Different Properties on the Same Form?
Are you appraising the retail values of 10 sites to 10 different owners? Are you appraising the bulk or discounted market value of the 10 sites to a single purchaser?
Can the Same Form Have More Than One Property on it?
Lots of folks have asked me, “Dustin, can I appraise two different properties on the same appraisal report at the same time?”. Now understand I am not a USPAP instructor, I am an appraiser, so I’m going to answer this question as best I can.
The question before us is legitimate, and one which I had to answer recently. The owner of 10 riverfront sites recently contacted me to appraise the individual sites. He was going to donate them to a charity and needed something to submit to the IRS to justify the tax deduction he wanted to take. So, I had to deal with two questions right at the beginning of the assignment. The way you do the appraisal will change depending on your answers to this two-part question: “Are you looking at the value of those parcels together, or are you looking at the value of those parcels separately?”
If you are dealing with those lots collectively, it is probably necessary to apply a discount rate. Some time ago, I had another, similar experience. The question I asked myself was, “What if one investor came along and bought all of these sites in bulk, what kind of discount rate would that investor expect?” In other words, is there a different value to one investor, versus ten sales of ten lots to ten different buyers? I found that, all other conditions being equal, yes, the bulk buyer would expect a discount from the full total retail price of the ten lots.
But, the question remains about appraising multiple properties within the same report. So what this comes down to really is your scope of work. What is it you’re appraising? Are you appraising the retail values of 10 sites to 10 different owners? Are you appraising the bulk or discounted market value of the 10 sites to a single purchaser? Whichever you’re doing, that must be clear right from the engagement letter. You must know the question(s) the client wants you to answer. And the client must know the circumstances under which you answered that question(s).
So, assuming your commission is to appraise the sites under the condition that one investor would purchase them, then there is a different protocol to follow than if your commission called for the market value of each site separately. In other words, to appraise each site, and then merely total the values would be the improper way to answer the question. It’s improper since an investor who buys in bulk expects a discount from retail. Plus, if the market is really hot, then that discount would likely be small since the investor would be taking a relatively small risk making such a bulk purchase.
On the other hand, if the market were slow, if the lots were in an area showing little demand or growth potential, if there were safer investments the investor could make, then a bulk investor would expect a very significant discount to account for all of the risks such an investment carries.
Now, with my recent assignment, the owner wanted a separate value for each of the sites since the owners had no intention to sell them in bulk to an investor. So, under this scope of work, it was totally proper, as well as compliant with USPAP, to form 10 separate value opinions. That’s why it’s important to ask this question up front, so you get the answer up front.
Now we get to the question of if there should have been one appraisal report, or 10 separate, stand-alone appraisal reports. When I went on line (Facebook) to seek answers from my peers, the opinions were varied, with some of the respondents personally taking each other to task over their answers (not unusual for Facebook).
First of all, understand USPAP Standard Two has nothing to say on the matter of how you report the appraisal. It merely tells us what we must include in the report so the report is not misleading. Know, as well, there are no Fannie Mae forms to answer such questions (nor any non-Fannie Mae forms, for that matter). So, as long as you develop your value opinion as Standard One dictates, then the reporting of that value opinion, while it must meet the reporting requirements of Standard Two, is pretty much up to you and your client.
In my case, I chose to communicate my appraisal via a Restricted Appraisal Report, since that format was all that was necessary. The IRS accepts this format. Therefore, in one report I had one section of analyses (neighborhood, highest and best use, and so forth). Then, spring boarding from that, I gave the client a separate value conclusion for each of the sites. All of the value conclusions came from the same set of comps since we did not do 10 appraisals, which would have been silly. We found riverfront lot comparable sales and listings, and then used these to value all of the individual sites.
Keeping all of this in mind, it’s my conclusion you can appraise multiple properties as part of one appraisal report. If I’m wrong, since I am a student of appraisal, please show me the flaws in my reasoning so I can learn. But, I do not think I was wrong. Not all reports go to Fannie Mae. So, not all reports must go on a Fannie Mae form. And not all reports must follow Fannie Mae’s report formatting. Every so often we get to make our own decisions relative to the appraisal’s reporting format. The only requirement is how we report the appraisal must conform with Standard Two.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 160 Can You Appraise More Than One Property on the Same Appraisal Form
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Clear as mud. The technical and legal answer is yes, if compliant with STD 2. That said, I rarely ever do it unless two properties are adjacent, i.e., improved property with adjacent vacant lot. Just my preference for reducing potential liability.
I never understood why some appraisers continue to use the wrong forms. A few years back my market had some major fires, the lenders were requesting appraisers to complete the 1004D to prove that the house was still standing, all they wanted was recent photos. This was clearly not a form to be used for a disaster area inspection, typical of lenders who do not not even know what they are asking. In most cases I was not even the original appraiser and I had never worked for some of these lenders. Other appraisers are using the URAR for non GSE work, like a divorce or a listing, does anyone read the limiting conditions on the forms anymore? My software company already has a Disaster Area Inspection Report, and General Purpose Forms.
What I don’t understand is when someone states, “I’m not a Scientist / Doctor / Lawyer / USPAP instructor” then move forward and try to answer the question pertaining to something they are not an expert in.
Yes your entitled to your opinion, but on something as important as this subject I’ll wait and read the expert’s answer.
