As The Miller said on his blog yesterday, he finally got around to answering a question about Manhattan real estate valuation methodology for outdoor spaces, [Terra Logic] Understanding The Value of Manhattan Apartment Outdoor Space. Great timing (for Manhattan Loft Guy), as I addressed this very question in the May 1, terrace sells for about $1mm at 110 West 25 Street. Of course, I was using a single example and he’s got years of data, so we each came at the question in a different way. (If it were a fight, it would not be a fair fight; glad we are not fighting.)
I was originally going to just post a short comment on his blog in response to this post. Then it got to be too long (and convoluted!) to spit on someone else’s blog, so I started this post. Then this thing just kept going, and going, and …. Grab your coffee, and keep the pot nearby; this will take a while.
You should read the whole Miller piece, of course (chock full of qualifiers, limitations, disclaimers), but here are the two main parts of his pregnant conclusion [his italics, my bold]:
- Estimate the ppsf of the property without the terrace
- The general relationship between finished terrace space and interior space – terraces are typically valued at 25-50% of the ppsf of the interior space.***
Note that The Miller’s sensible range of qualifiers include whether the outdoor space is disproportionately large (reducing the ppsf) and considerations such as utility, privacy, and location. He says view is not considered as a plus factor with outdoor space because the interior space already factors that in, but I assume he would make an allowance if the outdoor space had a spectacular view not seen from the interior. (I saw one like that yesterday.)
guidelines are guides, d’oh!
I will let The Miller express the core of his disclaimer:
It is great to have A Trusted Professional offer the well-grounded opinion that outdoor spaces typically are valued at 25-50% of interior space depending on a whole bunch of maddeningly variable variables. This seems like a very useful ballpark approach, so long as you accept that you are never going to be able to push it very precisely. (Keep in mind this very pregnant "conclusion" with my very bold bold: "This makes it easier to compare units with and without terraces and is predicated on the whether your % discount assumption for your exterior space is correct.")
I suspect that the data just is not deep enough to be more precise, particularly in a world in which individual sellers and buyers come to agreements about ‘value’ that sometimes cannot be rationalized by reference to broad metrics. In that vein, let’s look again at the roof deck at 110 West 25 Street and my May 1 analysis that "somebody just paid about $1,000,000 for that deck".
ppsf without deck
I assume in my post that the interior space of the 12th floor is comparable in condition to the 11th floor, which sold in July 2006 at $2.7mm, and to the 10th floor, which sold in July 2005 at $2.766mm. If that assumption is correct, we next consider what adjustment to make between the current market and a mix of July 2005 and July 2006. I am not going to over-manage here (is Joe Girardi a MLG reader??), so I assume that this market is similar to that mixed-market.
Thus, my interior square foot valuation for a beautiful high floor loft at 110 West 25 Street is $1,093/ft. That assumption accounts for $2,733,000 of the recent purchase price of the 12th floor with the "crowning glory" deck. How does that implied deck value of $1,152,000 look under The Miller’s analysis?
backing out the deck values, without falling off
The listing description describes the deck this way (without pictures :-):
The Market paid $768/ft for that deck, which is 70% of the (assumed) ppsf of interior space ($1,093/ft), way more the typical range of 25-50%.
If I understand The Miller, he would convert the 1,500 sq ft deck into the equivalent of interior space within a range of 337 to 775 sq ft, before considering any adjustments. At the base interior value of $1,093/ft, the deck should add from $368,341 to $736,682. Thus, before considering any adjustments, it appears that The Market over-paid for this deck by at least $400k, possibly substantially more than that.
Before we get to any positive drivers out of that range, consider that The Miller considers this deck to be too large to support full typical values. He says:
The interior space of 110 West 25 Street #12 is said to be 2,500 sq ft; the deck, 1,500 sq ft. Thus, 250 sq ft of this deck is "excess" in Miller World, subject to a greater-than-typical discount than the first 1,250 sq ft of deck to make the interior-exterior square feet adjustment. I am not going to do any calculus to even put a ballpark figure on that; just keep that in mind, going forward.
What plus factors might there be?
great utility = higher value
This deck should place well on The Miller Utility Scale. Both sections of the deck are (mostly) deep; the location is prime-for-the-building, being on top of a 12 story building, with fewer soot or noise issues and (probably) a decent breeze on even the muggiest August dusks; the privacy element may be a wash, as no one shares any nearby outdoor space, but some of The Stratus folks likely look down on this deck; views might be a little better on the deck than from the 12th floor interior, simply because the window placements limit the views from the interior in some way.
