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Uniform Standards of Professional Appraisal Practice (1990)
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Uniform Standards of Professional Appraisal Practice
As promulgated by the Appraisal Standards Board of The Appraisal Foundation
PREAMBLE
It is essential that a professional appraiser arrive at and communicate his or her analyses, opinions, and advice in a manner that will be meaningful to the client and will not be misleading in the marketplace. These Uniform Standards of Professional Appraisal Practice reflect the current standards of the appraisal profession.
The importance of the role of the appraiser places ethical obligations on those who serve in this capacity. These standards include explanatory comments and begin with an Ethics Provision setting forth the requirements for integrity, objectivity, independent judgment, and ethical conduct. In addition, these standards include a Competency Provision which places an immediate responsibility on the appraiser prior to acceptance of an assignment. The standards contain binding requirements, as well as specific guidelines to which a Departure Provision may apply under certain limited conditions. Definitions applicable to these standards are also included.
These standards deal with the procedures to be followed in performing an appraisal, review, or consulting service and the manner in which an appraisal, review, or consulting service is communicated. Standards 1 and 2 relate to the development and communication of a real property appraisal. Standard 3 establishes guidelines for reviewing an appraisal and reporting on that review. Standards 4 and 5 address the development and communication of various real estate or real property consulting functions by an appraiser. Standard 6 sets forth criteria for the development and reporting of mass appraisals for ad valorem tax purposes. Standards 7 and 8 establish guidelines for developing and communicating personal property appraisals. Standards 9 and 10 establish guidelines for developing and communicating business appraisals.
These standards are for appraisers and the users of appraisal services. To maintain the highest level of professional practice, appraisers must observe these standards. The users of appraisal services should demand work performed in conformance with these standards.
Comment: Explanatory comments are an integral part of the Uniform Standards and should be viewed as extensions of the provisions, definitions, and standards rules. Comments provide interpretation from the Appraisal Standards Board concerning the background or application of certain provisions, definitions, or standards rules. There are no comments for provisions, definitions, and standards rules that are axiomatic or have not yet required further explanation; however, additional comments will be developed and others supplemented or revised as the need arises
December 1990
ETHICS PROVISION
Because of the fiduciary responsibilities inherent in professional appraisal practice, the appraiser must observe the highest standards of professional ethics. This Ethics Provision is divided into four sections: conduct, management, confidentiality, and record keeping.
Comment: This provision emphasizes the personal obligations and responsibilities of the individual appraiser. However, it should also be emphasized that groups and organizations engaged in appraisal practice share the same ethical obligations.
Conduct
An appraiser must perform ethically and competently in accordance with these standards and not engage in conduct that is unlawful, unethical, or improper. An appraiser who could reasonably be perceived to act as a disinterested third party in rendering an unbiased appraisal, review, or consulting service must perform assignments with impartiality, objectivity, and independence and without accommodation of personal interests.
Comment: An appraiser is required to avoid any action that could be considered misleading or fraudulent. In particular, it is unethical for an appraiser to use or communicate a misleading or fraudulent report or to knowing permit an employee or other person to communicate a misleading or fraudulent report.
The development of an appraisal, review, or consulting service based on a hypothetical condition is unethical unless: 1) the use of the hypothesis is clearly disclosed; 2) the assumption of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison and would not be misleading; and 3) the report clearly describes the rationale for this assumption, the nature of the hypothetical condition, and its effect on the result of the appraisal, review, or consulting service.
An individual appraiser employed by a group or organization which conducts itself in a manner that does not conform to these standards should take steps that are appropriate under the circumstances to ensure compliance with the standards.
Management
The acceptance of compensation that is contingent upon the reporting of a predetermined value or a direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event is unethical.
The payment of undisclosed fees, commissions, or things of value in connection with the procurement of appraisal, review, or consulting assignments is unethical.
Comment: Disclosure of fees, commissions, or things of value connected to the procurement of an assignment should appear in the certification of a written report and in any transmittal letter in which conclusions are stated. In groups or organizations engaged in appraisal practice intra-company payments to employees for business development are not considered to be unethical. Competency, rather than financial incentives, should be the primary basis for awarding an assignment.
December 1990
B-2
ETHICS PROVISION (continued)
Management (continued)
Advertising for or soliciting appraisal assignments in a manner which is false, misleading, or exaggerated is unethical.
Comment: In groups or organizations engaged in appraisal practice, decisions concerning finder or referral fees, contingent compensation, and advertising may not be the responsibility of an individual appraiser, but for a particular assignment, it is the responsibility of the individual appraiser to ascertain that there has been no breach of ethics, that the appraisal is prepared in accordance with these standards, and that the report can be properly certified as required by Standards Rules 2-3, 3-2, 5-3, 8-3, or 10-3.
The restriction on contingent compensation in the first paragraph of this section does not apply to consulting assignments where the appraiser is not acting in a disinterested manner and would not reasonably be perceived as performing a service that requires impartiality. This permitted contingent compensation must be properly disclosed in the report.
Comment: Assignments where the appraiser is not acting in a disinterested manner are further discussed in the General Comment to Standard 4. The preparer of the written report of such an assignment must certify that the compensation is contingent and must explain the basis for the contingency in the report (See Standards Rule 5-3) and in any transmittal letter in which conclusions are stated.
Confidentiality
An appraiser must protect the confidential nature of the appraiser-client relationship.
Comment: An appraiser must not disclose confidential factual data obtained from a client or the results of an assignment prepared for a client to anyone other than: 1) the client and persons specifically authorized by the client; 2) such third parties as may be authorized by due process of law; and 3) a duly authorized professional peer review committee. As a corollary, it is unethical for a member of a duly authorized professional peer review committee to disclose confidential information or factual data presented to the committee
Record Keeping
An appraiser must prepare written records of appraisal, review, and consulting assignments-4ncluding oral testimony and reports--and retain such records for a period of at least rive (5) years after preparation or at least two (2) years after final disposition of any judicial proceeding in which testimony was given, whichever period expires last.
December 1990
Comment: Written records of assignments include true copies of written reports, written summaries of oral testimony and reports (or a transcript of testimony), all data and statements required by these standards, and other information as may be required to support the findings and conclusions of the appraiser. The term written records also includes information stored on electronic, magnetic, or other media. Such records must be made available by the appraiser when required by due process of law or by a duly authorized professional peer review committee.
B-3
COMPETENCY PROVISION
Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently; or alternatively:
1. disclose the lack of knowledge and/or experience to the client before accepting the assignment; and
2. take all steps necessary or appropriate to complete the assignment competently; and
3. describe the lack of knowledge and/or experience and the steps taken to complete the assignment competently in the report.
Comment: The background and experience of appraisers varies widely and a lack of knowledge or experience can lead to inaccurate or inappropriate appraisal practice. The competency provision requires an appraiser to have both the knowledge and the experience required to perform a specific appraisal service competently. If an appraiser is offered the opportunity to perform an appraisal service but lacks the necessary knowledge or experience to complete it competently, the appraiser must disclose his or her lack of knowledge or experience to the client before accepting the assignment and then take the necessary or appropriate steps to complete the appraisal service competently. This may be accomplished in various ways including, but not limited to, personal study by the appraiser; association with an appraiser reasonably believed to have the necessary knowledge or experience; or retention of others who possess the required knowledge or experience.
Although this provision requires an appraiser to identify the problem and disclose any deficiency in competence prior to accepting an assignment, facts or conditions uncovered during the course of an assignment could cause an appraiser to discover that he or she lacks the required knowledge or experience to complete the assignment competently. At the point of such discovery, the appraiser is obligated to notify the client and comply with items 2 and 3 of the provision.
The concept of competency also extends to appraisers who are requested or required to travel to geographic areas wherein they have no recent appraisal experience. An appraiser preparing an appraisal in an unfamiliar location must spend sufficient time to understand the nuances of the local market and the supply and demand factors relating to the specific property type and the location involved. Such understanding will not be imparted solely from a consideration of specific data such as demographics, costs, sales, and rentals. The necessary understanding of local market conditions provides the bridge between a sale and a comparable sale or a rental and a comparable rental. If an appraiser is not in a position to spend the necessary amount of time in a market area to obtain this understanding, affiliation with a qualified local appraiser may be the appropriate response to ensure the development of a competent appraisal.
With regard to mass appraisal as defined herein, an appraiser must immediately take all necessary steps to ensure the mass appraisal is developed under the supervision of an appraiser who has the qualifications referred to in Standard 6.
December 1990
DEPARTURE PROVISION
This provision permits limited exceptions to sections of the Uniform Standards that are classified as specific guidelines rather than binding requirements. The burden of proof is on the appraiser to decide before accepting
*limited assignment that the result will not confuse or mislead. The burden of disclosure is also on the appraiser to
*report any limitations.
An appraiser may enter into an agreement to perform an assignment that calls for something less than, or different from, the work that would otherwise be required by the specific guidelines, provided that prior to entering into such an agreement:
1. the appraiser has determined that the assignment to be performed is not so limited in scope that the resulting appraisal, review, or consulting service would tend to mislead or confuse the client, the users of the report, or the public; and
2. the appraiser has advised the client that the assignment calls for something less than, or different from, the work required by the specific guidelines and that the report will state the limited or differing scope of the appraisal, review, or consulting service.
Exceptions to the following requirements are not permitted: Standards Rules 1-1, 1-5,2-1,2-2,2-3,2-5,3-1,3- 2, 4-1, 5-1, 5-3, 6-1, 6-5, 6-6, 7-1, 8-1, 8-3, 9-1, 9-3, 9-5, 10-1, 10-3, and 10- 5. This restriction on departure is reiterated throughout the document with the reminder comment: Departure from this Winding requirement is not permitted.
Comment: Before making a decision to enter into an agreement for appraisal services calling for a departure from a specific appraisal guideline, an appraiser must use extreme care to determine whether the scope of the appraisal service to be performed is so limited that the resulting analysis, opinion, or conclusion would tend to mislead or confuse the client, the users of the report, or the public. For the purpose of this provision, users of the report might include parties such as lenders, employees of government agencies, limited partners of a client, and a client's attorney and accountant. In this context the purpose of the appraisal and the anticipated or possible use of the report are critical.
If an appraiser enters into an agreement to perform an appraisal service that calls for something less than, or different from, the work that would otherwise be required by the specific appraisal guidelines, Standards Rules 2-2(k), 5-2(i), 8-2(h), and 10-2(h) require that this fact be clearly and accurately set forth in the report.
The requirements of the departure provision may be satisfied by the technique of incorporating by reference.
For example, if an appraiser's complete file was introduced into evidence at a public hearing or public trial and the appraiser subsequently prepared a one-page report that 1) identified the property, 2) stated the value, and 3) stated that the value conclusion could not be properly understood without reference to his or her complete file and directed the reader to the complete file, the requirements of the departure provision would be satisfied if the appraiser's complete file contained, in coherent form, all the data and statements that are required by the Uniform Standards.
Another example would be an update report that expressly incorporated by reference all the background data, market conditions, assumptions, and limiting conditions that were contained in the original report prepared for the same client.
JURISDICTIONAL EXCEPTION
f any part of these standards is contrary to the law or public policy of any jurisdiction, only that part shall be void and of no force or effect in that jurisdiction.
SUPPLEMENTAL STANDARDS
These Uniform Standards provide the common basis for all appraisal practice. Supplemental standards applicable to appraisals prepared for specific purposes or property types may be issued by public agencies and certain client groups, e.g., regulatory agencies, eminent domain authorities, asset managers, and financial institutions. Appraisers and clients must ascertain whether any supplemental standards in addition to these Uniform Standards apply to the assignment being considered.
DEFINITIONS
For the purpose of these standards, the following definitions apply:
APPRAISAL: (noun) the act or process of estimating value; an estimate of value. (adjective) of or pertaining to appraising and related functions, e.g., appraisal practice, appraisal services.
APPRAISAL PRACTICE: the work or services performed by appraisers, defined by three terms in these standards: appraisal, review, and consulting.
Comment: These three terms are intentionally generic, and not mutually exclusive. For example, an estimate of value may be required as part of a review or consulting service. The use of other nomenclature by an appraiser (e.g., analysis, counseling, evaluation, study, submission, valuation) does not exempt an appraiser from adherence to these standards.
CASH FLOW ANALYSIS: a study of the anticipated movement of cash into or out of an investment.
CLIENT: any party for whom an appraiser performs a service.
CONSULTING: the act or process of providing information, analysis of real estate data, and recommendations or conclusions on diversified problems in real estate, other than estimating value.
FEASIBILITY ANALYSIS: a study of the cost-benefit relationship of an economic endeavor.
INVESTMENT ANALYSIS: a study that reflects the relationship between acquisition price and anticipated future benefits of a real estate investment.
MARKET ANALYSIS: a study of real estate market conditions for a specific type of property.
MARKET VALUE: Market value is the major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined. A current economic definition agreed upon by federal financial institutions in the United States of America is:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
1. buyer and seller are typically motivated.
2.both parties are well informed or well advised, and acting in what they consider their best interests;
3. a reasonable time is allowed for exposure in the open market;
4. payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Substitution of another currency for United States dollars in the fourth condition is appropriate in other countries or in reports addressed to clients from other countries. Persons performing appraisal services that may be subject to litigation are cautioned to seek the exact legal definition of market value in the jurisdiction in which the services are being performed.
DEFINITIONS (continued)
MASS APPRAISAL: the process of valuing a universe of properties as of a given date utilizing standard methodology, employing common data, and allowing for statistical testing.
MASS APPRAISAL MODEL: a mathematical expression of how supply and demand factors interact in 1 market.
PERSONAL PROPERTY: identifiable portable and tangible objects which are considered by the general public as being "personal," e.g., furnishings, artwork, antiques, gems and jewelry, collectibles, machine and equipment; all property that is not classified as real estate.
REAL ESTATE: an identified parcel or tract of land, including improvements, if any.
REAL PROPERTY: the interests, benefits, and rights inherent in the ownership of real estate.
Comment: In some jurisdictions, the terms real estate and real property have the same legal meaning. The separate definitions recognize the traditional distinction between the two concepts in appraisal theory.
REPORT: any communication, written or oral, of an appraisal, review, or analysis; the document that is transmitted to the client upon completion of an assignment.
Comment: Most reports are written and most clients mandate written reports. Oral report guidelines (See Standards Rule 2-4) and restrictions (See Ethics Provision: Record Keeping) are included to cover court testimony and other oral communications of an appraisal, review, or consulting service.
REVIEW: the act or process of critically studying a report prepared by another.
STANDARD I
In developing a real property appraisal, an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.
Comment: Standard I is directed toward the substantive aspects of developing a competent appraisal. The requirements set forth in Standards Rule 1-1, the appraisal. guidelines set forth in Standards Rules 1-2, 1-3, 1-4, and the requirements set forth in Standards Rule 1-5 mirror the appraisal process in the order of topics addressed and can be used by appraisers and the users of appraisal services as a convenient checklist.
Standards Rule 1-1
In developing a real property appraisal, an appraiser must:
(a) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal
Comment: Departure from this binding requirement is not permitted. This rule recognizes that the principle of change continues to affect the manner in which appraisers perform appraisal services. Changes and developments in the real estate field have a substantial impact on the appraisal profession. Important changes in the cost and manner of constructing and marketing commercial, industrial, and residential real estate and changes in the legal framework in which real property rights and interests are created, conveyed, and mortgaged have resulted in corresponding changes in appraisal theory and practice. Social change has also had an effect on appraisal theory and practice. To keep abreast of these changes and developments, the appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances. For this reason it is not sufficient for appraisers to simply maintain the skills and the knowledge they possess when they become appraisers. Each appraiser must continuously improve his or her skills to remain proficient in real property appraisal.
(b) not commit a substantial error of omission or commission that significantly affects an appraisal;
Comment: Departure from this binding requirement is not permitted. In performing appraisal services an appraiser must be certain that the gathering of factual information is conducted in a manner that is sufficiently diligent to ensure that the data that would have a material or significant effect on the resulting opinions or conclusions are considered. Further, an appraiser must use sufficient care in analyzing such data to avoid errors that would significantly affect his or her opinions and conclusions.
(c) not render appraisal services in a careless or negligent manner, such as a series of errors that, considered individually, may not significantly affect the results of an appraisal, but which, when considered in the aggregate, would be misleading.
Comment: Departure from this binding requirement is not permitted. Perfection is impossible to attain and competence does not require perfection. However, an appraiser must not render appraisal services in a careless or negligent manner. This rule requires an appraiser to use due diligence and due care. The fact that the carelessness or negligence of an appraiser has not caused an error that significantly affects his or her opinions or conclusions and thereby seriously harms a client or a third party does not excuse such carelessness or negligence
Standards Rule 1-2.
