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| The Harris Company, Real Estate Appraiser / Consultant 5780 West Centinela Avenue, Building 1, Suite 408 Los Angeles, California 90045 310.337.1973 harris_curtis@sbcglobal.net |
PIRS/ HARRIS COMPANY AND THE SCIENCE OF REAL ESTATE - PARTNERS
REAL ESTATE APPRAISAL
Nature of the Work (U.S. Department of Labor
Bureau of Labor Statistics)
Appraisers and assessors of real estate estimate the value of real property for a variety of
purposes, such as to assess property tax, to determine a sales price, or to determine the
amount of a mortgage that might be granted on a property. They may be called on to determine
the value of any type of real estate, ranging from farmland to a major shopping center, although
they often specialize in appraising or assessing only a certain type of real estate such as
residential buildings or commercial properties. Assessors determine the value of all properties
in a locality for property tax purposes whereas appraisers appraise properties one at a time for
a variety of purposes, such as to determine what a good sale price would be for a home or to
settle an estate or aid in a divorce settlement.
Valuations of all types of real property are conducted using similar methods, regardless of the
type of property or who employs the appraiser or assessor. Appraisers and assessors work in
localities they are familiar with so they have a knowledge of any environmental or other
concerns that may affect the value of a property. They note any unique characteristics of the
property and of the surrounding area, such as a specific architectural style of a building or a
major highway located next to the parcel. They also take into account additional aspects of a
property like the condition of the foundation and roof of a building or any renovations that may
have been done. Additionally, they may take pictures to document a certain room or feature, in
addition to taking pictures of the exterior of the building. After visiting the property, the appraiser
or assessor will determine the fair value of the property by taking into consideration such things
as comparable home sales, lease records, location, previous appraisals, and income potential.
They will then put all of their research and observations together in a detailed report, stating not
only the value of the parcel but the precise reasoning and methodology of how they arrived at the
estimate.
Appraisers have independent clients and focus solely on valuing one property at a time. They
primarily work on a client-to-client basis, and make appraisals for a variety of reasons. Real
property appraisers often specialize by the type of real estate they appraise, such as residential
properties, golf courses, or strip malls. In general, commercial appraisers have the ability to
appraise any real property but may generally only appraise property used for commercial
purposes, such as stores or hotels. Residential appraisers focus on appraising homes or
other residences and only value those that house 1 to 4 families. Other appraisers have a
general practice and value any type of real property.
Assessors predominately work for local governments and are responsible for valuing
properties so a tax formula can be used to assess property taxes. Unlike appraisers,
assessors value entire neighborhoods using mass appraisal techniques to value all the
homes in a local neighborhood at one time. Although they do not usually focus on a single
property they may assess a single property if the property owner challenges the assessment.
They may use a computer-programmed automated valuation model specifically developed for
their assigned jurisdictions. In most jurisdictions the entire community must be revalued
annually or every few years. Depending on the size of the jurisdiction and the number of staff in
an assessor’s office, an appraisal firm, often called a revaluation firm, may do much of the work
of valuing the properties in the jurisdiction. These results are then officially certified by the
assessor.
When properties are reassessed, assessors issue notices of assessments and taxes that
each property owner must pay. Assessors must be current on tax assessment procedures and
must be able to defend their property assessments, either to the owner directly or at a public
hearing, as accurate, since assessors are also responsible for dealing with tax payers who
want to contest their assigned property taxes. Assessors also keep a database of every parcel
in their jurisdiction labeling the property owner, issued tax assessment, and size of the property,
as well as property maps of the jurisdiction that detail the property distribution of the jurisdiction.
Appraisers and assessors write a detailed report of each appraisal. Writing these reports has
become faster and easier through the use of laptop computers, allowing them to access data
and write at least some of the report on-site. Another computer technology which has impacted
this occupation are electronic maps, made by assessor’s offices, of a given jurisdiction and its
respective property distribution. Appraisers and assessors use these maps to obtain an
accurate perspective on the property and buildings surrounding a property. Digital cameras are
also commonly used to document the physical appearance of a building or land at the time of
appraisal, and the pictures are also used in the documentation of the report.
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FannieMae's Property and Appraisal Guidelines—details their general requirements for
analyzing the property appraisal aspects of conventional mortgages secured by one- to four-
family properties. It also discusses special considerations for certain types of housing-units in
condominium, PUD, and cooperative projects; manufactured (and other factory-built) homes;
Community Living group homes; mixed-use properties; properties affected by environmental
hazards; urban properties; affordable housing program properties; properties located in special
assessment or community facilities districts; properties subject to leasehold interests
(including those held by community land trusts); and energy-efficient properties—that merit
special consideration in the property and appraisal review. Because the evaluation of a property
is such a vital part of the risk analysis, they expect a lender to place as much emphasis on
underwriting the property and reviewing the appraisal as it does on underwriting the borrower's
creditworthiness.
They require the appraiser to provide complete and accurate reports; to report neighborhood
and property conditions in factual and specific terms; to be impartial and specific in describing
favorable or unfavorable factors; and to avoid the use of subjective, racial, or stereotypical terms,
phrases, or comments in the appraisal report. The opinion of market value must represent the
appraiser's professional conclusion, based on market data, logical analysis, and judgment.
When the information or methodology of an appraisal requires additional clarification or
justification, the lender's underwriter must obtain from the appraiser any information that is
necessary to make an informed decision concerning the property.
We require that the appraiser and the lender follow appropriate practices in the property
valuation and underwriting processes. Their appraisal standards specifically prohibit the
development of a valuation conclusion that is based on race, color, religion, sex, handicap,
familial status, or national origin. The effectiveness of our property underwriting guidelines is
dependent on the ability of a lender and its appraisers to avoid the use of potentially
discriminatory practices in the property appraisal and underwriting processes.
We hold the lender responsible for the accuracy of both the appraisal and its assessment of the
marketability of the property; therefore, it is important for a lender's underwriters to understand
their role in the appraisal process and their relationship to the appraiser.
• The appraiser's role is to provide the lender with an accurate, and adequately supported,
opinion of value and an accurate description of the property.
• The underwriter's role is to review the appraisal report to assure that it is of professional
quality and is prepared in a way that is consistent with our appraisal standards, to analyze the
property based on the appraisal, and to judge the property's acceptability as security for the
mortgage requested in view of its value and marketability.
These requirements are intended to provide guidance to an underwriter and an appraiser about
the type of information that is needed to make a prudent underwriting decision. They are also
designed to provide our minimum acceptable appraisal standards. We recognize that our
guidelines may not address every appraisal problem; therefore, we allow the appraiser
discretion to properly develop the value opinion. The appraiser must, however, provide sound
reasoning in his or her appraisal report for any decisions he or she makes that are not
specifically covered by our guidelines.
This Part XI consists of four Chapters:
• Chapter 1—Appraiser Qualifications—discusses the lender's responsibility for selecting
appraisers and for reviewing their appraisals both initially and on an on-going basis, the use of
supervisory or review appraisers, and our right not only to refuse to accept appraisals prepared
by specific appraisers, but also to refer unacceptable appraisal reports to the appropriate state
appraiser licensing or regulatory boards for investigation and action.
• Chapter 2—Appraisal (or Property Inspection) Documentation—describes the various
appraisal (or property inspection) report forms that are to be used to document an appraisal (or
property inspection) and any required exhibits to them; discusses requirements related to the
age of an appraisal (or property inspection) report; explains the types of appraisals needed for
new, proposed, and existing construction; and references the various certifications that an
appraiser must make.
• Chapter 3—Special Appraisal Considerations—discusses considerations that should be
given to properties with unusual features, points out the need for properties to meet specific
eligibility criteria in order for the mortgage to be delivered to us, and explains the detrimental
effect that certain environmental conditions can have on a property's value.
• Chapter 4—Reviewing the Appraisal Report—discusses the requirements for analyzing a
property and its appraisal.
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FDIC Law, Regulations, Related Acts § 323.4 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a minimum:
(a) Conform to generally accepted appraisal standards as evidenced by the Uniform
Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Standards
Board of the Appraisal Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless
principles of safe and sound banking require compliance with stricter standards;
(b) Be written and contain sufficient information and analysis to support the institution's
decision to engage in the transaction;
(c) Analyze and report appropriate deductions and discounts for proposed construction or
renovation, partially leased buildings, non-market lease terms, and tract developments with
unsold units;
(d) Be based upon the definition of market value as set forth in this part; and
(e) Be performed by state licensed or certified appraisers in accordance with requirements set
forth in this part. [Codified to 12 C.F.R. § 323.4]
For probate appraisals the appraisal of property in the inventory shall be made by the personal
representative, probate referee, or independent expert
as provided in the probate code
Appraisals for the Los Angeles Word Airport must comply with requirements established by
the City of Los Angeles, the Federal Aviation Administration Audit, and The Uniform Relocation
Assistance and Real Property Acquisition Policies Act of 1970 (The Uniform Act), as amended
(49 CFR Part 24) which is mandatory and establishes the minimum Real Property Acquisition
Policies for Appraisal, Negotiation, and Property Possession Standards and Requirements.
