Phase 2 - Real Estate 101 (How to or one big idea)

Podcast – Mechanics Behind An Appraisal

Tyler Stewert
August 30, 2021
Podcast – Mechanics Behind An Appraisal

On this episode, Mike Milano discusses how to appraise and forecast commercial real estate properties.

Mike Milano, CCIM, MAI, is a Managing Director and has been with Colliers for 20 years. Mike has sold retail properties throughout Florida, and is consistently a top producer having sold in excess of $2.0 billion since joining Colliers. Holding both a CCIM and MAI designation is a rare accomplishment and speaks to Mike’s skill as a professional. Mike oversees retail investment sales throughout Florida, providing acquisition and disposition services to institutional and private clients.

Mike specializes in the sale of credit anchored shopping centers, lifestyle centers, enclosed malls, freestanding, net-leased retail and redevelopment properties. Mike has formed strategic alliances with mortgage brokers and lenders active in today’s market. This helps provide clients with access to both debt and equity.

Mike also has extensive experience assisting private clients, lending institutions and special servicers with disposition and workout solutions for challenging assets as well as performing and non-performing debt.

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RealCrowd – All opinions expressed by Adam, Tyler and podcast guests, are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Mike Milano – There are some people that really thrive on those and really like those, risk-takers, who will take those on and they will figure out something to do with these properties and it almost always involves changing the use.

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam, how are you today?

Adam Hooper – Tyler, I’m good, what do we have on tap?

Tyler Stewart – On tap today, we have Mike Milano, Managing Director at Collier’s.

Adam Hooper – Mike is a fellow CCIM, he’s a MAI, which we’ll talk about in the episode, and he’s been with Collier’s for over 20 years. So background and appraisal, most recently been in the brokerage world, and again, another really interesting conversation today.

Tyler Stewart – It was, today we covered three big ideas, mechanics behind an appraisal, forecasting property type and location for the next five to 10 years, and how to sell right. What were some of the keys you learned about the mechanics behind an appraisal?

Adam Hooper – This was a great dive, we haven’t talked about it on the podcast before, but this is really a lender-driven function, and we’ll learn all about that. Before we talked about that, though even, I think one of my interesting takeaways was, commercial real estate, to me, has always been about numbers, and it’s been about the process behind it and financials, but as we discussed with Mike, emotions are real. We’ve seen that play out in the commercial real estate world from time to time. Tyler, why don’t you tell us about forecasting the property type and location for the next five to 10 years.

Tyler Stewart – Sure, sure. Mike’s focus is retail, and so we we spent a lot of time on retail on this topic, and talked about one of the biggest keys to forecasting retail is the daytime population. What’s that look like? What’s the demographic? Who are the type of people who work in that area, how accessible is the retail in that area? It was a really good topic and deep dive with Mike.

Adam Hooper – Then also on that too, the forecasting. Listen for the discussion around the top of the market versus the peak of the market, I thought that was a pretty interesting look.

Tyler Stewart – It was, and then as we discussed selling right, what were some of the keys you learned about selling right from Mike?

Adam Hooper – It was about timing, right, it’s about when is the right time to sell, what does that sales process look like, and as an investor, what can you expect to see when you might hear from the manager, “We’re going to sell the property?” I think it was just an interesting kind of light on what happens when the time is right to sell the property?

Tyler Stewart – We talk so much about acquisition on the podcast, so it was good to talk about the end of a property cycle and the selling process.

Adam Hooper – Perfect, well, Tyler, I think that’s enough of us rambling along here. So, as always, if you have any questions or comments, please send us an email to If you want to learn more about real estate, you can always go to With that, let’s get to it. Michael, thanks for joining us today, excited to dig in on the world of appraisal and how that applies to our commercial real estate investment. We appreciate you coming on the show today.

Mike Milano – Adam, Tyler, thank you for having me.

Adam Hooper – Perfect, well, why don’t you tell us a little bit about how you got started in real estate. I know you’ve been working with a lot of institutional clients, but tell us a little bit kind of how you got into the business and what drew you towards the the appraisal world.

Mike Milano – I got into the business many, many years ago, and it was no more well thought out, than I had just come out of one job and was looking around for what I would do next. I just happened to have a real estate license which was not active, so I got into the real estate business just because I had a license and I started in residential real estate, and that was actually in the mid ’80s, so this goes back quite a few years. I was in residential for about three, three and a half years and saw that there may be greener pastures in commercial real estate, so I jumped ship, and I got into commercial real estate in 1986 and I’ve been here ever since.

