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Appraising for the Tax Court
By
Charles E. Blau, Esq. IFAC
National Association of Independent Fee Appraisers 2012 National Conference
Secaucus, New Jersey
Appraiser’s Role
• Assist the Trier of Fact
• Your appraisal may be brilliant, but if you are unable to assist the Judge in understanding how you got to your value you have failed as a witness.
• Sure you have a great resume are honest and a nice guy, so the judge should just believe you. ( the other guy has a great resume too)
• Facts: An experts opinion raises no higher than the facts.
What’s wrong with this write-up?• Sale Number 1 • Location: 319 Self Place, Orange, New Jersey• Block/Lot: 45/11• Grantor: James Tinkers• Grantee: Evers Chance• Date of Sale: July 4, 2010• Book/Page: 4511/23• Sale Price: $550,000• Lot Size (SF): 4,500• Zoning: Commercial• Building Size (SF):3,332• Verification: Deed• Description: One story and basement store• Sale Price/SF: $165.07• •
What’s wrong with this write-up?• Sale Number 2• • Location: 45 Main Street, Orange, NJ• Grantor: Robert Zimmerman• Block/Lot: 55/19• Grantee: Richard Starkey• Date of Sale: August 8, 2009• Book/Page: N.A.• Sale Price: $970,000• Lot Size (SF): 8,500• Zoning: Commercial• Building Size (SF):6,500• Verification: Assessor• Description: One story commercial in inferior condition compared to subject.• Sale Price/SF: $149.23•
What’s wrong with this write-up?• Sale Number 3• • Location: 6 Webster Place, Bogota, New Jersey• Block/Lot: 123C/19• Grantor: James Madison• Grantee: Dolly Madison• Date of Sale: March 4, 2010• Book/Page: 4521/211• Sale Price: $250,000• Lot Size (SF): 7,500• Zoning: Commercial• Building Size (SF): 5,500• Land To Bldg. Ratio1.36:1• Verification: Benedict Arnold• Description: Industrial• Sale Price/SF: $45.45• •
• 6 Webster Place, Bogota, New Jersey
What Does Verify Mean?
• Assessor
• Deed
• Broker
• Buyer/Seller
What Does Verify Mean?
• Deed Abstract (SR-1A)
• Attorney
• Appraiser
Non Useable Sales
• NU 6 –Sales of only a portion of the assessed unit
• NU 7 – Substantially improved after assessment
• NU 10 – Sale by Guardian, Trustee, etc.• NU 23 – includes machinery, fixtures• NU 26 - Some Other Reason
Non Useable Sales
• NU 31 First Sale after foreclosure
• According to The Appraisal Foundation’s Appraisal Practices Board Valuation Advisory issued May 7, 2012
• Some think using comparable sales that were bank owned properties or short sales, should be precluded as comparable sales.
• The Appraisal Foundation says that while this may be possible in some markets, this cannot be done in many other markets.
• There are markets were nearly all sales are bank-owned, short sales or other financially distressed sellers.
Comparable Sales
• All of your adjustments make sense, but what if conclusion doesn’t? Smell Test.
• Adjustments against your interest.
• Can’t prove be conservative.
Photos
• Google earth
• Not there?
• Interiors?
• Consistency
USPAP
• You care, but no one else does.
Appraisal Report
• Make it easy to follow
• Addenda
• Reference page numbers as you talk
• Wait until everyone on same page
Sales Comparison Approach
• Income Property without knowledge of income and expenses
• Magnitude of Adjustments
• As a check
I was told I can’t use that
• Don’t Reject Your Own Sales
Sale of Subject
• Should be the end of the story but often isn’t.
• Other side will do its best to discredit the sale if it hurts them.
• You should try to prove that it meets thedefinition of market value.
Date of Sale
• Town’s will often tell you that the sale must be before October 1, of the pre tax year.
• Best that most of your sales are before October 1 .
Date of Sale
• Ok if some of the sales are after. • When was contract?
• Was it on market before October 1st?
What is a comparable Sale?
• Does the sale meet the definition of market value? • Was it exposed to the market? • Was there a broker? • Was the seller under duress?
• Was there unusual financing?
• Does the sale have the same highest and best use as the subject property?
Assumptions and Boilerplate
• What if assumption is wrong, would it change your conclusion?
• Read your boilerplate
Support for Adjustments
• Paired sales
• Market Studies
• “…after years and years of experience and discussions with those knowledgeable in the market…”
Experience
• I believe the bright 17 year old high school student in elementary astronomy can do a better job estimating the distance to the moon than the old man of the mountains who has looked at the moon for 80 years. I would not give a red cent for an appraisal by the ‘expert’ who beats his breast and shouts: ‘I don't have to give reasons. I've had 40 years experience in this business.
Demonstrative Evidence
• Sale 3
• You can say that the• “Property is in poor condition”
Or
Theme of the Case
• What is it?
• Don’t let it get lost in the sauce
Lease SummaryLocation Landlord Tenant Bldg. Expenses $/Sf
45 Main Eiason Namath Office Net Net $15/sf
19 Central Parcells Marra Commercial Modified Gross $13.50/sf
49 Main Kranepool Harrelson Office Net Net Net $14/sf
50 Central Lasser Crabtree Office Net $22/sf
Economic Rent
• Economic Rent in New Jersey (Market Rent) Controls.
• Terms• Adjustments• Photos• Concessions• Source• Tenant Improvements
Vacancy Rate
• Stabilized
• Support
• Studies
• 10 year history
Capitalization Rate
• You must have some support for your cap rate.
• Band of Investment - based on what?
• ACLI , Korpacz, Real Estate Research Corp, other
• Market Derived.
• Not based on “your experience.” or the usual.
Expenses
• The Tax Court examines expense very critically.
• The courts are very suspicious if you examine only the current year’s expenses.
• Expenses can vary dramatically from year to year.•
Therefore you should examine at least 3 years and stabilize the the expenses to predicta typical year.
Cost Approach
• Don’t use it unless it really applies. • And then you better do it right. First sign you didn’t
do it at all is everything ends in a zero.
• Don’t just add site value.
• Just because its on your form you don’t need to do it.
What else do you need to know besides your Appraisal?
• Appraisal Theory• USPAP• A little law of Tax Appeals in your Jurisdiction
• Valuation Date• Leased Fee v Fee Simple
Other Things to Remember
• Know your weak spot, it will be attacked
• What if you have a great comp, but can’t verify it when you write your appraisal?