The appraisal is a formal written statement used to determine the fair market rent, and value or
just compensation for purchase of a specific property. The Real Estate Contracting Officer must
determine the appropriate type of appraisal method to be used: No appraisal for property value
less than $2,500, A Value Finding (opinion of value) for properties whose value is estimated to
be $2,500 to $5,000, A Short Form appraisal for non-complex properties regardless of the
estimated purchase price, and finally a Long Form is required for all eminent domain
proceedings regardless of the estimated cost. For the purchase of real property the appraisal
should include a before and after valuation of the property to determine the value of any
severance damage.
According to the “Appraisal Guide:” “Appraisal problems are often encountered by States, local
agencies, and appraisers because there is not a clear understanding of the relationship
between the “Uniform Act” and the appraisal function on Federal or federally-assisted
projects. This guide was developed to assist those involved to avoid potential appraisal
problems.” The major topics covered by the guide are: The “Uniform Act,” the “Appraisal
Formats,” and an “Appraisal Glossary.”
The purpose of the “Uniform Act” is to ensure that all property owners are treated fairly and
uniformly. Appraisal requirements are: 1) Establish just Compensation 2) Disregard
Differentials in Value Due to the Public Improvement 3) Consider the Possibility of Uneconomic
Remnants 4) Separate Damages From Value of Property Taken 5) Appraise All Buildings,
Structures, and Improvements 6) Consideration of Tenant Owned Buildings, Structures, and
Improvements 7) Appraise Equal Interest in All Buildings, Structures, and Improvements and 8)
Separate Tenant Interest in the Appraisal.
Appraisals for the Los Angeles Unified School District must be prepared in compliance with
the Office of Public School Construction (OPSC), site acquisition guidelines. The OPSC is
primarily a funding agency of the State Allocation Board who is responsible for the equitable
allocation of tax dollars. Their basic appraisal criteria are:
(a) The land improvements and appurtenances, excluding fixtures, equipment and personal
property, were appraised in an as is condition.
(b) Consideration in the appraisal was made for net useable acreage and severance damages.
(c) The district or its legal counsel has contracted for the appraisal service.
(d) The appraiser has certified to the district that the appraisal complies with the Uniform
Standards of Professional Appraisal Practice (USPAP) as promulgated by the Appraisal
Standards Board of the Appraisal Foundation.
(e) The amount of a court award for a site acquired in condemnation may be used in lieu of the
appraised value determined in (a) through (d) above, when specifically approved by the Board.
Preparation of appraisals for subsidized housing in compliance with the Uniform Standards of
Professional Appraisal Practice (USPAP) requires knowledge and experience that goes beyond
typical residential competency. Subsidized housing may be defined as single- or multifamily
residential real estate targeted for ownership or occupancy by low- or moderate-income
households as a result of public programs and other financial tools that assist or subsidize the
developer, purchaser, or tenant in exchange for restrictions on use and occupancy. The United
States Department of Housing and Urban Development (HUD) provides the primary definition of
income and asset eligibility standards for low- and moderate-income households. Other
federal, state, and local agencies, like the California Tax Credit Allocation Committee and the
Housing Authority of the City of Los Angeles, may define income eligibility standards for
specific programs and developments under their jurisdictions.
Subsidies and incentives that encourage housing for low- and moderate-income households
may create intangible property rights in addition to real property rights and also create
restrictions that modify real property rights. The appraiser should demonstrate the ability to
discern the differences between the real and intangible property rights and value the various
rights involved. Low-Income Housing Tax Credits (LIHTCs) are an example of an incentive that
results in intangible property rights that are not real property but might be included in the
appraisal. Project-based rent subsidies are an example of a subsidy accompanied by
restrictions that modify real property rights. Appraisers should be aware that tenant-based rent
subsidies do not automatically result in a property right to the owner or developer of subsidized
housing.
In appraisal of subsidized housing, the value definition selected or required by the client and the
reporting techniques should be discussed with the client prior to acceptance of the assignment
because the analyses may be based on general market terms, subsidized housing submarket
financing with unusual conditions or incentives, both, or some other defined premise.
Appraisers should be aware that appraisal of subsidized housing usually requires more than
one value analysis predicated on different scenarios. In appraisal of subsidized housing, value
conclusions that include intangibles arising from the programs will also have to be analyzed
under a scenario without the intangibles in order to measure their influence on value and report
the results without misleading the intended user.
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Service Real Estate Consultant, loan calculator, Real Estate Services, Appraisal Services,
Approved Appraisers, Link Partners, HUD Appraiser, Rehab Consultant, Remodel Consultant
What Is a HUD Appraiser/Appraisal? An appraiser is a professional person who can tell you
what your home is worth. The appraiser will come to your house and list the number and size of
the rooms and any extras, such as a fireplace, porch, pool, or garage. The appraiser will
compare your home and property to other homes that have sold recently with similar features.
The appraiser then estimates that your home might sell for approximately the same amount of
money as similar homes. This is called an "appraisal."
An appraisal is an estimate of what amount of money your home may sell for. It is very different
from a home inspection which will warn you against anything in the new home that should be
fixed. A home inspection must be conducted by a qualified home inspection.
The reason for a Relocation Appraisal is to estimate the market value of a transferee's home
and to provide insight into the client's needs and objectives. Other types of appraisals are done
for the purpose of insurance, mortgage, probate, or taxes. They all have something in common
in that they follow an appraisal process. However, each of these types of appraisal has a
different set of guidelines and procedures to follow; so does the relocation appraisal.
The relocation appraisal has a set of definitions and instructions to appraisers that relate only to
the relocation appraisal. These guidelines differ substantially from the appraisal process for
other types of appraisals. A thorough explanation of these guidelines is included in the
Relocation Appraisal Guide published by the Employee Relocation Council, Washington, D.C.
They direct the appraiser to forecast what the home will sell for in "as is condition" within a
reasonable marketing time. They can also direct the appraiser to estimate the market value
within a specified time frame. Confusion often exists as to the interpretation of market value and
reasonable marketing time. These guidelines may be altered at the direction of the client who
may have supplemental guidelines.
The relocation appraiser is often asked to take time during the inspection to counsel the
transferee on the appraisal process and accept information from the transferee such as "brag
sheets" listing improvements to the home since purchase and a factual record of any recent
sales and listings in the neighborhood which can be verified by the appraiser. The inspection
and counseling often require an hour, during which the appraiser has the opportunity to
communicate credibility and professionalism.
The relocation appraisal does not require a cost approach; however, if the appraiser is going to
submit this report for experience credit it is suggested that a cost approach be completed and
kept in the appraiser's file for future review by an Admissions Committee. (Note: the Employee
Relocation Appraisal Report that was revised in 1994 and is currently being used in the
industry, has the correct departures from the Uniform Standards of Professional Appraisal
Practice)
Another way in which a relocation appraisal differs from a mortgage appraisal is the appraisal
review process. An appraiser who accepts a relocation appraisal assignment must be
prepared to take the time to write a competent report, discuss the report with the client, and be
responsive to the client's questions. Requests for review of the factual data presented by the
transferee or data reported in another appraiser's report is part of the relocation appraisal
process. The appraiser is not being asked to change his value, but merely to review additional
data to determine if it could have an impact on his original value conclusion.
The appraiser must be educated in relocation appraising and willing to devote the extra time
required for answering client questions about his report. The appraiser must be aware that two
to five appraisal reports are being reviewed and discrepancies often occur. The questions are
asked for clarification, edification, and corrections since the reports are further reviewed by
corporate relocation personnel and, ultimately, the transferee.
Reprinted with permission from
The Society of Real Estate Appraisers, Fall 1990 Journal
225 North Michigan Avenue, Suite 724
Chicago, Illinois 60601-7601
THE COST SEGREGATION AUDIT TECHNIQUES GUIDE
This ATG has been developed to assist Internal Revenue Service (Service) examiners in the
review and examination of cost segregation studies. The primary goals are to provide
examiners with an understanding of
why cost segregation studies are performed for federal income tax purposes;
how cost segregation studies are prepared; and,
what to look for in the review and examination of these studies.
The ATG was developed by a cross-functional team of Service engineers and agents and is not
intended as an official IRS pronouncement. Accordingly, it may not be cited as authority.
BACKGROUND
In order to calculate depreciation for Federal income tax purposes, taxpayers must use the
correct method and proper recovery period for each asset or property owned. Property, whether
acquired or constructed, often consists of numerous asset types with different recovery periods.
Thus, property must be separated into individual components or asset groups having the same
recovery periods and placed-in-service dates in order to properly compute depreciation.
When the actual cost of each individual component is available, this is a rather simple
procedure. However, when only lump-sum costs are available, cost estimating techniques may
be required to "segregate" or "allocate" costs to individual components of property (e.g., land,
land improvements, buildings, equipment, furniture and fixtures, etc.). This type of analysis is
generally called a "cost segregation study," "cost segregation analysis," or "cost allocation
study."
In recent years, increasing numbers of taxpayers have submitted either original tax returns or
claims for refund with depreciation deductions based on cost segregation studies. The
underlying incentive for preparing these studies for federal income tax purposes is the
significant tax benefits derived from utilizing shorter recovery periods and accelerated
depreciation methods for computing depreciation deductions. The issues for Service examiners
are the rationale used to segregate property into its various components, and the methods
used to allocate the total project costs among these components.