In developing a real property appraisal, an appraiser must observe the following specific appraisal guidelines:
(a) adequately identify the real estate, identify the real property interest, consider the purpose and intended use of the appraisal, consider the extent of the data collection process, identify any special limiting conditions, and identify the effective date of the appraisal;
(b) define the value being considered; if the value to be estimated is market value, the appraiser must clearly indicate whether the estimate is the most probable price in terms of cash; or
(ii) in terms of financial arrangements equivalent to cash; or
(iii) in such other terms as may be precisely defined; if an estimate of value is based on submarket financing or financing with unusual conditions or incentives, the terms of such financing must clearly set forth, their contributions to or negative influence on value must be described and estimated, and the market data supporting the valuation estimate must be described and explained;
Comment: For certain counties of appraisal assignments in which legal definition of market value has been established and takes precedence, the Jurisdictional Exception may apply to this guideline.
If the concept of reasonable exposure in the open market is involved, the appraiser should be specific as to the estimate of marketing time linked to the value estimate.
(c) consider easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of a similar nature;
(d) consider whether an appraised fractional interest, physical segment, or partial holding contributes pro rata to the value of the whole;
Comment: This guideline does not require an appraiser to value the whole when the subject of the appraisal i; fractional interest, a physical segment, or a partial holding. However, if the value of the whole is not consider the appraisal must clearly reflect that the value of the property being appraised cannot be used to estimate the value of the whole by mathematical extension.
(e) identify and consider the effect on value of any personal property, trade fixtures, or intangible item, that are not real property but are included in the appraisal
Comment: This guideline requires the appraiser to recognize the inclusion of items that arc not real property i an overall value estimate. Additional expertise in personal property (See Standard 7) or business (See Standard appraisal may be required to allocate the overall value to its various components. Separate valuation of such items is required when they are significant to the overall value.
Standards Rule 1-3
In developing a real property appraisal, an appraiser must observe the following appraisal guidelines:
(a) consider the effect on use and value of the following factors: existing land use regulations, reasonably probable modifications of such land use regulations, economic demand, the physical adaptability of the real estate, neighborhood trends, and the highest and best use of the real estate;
Comment: This guideline sets forth a list of factors that affect use and value. In considering neighborhood trends, an appraiser must avoid stereotyped or biased assumptions relating to race, age, color, religion, gender, or national origin or an assumption that racial, ethnic, or religious homogeneity is necessary to maximize value in a neighborhood. Further, an appraiser must avoid making an unsupported assumption or premise about neighborhood decline, effective age, and remaining life. In considering highest and best use, an appraiser should develop the concept to the extent that is required for a proper solution of the appraisal problem being considered.
(b) recognize that land is appraised as though vacant and available for development to its highest and best use and that the appraisal of improvements is based on their actual contribution to the site.
Comment: This guideline may be modified to reflect the fact that, in various legal and practical situations, a site may have a contributory value that differs from the value as if vacant.
Standards Rule 1-4
In developing a real property appraisal, an appraiser must observe the following specific appraisal guidelines, when applicable:
(a) value the site by an appropriate appraisal method or technique;
(b) collect, verify, analyze, and reconcile:
(i) such comparable cost data as are available to estimate the cost new of the improvements (if any);
ii) such comparable data as are available to estimate the difference between cost new and the present worth of the improvements (accrued depreciation);
(iii) such comparable sales data, adequately identified and described, as are available to indicate a value conclusion;
(iv) such comparable rental data as are available to estimate the market rental of the property being appraised;
(v) such comparable operating expense data as are available to estimate the operating expenses of the property being appraised;
(vi) such comparable data as are available to estimate rates of capitalization and/or rates of discount.
Comment: This rule covers the three approaches to value. See Standards Rule 2-20) for corresponding reporting requirements.
(c) base projections of future rent and expenses on reasonably clear and appropriate evidence;
Comment: This guideline requires an appraiser, in developing income and expense statements and cash flow projections, to weigh historical information and trends, current market factors affecting such trends, and anticipated events such as competition from developments under construction.
(d) when estimating the value of a leased fee estate or a leasehold estate, consider and analyze the effect on value, if any, of the terms and conditions of the lease(s);
(e) consider and analyze the effect on value, if any, of the assemblage of the various estates or component parts of a property and refrain from estimating the value of the whole solely by adding together the individual values of the various estates or component parts;
Comment: Although the value of the whole may be equal to the sum of the separate estates or parts, it also ~ be greater than or less than the sum or such estates or parts. Therefore, the value of the whole must be tested b reference to appropriate market data and supported by an appropriate analysis of such data.
A similar procedure must be followed when the value of the whole has been established and the appraiser seek to estimate the value of a part. The value of any such part must be tested by reference to appropriate market da and supported by an appropriate analysis of such data.
(f) consider and analyze the effect on value, if any, of anticipated public or private improvements, location on or off the site, to the extent that market actions reflect such anticipated improvements as of the effective appraisal date;
Comment: In condemnation valuation assignments in certain jurisdictions, the Jurisdictional Exception may apply to this guideline.
(g) identify and consider the appropriate procedures and market information required to perform the appraisal, including all physical, functional, and external market factors as they may affect the appraisal;
Comment: The appraisal may require a complete market analysis (See Standards Rule 4-4).
(h) appraise proposed improvements only after examining and having available for future examination:
(i) plans, specifications, or other documentation sufficient to identify the scope and character of the
proposed improvements;
(ii) evidence indicating the probable time of completion of the proposed improvements; and
(iii) reasonably clear and appropriate evidence supporting development costs, anticipated earnings, occupancy projections, and anticipated competition at the time of completion.
Comment: The evidence required to be examined and maintained under this guideline may include such items with contractor's estimates relating to cost and the time required to complete construction, market and feasibility studies; operating cost data; and the history of recently completed similar developments. The appraisal may require a complete feasibility analysis (See Standards Rule 4-6).
(i) All pertinent information in items (a) through (h) above shall be used in the development of an appraisal.
Comment: See Standards Rule 2-2(k) for corresponding reporting requirements.
Standards Rule 1-5
In developing a real property appraisal, an appraiser must:
(a) consider and analyze any current Agreement of Sale, option, or listing of the property being appraised, if such information is available to the appraiser in the normal course of business;
(b) consider and analyze any prior sales of the property being appraised that occurred within the f6flowing time periods:
(C) one year for one- to four- family residential property; and (ii) three years for all other property types;
Comment: The intent of this requirement is to encourage the research and analysis of prior sales of the subject; the time frames cited are minimums.
(c) consider and reconcile the quality and quantity of data available and analyzed within the approaches used and the applicability or suitability of the approaches used.
Comment: Departure from this binding requirement is not permitted. See Standards Rule 2-2(k) Comment for corresponding reporting requirements.
STANDARD 2
In reporting the results of a real property appraisal an appraiser must communicate each analysis, opinion, conclusion in a manner that is not misleading.
Comment: Standard 2 governs the form and content of the report that communicates the results of an app a client and third parties
Standards Rule 2-1
Each written or oral real property appraisal report must:
(a) clearly and accurately set forth the appraisal in a manner that will not be misleading;
Comment: Departure from this binding requirement is not permitted. Since most reports are used and relied on by third parties, communications considered adequate by the appraiser's client may not be sufficient. An appraiser must take extreme care to make certain that his or her reports will not be misleading in the mark or to the public.
(b) contain sufficient information to enable the person(s) who receive or rely on the report to under it properly;
Comment: Departure from this binding requirement is not permitted. A failure to observe this rule could client or other users of the report to make a serious error even though each analysis, opinion, and conclusion the report is clearly and accurately stated. To avoid this problem and the dangers it represents to clients an users of reports, this rule requires an appraiser to include in each report sufficient information to enable the to understand it properly. All reports, both written and oral, must clearly and accurately present the analysis opinions, and conclusions of the appraiser in sufficient depth and detail to address adequately the significant specific appraisal problem.
(c) clearly and accurately disclose any extraordinary assumption or limiting condition that directly affects the appraisal and indicate its impact on value.
Comment: Departure from this binding requirement is not permitted Examples of extraordinary assumptive conditions might include items such as the execution of a pending lease agreement, atypical financing, or completion of onsite or off site improvements. In a written report the disclosure would be required in conj with statements of each opinion or conclusion that is affected.
Standards Rule 2-2
Each written real property appraisal report must:
(a) identify and describe the real estate being appraised;
(b) identify the real property interest being appraised;
Comment on (a) and (b): These two requirements are essential elements in any report. Identifying the re can be accomplished by any combination of a legal description, address, map reference, copy of a survey property sketch, and/or photographs. A property sketch and photographs also provide some description of estate in addition to written comments about the physical attributes of the real estate. Identifying the real rights being appraised requires a direct statement substantiated as needed by copies or summaries of legal descriptions or other documents setting forth any encumbrances.
(c) state the purpose of the appraisal;
(d) define the value to be estimated;
(e) set forth the effective date of the appraisal and the date of the report;
Comment on (c). (d) and (e): These three requirements call for clear disclosure to the reader of a report the "why, what, and when" surrounding the appraisal. The purpose of the appraisal is used generically to include both the task involved and the rationale for the appraisal. Defining the value to be estimated requires both an appropriately referenced definition and any comments needed to clearly indicate to the reader how the definition is being applied [See Standards Rule 1-2(b)]. The effective date of the appraisal establishes the context for the value estimate, while the date of the report indicates whether the perspective of the appraiser on the market conditions as of the effective date of the appraisal was prospective, current, or retrospective. Reiteration of the date of the report and the effective date of the appraisal at various stages of the report in tandem is important for the clear understanding of the reader whenever market conditions on the date of the report are different from market conditions on the effective date of the appraisal.
(f) describe the extent of the process of collecting, confirming, and reporting data;
Comment: This requirement is designed to protect third parties whose reliance on an appraisal report may be affected by the extent of the appraiser's investigation; i.e., the process of collecting, confirming, and reporting data.
(g) set forth all assumptions and limiting conditions that affect the analyses, opinions, and conclusions;
Comment: It is suggested that assumptions and limiting conditions be grouped together in an identified section of the report.
(h) set forth the information considered, the appraisal procedures followed, and the reasoning that supports the analyses, opinions, and conclusions
Comment: This requirement calls for the appraiser to summarize the data considered and the procedures that were followed. Each item must be addressed in the depth and detail required by its significance to the appraisal. The appraiser must be certain that sufficient information is provided so that the client, the users of the report, and the public will understand it and will not be misled or confused The substantive content of the report, not its size, determines its compliance with this specific reporting guideline.
(i) set forth the appraiser's opinion of the highest and best use of the real estate, when such an opinion is necessary and appropriate
Comment: This requirement calls for a written report to contain a statement of the appraiser's opinion as to the highest and best use of the real estate, unless an opinion as to highest and best use is unnecessary, e.g., insurance valuation or value in use appraisals. If an opinion as to highest and best use is required, the reasoning in support of the opinion must also be included.
(j) explain and support the exclusion of any of the usual valuation approaches;
(k) set forth any additional information that may be appropriate to show compliance with, or clearly identify and explain permitted departures from, the requirements of Standard 1;
Standards Rule 2-2 (continued)
Comment: This requirement calls for a written appraisal report or other written communication concerning the results of an appraisal to contain sufficient information to indicate that the appraiser complied with the requirements( of Standard 1, including the requirements governing any permitted departures from the appraisal guide. lines. The amount of detail required will vary with the significance of the information to the appraisal.
Information considered and analyzed in compliance with Standards Rule 1-5 is significant information that deserves comment in any report. If such information is unobtainable, comment on the efforts undertaken by d appraiser to obtain the information is required.
(1) include a signed certification in accordance with Standards Rule 2-3.
Comment: Departure from binding requirements (a) through (1) above is not permitted
Standards Rule 2-3
Each written real property appraisal report must contain a certification that is similar in content to the following form:
I certify that, to the best of my knowledge and belief that the statements of fact contained in this report are true and correct the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions I have no (or the specified) present or prospective interest in the property that is the subject of the report, and I have no (or the specified) personal interest or bias with respect to the parties involve my compensation is not contingent upon the reporting of a predetermined value or direction in va that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. I have (or have not) made a personal inspection of the property that is the subject of this report. more than one person signs the report, this certification must clearly specify which individuals in which individuals did not make a personal inspection of the appraised property.) no one provided significant professional assistance to the person signing this report (If there are exceptions, the name of each individual providing significant professional assistance must be stat
Comment: Departure from this binding requirement is not permitted
Standards Rule 2-4
To the extent that it is both possible and appropriate, each oral real property appraisal report (including expert testimony) must address the substantive matters set forth in Standards Rule 2-2.
Comment: In addition to complying with the requirements of Standards Rule 2-1, an appraiser making an 4 report must use his or her best efforts to address each of the substantive matters in Standards Rule 2-2.
Testimony of an appraiser concerning his or her analyses, opinions, and conclusions is an oral report in which appraiser must comply with the requirements of this Standards Rule.
See Record Keeping under the ETHICS PROVISION for corresponding requirements.
An appraiser who signs a real property appraisal report prepared by another, even under the label of '6review appraiser," must accept full responsibility for the contents of the report.
Comment: Departure from this binding requirement is not permitted
This requirement is directed to the employer or supervisor signing the report of an employee or subcontractor. The employer or supervisor signing the report is as responsible as the individual preparing the appraisal for the content and conclusions of the appraisal and the report. Using a conditional label next to the signature of the employer or supervisor or signing a form report on the fine over the words "review appraiser" does not exempt that individual from adherence to these standards.
This requirement does not address the responsibilities of a review appraiser, the subject of Standard 3.
In reviewing an appraisal and reporting the results of that review, an appraiser must form an opinion as to t adequacy and appropriateness of the report being reviewed and must clearly disclose the nature of the revised, process undertaken
Comment: The function of reviewing an appraisal requires the preparation of a separate report or a file mi memorandum by the appraiser performing the review setting forth the results of the review process. Review app go beyond checking for a level of completeness and consistency in the report under review by providing c comment on the content and conclusions of the report. They may or may not have first-hand knowledge of the property or of data in the report. The COMPETENCY PROVISION applies to the appraiser performing the review as well as the appraiser who prepared the report under review.
Reviewing is a distinctly different function from that addressed in Standards Rule 2-5. To avoid confusion marketplace between these two functions, review appraisers should not sign the report under review unless intend to take the responsibility of a cosigner.
Review appraisers must take appropriate steps to indicate to third parties the precise extent of the review A separate report or letter is one method. Another appropriate method is a form or checklist prepared and by the appraiser conducting the review and attached to the report under review. It is also possible that a single impression on the appraisal report under review, signed or initialed by the reviewing appraiser, may be ai appropriate method for separating the review function from the actual signing of the report- To be effective, however, the stamp must briefly indicate the extent of the review process and refer to a file memorandum clearly outlines the review process conducted.
The review appraiser must exercise extreme care in clearly distinguishing between the review process an appraisal or consulting processes. Original work by the review appraiser may be governed by STANDAI STANDARD 4 rather than this standard. A misleading or fraudulent review and/or report violates the El PROVISION.
Standards Rule 3-1
In reviewing an appraisal, an appraiser must:
(a) identify the report under review, the real estate and real property interest being appraised, the effective date or the opinion in the report under review, and the date of the review;
(b) identify the extent of the review process to be conducted;
(c) form an opinion as to the completeness of the report under review in light of the requirement standards;
Comment: The review should be conducted in the context of market conditions as of the effective date opinion in the report being reviewed.
(d) form an opinion as to the apparent adequacy and relevance of the data and the propriety of g adjustments to the data;
(e) form an opinion as to the appropriateness of the appraisal methods and techniques used and the reasons for any disagreement;
(f) form an opinion as to whether the analyses, opinions, and conclusions in the report under re. appropriate and reasonable, and develop the reasons for any disagreement.
Comment: Departure from binding requirements (a) through (f) above is not permitted
An opinion of a different estimate of value from that in the report under review may be expressed, provided the review appraiser:
1. satisfies the requirements of STANDARD 1;
2. identifies and sets forth any additional data relied upon and the reasoning and basis for the different estimate of value; and,
3. clearly identifies and discloses all assumptions and limitations connected with the different estimate of value to avoid confusion in the marketplace.
In reporting the results of an appraisal review, an appraiser must:
(a) disclose the nature, extent, and detail of the review process undertaken;
(b) disclose the information that must be considered in Standards Rule 3-1 (a) and (b);
(c) set forth the opinions, reasons, and conclusions required in Standards Rule 3-1 (c), (d), (e) and (f);
(d) include all known pertinent information;
(e) include a signed certification similar in content to the following:
I certify that, to the best of my knowledge and belief
- the facts and data reported by the review appraiser and used in the review process are true and correct.
- the analyses, opinions, and conclusions in this review report are limited only by the assumptions and limiting conditions stated in this review report, and are my personal, unbiased professional analyses, opinions, and conclusions. I have no (or the specified) present or prospective interest in the property that is the subject of this report and I have no (or the specified) personal interest or bias with respect to the parties
involved.
