Moderators will be Julia Stevenson, Head of Acquisitions at Langdon Park Capital, Linda Gallagher, Senior Managing Director and Regional Manager of the Washington, DC office of Cushman & Wakefield Valuation and Advisory, Stephanie Wiggins, Managing Director and Head of Production for Agency Lending at PGIM Real Estate, Larry Hentz, Executive Director of Business Development at Prince George's County Economic Development Corporation, and Carisa Stanley Beatty, First Vice President at Amalgamated Bank.
ULI Washington/Heather Frisischin
On Thursday, CREW DC, AAREP DC and ULI Washington conducted the third and final program in a series aimed at demystifying valuation and providing practical insights into negotiating equity and debt. Held at the King & Spalding offices at 1700 Pennsylvania Avenue, the program was moderated by Julia Stevenson, head of acquisitions at Langdon Park Capital.
“It can be perceptual, actual, or subconscious/unconscious/implicit. [bias]Summarizing the first panel, Stevenson said, “If you don’t understand the valuation process, it’s going to be difficult to navigate capital negotiations. [when] Talk to the lender [when] Dispute the valuation.
“[The second program] “We talked about the lack of research and data that could analyze whether there is actual bias or whether it's just a perception or a lack of knowledge to navigate the real estate process,” Stevenson noted.
The third programme aimed to clarify why and how value matters in the realm of capital markets.
“Typically, when the appraisal report is submitted, especially with loans and equity debt, the value has already been calculated,” said Linda Gallagher, senior managing director and regional manager for Cushman & Wakefield Valuation & Advisory's Washington, D.C. office, who served as the appraiser on the panel. [who] They don't know that. Part of the due diligence is often underwriting, pro formas, all the different pieces of information to understand the deal, that often aren't provided until the appraisal is sent. And then they're disappointed because it doesn't meet their specific criteria.”
“The appraisal is a critical component of the deal, and appraisers often know nothing,” she added, noting that commercial real estate tends to be an emotional investment, so it should be a very open and transparent process. She expressed frustration, noting that once she receives the underwriting package, “there's a difference, and it means either I'm wrong or they're wrong.”
“Your valuation is an unbiased, supported opinion of value, so the support is something you can see in our valuation reports and analysis, and because we use sales data, it tends to be backward-looking. When markets are changing dramatically, as they have been over the past few years, past information is outdated and irrelevant.”
Looking to the future
Appraisers are spending time looking to the future to understand land use trends and what's happening in the market, Gallagher explained. “The profession is getting a lot of attention.” [because] “There aren't enough of us out there, so we need more information from the borrower side, the bank side. Obviously it's the appraiser's responsibility to know what's going on in the market, what's going on around the property.”
“There's a regulatory wall between us as the lender and you,” said Stephanie Wiggins, managing director and head of agency lending at PGIM Real Estate. [Gallagher] As an appraiser, I am completely hands off. [regarding] Involvement of appraisers [in] “We plan to wait until the report is finalized, or at least in draft form.” The PGIM real estate agency platform includes Fannie Mae, Freddie Mac and FHA, and some of PGIM's equity capital is provided by parent company Prudential Financial.
But once the report is in hand, “that's really where I start arguing the deal,” says Wiggins, as she advocates for her clients by combing through the appraisal and looking for overlooked data in comparable properties.
Wiggins emphasized that sponsors can help lenders pitch the deal to the lender's investment committee, noting that the responsibility for understanding the market rests with the lender and developer. “As a developer, you want to know the highlights of the deal. You want to pitch to the lender, and then the lender has to pitch internally,” he said. “We work together to get the deal done and get it across the finish line. … That's the dirty, hidden secret of lending. … It's not all straight-forward. Relationships are absolutely key in any market, especially when the market is down. When the market is down, the more relationships you have with your lending partners, the more you'll gain.”
Moderator: Julia Stevenson, Langdon Park Capital
ULI Washington/Heather Frisischin
Tell a story
Continuing on the theme of knowing your market, Stevenson asked Larry Hentz, executive director of business development for the Prince George's County Economic Development Corporation, to talk about investments in the county, including the FBI headquarters and its economic impact over the last century.