The most common situation is the allocation or reallocation of building costs to tangible
personal property. A building, termed "section (§) 1250 property", is generally 39-year property
eligible for straight-line depreciation. Equipment, furniture and fixtures, termed "section (§) 1245
property", are tangible personal property. Tangible personal property has a short recovery period
(e.g., 5 or 7 years) and is also eligible for accelerated depreciation (e.g., double declining
balance). Thus, a faster depreciation write-off (and tax benefit) can be obtained by allocating
property costs to § 1245 property, or by reallocating § 1250 property costs to § 1245 property.
A simple example illustrates the tax benefits of a cost segregation study. In general, a turnkey
construction project includes elements of tangible personal property (e.g., phone system,
computer system, process piping, storage tanks). It is relatively easy to identify these items as §
1245 property and allocate a portion of the total project costs to them. However, a cost
segregation study may also report certain building occupancy items, such as carpeting, wall
coverings, partitions, millwork, lighting fixtures, suspended ceilings, doors, as § 1245 property.
These items may or may not constitute qualifying § 1245 property depending on particular facts
and circumstances, such as the location of the assets and the specific activities for which the
project was designed.
In addition to identifying specific project components that qualify as § 1245 property, cost
segregation studies may treat portions of building components as § 1245 property. For
example, a study may conclude that 15 percent of a building’s electrical system directly
supports § 1245 property, such as specialized kitchen equipment. Based on that conclusion,
the study will then treat 15 percent of the electrical system as § 1245 property. The allocation of
building components to § 1245 property is often a contentious issue.
Property allocations and reallocations are typically based on criteria established under the
Investment Tax Credit (ITC). A plethora of legislative acts, court decisions and Service rulings
have produced complex and often conflicting guidance with respect to property qualifying for ITC,
resulting in no bright-line tests for distinguishing § 1245 property from § 1250 property. Related
issues, such as the capitalization of interest and production costs under IRC § 263A and
changes in accounting method, add to the complexity of this issue.
In a recent landmark decision, the Tax Court ruled that, to the extent tangible personal property
is included in an acquisition or in overall costs, it should be treated as such for depreciation
purposes. The court also decided that the rules for determining whether property qualifies as
tangible personal property for purposes of ITC (under pre-1981 tax law) are also applicable to
determining depreciation under current law. [See Hospital Corporation of America, 109 T.C. 21
(1997)] The Service acquiesced to the use of ITC rules for distinguishing § 1245 property from §
1250 property.
Based on these developments, the use of cost segregation studies will likely continue to
increase. Unfortunately, there are no standards regarding the preparation of these studies.
Accordingly, studies vary widely in terms of the methodology, documentation, depth, format, and
expertise of the study’s preparer. This lack of consistency, coupled with the complexity of the law
in this area, often results in an examination that is controversial and burdensome for all parties.
Examiners reviewing cost segregation studies must determine the proper classification and
correct costs of property. In some cases (e.g., small projects) examiners may be able to
evaluate a study without assistance. However, other studies may require specialists with
expertise, industry experience and specialized training (e.g., Engineers, Computer Audit
Specialists and/or Technical Advisors). Examiners should perform a risk analysis as early as
possible to determine the depth of an exam and the need for assistance.
SUMMARY AND CONCLUSIONS
Depreciation issues involving cost segregation studies cross all LMSB industry lines and
impact SB/SE taxpayers as well. The lack of consistency in cost segregation studies and the
absence of bright-line tests for distinguishing property contribute to the difficulties of this issue.
The purpose of this ATG is to provide the foundation to a better understanding of cost
segregation studies and to provide the examination steps that will facilitate the audit process
and minimize burden on taxpayers, practitioners and Service examiners alike.
EXPERT WITNESS
Over the years we have worked on numerous projects which were tied to a judicial mandate.
They include dissolution of marriage proceedings, property tax disputes, inheritance tax liability
disputes, probates, and acquisitions by eminent domain. To our credit all, but one, was settled
prior to trial with one requiring a deposition hearing.
Our one court appearance was in the Superior Court, State of California-Compton Judicial
District, July 1999. We provided plaintiff expert witness testimony in an inverse condemnation
case.
PROPERTY ACQUISITION PROCESS-EMINENT DOMAIN
In the event that eminent domain is necessary, the Agency is required as a public agency to
follow a process prescribed in state law before a property can be condemned. At present, the
process
involves the following major steps and actions:
If property is offered for sale (by owner or through a broker/agent) the Agency may discuss
and negotiate the purchase with the owner (or broker/agent) as any other buyer.
If the property is not for sale but the Agency is interested in buying the property, the Agency
must undertake certain steps before it can acquire the property:
The Agency must appraise the property. A written “notice to appraise” must be sent to the
property owner and the property owner has the right to accompany the appraiser on a site
visit.
If the Agency decides to make an offer, the Agency must offer the appraised value and
provide the property owner with certain information concerning how the appraised price
was determined.
The Agency must offer to pay the reasonable costs, not to exceed $5,000, of an
independent appraisal ordered by the owner of the property that the Agency offers to
purchase under a threat of eminent domain, as specified, at the time the Agency makes
the offer to purchase the property.
Once the offer is made, the Agency and property owner are to negotiate for a reasonable
period of time, usually up to 30 days, to see if the parties can arrive at a negotiated
agreement.
If a negotiated agreement cannot be reached, the Agency cannot acquire the property
unless the Agency has current condemnation authority in its Redevelopment Plan.
If the Agency has condemnation authority and desires to consider acquisition by
condemnation, the Agency must first hold a hearing and give notice of that hearing to the
property owner who has the right to appear and be heard concerning the proposed
acquisition by condemnation.
If after the conclusion of the hearing the Agency desires to proceed with the acquisition by
condemnation, it cannot do so unless it adopts, by a 2/3 “super majority” of the Agency
board, a “resolution of necessity” that identifies the public use for the property and make
other findings required by California Eminent Domain Law.
If the resolution of necessity is adopted, the Agency may then proceed to file a court action
seeking acquisition of the property by condemnation, but must also at that time deposit in
court the full amount of probable compensation to be paid to the property owner (normally
the appraised value).
SENATE BILL 53 PROGRAM
Newhall Redevelopment Project
Page 6
The Agency, when it files the condemnation action or later, may seek an order of
possession so it can gain possession of the property while the litigation proceeds
concerning the value of the property. The owner may also challenge the Agency’s right to
use its condemnation authority.
The condemnation litigation then proceeds until its conclusion (or until a settlement is
reached).
If a court finds, on motion of the defendant, that the offer of the Agency was unreasonable
and the offer of the defendant was reasonable in light of the evidence admitted and the
compensation awarded in the proceeding, then the costs allowed shall include the
defendant’s litigation expenses. Litigation expenses are defined in Section 1250.410 (e) as
“the party’s reasonable attorney’s fees and costs, including reasonable expert witness and
appraiser fees.”
Because condemnation involves purchasing private property for a public purpose, federal
and state laws offer the following benefits to the owner whose property is acquired through
condemnation:
The redevelopment agency must pay cash unless the owner desires otherwise.
The property owner receives certain tax benefits, such as a right to reinvest the sale
proceeds within 2 calendar years (3 years for business property) before incurring
capital gains liabilities, and the property owner may transfer the assessed value of the
property purchased through condemnation to a new property acquired by the property
owner, provided that the value of the new property does not exceed 110% of the
value of the condemned property.
APPRAISAL REVIEW
Federal and State Laws, and Contractual Agreements precludes the communication of our work
product to unauthorized parties. In lieu of an actual Review Report I feel it is worth stating that
an appraisal review is not an easy assignment. It is exceedingly important for a “Reviewer” to
have a broad base of experience and education, dependance on affiliation with a particular
trade/professional association for review or other assignments is unwise.
We have designed a process to establish an amicable, communicative relationship between us
and the appraiser under review. We stick to the facts and support every observed deficiency
with a Citation and Supporting Documentation, WE DO NOT PROVIDE UNSUBSTANTIATED
OPINIONS OR INTERPRETATIONS (USPAP, Standards Rule 3-1.f & g, 1347, 1348 and 1351: ...
and develop the reasons for any disagreement). For example, an appraiser who has used an
incorrect legal description would be notified of this fact, given the appropriate Citation from
USPAP or the applicable regulation then provided the correct description contained in the
vesting document or similar available document. It goes without saying that “time is of the
essence.” We have found that this process works extremely well in the expeditious completion
of our Review Assignments; typically within one week.