Adam Hooper – Good, yeah, it’s similar, my entry into the business was commercial too, I’m not so good with paint colors, I like numbers, so that was definitely commercial was my calling.

Mike Milano – One thing about the commercial, a lot of people go into commercial thinking that there’s less emotional based in commercial that it’s more facts and figures, and one thing we fail to realize is this, we are dealing with people and we are dealing with two powerful human emotions, which in kind of a crass terms, greed and ego. Never underestimate the power of emotion to drive commercial deals, it happens and we really need to be aware and sensitive to that. This is still very much an emotion-based business.

Adam Hooper – That is a really good point. As much as we like to say that it is all financial numbers-based, I’m sure you’ve seen it many times, you’d be shocked at what such a small financial difference can be used as an excuse to blow up a deal.

Mike Milano – We amuse ourselves that we will find in a large a $10 million transaction, at the 11th hour, it may come down to the principals doing battle, over a $2,500 item. Both of them maintain that that’s a deal-killer, if it does not get resolved to their satisfaction. There is a very strong emotional play to this business as well.

Adam Hooper – For sure. You’ve been in the business, quite some time on the commercial side, tell us a little bit about what you’re doing today and kind of that path to get to what you’re up to now.

Mike Milano – What I do today is solely retail investment sales. We represent sellers in transactions and we’re a listing selling firm, but we do more than that, we’re also advisors, so we advise a lot of clients on strategies, of hold, sell, refinance, retenant, but it’s primarily around the retail asset and it covers in a wide array of going from single tenant net lease all the way up to major power centers. Been doing that now in the Tampa market, moved to Tampa in 1993 and have been doing that in Tampa for at least the last 25 years. When I first moved here, I was from Abilene, Texas, that’s a story in and of itself, and I got here to Clearwater, Tampa, I came as an appraiser. I just recently received my MAI designation and the company that I’m still working with had just recently purchased an appraisal company and I moved here to work with them because this company also had a brokerage division, and I knew that I wanted to get back into brokerage, which I did. That was the for the selection.

Adam Hooper – Now the MAI, tell us a little bit about that designation from the Appraisal Institute, what does that do? I know you’re also a fellow CCIM, so good to have another CCIM on the podcast here, but tell us a little bit about the MAI and what that means in the appraisal world.

Mike Milano – Well, when I first started in appraising, and this was before we had an economic meltdown that caused appraising to become more standardized, MAI was the premier designation, Member of Appraisal Institute, and lenders, and institutional owners and more sophisticated practitioners, would select and engage MAIs to do appraising. Since then, states have adopted uniform standards of practice and there are now a designation of general appraisers and residential appraisers, and general appraisers do a lot of commercial work. MAI is still a very prestigious designation, but it competes in the field with general appraisers, state-certified appraisers rather, who are not designated, so just MAI is a designation. Whereas if you have an MAI, you still have to have your state certification and be certified under the state to continue to do appraising as a livelihood.

Adam Hooper – What did that background as an appraiser coming from that side of the business, how has that informed your career, or maybe what are some early lessons you learned through getting that designation, and how’s that kind of changed your take on the real estate markets?

Mike Milano – Great question. It made me a better analyst and an underwriter of investment properties. The designation has actually done me more benefit as a broker than it really did as an appraiser. I quit appraising many years ago, I have not done a formal appraisal in probably over 20 years. But I’ve used the skill that I have to underwrite and properly assess properties as we’re underwriting for owners, for clients, for potential investors, and it also is given a level of respect in the investment community, recognizing that designation, they recognize between that and the CCIM, that I have an understanding of value, what drives value and how to assess value. It’s really, from an analytical standpoint, it’s been invaluable.

Adam Hooper – Perfect, well, let’s dig in a little bit. We haven’t talked about appraisals on the show yet, obviously, that’s a pretty crucial part of almost every transaction. For our audience members out there that maybe they’re familiar with a residential appraisal when they purchase their residence or primary residence, how does that differ from an appraisal in the commercial transaction cycle, and maybe what does that process look like, just from a 30,000-footer on the commercial real estate side, then we can kind of dig in from there?

Mike Milano – There’s some very distinct similarities and differences. Appraisals are still a lender-driven function. On cash transactions, there is no need to have appraisals, and a lot of times, in cash transactions, there are no appraisals done. Now, if either party, particularly the buyer, because of obligations within whatever the ownership entity is, they may be compelled to go ahead and order an appraisal just to satisfy themselves to value, but on a cash basis, there’s no need for an appraisal. Appraisals are really driven by the lenders as a check to make sure that the asset is well within the market value. So that’s what they’re really looking at, is what is the market value, regardless of what the buyer or seller have agreed to.

