APPRAISING CHANGE
Not since the passage of Financial Institutions Reform , Recovery , and Enforcement Act ( FIRREA ) in 1989 has the valuation of real estate come under such scrutiny and disruptive change as it has in 2022 . For much of the past 30-plus years , commercial real estate valuations were credible , even during the COVID-19 pandemic . But commercial real estate valuation has become more complex due to the introduction of three factors :
1 . A blurring of real estate and business enterprise value .
2 . Environmental , social , and governance ( ESG ) and diversity , equity , and inclusion ( DEI ) constraints along with a new set of proposed appraisal guidelines and credentialing that may replace the Uniform Standards of Professional Appraisal Practice ( USPAP ).
3 . Practical Applications of Real Estate Appraisal ( PAREA ), which is the probable replacement criteria / methodology to overhaul current USPAP and appraisal guidelines .
More than three decades ago , the motivating force in the appraisal industry was a lack of public trust in appraisals resulting from a deregulated savings and loan industry that led to egregious overvaluations and eventually a collapse in the ability to properly analyze asset value . The savings and loan crisis lasted a decade and led to the creation of the Resolution Trust Corporation and USPAP , which were needed to restore the structure of the real estate valuation industry .
Is your valuation knowledge up to date with these three factors ?
Complexity from a blurring of the business value ( going concern elements of valuation ) to the pure real estate feesimple property rights of value . Today , this blurring of property and business values extends to all property types and industry sectors , including hotels and hospitality variations ( including timeshares and Airbnb /
Brokers , investment advisers , and appraisers are quickly realizing an ESG score may become more impactful on valuation than the selection of a cap rate .
VRBO ), self-storage , manufactured housing and for-rent subdivision communities , REITs with NNN-lease structures for big-box retail stores , e-commerce warehouses , and mixeduse adaptive reuse projects .
ESG / DEI as a valuation element to address climate risk and diversity impacting every aspect of the CRE industry and today ’ s economy . ESG is no longer an acronym that operates as a substitute for climate change . And along with DEI , the two concepts are now mainstream policies that influence capital allocation and valuations at the property level for both investment advisers and individual CRE professionals . How so ? ESG scoring criteria and capital allocation implications based on these scores are transaction determinants . A less-than-favorable ESG or DEI score can derail a REIT merger or debt / equity capital allocation to a property . Brokers , investment advisers , and appraisers are quickly realizing an ESG score may become more impactful on valuation than the selection of a cap rate .
PAREA providing an alternate pathway for aspiring appraisers to fulfill experience requirements . The Appraiser Qualifications Board ( AQB ) created PAREA with the objective to “ create an alternative to the traditional appraiser supervisor / trainee model for gaining appraisal experience .” PAREA was influenced by a 2020-2021 U . S . Department of Housing and Urban Development investigation by The Appraisal Foundation , an entity created by the 1989 FIRREA legislation .
The AQB adopted the criteria and guide note for PAREA in 2020 , with both going into effect Jan . 1 , 2021 . PAREA , related to new appraisal credentialing , are guidelines currently under development by the AQB with aim for release and public comment in late 2022 .
My perspective as a 35-plus year appraisal veteran — and speaking independently from my role on the board of trustees for The Appraisal Foundation — is that PAREA advocates for a less-demanding path for the credentialing of state-licensed appraisers . With the goal of boosting diversity so “ the
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UMH Properties ’ Sebring Square in Florida shows Class A manufactured homes that are a step up from traditional trailer parks .
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