Road to Perdition

Michael Ford

Michael Ford

General Certified Real Estate Appraiser at Michael F. Ford Appraisal
Over 28 years appraising all property types and interests, in Southern California real estate. VP/Chairman National Appraiser Peer Review Committee, American Guild of Appraisers, #44OPEIU/AFL-CIO. - Michael Ford on e-AppraisersDirectory
Michael Ford

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Road to Perdition, Paved with IVS by The Appraisal Foundation & IVSC

It looks like USPAP and IVS are finally going to teach the world to sing in perfect harmony. Didn’t Coca Cola already do that?

It’s been awhile since I’ve harped about the International Valuation Standards (IVS) and the International Valuation Standards Council, or their inappropriate influence on USPAP.

Perdition Road paving compliments of The Appraisal Foundation under sub contract to MISMO. Unnecessary Bridging from USPAP to IVS provided by TAF.

For those unfamiliar with what (IVS) or who (IVSC) they are, the following link may help.

Scroll down to the corporate sponsors section. THIS is who the ‘international sponsors’ are. A veritable Who’s Who of Wall Streets favored accounting firms. Or, as I prefer to think of them the Johnny-come-lately’s of USPAP infamy.

Respected professionals that had to be dragged kicking and screaming to adopt USPAP in any token fashion at all. Primarily because of fundamental conflicts with their own long-established professional standards. At least until TAF promised to amend USPAP to suit them.

Regardless of damage to the real estate profession and appraisers standing in America.

Y’all may know “them” (BV professionals) better as the subjects of Standards Rules 9 & 10. Business Valuation. The folks that develop appraisals of ‘an interest in a business enterprise or intangible asset.’ ~yawn~. Of course, this description is from USPAP 2018-2019. It may change again tomorrow.

Like all USPAP versions, it too has changed with the tides, weather, and varied special interests holding influence over The Appraisal Foundation on any given day.

For example (from TAF) in 2006:

STANDARD 9 & STANDARD 10: Periodically, the Appraisal Standards Board performs a detailed examination of the form and content of a portion of USPAP. The 2006 USPAP reflects the results of such a process for STANDARDS 9 and 10. The extensive modifications are summarized below.

  • The Standards were edited to clarify that the subject of an appraisal assignment is the ownership interest in a business enterprise and other intangible asset. This change increases clarity about the appraisal process by recognizing that what is being appraised is an interest in the asset, not the asset itself.

Say what, what? I used to think I could comprehend American colloquial English, even if my ability to communicate in it falls short.

Waaaay back in 2006 TAF ‘discovered’ that valuators deal with ownership interests! As do we all. In this limited context, even a tenant’s interest is an ownership interest in a leasehold estate (subject to the terms of the lease). Imagine all the BV professionals that never knew this until TAF bestowed its knowledge upon them.

For a brief moment in 2006, the entire nation was alight with ‘Idea Bulbs’ glowing above the heads of business valuators and appraisers alike. They all had a ‘better idea’ at the exact same moment!

BV is a profession so committed to USPAP and FIRREA 1989 that it took until July 10, 2000 and June 27, 2003 for SR 9 and SR 10 to be adopted by TAF. In fairness BV professionals recognized early on that BV and R.E. Appraisal are incompatible.

All efforts since 2006 have been to make USPAP more compatible to AICPA guidelines and standards rather than to bring AICPA in to USPAP.

USPAP originated to promote and preserve ‘the public interest.’

Whatever that is!

Oddly, it has never been defined by TAF in USPAP. Probably because if it is ever specifically defined, its usefulness as a deliberately vague warm and fuzzy, meaningless euphemism to convey some imaginary public benefit will disappear. Every state would have to reword all their appraisal regulations & cite real objectives!.

Strange it appears in IVS as a purported purpose too. Right along with the current linguistic fad du jour “harmonization.”

Keep your eyes open for this one! Even Treasury Secretary Mnuchin is enthralled by ‘harmonizing various financial processes (read the Comprehensive Financial Reform Report to the President just released last month?).