Adam Hooper – In the real estate business, there’s always been this trope of, an appraisal just comes back at whatever the purchase price is, plus or minus small amount. How much of the appraisal is completely independent from the contract, or is it dependent upon the contract, what are the key factors that you guys are looking at when appraising?

Mike Milano – That’s a great question. We would really like to think it’s independent of the contract, and to the credit of a lot of appraisers, they are earnestly trying to come up and solve for market value. What’s interesting, though, is when a property is properly marketed, and exposed, and you get a multitude of prospective buyers, and particularly if you’re going through a bid scenario, that is the market, the market is responding. It should be that the appraisal should be matching the result of the contract. The other thing to really keep in mind, is there is not an absolute value on real estate, value is not defined to four decimal places, there’s a range of value. When appraisers look at these, they will look and see what the range of value is, and if the contract is well within the range, why would you come up with something other than that, or below that, to just create a disruption? Got to think that that’s part of the mindset going into this, it’s not instructed, which is the euphemistic term given to MAIs, but it is more, just trying to mimic what is going on in the market, and recognizing that there’s a range of value and if it’s within that range, why argue?

Adam Hooper – Right, by the technical definition, if you have a purchase and sale agreement that is a willing seller and a willing buyer, transacting at a, what should be a market price, and that is the definition of market. I think that’s a little tongue in cheek, but I think, again, that’s always one of those questions of, how independent is this, because it seems like, again, and I think you brought up a good point, right, if you’ve run a full market process, that should be pretty good indication of where value is, right, so I think that makes sense. So what are some of the key factors that an appraiser looks at when they’re coming up with that, what are some of those kind of external factors that they’re looking at in the market, or other sales comps, or stuff like that, to come up with that range of market value?

Mike Milano – It’s the gathering and integrity of the data that they’re going to use. If the sales comps, or the sales comps truly reflective. In houses, you’ve got a more homogeneous market, when you’re going and you’re looking at a three-bedroom-two-bath home, X number of square feet and it doesn’t have a pool, it is so much easier to go out and find sales within the area, within the neighborhood, and residential appraisers do have a little bit easier job. Commercial, you’re not as fortunate to find, let’s say that you’re valuing a strip center, a 35,000-square-foot strip center, you’re not going to be fortunate enough to find four other strip centers that have sold in the last 12 months within a one-mile radius of that, or half mile radius of that, which would be a great indicator. Sometimes you have to go out and you have to look in other areas, other sub markets, you have to go bigger, smaller, there’s a lot of things that will influence that. So it’s the integrity of the data, how the appraiser chooses to interpret the data, and how well that the appraiser will underwrite the income, if it’s an investment property. There’s just a lot of work that appraiser has to do to just make sure that they are adequately reflecting the market.

Adam Hooper – Is it primarily, sounds like, a sales comp-driven process, or is it more, I mean, your typical, you’ve got replacement cost approach, you’ve got sales comp approach, and you’ve got the kind of discounted cash flow approach?

Mike Milano – The income approach. If it’s an investment property, the income approach is going to be the heavy influence. That’s what people will base their decision on, cap rates, and yields, and things of that nature. Investment properties, it is primarily income approach, secondarily, comparable sales approach. User property, somebody’s buying a building they’re going to occupy, or a warehouse they’re going to use, that is going to be comparable sales, and cost approach, cost approach with land. If you could go buy a tract of land and build a building exactly the way you wanted it, and it cost you less than going and buying an existing building that you’d have to adapt, obviously, you go for the land and build a new building. The cost approach and comparable sales really drive appraiser techniques on user properties.

Adam Hooper – Okay, and then on a investment property, are you typically going to look at all three of those approaches and to kind of triangulate to a value, or there’s, like you said, on investment property, it’s primarily investment, or the income approach that drives the majority of those appraisals?

Mike Milano – Keeping with standard practice, you’re going to look at all three approaches, you’re going to look at the income, comparable sales, and the cost approach, you just will end up putting greater emphasis on either one or two of those, and not so much on the third. You’re going to look at cost approach investment sales, but you’re going to say that was the one that we gave the least weight to, driven primarily by the income approach, or by comparable sales.

Tyler Stewart – And then for some of our listeners out there, if they want to look at sales comps, where can they go to get a hold of that data?

