but when you're doing work in the state world you need the def defition that the IRS uses and that matters a lot because if something if you get audited and the IRS appraiser looks at it and he sees the wrong definition of market value or fair
7:13 market value the appraisal's void it's you know so like little things like that matter so again most people's experience I think is dealing with a residential appraiser and and and typically if you're appraising a house you're going to you know look at comparable sales and and do a a sales comparison approach um what what approaches do you use when um appraising um uh you know commercial property um and and and how are those
7:49 approaches different than what like I said somebody who's who's had their house appraised what how are those different than that yeah in the commercial World we'll do the income approach uh we'll do the cost approach uh most typically though we'll do the income approach and that's from the investor standpoint so we'll project what Market rent would be we'll analyze what the existing rents are if there's if it's at Market um and if it isn't net Market we'll we'll do the least hold the difference between the um contract and Market rent and you know we project potential gross income minus vacancy and
8:27 then look at appropriate uh expenses for that property and look at the noi then we look at the cap rates and there's a lot of factors that go into the on the income approach of a commercial property then we'll also do the cost approach if it's a newer type property uh if was just recently constructed or if it's special use property uh we just recently did a church uh in the Inland Empire and oh wow the two methods that we used was sales we also did the cost of pro so so I always used to joke that the
9:03 income approach was only applicable to some Churches but yeah there there are least churches out there but there are yeah yeah um so when you say you do a cost approach um would you give us a little bit more information on on how you do that like you did with the with the income approach you start with the rents you subtract vacancy subtract expenses right on a cost approach what does that mean in terms of determining the value for a property yes for the cost approach we would first determine the the land value of the site so we get an idea what the land value is then we
9:40 would uh estimate the cost of the entire building uh as like total replacement cost um for that property then we would you know look at U any depreciation functional opalescence or anything like that make your deductions so you're adding a depreciated Improvement value to the land and to get your overall cost value so and it's just one indication of value so but lately the costs have gone up so much that in most cases we put less Reliance on this on the cost
10:16 approach because even if we use updated uh uh building costs guidelines as like Marshall and Swift uh doesn't seem like when you compare it to an actual contractor's estimate the contractors is always higher so right so I put less emphasis on that unless we have really good data right yeah I mean my experience was that in in a high inflation environment um although Marshall and Swift is is a great source of data they're they're doing historical numbers so they're never quite up to
10:51 date with you know what's happening in the market right this moment it's it's it's really not possible because they have to gather and collate all that data first yeah so um I think the other thing the other important concept and and I I I saw this in my practice when I had it is this idea of of of highest and best use right so um in a commercial appraisal typically is as as I recall the process you're going to look at a property and and say okay what is the highest and best use for this property right so
11:26 would you talk a little bit about that and how that comes into play yeah that the highest best use is probably the most important part of the appraisal um if you if we if that part is wrong then the tire appraisal is wrong um it comes into play you know you're looking at uh the property as vacant and as improved what are the least uses legally physically uh of that property um what brings in the most income m and uh it's very important
12:01 especially in uh pockets of in Los Angeles where land values are very high and the existing improvements are they you know do they contribute to a value above land value so those are the items that we constantly are looking at so um you know if the land value is higher than the existing what's there then the highest best use is land but if it's not then it's it could be something else so um it's it's a a point in an appraisal that I feel that a lot of commercial
12:37 appraisers maybe gloss over just have their in their template but it is the most important feature of an appraisal right I remember working on on a um an appraisal again this is going back when I had my commercial real estate firm and it was a a property in an area where there was a lot of very old industrial buildings um and they were being torn down and and large new ones were being built and so when I looked at the highest and best use what I found was the it was really land
13:13 value anyone who was going to buy the property they well they might have temporarily used the building while they were pulling permits or whatever really they were going to be buying it for land value and so that's what I concluded and I did the valuation on that basis and the Cent just lost his mind because he said well but the building is there so you have to add the land on top you have to add the value of the building on top of the land and I said if I do that I would have to drop the value of the land considerably because if you're saying the building is not economically
13:49 obsolete then you're saying nobody's going to buy it to redevelop yeah and he could he couldn't he just couldn't that concept so I I run into that a lot in my practice and and when you when that does happen you know it happens and um but a lot of times if if you work for a good client who understands that process you know goes a long way but there is some explanation of just I just have to spell it out simple you know land's worth this