It looks like USPAP and IVS are finally going to teach the world to sing in perfect harmony. Didn’t Coca Cola already do that?

Apparently, synergy is out, and harmony is in. Now if we could only leverage it somehow… maybe in a value-added sort of way?

Instead of TAF saying (second draft introduction) “In recognition of new forms and formats…”

They can substitute ‘to meet the special interest demands for increased leveraging of harmonized synergies resulting in maximally beneficial value-added products and services… for the public trust TAF doth proclaim throughout the realm that [insert unnecessary USPAP revision here…]?

WHAT THE HECK DOES ANY OF THIS HAVE TO DO WITH REAL ESTATE APPRAISAL?

Truthfully… nothing.

That’s the real point of this IVS / IVSC article.

There is no benefit to be gained by America adopting IVS for anything or anyone other than the accounting profession. Adoption of IVS should be voluntarily left up to AICPA, NACVA or ASA. Not USPAP. American real estate appraisers should not be handicapped or burdened by it.

No “bridge” is needed from USPAP to IVS as promoted by The Appraisal Foundation (see pdf file below)

IF that is the desire and goal of AICPA then God Bless! Go for it. Just leave the real estate appraisal profession out of it. You just keep producing intentionally arguable ‘discount values’ to generate those high Fifth Avenue consulting fees in IRS audits (as well as other international taxation forums). Keep conjuring new theories to support hypothetical market conditions & concepts (that rarely exist in the real world); and keep trying to support discounts for imaginary retrospective levels of marketability loss via DLOMs. We real estate appraisers do NOT want to change your methods! Live! Enjoy! Prosper!

The world has always enjoyed the mysticism of a good carnival act. There will always be a need for the Blue Smoke and Chicken Bones Approach to BV just as long as Wall Street & Capital Exchanges the world over engage in International Chicanery and Flimflammery. It’s what makes the world go round… and that’s fine. Seriously. We need the indisputable 20/20 hindsight economists specialize in. Without it, we mere mortals may entirely have missed the Great Recession.

I am only interested in American Real Estate Appraisal and principles we appraisers follow. By the way BV, please stop calling yourselves appraisers! That was another TAF invention. You are Valuators and always have been. That’s how people used to tell us apart. Did you become ashamed of the term back when you first signed on to USPAP? Was it its imposition on appraisers to demonstrate accounting’s supremacy over mere appraisers?

Most real estate is not sold in the international market. Only consolidated real estate holding portfolios or business interests comprised of substantial trophy property real estate holdings are typically sold internationally.

Real Estate Appraisers appraise very specific ownership rights in individually identified pieces of real estate. In some relatively rare circumstances we ‘encroach’ on each other’s turf.

It’s the exception rather than the rule. When we venture into the realm of BV then we appraisers must know how to blow colored smoke and buy a few sacrificial chickens too.

When you engage in R.E. ‘valuation’ you should recognize the lessor-lessee as equal parts of the market rent equation; and not assume that it is the owner-investor that always sets market rent based on what Wall Street ‘demands’. Also, Pwc reported 20-year-old comps are NOT current market comps for anything! Applying the annual inflation rate to a known ten year old sale price of a specific real property does NOT credibly result in it’s market value today.

The fundamental differences in the specific techniques we employ for approaches that are similar in name only, and the professionally recognized principles we hold, are extremely different. So different as to be irreconcilable. No matter how badly TAF tortures USPAP to make it ‘fit’ all disciplines.

BV be proud of the NACVA, AICPA and ASA Business Valuation and Accounting standards but stop trying to impose them on us by subverting USPAP.

Note I used the word principles rather than standards five lines above.

Principle:
noun
“a fundamental truth or proposition that serves as the foundation for a system of belief or behavior or for a chain of reasoning.”
Standard:
noun

  1. a level of quality or attainment.