Mike Milano – There are third party services that are very good, I feel like I’m almost giving them a plug. There is a service, it’s a paid-for service, it’s called Real Capital Analytics, and Real Capital Analytics does a very good job of tracking sales, on investment sales, there is CoStar, CoStar does track sales of user and investment properties, whereas Real Capital Analytics is just investment properties, and then there is the county property appraisers website, just look at what activity is coming through. That is more raw data, and doesn’t really give a lot of the characteristics of the sale that you’re going to get from Real Capital or from CoStar that have been a bit more refined. Those are the three primary sources to go out and find comps, but those, a more casual investor who’s not plugged into those sources, it’s going to be particularly challenging to go out and find comparable sales. That’s where going to an appraiser and having a dialogue and saying, “We’re looking in the market,” make a relationship with an appraiser and appraiser may be able to get that information for them.

Adam Hooper – Now, are any factors like this upcoming supply or kind of demand drivers in the market, are those ever considered an appraisal, or appraisal is more of establishing what the value is today versus any kind of projections or forecasting for future values?

Mike Milano – Its supposed to be, yes. The short answer is yes. It’s called the highest and best use analysis. Within an appraisal, there should be a highest and best use where they’re trying to determine what is the current, what is the highest and best use, that’s driven a lot of times by current supply, demand, land use, things of that nature. Let’s say you look at a strip center, and it’s been vacant for some time, and they’ve been asked to buy it, they may determine that retail is no longer highest and best use because there’s enough for the retail around and it might be time to change it to another use provided that it’s allowable, medical, or maybe service, or maybe even service office. Yes, the short answer is they do look at those to try and see what the market is saying with regard to supply and demand.

Adam Hooper – That was on one of our recent episodes, a comment was made again in your retail space of we’re not necessarily oversupplied, we’re under-demolished, and so an appraisal.

Mike Milano – That’s a great line. An appraiser could come back and say, “We think the highest and best use for this property,” again, in your case, if it’s a strip center, “maybe this is a redevelopment place, the highest and best use.” That’s something that you could uncover through this appraisal process that you maybe you’re not looking at it that way, but that is something that could be reflected in a potential appraisal.

Adam Hooper – It could be, but that’s more of a consulting assignment. I think at that point, you’re putting a little bit too much on an appraiser. What’s very important is to understand what it is that you’re trying to achieve out of the process. To me, appraisers function well within the lending world and act as a check and balance for lenders to make sure that there’s sufficient value in the asset that they’re getting ready, or being asked to make a loan on, but I think going outside the appraisal, or talking to appraisers,

Mike Milano – who also can take on the role of consultant, if you want to look and see what a highest and best use is, or what alternate use is, or things like that, you can engage appraisers to do that, you can engage brokers to do that, who are specialties in their field, but, it is not uncommon for me to have discussion with investors who use the word appraisal, and they really don’t want an appraisal, what they’re trying to do is they’re trying to get an answer to some other question that the appraiser may or may not answer through the appraisal process, and what you’re talking about is one of those examples.

Adam Hooper – What you mentioned there too, that you also mentioned previously is, an appraisal is really a lender-driven process, right, it’s not so much the investor looking at this, as, “Am I paying the right amount for this project,” it’s more so from the lender’s perspective, “Am I loaning against the appropriate collateral for the loan that I’m about to make?”

Mike Milano – I think that is the most appropriate use of appraisals, and then the appraisers listening to this are probably going to take exception. You might get some comments back, but that’s really where they function. If you’re going to go off of just tell me the value, anything deviating from just tell me the value, the appraiser or broker, whoever, needs to give clear instruction and ultimately, what you’re trying to solve for, are you really trying to figure out what the highest and best use is, or what the redevelopment cost would be, or what retenanting costs, there’s a whole variety of things, but typically, the knee jerk is, well, let’s go get an appraisal, that may not be the most appropriate course of action.

Adam Hooper – I think we’ve all seen too, when an appraisal will come back, either lower than what’s anticipated, and the lender will adjust loan sizing, or maybe even come in higher than anticipated, and maybe they’ll increase the proceeds. What is the process once an appraisal is done and delivered before the investment manager to review, or dispute, or offer mitigating factors or anything like that? Once it’s done, is it set in stone, or is there ability to kind of have input in what’s done with that appraisal after that value is arrived at?

Mike Milano – Yeah, that is a great question. If you’re just arguing value, you’re going to have a tough time. If you are really trying to show evidence that there were some factors or information that was not known before that would have an influence, then you may have. Let’s say you get an appraisal that comes back that you think is low. And now, again, keep in mind the lender is the one who orders the appraisal, not the individual. The lender may choose not to share the entire appraisal with the client or the customer,

Tyler Stewart – then that’s a whole nother discussion. But just assuming that they do, the investor gets a call from the lender and says, “Got some bad news, the property did not appraise for value.” And the potential borrower says, “Gee, that’s unfortunate, can I take a look at it and see?” Lender says, “Yes,” they take a look at it, if they think that they did not use proper comps, and they know of some comps, they should certainly bring that to the appraiser’s attention, if they think that they got the income wrong,

Mike Milano – they should bring that to their attention, but if they’re just there to argue value, and nothing real material change, that’s going to be a tough position. Because that was the appraiser’s opinion based on the information that they had and their expertise, and their professional opinion.