14:24 and right now it's not the best use as it currently is improved and I I just try to make it as simple as possible because sometimes as a appraisers we just kind of go into the weeds of things and I I do that often so so um let's say um you're you're working now with an estate and um for whatever reason you know you're not brought in you know immediately after um the decedent has passed away maybe it's 6
14:59 months or even a year later for various reasons how is how is that um or is that going to impact the work that you do and if so how uh you know we do a lot of estate planning work and a lot of times it would be a retrospective value um usually like a day- tood death appraisal and that usually doesn't impact Us in any way it's just another appraisal to us but uh there you know I've over the years I've seen quite a few issues with u the with
15:39 States and ordering appraisals and the whole process so um it's I wrote down some notes but uh there's some there's some issues that I've I've seen um there's been a couple times where um we would get called in and they they had issues or something with IRS got it got audited and the apprais whoever did the appraisal was disqualified or it was thrown out and then I'll look at the appraisal and I there was a couple times
16:16 where I found out where they got an appraisal by somebody that wasn't licensed and and you know I turn that appraisal into the state and and they'll tell me he's like oh we have a file on this person and you know that they just put it in their books but you know I think if you are looking for uh an appraiser uh you know residential commercial the biggest thing you need to look up their license because there is that going on unfortunately and uh so we we've done with we had to deal with that several
16:51 times over the past couple years which is kind of surprising it doesn't happen a lot but it does happen and up and secondly um I have seen lately um I think just the general slowdown of the lending world and so still there's some residential appraisers who want to tackle commercial appraisal assignments so I've seen the after effects of that and where we they give us an appraisal that was done and there were the clients were unhappy and you look at it and you know the
17:27 residential appraiser who doesn't have a commercial license was appraising commercial and they're clearly not competent so unfortunately that I've seen that over the past couple years as well so um but so I think it's pretty important if anyone that is getting um any appraisals for Estates to look up the license um and make sure that it's a state licensed appraiser and depending if it's residential commercial and if it's commercial make sure it's a certified General appraiser okay and so you you brought up
18:05 the issue of Competency and I know as a um I mentioned to you you know before we we got on live that I I used to I was a usap instructor um usap is the uniform standards of professional appraisal practice and it's it's basically the the ethical standards that appraisers um have to comply with so um when you talk about competency right there's there's supposed to be a competency statement in every appraisal right so what goes into that that statement from your standpoint
18:42 and what should someone who's thinking of engaging an appraiser be looking for Beyond just just the license especially for commercial appraisers right where there it covers such a broad broad range yeah uh like I stated earlier you you know I'm a kind of a generalist so you know if someone were to hire me to praise their gas station I would tell them no because I'm not competent just because I have a license to praise anything uh doesn't mean I'm the right person so um it's pretty important to uh
19:17 vet the appraiser you know once they have the the license level is one thing but then it's said okay you're praising a shopping center do you have a lot of experience praising shopping centers and can you send me a sample of praise report or tell us a little bit more about your experience or about shopping centers in this area that you've done so so that's a definitely a thing when you're ordering a appraisal make sure the person's competent and licensed so okay and um once so once you've established that that kind of Baseline and I I know I
19:53 used to see this in my practice so like I had a call one time from a client he said hey I want you to appraise a golf course and I said don't know how never done it yeah I said you you I said I can find someone who you know appraises golf courses and he said no we want you to do it and I said I just told you I don't know how to appraise I've never appraised a golf course don't know how to do it he said no I I understand that he said he and he he was the chief
20:29 appraisal officer for the for the lender and he said um he said I I get it you're you you've made your competency disclosure yeah he said I I need you to do it he said oh and by the way I I I need this in 72 hours of course so you know it's like you know good client relations like I went through a crash course you know in in learning how to appraise a golf course um and I I I mean I must have done okay because um you know
21:07 the when they had to foreclose on the golf course it turned out my value was pretty close to what they sold there's ways to to gain competency and take classes or work with a mentor you know uh you probably did all the right ways but my experience uh I do see a lot of people in not doing taking you know U the right ways to get there so and so and we're we're we're gonna um I don't want to run out of time before we address this issue okay um within within the estate trust in Estates world
21:45 yeah what kind of conflicts have you seen um arising out of valuation of properties and and and how have you um worked to at least potentially resolve those conflicts I I think you know I've seen a lot of conflicts um with expectations uh sometimes uh they'll be an estate like a fractional interest uh we do fractal interest appraisals and the the client is working with someone from the IRS and they have expectations
22:22 of the appraisal uh being at certain discount rates or using certain methods like the partition method the income method of of a fractional interest appraisal and you know and sometimes the client is not relaying that to the appraiser so I've seen issues arise through that um so um and just having the best data and knowing what like if you ever get audited what an IRS what they look for you know like definitional market value make sure you have both approaches to value and for for a fractional interest