    “their restaurant offers a high standard of service”
    synonyms: quality, level, grade, caliber, merit, excellence
    “the standard of her work”

  2. an idea or thing used as a measure, norm, or model in comparative evaluations.
    “the wages are low by today’s standards”

adjective

  1. used or accepted as normal or average.
    “the standard rate of income tax”
    synonyms: normal, usual, typical, stock, common, ordinary, customary, conventional, wonted, established, well established, settled, set, fixed, traditional, prevailing
    “the standard way of doing it”

Like most foundations, principles should be concrete, or at least intended to be permanent. Nothing says a principle cannot change over time considering new information and significant need. What it does not mean, is that it is something that can or should be changed as often as one’s underwear; the tides, or annual weather cycles.

Standards are more flexible. Much like the restaurant example in the first definition, standards can offer a full menu of selections. Originally intended to conform to the second definition, USPAP has become too much like the first standards definition.

Standards should never overrule principles. Minimum existing standards should not be further minimized.

International Valuation Standards, IF intended to apply to all the countries that have ‘signed on to’ the IVS and IVSC are a bad joke when applied at the retail real estate level within the individual nations. It wouldn’t surprise me a bit if the misguided concept known by the term bifurcated appraisal originated there. Possibly a derivative of bifurcated integrity.

An orderly method to measure and facilitate the flow of international trade, and to assure adequacy of accounting for a variety of differences IS necessary. It’s also one that should properly be left to the accounting profession based on the expressed needs of international trading partners & sovereign requirements. Not TAF.

It has nothing to do with how much “Joe, The Plumber” is going to pay for a 10,000 sf warehouse in Dayton, Ohio; how much entry level housing is selling for in my own Westside barrio, or luxury estates down in Miami.

For appraisal of these properties we analyze ONLY American markets. Not what’s going on in Abu Dhabi or Bopu-Botswanna. (I know, Bopu part was dropped but I just like the sound of it).

For 99% of our work, we do not need to directly consider international economics. The relative strength of the U.S. Dollar agaisnt the discounted monetary value of three chickens in Somalia rarely enters into consideration in our appraisals.

Fred & Ethyl Mertz are more concerned with the value of the dollar relative to a gallon of gas in the USA. Until 2% Option ARMs with negative amortization also include a pick-a- payment-in-chickens option, IVS do not enter into our analyses.

American real estate ‘value’ has nothing in common with infamous “Circle Rates” or grey markets in Delhi, India. Nor do tribal lands in Pakistan have a determinable market value.

Additionally, over half the world is reportedly Muslim. In many officially Islamic Governments taxation of citizens (or even the right of citizenship) is based on religious belief under Sharia. Such codified laws cannot be reconciled to our own in terms of defining specific in-country market values. If one’s religion affects the property operating expense and net operating income we cannot reconcile that to an equivalent value in America. Not because we cannot quantify the monetary impact, but because we do not legally recognize the concept.

In other nation signatories to IVS, rule is by military junta or other totalitarian governance. ‘Value’ is what the sovereign grand poohbahs say it is.

Based on decades of letters, and email notices from various ex-government officials and former leader’s family members, Nigeria is awash with many hundreds of millions in U.S. Dollars begging to come home. How does IVS treat these windfalls? Is imaginary largesse subject to international claw-back, valued the same as it is in the U.S.? Do we make extraordinary assumptions (USPAP); or assumptions & special assumptions (IVS)?

Look at the list of sponsors and member countries. Can any reader honestly say that many if not most don’t have ‘values’ that are well known to be influenced by outright bribes or gifts to bureaucrats?

Azerbaijan? Seriously? Where the mere mention of places like Nagorno Karabakh can still get one killed?  What is the market adjustment for a minefield in your backyard?

Taiwan? Sure. How about Russia? (Assuming they aren’t too busy deciding our electoral victors for us).

Saudi Arabia? Yemen? Kuwait? Qatar? Egypt? Libya? Algeria? Morocco? Does the term baksheesh ring a bell?

