Category Archives: Reviewer Thoughts & Tips

The main attempt of this blog is for me to give back to the real property valuation industry. I can’t take my knowledge with me when I leave this world. So, my goal is to share everything I know through writing articles, teaching classes and seminars, and this blog.

I usually receive several questions a week from fee appraisers, appraisal reviewers, and chief appraisers regarding appraisal reports, FIRREA, or USPAP. Hopefully, these will provide most of the content for this blog. In this way, we can all learn from the same issue under discussion. Obviously, items will be redacted as needed to maintain confidentiality.

If I hit a lull in inquiries, I have a huge treasure trove of topics to draw on. I will try to discuss interesting topics I have encountered in international reports. It is a neat world out there and us American valuers should be amazed at how the rest of the world handles various items.

Yes, I will give my interpretation of FIRREA and USPAP. Everyone knows I am not shy. However, to CYA, I need to give the standard verbiage that my interpretations are not legal interpretations….they have not and cannot be approved by examiners and regulators. Each Bank should contact their specific examiner and/or the appropriate regulator in Washington DC that interprets FIRREA.

Mann Overboard, Reviewer Thoughts & Tips

LEASE-UP FOR OWNER-OCCUPIED BUILDINGS – A DEBATE YET TO BE SETTLED

August 9, 2018 – Over my 30+ year career, this question has come up every few years.  When performing the Income Approach for a vacant or owner-occupied building (same thing), should there be discounting for the time and cost to lease it up?

My short answer is – Yes.  However, I would say 99% of appraisers do not make such a deduction.  Why not?

A few notes before I summarize a great response from an appraiser who does make the deduction.

First, America’s definition of Market Value assumes a sale occurs.  Therefore, an owner-occupied property is vacant when it sells.  That occupant moves out so either a new owner occupant can move in or third-party tenants can move in.  I have long argued that EVERY house/condo in America sells vacant – regardless if the owner occupies it right up to closing or it is physically vacant beforehand.  Of course, rental properties are the exception.

Second, the Income Approach assumes an investor owns the property and will lease it up to stabilization to third-party tenants.  The Income Approach does not assume owner occupancy!

Therefore, a vacant or owner-occupied property has to be leased up to obtain stabilization that is assumed in the direct cap method of the Income Approach.  Lease-up is not free and instantaneous that often.  Below is the summarized response that was shared with me.

As always, I welcome your thoughts.  Unlike our cultural and political world, differing opinions are welcome and will not be called ‘tone deaf’ or racist or some kind of phobic and so on:)  If I get enough comments, I will do a follow up post.

(Oh, let me add that the Sales Comparison Approach will depend on what sales are used.  If the comps were 100% vacant and/or owner-occupied, then the SCA already reflects such discounting for lease-up.  If the comps were partially or 100% leased, then….hmmmmm….)

(Second oh….all of this is needed to determine one of the 3 highest & best use conclusion items – type of occupancy.  Sometimes it is Owner Occupancy and other times it is Third-Party Tenants via an Investor owning the property.)

OK, finally to the Anonymous Appraiser Reply:

  1.  For the purpose of our analysis, owner-occupied space is presumed vacant and subject to deductions to reach stabilized occupancy in the “As Is” Market Value.
  2. FIRREA requires appraisers to “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.”
  3. The present value of all costs necessary to achieve stabilized occupancy (including rent loss, leasing commissions, concessions, tenant improvements, rehabilitation costs, and/or profit loss) incurred during the lease-up period must be considered in developing the “As Is” Market Value conclusion.
  4. ((In this particular appraisal, )) The sales utilized in the Sales Comparison Approach were all vacant or owner-occupied; therefore, no lease-up adjustment was applied to the Sales Comparison Approach.

I agree with this logic.  Even for non-FIRREA appraisals.

What does the market do?  Well, that is answered in the Sales Comparison Approach as prices for vacant and/or owner-occupied properties reflect how an owner values the property or an investor values it knowing s/he has to find a tenant(s).

Thoughts….

The Mann

Reviewer Thoughts & Tips

A REAL-WORLD SCENARIO AND HOW FIRREA ADDRESSES IT

August 2, 2018 – First, thanks to a bank client for sharing some real-world situations with me and allowing me to post them to my blog.  Also, thanks to the regulators for providing anonymous explanations of how FIRREA applies.