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REAL PROPERTY INSPECTIONS
A recent addition to our Appraisal Practice is incorporation of the American Society for Testing
Materials (ASTM) E-2018 Commercial Inspection Protocol into each and every Multi Family
Residential, Commercial, and Industrial Appraisal Report, upon request. The purpose of this
protocol is to define a good commercial and customary practice in the United States of America
for conducting a baseline Property Condition Assessment (PCA) of the improvements located
on a parcel of residential, commercial, or industrial real estate. The process is performed by a
walk-through survey/inspection, and conducting research, as outlined within the ASTM E-2018
guide. The goal is to identify and communicate physical deficiencies to a user. Physical
deficiencies are the presence of conspicuous defects or material deferred maintenance on a
subject property’s material systems, components, or equipment as observed during the field
observer’s walk-through survey/inspection. This standard specifically excludes deficiencies that
may be remedied with routine maintenance, miscellaneous minor repairs, normal operating
maintenance, and de minims conditions that generally do not represent material physical
deficiencies of the property.
The scope of the standard includes a document review, independent research, and personal
interviews which augment the walk-through survey/inspection. The work product resulting from
completing a PCA in accordance with the ASTM E-2018 standard is a Property Condition
Report (PCR). The PCR incorporates the information obtained during the Walk-Through
Survey, the Document Review and Interviews, and includes opinions of probable costs for
suggested remedies of the physical deficiencies identified. The objective of the walk through
inspection is to visually observe the subject property so as to obtain information on material
systems and components for the purposes of providing a brief description, identifying physical
deficiencies to the extent that they are observable, and obtain information needed to address
issues in the PCR. The purpose of the document review and interviews is to assist with the
consultant’s understanding of the subject property and identification of physical deficiencies.
Our goal, once again, is to be the leader in our industry by continuously improving our work
product.
Instructions For Preparing The Multifamily Property Inspection & Evaluation Report (Form
4255) This Form 4255 should be completed by the servicer. It should be submitted to Fannie
Mae within 30 days of completion of each
annual physical inspection and at such other times as Fannie Mae requires.
General Instructions Before visiting the site, obtain and review:
• a current Certification to Project Rent Roll (Form 4243)
• a copy of the previous Multifamily Property Inspection and Evaluation Report
While at the site:
• inspect all vacant units
• inspect the lesser of 20 occupied units or 5 percent of the occupied units, if possible
• inspect units of each unit type
• see enough of the project to assess how the Property is being maintained
• take 5-10 representative color photographs of the buildings, units, and features inspected
• take photographs of extraordinary items requiring repair, maintenance, or replacement
• interview the property manager and other on-site staff to follow-up on maintenance items
noted on the last Multifamily
Property Inspection and Evaluation Report and to get feedback on the Property’s condition and
performance After conducting each annual inspection and completing Form 4255, submit the
original of the form along with a copy of the
Certification to Project Rent Roll (Form 4243), and a representative set of photographs to
Multifamily Operations - Asset Management at the following address:
Fannie Mae
Multifamily Operations - Asset Management
Drawer #AM
3900 Wisconsin Avenue, NW
Washington, DC 20016
Inspection Resource Center
Periodic physical property inspections are a critical component of oversight and maintenance of
commercial and multifamily properties. Mortgage Bankers Association (MBA) has worked
with industry leaders to help increase the level of communication, standardization of reporting
and the quality of the review for property inspections.
In 2005, Mortgage Bankers Association (MBA) adopted new inspector qualifications best
practices, which require adequate training and experience for all those professionals inspecting
properties financed by Fannie Mae and Freddie Mac.
MBA will continue to work with the members on property inspections in 2006.
Detrimental conditions cause over $50 billion in damages annually, and this figure is
consistently rising. Some cite the fact that much of today’s developments are in areas that were
once considered too risky because of soil conditions, access, proximity to airports, jails or
prisons, or for other reasons. The Real Estate Disclosure Report was developed as a
comprehensive process to report on the myriad of issues that may be important to the property
owner, lender, or other client, so that the user of the disclosed data has a clear picture of the
property’s condition and environs. We are one of a very few companies, nation wide, certified by
the Appraisal Institute to prepare Real Estate Disclosure Reports (RED Reports).
The RED Report does not put a dollar figure on any conditions. A proper disclosure report
simply informs the user of the report that certain conditions are known or believed to exist, but is
not a guarantee or substitute for a cost study. The conditions may have no impact on value
whatsoever. Items of disclosure include: General Conditions, Transactional Conditions, Market
Conditions, Distress or Tragic Conditions (Crime, Deaths, etc.), Imposed Conditions (Zoning,
CC&R’s, etc.), Building Conditions, Soils Conditions, Environmental Conditions, Natural
Conditions (Earthquake, Endangered Species, etc.), and Hazardous Conditions.
INITIAL INSPECTIONS 1950.5 (f)(1)-Within a reasonable time after notification of either party's
intention to terminate the tenancy, or before the end of the lease term, the landlord shall notify
the tenant in writing of his or her option to request an initial inspection and of his or her right to
be present at the inspection.
In 1999 we were Certified as Contract Physical Inspectors, for the “NIC” and “BIC” Contracts,
by the Real Estate Assessment Center (REAC), a newly formed agency of HUD. REAC is
responsible for obtaining physical inspection and financial information for HUD-insured and
assisted housing. The purpose of the Inspection Program is to inspect properties with HUD-
held mortgages, properties for which HUD acts as the Section 8 contract administrator, and
properties owned by Public Housing Agencies. HUD published a final rule that established
uniform physical condition standards for public housing and housing that was insured and/or
assisted under certain HUD properties. These standards are intended to ensure that this
housing is decent, safe, sanitary, and in good repair.
REHAB CONSULTATIONS
The Federal Housing Administration (FHA), which is part of the Department of Housing and
Urban Development (HUD), administers various single family mortgage insurance programs.
These programs operate through FHA-approved lending institutions which submit applications
to have the property appraised and have the buyer's credit approved. These lenders fund the
mortgage loans which the Department insures. HUD does not make direct loans to help people
buy homes.
The Section 203(k) program is the Department's primary program for the rehabilitation and
repair of single family properties. As such, it is an important tool for community and
neighborhood revitalization and for expanding homeownership opportunities. Since these are
the primary goals of HUD, the Department believes that Section 203(k) is an important program
and we intend to continue to strongly support the program and the lenders that participate in it.
Many lenders have successfully used the Section 203(k) program in partnership with state and
local housing agencies and nonprofit organizations to rehabilitate properties. These lenders,
along with state and local government agencies, have found ways to combine Section 203(k)
with other financial resources, such as HUD's HOME, HOPE, and Community Development
Block Grant Programs, to assist borrowers. Several state housing finance agencies have
designed programs, specifically for use with Section 203(k) and some lenders have also used
the expertise of local housing agencies and nonprofit organizations to help manage the
rehabilitation processing.
The Department also believes that the Section 203(k) program is an excellent means for
lenders to demonstrate their commitment to lending in lower income communities and to help
meet their responsibilities under the Community Reinvestment Act (CRA). HUD is committed to
increasing homeownership opportunities for families in these communities and Section 203(k)
is an excellent product for use with CRA-type lending programs.
If you have questions about the 203(k) program or are interested in getting a 203(k) insured
mortgage loan, we suggest that you get in touch with an FHA-approved lender in your area or
the Homeownership Center in your area.
Housing rehabilitation is an important component of any strategy aimed at meeting the nation's
affordable housing needs. Keeping a home in good working order or bringing one back from a
state of disrepair promotes both sustainability and affordability with every stroke of the hammer
and every plumb line snap. Pursuing a high quality rehab or renovation can also result in
homes that are
better able to withstand storms and other natural disasters.
DISCOUNT REAL ESTATE BROKER
Full Service - Discounted Fees
(Maximum broker commission 4%)
Six-Percent Real Estate Broker Business Model
Services: Broker Only
Agents: Four (4)
Commissions Paid by Seller: Four (4)
Royalties to Franchiser: Varies
Savings: None
Our Discount, Real Estate Broker Business Model
Services: Broker, Appraiser, Loan Broker, Attorney Referral
Agents: One (1)
Commissions Paid By Seller: One (1)
Royalties to Franchiser: None (0)
Savings: Minimum Two-Percent (2%)
REAL ESTATE CONSULTATIONS
Consulting is a unique real estate specialty. It is not considered a specific discipline with a
defined body of knowledge, such as brokerage, manager, or appraisal. Rather, real estate
consulting is a process—one that requires technical competency, thoughtful analysis, and
critical inquiry, all of which are directed toward achieving the best results for a client or
employer. At a minimum your consultant should have a Real Estate Brokers Licence, a
General Appraisal Licence and basic understanding of Architectural Systems, Construction
Methods and Inspection Techniques.
A of Real Estate Consultant serves as the link between defining the problem and devising a
solution, or measurable economic value. Essential to the consulting process is the trust and
confidence that prevails in the client or employer relationship. No matter the property type, real
estate decision makers call upon the Consultants in-depth knowledge for a breadth of services
including:
Nature of the Work (U.S. Department of Labor
Bureau of Labor Statistics)
Appraisers and assessors of real estate estimate the value of real property for a variety of
purposes, such as to assess property tax, to determine a sales price, or to determine the
amount of a mortgage that might be granted on a property. They may be called on to determine
the value of any type of real estate, ranging from farmland to a major shopping center, although
they often specialize in appraising or assessing only a certain type of real estate such as
residential buildings or commercial properties. Assessors determine the value of all properties
in a locality for property tax purposes whereas appraisers appraise properties one at a time for
a variety of purposes, such as to determine what a good sale price would be for a home or to
settle an estate or aid in a divorce settlement.