Mexico & corruption? Read about Land Administration and Taxation there.

Even if the intent of IVS were a purely racist based western nations concept (as several have suggested to me), could we still apply it uniformly in places like Switzerland or England? Both of which can still dictate that housing must have thatched roofs!

Perhaps in socialist Sweden?

Even the beloved rapscallions of Australia recognized long ago that their ValMin standards were incompatible with USPAP.

Do IVS reflect or accurately measure and report the same retail level real estate values found in Oriskany, NY; Compton, CA, Kill Devil Hills, NC, Taos, NM or Anywhere, USA?

Hardly.

Certainly, we can stretch the definitions umbrella to be so large it technically encompasses all concepts, but does that produce greater clarity? Does it promote public trust?

It has the same meaningless context as saying all elected public representatives must be of good moral character to promote and preserve the public trust. Sure.

IVS has no chance of success internationally. None. Why on earth would we want to adopt it in the USA; much less have a TAF-developed bridge to it? (see pdf below). Are IVS all going to have a fundamental hypothetical condition that all participants are honest? How about extraordinary assumptions that all participants are operating above board and purely out of concern for the good of mankind…or the public trust?

Has the Appraisal Foundation not gotten the memo yet? The ‘New’ World Order concept is dead. WE don’t want it, and as near as I can tell, no one else does either!

TAF, Congress gave you ONE JOB and you screwed that up! Leave IVS development appropriately to AICPA, NACVA and ASA.

I urge all readers to contact your local Congress Member and Senators, directly or through your state real estate appraiser’s coalitions. Ask them to direct TAF to refocus itself on Real Estate issues only, or to revoke the TAF mandate and “authority” on USPAP. This particular 29-year farce has run its course. Even TAF admits USPAP was created several years before the law that created them was passed.

ALL they have done for 29 years is plagiarize other organizations standards, and screw them up!

At a bare minimum, insist to TAF that in the current proposed (2nd draft) USPAP revisions that the phrase public trust also be clearly defined in their new definitions of common English language terms that have become too confusing for professionals to comprehend when used in a real estate context.

I contend the ‘Public Trust’ (as most English speakers interpret it) is being grossly betrayed. The phrase has become nothing more than a vague catch-all to support whatever whimsical revisions TAF’s lending industry handlers direct them to make and then somehow ‘justify’.

It belongs right up there with such hackneyed political claims as new taxes always being needed (1) “…to preserve public safety”, or (2) “…for the children.”
 

Image credit flickr - Diego Hurtado
Michael Ford

Michael Ford

Over 28 years appraising all property types and interests, in Southern California real estate. VP/Chairman National Appraiser Peer Review Committee, American Guild of Appraisers, #44OPEIU/AFL-CIO. - Michael Ford on e-AppraisersDirectory

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2 Responses

  1. Baggins Baggins says:

    “We recognize these truths to be self evident”. A light bulb just turned on somewhere! The consolidation and technical alterations of MLS and many related systems are opening up the doors for international investors more than for the benefit of regular American citizens. These bridge attempts are just further progressions of the sell out of sovereign American interests. We The People rejected TPP and will not be governed by anyone else. It does not take much digging into the alumni and members list to understand the risks. Read up on your future international employers. Get to know the new governing authorities for your appraisal work products. Then sign up for the IVSC newsletter from Londonistan and please don’t forget to click the China appraisal society link. Sow must now also be in multiple languages. Remember to adjust your ethic based on the governing authority.

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  2. Baggins Baggins says:

    Hey look at this one. Around 3.5 years after refinancing, MERS finally got my title straightened out for the previous company. What great guys.

    You know why there is a never ending stream of pointless regulation? So nobody looks at clouded title and robosigning ever again, much less to dare spend time looking into departure from fee simple processes.

    Dash in a little international legal precedent for that extra money flavor.

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Road to Perdition

by Michael Ford time to read: 11 min
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