My compensation is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this review report. my analyses, opinions, and conclusions were developed and this review report was prepared in conformity with the Uniform Standards of Professional Appraisal Practice. I did not personally inspect the subject property of the report under review. no one provided significant professional assistance to the person signing this review report. (If there are exceptions, the name of each individual providing significant professional assistance must be stated.)
Comment: Departure from binding requirements (a) through (e) above is not permitted
B-19
STANDARD 4
In performing real estate or real property consulting services, an appraiser must be aware of, understand, correctly employ those recognized methods and techniques that are necessary to produce a credible result.
Comment: Standard 4 is directed toward the same substantive aspects of professional practice set forth Standard 1, but addresses the performance of consulting services by an appraiser. Consulting is a broad is applied to studies of real estate other than estimating value. Land utilization studies; highest and best analyses; marketability, feasibility, or investment studies; and other research-related studies are example consulting assignments. An appraiser must have the ability to develop an analysis/research program that responsive to the client's objective; to perform primary research; to gather and present secondary and data; and to prepare a documented written report.
Standard 4 addresses the concept of identifying the client's objective. There is an important difference performing an impartial consulting service as a disinterested third party that responds to the client's s objective and performing a consulting service that is intended to facilitate the achievement of the client five. While both are legitimate business activities within the realm of professional appraisal practice, the appraiser must recognize the distinction and the consequent obligations.
An appraiser retained to act as a disinterested third party (or reasonably perceived by the public as acting disinterested third party) in performing an unbiased consulting service cannot be compensated in a man contingent on the results. However, an appraiser retained to perform a legitimate service such as broker mortgage banking, tax counseling, or zoning advice may be compensated by a fee contingent on the services achieved, but only when a proper disclosure of the role being performed by the appraiser is made.
Standards Rule 4-1
In performing real estate or real property consulting services, an appraiser must:
(a) be aware of, understand, and correctly employ those recognized consulting methods and tech that are necessary to produce credible results;
(b) not commit a substantial error of omission or commission that significantly affects the results consulting service;
(c) not render consulting services in a careless or negligent manner, such as a series of efforts that considered individually, may not significantly affect the results, but which, when considered i aggregate, would be misleading.
Comment: Standards Rule 4-1 is identical in scope and purpose to Standards Rule 1-1. Departure fro requirements (a). (b). and (c) is not permitted
Standards Rule 4-2
In performing real estate or real property consulting services, an appraiser must observe the following sp guidelines:
(a) clearly identify the client's objective
(b) define the problem to be considered, define the purpose and intended use of the consulting service, consider the extent of the data collection process, adequately identify the real estate and/or property under consideration (if any), describe any special limiting conditions, and identify the effective date of the consulting service;
(c) collect, verify, and reconcile such data as may be required to complete the consulting service;
(i) if the market value of a specific property is pertinent to the consulting assignment, an appraisal in conformance with Standard 1 must be included in the data collection;
All pertinent information Shall be included;
Comment: If an appraisal is pertinent, the appraiser performing the consulting service should carefully review the ETFUCS PROVISION and the explanatory comment at the beginning of STANDARD 4 to ensure that any personal interest of the appraiser or contingent compensation for the consulting service do not conflict with the independence required of the appraisal function.
The appraiser performing the consulting service may find it necessary to retain (or suggest that the client retain) another appraiser to perform the appraisal.
(d) apply the appropriate consulting tools and techniques to the data collected;
(e) base all projections on reasonably clear and appropriate evidence.
Comment A consulting service must begin with a clear identification of the client's objective, which may not be explicit in the client's statement of the assignment. The appraiser should precisely define the nature of the problem the client faces and the purpose of the consulting service. If the consulting service involves specific real estate or property, the appraiser must obtain a legal description, street address, or other means of specifically and adequately identifying the real estate or property.
The appraiser must assess the overall range of work for solving the problem, the methodologies to be used and the specific research data directly relevant to the consulting service.
Standards Rule 4-3
In performing real estate or real property consulting services, an appraiser must observe the following specific guidelines when a conclusion or recommendation is required by the nature of the assignment:
(a) identify alternative courses of action to achieve the client's objective and analyze their implications;
(b) identify both known and anticipated constraints to each alternative and measure their probable impact;
(c) identify the resources actually or expected to be available to each alternative and measure their probable impact;
(d) identify the optimum course of action to achieve the client's objective.
Comment: After proper consideration of all alternative courses of action, the appraiser should identify optimum course of action in terms of the client's objective and forecast the likelihood it can be achieve conclusions must be logically related to the resources available and the constraints that may limit any alternatives.
Standards Rule 4-4
In performing a market analysis, an appraiser must observe the following specific guidelines when applied
(a) define and delineate the market area;
(b) identify and analyze the current supply and demand conditions that make up the specific re market;
(c) identify, measure, and forecast the effect of anticipated development or other changes and in supply;
(d) identify, measure, and forecast the effect of anticipated economic or other changes and future demand.
Comment: The appraiser should carefully define and delineate the pertinent market area for the analysis Supportive reasoning for the selection of the boundaries must be stated. The appraiser should identify i class(es) of real estate under consideration and analyze the forces that are likely to affect supply/demand ships.
The appraiser is expected to provide a comprehensive physical and economic description of the existing space for the specific use within the defined market area, an explanation of the competitive position of subject, and a forecast of how anticipated changes in future supply (additions to or deletions from the ii may affect the subject property.
The appraiser is expected to project the quantity and price or rent level of space that will be demanded, particular sub-market. The capture or penetration rates of competitive projects should be examined in detail to lead to a reasoned conclusion as to the forecasted price or rent levels at which the market is likely to accept the subject space and the estimated absorption or rent-up period.
The analysis of economic changes in the market in which the property is located may include the following determinants of demand: population, employment, and income characteristics; interest rates; zoning an( regulations; rents and/or sales; new construction planned or underway; vacant sites as potential competitive subject; transportation; taxes; and the cost and adequacy of sewer, water, power, and other utilities. For techniques should be relevant, reasonable, practical, and supportable. Regardless of the forecasting in& employed, the appraiser is expected to provide a clear and concise explanation and description of the mi methodologies.
Standards Rule 4-5
In developing a cash flow and/or investment analysis, an appraiser must observe the following specific guidelines when applicable:
(a) consider and analyze the quantity and quality or the income stream.
(b) consider and analyze the history of expense and reserves;
(c) consider and analyze financing availability and terms;
(d) select and support the appropriate method of processing the income stream;
(e) consider and analyze the cash flow return(s) and reversion(s) to the specified investment position over a projected time period(s).
Comment: Since real estate investment decisions are predicated on financial implications, the consulting service should define the client's investment criteria, consider major variables in the real estate and financial markets, and forecast the anticipated results. Definitions of the financial indices used (such as internal rate of return) and explanations of the financial analysis techniques and computer programs employed should be included. The ETHICS PROVISION and COMPETENCY PROVISION are especially important to Standards Rule 4-5 with regard to hypothetical conditions and technical proficiency.
Standards Rule 4-6
In developing a feasibility analysis, an appraiser must observe the following specific guidelines when applicable:
(a) prepare a complete market analysis;
(b) apply the results of the market analysis to alternative courses of action to achieve the client's objective;
(i) consider and analyze the probable costs of each alternative;
(ii)consider and analyze the probability of altering any constraints to each alternative;
(iii) consider and analyze the probable outcome of each alternative.
Comment: An important step in feasibility analysis is to complete a market analysis.
The appraiser should compare the following criteria from the client's project to the results of the market analysis: the project budget (all construction costs, fees, carrying costs, and ongoing property operating expenses); the time sequence of activities (planning, construction and marketing); the type and cost of financing obtainable; cash flow forecasts over the development and/or holding period; and yield expectations. The appraiser should have enough data to estimate whether the project will develop according to the expectations of the client and is economically feasible in accordance with the client's explicitly defined financial objectives.
STANDARD 5
In reporting the results of a real estate or real property consulting service, an appraiser must communicate analysis, opinion, and conclusion in a manner that is not misleading
Comment: Standard 5 is identical in intent and purpose to the appraisal reporting requirements in that the appraiser must explain logically and convincingly the reasoning that leads to his or her conclusions. The information should be orderly and progressive, leading from the broadest to the most specific level of anal possible. Those topics most critical to the consulting conclusions should receive the most detailed emphasis
In many business situations involving consulting services, the role of the appraiser carries with it an implicit impartiality. For this reason, an appraiser must exercise extreme caution in undertaking assignments that the achievement of the specific goals of a client. A clear and complete disclosure of the role being performed the appraiser must be part of any written report that results from the acceptance of such an assignment. The disclosure must be stated in any letter of transmittal, statement of assumptions and limiting conditions, an executive summary. In this connection, the appropriate use of the Certification in Standards Rule 5-3 is al required, but it is not sufficient in and of itself. A timely and complete disclosure is required in any oral
Standard s Rule 5-1
Each written or oral consulting report must:
(a) clearly and accurately set forth the consulting service in a manner that will not be misleading;
(b) contain sufficient information to enable the person(s) who receive or rely on the report to under it properly;
(c) clearly and accurately disclose any extraordinary assumption or limiting condition that directly the consulting service and indicate its impact on the final conclusion or recommendation (if an
Comment: Departure from binding requirements (a). (b). and (c) is not permitted consulting report in sufficiently comprehensive so the client can visualize the problem and follow the reasoning through each the analytical process. It is essential that throughout the report the data, analyses, assumptions, and conclusions are logical and adequately supported. Basic analytical and statistical principles, logical reasoning, and so professional judgment are essential ingredients of the report.
Standards Rule 5-2
Each written consulting report must comply with the following specific reporting guidelines:
(a) define the problem to be considered;
(b) state the purpose of the consulting service;
(c) identify and describe the real estate and/or property under consideration (if any)
(d) set forth the effective date of the consulting service and the date of the report;
(e) describe the overall range of work and the extent of the data collection process;
(f) set forth all assumptions and limiting conditions that affect the analyses, opinions, and conclusions;
(g) set forth the information considered, the consulting procedures followed, and the reasoning that supports the analyses, opinions, and conclusions;
(h) set forth the appraiser's final conclusions or recommendations (if any);
(i) set forth any additional information that may be appropriate to show compliance with, or clearly identify and explain permitted departures from, the requirements to Standard 4;
(j) include a signed certification in accordance with Standards Rule 5-3,
Comment: The appraiser must set forth all of the assumptions and limiting conditions under which the consulting service is made, and support their validity. Specific assumptions or conditions imposed by the client must be clearly set forth as part of the identification of the objective of the consulting service. The appraiser must investigate the validity of such assumptions or conditions and give reasons for finding them realistic.
It is improper to omit any of the requirements from a consulting report transmitted to the client without good cause. Any departure from normal procedures and the effect of any unusual factors or conditions in connection with the problem must be explained. A misleading or fraudulent report violates the ETHICS PROVISION as well as this Standard.
A written consulting report must contain a certification that is similar in content to the following form:
I certify that, to the best of knowledge and belief the statements of fact contained in this report are true and correct. the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions. I have no (or the specified) present or prospective interest in the property (if any) that is the subject of
this report, and I have no (or the specified) personal interest or bias with respect to the parties involved. my compensation is not (or is) contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. (If the compensation is contingent, the basis of such contingency must be disclosed in this certification and in any letter of transmittal and executive summary.)
my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. I have (or have not) made a personal inspection of the property (if any) that is the subject of this report. (If more than one person signs the report, this certification must clearly specify which individuals did and which individuals did not make a personal inspection of the property.) No one provided significant professional assistance to the person signing this report (If there are exceptions, the name of each individual providing significant professional assistance must be stated.)
Comment: Departure from this binding requirement is not permitted,
To the extent that it is both possible and appropriate, each oral consulting report (including expert testimony address the substantive matters set forth in Standards Rule 5-2.
STANDARD 6
In developing and reporting a mass appraisal for ad valorem tax purposes, an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce and communicate credible appraisals within the context of the property tax laws.
Comment: Standard 6 is directed toward the substantive aspects of developing and communicating competent analyses, opinions, and conclusions for ad valorem tax purposes. Two types of appraisals are made for ad valorem tax purposes: individual property appraisals and mass appraisals. Individual property appraisals usually are made when a mass appraisal is being contested. Generally, individual property appraisals should conform to Standard I and/or 7. Mass appraisals, which often are developed by teams of people, some of whom may not be appraisers, are the subject of this Standard.
Although appraisal is an important aspect of ad valorem tax administration, other important aspects, including locating and describing property, identifying ownership, determining taxability, making assessments, maintaining cadastral record systems, and satisfying a variety of information needs, result in appraiser-client relationships that are distinctly different from the usual relationships between appraisers and clients.
Standards Rule 6-
(a) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal;
Comment: S.R. 6- 1 (a) is identical in scope and purpose to S.R. I - I (a). Changes in regional economies, development patterns, and property tax legislation have a substantial impact on property assessment.
(b) not commit a substantial error of omission or commission that significantly affects an appraisal;
Comment: S.R. 6- 1 (b) is identical in scope and purpose to S.R. I - I (b) when making an individual property appraisal S.R. 6-1(d) applies in mass appraisal.
(c) not render an appraisal in a careless or negligent manner;
Comment: S.R. 6- 1 (c) is identical in scope and purpose to S.R. I - I (c)
(d) employ those recognized mass appraisal procedures and techniques that are necessary to minimize errors in the data and analyses;
Comment: This rule requires appraisers for ad valorem tax purposes engaged in mass appraisal to take reasonable steps to ensure that the quantity and quality of the factual data that are collected are sufficient to produce credible appraisals. The requirements for real and personal property differ.
For real property, systems for routinely collecting and maintaining ownership, geographic, sales income and expense, cost, and property characteristics data should be established. Geographic data should be contained in a complete set of cadastral maps compiled according to current standards of detail and accuracy. Sales data should be collected, confirmed, screened, adjusted, and filed according to current standards of practice. The sales file should be separate from the property record file and should contain, for each sale, property characteristics data that are contemporaneous with the date of sale. Property characteristics data should be appropriate to the mass appraisal models being used, the requirements of classification and property tax policy, the requirements of other government and private users, and the marginal benefits and costs of collecting and maintaining each particular property characteristic. The property characteristics data file should contain data contemporaneous with d appraisal as well as current data. It may contain historical data on sales. The property characteristics data system should provide for periodic reinspection of all properties and special inspections of properties for building permits have been issued. Data collectors should be trained, and they should use data. The data collection program should incorporate checks and audits to ensure that data are recorded correctly an consistently.
For personal property, systems for routinely collecting and maintaining stasis and ownership data, market cost, price, sales and income and expense), and property characteristics data should be established. Person property data collection systems usually rely heavily on reports of taxable property holdings filed by own agents, but appraisers should have systems for verifying and auditing those reports and for discovering un taxable property.
(e) employ those recognized techniques for formulating and calibrating mass appraisal models; and
Comment: Appraisers for ad valorem tax purposes engaged in mass appraisal must develop mass appraisal that with reasonable accuracy represent the mathematical relationship between property value and supply demand factors, as represented by quantitative and qualitative property characteristics. Models should be c using generally recognized mass appraisal techniques, including multiple regression analysis and the adapt estimation procedure, for applying the sales comparison, income, and cost approaches to value. Whenever or appropriate, more than one method should be used in appraising a group of properties.
Since personal property items generally are more homogeneous than real property parcels, personal property valuation models generally are simpler than real property valuation models.
(f) employ those recognized mass appraisal testing procedures and techniques that are necessary to ensure that standards of accuracy are maintained.
Comments It is implicit in mass appraisal that, even when well-formulated and well-calibrated mass appraisal models are used, some individual value estimates will not meet standards of reasonableness, consistency, accuracy. However, appraisers for ad valorem tax purposes engaged in mass appraisal have a professional sensibility to ensure that, on an overall basis, models produce value estimates that meet attainable standards o accuracy. This responsibility requires appraisers to evaluate the performance of models, using, as appropriate goodness of fit statistics, hold-out samples, analysis of residuals, and assessment-ratio data. They also should review individual value estimates before the decision to use those estimates as the basis for assessment is
Standards Rule 6-2
In developing a mass appraisal for ad valorem tax purposes, an appraiser must:
(a) adequately identify the real estate, identify the real property interest under consideration, define purpose and intended use of the appraisal, consider the scope of the appraisal, describe any special( limiting conditions, and identify the effective date of the appraisal;
Comment: Analogous considerations to those set forth in S.R. 6-2(a) apply to personal property. S.R. 6-3 and S.R. 64(a), 6-4(f), and 6-4(h) do not apply to personal property.
In mass appraisal, fee simple interests in property are assumed and appraisers need only identify the real property interest under consideration explicitly when that assumption is not met.