SCENARIO – Any City USA – We financed one 4-plex (units cannot be sold individually) and eventually there may be more than four 4-plex properties.  At what point do we consider this tract development, therefore would need discounted cash flow analysis completed?

Assumption – Ignore any land for future development

Assumption – All development occurs in same development

FIRREA Application Under Several Situations:

First 4-Plex – This is a SINGLE 1-4  Family residential property.  Therefore, the $250,000 threshold applies and an evaluation is required if the loan amount is $250,000 or lower.  As always, the bank can choose to order an appraisal.  If the loan amount is above $250,000 then an appraisal is required.

Two 4-Plexes at once – This falls under Commercial Real Estate Transaction and the new $500,000 threshold.  A loan amount at or below the threshold requires an evaluation and above the threshold requires an appraisal.

Five or more 4-Plexes – This meets the definition of Tract Development and  would need a discounted cash flow analysis completed.  Some exceptions are possible, but generally a DCF analysis is performed.  The $500,000 threshold applies as to whether the DCF is done in an evaluation or appraisal.

With the new definition of Commercial Real Estate Transaction and the new threshold of $500,000, the above project shows the realm of possibilities.

As always, please contact me if you want  to discuss this.

Also, as always, I encourage you to contact the authors of the 2018 interagency bulletin that introduced the new definition and threshold.  They can give an ‘official’ opinion on how to handle your particular situation.  You do not need to provide a borrower’s name or such.  They simply want to help you follow FIRREA correctly.

I will be posting a few more scenarios over the next few weeks….check back often:)

The Mann

 

Reviewer Thoughts & Tips

THE ‘ERROR’ IN THE 2010 INTERAGENCY APPRAISAL GUIDELINES

July 30, 2018 – The following wording from the December 2010 IAEG suggests that property value be used to determine if an appraisal or evaluation is needed.  Obviously, this is not possible since property value is not known at the time a decision is made.

The text appears next followed by a reply from G. Kevin Lawton with the OCC.  Mr. Lawton was kind enough to provide the response and allow it to be credited to him.

Text from Item 1 in Appendix A:

1. Appraisal Threshold
For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices.54 If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.

Mr. Lawton’s response:

This is one of those areas in the Guidelines where the wording, which mixes the concept of “value” and “transaction value,” can create a problem that is confusing and not consistent with the regulation, and I have had banks and examiners complain about the inconsistency.

The solution is to have banks allocate “transaction value” among the individual properties rather than “property value.”  The bank should allocate the entire aggregate commitment among properties.  Doing this allocation of “transaction value” rather than expected “property value,” sticks to the spirit of the regulation itself.  There is another, bigger advantage of using transaction value as the driver: it avoids the Catch‐22 problem that some banks have brought up: “what if I allocate property value to one property of $200,000, obtain an evaluation, and the evaluation result shows a market value (property value) of $260,000, do I then need to go get an appraisal?”  In other words, “I estimated the property value to be $200,000 and I was wrong. The property value is $260,000 and since, using the “property value” as the driver for what is needed, I now need an appraisal because the property value is above the threshold. This, in itself, is an area where the Guidelines are not consistent with the regulation, since the Guidelines talk about property values “less than the appraisal threshold” (Appendix A, Section 1). That sentence, and the following sentence in the Guidelines mix the concept of “property value” and “transaction value” (last two sentences in Section 1).

The “appraisal threshold” deals with transaction value, not property value.  So, back to the example above, if the banker estimates (allocates) $200,000 of the transaction value to the property (rather than “guessing” a $200,000 property value) then an evaluation is allowable and if the evaluation result shows a property value of $260,000 there is no Catch‐22.  It does not matter what the property value result is because property value does not drive what is needed.  So when a bank addresses “property value” as the driver of what product (appraisal or evaluation) is the minimum product required under the regulation they may need an evaluation (based on a guess of property value of $200,000) followed by an appraisal (because the evaluation shows a property value of $260,000). This is not what the Guidelines intended.

One could probably argue this several ways, but the “allocation of transaction value” among the individual properties, accomplishes the following:  1) it is consistent with the intent of the regulation, 2) doesn’t jumble the concepts of property value and transaction value, 3) avoids the “what if’s” when property value is the driver, 4) is understandable, and, 5) is a practical solution for our bankers.

Hope this provides some clarity to this issue.