Valuations of all types of real property are conducted using similar methods, regardless of the
type of property or who employs the appraiser or assessor. Appraisers and assessors work in
localities they are familiar with so they have a knowledge of any environmental or other
concerns that may affect the value of a property. They note any unique characteristics of the
property and of the surrounding area, such as a specific architectural style of a building or a
major highway located next to the parcel. They also take into account additional aspects of a
property like the condition of the foundation and roof of a building or any renovations that may
have been done. Additionally, they may take pictures to document a certain room or feature, in
addition to taking pictures of the exterior of the building. After visiting the property, the appraiser
or assessor will determine the fair value of the property by taking into consideration such things
as comparable home sales, lease records, location, previous appraisals, and income potential.
They will then put all of their research and observations together in a detailed report, stating not
only the value of the parcel but the precise reasoning and methodology of how they arrived at the
estimate.
Appraisers have independent clients and focus solely on valuing one property at a time. They
primarily work on a client-to-client basis, and make appraisals for a variety of reasons. Real
property appraisers often specialize by the type of real estate they appraise, such as residential
properties, golf courses, or strip malls. In general, commercial appraisers have the ability to
appraise any real property but may generally only appraise property used for commercial
purposes, such as stores or hotels. Residential appraisers focus on appraising homes or
other residences and only value those that house 1 to 4 families. Other appraisers have a
general practice and value any type of real property.
Assessors predominately work for local governments and are responsible for valuing
properties so a tax formula can be used to assess property taxes. Unlike appraisers,
assessors value entire neighborhoods using mass appraisal techniques to value all the
homes in a local neighborhood at one time. Although they do not usually focus on a single
property they may assess a single property if the property owner challenges the assessment.
They may use a computer-programmed automated valuation model specifically developed for
their assigned jurisdictions. In most jurisdictions the entire community must be revalued
annually or every few years. Depending on the size of the jurisdiction and the number of staff in
an assessor’s office, an appraisal firm, often called a revaluation firm, may do much of the work
of valuing the properties in the jurisdiction. These results are then officially certified by the
assessor.
When properties are reassessed, assessors issue notices of assessments and taxes that
each property owner must pay. Assessors must be current on tax assessment procedures and
must be able to defend their property assessments, either to the owner directly or at a public
hearing, as accurate, since assessors are also responsible for dealing with tax payers who
want to contest their assigned property taxes. Assessors also keep a database of every parcel
in their jurisdiction labeling the property owner, issued tax assessment, and size of the property,
as well as property maps of the jurisdiction that detail the property distribution of the jurisdiction.
Appraisers and assessors write a detailed report of each appraisal. Writing these reports has
become faster and easier through the use of laptop computers, allowing them to access data
and write at least some of the report on-site. Another computer technology which has impacted
this occupation are electronic maps, made by assessor’s offices, of a given jurisdiction and its
respective property distribution. Appraisers and assessors use these maps to obtain an
accurate perspective on the property and buildings surrounding a property. Digital cameras are
also commonly used to document the physical appearance of a building or land at the time of
appraisal, and the pictures are also used in the documentation of the report.
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FannieMae's Property and Appraisal Guidelines—details their general requirements for
analyzing the property appraisal aspects of conventional mortgages secured by one- to four-
family properties. It also discusses special considerations for certain types of housing-units in
condominium, PUD, and cooperative projects; manufactured (and other factory-built) homes;
Community Living group homes; mixed-use properties; properties affected by environmental
hazards; urban properties; affordable housing program properties; properties located in special
assessment or community facilities districts; properties subject to leasehold interests
(including those held by community land trusts); and energy-efficient properties—that merit
special consideration in the property and appraisal review. Because the evaluation of a property
is such a vital part of the risk analysis, they expect a lender to place as much emphasis on
underwriting the property and reviewing the appraisal as it does on underwriting the borrower's
creditworthiness.
They require the appraiser to provide complete and accurate reports; to report neighborhood
and property conditions in factual and specific terms; to be impartial and specific in describing
favorable or unfavorable factors; and to avoid the use of subjective, racial, or stereotypical terms,
phrases, or comments in the appraisal report. The opinion of market value must represent the
appraiser's professional conclusion, based on market data, logical analysis, and judgment.
When the information or methodology of an appraisal requires additional clarification or
justification, the lender's underwriter must obtain from the appraiser any information that is
necessary to make an informed decision concerning the property.
We require that the appraiser and the lender follow appropriate practices in the property
valuation and underwriting processes. Their appraisal standards specifically prohibit the
development of a valuation conclusion that is based on race, color, religion, sex, handicap,
familial status, or national origin. The effectiveness of our property underwriting guidelines is
dependent on the ability of a lender and its appraisers to avoid the use of potentially
discriminatory practices in the property appraisal and underwriting processes.
We hold the lender responsible for the accuracy of both the appraisal and its assessment of the
marketability of the property; therefore, it is important for a lender's underwriters to understand
their role in the appraisal process and their relationship to the appraiser.
• The appraiser's role is to provide the lender with an accurate, and adequately supported,
opinion of value and an accurate description of the property.
• The underwriter's role is to review the appraisal report to assure that it is of professional
quality and is prepared in a way that is consistent with our appraisal standards, to analyze the
property based on the appraisal, and to judge the property's acceptability as security for the
mortgage requested in view of its value and marketability.
These requirements are intended to provide guidance to an underwriter and an appraiser about
the type of information that is needed to make a prudent underwriting decision. They are also
designed to provide our minimum acceptable appraisal standards. We recognize that our
guidelines may not address every appraisal problem; therefore, we allow the appraiser
discretion to properly develop the value opinion. The appraiser must, however, provide sound
reasoning in his or her appraisal report for any decisions he or she makes that are not
specifically covered by our guidelines.
This Part XI consists of four Chapters:
• Chapter 1—Appraiser Qualifications—discusses the lender's responsibility for selecting
appraisers and for reviewing their appraisals both initially and on an on-going basis, the use of
supervisory or review appraisers, and our right not only to refuse to accept appraisals prepared
by specific appraisers, but also to refer unacceptable appraisal reports to the appropriate state
appraiser licensing or regulatory boards for investigation and action.
• Chapter 2—Appraisal (or Property Inspection) Documentation—describes the various
appraisal (or property inspection) report forms that are to be used to document an appraisal (or
property inspection) and any required exhibits to them; discusses requirements related to the
age of an appraisal (or property inspection) report; explains the types of appraisals needed for
new, proposed, and existing construction; and references the various certifications that an
appraiser must make.
• Chapter 3—Special Appraisal Considerations—discusses considerations that should be
given to properties with unusual features, points out the need for properties to meet specific
eligibility criteria in order for the mortgage to be delivered to us, and explains the detrimental
effect that certain environmental conditions can have on a property's value.
• Chapter 4—Reviewing the Appraisal Report—discusses the requirements for analyzing a
property and its appraisal.
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FDIC Law, Regulations, Related Acts § 323.4 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a minimum:
(a) Conform to generally accepted appraisal standards as evidenced by the Uniform
Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Standards
Board of the Appraisal Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless
principles of safe and sound banking require compliance with stricter standards;
(b) Be written and contain sufficient information and analysis to support the institution's
decision to engage in the transaction;
(c) Analyze and report appropriate deductions and discounts for proposed construction or
renovation, partially leased buildings, non-market lease terms, and tract developments with
unsold units;
(d) Be based upon the definition of market value as set forth in this part; and
(e) Be performed by state licensed or certified appraisers in accordance with requirements set
forth in this part. [Codified to 12 C.F.R. § 323.4]
For probate appraisals the appraisal of property in the inventory shall be made by the personal
representative, probate referee, or independent expert
as provided in the probate code
Appraisals for the Los Angeles Word Airport must comply with requirements established by
the City of Los Angeles, the Federal Aviation Administration Audit, and The Uniform Relocation
Assistance and Real Property Acquisition Policies Act of 1970 (The Uniform Act), as amended
(49 CFR Part 24) which is mandatory and establishes the minimum Real Property Acquisition
Policies for Appraisal, Negotiation, and Property Possession Standards and Requirements.
The appraisal is a formal written statement used to determine the fair market rent, and value or
just compensation for purchase of a specific property. The Real Estate Contracting Officer must
determine the appropriate type of appraisal method to be used: No appraisal for property value
less than $2,500, A Value Finding (opinion of value) for properties whose value is estimated to
be $2,500 to $5,000, A Short Form appraisal for non-complex properties regardless of the
estimated purchase price, and finally a Long Form is required for all eminent domain
proceedings regardless of the estimated cost. For the purchase of real property the appraisal
should include a before and after valuation of the property to determine the value of any
severance damage.
According to the “Appraisal Guide:” “Appraisal problems are often encountered by States, local
agencies, and appraisers because there is not a clear understanding of the relationship
between the “Uniform Act” and the appraisal function on Federal or federally-assisted
projects. This guide was developed to assist those involved to avoid potential appraisal
problems.” The major topics covered by the guide are: The “Uniform Act,” the “Appraisal
Formats,” and an “Appraisal Glossary.”