The listing agent would like us to consider a plus factor that The Miller calls "association":
After all, this loft was marketed as "#PH". I don’t know if The Miller would agree in this case, since this is not a ‘real’ penthouse. By my lights, a real penthouse is surrounded by a set-back terrace directly accessible from a door in the penthouse. This deck is a roof deck, accessible by going to the roof. It is a great amenity, but not of the same character as the terrace of a real penthouse.
I am not going to add a plus for that, but I have another one that is not addressed in the overview of The Miller.
scarcity = premium value?
I suspect The Miller would find it prudent to consider how many choices a buyer has that include outdoor space. (Makes sense to me.) In the case of this deck, that seems to me the most likely driver for a premium value: someone who loves lofts has relatively few choices that include exclusive rooftop space. That buyer might be willing to ‘overpay’ to get that amenity, in the same way that people who love views will overpay.
I will never know what specifically motivated this specific buyer to pay about a million bucks for this roof deck. Even with all the qualifiers and disclaimers in The Miller’s analysis, I suspect that an appraiser would have a hard time reaching that value. (More on that, below.)
quibble, moan, empathize
I get what The Miller is trying to do in his blog post, and I very much appreciate his insights. His analysis convinces me that the question of Valuing Manhattan Outdoor Space is one of those questions that is more Appraiser Art than Science. When pencil hits spreadsheet, a talented and experienced Manhattan appraiser is going to come up with a ‘reasonable’ value for any outdoor space after making many, many ‘adjustments’ from a ballpark starting point, some of which the appraiser might not even be able to articulate.
What The Miller’s blog post tells me is that this is inherently UN-scientific. That this question cannot be answered in any comprehensive and coherent way, because which variables are most important, and how the variables inter-depend, cannot be stated in advance, or in the abstract.
I don’t mean to be critical here of The Miller, or his approach. (Quite the contrary, in fact.) I just think that after all his effort, the most critical part of his analysis is his disclaimer (his bold, not mine):
do guidelines actually add value?
Sad to say, that sounds very much to me like Potter Stewart ‘valuing’ pornography. The Miller opens the curtain a bit to reveal the scaffold of his analysis, but can’t possibly account in a blog post for how he would apply his experience to a particular set of Manhattan square feet exposed to the elements.
Even much qualified, his "non-formula formula" comes down to:
A. Start with a value for the interior in $/ft
Yes, this approach is better than a number Pulled From (the) Air.
But it hardly inspires confidence that three appraisers would come within a reasonable range of each other in valuing a specific terrace. I obviously don’t have an alternative. But my take-away from this is that no one could push too hard in saying that a terrace is ‘really’ worth $xxx because at the end of the day it is going to come down to an appraiser’s opinion. (JM: is that why they pay the appraisers such Big Bucks??) Any principled conversation about a specific loft will run out of gloves (on the one hand … on the other hand … on yet another hand …).
I tend to look backward to understand how I should interpret what is happening now. Let’s go back to the (million dollar??) decks at 110 West 25 Street. I am fairly confident about my valuation of the interior space. What did the bank think about values here?
actual loan = 75%
This condo buyer filed a mortgage for 75% of the $3.885mm purchase price ($2,913,750), so Citibank (at least) could not have been too concerned about the values here. That is nearly $200k more than I think the interior space is worth.
CAVEATS: I could be wrong about the value of the interior space, which might be worth more than the 2005-2006 10th and 11th floor sales indicate. There could be ‘plus factors’ that The Miller would consider here (if he knew everything about the loft and the deck; I don’t), that I have not considered.
Nonetheless, since the buyer got a super-jumbo mortgage for 75% of his purchase price, it appears that the bank thought the deck was worth a lot more than The Miller’s ‘guidelines’ would indicate. I wonder who did the appraisal and what they used for comps???
Or perhaps things are not quite as they appear….
on further review…
Yes, The Google is my friend. Quick Google search shows that the buyer has the same name as a Managing Director in Citigroup Global Markets. Perhaps this was a loan that they will keep in-house, that did not have to meet ordinary super-jumbo underwriting standards.
Or maybe the deck is worth a great deal. The more I ‘know’, the more confused I get.
© Sandy Mattingly 2010