The Mann

Mann Overboard, Reviewer Thoughts & Tips

REVISIONS MADE TO TITLE XI OF FIRREA

April 2, 2018 (UPDATED) – The Agencies have finally released ‘The Final Rule’ for updates to FIRREA.  A copy of the document can be found at:

https://www.fdic.gov/news/board/2018/2018-03-20-notice-sum-c-fr.pdf

The main change is increasing the de minimus level for commercial real estate transactions from $250,000 to $500,000.  Although this might seem significant, it is basically an adjustment for inflation from the last change to $250,000 in 1994.

Also, the definition of ‘commercial real estate transaction’ has been updated.

The changes are not in effect until published in the Federal Register,  I will update this post when this occurs.  UPDATE – This document is now live as it is in the Federal Register.

Financial institutions should update their appraisal/evaluation policies accordingly.

The Mann

 

Mann Overboard, Reviewer Thoughts & Tips

CORRECTING THE APPRAISAL FOUNDATION’S FAKE NEWS

May 18, 2017 – Today The Appraisal Foundation (TAF) gave a webinar on using Restricted Appraisal Reports (RARs) to meet the need of Evaluations.  As TAF is no longer an unbiased entity, I will correct the Fake News they put out today.  My perspective is based on 23+ years of writing true Evaluations (i.e. non-USPAP) and 23 years of ordering RARs.  I have seen both type of reports all across the nation.  So, here goes…

  1.  FAKE NEWS – Evaluation requirements are more than Appraisal requirements.  Misleading.  TAF listed the 5 appraisal requirements listed in FIRREA.  Then compared that to the 14 bullet points for Evaluations listed in the IAEG.  Of course, one of the 5 appraisal requirements is mandatory compliance with USPAP – which has 12 bullet points in SR 2-2.  A few of those requirements require multiple items.  FACT – As I will explain below, A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

2.  Remember USPAP has NOTHING to do with Evaluations.  Only the December 2010 IAEG applies to Evaluations.  Thus, this webinar and the next webinar about writing an USPAP Evaluation (an oxymoron – USPAP has an A for Appraisal in it, not an E for Evaluation! Evaluation requirements are in the IAEG) are not relevant.

3.  IMPORTANT EXPLANATION FROM GEORGE MANN:

A.  Evaluations CAN omit many items that are required and/or reported in the typical appraisal report (I will list many below).

B.  RARs CANNOT omit any items required by the IAEG for Evaluations.

C.  Therefore, RARs MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

4.  FAKE NEWS – It was insinuated in the webinar that a RAR could have less content than an Evaluation.  A single statement near the end said RARs do need to be beefed up and that will be explained in the next webinar.  That should have been emphasized more.  The sample RAR presented would NOT meet Evaluation requirements.  The IAEG says ‘sufficient information’ is needed.  Simply stating a value is not sufficient information.

5.  Here is a list of items that are typically included in a RAR, but are NOT included in an Evaluation:

2 very important items are Evaluations do NOT require the SR 2-3 Certification, nor do you have a work file requirement.  Those are yuge and bigly!

Reporting-wise Evaluations typically will NOT contain an executive summary, limiting conditions, extraordinary assumptions and hypothetical conditions, intended use, intended user, zoning, tax assessment info, flood zone, detailed property descriptions, prominent use restriction statement (RARs), or listing and sales history.  That is not to say every RAR needs all of those items (many are mandatory though) nor that every Evaluation will omit all of those items (most of them will be omitted though).  Therefore, it is FAKE NEWS for anyone to ever say or insinuate that a RAR contains less or equal detail to an Evaluation.

Remember, Mann’s Law of Evaluations – A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

Lastly, not that TAF suggested a bank would use an Evaluation on a $34 Million property, the IAEG makes it clear that as the loan and/or property become more complex, banks need to move towards appraisals.  Nearly all Evaluations will be on properties valued around $1 Million or less.  Some exceptions will exist, especially for the largest banks.  But, not too often will a bank use an Evaluation on properties over $1 Million.  Yes, technically, they make their decision based on loan amount.  But, us appraisers deal with property value.

TAF made a great point that an RAR can be done on any size property.  The amount of work doesn’t change between a RAR and an Appraisal Report.  But, the amount of reporting is less (in a RAR) and that saves a little bit of writing time.