Hentz noted that Prince George's County is 500 square miles (1,295 square kilometers) with a population of just under 1 million, 40 percent of whom are college graduates. The median annual household income in the county is $90,000.
“We rank in the top 4 percent of counties in the United States, 125th out of 3,124 counties,” Hentz added, “but the reality is that even though we're in the top 4 percent, the top 1 percent are the surrounding counties: Fairfax, Alexandria, Montgomery, Loudoun.”
In 1943, construction began on the Pentagon. [that anyone] That decision foresaw billions of dollars in benefits and made Northern Virginia what it is today.”
Hentz said the FBI headquarters, scheduled to break ground in 2025, is expected to bring 7,500 jobs to the county, along with all FBI contractors and $100 million in infrastructure improvements funding from the state of Maryland. Over time, the headquarters will be a hub that will attract new businesses to Prince George's County, including technology and cybersecurity companies in sectors critical to the FBI's mission.
Larry Hentz, executive director of business development at Prince George's County Economic Development Corporation; Carisa Stanley Beatty, first vice president at Amalgamated Bank; Julia Schmidt, real estate partner at King & Spalding; Stephanie Wiggins, managing director and head of production and agency lending at PGIM Real Estate; Julia Stevenson, head of acquisitions at Langdon Park Capital; and Elizabeth Pye, business development manager at Altus Group.
dance
“It's like a dance,” Carisa Stanley Beatty, first vice president of Amalgamated Bank, a 140-year-old bank, said of the process.
For example, Beatty noted that Chicago has a lot of negative news about crime and undercover deals. [Amalgamated’s] General accounts are not bullish on Chicago right now. So unfortunately, even if you bring the most perfect deal to the investment committee of, say, our Core Plus fund, the minute they see “Chicago” on the cover, they're done. They're just done. So that's the bias.”
Beatty says this bias doesn't come from appraisers, owner/operators or developers: As a lender, she brings a lot of data, including appraisals and market information, to the investment committee to “mitigate this bias that our people currently have about the market and the asset class.”
“When you deal with a large organization, you give them all [bits of] information [where their bias exists]what they are currently experiencing” and balance that with forward-looking information about the market, for example from economic development authorities, to help “sell the vision.”
“The first hurdle I always have to overcome is [explaining to the credit committee/investment committee] “You have to explain what this market is like in a way that they can understand,” Beatty said. As a New York bank, telling the committee about the Washington, D.C., area in a way that they can understand might mean equating the New York area with the Washington, D.C. area that the committee knows.
Another type of bias can come from the type of transaction, she said. For example, Amalgamated didn't do much subsidized housing because the bank didn't have experience with that type of transaction. “Now I've changed that.” [stance]”I came to banking with a background in subsidized housing,” Beatty added.
Rating Bias
As for appraiser bias, Gallagher noted that while appraisal fees have nothing to do with value, there is no benefit to appraisers other than the appraisal fee: “In commercial real estate, I think bias comes into play when property values rise to a certain level. [of] Professional—Professional [who] Tends to not understand or understand the institutional quality or type of property [of] It's the market. And it's the appraiser's responsibility to learn about it.”
“There's a lot of value there,” Gallagher said, “but if you don't dig deep and understand the dynamics of that investment, you're going to miss that value. If you're from an urban or suburban background, you only see very heavy industrial uses and you don't understand supply and demand, you're going to miss that value.”
Pizza Magic
Altus Group business development managers Julia Stevenson and Elizabeth Pye hatched the idea for the series over pizza, with Stevenson challenging the pair to come up with a program to better understand the world of appraisals and valuations and view it through the lens of fairness.
With a lack of female appraisers and minorities, the friends were curious how the lack of representation impacts the appraisal process.
“Residential information is publicly available, [commercial real estate is privately owned, and so there is] “There is barely enough evidence to synthesize any conclusions,” Stevenson said of one of the big lessons from the series. Another is that valuation bias can arise for a variety of reasons, particularly a lack of market information and understanding.
“I'm proud that Julia and I have been a part of bringing these conversations to light,” Pai said. “This is just a seed of what needs to grow and become a bigger conversation, a more important conversation.”