USPAP Nuggets: Land Value Only Appraisals on Improved Land Without Hypothetical Conditions.
When it comes to appraising land, professionals in the field often encounter a variety of unique scenarios. One such scenario is appraising improved land but offering an opinion on the land value only, without considering existing improvements. This article will explore the nuances of this type of appraisal, addressing common questions and providing guidance on best practices.
Understanding Hypothetical Conditions
Before delving into the specifics of land appraisals, it’s crucial to understand what a hypothetical condition entails. According to the Uniform Standards of Professional Appraisal Practice 2024 (USPAP), a hypothetical condition is defined as:
"A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis."
Comment: Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property, or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.
Appraising Land Exclusively
In some assignments, clients request an appraisal of the land alone, excluding any existing improvements. This might initially seem to necessitate a hypothetical condition since the improvements are being disregarded. However, as clarified by the Appraisal Standards Board (ASB) of The Appraisal Foundation, (see USPAP Q&A Volume 10, Number 3)
Question: Does appraising an improved property, focusing solely on the land and excluding the improvements, require a hypothetical condition?
Response: No, such an assignment does not require the use of a hypothetical condition. Standards Rule 1-2(e)(v) permits the appraisal of a physical segment of a property, such as the land, without considering the improvements. Therefore, the land is treated as the subject of the appraisal, and the improvements are acknowledged but not valued.
USPAP Rule 1-2(e)(v) states:
"An appraiser must:
(i) identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, including:
(ii) its location and physical, legal, and economic attributes;
(iii) the real property interest to be valued;
(iv) any personal property, trade fixtures, or intangible items that are not real property but are included in the appraisal;
(v) any known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of a similar nature; and whether the subject property is a fractional interest, physical segment, or partial holding."
Comment: An appraiser is not required to value the whole when the subject of the appraisal is a fractional interest, a physical segment, or a partial holding.
It is important to note that the land itself is considered a physical segment of the property, separate from any improvements that might exist on it. For instance, in a cost approach valuation, appraisers often develop an opinion of the site value as if it were vacant, distinct from the estimated value of any improvements. This method parallels the process of appraising land without a hypothetical condition.
Practical Implications
When performing such an appraisal, it’s essential to ensure the report clearly communicates the scope of the assignment. The report should:
Acknowledge Existing Improvements: Although the improvements are not included in the valuation, their existence must be noted to avoid any misleading impressions.
Focus on Land Value: The valuation should concentrate on the land itself, similar to how an appraiser might evaluate the site value separately when developing the cost approach.
Clear and Transparent Reporting
When appraising land without valuing existing improvements, as long as the improvements are acknowledged and the focus remains on the land, there is no requirement for a hypothetical condition label. This approach ensures the appraisal is straightforward and adheres to USPAP standards without unnecessary complexity.
Conclusion
Appraising improved land by offering an opinion on the land value only is a common yet specialized task within the appraisal profession. By understanding and correctly applying USPAP guidelines, appraisers can effectively navigate these assignments. Clear communication, transparent reporting, and a precise focus on the land value are key components to delivering a credible and compliant appraisal.