NEWS ANALYSIS: In search of ‘fair value’

Panelists at last month’s PERE Real Estate CFOs Forum in New York stressed the need to “look behind the numbers” as opposed to simply using a recent transaction price as an indication of value. The panelists included John Busi of Cushman & Wakefield, Peter Brooks of Ernst & Young, Brian Glanville of Integra Realty Resources and Daniel Lesser of Richard Ellis.

The advent of FAS 157 means that investment funds must report asset values that reflect the price they would fetch if sold into the current market. Finding this “fair value” is especially tricky in a market where the sellers are distressed and the scant comparable transactions are often completed in a disorderly fashion, the panelists said.

For example, Lesser, who tracks sales in the hotel real estate market, said he’d seen very widely different valuations of similar properties recently. One hotel was sold at 40 percent of replacement cost, and a second at 75 percent of replacement cost.

Many real estate GPs are tempted to bypass this mess and report their asset values based on prices they believe will be reached several years down the road when the market has become more rational. But this runs counter to the standard of FAS 157, cautioned Glanville. “Market value is the value at the date of appraisal,” he warned.