Commercial Mortgage Quick Reference Guide
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Gross Potential Rent
ADR: Average Daily Rate
Commercial Bridge Loans
CMBS and Conduit Loans CTL: Credit Tenant Lease Debt Service Coverage Ratio Debt Coverage Ratio Debt Yield
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GLA: Gross Leasable Area
LIHTC Loan Constant
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Skin In The Game
BPO: Broker Price Opinion
A broker price opinion or BPO is a report that can be prepared by a broker, appraiser, or agent. A BPO, also referred to as a BOV, or broker opinion of value, can help a buyer get an estimate of the price of a multifamily or commercial property. Unlike an appraisal, a BPO/BOV cannot be used to get a multifamily loan or for taxation purposes, but can generally be obtained for much less money than a traditional appraisal.
How Are BPOs Performed?
A BPO can be done either as a drive-by visit or as a full inspection of a property’s interior. Whether a BPO is a drive-by or involves an interior inspection, the broker, appraiser, or agent will typically drive through the neighborhood to get a better understanding of the local area. Then, they’ll use their MLS to find similar, comparable properties to create an accurate estimate of the subject property’s value. Generally, they will use at least three properties that are currently on the market, as well as three properties that have recently sold, in order to create a reasonable estimate. This is a version of the sales comparison approach that is often used for traditional appraisals.
However, this is not the only way that the professional performing the BPO can estimate the price of a property. They will also often use other valuation methods, such as the income capitalization approach and the cost analysis approach. The income capitalization approach values property based on the income it can generate, while the cost analysis approach attempts to estimate the cost of replacing the property, minus depreciation. The cost analysis approach must not simply look at actual, physical depreciation of the property, but must also look at the property’s functional obsolescence. This refers to the fact that some older buildings are no longer a good fit for the needs of modern residents. For instance, tiny bathrooms and closets may have been par for the course for apartments in the 40s and 50s, but are no longer appropriate for 21st-century residents.
Appraisals vs. BPOs
The main reason that multifamily investors like to use BPOs instead of appraisals is the fact that they are significantly faster and less expensive. For instance, commercial appraisals typically begin at $2,000 (and can go up to $25,000 for very large properties) and can take several weeks. In contrast, BPOs can cost as little as $250 and rarely cost more than $2,000. Of course, if an investor actually wants to get financing, they will still need to go through the official appraisal process, but getting an appraisal is generally overkill for someone who is merely considering purchasing a property.
The Elements of a Broker Price Opinion
BPOs don’t necessarily follow a standard format, which means that they may look somewhat different based on the individual practices of the broker. Despite that, some elements are pretty standard for most BPOs/BOVs, including:
Location Report: This section typically includes a property’s address, descriptions of all buildings on the property (and their dimensions), a map of the site, and aerial images of the property.
Site and Property Information: This will include data about the property’s condition, how it can be accessed, and the visibility of the overall site.
Zoning Report: This will look at whether the property complies with local zoning rules.
Neighborhood Analysis: This will examine the overall neighborhood, and may include the broker’s insights as to whether area property values are increasing or decreasing.
Comps Report: This will include specific information about the comparable properties that the broker or appraiser is using to estimate the property’s value. Notes will generally be added to explain any significant differences between the subject property and the comparison properties.
Proforma: The proforma is a set of projected numbers that can help an investor understand a property’s potential profitability for the year or years to come. It may include projections of the property’s GPI (gross potential income), NOI (net operating income), or other essential metrics.
Tenant Data: The section may include some analysis of a property’s rent roll, which could impact the estimated value of the property. For instance, if a large proportion of tenants are behind on their rent, the broker or appraiser may reduce the estimated value of the property.
General Market Report: This section looks at the overall market, incorporating economic, employment, and real estate development data, as well as a variety of other significant trends.
BPO Valuation: Finally, the valuation part of the report will combine data from all other aspects of the BPO to generate an estimation of market value.