Adam Hooper – And then on the flip side, if it comes in higher than contract value, you’re probably not going to see many managers trying to argue that down, are you?

Mike Milano – I don’t think that’s going to happen. That point, the appraiser will not get a phone call.

Adam Hooper – He’ll get a bottle of bourbon in the mail or something.

Mike Milano – There you go.

Adam Hooper – For our audience that are your typically limited, passive investors, in deals through a third-party professional real estate manager is going to be running that process. Are there any insights, or questions, or anything they should be aware of throughout the appraisal process, or that’s really kind of in the manager’s hands? And some might share it, some might not, but generally, that’s the manager’s responsibility to kind of work through that appraisal process and uncover or address any of these issues that come up?

Mike Milano – Yeah, I think for investors, if they are purchasing a property, and they’re going to put debt on it, the lender is going to order an appraisal, that’s a given. And to have dialogue with the lender before, to just say, “We have every confidence this property is going to appraise at the contract price, if not even more than the contract price. But in the unfortunate event it does not, are you going to be able to share the appraisal with us just so we can talk to the appraiser and better understand why did not come up to value?” I think that would be one thing that would be important to do. If the lender says yes, lender says no, then they can decide how they want to respond accordingly. But just keep in perspective, to me, the appraisal is more of a function of lending and debt than it is of just necessarily establishing a market value, the market value is established by the market, duh, and I think with investors, fully understand what problem you’re trying to solve for before you order an appraisal, what is it you’re trying to find as a result, and they may be able to get the answer in a variety of ways of going to a broker and getting a broker opinion of value, betting a consulting assignment, it could be an appraiser, not appraiser, but understand what it is they’re trying to seek before they just launch out and get an appraisal.

Adam Hooper – Perfect. I think that’s a wonderful overview on appraisal, and that’s again, glad that we can kind of peel back some of those layers and hopefully give our listeners a little bit more insight to what goes on. Switching now towards more of your transactional side of the business, a lot of your work is with bigger institutional clients on the sell side of larger retail properties. Let’s maybe talk a little bit about when you’re looking at markets and some of the listeners out there, when they’re looking at markets, and trying to understand how some of these managers are maybe forecasting some of these assumptions, or can maybe do some of that research themselves, what are some of those things that you look at when you’re trying to figure out, how is this market going to perform over the next handful of years, five, 10 years during that whole period? Are there any key factors or indicators that you look at, maybe specifically in the retail space, that would give you a kind of a feel for how the performance of that market might go over the next handful of years?

Mike Milano – The one we use the most are demographics. Because retail is so driven by location, and people, and accessibility, and income levels. Even as retail, let’s just talk about retail in general, retail obviously has made a tremendous shift. Now, the retail of preference in strip centers, are retailers that are more service-oriented and less reliant on selling goods out of their store. That leads us to restaurants and to services like dental, and massage, and nail, and hair, and services like that, that you cannot duplicate on internet, or entertainment. There has been a shift to go into less product-driven, things that you can’t buy online, and it doesn’t all have to come from Amazon, there are other vendors out there besides Amazon, just the idea, you can buy it online, and it’s more convenient. But even if you’re a service-oriented, you want to have an accessible location, you want to have a location that has good traffic pattern, that has good densities, population around you, and income levels, to afford to buy the goods and services that are at that retail center. Demographics and seeing what’s happening within an area, is very, very, very important, and that’s what we focus on. And we look at key things like the population, daytime population is huge, not only how many people live here permanently, but how many people are hanging out this location during the day, how many office workers are around there that need to leave for lunch, or want to run errands during lunchtime? We look at income levels

Mike Milano – and we look at, well, density is the population, and just accessibility, traffic counts, is this property at a signal, as the intersection, if it’s not, how easy is it to get in and out of? Those are the things that drive from a retail standpoint that are critically important. So let’s take Tampa Bay, for instance, Tampa Bay is, last time I checked, we were at the edge of the Gulf. We have one way to grow.

Adam Hooper – It hasn’t changed yet, right, it’s still there?

