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Litigating Equal &

Uniform Analysis

Joshua Wood, JD, MAI, AI-GRS

Sec. 42.26. Remedy for Unequal

Appraisal

(a) The district court shall grant relief on the ground that a property is appraised unequally if:

(1) the appraisal ratio of the property exceeds by at least 10 percent the median level of appraisal of a reasonable and representative sample of other properties in the appraisal district;

(2) the appraisal ratio of the property exceeds by at least 10 percent the median level of appraisal of a sample of properties in the appraisal district consisting of a reasonable number of other properties similarly situated to, or of the same general kind or character as, the property subject to the appeal; or

(3) the appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted.

“… a reasonable number of comparable properties appropriately adjusted.”

Reasonable number

01Comparable properties

02Appropriately adjusted

03

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Is an E&U

report an

appraisal?

“You do not ask, and we do not opine

on, whether a U&E study is a kind of

appraisal or appraisal consulting or

review.” Attorney General Opinion

GA-0911, 2/7/12

Texas Occupations Code Sec. 1103.405

A person who holds a certificate, license, or registration issued under this chapter shall comply with:

(1) the most current edition of the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation; or

(2) other standards provided by board rule that are at least as stringent as the Uniform Standards of Professional Appraisal Practice.

USPAP Definitions

APPRAISAL

the act or process of developing an opinion of value; an opinion of value.

VALUE

the monetary relationship between properties and those who buy, sell, or use those properties

Comment: Value expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property at a given time in accordance with a specific definition of value. In appraisal practice, value must always be qualified - for example, market value, liquidation value, or investment value.

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Is an E&U an appraisal?

Summary

Appraisers in Texas must comply with USPAP

USPAP distinguishes value in general from kinds of value

Some parts of USPAP apply only to market value appraisals, others to all kinds

USPAP defines an appraisal as both an opinion of value, and the process of determining an opinion of value

USPAP does not limit “appraisal” to market value opinions

USPAP states that value is always an opinion and never a fact—a conclusion to a value is an expression of an opinion

Therefore, under USPAP, an E&U analysis is an appraisal, because it is the process of determining a value conclusion (aka, a value opinion)

What does USPAP require of an E&U?

Act in a manner that is independent, impartial, and objective

Comply with

the ETHICS RULE

the COMPETENCY RULE

the JURISDICTIONAL EXCEPTION RULE

the SCOPE OF WORK RULE

the RECORD KEEPING RULE

the applicable development and reporting Standards

Standards 1 & 2

the applicable Statements

Josh’s

USPAP Classes &

Seminars

USPAP Updates / Refreshers

USPAP for attorneys

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Standard 1: Real Property Appraisal, Development

SR 1-1, 1-2, 1-4, 1-6: All appraisals (incl. E&U)

SR 1-3, 1-5: Only market value appraisals

USPAP Standards Rule 1-2

an appraiser must …

(e) identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, including:

… (iv) any known easements, restrictions,

encumbrances, leases, reservations,

covenants, contracts, declarations, special

assessments, ordinances, or other items of a

similar nature

USPAP Standards Rule 2-2(a)

an appraisal report must …

(iv) state the real property interest appraised

"Real property" means:

(A) land;

(B) an improvement;

(C) a mine or quarry;

(D) a mineral in place;

(E) standing timber; or

(F) an estate or interest, other than a mortgage or deed of trust creating a lien on property or an interest securing payment or performance of an obligation, in a property enumerated in Paragraphs (A) through (E) of this subdivision. Sec. 1.04(2)

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Scope of

WorkAn appraiser must properly identify the problem to

be solved in order to determine the appropriate scope of work. The appraiser must be prepared to demonstrate that the scope of work is sufficient to

produce credible assignment results.

For each appraisal and appraisal review assignment, an appraiser must:

1. identify the problem to be solved;

2. determine and perform the scope of work

necessary to develop credible assignment

results; and

3. disclose the scope of work in the report.

Is the property appraised

unequally?

Appraisal Problem

Scope of Work

Comparable properties

Reasonable number

Appropriately adjusted

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Research

Questions

What’s a comparable

property?

How many is a reasonable

number?

What are the appropriate adjustments?

Framework

StatuteCase Law

USPAPAppraisal Practice

Comparable Properties

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Statute

The district court shall grant relief on the ground that a property is appraised unequally if the

appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted. 42.26(a)(3)

What is a

Comparable?

