[Title 32 CFR 644.45]
[Code of Federal Regulations (annual edition) - July 1, 2002 Edition]
[Title 32 - NATIONAL DEFENSE]
[Subtitle A - Department of Defense (Continued)]
[Chapter V - DEPARTMENT OF THE ARMY (CONTINUED)]
[Subchapter J - REAL PROPERTY]
[Part 644 - REAL ESTATE HANDBOOK]
[Subpart B - Appraisal]
[Sec. 644.45 - Rental value.]
[From the U.S. Government Printing Office]


32NATIONAL DEFENSE42002-07-012002-07-01false644.45Sec. 644.45NATIONAL DEFENSEDepartment of Defense (Continued)DEPARTMENT OF THE ARMY (CONTINUED)REAL PROPERTYREAL ESTATE HANDBOOKAppraisal
Sec. 644.45  Rental value.

    (a) Definition. (1) The fair rental value of the property is the 
amount which, in a competitive market, a well-informed and willing 
lessee would pay and which a well-informed and willing lessor would 
accept for the temporary use and enjoyment of the property.
    (2) Appraisals to establish fair rental values will be made in 
accordance with acceptable standards of appraisal applicable to the 
particular type of property and in accordance with general appraisal 
practices and procedures heretofore described in relating to all 
appraisal work. The preparation of time-

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consuming and lengthy appraisal reports should be kept to a minimum, 
particularly with regard to rental properties of low value. A brief 
summary of the essential facts will be sufficient to support leases by 
the Government of building space or unimproved land where the net rental 
value is not in excess of $3,600 per annum.
    (b) Applicability. All provisions of this subpart are applicable to 
``inleasing'' of real property for use of the Government, and equally 
applicable to ``outleasing'' of Government-owned real property. Section 
644.45(l) Government Quarters, is normally applicable only to 
``outleasing'' of quarters to civilian employees. The provisions are, 
however, also considered valid considerations in appraising 
``inleases,'' wherein privately-owned housing is being rented for 
occupancy by military personnel in lieu of quarters allowances.
    (c) Services. In the absence of an agreement or contract, a lessor 
is not bound to furnish any utilities or building services of any kind, 
and such services may not be acquired under the power of eminent domain. 
It is, therefore, necessary for the appraiser to include in his report 
as separate items the estimated cost of all customary services that may 
be required to permit the normal use and occupancy of the property.
    (d) Market Value of Fee. (1) Where temporary use of an entire 
building or other independent unit of an ownership is proposed, the 
appraisal will ordinarily report both the market value of the fee title 
and the fair annual rental value. However, no appraisal of fair market 
value of fee title is required in any case where assessed value, 
supported by statement of the assessor and ENG Form 869-R (15% Valuation 
Certificate), can be used for compliance with existing law, Section 322 
of the Act of June 30, 1932 (40 U.S.C. 278a), known as the ``Economy 
Act.'' Fee value is not required for land only leases, as the Economy 
Act is not applicable.
    (2) An exception to the above procedure is in regard to the 
appraisal of family housing units. As an alternative, the appraiser can 
support his rental valuation by use of comparable rentals and a 
statement that the lease value does not exceed 15% of the fair market 
value.
    (e) Lease of Minor Portions of Buildings. Where appraisals are 
required to establish rental value of a minor portion of a building, it 
will not be necessary to estimate the fee value of the entire property, 
provided that the net annual rental does not exceed $2,000. A sound 
rental value can ordinarily be estimated by comparison with established 
rentals in subject property and in adjacent similar properties in the 
community. However, care should be exercised to insure the 
reasonableness of the reported comparable rental values. The appraiser's 
report must include sufficient data on these current rentals to support 
adequately the rental estimate for the subject space.
    (f) Unexpired Lease. Where the premises to be acquired are occupied 
by tenants under leases which cannot be terminated at will by the 
landlord, the appraiser's report will set forth in detail the terms of 
the existing leases and will show the value of the tenant's interest. 
The value of the tenant's interest is based on the fair rental value 
(economic rent) of the part of the property occupied by the tenant for 
the unexpired term of the lease, or for the term condemned, whichever is 
shorter, less the rent which the tenant is obligated to pay (contract 
rent) under the existing lease. The difference between the economic and 
contract rent is known as ``bonus rent.''
    (g) Bonus Value. Wherein a ``bonus rent'' is reflected as being the 
difference between economic and contract rent, a full narrative 
discussion will be included in the report. It is of paramount importance 
that the present economic rental be supported by the rental market data. 
The ``bonus value'' is the present worth of the discounted bonus rent.
    (h) Rental Appraisal Report. The appraisal report will contain 
adequate facts and discussions relative to the following:
    (1) Land description, showing street frontages and lot depths.
    (2) Adequate description of improvements and furnishings, including 
type of construction, total floor space, floor