Mike Milano – Hasn’t changed yet, we only have one way to grow and that’s to the East. Pinellas County is fairly well-developed out. Pinellas County, if there is vacant land, there’s a reason, it’s either a wetlands, or it can’t be built on, or somehow it’s being protected. In Pinellas County, what we look at are redevelopment opportunities, repurposing opportunities, that’s huge, where you can put together three, five, seven, 10 acres and then use it for some other use. Whereas when we get to Hillsborough County, and you go to the East or North East, South East Hillsborough, and you go up into those there, you can see Riverview and Gibsonton, and then going up to Wesley Chapel areas, that’s where the real growth is occurring, because that’s where they have land, that’s the direction that they can go. So when we’re looking at retail, we’re looking at those key elements, and saying, “This is what drives our decision-making.” Then we jump all the way over to Orlando, and they have their own unique situation there, because Orlando, the largest interior city in Florida has such a huge geographic area, that you have to be extra careful that you’re not going into a retail area that will be leapfrogged in three to five years, as a new area emerges further out from where you were, does that make sense? So you’re in an area that’s doing well, but they’ve said they’re going to open up a whole new subdivision, or they’re building roads, and then two or three miles out is going to be the next great hotspot, and some of the retailers

Mike Milano – that were in this established area, jump over to the new area and what’s left behind is no longer as viable a retail. Orlando, when we talk to people about Orlando, surprisingly, there’s a higher degree of caution when dealing with Orlando, just because how trends can change because the geography is so big.

Adam Hooper – I want to dig into two things here. I want to come back to the, if it’s vacant, there’s a reason, but before we get into that one, on the demographic side, are you looking more at the raw numbers, so just the raw population, the raw, the kind of the nominal number there, or you’re looking more at the trends, is this an increasing population trend, is it a decreasing population trend, or both? Which do you put more emphasis on, which do you put more emphasis on, I guess, would be the question.

Mike Milano – Adam, great question. Yes, you’re looking at both. You are definitely looking at what the growth trend is. And that’s a great way to help me crystallize the thought of where I was going talking about Pinellas County, where you’re looking at Eastern Hillsborough, you’re going to see the densities aren’t maybe as much as they are in Pinellas, but they’re growing year over year. Whereas in Pinellas, you may have great densities, but it may be flat to no growth, and some areas may be even decreasing. That presents a whole ‘nother set of decisions. I’m not saying people will not go there, they just will understand that that population is not necessarily growing because it’s completely developed. It is both, it’s the current demographics, it is the raw data, but it’s also the growth trend and what you see projecting out into the future, that’s huge. – Great, perfect.

Adam Hooper – Great, perfect. Now back to this, if it’s vacant, there’s a reason, I think it’s similar kind of tangential point to that is, it’s something we’ve heard numerous places and times is, we’re quite mature in the cycle of eight to 10 years, depending on when you start. There’s a sentiment that if the value hasn’t been added by now, by this point in the cycle, there’s a reason why. So I’d love to get your thoughts on, are there still opportunities out there where properties haven’t been rehabbed, they haven’t been retenanted, they haven’t had that renovation yet at this stage of the game, and why there might still be opportunity there, or, are we getting later on in the cycle enough that a lot of value has been added, and those deals are maybe less abundant or harder to find right now?

Mike Milano – Another excellent question. I’m going to address it a couple of ways. One, it has to do with which markets and sub-markets you’re looking at. Florida is the third largest state, we’re growing at some crazy number, I’ve heard different numbers, but something like 1,500 people a day. Obviously, some markets benefit greater than others. Where I see an abundance of caution is in secondary markets or tertiary markets that are somewhat off the main road and investors are hard-pressed to say, “Why would I own a property there,” particularly if we are at peak of market, and if market’s going to soften, you would think that those areas may be the first to suffer and the last to come back. What that drives is that drives a lot of investors to want to look at primary markets in Florida, and primary markets, by the way, Miami, Broward, Dade County, they are a market unto themselves, they are completely unique, and we consider them almost to be a foreign country, just because of the differences in wealth and decision-making, and how properties are transacted. It’s a different mindset than what we see in the balance of other Florida. So those who are transacting in South Florida, they do great, and that is a great, great market to be in, it’s truly a first-year market, but it’s a bit of a challenge. For us, our top markets are Orlando, Tampa, Jacksonville, Fort Myers, and that picks up Naples. Now, Sarasota is starting to get a lot of play. The middle of the state, looking at Ocala, looking at Gainesville, those are still good markets, but you’re going to pick and choose

Mike Milano – and be very selective of what you do within those. Those are the ones that are really getting the attention at peak of market. Let’s come back and talk about a property that is vacant. You really, if it’s retail, in particular, really any class, look around and see what’s happening around this property, look at the demographics. If you’ve got a property that’s mostly vacant, in an area that has favorable demographics, good densities, reasonable growth, good income levels, good daytime population, and your property that you’re looking at is mostly vacant, and everything around it is mostly full, that tells you you have an ownership problem, not a property problem, short of it having restricted access, but those are the kind of properties. On the other hand, if this property is vacant, and everything around it is vacant, then you got weak demographics, you’ve just answered your question, it’s a property problem, that one is not going to come back.