The purpose of the “Uniform Act” is to ensure that all property owners are treated fairly and
uniformly. Appraisal requirements are: 1) Establish just Compensation 2) Disregard
Differentials in Value Due to the Public Improvement 3) Consider the Possibility of Uneconomic
Remnants 4) Separate Damages From Value of Property Taken 5) Appraise All Buildings,
Structures, and Improvements 6) Consideration of Tenant Owned Buildings, Structures, and
Improvements 7) Appraise Equal Interest in All Buildings, Structures, and Improvements and 8)
Separate Tenant Interest in the Appraisal.
Appraisals for the Los Angeles Unified School District must be prepared in compliance with
the Office of Public School Construction (OPSC), site acquisition guidelines. The OPSC is
primarily a funding agency of the State Allocation Board who is responsible for the equitable
allocation of tax dollars. Their basic appraisal criteria are:
(a) The land improvements and appurtenances, excluding fixtures, equipment and personal
property, were appraised in an as is condition.
(b) Consideration in the appraisal was made for net useable acreage and severance damages.
(c) The district or its legal counsel has contracted for the appraisal service.
(d) The appraiser has certified to the district that the appraisal complies with the Uniform
Standards of Professional Appraisal Practice (USPAP) as promulgated by the Appraisal
Standards Board of the Appraisal Foundation.
(e) The amount of a court award for a site acquired in condemnation may be used in lieu of the
appraised value determined in (a) through (d) above, when specifically approved by the Board.
Preparation of appraisals for subsidized housing in compliance with the Uniform Standards of
Professional Appraisal Practice (USPAP) requires knowledge and experience that goes beyond
typical residential competency. Subsidized housing may be defined as single- or multifamily
residential real estate targeted for ownership or occupancy by low- or moderate-income
households as a result of public programs and other financial tools that assist or subsidize the
developer, purchaser, or tenant in exchange for restrictions on use and occupancy. The United
States Department of Housing and Urban Development (HUD) provides the primary definition of
income and asset eligibility standards for low- and moderate-income households. Other
federal, state, and local agencies, like the California Tax Credit Allocation Committee and the
Housing Authority of the City of Los Angeles, may define income eligibility standards for
specific programs and developments under their jurisdictions.
Subsidies and incentives that encourage housing for low- and moderate-income households
may create intangible property rights in addition to real property rights and also create
restrictions that modify real property rights. The appraiser should demonstrate the ability to
discern the differences between the real and intangible property rights and value the various
rights involved. Low-Income Housing Tax Credits (LIHTCs) are an example of an incentive that
results in intangible property rights that are not real property but might be included in the
appraisal. Project-based rent subsidies are an example of a subsidy accompanied by
restrictions that modify real property rights. Appraisers should be aware that tenant-based rent
subsidies do not automatically result in a property right to the owner or developer of subsidized
housing.
In appraisal of subsidized housing, the value definition selected or required by the client and the
reporting techniques should be discussed with the client prior to acceptance of the assignment
because the analyses may be based on general market terms, subsidized housing submarket
financing with unusual conditions or incentives, both, or some other defined premise.
Appraisers should be aware that appraisal of subsidized housing usually requires more than
one value analysis predicated on different scenarios. In appraisal of subsidized housing, value
conclusions that include intangibles arising from the programs will also have to be analyzed
under a scenario without the intangibles in order to measure their influence on value and report
the results without misleading the intended user.
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What Is a HUD Appraiser/Appraisal? An appraiser is a professional person who can tell you
what your home is worth. The appraiser will come to your house and list the number and size of
the rooms and any extras, such as a fireplace, porch, pool, or garage. The appraiser will
compare your home and property to other homes that have sold recently with similar features.
The appraiser then estimates that your home might sell for approximately the same amount of
money as similar homes. This is called an "appraisal."
An appraisal is an estimate of what amount of money your home may sell for. It is very different
from a home inspection which will warn you against anything in the new home that should be
fixed. A home inspection must be conducted by a qualified home inspection.
The reason for a Relocation Appraisal is to estimate the market value of a transferee's home
and to provide insight into the client's needs and objectives. Other types of appraisals are done
for the purpose of insurance, mortgage, probate, or taxes. They all have something in common
in that they follow an appraisal process. However, each of these types of appraisal has a
different set of guidelines and procedures to follow; so does the relocation appraisal.
The relocation appraisal has a set of definitions and instructions to appraisers that relate only to
the relocation appraisal. These guidelines differ substantially from the appraisal process for
other types of appraisals. A thorough explanation of these guidelines is included in the
Relocation Appraisal Guide published by the Employee Relocation Council, Washington, D.C.
They direct the appraiser to forecast what the home will sell for in "as is condition" within a
reasonable marketing time. They can also direct the appraiser to estimate the market value
within a specified time frame. Confusion often exists as to the interpretation of market value and
reasonable marketing time. These guidelines may be altered at the direction of the client who
may have supplemental guidelines.
The relocation appraiser is often asked to take time during the inspection to counsel the
transferee on the appraisal process and accept information from the transferee such as "brag
sheets" listing improvements to the home since purchase and a factual record of any recent
sales and listings in the neighborhood which can be verified by the appraiser. The inspection
and counseling often require an hour, during which the appraiser has the opportunity to
communicate credibility and professionalism.
The relocation appraisal does not require a cost approach; however, if the appraiser is going to
submit this report for experience credit it is suggested that a cost approach be completed and
kept in the appraiser's file for future review by an Admissions Committee. (Note: the Employee
Relocation Appraisal Report that was revised in 1994 and is currently being used in the
industry, has the correct departures from the Uniform Standards of Professional Appraisal
Practice)
Another way in which a relocation appraisal differs from a mortgage appraisal is the appraisal
review process. An appraiser who accepts a relocation appraisal assignment must be
prepared to take the time to write a competent report, discuss the report with the client, and be
responsive to the client's questions. Requests for review of the factual data presented by the
transferee or data reported in another appraiser's report is part of the relocation appraisal
process. The appraiser is not being asked to change his value, but merely to review additional
data to determine if it could have an impact on his original value conclusion.
The appraiser must be educated in relocation appraising and willing to devote the extra time
required for answering client questions about his report. The appraiser must be aware that two
to five appraisal reports are being reviewed and discrepancies often occur. The questions are
asked for clarification, edification, and corrections since the reports are further reviewed by
corporate relocation personnel and, ultimately, the transferee.
Reprinted with permission from
The Society of Real Estate Appraisers, Fall 1990 Journal
225 North Michigan Avenue, Suite 724
Chicago, Illinois 60601-7601
THE COST SEGREGATION AUDIT TECHNIQUES GUIDE
This ATG has been developed to assist Internal Revenue Service (Service) examiners in the
review and examination of cost segregation studies. The primary goals are to provide
examiners with an understanding of
why cost segregation studies are performed for federal income tax purposes;
how cost segregation studies are prepared; and,
what to look for in the review and examination of these studies.
The ATG was developed by a cross-functional team of Service engineers and agents and is not
intended as an official IRS pronouncement. Accordingly, it may not be cited as authority.
BACKGROUND
In order to calculate depreciation for Federal income tax purposes, taxpayers must use the
correct method and proper recovery period for each asset or property owned. Property, whether
acquired or constructed, often consists of numerous asset types with different recovery periods.
Thus, property must be separated into individual components or asset groups having the same
recovery periods and placed-in-service dates in order to properly compute depreciation.
When the actual cost of each individual component is available, this is a rather simple
procedure. However, when only lump-sum costs are available, cost estimating techniques may
be required to "segregate" or "allocate" costs to individual components of property (e.g., land,
land improvements, buildings, equipment, furniture and fixtures, etc.). This type of analysis is
generally called a "cost segregation study," "cost segregation analysis," or "cost allocation
study."
In recent years, increasing numbers of taxpayers have submitted either original tax returns or
claims for refund with depreciation deductions based on cost segregation studies. The
underlying incentive for preparing these studies for federal income tax purposes is the
significant tax benefits derived from utilizing shorter recovery periods and accelerated
depreciation methods for computing depreciation deductions. The issues for Service examiners
are the rationale used to segregate property into its various components, and the methods
used to allocate the total project costs among these components.
The most common situation is the allocation or reallocation of building costs to tangible
personal property. A building, termed "section (§) 1250 property", is generally 39-year property
eligible for straight-line depreciation. Equipment, furniture and fixtures, termed "section (§) 1245
property", are tangible personal property. Tangible personal property has a short recovery period
(e.g., 5 or 7 years) and is also eligible for accelerated depreciation (e.g., double declining
balance). Thus, a faster depreciation write-off (and tax benefit) can be obtained by allocating
property costs to § 1245 property, or by reallocating § 1250 property costs to § 1245 property.
A simple example illustrates the tax benefits of a cost segregation study. In general, a turnkey
construction project includes elements of tangible personal property (e.g., phone system,
computer system, process piping, storage tanks). It is relatively easy to identify these items as §
1245 property and allocate a portion of the total project costs to them. However, a cost
segregation study may also report certain building occupancy items, such as carpeting, wall
coverings, partitions, millwork, lighting fixtures, suspended ceilings, doors, as § 1245 property.