Similarly, the purpose, intended use, and scope of appraisals are assumed to be for ad valorem taxation, which facts do not need to be explicitly defined unless there is an intent to use an appraisal for ad valorem tax purposes for another function. With respect to special limiting conditions, appraisers for ad valorem tax purposes generally operate under pronounced cost constraints. Politically acceptable expenditure levels for assessment administration are a function of a number of factors, including the value of the property being taxed and the relative reliance of the client governmental bodies on the property tax. As a result, expenditure levels may be considerably lower than the suggested levels in many areas. Sacrifices in data completeness and accuracy, valuation methods, and valuation accuracy are an inevitable consequence of such fiscal constraints. Appraisers should not be held accountable for constraints that are beyond their control.
M define the value being considered; if the value to be estimated is market value, the appraiser must clearly indicate whether the estimate is the most probable price
(i) in terms of cash; or (ii) in terms of financial arrangements equivalent to cash; or (iii) in such other terms as may be precisely defined;
Comment: The definition of value for ad valorem tax purposes usually is stated in legislation, regulations, or court decisions and may vary with property use. Appraisers for ad valorem tax purposes must determine whether a stated legal definition differs materially from the general requirements of this rule and govern themselves accordingly. However, in mass appraisal it is not necessary for appraisers to define the value being considered explicitly in writing.
(c) when applicable and when the information is available to the appraiser in the normal course of business, consider easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of similar nature;
(d) consider whether an appraised fractional interest, physical segment, or partial holding contributes proportionately to the value of the whole, if applicable;
(e) identify and consider any personal property, fixtures or intangible items that are not real property but are included in the appraisal.
Standards Rule 6-3
In developing a mass appraisal for ad valorem tax purposes, an appraiser must:
(a) consider the effect on use and value of the following factors: existing land use regulations, reasonably probable modifications of such land use regulations, economic demand, the physical adapt ability of the property, neighborhood trends, and the highest and best use of the property;
Comment: S.R. 6-3(a) is identical in scope and purpose to S.R. 1-3(a).
(b) recognize that land is appraised as though vacant and available for development to its highest use and that the appraisal of improvements is based on their actual contribution to the site.
Standards Rule 6-4
In developing a mass appraisal for ad valorem tax purposes, an appraiser must:
(a) value the site by an appropriate method or technique;
(b) collect, verify, analyze, and reconcile:
(i) such comparable cost data as are available to estimate the cost new of the improvement (if
(ii) such comparable data as are available to estimate the difference between cost new and the worth of the improvements (accrued depreciation);
(iii) such comparable sales data, adequately identified and described, as are available to individual value conclusion;
(iv) such comparable rental data as are available to estimate the market rental of the property appraised;
(v) such comparable operating expense data as are available to estimate the operating expense property being appraised;
(vi) such comparable data as are available to estimate rates of capitalization and/or rates of it
No pertinent information shall be withheld.
(c) base projections of future rent and expenses on reasonably clear and appropriate evidence;
(d) when estimating the value of a leased fee estate or a leasehold estate, consider and analyze the effect on value, if any, of the terms and conditions of the lease;
(e) consider and analyze the effect on value, if any, of the assemblage of the various estates parts of a property and refrain from estimating the value of the whole solely by adding together individual values of the various estates or component parts;
Comment: This rule should not be construed to invalidate properly formulated mass appraisal models c by use of the cost approach.
(f) consider and analyze the effect on value, if any, of anticipated public or private improvement on or off the site, to the extent that market actions reflect such anticipated improvements as o effective appraisal date;
(g) identify and consider the appropriate procedures and market information to perform the app including all physical, functional, and external market factors as they may affect the appraisal
(h) appraise proposed improvements only after examining and having available for future examination
(i) plans, specifications, or other documentation sufficient to identify the scope and character proposed improvements;
(ii) evidence indicating the probable time of completion of the proposed improvements; and
(iii) reasonably clear and appropriate evidence supporting development costs, anticipated earnings, occupancy projections, and the anticipated competition at the time of completion.
Comment: Ordinarily proposed improvements are not formally appraised for ad valorem tax purposes. Appraisers, however, are sometimes asked to provide informal estimates of assessed values of proposed improvements so that developers can estimate future property tax burdens. Sometimes condominiums and units in planned unit developments are sold with an interest in unbuilt community property, the proportionately value of which, if any, should be considered in the analysis of sales data.
Standards Rule 6-5
In developing a mass appraisal for ad valorem tax purposes, an appraiser must:
(a) consider and analyze any current agreement of sale, option, or listing of the property being appraised, if such information is available to the appraiser in the normal course of business;
(b) consider and analyze any prior sales of the property being appraised;
(
c) consider and reconcile the quality and quantity of data available and analyzed within the approaches used, and the adaptability or suitability of the approaches used.
Mass appraisals for ad valorem tax purposes must be supported by documentation that is reasonably accessible to the public and communicated in ways that are not misleading. Documentation may be in the form of (1) records and riles in electromagnetic, micrographic, paper, or other storage media, (2) reports, (3) manuals, (4) regulations, (5) statutes, or other acceptable forms. The documentation should substantially conform to the factual requirements of Standards Rule 2-2. Appraisals for ad valorem tax purposes should be certified in a manner consistent with law and with generally accepted assessment practices.
Comment: For reasons of efficiency, the documentation supporting mass appraisals for ad valorem tax purposes virtually never would be found in a single report. Such matters as the purpose of an appraisal, the date of appraisal, the definition of value, the treatment of divided interests, and the like generally are matters of law and are found in constitutions, statutes, ordinances, regulations, or opinions. The rationale for choosing a particular valuation model and calibration method rarely would be stated in writing, except when specified in regulations or contested in court. The mathematical form of the model should, however, be accessible to qualified interested parties. Property owners and their agents should have access to the property characteristics data on their properties upon request. Value conclusions on all properties should be made accessible to all interested parties.
STANDARD 7
In developing a personal property appraisal, an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.
Comment: Standard 7 is directed toward the same substantive aspects set forth in Standard 1, but address personal property appraisal.
Standards Rule 7-1
In developing a personal property appraisal, an appraiser must:
(a) be aware of, understand, and correctly employ those recognized methods and techniques that necessary to produce a credible appraisal;
(b) not commit a substantial error of omission or commission that significantly affects an appraisal
(c) not render appraisal services in a careless or negligent manner, such as a series of errors that considered individually, may not significantly affect the results of an appraisal, but which, which considered in aggregate, would be misleading.
Comment S.R. 7-1 is identical in scope and purpose to S.R. I - 1.
Standards Rule 7-2
In developing a personal property appraisal, an appraiser must observe the following specific appraisal g
(a) adequately identify the object(s) to be valued, including the method of identification;
(b) define the purpose and intended use of the appraisal, including any special limiting condition
(c) identify the effective date of the appraisal, clearly distinguishing the appraisal date from the date when appropriate;
(d) define the value to considered consistent with the purpose of the appraisal;
(e) value the object(s) by an appropriate appraisal method or technique;
(f) collect, verify, analyze, and reconcile such data as are available, adequately identified and d to indicate a value conclusion;
No pertinent information shall be withheld.
Comment: These guidelines apply the concepts outlined in S.R. 2-2 to personal property appraisal
Standards Rule 7-3
In developing an appraisal of certain types of fine art, when applicable, consider and analyze the effect 4
(a) Any relevant damage or imperfections;
(b) the importance of the object(s) as compared to other items of the same type and classification relating to an artist's total work, or as enhancing other parts of a specific collection;
(c) any historical factors (provenance) which would affect value;
(d) the market acceptability of the style and scale of the object(s);
(e) the utility, if any, in today's society as it relates to the originally intended use of the object(s);
(f) any prior sales of the object(s) being appraised.
Comment: This guideline sets forth recognized appraisal methods and techniques for certain types of fine art that are consistent with U.S. Internal Revenue Service requirements.
STANDARD 8
In reporting the results of a personal property appraisal, an appraiser must communicate each analysis, optimize and conclusion in a manner that is not misleading.
Comment: Standard 8 is identical in scope and purpose to the appraisal reporting requirements in Standard(
Standards Rule 8-1
Each written or oral personal property appraisal report must:
(a) clearly and accurately set forth the appraisal in a manner that will not be misleading;
(b) contain sufficient information to enable the person(s) who receive or rely on the report to under it properly;
(c) clearly and accurately disclose any extraordinary assumption or limiting condition that directly the appraisal and indicate its impact on value.
Standards Rule 8-2
Each written personal property appraisal report must comply with the following specific reporting guidelines
(a) identify and describe the personal property being appraised;
(b) state the purpose and scope of the appraisal:
(c) define the value to be estimated;
(d) set forth the effective date of the appraisal and the date of the report;
(e) set forth all assumptions and limiting conditions that affect the analyses, opinions, conclusions valuations;
(f) where appropriate, set forth the information considered, the appraisal procedures followed, ar reasoning that supports the analyses, opinions, conclusions and valuations;
(g) when analysis of comparable sales is one of the methods used in the appraisal of personal prop sale purposes,
carefully document the sales and analysis;
(h) set forth any additional information that may be appropriate to show compliance with, or clearly identify and "plain permitted departures from, the requirements of Standard 7;
(i) include a signed certification in accordance with Standards Rule 8-3.
Standards Rule 8-3
Each written personal property appraisal report must contain a certification that is similar in context of the following form:
I certify that, to the best of my knowledge and belief that the statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions. I have no (or the specified) present or prospective interest in the property that is the subject of this report, and I have no (or the specified) personal interest or bias with respect to the parties involved. my compensation is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. I have (or have not) made a personal inspection ofthe personal property that is the subject of this report. (If more than one person signs the report, this certification must clearly specify which individuals did and which individuals did not make a personal inspection of the appraised property.) no one provided significant professional assistance to the person signing this report (If there are exceptions, the name of each individual providing significant professional assistance must be stated.)
Standards Rule 8-4
To the extent that it is both possible and appropriate, each oral personal property appraisal report (including expert testimony) most address the substantive matters set forth in Standards Rule 8-2.
ADDITIONAL DEFINITIONS APPLICABLE TO STANDARDS 9 AND 10
BUSINESS ASSETS: Tangible and intangible resources other than personal property and real estate the are employed by a business enterprise in its operations.
BUSINESS ENTERPRISE: A commercial, industrial, or service organization pursuing an economic activity.
BUSINESS EQUITY: The interests, benefits, and rights inherent in the ownership of a business enterprise or a part thereof.
Comment: To the extent that several of the definitions cited on PageB-7 and B-8 of these Standards apply the business appraisal and include a direct reference to real estate, they are modified for the purpose of Standard and 10.
STANDARD 9
In developing a business appraisal, an appraiser must be aware of, understand, and correctly employ those refined methods and techniques that are necessary to produce a credible appraisal.
Comment: Standard 9 is directed toward the same substantive aspects set forth in Standard 1, but address business appraisal.
Standards Rule 9-1
In developing a business appraisal, an appraiser must:
(a) be aware of, understand, and correctly employ those recognized methods and techniques that an necessary to produce a credible appraisal;
Comment: S.R. 9-1 (a) is identical in scope and purpose to S.R. I - I (a). Changes and developments in the economy and in investment theory have a substantial impact on the business appraisal profession. Important changes in the financial arena, securities regulation, tax law and major new court decisions may result in corresponding changes in business appraisal theory and practice.
(b) not commit a substantial error of omission or commission that significantly affects an appraisal:,
Comment: S.R. 9- 1 (b) is identical in scope and purpose to S.R. I - I (b).
(c) not render appraisal services in a careless or negligent manner, such as a series of errors that, considered individually, may not significantly affect the results of an appraisal, but which, when considered in the aggregate, would be misleading.
Comment: S.R. 9- 1 (c) is identical in scope and purpose to S.R. I - I (c).
Standards Rule 9-2
In developing a business appraisal, an appraiser must observe the following specific appraisal guidelines:
(a) adequately identify the business enterprise, assets, or equity under consideration, define the purpose and the intended use of the appraisal, consider the scope of the appraisal, describe any special conditions, and identify the effective date of the appraisal;
(b) define the value being considered.
Comment: S.R. 9-2(b) is identical in scope and purpose to S.R. 1-2(b).
(i) if the appraisal concerns a business enterprise or equity interests, consider any buy-sell agreements, investment letter stock restrictions, restrictive corporate charter or partnership agreement clauses, and any similar features or factors that may have an influence on value
(ii) if the appraisal concerns assets, the appraiser must consider whether the assets are
(1) appraised independently; or (2) appraised as parts of a going concern.
Comment: The value of assets held by a business enterprise may change significantly depending on whether the basis of valuation is acquisition or replacement, continued use in place, or liquidation.
(iii) if the appraisal concerns equity interests in a business enterprise, consider whether the interests are appraised on a majority or minority basis.
Comment: S.R. 9-2(b)(iii) is identical in scope and purpose to S.R. 1-2(d).
Standards Rule 9-3
In developing a business appraisal relating to a majority interest in a business enterprise, an appraiser must investigate the possibility that the business enterprise may have a higher value in liquidation than for continued operation as a going concern. If liquidation is the indicated basis of valuation, any real estate or personal property to be liquidated must be valued under the appropriate standard.
Comment: This rule requires the appraiser to recognize that continued operation of a marginally profitable business is not always the best approach as liquidation may result in a higher value. It should be noted, however, that this should be considered only when the business equity being appraised is in a position to cause liquidation. If liquidation is the appropriate basis of value, then assets such as real estate and personal property must be appraised under Standard 1 and Standard 7, respectively.
Standards Rule 9-4
In developing a business appraisal, an appraiser must observe the following specific appraisal guidelines when applicable:
(a) value the business enterprise, assets or equity by an appropriate method or technique.
(b) collect and analyze relevant data regarding:
(i) the nature and history of the business;
(ii) financial and economic conditions affecting the business enterprise, its industry, and the general economy;
(iii) past results, current operations, and future prospects of the business enterprise;
(iv) past sales of capital stock or partnership interests in the business enterprise being appraised;
(v) sales of similar businesses or capital stock of publicly held similar businesses;
(vi) prices, terms, and conditions affecting past sales of similar business assets;
(vii) physical condition, remaining life expectancy, and functional and economic utility or obsolescence.
No pertinent information shall be withheld
Comment: This guideline directs the appraiser to study the prospective and retrospective aspects of the bi enterprise and to study it in terms of the economic and industrial environment within which it operates. P sales of securities of the business itself or similar businesses for which sufficient information is available also be considered.
This guideline also requires the appraiser to investigate and take into account not only that loss of value r from deterioration due to age but also loss of value due to functional and economic obsolescence. Economic obsolescence is a major consideration when assets are considered as parts of a going concern. It is also the criterion in deciding that liquidation is the appropriate basis for valuation.
Standards Rule 9-5
In developing a business appraisal, an appraiser must:
(a) select one or more approaches that apply to the specific appraisal assignment.
(b) consider and reconcile the quality and quantity of data available for analysis within the appropriate groups that are applicable.
Comment: This rule requires the appraiser to use all approaches for which sufficient reliable data are available However, it does not mean that the appraiser must use all approaches in order to comply with the rule if approaches are not applicable.
STANDARD 10
In reporting the results of a business appraisal an appraiser must communicate each analysis, opinion, and conclusion in a manner that is not misleading.
Comment: Standard 10 is identical in scope and purpose to the appraisal reporting requirements in Standard 2.
Standards Rule 10-1
Each written or oral business appraisal report must:
(a) clearly and accurately set forth the appraisal in a manner that will not be misleading.
Comment: S.R. 10-1(a) is identical in scope and purpose to S.R. 2-1(a).
(b) contain sufficient information to enable the person(s) who receive or rely on the report to understand it properly.
Comment: S.R. 10-1(b) is identical in scope and purpose to S.R. 2-1(b).
(c) clearly and accurately disclose any extraordinary assumption or limiting condition that directly affects the appraisal and indicate its impact on value.
Comment: This rule requires a clear and accurate disclosure of any extraordinary assumptions or conditions that directly affect an analysis, opinion, or conclusion. Examples of such extraordinary assumptions or conditions might include items such as the execution of a pending lease agreement, atypical financing, infusion of additional working capital or making other capital additions, or compliance with regulatory authority rules.
Standards Rule 10-2
Each written business appraisal report must comply with the following specific reporting guidelines:
(a) identify and describe the business enterprise, assets or equity being appraised.
(b) state the purpose of the appraisal.
(c) define the value to be estimated.
(d) set forth the effective date of the appraisal and the date of the report.
Comment: Every business appraisal report must include information sufficient to identify what is being appraised, for what purpose, what type of value is being sought and the date as of which the value applies. If the appraisal concerns equity, it is not enough to identify the entity in which the equity is being appraised but also the nature of the equity, for example: how many shares of common or preferred stock. The purpose may be to express an opinion of value but the intended use of the appraisal must also be stated.
Not only the type of value being sought -fair market value, value in use, etc. must be stated but it must also be defined clearly. The report date is when the report is submitted; the appraisal date or date of value is the effective date of the value conclusion. This date cannot be later than the report date.
(e) describe the scope of the appraisal.
