USPAP Advisory Option 17: Current or Prospective Value ?

[Helpless]

The following is a direct quote from USPAP's Advisory Opinion (AO) No. 17:

"Many real property appraisers have been uncertain whether a current value opinion, rather than a prospective value opinion, may be provided in compliance with USPAP for a property subject to completion of proposed improvements and, if so, which portions of USPAP are most relevant to the assignment.

Both current and prospective value appraisals subject to completion of proposed improvements to real property are permitted under USPAP. As noted in Advisory Opinion 34, a current value appraisal occurs when the effective date of appraisal is contemporaneous with the date of the report, and a prospective value appraisal occurs when the effective date of appraisal is after the date of the report. Development of a value opinion(s) for a subject property with proposed improvements in a current value appraisal involves at least one hypothetical condition, specifically that the described improvements have been completed as of the date of value."

With regards to the bolded sentence, is the AO suggesting a hypothetical condition should be employed in both of the following cases or just the last case (No. 2)?

Case No. 1: A vacant/unimproved site where a developer is planning to build a 5-story apartment project?

or Case No. 2: An existing 5-unit residential property where the owner is planning to add a pool and pool house in the future?

The only reason I ask is that in Case No. 1 I have seen numerous appraisals similar to Case No. 1 where a hypothetical condition is rarely (if ever) used.

 

[CANative]

Case No. 1: A vacant/unimproved site where a developer is planning to build a 5-story apartment project?

Land and proposed improvements or land that may have some existing entitlements?

 

[CANative]

AO 17 as written:


Development of a value opinion(s) for a subject property with proposed improvements in a current value appraisal involves at least one hypothetical condition, specifically that the described improvements have been completed as of the date of value."


It is inelegantly written. Clearer statement would have been


Development of a value opinion(s) for a subject property with proposed improvements in a current value appraisal (i.e., of a current date when the improvements have not yet been completed but are valued as-complete as of the current date) involves at least one hypothetical condition, specifically that the described improvements have been completed as of the date of value."

 

[Helpless]

It is inelegantly written. Clearer statement would have been

Development of a value opinion(s) for a subject property with proposed improvements in a current value appraisal (i.e., of a current date when the improvements have not yet been completed but are valued as-complete as of the current date) involves at least one hypothetical condition, specifically that the described improvements have been completed as of the date of value."

Thank you CANative! That is what I thought they meant but the wording is so clumsy I was not sure. Your reframing of it is 100 times more clear. Thanks again.

 

[J Grant]

The following is a direct quote from USPAP's Advisory Opinion (AO) No. 17:

"Many real property appraisers have been uncertain whether a current value opinion, rather than a prospective value opinion, may be provided in compliance with USPAP for a property subject to completion of proposed improvements and, if so, which portions of USPAP are most relevant to the assignment.

Both current and prospective value appraisals subject to completion of proposed improvements to real property are permitted under USPAP. As noted in Advisory Opinion 34, a current value appraisal occurs when the effective date of appraisal is contemporaneous with the date of the report, and a prospective value appraisal occurs when the effective date of appraisal is after the date of the report. Development of a value opinion(s) for a subject property with proposed improvements in a current value appraisal involves at least one hypothetical condition, specifically that the described improvements have been completed as of the date of value."

With regards to the bolded sentence, is the AO suggesting a hypothetical condition should be employed in both of the following cases or just the last case (No. 2)?

Case No. 1: A vacant/unimproved site where a developer is planning to build a 5-story apartment project?

or Case No. 2: An existing 5-unit residential property where the owner is planning to add a pool and pool house in the future?

The only reason I ask is that in Case No. 1 I have seen numerous appraisals similar to Case No. 1 where a hypothetical condition is rarely (if ever) used.

This appraisal is made “as is”, subject to completion per plans and specifications on the basis of a hypothetical condition that the improvements have been completed, subject to the following repairs or alterations on the basis of a hypothetical condition that the repairs or alterations have been completed, or subject to the following required inspection ...

Above is from URAR form, (for example, aware not all appraisals done on the form ) The fact is it is not just an HC but made subject to completion of the HC ...( completion some time in future ) which is perhaps where confusion lies ... The current effective date is the value date, using the HC that it is complete - at a later date, when the work has been done , appraiser goes out and inspects, and signs that the work is completed on the new date, at that point the completion in the HC has been fulfilled and the HC is lifted so the appraisal retrospective to the original eff date is now " as is" "

Example 07/01/2019 effective date appraisal of a vacant site subject to HC completion of a 5 story building . A year later the work is complete, and on 07/01/2020, the appraiser goes out to inspect and signs off the building is finished - The effective valuation date remains 07/01/2019 , but now with the signed inspection it no longer is subject to an HC it is now "as is" ( at which point a lender lends or buyer closes a purchase etc, unless they are insane and did it a year ago when nothing was built )

 

[Meandering]

Thank you CANative! That is what I thought they meant but the wording is so clumsy I was not sure. Your reframing of it is 100 times more clear. Thanks again.

Just gives them an excuse to print a new USPAP book next year to clarify their awkwardness in the current one.

.

 

[KHS445]

When doing prospective or as complete reports I always include in my hypotheticals a statement that reads in part “subject to 100% completion per the provided plans and specs using average or better quality materials and workmanship“. If it is a build to suit I will include language regarding acceptance by the proposed tenant per the terms of the lease.

 

[CANative]

When doing prospective or as complete reports I always include in my hypotheticals a statement that reads in part “subject to 100% completion per the provided plans and specs using average or better quality materials and workmanship“. If it is a build to suit I will include language regarding acceptance by the proposed tenant per the terms of the lease.

If doing a prospective would you make an EA as to your forecast of market conditions as to the prospective date of value?

 

[George Hatch]

Some proposals never come about. IMO, saying that you think it will be true in the future when you know for a fact that sometimes it will never be true poses a problem. As far as I'm concerned a current "does not exist" is the only condition an appraiser can be reasonably EA sure of with a prospective value opinion; everything beyond that comprises a hypothetical. Maybe it'll happen and maybe it won't.

I understand the rationale of assuming the proposal will exist as of a future date, I just don't agree with it.

 

[Terrel L. Shields]

OK. I have a problem with this. Prospective is in the future. The value date is in the future. And if you value it for that future date (say 1 year from today) then it is "prospective" and not contrary to what exists as of that date in 2021. You make the extraordinary assumption that it is built since it is likely to be built. But doing a plans and specs to the days date today, aka June 29, 2020 requires an HC that is was, in fact, "done" on this day which is contrary to what exists...but it is not prospective. Prospective is a future event. Final inspection merely confirms it was done to plans and specs and has nothing to do with the value or how it was derived.

Prospective is a can of worms because some event (like SARS Cov 2) takes place. Plans and specs, imnsho, done using today's date is not a "prospective" appraisal. Only if the date of value is in the future can it be "prospective".