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?