(f) set forth all assumptions and limiting conditions that affect the analyses, opinions, and conclusion
(g) set forth the information considered, the appraisal procedures followed, and the reasoning that supports the analyses, opinions, and conclusions.
(h) set forth any additional information that may be appropriate to show compliance with, or clear identify and explain permitted departures from, the requirements of Standard 9.
Comment: S.R. 10-2(e), (f), (g), and (h) are identical in scope and purpose to S.R. 2-2(f), (g), (h), and (i)
(i) include a certification in accordance with S.R. 10-3.
Include a letter of transmittal signed by the person assuming technical responsibility for the appraisal.
Comment: An appraisal report cannot be anonymous. The appraiser or the person assuming technical re reliability for the appraisal must sign the report. The person assuming technical responsibility for the appraisal be the person under whose direct supervision the appraisal investigation was conducted and who had first responsibility for the conclusions and opinions of value in the appraisal report. Reports issued by a firm r signed by the person authorized to sign on behalf of the firm, only if the person assuming technical respect for the appraisal also signs.
Standards Rule 10-3
Each written business appraisal report must contain a certification that is similar in content to the following
I certify that, to the best of my knowledge and belief the statements of fact contained in this report are true and correct. the reported analyses, opinions, and conclusions are limited only by the reported assumptions limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions I have no (or the specified) present or prospective interest in the property that is the subject o report, and I have no (or the specified) personal interest or bias with respect to the parties inv my compensation is not contingent on an action or event resulting from the analyses, opinions conclusions in, or the use of, this report.
- my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.
- no one provided significant professional assistance to the person signing this report (If there; exceptions, the name of each individual providing significant professional assistance must be!
Standards Rule 10-4
To the extent that it is both possile and appropriate, each oral business appraisal report (including expert testimony) must address the substantive matters set forth in S.R. 10-2.
Comment: S.R. 10-4 is identical in scope and purpose to S.R. 2-4.
Standards Rule 10-5
An appraiser who signs a business appraisal report prepared by another, even under the label "review appraiser," must accept full responsibility for the contents of this report.
Comment: S.R. 10-5 is identical in scope and purpose to S.R. 2-5.
Supplemental Standards of
Professional Appraisal Practice
SUPPLEMENTAL STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE
Adopted by the Board of Directors and Effective January 1, 1991
Preamble
As noted in the Introduction, the Uniform Standards of Professional Appraisal Practice ("Uniform Standards") developed by the Ad Hoc Committee were generally consistent with the Appraisal Institute's existing Standards of Professional Appraisal Practice. There were, however, a few exceptions. First, the definition of certain terms in the Uniform Standards differed from the definition of these same terms in the Standards of Professional Appraisal Practice and it was possible that these changes in definition narrowed the scope of the appraisal activities covered by the Standards of Professional Appraisal Practice. Second, the required form of certification specified in the Uniform Standards made no reference to compliance with the requirements of the Appraisal Institute, to the right of the national Ethics and Counseling Committee and other duly authorized representatives of the Appraisal Institute to review the reports of each Member and Affiliate, or to the status of a Member under the Appraisal Institute's continuing education program. Although the favorable reception given to the Uniform Standards by federal and state regulatory agencies and by state legislatures made it clear that Members and Affiliates of the Appraisal Institute would benefit substantially from the adoption of the Uniform Standards, the Appraisal Institute did not wish to narrow the scope of the appraisal activity that was covered by the existing Standards of Professional Appraisal Practice or to drop the requirement discussed above relating to the appraiser's certification in an appraisal report. Therefore, when the Appraisal Institute adopted the Uniform Standards, it also adopted these Supplemental Standards of Professional Appraisal Practice ("Supplemental Standards") to cure the definitions problem and the certification problem. Supplemental Standard 3 was adopted later in response to a concern about the broadness of the Ethics Provision. The Uniform Standards and Supplemental Standards are collectively referred to as the "Standards of Professional Appraisal Practice." There can be no conflict between these two components of the Standards of Professional Practice because the Supplemental Standards add to, but do not subtract from, the Uniform Standards.
Definitions Problem
The Uniform Standards define the terms "appraisal," "consulting" and "review" as follows:
Appraisal: (noun) The act or process of estimating value; an estimate of value.(adjective) Of or pertaining to appraising and related functions, e.g. appraisal practice,appraisal services Consulting: (adjective) The act or process of providing information, analysis of real estate data
and recommendations or conclusions on diversified problems in real estate, other than estimating value.
Review: The act or procedure of critically studying a report prepared by another.
In the Uniform Standards these three terms are intended to encompass the work performed by appraisers in the marketplace and it is clear that in most instances, the work performed by a Member or an Affiliate would be appraisal work, consulting services, or review work and that this work would fit squarely under one of the above definitions. It is not clear, however, that the combination of the three types of work defined above would include everything that is covered by the definition of the term "appraisal" as it appears in the Code of Professional Ethics of the Appraisal Institute. This definition is as follows:
Appraisal: An analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate.
Further, although many of the Standards Rules and Explanatory Comments in the Uniform Standards relating to appraisal work, consulting services and review work are identical, there are some differences. Therefore, it is possible that an improper action of a Member or an Affiliate could escape coverage under the Uniform Standards if the activity or work product of such Member or Affiliate was classified under the wrong segment.
Certifications Problem
Since the Uniform Standards were designed for the use of all appraisers, they make no reference to any appraisal organization. The Standards of Professional Appraisal Practice of the Appraisal Institute, however, have always contained rules relating to the Appraisal Institute. The purpose of these rules is threefold: first, to advise the client and third parties that the appraisal has been arrived at and the appraisal report has been prepared in accordance with the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute; second, to advise the client and third parties that the Appraisal Institute has a legal right to review the report; and third, to advise the client and third parties as to whether or not the Member signing the report is current under the continuing education program conducted by the Appraisal Institute.
SUPPLEMENTAL STANDARDS & STANDARDS
SUPPLEMENTAL STANDARD 1
The Uniform Standards of Professional Appraisal Practice shall apply to all activities of a Member or an Affiliate involving an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate.
S.S.R. 1-1
The Standards Rules in the Uniform Standards relating to the development of an "appraisal," a "consulting" service or a "review" and to the communication of an "appraisal," a "consulting" service or a "review" shall apply to all activities of a
Member or an Affiliate that involve an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate even though such activity does not clearly fall within the Uniform Standards definition of "appraisal," "consulting" or "review."
When appropriate, the Standards Rules and Explanatory Comments relating to "appraisal" work shall be equally applicable to "consulting" services and "review" work. Similarly, when appropriate, the Standards Rules and Explanatory Comments relating to "consulting" services and "review" work shall be equally applicable to "appraisal" work.
EXPLANATORY COMMENTS
GENERAL COMMENT
If broadly construed, it is possible that the Uniform Standards would apply to all activities of a Member or an Affiliate that involve an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate. The purpose of Supplemental Standard I is to require this broad interpretation.
Comment 1-2
An illustration of the application of Supplemental Standards Rule 1- 2 occurs when a Member or an Affiliate estimates value in connection with a real estate brokerage assignment or a real estate tax adjustment assignment. The Code of Professional Ethics permits Members and Affiliates to accept these assignments and to receive a contingent fee for their work provided that third parties and the public do not perceive that the appraiser was employed or retained to act "as a disinterested third party in rendering an unbiased estimate or opinion of the nature, quality, value or utility of specified interests in or aspects of identified real estate."
The distinction that is made in the Code of Professional Ethics between an "appraisal assignment" (where the appraiser is disinterested or would be so perceived and cannot accept a contingent fee) and "specialized appraisal services" (which include all appraisal services other than those classified as an "appraisal assignment") is lost in the Uniform Standards because the term "appraisal" is limited to one segment of the work done by an appraiser. However, the Code's distinction between an "appraisal assignment" and "specialized appraisal services" is equally important for "appraisal" work, "consulting" services and "review" work. The Uniform Standards pro vide appropriate rules only in connection with "consulting" services.
The rules relating to "consulting" services state that "an appraiser must exercise extreme caution in undertaking assignments that involve the achievement of the specific goals of a client." Also, the form of certification that is required by S.R. 5-3 specifically refers to both fixed and contingent compensation. The problem is that reports dealing with value for brokerage purposes or for tax adjustment purposes quite fixed have a specific estimate of value for identified real estate. Should this type of report be classified as an "appraisal" report, a "consulting" report or both? The Uniform Standard
SUPPLEMENTAL STANDARDS & STANDARDS RULES
SUPPLEMENTAL STANDARD
The form of certification used by a Member or an Affiliate in a written report that contains an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate must include a statement indicating compliance with the Code of Professional Ethics and Standards of Professional Appraisal Practice and a statement advising the client and third parties of the Appraisal Institute's right to review the report. The form of certification used by a Member in a written report that contains an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate must include a statement indicating the current status of the Member under the Appraisal Institute's continuing education program.
S.S.R. 2-1
Each written report of a Member or an Affiliate that contains an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interest in, or aspects of, identified real estate must contain a certification that is similar in content to the following form:
I certify that, to the best of my knowledge and belief, the reported analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute.
EXPLANATORY COMMENTS
do not say. This may not be a serious problem when you are dealing only in the standards area, but it is a very serious problem when the Standards are coupled with a Code of Professional Ethics and a Member's designation may be at stake.
Supplemental Standard I restores the rules and explanations that were lost when all appraisal work was divided into three parts or segments labeled "appraisal," "consulting" and .review" and a specific definition was provided for each segment. Even though a Standards Rule or Explanatory Comment relating to one type of work is not repeated in the rules relating to another type of work, it must be observed for all types of work if it is appropriate.
Members and Affiliates must be familiar with the rules for all three types of work and observe all of the rules that are appropriate for each assignment, regardless of the classification of the work under the definitions in the Uniform Standards.
General Comment
When preparing a report classified by the Uniform Standards as an "appraisal" report, the additional statements required by Supplemental Standard 2 may be added to the statements required by S.R. 2-3. When preparing a report classified by the Uniform Standards as a "consulting" report, the additional statements required by Supplemental Standard 2 may be added to the statements required by S.R. 5-3. When preparing a report classified by the Uniform Standards as a "review" report, the additional statements required by Supplemental Standard 2 may be added to the statements that are required by either S.R. 2-3 or S.R. 5-3, whichever is appropriate.
SUPPLEMENTAL STANDARDS & STANDARDS
S.S.R. 2-2
Each written report of a Member or Affiliate that contains an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate must contain a certification that is similar in content to the following form:
I certify that the use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives.
S.S.R. 2-3
Each written report of a Member that contains an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate must contain one of the following statements:
Either
As of the date of this report, I (or Member's name or Members' names) have/has completed the requirements of the continuing education program of the Appraisal
Institute.
or
As of the date of this report, I (or Member's name or Members' names) have not/has not completed the requirements of the continuing education program of the
Appraisal Institute.
SUPPLEMENTAL STANDARD 3
The Appraisal Standards Board of the Appraisal Foundation added an Ethics Provision to the Uniform Standards of Professional Appraisal Practice on December 4, 1989. of the language in this Ethics Provision is very broad and the Appraisal Institute has interpreted this Ethics Provision to apply to appraisal conduct only. The Appraisal Institute has an existing Code of Professional Ethics that is adequate to carry out the intent of the Ethics Provision. Therefore, the Appraisal Institute will enforce its own Code of Professional Ethics under its existing enforcement procedures as the proper means of enforcing the Ethics Provision of the Uniform Standards of Professional Appraisal Practice.
S.S.R. 3-1 The Ethics Provision of the Uniform Standards shall be enforced solely by enforcement of the Code of Professional Ethics under the existing enforcement procedures.
EXPLANATORY COMMENTS
Comment S.S.R. 2-3
The continuing education program of the Appraisal Institute is maintained only for its Members. Affiliates may attend continuing education courses and seminars but they do not receive continuing education credit. Therefore, it is inappropriate to require Affiliates to make the statement found in S.S.R. 2-3.
It should be noted that S.S.R. 2-3 differs from other Supplemental Standards Rules in that it requires Members to use the "act text. A statement that is merely "similar in content" is not acceptable. If a Member seeks to explain his or her failure to complete the requirements of the Appraisal Institute's continuing education program, extreme care must be used. The Appraisal Institute does not deem other activities to be the equivalent of its continuing education requirements. Misleading statements that relate to a Member's qualifications violate Ethical Rule 5-6 of the Code of Professional Ethics. Misleading statements of any kind may violate Ethical Rule 1-1(a) of the Code.
GUIDE NOTES TO
THE STANDARDS OF
PROFESSIONAL APPRAISAL
PRACTICE
GUIDE NOTE 1
VALUATION OF REAL ESTATE INTERESTS INTENDED FOR SYNDICATION AND VALUATION OF REAL ESTATE PARTNERSHIP INTERESTS
Introduction
The syndication of real estate has become an important element in the current real estate market. The process of syndication often begins when an individual or group (the syndicator) purchases interests in real estate for the purpose of transferring it to a limited partnership and then selling limited partnership interests to investors. Problems arise for an appraiser when he or she is asked to value the real estate interests at the time of their purchase by the syndicator because the syndicator frequently is buying more than real estate. Problems also arise when the syndicator sells limited partnership interests to investors because of the inherent difficulty involved in separating the value of the interests in real estate from the aggregate value of the limited partnership interests.
In the syndication industry the price of the interests in real estate at the time of acquisition by the syndicator is sometimes referred to as wholesale value; and the aggregate price of the individual partnership interests to be sold by the syndicator is sometimes referred to as aggregate market value, retail value, or syndication value. If these terms are used by an appraiser, however, they must be defined clearly and precisely so that the users of the report and the public will not be confused or misled.
Valuation problems often relate to non-real estate items or conditions involved in the sale and purchase transaction such as special financing and guarantees of occupancy or income. These items are difficult to isolate and evaluate even when all facts are known. In the context of syndication purchases, the problem of analyzing comparable sales is more difficult than usual because it is extremely difficult to obtain all relevant data.
When a syndicator sells the real estate partnership interests to investor purchasers, the sale price of a limited partnership interest includes management services and other benefits in addition to the interests in real estate.
The syndication of real estate involves the marketing of highly specialized interests, both real and personal, to a specifically defined group of purchasers with varying motivations. Unless extreme care is taken to distinguish the exact nature of the interests being appraised, valuation conclusions can be greatly distorted or misleading, and an appraiser may become liable to third parties under security and tax regulations that have often been described as punitive.
Basis for Proper Evaluation
Acquisition by the Syndicator
All appropriate approaches should be used to estimate value. When analyzing comparable sales in the sales comparison approach, all transactions should be specifically analyzed to
Adopted by the Board of Directors and effective January 1, 1991 determine whether non-real estate items were included in the price. If non-real estate items were included, they should be separately identified and their effect on the sale price should be carefully considered.
A limited assignment should be accepted only in unusual circumstances.
Sale of Partnership interests by the Syndicator
Syndicators frequently assert that the aggregate price they are paid by investors who purchase partnership interests establishes the market value of the interests in real estate that are the subject of the syndication. The market value of the interests in real estate is an important item in a syndication because the value of the improvements is used to establish the basis for depreciation which in turn creates substantial tax benefits. The appraiser, however, must carefully analyze the aggregate sale price of the partnership interests sold to investors and separate the value of the interests in real estate from the contributory value of the non-real estate interests sold. Rarely would the retail price of the individual partnership interests sold to investors equal the market value of the interests in real estate. It is essential that the appraiser understand that the partnership interests sold by the syndicator include non-realty items such as management services, investor-specific tax benefits, the ability to invest in a major property that an investor might be incapable of investing in alone, and the potential for improved liquidity. Potential capital appreciation and eligibility for tax benefits are considered to be elements of realty that influence investors and may impact market value. These elements of realty are not limited to syndications.
When valuing fractional interests in a real estate partnership, an appraiser must be certain that all market data is comparable and be acutely aware of what was included in each investment package utilized in the valuation process. In this connection an appraiser can appraise the partnership interest involved either by breaking it down into separate components or by considering it as a whole with all the components properly identified.
Unacceptable Practices
1. Failing to determine whether non-realty items were included in the price of comparable sales. (See S.R. 1-2(e)).
2. Using the retail price of the aggregate fractional interests in the partnership or the aggregate market value of the partnership as the market value of the real estate interests being appraised. (See S.R. 1-4(e)).
3. Combining the value of non-real estate items with the value of the real estate interests being appraised without proper identification and analysis. (See S.R. 14(c)).
4. Failing to describe and measure the effects of submarket or atypical financing on the value of the real estate interests being appraised. (See S.R. 1-2(b)).
(Please Note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied in various situations. Guide Notes should not be considered without referring to the appropriate Standards Rules.)