These items may or may not constitute qualifying § 1245 property depending on particular facts
and circumstances, such as the location of the assets and the specific activities for which the
project was designed.
In addition to identifying specific project components that qualify as § 1245 property, cost
segregation studies may treat portions of building components as § 1245 property. For
example, a study may conclude that 15 percent of a building’s electrical system directly
supports § 1245 property, such as specialized kitchen equipment. Based on that conclusion,
the study will then treat 15 percent of the electrical system as § 1245 property. The allocation of
building components to § 1245 property is often a contentious issue.
Property allocations and reallocations are typically based on criteria established under the
Investment Tax Credit (ITC). A plethora of legislative acts, court decisions and Service rulings
have produced complex and often conflicting guidance with respect to property qualifying for ITC,
resulting in no bright-line tests for distinguishing § 1245 property from § 1250 property. Related
issues, such as the capitalization of interest and production costs under IRC § 263A and
changes in accounting method, add to the complexity of this issue.
In a recent landmark decision, the Tax Court ruled that, to the extent tangible personal property
is included in an acquisition or in overall costs, it should be treated as such for depreciation
purposes. The court also decided that the rules for determining whether property qualifies as
tangible personal property for purposes of ITC (under pre-1981 tax law) are also applicable to
determining depreciation under current law. [See Hospital Corporation of America, 109 T.C. 21
(1997)] The Service acquiesced to the use of ITC rules for distinguishing § 1245 property from §
1250 property.
Based on these developments, the use of cost segregation studies will likely continue to
increase. Unfortunately, there are no standards regarding the preparation of these studies.
Accordingly, studies vary widely in terms of the methodology, documentation, depth, format, and
expertise of the study’s preparer. This lack of consistency, coupled with the complexity of the law
in this area, often results in an examination that is controversial and burdensome for all parties.
Examiners reviewing cost segregation studies must determine the proper classification and
correct costs of property. In some cases (e.g., small projects) examiners may be able to
evaluate a study without assistance. However, other studies may require specialists with
expertise, industry experience and specialized training (e.g., Engineers, Computer Audit
Specialists and/or Technical Advisors). Examiners should perform a risk analysis as early as
possible to determine the depth of an exam and the need for assistance.
SUMMARY AND CONCLUSIONS
Depreciation issues involving cost segregation studies cross all LMSB industry lines and
impact SB/SE taxpayers as well. The lack of consistency in cost segregation studies and the
absence of bright-line tests for distinguishing property contribute to the difficulties of this issue.
The purpose of this ATG is to provide the foundation to a better understanding of cost
segregation studies and to provide the examination steps that will facilitate the audit process
and minimize burden on taxpayers, practitioners and Service examiners alike.
EXPERT WITNESS
Over the years we have worked on numerous projects which were tied to a judicial mandate.
They include dissolution of marriage proceedings, property tax disputes, inheritance tax liability
disputes, probates, and acquisitions by eminent domain. To our credit all, but one, was settled
prior to trial with one requiring a deposition hearing.
Our one court appearance was in the Superior Court, State of California-Compton Judicial
District, July 1999. We provided plaintiff expert witness testimony in an inverse condemnation
case.
PROPERTY ACQUISITION PROCESS-EMINENT DOMAIN
In the event that eminent domain is necessary, the Agency is required as a public agency to
follow a process prescribed in state law before a property can be condemned. At present, the
process
involves the following major steps and actions:
If property is offered for sale (by owner or through a broker/agent) the Agency may discuss
and negotiate the purchase with the owner (or broker/agent) as any other buyer.
If the property is not for sale but the Agency is interested in buying the property, the Agency
must undertake certain steps before it can acquire the property:
The Agency must appraise the property. A written “notice to appraise” must be sent to the
property owner and the property owner has the right to accompany the appraiser on a site
visit.
If the Agency decides to make an offer, the Agency must offer the appraised value and
provide the property owner with certain information concerning how the appraised price
was determined.
The Agency must offer to pay the reasonable costs, not to exceed $5,000, of an
independent appraisal ordered by the owner of the property that the Agency offers to
purchase under a threat of eminent domain, as specified, at the time the Agency makes
the offer to purchase the property.
Once the offer is made, the Agency and property owner are to negotiate for a reasonable
period of time, usually up to 30 days, to see if the parties can arrive at a negotiated
agreement.
If a negotiated agreement cannot be reached, the Agency cannot acquire the property
unless the Agency has current condemnation authority in its Redevelopment Plan.
If the Agency has condemnation authority and desires to consider acquisition by
condemnation, the Agency must first hold a hearing and give notice of that hearing to the
property owner who has the right to appear and be heard concerning the proposed
acquisition by condemnation.
If after the conclusion of the hearing the Agency desires to proceed with the acquisition by
condemnation, it cannot do so unless it adopts, by a 2/3 “super majority” of the Agency
board, a “resolution of necessity” that identifies the public use for the property and make
other findings required by California Eminent Domain Law.
If the resolution of necessity is adopted, the Agency may then proceed to file a court action
seeking acquisition of the property by condemnation, but must also at that time deposit in
court the full amount of probable compensation to be paid to the property owner (normally
the appraised value).
SENATE BILL 53 PROGRAM
Newhall Redevelopment Project
Page 6
The Agency, when it files the condemnation action or later, may seek an order of
possession so it can gain possession of the property while the litigation proceeds
concerning the value of the property. The owner may also challenge the Agency’s right to
use its condemnation authority.
The condemnation litigation then proceeds until its conclusion (or until a settlement is
reached).
If a court finds, on motion of the defendant, that the offer of the Agency was unreasonable
and the offer of the defendant was reasonable in light of the evidence admitted and the
compensation awarded in the proceeding, then the costs allowed shall include the
defendant’s litigation expenses. Litigation expenses are defined in Section 1250.410 (e) as
“the party’s reasonable attorney’s fees and costs, including reasonable expert witness and
appraiser fees.”
Because condemnation involves purchasing private property for a public purpose, federal
and state laws offer the following benefits to the owner whose property is acquired through
condemnation:
The redevelopment agency must pay cash unless the owner desires otherwise.
The property owner receives certain tax benefits, such as a right to reinvest the sale
proceeds within 2 calendar years (3 years for business property) before incurring
capital gains liabilities, and the property owner may transfer the assessed value of the
property purchased through condemnation to a new property acquired by the property
owner, provided that the value of the new property does not exceed 110% of the
value of the condemned property.
APPRAISAL REVIEW
Federal and State Laws, and Contractual Agreements precludes the communication of our work
product to unauthorized parties. In lieu of an actual Review Report I feel it is worth stating that
an appraisal review is not an easy assignment. It is exceedingly important for a “Reviewer” to
have a broad base of experience and education, dependance on affiliation with a particular
trade/professional association for review or other assignments is unwise.
We have designed a process to establish an amicable, communicative relationship between us
and the appraiser under review. We stick to the facts and support every observed deficiency
with a Citation and Supporting Documentation, WE DO NOT PROVIDE UNSUBSTANTIATED
OPINIONS OR INTERPRETATIONS (USPAP, Standards Rule 3-1.f & g, 1347, 1348 and 1351: ...
and develop the reasons for any disagreement). For example, an appraiser who has used an
incorrect legal description would be notified of this fact, given the appropriate Citation from
USPAP or the applicable regulation then provided the correct description contained in the
vesting document or similar available document. It goes without saying that “time is of the
essence.” We have found that this process works extremely well in the expeditious completion
of our Review Assignments; typically within one week.
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REAL PROPERTY INSPECTIONS
A recent addition to our Appraisal Practice is incorporation of the American Society for Testing
Materials (ASTM) E-2018 Commercial Inspection Protocol into each and every Multi Family
Residential, Commercial, and Industrial Appraisal Report, upon request. The purpose of this
protocol is to define a good commercial and customary practice in the United States of America
for conducting a baseline Property Condition Assessment (PCA) of the improvements located
on a parcel of residential, commercial, or industrial real estate. The process is performed by a
walk-through survey/inspection, and conducting research, as outlined within the ASTM E-2018
guide. The goal is to identify and communicate physical deficiencies to a user. Physical
deficiencies are the presence of conspicuous defects or material deferred maintenance on a
subject property’s material systems, components, or equipment as observed during the field
observer’s walk-through survey/inspection. This standard specifically excludes deficiencies that
may be remedied with routine maintenance, miscellaneous minor repairs, normal operating
maintenance, and de minims conditions that generally do not represent material physical
deficiencies of the property.
The scope of the standard includes a document review, independent research, and personal
interviews which augment the walk-through survey/inspection. The work product resulting from
completing a PCA in accordance with the ASTM E-2018 standard is a Property Condition
Report (PCR). The PCR incorporates the information obtained during the Walk-Through
Survey, the Document Review and Interviews, and includes opinions of probable costs for
suggested remedies of the physical deficiencies identified. The objective of the walk through
inspection is to visually observe the subject property so as to obtain information on material
systems and components for the purposes of providing a brief description, identifying physical
deficiencies to the extent that they are observable, and obtain information needed to address
issues in the PCR. The purpose of the document review and interviews is to assist with the
consultant’s understanding of the subject property and identification of physical deficiencies.
