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Commercial Appraisal for Estate Tax

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GCJim

Senior Member
Joined
Dec 11, 2007
Professional Status
Certified General Appraiser
State
New Jersey
Commercial gurus, I just want to make absolutely SURE about this one:
Purpose is for Estate Tax determination.
Subject is a commercial property, former gas station type concrete block building with auto repair bays and 2 small offices on a larger than average lot, currently used for auto repair and used car sales.
No past or present environmental concerns. Owner is a real estate holding company. There are technically 2 tenants: Owner also owns the auto repair biz and pays rent to the holding company. Owner of the auto sales operation also pays rent to the holding company.
Retrospective appraisal as of date of death. Sales comparison approach. No problem with either of these.
However, it is unusual in my neck of the woods for a property such as this to be leased. Most often would be purchased by an owner / user. Also, HBU as if vacant would likely be for development as a multi-unit office building. HBU as improved would be its current use, in an area dominated by auto service businesses. Current use adds value, so I would not recommend conversion for an alternate use.
I have done estate tax appraisals before, have read the IRS pamphlets / guidance in the past, am familiar with IRS ‘Fair Market Value’ definition, and feel competent for the assignment.
Problems / Questions: I normally would only do a sales comparison approach for this assignment. Is this sufficient in this case for IRS (tax) purposes? Would they be looking for or require the Income Approach here? I also would not be doing an exhaustive HBU analysis within the report. Would they look for or require a more in-depth HBU analysis?
Thanks in advance for any suggestions or advice.
 

PL1957

Senior Member
Joined
Jul 19, 2004
Professional Status
Certified General Appraiser
State
Illinois
IMO, if there is was a lease in place that would survive a property transfer, you must take it into consideration in coming up with your DOD value. If you feel you can do that in a supportable fashion using only a Sales Comparison approach, go right ahead. I'd also be interested in how you do that, since I really can't see any way that would involve less work or less complication that just doing the income approach.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
I think with the leases in place, even though they appear to be someone incestuous, you have to address them and I would suggest do an income approach on the property. I also believe your highest and best use analysis needs to be pretty thorough in order to show that demolition of the improvements and contruction of new would not result in a rental rate sufficiently above that which exists to support both demolition and construction. This would be done in both the financially feasible and the maximally productive sections of highest and best use. You will need some data in order to do this.
I think the IRS will look at the history of the property and see that is has been producing rental income and yet you havent done an income approach. Because the "majority" are owner occupied would not suggest that "all" are and I think given the history an income approach will be necessary.

I wish you well.
 

Louis Pompeo

Member
Joined
Nov 23, 2007
Professional Status
Certified General Appraiser
State
Mariana Islands
I was an IRS Appraisal Reviewer for 5 years up till 2 years ago.

They are looking for a USPAP compliant report.

If you are not going to include an approach to value that would appear to be "usually included" in such a valuation assignment, you had better be convincing as to why you are not considering it a valid analysis of value.......i.e., The subject property is not considered to be investment grade.....The HBU analysis indicates strongly that an owner-user is the most typical buyer of this property, etc.

As with all reviews, the IRS may perform a field inspection of the subject property (from the exterior) with your appraisal in hand. You would not want the IRS Appraiser stopping in a few brokers offices or doing a COMPS search and finding out that this type of property is regularly rented in that market and/or that there is enough supporting data in the marketplace to put together a meaningful Income Approach.

Suggestion: Do a full-blown, market supported, tight sales comparison approach.....then do a perfunctory and short Income Approach using whatever data you can.

Final reconcile by giving all weight to the Sales Comparison Approach.

That should make it sail through the IRS Examination process.

Good luck
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
I was an IRS Appraisal Reviewer for 5 years up till 2 years ago.

They are looking for a USPAP compliant report.

If you are not going to include an approach to value that would appear to be "usually included" in such a valuation assignment, you had better be convincing as to why you are not considering it a valid analysis of value.......i.e., The subject property is not considered to be investment grade.....The HBU analysis indicates strongly that an owner-user is the most typical buyer of this property, etc.

As with all reviews, the IRS may perform a field inspection of the subject property (from the exterior) with your appraisal in hand. You would not want the IRS Appraiser stopping in a few brokers offices or doing a COMPS search and finding out that this type of property is regularly rented in that market and/or that there is enough supporting data in the marketplace to put together a meaningful Income Approach.

Suggestion: Do a full-blown, market supported, tight sales comparison approach.....then do a perfunctory and short Income Approach using whatever data you can.

Final reconcile by giving all weight to the Sales Comparison Approach.

That should make it sail through the IRS Examination process.

Good luck


Very good advice Pat. Thanks for this post. I appreciate the education you have given us all.
Cheers
 

Kali the Boston Terrier

Senior Member
Joined
Jul 7, 2003
Professional Status
Certified General Appraiser
State
Michigan
Pat:

I hope you don't mind getting bothered a whole bunch. AT least with other hordes of appraisal users out there, we all kind of know what they are looking for and not...the IRS and the other hand...a bit of a mystery.
 

SharperImage

Sophomore Member
Joined
Sep 14, 2005
Professional Status
Certified General Appraiser
State
Wisconsin
I might be wrong on this, but;
When doing an estate appraisal, are you not appraising the property as it sat at the time of death? Even if the property was not being utilized as the Highest and Best Use, the value would be what it was when the person died?
Redevelopment may be "hypothetically" the best use for the property NOW and may be a higher value, but at the time of DEATH, the value has to be what the property was at that point in time.
At least that's my take on the situation and since it comes after a three day weekend may be a tad foggy.

SI
 

GCJim

Senior Member
Joined
Dec 11, 2007
Professional Status
Certified General Appraiser
State
New Jersey
Thank you all for the good advice. Much appreciated!
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
I might be wrong on this, but;
When doing an estate appraisal, are you not appraising the property as it sat at the time of death? Even if the property was not being utilized as the Highest and Best Use, the value would be what it was when the person died?
Redevelopment may be "hypothetically" the best use for the property NOW and may be a higher value, but at the time of DEATH, the value has to be what the property was at that point in time.
At least that's my take on the situation and since it comes after a three day weekend may be a tad foggy.

SI


The only change to the above statement would be if the Estate is using the "alternate" date of valuation which is a day exactly six months to the date following the date of death. It does not happen very often, but for various reasons it can. Conversations should be had with the estate attorney / accountant to make sure what the date of appraisal is .. between these two dates. (The estate must pick one date for valuation of ALL of the estates assets .. not just the realty).
 
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