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News from NCREIF: valuation committee meeting notes.

The National Council of Real Estate Investment Fiduciaries' (NCREIF) 2011 Summer Conference took place in Chicago, Illinois, July 13-14. The conference included a mix of general sessions, which were attended by approximately 200 conference attendees, as well as individual committee sessions. Appraisal Institute members comprised a majority of the attendees to the NCREIF Valuation Committee meetings, where the discussions focused on a number of issues that impact the real estate valuation profession.

Leaders of the nine standing committees (the largest committees are Valuation, Accounting, and Research) participated in a planning meeting with NCREIF leadership, including Board Chair Catherine Polleys (Hewitt EnnisKnupp), and Chief Executive Officer Roy Rendino. The Valuation Committee was represented by Del Kendall, MAI (Real Estate Research Corporation), as chair, and Tyler Brown, MAI (Cornerstone Real Estate Advisors, LLC), as vice chair. A number of initiatives and strategies were discussed that would enable NCREIF to provide continued leadership on investment real estate issues. Internal initiatives included webinars sponsored by the various committees, with the Valuation Committee planning a presentation in December 2011 (the topic is yet to be determined; check for updated information).

Another current initiative is focused on the development of a query tool that can be used to extract a wealth of valuation data from the properties housed in NCREIF's database. NCREIF has an extensive database provided by 6,349 properties, and each is valued quarterly. The financial information is compiled quarterly in the form of Argus models for all of the properties. This allows for the potential to extract rates used in the models, income and expense data, and other valuation assumptions (renewal probabilities, rent growth estimates, etc.). Jeff Fisher, a NCREIF academic member from the Indiana University Benecki Center for Real Estate Studies, and Dan Dierking, chief information officer of NCREIF, are spearheading the database extraction efforts. It has not been determined how this information will be made available to members or if a subscription service could be instituted for nonmembers.

The Valuation Committee has also been part of the NCREIF response to external industry pronouncements. The Valuation Committee, with NCREIF review and approval, has issued regular responses to pronouncements by the Financial Accounting Standards Board (FASB), International Valuation Standards Council (IVSC), Global Investment Performance Standards (GIPS), and the Department of Labor (DOL). Before plunging into specific responses to these authoritative organizations, perhaps a brief understanding of their substance is appropriate.

* The FASB was designated by the US Securities and Exchange Commission in 1973 as the organization responsible for setting accounting standards for public companies in the United States. Many new accounting rules from this board deal with the issue of increasing transparency in the real estate industry, a plus for those in the valuation industry.

* IVSC is headquartered in London. A primary objective of this group is to develop high-quality international standards and support their adoption and use. In addition to representing over 50 countries, NCREIF is an institutional member.

* GIPS standards were created and are administered by the CFA Institute to allow investors to compare investment firms globally.

* The DOL is the US department charged with protecting employees and retirees. Its responsibilities include working conditions, benefits, and rights.

In summer 2011, the IVSC issued two exposure drafts covering discounted cash flow and replacement cost, respectively. The Valuation Committee submitted a response to these initiatives to clarify several pertinent valuation issues. More information on these exposure drafts can be viewed at As governmental and industry bodies move more toward greater transparency of real estate investments, the committee will continue to provide insightful comments to those organizations.

The initial Valuation Committee session at the conference convened after a general session titled, "Trends in Global Investment." The first topic discussed was whether the Valuation Committee would nominate one of its members for a position on the Real Estate Information Standards (REIS) Council. The REIS Council is responsible for setting information standards for NCREIF members in the areas of portfolio management, performance, asset management, financial (accounting), and valuation. The REIS Council consists of eleven members who serve staggered three-year terms. It is required that one MAI be on the council; the MAI position is currently filled by Rick Wincott, MAI.

A series of speakers followed, including Rendino, who gave an overview of the prospective business plan for the Valuation Committee that would dovetail with the business plan of NCREIF. Alyce DeJong, MAI (Prudential Real Estate Investors), then updated the committee on her activities as NCREIF's designated representative to the IVSC. She also serves on the NCREIF's board of directors, and she relayed the board's activities in considering whether to approve the Valuation Committee's response to two IVSC exposure drafts. DeJong also spoke about upcoming changes with USPAP, which she follows closely since her" previous term on the Appraisal Foundation.

Bruce Kellogg, MAI (Argus Software), next spoke to the Valuation Committee about the Open Standards Consortium for Real Estate (OSCRE) and its international membership. Tyler Brown then spoke to the committee about NCREIF's goals, which included increasing transparency in the returns produced by the NCREIF Property Index and increasing awareness of the NCREIF.

David Walden (NPV Advisors, Inc.) presented a market analysis of the Chicago office market that touched on office fundamentals, such as supply and demand. He offered in-depth analysis of issues that often arise in reviewing inventory and availability stats that vary by vendor, something many of those in the valuation industry face.

The next session, "Alternatives to IRR," was jointly offered by the Valuation Committee and Performance Measurement Committee. Dean Altschuler (Bard Consulting, LLC) proposed a different technical approach to replace time-weighted returns with dollar-weighted returns.

Following Altschuler's session, committee members participated in a number' of general sessions. One session, "What's Going on with Debt," covered lending activity for life companies, commercial mortgage-backed securities, and conventional lending. Lending volume in 2011 for commercial mortgage-backed securities was forecasted at $30 to $40 billion (this was before the US credit downgrade stymied fourth quarter volume). Another general session, "Risk Management Comes of Age in Real Estate," outlined the changing ways in which investors assess risk in their real estate investments. This discussion focused on risks outside of capitalization rate and internal rate of return, such as tenant quality, operating issues, and interest rate risk.

The general session, "Business Overview of FASB Initiatives," addressed recent FASB pronouncements, such as new lease accounting rules and new guidelines affecting investment companies. Another general session offered was entitled, "Valuations and Pricing in a Changing Market: Lessons We Should Remember, But Probably Won't."

The closing general session was led by Richard Hanson (Mesa Development). His presentation, "Overview of the Millennium Park Project--Changing Demographics and Economic Conditions," was a topic of expertise for Hanson, as he developed this luxury condominium in Chicago. An interesting summary of the research and analysis that went into the development was given to the audience. It provided a welcome, practical view of real estate after two days of theoretical and regulatory tethered analysis.

by Del Kendall, MAI, and Tyler Brown, MAI

Del Kendall, MAI, is the current chair of the NCREIF Valuation Committee. He is a managing director with Real Estate Research Corporation and heads its office in Houston, Texas. His areas of expertise include valuation management, real estate consulting, and litigation support. Kendall also serves as a member of NAIOP's National Research Directors Committee. Contact:

Tyler Brown, MAI, is the current vice chair of the NCREIF Valuation Committee and will be the chair in 2012-2013. He is a vice president for valuation with Cornerstone Real Estate Advisers in Hartford, Connecticut. His responsibilities include the quarterly valuation of approximately $9 billion in commercial real estate assets across the United States. Contact:
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Title Annotation:NOTES AND ISSUES
Author:Kendall, Del H.; Brown, Tyler
Publication:Appraisal Journal
Article Type:Conference notes
Date:Sep 22, 2011
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