GUIDE NOTE 2
CASH EQUIVALENCY IN VALUE ESTIMATES IN ACCORDANCE WITH STANDARDS RULE 1-2 (b)
Introduction
An appraiser may be requested to estimate the value of real property on the assumption that certain specific financing is available from or through the seller that differs from the financing that is currently available from conventional lenders. Such an assumption as to financing may have no effect or may have a favorable or an unfavorable influence on the resulting estimate of value. Further, the sales data that is used in the sales comparison approach may have been affected by financing that influenced the price either favorably or unfavorably at the time of the sale.
For several decades, real estate financing secured from institutional lenders had fairly consistent interest rates and terms and was often referred to as "typical" financing. The sale prices of property purchased with such "typical" financing were generally considered to be cash equivalent. However, high mortgage interest rates have prompted the use of alternative methods of financing. This so called "creative" financing included special incentives, interest buy downs, lender participation in income and equity, and other techniques. In addition, interest rate restrictions on government -guaranteed financing sometimes led to sellers paying the loan origination costs (points) for buyers and adjusting the sale price of the property to offset this added cost. Ibis market condition introduced a myriad of complex terms and inducements that can have either a positive or negative impact on the price paid for a real property interest. As a result, "typical" financing took on a different meaning. What is typical today can be the methods and terms of financing that are prevalent in a specific geographic area or the dominant type of financing available to a particular type of property, either new or existing. The sale prices of property purchased under such terms may or may not be cash equivalent.
The requirement that appraisers analyze and measure the effect of financing is determined not by the availability of the particular financing but, rather, by its effect on the price of comparable sales and the price that most probably represents the defined value of the property being appraised.
In responding to the questions posed by the client that initiated the appraisal assignment, the appraiser must adhere to ethical standards and fundamental appraisal principles and practices that are sensitive to the market. A clear understanding is necessary between the appraiser and the client as to the interest being valued and the need for the appraiser to analyze existing, available and/or proposed financing. If the appraisal assignment is to estimate market value, the definition of market value must not only be consistent with the client's needs but must also meet the requirements of Standards Rule 1-2(b).
Basis for Proper Evaluation
The market value of a clearly identified property interest may be reported in a number of ways: (1) cash, (2) terms equivalent to cash, or (3) other precisely defined terms. An example of such other terms is the cash value of the equity interest subject to existing or proposed financing.
Standards Rule 1-2(b) requires an appraiser to clearly define the terms of such financing and estimate the effect of any financing, if any, on the value reported. Further, the market
Adopted by the Board of Directors and effective January 1, 1991 data supporting the valuation estimate must be described and explained. When submarket financing or financing with unusual conditions or incentives is involved and results in an effect on the estimate, the appraiser can either:
Report two values (as financed and cash equivalent); or
Report one value and indicate the positive or negative influence the financing terms have on the value reported.
Standards Rule 1-2(b) contains this reporting requirement so that interested parties will be aware of how much the favorable or unfavorable financing impacts the value reported. Standards Rule 1-2(b) does not imply that different terms of payment will always lead to a different value. It simply requires that the proper analysis be made and that an appropriate statement be included in the report
Once a property owner finances the property, ownership becomes subject to the tenure of the mortgage. The sum of the value of owner equity and the face amount of the balance(s) of the mortgage(s) may or may not be equal to the free and clear value of the property. Any difference represents the impact that the financing has on the value as indicated by the market (absent other factors that would impact value).
The same analysis outlined above must also be applied to comparable sales data. The appraiser should ascertain the terms of the financing involved in the acquisition of a comparable property and estimate the influence of such financing, if any, on the sale price. For example, does an all-cash sale differ from a sale in which the buyer assumed existing financing or secured new financing from the seller, a third party, or both? If so, why and what is the impact on price?
A clear distinction must be made between sale prices that are not affected by financing or other considerations, including sale prices for terms considered by the seller to be equivalent to cash transactions, and sales involving premiums or discounts due to financing. If the financing is unfavorable to the purchaser, one way that the difference may be measured is by the cost to retire the debt. Furthermore, the effect of financing on each comparable sale must be considered in light of the market as of the date of the sale, not the date of valuation of the subject. The appraiser should attempt to determine whether or not, at the time of sale, the financing affected the sale price in the minds of the parties to the transaction. If it did, the effect must be analyzed and an adjustment must be made and reported.
In estimating the value of a property, the appraiser must ascertain whether or not any existing financing is assumable, repairable, or replaceable. Also, the appraiser must estimate the potential value impact of the cost of items such as finders fees, points and prepayment penalties and the effect of the present worth of participation by lenders, if any. The appraiser should also judge the duration of any favorable or unfavorable influence from mortgages or participation It should not be assumed that the benefit or detriment due to financing will continue throughout the stated amortization or participation terms. The value contribution of a mortgage fluctuates as interest rates rise and fall. The possibility of retiring unfavorable financing prior to its full payout period should also be considered.
The value of a property on the basis of cash or cash equivalency can be estimated most directly by comparing it with similar properties that were being sold for cash or its equivalent on the open market. However, if the total consideration for a comparable sale includes something other than cash (e.g., the exchange of property, life tenancy, or other interests), such consideration should be converted to cash equivalency. The concept of estimating cash equivalency goes beyond the discounting of debt encumbrances.
If sufficient data to permit a direct market comparison is not available, the cash equivalency of existing or proposed financing can be estimated by discounting the contractual terms at current market rates or yield rates for the same type of property and loan term over the expected holding period of the property. However, such mathematical methods should be weighed against other market indications.
In summary, demonstrated knowledge of the market financing available to the subject and comparable sale properties, analytical judgment, and common sense are required of the appraiser in determining whether or not specified financing impacts the value of a property.
Standards Rule 1-2(b) requires that the impact of favorable or unfavorable financing on market value be estimated and reported. The value reported must be clear and meaningful to the client and cannot be misleading to the public or third parties.
Unacceptable Practices
1. Failure to accurately report the specific terms of any existing or proposed financing of the subject property, when such financing has an impact on the appraisal problem. (See S.R. 1- 2(b)).
2. Failure to estimate and report the effect of favorable or unfavorable financing terms on value. (See S.R. 1-2(b)).
3. Failure to analyze and make appropriate adjustments to a comparable sale that included favorable or unfavorable financing terms as of the date of sale, when comparing the sale to the property being appraised. (See 1-2(b)).
4. Failure to state that financing data on a comparable sale is not available despite diligent investigation, and that reliance on the particular sale is thus limited. (See 1-4(b)(iii)).
(Please Note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied in various situations. Guide Notes should not be considered without referring to the appropriate Standards Rules.)
GUIDE NOTE 3
THE USE OF FORM APPRAISAL REPORTS FOR RESIDENTIAL PROPERTY
Introduction
Most residential appraisal assignments require a report of findings on one of the approved forms used extensively in the secondary mortgage market. Examples are:
FHLMC 70/FNMA 1004 - Residential Appraisal Report
FHLMC 72 (2-12 units)/FNMA 1025 (2-4 units) - Small Residential Income Property
FHLMC 465/FNMA 1073 - Individual Condominium or PUD Unit
Many forms used by other entities are similar to the FHLMC/FNMA forms. For example, the Employee Relocation Council (ERC) form, widely adopted by the employee relocation industry, is modeled after FNMA 1004 and the neighborhood, site, improvement descriptions, and market data analysis sections are nearly identical. However, other sections address specific interests of the client. Appraisers using the ERC form should be aware that its stated definition of market value varies somewhat from the definition adopted by FNMA. The ERC definition is somewhat generic and various companies hiring appraisers have adopted different interpretations of the market value definition in the ERC form. In addition, the ERC form does not include certifications that meet the requirements of the Appraisal Institute's Code of Professional Ethics and Standards of Professional Appraisal Practice. Other appraisal forms also have this deficiency.
It is the responsibility of the appraiser to obtain a clear understanding of the client's needs and to respond by applying fundamental appraisal principles and practices in an ethical manner. If a proposed appraisal assignment cannot be completed in accordance with the requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice, the assignment must not be accepted.
The move toward the use of common appraisal forms in the national marketplace has led to a greater uniformity in reports, but has not eliminated the difference in quality among reports. For this reason, guidelines for preparing form residential appraisal reports in accordance with the Standards of Professional Appraisal Practice are essential.
Basis for Proper Valuation
When using any form report, or signing the report as review appraiser, it is the responsibility of the appraiser and the review appraiser to ensure that the appropriate methods and techniques have been properly employed. Appropriate addenda must be added when additional information is required to complete the appraisal process. Such addenda are frequently used for value definition, certification, limiting conditions, maps, sketches, legal descriptions, and additional comments, When signing a report as review appraiser, the appraiser accepts full responsibility for the contents of the report (cf. Explanatory Comment S.R. 2-5).
The appraiser must select the valuation methodology that is appropriate for each specific appraisal problem. The sales comparison approach is generally considered most relevant for residential property appraisals. Therefore, most forms are focused on the sales comparison approach and additional information may need to be added when the cost approach or the income capitalization approach are relevant to the subject property.
Adopted by the Board of Directors and effective January 1, 1991 Whether or not the cost approach is developed, an estimate of the value contribution of land to overall value is usually required for the underwriting analyses employed in the secondary market.
Consistency is of paramount importance in form reports. The column labeled "Average" in the rating grid means "Typical" and does not have a negative connotation. A "Fair" or "Poor" rating for an item always requires a comment regarding any resulting effect on value. No items on the form should be left blank. If a category on the form is inappropriate for the specific appraisal problem, the item should be marked "Not Applicable." For example, public transportation in a rural location should be marked "Not Applicable" and not marked "Poor" or left blank.
The headings down the left side of the principal forms mirror the appraisal process. Care should be taken to relate the comments in these sections to the proper headings (e.g., site comments should not appear under the neighborhood section). If the value of the property being appraised does not fall within the typical price ranges identified in the neighborhood section, an adequate explanation must be provided. In completing the neighborhood rating grid, the subject neighborhood should be compared with other competing neighborhoods. In completing the property rating grid, the property should be compared with other properties within the subject neighborhood.
Highest and best use appears on most forms merely as a box to be checked because the use of the form itself is a statement of highest and best use. It is inappropriate to use a single-family dwelling report form if the appraiser concludes that the highest and best use of the property is a different use.
To ensure consistency, the description of the subject property in the adjustment grid of the sales comparison (market data) approach section of the form should be completed simultaneously with or checked carefully against the property description on the front of the form. Also, the effective age remaining economic life estimates in the description of the improvements should be consistent with any accrued depreciation noted in the cost approach. The area of the basement (if any) and the percent of finished basement (if any), should be clearly stated.
The sales comparison (market data) approach section of the principal forms provides grids for the description and adjustment of three comparable sales. The appropriateness of the adjustments used is best demonstrated by bracketing the characteristics of the subject in selecting the sales data. The appraiser must decide whether additional sales or comments are necessary.
The term "Typical" should not be used in the "Description" column unless the report clearly identifies that which is typical in the market for the subject and sale properties. This is particularly important when considering an adjustment for "Sales or Financing Concessions" (cf- Guide Note 2). The appraiser should be aware that, although no adjustment among several types of prevailing financing options may be appropriate in the local market, underwriters in the secondary market are often the ultimate readers and reviewers of form reports and may not be familiar with the local markets of the properties comprising the loan package being considered for purchase. The appraiser's responsibility is to present the facts of each sale transaction in such a way that the reader or reviewer of the report, including the underwriter in the secondary market, will clearly understand the terms and conditions under which the subject is valued.
Unacceptable Practices
Many of the above comments describe recommended practices in contrast to unacceptable practices. Some additional unacceptable practices are:
1. Failure to consider the purpose, definitions, assumptions, conditions, and limitations that are inherent in the form report used for a residential appraisal. (See S.R. 1-2 (a)).
2. Failure to qualify a report or to refuse an assignment when underwriting criteria conflict with proper appraisal practice. The Departure Provision must be carefully considered when accepting such an appraisal assignment.
3. Signing an appraisal report as a review appraiser without setting forth the results of the review process or accepting full responsibility for the contents of the report. (See S.R. 2-5 and Standard 3).
4. Failure to consider, analyze and report any prior sales of the property being appraised within one year of the date of the appraisal (See S.R. 1-5(b)(i)).
(Please Note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied in various situations. Guide Notes should not be considered without referring to the appropriate Standards Rules.)
GUIDE NOTE 4
DISCOUNTED CASH FLOW ANALYSIS AS A VALUATION METHOD
Introduction
The use of discounted cash flow (DCF) analysis has gained acceptance as an analytical tool and method of valuation within the Income Capitalization Approach to value. DCF is not a new method, but it did not enjoy widespread use until modem computer technology enabled appraisers to automate the process using personal computers or handheld financial calculators. The popularization of DCF was also stimulated by the inflation experienced during the 1970's and early 1980's and the increased use of this technique by market participants in their decision making process.
DCF analysis has become an accepted method of valuation within the institutional real estate market, and to an increasing degree within the general real estate markets. DCF techniques may be applicable in the valuation or analysis of various property types, including proposed construction and land development, rehabilitation, condominium development or conversion, and income properties. DCF analysis is becoming a requirement of advisors, asset managers, fiduciaries, portfolio managers, syndicators, underwriters and others dealing in investment grade real estate. Many users of appraisal services favor the inclusion of DCF analysis as a management tool in projecting cash flow and return expectations, capital requirements, refinancing opportunities and timing of future property dispositions. DCF analysis is regarded as one of the best methods of replicating steps taken to reach investor buy/sell/hold decisions by many appraisers and market participants. Accordingly, DCF analysis is often a part of the exercise of due diligence in the evaluation of an investment.
Basis for Proper Valuation
DCF methodology is based on the principle of anticipation, i.e., value is created by the anticipation of future benefits. Because DCF analysis is profit oriented and dependent upon the analysis of uncertain future events, it is vulnerable to misuse. DCF analysis reflects investment criteria and requires the appraiser to make a variety of empirical and subjective assumptions. The use of DCF is appropriate for both investment value and market value appraisals, as well as other analytical uses such as sensitivity tests. To avoid misuse or misunderstanding in appraisal assignments when the purpose is to estimate market value, it is incumbent upon the appraiser to make sure that the controlling input is consistent with market evidence and prevailing market attitudes. Market value DCF analyses should be supported by market derived data and the assumptions should be both market and property specific. Market value DCF analyses are intended to reflect the expectations and perceptions of market participants along with available factual data, and should be judged on the market support for the forecasts when made, not whether specific items in the forecasts are realized. An appraisal report which includes the results of DCF analysis must clearly state the assumptions on which the analysis is based and must set forth the relevant data used in the analysis.
DCF analysis is an additional tool available to the appraiser and is best applied to value estimates in the context of one or more other approaches. This Guide Note focuses on criteria for proper DCF analysis and does not imply that DCF analysis is or should be the only method employed.
Adopted by the Board of Directors and effective January 1, 1991
SR. I-I(b) and SR. 4- 1 (b) state that the appraiser must not commit a substantial error of omission or commission that significantly affects the appraisal or the consulting service, and SR. W(c) and SR. 4- 1 (c) state that the appraiser must not render appraisal or consulting services in a careless or negligent manner such as a series of errors that, considered individually, may not significantly affect the results of an appraisal or consulting service but which, when considered in the aggregate would be misleading. These two rules are significant in DCF analysis because of the compounding effect of errors in the input, unrealistic assumptions and programming errors. Computer printouts showing the results of DCF analysis may be generated by commercial software or by software prepared by the appraiser. In either event the appraiser is responsible for the entire analysis including the controlling input, the calculations and the resulting output.
SR. 14(h) and SR. 4-2(e) relate to the requirement for realistic forecasts in the appraisal and analysis of proposed improvements and development projects. SR. 14(c) and SR. 4-2(e) require that estimates of anticipated future rent and expenses be based on reasonably clear and appropriate evidence. The explanatory comment relating to SR. 14(c) makes specific reference to cash flow projections, the essence of DCF analysis.
DCF accounts for and reflects those items and forces that affect the revenue, expenses and ultimate earning capacity of a property and represents a forecast of events that would be considered likely within a specific market. For example, in the appraisal of a multi-tenant property, a lease-by- lease analysis addresses contract and market rents, specific escalations, operating expenses, pass- through provisions, market derived or specific concessions, capital expenditures, and any other measurable specific provisions applicable. Revenue growth rate or decline rate assumptions are premised upon analysis of supply/demand factors and other economic conditions and trends within the market area of the subject property. Operating expense change rates should reflect both overall expense trends and the specific trend of significant expense items.
Discount rates applied to the cash flows and estimates of the reversion should be derived from data and information in the real estate and capital markets. Surveys of investor opinion and yield indices are also useful in the rate selection process. Considerations used in the selection of rates are risk, inflation, and real rates of return. When reversion capitalization rates are used, they should reflect current investor expectations considering the property type, age and condition of the improvements, cash flow characteristics, and related factors. The projection period is a variable and should be set on the basis of the facts and circumstances of each analysis.