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load for storage space, number of rentable rooms, or income-producing 
space, nonproductive or public space, total cubic content, and 
reproduction cost of improvements less depreciation.
    (3) Assessed valuation and lawful ratio to market value, if the 
annual rental value exceeds $2,000.
    (4) Analysis and discussions of current rentals of similar 
properties and rental history of the property appraised.
    (5) Discussion of the appraisal process and rental rates applicable 
to the terms of the proposed lease, particularly as to any differential 
in the rate of return applicable to customary long term rentals.
    (6) Statement showing distribution of appraised annual rental as 
allocated to fixed charges and fair rate of return on land, buildings, 
and any furnishings or equipment that are included in the proposed 
taking.
    (i) Special Purpose Properties. Appraisals to estimate the rental 
value of hotels, clubs, hospitals, and other highly specialized 
properties will include full information on the income capacity of the 
property under average competent management and under accepted standards 
of operation for the particular type of property involved. The appraisal 
reports will, among other things, contain an analysis and discussion of 
the following items:
    (1) Financial history of property, including indebtedness, the 
actual past income or earnings of the property based upon audit reports 
for the past five years or longer, and any unaudited current months of 
the fiscal year. In the absence of audits, corporate statements may be 
furnished if properly certified.
    (2) Discussion of the past operation and management methods with 
comments relative to any excessive or insufficient charges appearing in 
the financial statements obtained.
    (3) Appraiser's estimate of the stabilized income of the property.
    (4) Appraiser's estimate of profits available for typical lessee-
operator.
    (5) Recommendations of the appraiser as to the relative merits of 
acquiring fee title to the property as against acquiring a leasehold 
interest.
    (j) Farms and Rural Properties. Appraisals to estimate the rental 
value of farms and other types of rural properties will report the 
present market value of the fee title, the fair annual rental value, and 
any direct damage to growing crops, standing timber, or improvements to 
be removed or destroyed. The damage will be reported separately from the 
rental value in order to permit the reflection of the damage in the 
primary rental term.
    (k) Industrial Installations. (1) Appraisal reports will be obtained 
to support all leases of industrial installations or portions thereof. 
It is important that appraisals of operating industrial installations be 
prepared by specially qualified appraisers or consultants intimately 
familiar with the particular processes and production capabilities and 
related factors having any bearing on the value of a particular plant.
    (2) The appraisers selected to estimate the rental value should be 
fully informed as to all known prospective lessees and the amount of any 
bids, or offers made for the use of the property, and as to all terms, 
conditions, and limitations under which the property will be made 
available for use or operation.
    (3) The appraisal reports will include a detailed inventory setting 
forth all physical factors pertaining to the land, buildings, machinery, 
and equipment and an adequate discussion of all local factors 
influencing the profitable use of the facility. Data pertinent to the 
prevailing rentals for other Government and privately-owned industrial 
plants and warehouses considered reasonably similar to the facilities to 
be leased will also be included. The conclusions of the appraiser as to 
other matters of importance to the Department of the Army in its leasing 
operations will likewise be presented. The appraiser should bear in mind 
that idle manufacturing plants, and all industrial properties, as a 
general rule, are valuable only to the extent and degree that they are 
usable in actual production. It is also a generally accepted economic 
fact that the plant and fixed equipment (real estate) is the production 
factor for which a return can ordinarily be realized after the cost of 
all

