I just had to write this for all you attorneys in the blogosphere.  It’s of interest to lenders too.  I’d like to put to rest a misconception.

As you may know, every two years the Uniform Standards of Professional Appraisal Practice is updated and changed.  USPAP is the “law” we appraisers work under.  Sometimes the changes are major, other times they just change a word in a sentence.  In this case the Appraisal Foundation removed a sentence from the original editions of USPAP that makes a very big difference to people who appraise marinas.  I mention this because there are many people who still remember what the old sentence said and don’t realize that it is no longer there.

Standards Rule 1-2(e) says:

In developing a real property appraisal, an appraiser must observe the following specific appraisal guidelines:  (e) identify and consider the effect on value of any personal property, trade fixtures, or intangible items that are not real property but are included in the appraisal.

How it Was in the Olden Times…

This rule hasn’t changed but the Comment underneath has.  This is what it said in the 2000 edition of USPAP (page B-10):

This guideline requires the appraiser to recognize the inclusion of items that are not real property in an overall value estimate.  Additional expertise in personal property (see Standard 7) or business (See Standard 9) appraisal may be required to allocate the overall value to its various components.  Separate valuation of such items is required when they are significant to overall value. [my emphasis added]

So under the original standard that many people still think holds true today, appraisers who value marinas need to separate business, personal property and real estate values when significant.  Of course, significant is open to interpretation, but you get the point.

Welcome Back to the Present

Sometime between the 1990 and 2000 edition, this sentence was removed.  In the 2000 edition, none of the comment remains.  Same goes for the 2008-2009 edition.  After a detailed crawl through the current edition and with the help of their fabulously compiled index, nothing in USPAP remains that states or infers, that appraisers need to separate business, personal property and real estate values in an appraisal – significant or otherwise.

I understand why and suspect it was the hotel valuation experts who really, really wanted this removed.  Let’s take the case of marinas.  When they are bought and sold, the price is business enterprise value.  All the components are included in one lump number.  Although I’ve seen business value and real estate separated on contracts of sale, when I’ve inquired as to how the seller and buyer came up with those numbers, I get responses like “it is what my accountant wanted me to do”, “I did it to reduce my taxes” or “it is just something that I threw out there”.  Not very scientific, is it?  And that’s the point.  When the market trades using business enterprise value, why should appraisers be forced to separate them when market participants do not?  If buyers and sellers can’t do it with any degree of precision, why should appraisers be held accountable?  To use appraiser terminology, doing so does not reflect the actions, thinking, motivation or behavior of market participants or the market.

This One’s for Opposing Counsel

For attorneys that like to question me on the witness stand about this topic, this blog is for you!  It also makes for a good hyperlink in our marina appraisals that provides further reasoning why the market value we report is always prefaced as going concern.