Sec. 23.013

(d) Whether a property is comparable to the subject property shall be determined based on similarities with regard to

location,

square footage of the lot and improvements,

property age,

property condition,

property access,

amenities,

views,

income,

operating expenses,

occupancy, and

the existence of easements, deed restrictions, or other legal burdens affecting marketability.

Confidential!

Confidentiality and Appraisal

Appraisal, especially commercial appraisal, depends on confidential information

Residential real estate isn’t commercial real estate; residential appraisal isn’t commercial appraisal

Commercial property is bought and sold based on information that isn’t publicly available

Limiting appraisers’ access to that information harms the appraisal process

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Sec. 23.01(f) The selection of comparable properties and the application of appropriate adjustments for the

determination of an appraised value of property by any person under Section 41.43(b)(3) or 42.26(a)(3) must be based on the application of

generally accepted appraisal methods and techniques. Adjustments must be based on recognized methods and techniques that are necessary to produce a credible opinion.

What is a Comparable?

Case Law?

USPAP?

Standards Rule 1-4: When a sales comparison approach is necessary for credible assignment results,

an appraiser must analyze such comparable sales data as are available to indicate a value conclusion.

What is a

Comparable?

Appraisal Practice?

The Appraisal of Real Estate, 14th ed.

“… an adequately supported

determination of the subject property’s

highest and best use provides the basis for

the research and analysis of comparable

sales, answering such questions as [w]hich

comparable properties match the highest

and best use of the subject property.” pp.

379-80.

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The Appraisal

of Real Estate,

14th ed., p.381

Research the competitive market for information on properties that are similar….

The characteristics of the properties such as property type, date of sale, size, physical condition, location, and land use

constraints should be considered. The goal is to find a set of comparable[s] … as

similar as possible to the subject property to ensure they reflect the actions of similar

buyers. Market analysis and highest and best use analysis set the stage for the selection of appropriate comparable sales.

The Appraisal

of Real

Estate, 14th

ed.

Similar buyers -> substitute property

The principle of substitution holds that the value

of property tends to be set by the cost of

acquiring a substitute or alternative property of

similar utility and desirability within a reasonable

amount of time. p.379

Whether a property is comparable depends on

market analysis and highest and best use

analysis. P.381

Highest and best use: which use (or alternative

use) creates the highest (market) value. p.332

The final step in highest and best use analysis is

maximum productivity, which is measured in

terms of market value. P.343

Reasonable Number of

Comparables

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What’s a reasonable number of

comparables?

Statute?

Case law

Weingarten: 10 not enough

Kempwood: 9 is enough

USPAP

Standards Rule 1-4: When a sales comparison approach is

necessary for credible assignment results, an appraiser must

analyze such comparable sales data as are available to

indicate a value conclusion.

What’s a reasonable number of comparables?

“The goal is to find a set of of comparable[s] … as similar as possible to the subject.” The Appraisal of Real Estate, 14th

ed., p.381

The goal is not a certain number of sales, but a character of the data set

The universe of recent sales is much smaller than the universe of comparable assessments—”how many

comparables?” isn’t typically a question asked in generally accepted appraisal methods and techniques

Instead, appraisers ask “Do I have good comparables?”

A single great

comparable is

more valuable

than ten

mediocre ones

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What’s a

reasonable

number of

comparables?

Market value

appraisals v. E&U

Generally accepted appraisal methods and techniques do not constrain an appraiser to concluding to the median

Therefore, an appraiser can typically be liberal about including data in an adjustment grid, knowing that it need not influence the final conclusion

Appraisers are not trained to make choices in selecting comparables under the assumption that they must conclude to the median rather than giving the best comparable the most weight

What’s a reasonable number of comparables?

What would generally accepted

appraisal methods and techniques look like, if they

included the requirement that the appraiser always conclude

to the median?

What’s a reasonable

number of comparables

in an E&U analysis?

If every addition or deletion of a comparable from the data set changes the

conclusion, then the choice to use one more or one fewer comparable impacts on

the credibility of the analysis.

We still have the requirement that the analysis be credible. 23.01(f)

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Credibility

USPAP demands it

Sec. 23.01(f) demands it

Kempwood

A test for “reasonable number”?