Mann Overboard, Reviewer Thoughts & Tips

Agencies Finalize EGRPRA Review with Joint Report to Congress

March 22, 2017 – After about 2 years, FFIEC has finally published their report that includes dealing with appraisal issues.

The link is below.   Pages 28 to 40 deal with appraisal issues.  Albeit, appraisals are discussed a bit in a few other places.  As noted, these are NOT final and official changes.

In general, if the proposal does not change, this is a big win for appraisers.  The small increase in a single threshold will not have a major affect on appraisal volume.

https://www.occ.gov/news-issuances/news-releases/2017/nr-ia-2017-33a.pdf?utm_campaign=ABA-Newsbytes-032217-HTML&utm_medium=email&utm_source=Eloqua

Reviewer Thoughts & Tips

USPAP CHANGES FOR 2018-2019

February 24, 2017 – The ASB has posted a summary of changes at the following link:

https://appraisalfoundation.sharefile.com/share?#/view/s305094efde84bbda

For those performing appraisal review, you will want to read about the changes and plan ahead if there will be changes needed for your review documents.

The definition changes are also worth noting.  We have 10 months to get ready for the changes.

Reviewer Thoughts & Tips

TRANSACTION VALUE

February 17, 2017 – I received the following question:

QUESTION:  I had an appraisal/FDIC interpretation question in regards to the $250,000 transaction value from fil10082a and thought I’d reach out and see if you could provide any input.

Example:  An individual identified a situation where there’s an existing $1,300,000 loan and a borrower is requesting another $200,000 for improvements.  Is the “transaction value” (as defined in FDIC fil10082a) $200,000, which is the new subsequent request OR is it equal to the new exposure of $1,500,000?  All else equal (market values have held, no material property deterioration, etc.), no new appraisal would be required if the transaction value is under $250,000.

Any input you could provide would be appreciated.

ANSWER:  The transaction amount is the total $1.5 Million.

Assuming no change in market conditions or collateral protection, an evaluation is permitted and an appraisal is not required.

However, you should consider getting an appraisal if there were potential credit risk management concerns.

Also, regulators want banks to have a policy on when to obtain appraisals even though an evaluation is permitted.

ADDITIONAL NOTE – There is no dollar threshold for loan renewals, refinancings, or subsequent transactions.  The $250,000 and $1,000,000 thresholds only apply to New Loans.

 

Reviewer Thoughts & Tips

HAWAII

January 28, 2017 – The fun part of reviewing is seeing how things are done in different markets.  I ran into two items I have not seen before.

The subject is not within a tsunami evacuation zone.

Well, I guess that is something to worry about over there.  I have not seen such for properties along the West Coast of the mainland though.  Maybe, just not a big issue for the mainland versus Hawaii.

Zone D is defined as areas where there are possible but undetermined flood hazards, as no analysis of flood hazards has been conducted. Not within a Special Flood Hazards Area but within 250 feet of Zone
AE.

I have not encountered Flood Zone D before.  This particular property is in Honolulu.  It doesn’t seem like it would be a tough place to determine a flood zone for.

As they say, you learn something every day.  I learned two things:)

Reviewer Thoughts & Tips

I HAVE HIT A NEW LOW :)

September 21, 2016 – Not too many people would use the above as a headline:)  Let me explain…

About 8 years ago today in fact, the last review I did as Chief Appraiser for the fractional bank (as it was called…or Evil Empire by other banks) was an appraisal of a vacant residential lot in Detroit.  The value conclusion was $100.  It was well supported with two sales at $100 and a listing at $200 that the appraiser adjusted downward 50%.

I had spent 22 years appraising and reviewing.  Made it to Chief Appraiser of a $100 Billion bank.  And there I sat making the big bucks to review a $100 residential lot:)  And, yes, the appraiser’s fee was higher than the value conclusion.

I have used that story many times over the years.  Now, I can top it.  I just got paid to review an appraisal of what has to be kept as a confidential property (and client).  The value conclusion was $0!  Yes, I have finally hit a new low! Now, I can finally say I have appraised and/or reviewed properties ranging in value from $0 to over $2 Billion.  That is a resume builder!  It was annoying to use $100 as the bottom of that range.

Oh, and yes again, my review fee was higher than the value conclusion.  Thankfully, USPAP prohibited me from quoting a review fee that was a percentage of the value! LOL

Everyone have a great day:)