22:57 and make sure their data for the discount rates is solid so um you know there's been issues that I've seen with just communication involved and and sometimes not being relayed information a lot down the line when it gets to us but so take take a minute and explain what you mean by a fractional interest oh it's it's a percentage ownership or undivided interest into a a certain property uh like a for example an LLC can own a
23:32 property and there could be a 49% owner here 51% owner there and we're valuing those interests okay so okay so it's it's a percentage interest in the under in the in the um entity that owns the property yes and and so the idea then is like if if if you were the 51% owner and I'm the 49% owner if I were to try and sell my 49 % ownership in the entity and the property is worth let's say $100,000 am I going to get $49,000 for my share and and so there's
24:09 a presumption that someone buying that Minority stake is going to say well I'm not sure I'm gonna pay $49,000 for that is that kind of the yeah it's it's it's less than 49 if it's 49% but because there's discount rates uh Associated and there's case law filings that show what discount rates are for something like that depending on the situation so but typically if you have a 49% interest in a property and you think it's worth 49% it's always going to be less just because it's um
24:46 just because of that and is there kind of a a scale so that let's say somebody has a 10% interest is the discount off the 10% interest going to be higher because it's smaller or I I think all the if it's less than the majority then I think they're all kind of somewhat similar from what I've seen But if a person has a Hu major stake in more than 51% uh there's I've seen different scales for that oh okay but um but there's there's different ways to to
25:22 do it you can look at comparable sales you can look at um um you can look at court cases and filings that actual uh settlements and you can do the the partition method the income method as well of estimating like attorney fees and stuff like that so okay okay oh oh part you mean partition costs and such yes right okay got it got it so um and and just have another minute here before um our time is up so okay when is the best time to get an appraiser involved
26:00 in in in the um administration of a of a trust or an estate uh that's a good question uh I would say sooner than than later um because we I've seen so many instances on our end where there's deadlines and they haven't even got their state um appraised and in just unrealistic timeline so sooner the better and uh just working with a actual professional to handle their
26:36 estate um I've seen so many horror stories where we're vo a person's a state of prop like a portfolio properties for their state and they don't have a proper manage uh asset uh property manager we can't even get leases for the properties and just the data so you know just having all that information available and and I seen a lot of um property owners and someone passes that property owner was the main person and they leave it to their son or daughter and they have no idea what they
27:11 own they don't know if it's leased or so just um having all the parties involved and knowing what's going on with particular property uh was very important and uh fortunately we see we see all sides we see a very prepared person who is on top of everything and then we see the last minute we need the appraisal done in a week or something emergency status for their to for some deadline filing that they have to do yeah yeah it's interesting I I I was
27:48 just thinking about this because you know these days you can have everything located in in the cloud like in a Dropbox or something and you could basically just you know give you access to those files and you'll have all the leases the income and expense statements Etc but of course if that stuff isn't uploaded now it's you know you I I mean I've done those appraisals where you're getting basically a shoe box it's like here's here's my data it's like the last several uh appraisals that we've done we you know we appraised a shopping center for a trust and it's a literally everything's hard
28:23 copy they don't have the original lease just an amendment and know there's no square footage on there's no rent rolls so there's H just we just uh just keep a a catalog of all your information in a in an area so you can send it to an appraiser if you ever have to get appraised day and and I imagine and I'm I'm gonna shamelessly plug you here you know because I'm sure you don't want to do this but I think it's it's important for people to understand that um if an appraiser has to reconstruct Rec records if they have to go and and start doing
29:00 detailed measurements of a property and and also has to do so on a very short time frame all of that raises the cost of doing the appraisal work right because yes you're setting aside other clients Andor it's just taking so much more time to do all that so by keeping those records right it it it it can also mean um you can do your job at a more uh you know a lower cost basically yeah and in the appraisal World especially the commercial world I feel like you you get what you pay for and and really I feel
29:37 like the appraisal world isn't I'm immersed in it because this is what I do but if I didn't know anything about commercial real estate I would totally be lost because there's not a lot of good resources out there definitely um uh for example um you know like a commercial appraisal report cost cost you know several thousands of dollars but you know so we'll get uh people shopping around and this and one person will say oh I gotta qu for $800 for the shopping center and but then they tell you it's it's on a form report and can the IRS
30:14 really do that you know like so right there's a lot of details that need to be sorted out and and really figure out what you really need and you know some of these cost uh that $800 for report you know may not hold court and for an IRS scrutiny or something like that so right right it also makes you much more vulnerable to challenge because you don't have all the the for for people who are unfamiliar with these terms so I I I suspect the typical report you do is a narrative report which is what we would think of
