Reader's Guide to Commercial Appraisal: Determining Your Intended User
Complicated Jargon Becomes Easy-to-Understand Knowledge - Part One of a Three Part Series
Each profession has its own jargon and commercial appraisers certainly aren’t any different. Lately, we’ve had numerous inquiries about the intended user of a commercial appraisal report and have discovered a lot of confusion exists for those not in the day-to-day appraisal business. We are here to help clear that confusion in a series of blog posts, the first of which will help you understand the basic terminology for intended users of commercial appraisals.
Scanning the crowd: who is your client?
To be precise, the appraisal industry’s definition of “client” is the person or institution who initiates the appraisal service. For example, in most finance-related real estate transactions, the appraisal is ordered by the bank, who is then considered the client and intended user as they are paying for the service and will rely on the report for their lending purpose decisions. However, agency agreements can be a bit more complicated when we are retained by accountants, property managers/owners, REITS, lawyers or financial planners. Any one of these groups can sometimes be considered a client (the person engaging our services and paying our invoice) although the person/entity paying for services may not necessarily be considered the intended user of our appraisal (intended user = the person relying on our reports conclusions and analysis).
Intended Use: let’s start there
In the Dictionary of Real Estate Appraisal 6th edition & USPAP, intended use is defined as, “the use(s) of an appraiser’s reported appraisal or appraisal review assignment results, as identified by the appraiser based on communication with the client at the time of the assignment.” (USPAP, 2018-2019 ed.) It is important to understand the intended use of a commercial appraisal so you have the appropriate frame of reference to interpret what you are reading. When reading an appraisal report that was prepared to secure financing through a lender or mortgage company, for example, the intended use of that appraisal report will likely be to answer specific questions relative to value for a loan. That intended use, and the data that is provided in the report may very well be different if the intended use were for trust, insurable value, estate planning, or tax purposes.
digging deeper: so then who is the intended user of a commercial appraisal?
The intended user is denoted by an appraiser as someone who will employ the information contained in a commercial appraisal report. The client who initiated the appraisal and is paying for it can be – but is not always – the intended user. For example – when we initiate an appraisal for estate planning, the property owner (our client) may pay for the appraisal but the primary intended user is actually the client’s accounting firm. However, there are times when others can be named as additional intended users. But regardless, if a client is not listed as an intended user, he/she may not rely on an appraisal report for decisions he/she may make.
and deeper: Why can’t you tell just anyone about the information found in appraisal report?
There are reasons why we can’t share information about an appraisal report with others who aren’t listed as an intended user of the report. As appraisers, we are bound by USPAP, code of ethics, FIRREA and Dodd-Frank Act (if Federally Regulated Transaction) to not share information with people who are not the intended user. This means we cannot share what our value conclusion was, when the report was issued, or any other information about the report. While a property contact may have given us the information we relied on for a bank-related financing appraisal, we cannot share our results with that person as he/she is not the intended user.
so what about effective value date?
For most appraisals, the effective date is the date of the inspection. Simply put, the appraiser is basing his analysis and valuation efforts on the value date agreed upon in advance of any work taking place. Even if a property owner is planning on making improvements in the next few days, our effective value date might be subject to an extraordinary assumption that the proposed improvements are made at a specific future point in time. The same holds true for any negative happenings that could occur to that property, say a fire or water damage, after the effective value date. This date is the moment in time that the value represents in the report, the property’s snapshot in history.
and that’s different than date of report?
The Date of Report is the date that the report is sent to the intended user. This is important because that issuance date of the appraisal report is usually different than the effective value date. If something happened to a property (such as the catastrophic event like a fire or something positive like that remodel we mentioned above) between the effective value date and the date of report, it is not reflected in the appraisal report.
in the end, it’s not just jargon
Language and words matter, in appraisal this is no different. The language included in engagement letters protects both the appraiser and any intended users. For example, say an unauthorized party comes across an appraisal report prepared several years ago for other users. Such users, if unauthorized, have no right to rely on an appraisal if they are not named as intended users.
While the intention of an appraisal report is to clearly and concisely outline the support for an estimate of market value, it can still contain language that feels like jargon. If you have any questions about the intended user of a commercial appraisal or need a commercial valuation, please do not hesitate to give the team at Argianas & Associates a call at 630.390.0113 or complete this form. To receive more real estate appraisal resources or receive our original thought pieces, be sure to join our mailing list to receive our e-newsletter.