All You Need to Know about Development Appraisals

We spoke to Dr Koenen, a specialist in construction law, to learn all about development appraisals in construction. What do you do if your appraisal has come in low or what legal issues can cause appraisals to invoke failure? Read on to find out.

What is a development appraisal in construction?

In the construction business, the development appraisal generally concerns properties and their opportunities for development; vacant lots, gaps between buildings and abandoned industrial or military sites are especially suited for development appraisal. In order to examine their value and to emphasise their development and appreciation potential, the potential of the property has to be contrasted with its risks. Therefore, the development appraisal leads off with an analysis of the current state of the property, which includes a review of the property itself, the site and the significant market situation. With regard to the property itself, follows an examination of the substance (e.g. are there any contaminated sites?), potential property rights of third parties, for example, rights of use, and furthermore, the building regulations (does a development plan exist or are there other regulations?).

On the basis of market analysis, this ultimately follows an examination for which the surrounding construction projects has a need. The results are then put together and are presented to the owner of the property or the investor along with a valuation of the building plot, ideas and concepts for the best use of the property and the optimal realisation of profits.

If the investor decides to pursue a project on the property, the project controllers that were already entrusted with the preceding analysis, are most likely to also execute the following architectural or investor competitions and manage the tendering and award procedures.

What do appraisers look for when determining a property’s value?

According to § 194 of the German building code (Baugesetzbuch), the market value of a given property is set by the value it could obtain in the course of business at the time of the determination. Modifiers are the legal circumstances, the actual and local conditions, without taking any personal relations into account.  Relevant for the determination of a properties market value are all variables that might affect the value of a given property, such as: current and future taxes, encumbrances, future economic development (especially regarding the construction and land market), state-controlled housing policies, the situation at the job market, spending capacities, the surrounding infrastructure, the region’s attractiveness for housing or business, as well as the state of development of the property and its access to the surrounding infrastructure, along with the  size and shape of the property, possible restrictions for usage or construction and existing or expected emissions.

Often the task of creating assessments regarding market values of (un)developed premises is appointed to a rating committee. These committees study the average paid prizes for properties regularly and check their development status, in order to publish the land and market value of the examined land plots.

What happens if the appraisal comes in low?

If the evaluation of a given property comes in low, the market value is usually hit directly, because the assessments are publically available.

The appraisal often also has direct consequences regarding taxation.  If the appraisal was part of foreclosure proceedings or is of vital importance to the property owner, the results should be put into question and the assignment of another appraiser should be taken into consideration because their results can differ significantly.

How can a lawyer help in this situation?  

A lawyer should already be contacted at the first signs of a property evaluation which does not result in the investor’s or owner’s satisfaction. At this early point in time – and especially if the constructional planning law is not explicit or uncomplicated – a lawyer can exploit all the options the law offers, such as a construction preliminary (“Bauvoranfrage”), which advances the legal admissibility of a certain construction project to be settled.  Of course, a lawyer can also take action if a negative assessment has already been set, but then the lawyer’s own evaluation and their actions most likely only exist in parallel with the appraisal that came in low.

That is why in large building projects specialised lawyers support the investor or property owner during all stages of the building project up to its completion.

What legal issues can cause an appraisal to invoke failure? 

Within the framework of an appraisal, “hidden” defects of a property can be problematic. For example, if all the existing documents are not analysed in advance, old rights of use or other encumbrances can be overlooked. Another legal issue that is often problematic in terms of appraisal, is the missing examination whether or not all of the local improvement assessments have been paid, because improvement contributions from roadworks many years ago often lead to a subsequent nonprofitable project.

Ultimately the risks do not end there; it is also important to collect information regarding future developments in construction planning law, such as a projected development plan because the planning community has legal tools like a so-called development freeze, which enables the administration to stop projects that contradict their planning, in advance to really establishing the development plan. A development freeze would stop the building project and lead to massive financial losses and even the incompletion of the whole building project.

In this context, it is important to understand, that not even the notary is obligated to check those aspects mentioned above. If the investor or property owner operates without legal assistance they themselves have to check all the existing legal documents regarding the property at hand, if they want to minimalise the risk.

After all, for the feasibility of the project at hand, it is vital to fully apprehend the predominant building rights. Insufficient legal assessments and a faulty appraisal almost always lead to increased costs or an imbalance between the financing and the necessary expenses, if they do not result in the unfeasibility of the whole project in the end.

Dr Andreas Koenen

Roggenmarkt 1 48143 Münster

Tel. 0251.9816297-0

Fax 0251.9816297-9

www.bauanwaelte.de

DR ANDREAS KOENEN is a certified specialist in building and architectural law, a lecturer for building law, and managing director of “Netzwerk Bauanwälte” (a network of law firms specialised on building law throughout Germany, www.nwba.de).

Dr Koenen was a scholarship holder of the “Studienstiftung des Deutschen Volkes”, studied, inter alia, law at the University of Münster and Bochum, and earned his PhD at the University of Münster.

Dr Koenen is a lecturer at the Philipps-University Marburg, at the school for municipal administration in Essen, and the English Business School (EBZ) in Bochum. The JUVE-handbook for commercial law firms chose Dr Koenen as a recommended lawyer. From 2017 to 2018 the journal FOCUS selected Dr Koenen as a top lawyer. Dr Koenen is a co-author of many textbooks on law and responsible for literature in online libraries (https://www.bauanwaelte.de/rechtsanwaelte/dr-andreas-koenen/).

KOENEN BAUANWÄLTE® was founded by Dr Koenen in 2004 and operates from four locations – mainly in the North-Western part of Germany.

The law firm is specialised in all branches of law that are needed when a building/construction project is to be realised – from a detached single-family home to a major construction project or public institutions. This includes especially the private and public building law.