30:51 is when we say a report and there are all these forms out there and typically for a house it will be a form form report that's not unusual for a house at all but for commercial property um any kind of sophisticated user of appraisals is probably going to you know expect a narrative report because they want that that volume of data yes definitely so but so there's a lot of I'm filing a lot of calls of you know experienced users of ordering appraisals and then people
31:26 that don't know anything about the process and but I'm happy to explain how it goes and and if we might not be the right fit I'll Point them to the appraisal Institute or search for other appraisers that can do give them an appropriate bit so great great so um we do have to wrap up now so just want to let everybody know that um Math's contact information will be in the show notes after the show posts so his LinkedIn profile his website and his telephone number so if you do do you have any questions for for Matt um I think you can feel free to um you know
32:03 go on his website and you can contact him there um if you have some some general questions if you obviously if you want to engage him I'm I'm sure he'll be happy to speak with you um give give him a call but um I I I want to just Echo a couple of things that Matthew said and one is make sure that you're finding someone who's competent um and and and that's really the key I I I know this from I I was in the appraisal business for for 20 years um and um I remember one time I was I was
32:40 involved in an arbitration against a guy who was far more experienced than I was um and it was on an apartment building here in the city of Los Angeles and he didn't even mention that there's a rent stabilization ordinance here in Los Angeles and when we and when I mentioned that to the you know to the lawyer that had brought me in as the expert witness and he and he said well is that really going to change the numbers and I said well the fact of the matter is probably not but like it doesn't make him look
33:16 competent um and and in fact you know when the when the lawyer was ask me a question he said he said um is is is there a rent stabilization ordinance in you know Los I said yes is and he said and and did you mention that in your report and I said yes it's on page you know whatever it was and he and he said um did you review you know the other side's report I said yes it is said did they mention anything about that there I said no they didn't right and and to to his credit when we were when we were leaving and we we got to the the elevators to leave and I'm like this guy's just he's gonna kill me right and
33:53 he turned to me and he said that that was a good catch he said that was incredibly stupid of me to not mention it he said he said I really respect the fact that that you saw that um so so I would say in this case see he was he was competent but you know sometimes even the most competent appraiser will miss things yeah because it's a very complex business right so it's worthwhile to get another set of eyes on things to to make sure that all of the issues have been covered because
34:29 the IRS will will use anything they can find to try and impeach your work if they if they think that they can get you know more tax dollars so I I I throw that out there because even if you've got um an appraisal an appraiser that you use and you like his work um it's there'll be a big benefit to um having Matthew or or someone like Matthew do a review of that apprais it it could be very inexpensive Insurance especially if you're talking about very large numbers and Matthew
35:04 mentioned his firm does a lot of review work so I yeah you know that means I presume that you're used to looking for you know those kinds of of of Errors yes we do a lot of usap compliant uh appraisal reviews uh so mainly for a lot of lenders but same principles apply for for not non- lender work for so yeah yeah and and and the other thing I would the other thing I want to stress is and and and Matt Matt didn't say it quite this way but I would recommend building a relationship with an appraiser especially if you're a a trust and
35:40 estate professional lawyer accountant build a build a um a a relationship with someone um so that you can have that free flow of information and that confidence in in the professional that you're dealing with because that can also have a have a big impact on on the work that you get so that that that's an important point you know we have great clients that give us everything and yes that those relationships are key and and telling your client what you need and and all the great communication between
36:16 client uh is needed so absolutely absolutely so Matthew thank thanks for coming on the show today um and spending a some some rainy time with me um and uh you know en enjoyed it and you know as um as things change and develop um in in you know in your area of trust and Estates um you know perhaps we'll have you you come back on and uh and we were we were chatting earlier that we should do sort of you know most harrowing appraisals you know maybe we'll have you
36:51 back on to just sort of tell us what may we used to call Se stories these like ones that were just disasters or just you know really difficult to do so to have you come back on and uh and uh you know just kind of Reminisce about some of those I think um it's good for people to hear about those so they can avoid them yes that be I'm gonna have you hang tight here for a minute while I wrap things up and and take us offline so that's that's our show for today I hope you enjoyed it hope you found some some good information here tomorrow um at 10:00
37:28 a.m. Tuesday Pacific time is my show business lessons from the military and then on Wednesday also at 10 a.m. Pacific is people making money so I hope you'll join me for our other shows um this week and then a week from today um we'll be back again on trust and Estates weekly my guest is going to be um Hillary Cooper live from New York City um her business is called uncluttered and she's in in a a very interesting niche of trust and Estates
38:04 where um she will go into typically it's a home um and and go through all the property that a decedent left behind and and take care of disposing of that property sorting through it and disposing of the property making sure the heirlooms get to the airs and that sort of thing so I hope you'll you'll join me uh when when I talk to Hillary next week so Matthew thanks again for joining me and uh for all of you signing off as I always do Marie you're my bell all the best folks