Answer = Yes
It is Common in more Rural areas than in the Suburbs
We commonly have two properties on the same form, typically one is the site with a House and the other a Vacant Site or a site with a Detached Garage where the Lender is using both to back the loan
Dustin my friend, Watch out in that particular minefield,
I’ve never seen restricted reports that meet minimum IRS requirements. Of course, it will take about 2 to 3 years for the audit to decide if the data is summarized or stated. TAF can change the names or report types all they want. IRS still requires information to be summarized rather than stated. I haven’t checked all the most recent regs (Treasury Regs; IRC, IRR, Commissioner’s PLRs & Court Cases) on this specific issue yet but those I did check still hadn’t been updated to accept restricted reports. IRS usually updates their regs DVDs about every six months.
I have seen what would otherwise be restricted reports inserted as separate sections within larger reports covering multiple properties and when done right it meets their requirements. My hope is that your work was incorporated into your clients CPAs or tax attorney’s larger report.
Beware of discounting with IRS. In the instance, you cited it would reduce the deduction so they would not likely challenge it. …BUT, Just for fun type “DLOM MFFord” into your search browser.
Particular attention should be paid (by appraisers anyway) to knowing whether they are dealing with entity interests or TICs. Recommend leaving entity interests to the accountants and CPAs (or trained business valuators). TICs vary from state to state based on your states rights to partition.
Applying ‘typical’ Entity DLOMs to TICs is a surefire recipe for disaster. There is no safe haven discount amount.
Also, I copied the entire IRS non-cash charitable donation procedures powerpoint presentation which can be found at http://www.mfford.com (under non-cash charitable donations tabs). The area to pay particular attention to is the value of the whole of contiguous parcels versus the value of the whole minus the donated parcel, and Form 8283 required for each and every single non-cash charitable donation. I can’t say how that affects the project you worked on but you may want to double check and see.
I can see HOW 10 contiguous could be done on a ‘single form’ but that form (addendums) would have to include ten separate complex ‘before & after analyses. Not only could you do it, but IRS would also almost certainly prefer (insist on?) it.
Great example, Mike Ford. Just because you CAN do something, doesn’t mean you should.
Absolutely right. I think a lot of this stems from the desire to convert Business Valuators to USPAP compliant ‘appraisers’ and licensed real estate appraisers to ‘valuators’. Im pretty sure AICPA must have put their foot down about calling us ‘business valuators.’
It’s common in tax practice appraising (usually by accountants; and sometimes by probate referees), to list hundreds of individual property values owned by Entities (as individuals). They may include separate summaries (short paragraphs) showing individual “market derived” net income, but they are just as likely to take entire categories (say hotels; or recreation properties-campgrounds, travel centers, etc) and simply ‘declare’ that Wall Street investors for the asset-class demand a return rate of “x” and in order to achieve that return rate the ‘market income’ must be “y”. 180 degrees opposite techniques of traditional real estate appraisals valuing the same individual assets.
This was in the works and anticipated back in 2009-11, and also when (some in) AI tried to get AB624 through (successfully replaced by SB70) in my state. It’s also what leads to the vague and ambiguous scope of work statements being used to circumvent specific aspects of standards that do not lend themselves to 30-second analyses.
We’ve gone down so far on that slippery slope I don’t know if we will ever make it back to solid principles, practices and meaningful ethics becoming the norm again.
My worst experience after accepting an assignment for a small office building was in testifying for a fee half as large as the business valuators. The Judge denied his testimony because he did not develop a cap rate.
I collected my miserly fee in front, We discussed fees waiting to testify, he went first.
I regularly discount values of multiple ownerships. Anything less than a CONTROLLING interest is awkward to sell.
However limited partnerships sell (to a different name LLC) while retaining some of the old partners (Who Knew). Often those were internal sales, NOT FMV. How do you figure???
Don’t use a form, and if you do put the value on a front page transmittal letter and not to 1004 or?? form
I hope those are purely entity ownership interests and not TICs Don. Don’t take my word or site info for it. Take the governments. https://www.irs.gov/pub/irs-utl/dlom.pdf
TICS are usually limited to partition costs ‘discounts’. Any fractional ownership interest discounts involving TICs that exceed partition costs are not usually supportable (as in as close to ‘never’ as we can ever come to in this profession).
Entity interests deal in DLOM and DLOL DLOC marketable and non-marketable. Beware, non-marketable (unregistered/restricted stocks) are no longer required to be held for two years (6 months is the minimum conditional resale limit now) so any PWC REIT sourced discount rates or Restricted Stock Studies developed prior to the time the period was reduced from 2 years to 1/2 year are now invalid. https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html
Aside from the fact that a 1/2 billion REIT bears no resemblance to most C&I property sold in American main street markets as opposed to Wall Street markets.
Most were small partnerships among friends or family’s, for taxes. much of the info came from the accounts studies distributed among appraisers, some came from sales IN partnerships where timing required a temporary partner, or family member to substitute until the ultimate sale. I found some of these contradictory, another friend paid a premium, and in another a family member screwed a relative.
Most of these situations occurred before those above cited studies. I noted in the one those PDF; it stated that these situations MAY CHANGE. Thanks for your concern. The statutes have expired and shield me!!
Four years for returns; three years for refunds and ten years for issues where IRS can allege (charge) criminal tax avoidance. Appraiser studies sketchy at best but depending on what specifically who knows? The remainder are interesting. In any event, if more than 4 years lapsed apparently IRS saw no red flags. Good job!