The results of DCF analysis should be tested and checked, as necessary, for errors and reasonableness. Because of the compounding effects in the projection of income and expenses, even slight input errors can be magnified and can produce unreasonable results. For example, it is good practice to ascertain whether cash flows are changing at reasonable rates. Similarly, it is good practice to compare the reversion capitalization rate with the inferred entrance capitalization rate to ascertain that the relationship between the rates is reasonable and explainable.
Standard 2 and Standard 5 require the appraiser to communicate each analysis, opinion and conclusion in a manner that is not misleading. Appraisals using DCF techniques, particularly computerized projections of itemized future cash flow supported by exhaustive printouts, can be misleading. The seeming precision of computer generated projections may give the appearance of certainty to projections that are actually variable within a wide range. In DCF analysis, all of the assumptions such as growth rates, decline rates, rental rates, discount rates, financing terms, expense trends, capitalization rates and other determinants of future benefits or value directly affect the conclusion and must be clearly and accurately disclosed in the appraisal report.
Unacceptable Practices
1. Using unreasonable or unsupported assumptions or hypotheses as a basis for DCF analysis. (See S.R. 2-2(g), S.R. 5-2(f), S.R. 2-1(c) and S.R. 5 -I(c); see also E.R. 3-5 and E.R. I - 1).
2. Failure to test and check the results of DCF analysis for errors and reasonableness. (See S.R. I - I (b) and (c), S.R. 4- 1 (b) and (c)).3. Acceptance of, or reliance upon, computer software that has not been tested by the appraiser or cannot be controlled by the appraiser or is known to produce questionable results.(See S.R. I -I (a) and S.R. 4-2(d)).
4. Failure to disclose all significant assumptions and conclusions. (See S.R. 2-2(g) and S.R. 5- 2(f)).
5. Failure to differentiate between investment value and market value. (See S.R. 2-2(d)).
(Please Note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied in various situations. Guide Notes should not be considered without referring to the appropriate Standards Rules.)
GUIDE NOTE 5
VALUE ESTIMATES AS OF A RETROSPECTIVE OR PROSPECTIVE DATE
Introduction
Two dates are recognized as being essential to any appraisal report. According to Standards Rule (S.R.) 2-2(e), each appraisal report must specify the effective date of the appraisal and the date of the report The date of the report is important because it indicates the perspective from which the appraiser is examining the market. The effective date of the appraisal is important because it establishes the context for the value estimate. Three categories of effective dates exist. A retrospective, current, or prospective valuation date may be used according to the purpose and function of the appraisal assignment.
Retrospective appraisals (when the effective date of the appraisal is prior to the date of the report) may be required for a variety of situations such as property tax matters, estate or inheritance tax matters, condemnation proceedings, or suits to recover damages.
A current appraisal is when the effective date of the appraisal is contemporaneous with the date of the report Since most appraisals require current value estimates, the importance of specifying both the date of the report and effective date of the analysis is sometimes lost.
Prospective appraisals (when the effective date of the appraisal is subsequent to the date of the report) may be required in connection with valuations of property interests related to proposed developments or for other reasons such as the value at the end of a cash flow projection. In some methodologies, reversion is implicit in the capitalization rate used; in others, it is explicitly identified as a final cash flow. In regard to proposed developments, prospective value estimates are frequently required as of the time the development is to be completed, and as of the time the development is projected to achieve stabilized occupancy. These prospective values form a basis for investment decisions and loan underwriting.
The use of clear and concise language and appropriate terminology in appraisal reports helps to eliminate the preparation of misleading reports. To avoid any confusion, the appraiser must clearly and unequivocally establish the date to which the value estimate applies. In prospective value estimates, use of the term market value without a modifier such as forecasted or prospective is improper. Prospective value estimates are intended to reflect the expectations and perceptions of market participants along with available factual data, and should be judged on the market support for the forecasts when made, not whether specific items in the forecasts are realized.
Basis for Proper Valuation
The development of a retrospective appraisal is complicated by the fact that the appraiser already knows what occurred in the market after the effective date of the appraisal. Data subsequent to the effective date of the appraisal may be considered in estimating a retrospective value as a confirmation of trends that would reasonably be considered by a buyer or seller as of that date. The appraiser should determine a logical cut-off because, at some point distant from the valuation date, the subsequent data will not reflect the relevant market. This is a difficult determination to make. Studying the market conditions as of the date of the appraisal assists the appraiser in judging where he or she should make this cutoff.
When appraisals of prospective value are required with regard to valuation of property
Adopted by the Board of Directors and effective January 1, 1991 interests related to proposed improvements, S.R. 1-4(h) regarding the scope, character and probable time of completion of the proposed improvements and S.R. 14(c) regarding the basis for anticipated future rent and expenses are relevant. Evidence that proposed improvements can be completed by the effective date of the appraisal is important. The appraiser should identify whether the value estimate represents value at the time the improvements are to be completed but not fully occupied, or value at stabilization when a rental project reaches its level of expected long-term occupancy.
Support for estimated income and expenses at the time of completion of proposed improvements and during the rent-up or sell-out period requires the incorporation of sufficient market research in the appraisal and the consideration of existing and future competition. It is appropriate to study comparable projects for evidence of construction periods, development costs, income and expense levels, and absorption. Items such as rental concessions, commissions, tenant finish allowances, add-on factors, and expense pass throughs, must be studied to estimate true income expectancy.
In developing a prospective appraisal, the appraiser analyzes market trends to provide support for forecasted income and expense or sell-out estimates, absorption periods, capitalization rates, and discount rates as of the effective date of the appraisal. Economic trends such as growth in population, employment, and future competition are also analyzed. The overall economic climate and variations in the business cycle should be considered and weighed in the performance of the valuation process.
In developing a prospective appraisal, all value conclusions should include reference to the time frame in which the analysis was prepared to clearly delineate the market conditions and point of reference from which the appraiser developed the prospective value indication. It is appropriate to include a limiting condition citing the market conditions from which the prospective value estimate was made and indicating that the appraiser cannot be held responsible for unforeseeable events that alter market conditions prior to the effective date of the appraisal.
Unacceptable Practices
I . Failure to state the date of the report and the effective date of the appraisal. (See S.R. 2- 2(e)).
2. Failure to state the time frame in which the analysis was prepared to clearly delineate the market conditions and point of reference from which a prospective value indication was developed. (See S.R. 2-2(h)).
3. Failure to provide sufficient documentation for the anticipated scope, character, construction period, development costs, income and expense levels, absorption, and competition for proposed improvements. (See S.R. 14(c) and (h), S.R. 2-2(h)).
(Please Note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied in various situations. Guide Notes should not be considered without referring to the appropriate Standards Rules.)
GUIDE NOTE 6
RELIANCE ON REPORTS OR INFORMATION PREPARED BY OTHERS
Introduction
Appraisers often rely, at least in part, on reports or information prepared by others in making certain decisions in the process of an appraisal, consulting service, or review. Reliance on the reports of others generally increases with the complexity of the problem. The use of reports and information prepared by others may increase in the future because appraisers are providing more specialized services and will need more information to make decisions and prepare their reports.
Reports prepared by others vary in form, content, and applicability. Although these reports are frequently used in conjunction with proposed properties and transactions, they may also be applicable to existing properties and used in special situations such as litigation and arbitration.
In general, these reports fall into four major classifications:
General Informational Reports
General informational reports are usually descriptive in nature and provide information pertaining to an overall area. These reports include data on demographics, economic trends, and other such matters. They are not specific to the property being appraised.
Reports Prepared by Licensed or Certified Non Real Estate Professionals
Reports prepared by licensed or certified non real estate appraisal professionals are specific to the "subject property" and may be either descriptive or factual in nature. These reports include engineering services, environmental studies, soil reports, impact studies, survey reports, zoning opinions, audited financial statements by a Certified Public Accountant, and other reports relating to matters beyond the scope of appraiser's expertise, or services not typically offered by appraisers.
Reports Prepared by Other Non Real Estate Appraisal Professionals
Reports in this category are prepared by experts who are not licensed or certified but have specific experience or expertise that an appraiser may rely upon. Examples include reports pertinent to the appraisal problem from academicians, theatre operators, and personal property value
Other Reports
Other reports pertaining to the subject property may be prepared by the client, by another real estate professional, or by others. These reports include financial statements, prior appraisal reports on the subject property, highest and best use studies, rental surveys, cost studies, and others.
Before using reports or information prepared by others the appraiser must consider
1. the standards under which the reports were prepared;
2. the source and extent of the instructions given to the preparer of the report; and
3. how the appraiser relied on these reports in making decisions and preparing his or her report.
Adopted by the Board of Directors and effective January 1, 1991
Basis for Proper Valuation
Value is usually defined as the present worth of all future benefits that accrue to real property ownership. Because the valuation process may require projections which are influenced by uncertain events the basis for all assumptions and projections employed by the individual who prepared the report must be understood and accepted by the appraiser who uses this report.
Standards Rules I - I (b) and 4- 1 (b) state that the appraiser must not commit a substantial error of omission or commission that significantly affects the appraisal or the consulting service. Standards Rules 1-1(c) and 4-1(c) state that the appraiser must not make a series of errors that, considered individually, would not significantly affect the results of an appraisal or consulting service, but which, considered in the aggregate, would indicate that the professional services are being rendered in a careless or negligent manner. Standards Rule 14 requires that estimates of anticipated future rent and expenses for a property being appraised be based on reasonably clear and appropriate evidence and Standards Rule 14(h) sets forth the requirements for appraising proposed improvements.
Standards Rules 2-1(a) and 5-1(a) require that each written or oral appraisal or consulting report must be clearly and accurately set forth in a manner that will not be misleading. Standards Rule 2- l(b) and 5-1(b) require that each written or oral appraisal or consulting report must contain sufficient information to enable a person who receives or relies on the report to understand it properly. Standards Rules 2-2(g) and 5-2(f) require that each written appraisal report or consulting report must set forth all assumptions and limiting conditions that effect the analyses, opinions, and conclusions. Standards Rules 2-3 and 5-3 require that each written appraisal or consulting report must contain a statement with regard to receiving significant professional assistance.
Market value estimates should be supported by market-derived data and assumptions made should be specific to both the market and the property. If an appraiser accepts the projections or assumptions of others without verification or some assurance of the accuracy or reasonableness of the calculations or information provided, he or she would violate the aforementioned standards rules.
These rules are significant to appraisers using reports or information prepared by others, particularly when the information is used as the basis for his/her projections or conclusions.
The need for review and verification of reports or information prepared by others will vary with their content and applicability. The amount of review or verification required depends on the scope of the assignment, the type of information used, and the relevance of the information to the opinions and judgments rendered.
The four major classifications of reports require varying levels of review and care on the part of the appraiser, as offered below:
General Informational Rates
General informational reports usually require limited verification. Most discrepancies are easily clarified.
Reports Prepared by Licensed or Certified Non Real Estate Appraisal Professionals
Reports or information prepared by licensed or certified non real estate appraisal professionals typically offer conclusions as to the adequacy of a specific property component or issue pertaining to the property. These conclusions are generally based on accepted procedures or standards and represent informed opinions on matters beyond the appraiser's expertise. Absent reasonable doubt, these reports usually can be accepted conditioned upon the qualification that they were prepared by recognized professionals. Should observed or apparent material discrepancies exist between the appraiser's investigation and the submitted report prepared by a licensed or certified non real estate appraisal professional, such material discrepancies must be disclosed.
Reports Prepared by Other Non Real Estate Appraisal Professionals
An appraiser's reliance on reports prepared by these experts is distinct from that of the preceding paragraph in die greater care the appraiser should exercise in determining the pertinent expertise of the author.
Other Reports
Other reports prepared by, or at the direction of, the client, other real estate professionals, or others, require a careful review for reasonableness. The level of investigation should be appropriate to the problem. The appraiser must understand the assumptions on which these reports are based as well as their applicability and validity to the assignment.
Unacceptable Practices
I . Using unreasonable or unsupported assumptions as a basis for projections (See S.R. 2- 1(c), S.R. 2-2(g), S.R. 5-1(c), and S.R. 5-2(f)).
2. Blind acceptance of a report or information relied upon that was prepared by others (See S.R. 1-1(b) and S.R. 4-1(b) and E.R. 1-1 and E.R. 3-2).
3. Failure to identify reports of others and the specifics that were relied upon and failure to cite as a minimum the author, and the date of the report (See S.R. 2-3, S.R. 5-3, S.R. 2-2(g) and S.R. 5-2(f)).
4. Failure to reveal and explain each apparent discrepancy between any two opinions that were relied upon (See S.R. 2-2(h) and S.R. 5-2(g)).
5. Failure to specifically accept responsibility for any real estate appraisal or analysis opinion of another relied upon for the analysis, opinion or conclusion (See S.R. 23, S.R. 5-3, S.R. 2- 2(g) and S.R. 5-2 (f)).
6. Failure to preserve, consistent with Ethical Rule 2-7, the reports of others that have been relied upon. (Please note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied. They should not be considered without referring to the Standards of Professional Appraisal Practice.)
GUIDE NOTE 7
APPRAISALS OF REAL ESTATE WITH RELATED PERSONALTY
Introduction
Members and Affiliates of the Appraisal Institute may conduct appraisals of real property and related personality. In so doing, they are regulated by the Standards of Professional Appraisal Practice (Standards). The Standards consist of two documents, the Uniform Standards of Professional Appraisal Practice (Uniform Standards) and the Supplemental Standards of Professional Appraisal Practice (Supplemental Standards).
Supplemental Standard I defines appraisal to embrace opinions of various types of value (e.g., market, investment) as well as various non-value analyses and conclusions, so long as each relates to a specified interest in, or aspect of, identified real estate, and providing that the appraiser leaves no doubt whether the opinion is unbiased or biased (see Comment to S.S.R. 1-2) and otherwise adheres to the Code of Professional Ethics.
The Uniform Standards defines real property as "the interests, benefits, and rights inherent in the ownership of real estate." The Uniform Standards defines real estate as "an identified parcel or tract of land, including improvements, if any."
The word improvements is not defined by the Standards but it is generally understood to mean "anything attached to the identified land whether by nature or by human activity." For appraisal purposes, both real estate and improvements specifically exclude personality, defined here to include a) personal property, including business and trade inventories and supplies; b) non-real estate fixtures and leasehold improvements; c) net working capital and securities; and d) intangible assets.
The term personal property is defined narrowly by the Uniform Standards to exclude, for example, trade fixtures and intangibles. The definition is: "identifiable portable and tangible objects which are considered by the general public as being 'personal', e.g., furnishings, artwork, antiques, gems and jewelry, collectibles, machinery and equipment." S.R. 6-2(e) refers to "personal property, fixtures or intangible items that are not real property ......
Fixtures that are not real estate are identified as trade fixtures, domestic fixtures, and leasehold improvements. They are personality regardless of ownership, regardless of who purchased or installed the item, and regardless of how securely the item is attached to the real estate.
Usually, trade fixtures for business, and domestic fixtures for residences, are installed by or for occupants who at occupancy-conclusion may forfeit them, sell them, remove them, or abandon diem, depending upon 1) the lease or sale contract, 2) the contribution made where installed, 3) their investment value to the departing occupant, 4) custom, and 5) other considerations. For example, in a plumbing contractor's establishment, there may be three categories of toilets: those used by the staff and customers are fixtures, i.e., real estate; those on display, built into model bathroom * s, are trade fixtures, i.e., real estate related personality; and those in the rear storage area available for delivery to, and installation in, customers' buildings (where, when affixed, they will then become part of the real estate) are inventory, i.e., personality that is not yet related to any real estate. Leasehold items differ physically from trade/domestic fixtures in that they are constructed on site rather than merely installed (or modified and installed). For example, a tavern's bar might be constructed on the premises whereas the bar stools would merely be trade fixtures.
Adopted by the Board of Directors and effective January 1, 1991 D-17 installed as delivered. Such distinctions are not useful in the appraisal analysis, although a client may have some other justification for differentiation.
Local custom regarding whether an item is considered to be realty or personality is of great importance regarding carelessly drafted purchase contracts. For example, where the contract is silent, a dwelling's refrigerator would be conveyed as realty in some jurisdictions but would not in other jurisdictions. The nearby table lamp, which is affixed to the real estate in exactly the same manner as is the refrigerator (by electric plug), is not real estate in any jurisdiction. Other personality items in dwellings may include fireplace inserts, window treatments, and satellite dishes.
A securely affixed item, nominally personality, may revert to realty at occupancy termination, if its relocation requires prohibitively expensive damage to itself (e.g., partitioning) or to the building in which it is located (e.g., a wall safe). The value contribution at that time may be negative or positive, depending upon the nature of the item and demand for it at its location.
