USPAP / Firrea Requirements Regarding Subdivisions

[Patrick Smith]

Does anyone have the references that require appraisers to:

1) Provide an "as is" value for development land (and NOT a hypothetical condition that it is rezoned for the intended use), and;

2) Discount for bulk sale all subdivisions over 5 lots.


(I'm writing a new appraisal template and want to include the actual requirement language in the footnotes. I have heard of these requirements in a class, but I can't find them in writing anywhere.)

Many thanks to anyone who can help !

 

[PL1957]

Probably the easiest place to find specifics would be in the Interagency FAQs on Residential Tract Development. This was all covered in yesterday's ABA/AI Telephone Briefing.

 

[Patrick Smith]

http://www.FDIC.gov/news/news/financial/2005/fil9005a.html

The link above answers question #2 (but with no reference to either USPAP or FIRREA).
I may conclude that these regulations are not USPAP or FIRREA driven, but are regulations by the following agencies (as a group):

The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).

If anyone else has information on these issue please post. I'll be back after a beer or two to check on your progress and hand out grades.... (LOL)

:dance:

 

[Howard Klahr]

http://commerce.appraisalfoundation.org/ht...AP2005/smt4.htm

Your reference to the FDIC publication is correct that the reporting of the "As Is" value as of the effective date of value is a banking regulation requirement.

The reporting of an "As Stabilized" or "Sell-Out" value is basically the primary premise of the assignment. However, the value conclusion is considered a prospective value and USPAP along with the banking regulators require an "As Completed" value which for subdivisions is the same as a "Bulk Value".

This value would generally reflect the value at the point land development is completed and you would then have a subdivision of completed lots. However, in the "real world", often a subdivision is developed in phases with roads, utilities, site work, etc having been installed and completed on one end and land construction activity is continuing on the other. The developer also often has sold these early completed lots to builders which are beginning construction of their improvements while remaining land development continues. As a result, this "As Completed" point in the development process may not ever truly exist for the entire development at the same point in time.

The "As Completed" and "Bulk Value" concepts originated primarily from multi-tenant developments such as rental apartment projects, high rise condominium developments, office buildings and retail centers where phased completion and occupancy is not possible/practical. This value reference would then reflect the prospective value of a proposed development at the point of completing development/construction but prior to having achieved a stabilized occupancy or possibly even any occupancy at all.

 

[Patrick Smith]

Well,
I may as well add this in, too (since it's a subdivision topic)... The following is a question from a previous post regarding discounting for subdivision analysis:

The discount factors for yield capitalization are determined by 1/(1+Y)^N – where Y=yield rate and N=period number. An example using this equation is that the discount factor for period 9 at a 12% yield rate is 0.360610. As most assume “period” to mean “year”, most yield rates are assumed “nominal”, “annual” rates. However, how does one calculate the partial period discount factor if a 12% annual rate is assumed, but the income is received quarterly?

I have seen it done like this:

Period 1: 1/(1+Y)^.25 = 0.972065
Period 2: 1/(1+Y)^.50 = 0.944911
Period 3: 1/(1+Y)^.75 = 0.918515
Period 4: 1/(1+Y)^1.0 = 0.892857
Period 5: Period 1/(1+Y) = 0.867916
Period 6: Period 2/(1+Y)…etc.

I have also seen where the 12% annual rate is simply assumed to be a 3% effective quarterly rate like this:

Period 1: 1/(1+Y)^1 = 0.970874
Period 2: 1/(1+Y)^2 = 0.942596
Period 3: 1/(1+Y)^3 = 0.915142
Period 4: 1/(1+Y)^4 = 0.888487
Period 5: 1/(1+Y)^5 = 0.862609

In the second example, the discounting is more severe. I’ve seen other methods too but I prefer method #1. Any comments / suggestions are welcome.

 

[Terrel L. Shields]

To comply with the Federal Reserve Appraisal Standards for Federally Related Transactions Subpart G 225.64 of the FDIC, an appraiser must among other requirements,

(9) analyze and report appropriate deductions and discounts for any proposed construction and discounts for any proposed construction, or any completed properties that are partially leased or leased as other than market rents as of the date of appraisal, or any tract developments with unsold units;

Further, the FDIC defines tract developments as follows in 225.62. (2)j:

(j) “Tract Development” means a project of five units or more that is constructed or is to be constructed as a single development.

That what's you looking for?

 

[Patrick Smith]

"That what's you looking for?"

Well.... Close! I guess the most important issue is whether development land that is NOT zoned for its intended use can be appraised under a hypothetical condition that proper zoning is in place. I heard once in a USPAP class that the worst case scenario MUST be presented. IE: You are appraising a proposed subdivision and the land is zoned for light industrial use. Some would argue that if rezoning to allow the development is HIGHLY PROBABLE that the value can be based on a hypothetical condition that a subdivision use will be allowed. According to the class instructor, an "as is" value assuming no rezoning MUST BE provided.

 

[Fred]

Patrick,

I guess the most important issue is whether development land that is NOT zoned for its intended use can be appraised under a hypothetical condition that proper zoning is in place.

There is no one right solution.

Appraisals do not occur in a vacuum. Appraisals occur because somewhere there is a decision-maker (intended user), who needs an estimate of a specific type of value to make a decision (intended use). It COULD be correct to do it any way imaginable depending on the intended user’s anticipated decision.

I can think of a few valuation scenarios right off:
1. What it would be worth today if it had already been rezoned
2. What it will be worth after it is rezoned
3. Probability-weighted present value of a site that is a rezone candidate
(You might need some form of #2 to find #3).

Some would argue that if rezoning to allow the development is HIGHLY PROBABLE that the value can be based on a hypothetical condition that a subdivision use will be allowed.

Probable future use is not a “hypothetical condition.”