Adding any more properties would mean including properties with fewer similarities. 186 S.W.3d at 160.

But isn’t that always going to be the case? One comp is most similar, the next will be slightly less similar, and so on.

Perhaps this can be measured by the degree of adjustment required.

Is there a certain threshold where the adjustments become too great?

Careful—different properties have different scales of adjustment

What’s a lot of adjustment in one place might not be a lot somewhere else

Appropriate Adjustments

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What’s an appropriate adjustment?

Statute?

Case law

EXLP: “[T]he only independent analysis required is adjusting the appraised values [of the comparison properties] to put the properties on equal footing.” 553 S.W.3d at 686, quoting Harris CAD v. United Inv’rs Realty Trust

USPAP

Standards Rule 1-4: When a sales comparison approach is necessary for credible assignment results, an appraiser must analyzesuch comparable sales data as are available to indicate a value conclusion.

What’s an appropriate adjustment?

The Appraisal of Real Estate, 14th ed., p.398

Techniques includes data analysis, statistical analysis, cost-based adjustments and income-based adjustments.

“Above all, the appraiser must be careful to ensure that mathematical adjustments reflect the reactions of

market participants.”

Weingarten factors

Comparables are all smaller

019 out of 10 have a much lower value

02Only 10 of 191 candidates used

03Appraiser “carved out” parts of the account for comparison

04Adjustments were applied for physical characteristics only

05Adjustments were subjective

06

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Lessons from Weingarten

Bracket the subject (larger and smaller)

Ideally, bracket all major characteristics (age, location, etc.)

Kempwood said there’s nothing wrong with #2

Kempwoodapproved of a small data set, because it fell under a clear

selection process and

wasn’t cherrypicked

It’s not the number that matters, it’s the

process

Potentially problematic, but deferred to trial

court

Physical only OK if they

encompass economic factors too

In Kempwood, selecting only Class D

had this effect

Don’t make subjective

adjustments

Subjective v. Objective

USPAP: Appraiser one who is expected to perform valuation services competently and in a manner that is independent,

impartial, and objective

Appraisers act objectively when they’re being

independent and not picking sides

Sometimes appraisers say “subjective” when they mean qualitative.

8th Wonder: courts recognize that appraisal, (including E&U), is not science, and that it is OK for appraisers to use judgment. Using judgment does not imply subjectivity. But even qualitative adjustments should be supported with reasons.

Verification

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Must E&U data be verified?

Statute? Case lawKempwood: “We cannot see

why [the appraiser] should be expected to verify

HCAD’s data.” 186 S.W.3d at 160.

USPAPStandards Rule 1-4: In

developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results.

Why verify assessment data?

What if the comparable was adjusted for deferred

maintenance, and the subject has no deferred

maintenance?

What if the comparable received a discount for a

leaseup, and the subject was stabilized?

If a comparable property went to an ARB hearing,

certain otherwise unavailable data might be made

public, which would help make a better adjustment.

Bottom line: it’s necessary to put the comparables on

an “equal footing.” (EXLP / United Investors)

Value v.

Market Value

Catherine Tower, relying on EXLP: “Value” in the tax code

doesn’t have to mean “market value.” “Market value” is a “catch-all reference to the taxable value produced

through application of the code’s rules.”

USPAP has requirements that attach to any kind of value

opinion, not just market value; and E&U reports are appraisals

that must comply with standards

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Selected USPAP Requirements

Identify leases, contracts and other similar items (SR 1-2)

Verify all information necessary for credible assignment results (SR 1-4)

Reconcile

(SR 1-6)

the quality and quantity of data; and

the applicability and relevance of the methods and techniques used

Legal

Requirements

Select comparables based on generally accepted appraisal methods and techniques

Must know the highest and best use of the subject and the comparables

Must know whether some other use would return a greater (market) value

Must compare the value of the actual use of the property against the value of alternative uses

Adjust the comparables, based on recognized methods and techniques, so that they are on

“equal footing”

Adjustments must reflect reflect the reactions of market participants

Questions

to ask when

reading an E&U report

Does the appraisal comply with USPAP?

Does the appraisal comply with Texas

law?

How does the appraisal identify

comparable properties?

How does the appraisal establish that a reasonable number was used?

Did the appraiser verify the data?

Has the appraisal made appropriate,

market-based, adjustments?

Are the assignment results credible?