Adam Hooper – Are those solvable problems or problems that you should just kind of let be and move on?

Mike Milano – No, they can be solvable, it just depends on what use could be. Believe me, they’re challenging, and you’re scratching your head and figuring, “Okay, what do we do with this?” There are some people that really thrive on those and really like those, risk-takers, who will take those on, and they will figure out something to do with these properties, and it always, almost always, involves changing the use, or maybe they have a tenant in tow that will work for that space, and they can make it happen. That’s a very, very small buying pool that look at those that are truly challenged assets.

Adam Hooper – Switching gears a little bit into your role as a seller’s representative, how does a manager decide when the right time to sell an asset is?

Mike Milano – Different ones have different views on it. On an institutional level, it sometimes has a less to do about the specific property, than it does just what’s going on internally within the institution, what are they trying to do, if they’re a publicly traded company, are they trying to meet Wall Street expectations, are they trying to generate certain returns, have they told Wall Street a new story that they’re going to go after a certain product type, so if these properties are not their core asset that they’ve identified, what are they going to do, are they going to sell them off? So institutions have decisions that are driven less by specific location and more by what the overall strategy is with inside the company, whereas individuals, high net worth individuals, companies, corporations, that they buy and sell real estate, they’re looking at market timing. Let’s say you have an asset that is fully leased, and there’s only incremental increases within the income year over year, and you’ve just signed some new leases, and you’ve got some good term left on those leases, that may be an ideal time to sell, because the property is at peak value, and you’re not going to get really much movement going forward, so go ahead and sell it. So that begs the question, why would somebody buy that? Well, because it may fit somebody’s profile, that they want a fully leased, fully stabilized asset that has a good track record, and they’re more passive, and they’re willing to just own it and clip coupons more, if you will, and it’s less management-intensive.

Adam Hooper – One of the things that we’re transitioning into in our business is looking at things from a more of a risk profile perspective. I think oftentimes, we see, whenever a strategy or a risk profile has a significant change, that’s often a trigger for a sale event, right? If it’s a development, higher risk on the initial phases, once that’s built, stabilized, occupied, that’s a pretty significant shift in the risk profile. And oftentimes, that will trigger a sale as well. It’s again, throughout the spectrum, if you get a value-add opportunity, maybe different capital wants to come in, they’ll pay a little bit higher dollar because it’s stabilized, and they just want those coupons, like you’re saying. That’s one thing we’ve seen as a trigger as well, but sounds maybe less than on the institutional side, but that’s maybe more of the kind of private manager side.

Mike Milano – I will say that over the last three or four years, because we, or everyone, everyone recognizes that we’re in uncharted territory, we’ve never had recovery last this long, so it’s really funny, the psychology that goes. Three years ago, everyone was using peak of market. Well, here we are three years later, and we still got the same market, so how long does a peak last? So they’ve quit using the word peak and just say, we’re still at top of market, how long can we sustain this market? What I’ve noticed, even in institutional and non, is the majority of the folks, majority, there’s still some that prefer a fully leased, fully stabilized asset, but the majority are looking for some value-add component, what can I can do to move the needle? Renewing lease below market, take below-market rents and renewing those of higher rents, or moving them out and getting other tenants in, fill vacancy, do a rehab and better position the property, there’s a whole variety, but even institutional owners who primarily wanted to buy core properties, fully stabilized, have changed now and they’re looking more at some value-add component. Because if we have hit a plateau, they at least want to go out on a high note and add some value to it, if they have to dispose the asset, they’re going to get at least as much, if not more, than what they paid for.

Adam Hooper – That makes sense. Switching a little bit to the mindset from a passive investor in these where there’s going to be professional asset manager kind of driving this process, once an investor is notified that the intent is to sell the asset, maybe just a quick kind of walk through what that timing looks like, what kind of communications an investor might typically receive for that, and what the sales process will typically play out as.