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other factors in production has been provided. Military necessity has 
required the construction of many plants which are designed for special 
purposes and which may tend to defeat the ordinary approaches to the 
market rental value problem. In the absence of comparable rentals of 
similar properties or other reliable comparative guides to value for 
temporary use, market rental value should be estimated with particular 
consideration to the following methods:
    (i) Reasonable Return on Estimated Fair Value. For this purpose 
``fair value'' is defined as the prudent cost of reproduction less 
depreciation of only that portion of the property that is readily 
adaptable or capable of competition with alternative properties which 
may be available to or constructed by the proposed lessees. Items of 
equipment and any portions of a plant that do not directly contribute to 
the specific use may be eliminated from consideration and the rental 
return estimated only on items and space actually adaptable for use in 
the proposed enterprise. The appraiser is particularly concerned with 
any competitive disadvantages or penalties accruing to subject property 
by comparison with the alternatives available to prospective users. The 
rental estimate should therefore be appropriately modified with respect 
to adequate allowances for amortization of necessary alterations to be 
made by the lessee. Other operating disadvantages that might tend, from 
the competitive viewpoint, to result in increased operating cost or 
other penalties that might in any way be brought forward in negotiations 
to establish an acceptable rental price must also be considered.
    (ii) Ratio of Plant Costs to Productive Capacity. In many lines of 
industrial enterprise, it may be possible to obtain comparable operating 
experience ratios with reference to relation of average annual real 
estate costs or plant investment charges to the gross annual production. 
The difficulties of estimating production levels and obtaining 
sufficiently accurate data as to actual operating experience are fully 
appreciated. Suggested sources of such information are annual statements 
of prospective lessees and their competitors. It is believed that this 
approach to the appraisal problem is fundamentally sound, particularly 
so when there is an indicated demand for the full capacity of an 
industrial plant as originally designed, and that this method will serve 
as a reasonable check and balance against return on ``fair value.'' It 
should also be very helpful as a guide to the rate of capitalization in 
the ``fair value'' approach to the rental problem.
    (iii) Taxes. The appraisal will not be influenced by the fact that 
the Government is not presently required to pay taxes on the property.
    (iv) Savings. When appropriate, the estimated savings in 
maintenance, protection, repair and restoration, if any, will be 
obtained by the Management and Disposal Branch from the using service or 
other competent authority and furnished to the appraiser preparing the 
appraisal report.
    (l) Government Quarters. (1) Rental schedules for Government 
quarters furnished to civilian employees will be supported by written 
appraisal reports reflecting adequate coverage of the following items:
    (i) Construction Details. Physical description of quarters will 
include the general grade of construction work, materials and 
decorations, number of rooms, floor space, porches, garages, general 
appearance and condition.
    (ii) Equipment and Accessories:

Refrigeration
Cooking facilities
Kitchen cabinets
Closet space
Built-in conveniences
Screening
Elevators
Telephone service
Utilities
Plumbing

    (iii) Furniture and Furnishings.
    (iv) Site Conditions:

Lot size
Lot size per living unit
Access (street and road frontage)
Restrictions
Land improvements (walks, driveways, shrubbery, lawns, topography, etc.)
Hazards and/or amenities

    (v) Neighborhood Development and Data:

Local zoning regulation

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Public transportation
Schools
Shopping facilities
Recreational facilities
Supply and demand for housing
Population statistics
General trends

    (vi) Comparable Rental Data. Data will include results of a 
comprehensive survey of current rental rates applicable to the most 
similar privately-owned housing in the nearest competitive or comparable 
neighborhood or community. Typical rental rates will be compiled, 
analyzed and tabulated, and subject properties identified and described 
in the same manner as prescribed above for Government quarters. The 
appraisal report should include a vicinity map showing location of 
rental units listed for comparison in relation to the location of the 
quarters being appraised.
    (vii) Comparative Relationships. The appraisal report will include a 
discussion of relative merits of Government quarters by comparison with 
private housing units. Rental rates of housing controlled by 
governmental agencies or subsidized by private industry will not be used 
as a basis for comparison.
    (viii) Correlation of Rental Units. A discussion of basic reasoning 
supporting the final rental value unit for each distinctive rental 
bracket is imperative.
    (ix) Photographs. Photographs of typical views of the quarters 
appraised and typical private housing units cited as comparable rentals 
will be included in each report.
    (x) Appraisal Certificate. Rental appraisal reports will not be 
considered acceptable without appropriate certification substantially in 
accordance with: ``I certify that the above rental values represent my 
unbiased opinion of the present fair market rental value of the quarters 
described. I am not now a tenant residing in such quarters nor do I have 
any intention of becoming a tenant therein.''
    (2) Reappraisals of rental quarters are required every fifth year 
subsequent to previous appraisal. Rental rates will be adjusted annually 
between appraisals by application of the Consumer Price Index (CPI) 
maintained by the Bureau of Labor Statistics, Department of Labor, and 
as further required in accordance with Transmittal Memorandum No. 2, OMB 
Circular A-45, revised October 30, 1974.