The Effect of Crime on Commercial Property Market Value and Appraisals - Part 1 of 5

I have to say that crime is one of those “taboo” topics that no one wants to talk about in an appraisal.  It is the ultra rare appraisal that even mentions crime statistics, let alone using them to support an adjustment or a direction of an adjustment.  Yet as we all know, crime has a huge impact on market value and even highest and best use.

The fear is that something will be written into an appraisal report that is prejudicial or if the purpose of the appraisal is for financing, what is said will make the lender very skittish about making a loan.  The lender may fear what the underwriters and auditors will say.  As a result, this topic is almost never addressed in any way in a written report.  To that I say rubbish.  There are ways to present crime data, analyze it and make adjustments that neither violate USPAP nor put an appraiser’s career at risk.  I’ll explore them in this series.

Sometimes Reality Hurts

I find it amusing that appraisal clients know the real deal but don’t want it discussed.  They know whether an area is a “good” area or a “bad” area, by whatever subjective criteria they use in determining this.  They have an intrinsic feel for whether there are crime problems or not.  Who are we kidding?  I’m not saying there aren’t exceptions, but leaving something out that clearly affects every conclusion in an appraisal is a disservice.  I have always believed that clients need to know the good and the bad about a property and a market.  That’s why when I train an appraiser, I require them to tell me at least five things that I put under the title of Important Conclusions at the end of the Executive Summary.  I don’t care what they are.  It’s about being honest.  Of course, by saying what I am in this series, I probably will never have another “crime” ridden appraisal again, but that’s OK by me.  Like they say in the X-Files, “the truth is out there”.

Necessary or Unnecessary?

Before I delve into details, I’d like to set the record straight.  Crime does not need to be reported in every appraisal or even most appraisals.  Crime has an impact when compared to something else.  In these instances, it should be discussed.  For example, if the crime rates are similar between your subject and your comparables, it does not need to be mentioned.  Also, if crime did not affect market value (because you used comparables that have similar crime rates), it does not need to be mentioned.  This applies especially to lender appraisals.  Where it does come into play is when your subject is affected by crime but your comparables are not or vice-versa.  This occurs when the typical market participant or the majority of the market would consider or not consider properties that vary substantially in their degree of crime.  Their actions would be different, so as appraisers we need to consider that.  It’s not like appraisers can hide that – we have to report marketing times and you can bet that properties that have atypical crime rates have much longer and highly noticeable marketing times.

Oh, What a Tangled Web We Weave

What’s the big deal about crime?

• It can delineate market boundaries, not unlike what some old movies referred to as “the wrong side of the track”.
• It directly affects the ability of an area to attract national tenants.
• The type of tenants and businesses found in an area that is considered “crime ridden” are usually quite different from areas that are not.
• In general, rental rates are materially lower
• It is hard to find cap rates in areas that are crime ridden because the number of sales are far fewer.
• All the above limit the number of rebuild scenarios that are financially feasible

I’ve had two cases where crime made a huge impact on highest and best use and market value… but you’ll have to wait for my next installments to find out I handled them.

John Simpson, MAI