Mike Milano – You just prompted me to talk about one of my favorite subjects too, and it’s called, roof condition, so I’ll get to that in a second, and I want to out there, so we’ll go like hold that thought. When a decision is made to sell, the first thing that should be done is to do a physical and financial cleanup. Inspect the property, make sure that it is in good physical condition. Cosmetics does matter, it really does. We’d like to think in commercial, everything’s about the numbers, and it’s not about feelings or emotions, but when you drive up to a property and it looks worn and tired, you just have a less impressive view of it. When you come up to a property and you can see it has been well-maintained, taken care of, it’s been pressure-washed, the landscaping has been refreshed, a parking lot has been seal-coated and striped, and that’s fresh and new, that matters, that really does, and the amount of money that is spent on that pales in comparison to what you get as far as just a market reception. Physically, I would make sure the property is in excellent condition, fix what you can fix, reasonably, and inspect the roof, know what you’re looking at with your roof. That is the number one, number one retraded item in a transaction, is condition of the roof, regardless of the property. If investment property, user property, that’s the number one. So in Florida, if it’s 10 years or less, you’re probably in good shape, if it’s 10 to 15 years, get a good understanding of the roof, if it’s greater than 15 years,

Mike Milano – you’re going to have some potential questions and problems, and if it’s greater than 20, you’re going to be asked to replace the roof. Just understand that so you’re not blindsided by it. If there’s anything you can do to extend the life of it, extend the life of it, because when the buyer shows up, they’re going to assume the worst-case scenario, if there’s any issues having to do with the roof. It may have been a $50,000 fix, and the buyer is going to say it’s a $500,000 fix, so just be careful on that. That’s physically. Financially, renew leases that need to be renewed. If you got some past due accounts, or receivables, clean them up, either collect the money, or wave it, or forgive it, but don’t leave a mess for somebody to look at, and all of a sudden, start thinking that half the tenants are getting ready to implode. Just get the property prepared, be proactive about it, get it in good financial, physical condition, and that’s the best time to take it up to market, that’s when you will have a greater probability of getting top value because, again, properties have a range of value, not a specific.

Adam Hooper – From a timeline perspective, from the initial decision to make a sale, how do you typically see that playing out in the market these days?

Mike Milano – Once a decision is made, you’re going to go through an underwriting, and depending on how much time it takes to do what I suggested to be the cleaning up, or financial or physical, but to take it out to market, the sale cycle on an investment property is somewhere around six to nine months. It can shorter than that, but you want to give a reasonable marketing time of 45, sometimes 60 days, do a maybe a call for offers, get offers in, do a best and final, go through a 30, 45-day due diligence, 30, 45-day close, it takes 30 or 45 days to get a contract drafted. Turning like that, I’m being a little facetious, but I’m telling you guys, it takes forever.

Adam Hooper – It takes some time.

Mike Milano – It takes some time to get a contract done. But it’s a best case four month, on single tenant net lease four months, multi-tenant, it’s more of a six month, plus or minus process.

Adam Hooper – Perfect. That’s a great overview and I think will be really helpful for our listeners out there to kind of begin better understand how some of these things work mechanically, what they can expect in terms of timing. We’re at the stage of the cycle of our business where we’re seeing lot more of the assets entering that sales phase, they’ve added value the last three, four years, they’re starting to enter that sales process. We’re getting a lot of questions from investors of, how does the sales process work out? This is going to be super helpful for listeners out there to understand a little bit more about what happens when that sale decision is made.

Mike Milano – Okay, good.

Adam Hooper – Perfect. Well, is there anything we didn’t cover that you want to mention here before we wrap it up? Is there anything that you guys are putting out that listeners can kind of keep aware of any content that you guys are putting out that we should be aware of, we can put in the show notes as well?

Mike Milano – We do a fairly comprehensive study on cap rates for retail properties, and we did it statewide. We’re going to be doing our Q1 2019 Market Overview, along with our 2018 Cap Rate Report, which is usually a pretty good significant report that we do where we talk about trends of happening in a, what we see so far, starting in ’19 and trends that we’ve seen happening in ’18 as it pertains to value, and where we see the hot segments of retail market.

Adam Hooper – Perfect, well, once you have that available, please send it over to us, we’ll put a link in the show notes. With that, Mike, again, really appreciate your time on the show today and we’ll have your contact info and everything in the show notes for anybody that wants to reach out and discuss a little bit more with you.

Mike Milano – Adam, Tyler, thank you very much, it was a pleasure being here and look forward to hearing the podcast myself, thanks.

Adam Hooper – Great, well, listeners, as always, we appreciate you following along. If you have any questions or comments, please send us an email to With that, we’ll catch you on the next one.

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