Most single-family dwellings, factories, amusement facilities, farms, and ecclesiastical properties, and many office and retail buildings, are appraised to include some affixed tangible personality (e.g., bookshelves, carpet). But, often, some items of affixed personality are to be removed (or separately sold) by the grantor and should be excluded from the appraisal opinion. In all such cases, specificity is necessary. It is of great importance to the appraiser whether, for example, the gas range, the leaded stained glass window, and the dining room light fixtures are to be included in, or excluded from, the appraisal opinion. On the other hand, the contributory value of these items in no way depends upon whether each or any of the items is legally realty or personality
In those cases in which the function of the appraisal assignment is related to some types of government activity, such as ad valorem real estate taxation, or eminent domain, the appraiser may be instructed to "exclude all personality" In those cases, the appraiser should either know how to comply, or find out how to comply with this legal instruction.
Net working capital is the sum of liquid assets less short-term liabilities. Depending on the enterprise being appraised, net working capital may include cash, marketable securities and liquid supplies less current liabilities such as accounts payable and short term loans.
Intangibles can be realty or personality and should be specifically included or excluded from an appraisal depending upon the nature of the assignment and the client's reasonable (and reported) explicit or implicit instructions. An easement is an example of intangible realty, whereas an alcoholic beverage license is an example of intangible personality An option to lease or to buy real estate may have intangible aspects, but options are usually held to be realty rights.
Patence and goodwill are invariably considered to be personality.
Usually, a condominium interest is thought to be real estate, whereas a cooperative share without the accompanying leasehold interest is considered to be personality
The Appraisal Institute regulates the appraisals and the resulting written and oral reports, of its Members and Affiliates, when of real estate and related tangible and intangible personality, by requiring compliance with its Standards and with its Code of Professional Ethics. The Appraisal Institute does not regulate its Members' and Affiliates' appraisal activity regarding 1) non-realty related personal property (i.e. tangible and portable, e.g., artwork, furniture), and 2) business equity shares (as defined in ADDITIONAL DEFINITIONS APPLICABLE TO STANDARDS 9 & 10), by requiring compliance with any of the Standards unless an appraisal of real property is involved. Compliance with the Code of Professional Ethics, however, is required regarding all Member/Affiliate business activities unless compliance would result in an inequitable result or is contrary to public policy or law.
When formulating an appraisal, Members and Affiliates are required by S.R. 1-2(e) to "identify and consider any personal property, fixtures, or intangible items that are not real property but are included in the appraisal." S.R. 6-2(e) makes the same requirement regarding mass appraisals. S.R. 21 (a) and (b), and S.R. 2-2(f), (h), and (i), and the Code of Professional Ethics, taken together, require that the identification and consideration be clearly reported in a non-misleading manner.
Basis for Proper Evaluation
For each appraisal, the appraiser should identify and consider any personal property, fixtures, or intangible items that are not real property but are included in the appraisal (S.R.
Personality that is related to real estate ' e, and which is to be included in an appraisal opinion, should be identified and described in the appraisal report.
For many appraisal opinions (feasibility, market rent, investment value, etc.), a determination of the highest and best use of the personality is necessary. The major use deteriorations are 1) identify which, if any, personality items should remain on site, as is; 2) identify which, if any, personality items make a greater contribution for off-site use (when considering marketing and removal expenses); 3) identify which off-site use items should be sold as salvage (re-used for the designed function; sold intact) and which as scrap (re-used for parts or materials, or discarded; permitting dismantling and destruction); and 4) identify which, if any, personality items make a greater contribution for on-site relocation (when considering relocation expenses).
Often, a determination is necessary regarding the degree of physical deterioration and design obsolescence, if any, that afflicts the personality items. A determination regarding the remaining economic life of the building(s) with which the related personality is associated (which is often a function of increasing land value) may be helpful inasmuch as the on-site utility of personality is limited to that of the building to which it contributes. There may be instances in which the nature of the business operation extends the economic life of the building.
If, in related personality cases, the appraiser predicates the opinion on an enhanced physical or functional condition because of an assumption of repairs, replacements, etc., the assumption should be reported.
Some kinds of related personality may be leased, other kinds may be purchased, and still other kinds may be assembled or constructed. Typical appraisal approaches may be employed (i.e., income, sales, cost). The principles of consistent use and contribution should be observed.
If the appraisal opinion is to include personality that is either superior or inferior to that typically found in competing properties, allowance for the difference, on a contributory basis, should be considered in whatever procedures are appropriate to appraise the real estate and its related personality
If the appraisal opinion is to omit personality that is integral to operating the real estate for its highest and best use, then comparable sale adjustments, cost summations, and income stream analyses should reflect that fact.
In developing a business assets appraisal (which may include intangible resources see ADDITIONAL DEFINITIONS APPLICABLE TO STANDARDS 9 & 10), the appraiser must consider whether such assets are meant to be appraised as part of a going concern or as separate assets (S.R. 9-2(b)(ii)).
If an eminent domain condemns or orders a market value appraisal of "real estate only" when the appraised building is improved with personality (e.g. trade fixtures) or occupied by personality (e.g., original furnishings in a historic dwelling), the contribution of which is greater for on-site use than for off-site use, then the appraiser must 1) set forth the client instruction in any oral or written appraisal report (S.R. 2-1 (Q) and 2) determine whether the value diminution to the personality should also be estimated and reported lest the appraisal mislead those who are to determine just compensation (S.R. 21 (a)).
Unacceptable Practices
1. To fail to identify, consider, and report the description of items of related personality, and unrelated personality, which are included in the appraisal
(S.R. 1-2(e) and S.R. 8-2(a)).
To depart from the principles of consistent use and contribution when appraising the included personality (S.R. 14(e)).
3. To develop an appraisal of real estate and related personality without adequate knowledge, or without employing proper procedures (S.R. I - I (a) and S.R. 7-1 (a)).
[Please Note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied. They should not be considered without referring to the Standards of Professional Appraisal Practice.]
GUIDE NOTE 8
THE CONSIDERATION OF HAZARDOUS SUBSTANCES IN THE APPRAISAL PROCESS
Introduction
The consideration of environmental forces along with social, economic and governmental forces is fundamental to the appraisal of real estate. Although appraisal literature has long recognized environmental forces as major determinants of value, the focus has been on the consideration of climatic conditions, topography and soil, the surrounding neighborhood, accessibility, and proximity to points of attraction. These environmental forces are readily apparent to a member of the general public who is not specifically trained as an expert in observing these forces. There is, however, a growing need to give special consideration to the impact of hazardous substances on the valuation of real property.
The growing need to consider hazardous substances is a recent trend stemming from the creation and identification of new hazards, recent federal and state legislation enacted to control and place responsibility for these hazards and an increasing public awareness of the problems resulting from these hazards.
The presence of hazardous substances on a property can significantly impact value. In some cases the property may have a "negative" value as the clean-up cost could be greater than the property value after clean up.
For the purpose of this guide note the term "hazardous substances" covers any material within, around or near a property that may have a negative effect on its value. Accordingly, the principles discussed in this guide note apply equally to hazards that may be contained within the property such as friable,asbestos and external hazards such as toxic waste or contaminated ground water.
The purpose of this guide note is to provide guidance in the application of the Standards of Professional Appraisal Practice to the appraisal of real estate affected by hazardous substances and, in particular, to the consideration of such hazards in the appraisal process. It is not the purpose of this guide note to provide technical instructions or explanations concerning the detection or measurement of hazardous substances.
Basis for Proper Evaluation
The Competency Provision of the Uniform Standards of Professional Appraisal Practice requires the appraiser to either (1) have the knowledge and experience necessary to complete a specific appraisal assignment competently or (2) disclose the appraiser's lack of knowledge or experience to the client and take all steps necessary or appropriate to complete the assignment competently.
The Competency Provision is of particular importance in the appraisal of real property that may be affected by hazardous substances. The typical appraiser does not have the knowledge or experience required to detect the presence of hazardous substances or to measure the quantities of such material. The appraiser, like the buyers and sellers in the open market, typically relies on the advice of others in matters that require special expertise.
There is nothing to prevent a professional appraiser from becoming an expert in other fields, but the typical real estate appraiser is neither required, nor expected, to be an expert in the special field of hazardous substances. This guide note therefore addresses the problem of hazardous substances from the viewpoint of the typical appraiser who is not qualified to detect or measure hazardous materials.
Adopted by the Board of Directors and effective January 1, 1991
D-21
For an appraisal which accounts for the effects on value of hazardous substances, the typical appraiser would require the professional assistance of others. For an appraisal with no separate accounting for the possible effects on value of known hazardous substances, the typical appraiser would not require the professional assistance of others. These alternatives are further discussed below.
The appraiser may accept an assignment involving the consideration of hazardous substances without having the required knowledge and experience in this special field, provided the appraiser discloses such lack of knowledge and experience to the client prior to acceptance of the assignment and arranges to complete the assignment competently. This may require association with others who possess the required knowledge and experience or reliance on professional reports prepared by others who are reasonably believed to have the necessary knowledge and experience. If the appraiser draws conclusions based upon the advice or findings of others, the appraiser must believe that the advice or findings are made by persons who are licensed, certified or otherwise properly qualified. (See Guide Note 6, Reliance on Information or Reports Prepared by Others.) It is suggested that the client choose and hire any qualified environmental professionals.
In developing an appraisal based in part on the findings of others with respect to the existence of, and the effects of, hazardous substances, the appraiser must correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal. The loss of value attributable to hazardous substances is generally measurable using the same methods and techniques that are used to measure depreciation from other causes. However, in some cases even environmental professionals cannot agree on the level of clean up required, the appropriate method of that clean up, or the cost.
The appraiser is cautioned that the value of a property impacted by environmental hazards may not be measurable simply by deducting the apparent costs or losses from the total value, as if "clean." The possibility of other changes affecting value, such as a change in highest and best use or even the marketability, should be considered.
S.R. 2-3, S.R. 5-3 and S.S.R. 1-2 require the appraiser to include, with each written report, a certification that states the name of each individual providing significant professional assistance, Accordingly, environmental engineers, inspectors and other professionals who prepare reports, furnish advice or make findings that are used in the appraisal process must be named on the certificate.
Under the Departure Provision, the appraiser may accept an assignment that would exclude the consideration of hazardous substances, provided that: the resulting appraisal is not misleading; the client has been advised of the limitation; and the report is qualified to reflect this limitation.
When there are no known hazardous substances it is recommended, as a matter of standard practice, for the appraiser to issue a disclaimer or limiting condition to the effect that the appraisal is predicated on the assumption that hazardous substances do not exist. No property can be assumed to be uncontaminated. If the property being appraised is not known' to be affected by hazardous substances and there is no reason to believe that it may be so affected, the issuance of such a disclaimer or limiting condition would not be considered to limit the scope of the appraisal. If the property being appraised is known to be affected by hazardous substances, or if there is reason to believe that it may be so affected, the appraiser cannot exclude the consideration of such materials without limiting the scope of the appraisal. In such appraisals, the appraiser must take great care to make sure that the limitation is not misleading.
If a property is known to be affected by hazardous substances, or if there is reason to believe that a property may be so affected, it may serve a valid and useful purpose to obtain an appraisal of the property, excluding the consideration of hazardous substances. Such an appraisal could be required as the logical starting point in a study of the impact of hazardous
1. Knowledge is being defined here to mean obvious to the untrained person or specifically communicated through a reasonably reliable source. substances or in connection with legal proceedings. Whatever the purpose, such an appraisal must be properly qualified to prevent its misuse. The valuation of property, as if unaffected by hazards that are known to be present or are suspected of being present, would be predicated on an extraordinary assumption and therefore subject to S.R. 2- 1 (c) without exception. S.R. 2- 1 (c) requires that each written or oral real estate appraisal report must clearly and accurately disclose any extraordinary assumption or limiting condition that directly affects the appraisal and indicate its impact on value. Similarly, S.R. 2-2(k) requires that the report clearly identify and explain any permitted departures from the regular requirements.
In limited assignments such as discussed above, the requirements of the Departure Provision, S.R. 2-1(c) and S.R.2-2(k) may be satisfied by including a suitable disclosure or limiting condition, an appropriate statement of purpose and properly qualified conclusions in the report. For purposes of illustration, assume that a property known to contain friable asbestos is to be appraised in accordance with the client's instructions, as if unaffected by asbestos. The report for such an appraisal would require a limiting condition, an appropriate statement of purpose andqualified conclusions similar in content to the following example
In accordance with the client's instructions, the estimated value reported herein reflects the total value of the subject property, as if unaffected by asbestos. It is reported that asbestos is present within the subject property. The presence of asbestos may have a negative influence on the value of the subject property, but the consideration of the effects of asbestos on the value of the subject property is beyond the purpose and scope of this appraisal. The appraiser cautions against the use of this appraisal without knowledge of the intended purpose and limited scope of the appraisal
In addition to an appropriate limiting condition such as shown above, there should be an appropriate statement of purpose and the conclusion should be properly qualified, as illustrated below.
The purpose of this appraisal is to estimate the market value of the subject property, as if unaffected by asbestos, as of January 1, 19XX
The appraiser's final opinion of the market value of the subject property, as if unaffected by asbestos, as of January 1, 19XX is therefore $XX,XXXXXX.
The limiting condition(s) should be stated in the letter of transmittal, if any, the body of the report, and whenever the report conclusion is stated.
Standard Disclaimers and Statements of Limiting Conditions
As previously mentioned, it is recommended practice, even in the appraisal of property where there is no reason to believe that the property is affected by hazardous substances, to include a standard disclaimer or statement of limiting conditions that pertains specifically to hazardous substances in the appraisal report. Such statements are riot required by the Standards of Professional Practice, and they are not intended to limit the scope of the appraisal to something less than would otherwise be required. Rather, they are intended to clarify the normal limits of the appraisal, disclose the appraiser's lack of expertise with respect to hazardous substances, and disclaim the appraiser's responsibility for matters beyond the appraiser's level of expertise.
The following example is offered for illustration only.
Unless otherwise stated in this report, the existence of hazardous substances, including without limitation asbestos, polychlorinated biphenyls, petroleum leakage, or agricultural chemicals, which may or may not be present on the property, or other environmental conditions, were not called to the attention of nor did the appraiser become aware of such during the appraiser's inspection. The appraiser has no knowledge of the existence of such materials on or in the property unless otherwise stated. The appraiser, however, is not qualified to test such substances or conditions. If the presence of such substances, such as asbestos, urea formaldehyde foam insulation, or other hazardous substances or environmental conditions, may affect the value of the property, the value estimated is predicated on the assumption that there is no such condition -on or in the property or in such proximity thereto that it would cause a loss in value. No responsibility is assumed for any such conditions, nor for any expertise or engineering knowledge required to discover them.
There is no suggestion that the preceding statement or any other disclaimer or limiting condition would be appropriate in all jurisdictions and circumstances. Appraisers are advised to consult their own legal counsel for assistance in developing individualized language for limiting conditions statements. Such statements may be considered in determining the extent of the appraiser's liability, if any, in connection with hazardous substances, and in determining whether the appraiser is eligible for errors and omissions liability insurance in connection with appraisals involving the consideration of hazardous substances.
The appraiser should note in the report any condition that is observed during the inspection of the subject property or becomes known to the appraiser through the normal research involved in performing the appraisal which would lead the appraise ~ to believe that hazardous substances may be present in or on the subject property, or is at variance with information or descriptions provided by others.
Unacceptable Practices
In the appraisal of property that requires the consideration of hazardous substances, but where the appraiser does not have the knowledge or experience required to detect the presence of such hazards or to measure the quantities of such hazards, the following practices are unacceptable.
I . Failure to disclose to the client the appraiser's lack of knowledge and experience with respect to the detection and measurement of hazardous substances (See Competency Provision).
2. Failure to take the necessary steps to complete the assignment competently such as personal study by the appraiser, association with another appraiser who has the required knowledge and experience or obtaining the professional assistance of others who possess the required knowledge and experience (See Competency Provision).
In the appraisal of property that is affected by hazardous substances, but where the purpose of the appraisal is to estimate value as if unaffected by hazardous substances, the following practice is unacceptable.
3. Failure to include in the report a qualification that reflects the limited scope of the appraisal, a limiting condition that clearly reveals the fact that the property is ap praised as if unaffected by hazardous substances, an appropriate statement of purpose and properly qualified conclusions (See Departure Provision, S.R. 2- 1 (c) and S.R. 2-2(k)).
4. Failure to report known hazardous substances affecting the property (See S.R. 2- 1 (b) and S.R. 2-2(c)).
In the appraisal of property affected by hazardous substances, if the appraiser relies upon the findings of other professionals with respect to the presence of, and the probable effects of, hazardous substances, the following practice is unacceptable.
5. Failure to acknowledge the professional assistance of others and to name the persons providing the assistance in the certificate (See S.R. 2-3, S.R. 5-3 and S.S.R.
1-2). [Please note: Guide Notes to the Standards of Professional Appraisal Practice are an integral part of the Standards document. Guide Notes illustrate how the requirements of the Standards should be applied. They should not be considered without referring to the Standards of
Professional Practice.] D-24