Our goal, once again, is to be the leader in our industry by continuously improving our work
product.
Instructions For Preparing The Multifamily Property Inspection & Evaluation Report (Form
4255) This Form 4255 should be completed by the servicer. It should be submitted to Fannie
Mae within 30 days of completion of each
annual physical inspection and at such other times as Fannie Mae requires.
General Instructions Before visiting the site, obtain and review:
• a current Certification to Project Rent Roll (Form 4243)
• a copy of the previous Multifamily Property Inspection and Evaluation Report
While at the site:
• inspect all vacant units
• inspect the lesser of 20 occupied units or 5 percent of the occupied units, if possible
• inspect units of each unit type
• see enough of the project to assess how the Property is being maintained
• take 5-10 representative color photographs of the buildings, units, and features inspected
• take photographs of extraordinary items requiring repair, maintenance, or replacement
• interview the property manager and other on-site staff to follow-up on maintenance items
noted on the last Multifamily
Property Inspection and Evaluation Report and to get feedback on the Property’s condition and
performance After conducting each annual inspection and completing Form 4255, submit the
original of the form along with a copy of the
Certification to Project Rent Roll (Form 4243), and a representative set of photographs to
Multifamily Operations - Asset Management at the following address:
Fannie Mae
Multifamily Operations - Asset Management
Drawer #AM
3900 Wisconsin Avenue, NW
Washington, DC 20016
Inspection Resource Center
Periodic physical property inspections are a critical component of oversight and maintenance of
commercial and multifamily properties. Mortgage Bankers Association (MBA) has worked
with industry leaders to help increase the level of communication, standardization of reporting
and the quality of the review for property inspections.
In 2005, Mortgage Bankers Association (MBA) adopted new inspector qualifications best
practices, which require adequate training and experience for all those professionals inspecting
properties financed by Fannie Mae and Freddie Mac.
MBA will continue to work with the members on property inspections in 2006.
Detrimental conditions cause over $50 billion in damages annually, and this figure is
consistently rising. Some cite the fact that much of today’s developments are in areas that were
once considered too risky because of soil conditions, access, proximity to airports, jails or
prisons, or for other reasons. The Real Estate Disclosure Report was developed as a
comprehensive process to report on the myriad of issues that may be important to the property
owner, lender, or other client, so that the user of the disclosed data has a clear picture of the
property’s condition and environs. We are one of a very few companies, nation wide, certified by
the Appraisal Institute to prepare Real Estate Disclosure Reports (RED Reports).
The RED Report does not put a dollar figure on any conditions. A proper disclosure report
simply informs the user of the report that certain conditions are known or believed to exist, but is
not a guarantee or substitute for a cost study. The conditions may have no impact on value
whatsoever. Items of disclosure include: General Conditions, Transactional Conditions, Market
Conditions, Distress or Tragic Conditions (Crime, Deaths, etc.), Imposed Conditions (Zoning,
CC&R’s, etc.), Building Conditions, Soils Conditions, Environmental Conditions, Natural
Conditions (Earthquake, Endangered Species, etc.), and Hazardous Conditions.
INITIAL INSPECTIONS 1950.5 (f)(1)-Within a reasonable time after notification of either party's
intention to terminate the tenancy, or before the end of the lease term, the landlord shall notify
the tenant in writing of his or her option to request an initial inspection and of his or her right to
be present at the inspection.
In 1999 we were Certified as Contract Physical Inspectors, for the “NIC” and “BIC” Contracts,
by the Real Estate Assessment Center (REAC), a newly formed agency of HUD. REAC is
responsible for obtaining physical inspection and financial information for HUD-insured and
assisted housing. The purpose of the Inspection Program is to inspect properties with HUD-
held mortgages, properties for which HUD acts as the Section 8 contract administrator, and
properties owned by Public Housing Agencies. HUD published a final rule that established
uniform physical condition standards for public housing and housing that was insured and/or
assisted under certain HUD properties. These standards are intended to ensure that this
housing is decent, safe, sanitary, and in good repair.
REHAB CONSULTATIONS
The Federal Housing Administration (FHA), which is part of the Department of Housing and
Urban Development (HUD), administers various single family mortgage insurance programs.
These programs operate through FHA-approved lending institutions which submit applications
to have the property appraised and have the buyer's credit approved. These lenders fund the
mortgage loans which the Department insures. HUD does not make direct loans to help people
buy homes.
The Section 203(k) program is the Department's primary program for the rehabilitation and
repair of single family properties. As such, it is an important tool for community and
neighborhood revitalization and for expanding homeownership opportunities. Since these are
the primary goals of HUD, the Department believes that Section 203(k) is an important program
and we intend to continue to strongly support the program and the lenders that participate in it.
Many lenders have successfully used the Section 203(k) program in partnership with state and
local housing agencies and nonprofit organizations to rehabilitate properties. These lenders,
along with state and local government agencies, have found ways to combine Section 203(k)
with other financial resources, such as HUD's HOME, HOPE, and Community Development
Block Grant Programs, to assist borrowers. Several state housing finance agencies have
designed programs, specifically for use with Section 203(k) and some lenders have also used
the expertise of local housing agencies and nonprofit organizations to help manage the
rehabilitation processing.
The Department also believes that the Section 203(k) program is an excellent means for
lenders to demonstrate their commitment to lending in lower income communities and to help
meet their responsibilities under the Community Reinvestment Act (CRA). HUD is committed to
increasing homeownership opportunities for families in these communities and Section 203(k)
is an excellent product for use with CRA-type lending programs.
If you have questions about the 203(k) program or are interested in getting a 203(k) insured
mortgage loan, we suggest that you get in touch with an FHA-approved lender in your area or
the Homeownership Center in your area.
Housing rehabilitation is an important component of any strategy aimed at meeting the nation's
affordable housing needs. Keeping a home in good working order or bringing one back from a
state of disrepair promotes both sustainability and affordability with every stroke of the hammer
and every plumb line snap. Pursuing a high quality rehab or renovation can also result in
homes that are
better able to withstand storms and other natural disasters.
DISCOUNT REAL ESTATE BROKER
Full Service - Discounted Fees
(Maximum broker commission 4%)
Six-Percent Real Estate Broker Business Model
Services: Broker Only
Agents: Four (4)
Commissions Paid by Seller: Four (4)
Royalties to Franchiser: Varies
Savings: None
Our Discount, Real Estate Broker Business Model
Services: Broker, Appraiser, Loan Broker, Attorney Referral
Agents: One (1)
Commissions Paid By Seller: One (1)
Royalties to Franchiser: None (0)
Savings: Minimum Two-Percent (2%)
REAL ESTATE CONSULTATIONS
Consulting is a unique real estate specialty. It is not considered a specific discipline with a
defined body of knowledge, such as brokerage, manager, or appraisal. Rather, real estate
consulting is a process—one that requires technical competency, thoughtful analysis, and
critical inquiry, all of which are directed toward achieving the best results for a client or
employer. At a minimum your consultant should have a Real Estate Brokers Licence, a
General Appraisal Licence and basic understanding of Architectural Systems, Construction
Methods and Inspection Techniques.
A of Real Estate Consultant serves as the link between defining the problem and devising a
solution, or measurable economic value. Essential to the consulting process is the trust and
confidence that prevails in the client or employer relationship. No matter the property type, real
estate decision makers call upon the Consultants in-depth knowledge for a breadth of services
including:
- Feasibility Studies
- Financial Analysis
- Valuation and Appraisal
- Acquisitions and Dispositions Consulting
- Real Estate Brokerage
- Development Planning
- Asset Management and Capital Budgeting
- Site Location, Relocation, Lease/Purchase Evaluation
- Corporate Real Estate Strategy
- Commercial Mortgage-Backed Securities (CMBS)
- Expert Witness Testimony and Litigation Support/Appraisal Review
- Investment Analysis
- Supply/Demand Analysis
- Highest and Best Use/Reuse Studies
- Acquisition Due Diligence
- Property Management and Performance Evaluation
- Eminent Domain Appraiser/Broker
- Land Use Planning
- Non-Profit Consulting
- Mortgage Lending
- Pension Fund Consulting
- Public/Private Partnerships
- Workouts
- Environmental Consulting
- Facilities Planning
- Capital Formation and Syndication
- Exchanges
- REITs
- Investment Advisory
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| We Make a Simple Pledge to Communicate, in a timely Fashion, each appraisal, analysis, and opinion without bias or partiality Abstain from behavior that is deleterious to our clients, the appraisal profession, and the public Hold paramount the confidential nature of the appraiser/consultant - client relationship and Comply with the requirements of the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics of the National Society of Real Estate Appraisers |
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Commercial Appraiser and Real Estate Consultant, Los Angeles, CA
Commercial Appraiser and Real Estate Consultant, Los Angeles, California
Commercial Appraiser and Residential Appraiser, Los Angeles, California
Commercial Appraiser, Los Angeles, California
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