The Effect of Crime on Commercial Property Market Value and Appraisals - Part 4 of 5

We’ve explored what crime can do to a regional mall.  Now I’d like to shift your attention to a case where crime affected what was going to be built on a spot of vacant land.

The Case of the Stigmatized Fully-Approved Office Building

We were hired for a tax appeal of a parking lot in Washington, D.C.  But it was not just any parking lot.  This lot had approvals for a seven story, Class A office building with over a quarter million square feet approved.  The design had even won a few awards and it was targeted at lawyers and lobbyists.  The time frame was during a strong real estate market.

Something was definitely amiss because the approvals were over seven years old and yet the building had not been built.  I inspected the property and didn’t see anything wrong with the neighborhood.  It was a mixed-use high-rise area with apartments across the street and offices on a diagonal, although nothing on the quality level that was proposed for the subject building.

Since I was hired by a tax consultant for the appeal and he represented the owner, I got some of the scoop up front.  The problem was all the crime in the neighborhood was centered on this parking lot.  The owner hired a major commercial real estate brokerage firm to market it for all of the past seven years and yet they could find no one to pre-lease any space in the building.  The broker also confirmed what I was told – crime was the problem.  Dozens had seen it but not a single one wanted to lease.

Yes, I could have looked in the newspaper like I did the prior regional mall example but I doubted that would give me anything specific.  The place to go to get information was the Metropolitan Police Department.  So I setup an appointment to go there in person.

Before I went, I did my homework.  I found all multistory office approved vacant lots in the District that sold in the past several years.  I took that and my subject data with me to the Police Department.

I must admit, they had an amazing operation going.  I had no idea that they had so much information and it was available to the public for the asking.  It took a couple of hours but what they put together made my case very easy.  They provided me crime statistics not just for my subject but for my comps as well.  This was a lot similar to what I presented in Part 2 where crime was broken down into assault, burglary, etc.  Of particular relevance was that crime was between two and five times less within two blocks of the subject in any direction.

So I got thinking… what would the price per square foot of approved office area be if I used number of crimes as my denominator?  First and foremost, I had to select office approved lots with similar floor area ratios, which was not hard (the subject had a FAR of 9.4, so anything with a FAR below 5 was excluded).  My other criteria was selecting sales in the same and adjacent office markets (the Central Business District and East End).  Lo and behold, there was a very interesting relationship.  I was able to show a fairly strong “price per crime” trend.  It wasn’t exactly linear… I couldn’t be that lucky… but there it was.  It’s hard to argue with the numbers and it’s harder still to argue with a nice, pretty Excel-generated chart.

In Part 5, I’ll explain how I translated this into the value of the subject site and how the case transpired before the tax board.

John Simpson, MAI