Common Fallacies and Mistakes
Mark Pomykacz, MAI, has compiled a list of the six most common fallacies and mistakes surrounding real estate and business appraisal and consulting. Some of these fallacies could be considered humorous if it weren’t for the fact that they cause significant problems and cost the real estate community millions of dollars. Mostly, it is laymen and novices whose succumb, but all too often experts also fall victim, while the business and appraisal communities do little to dispel these myths.
Fallacy / Mistake #1Laypeople mistakenly believe that appraisers only work for banks, providing expensive, full volume appraisals for loans, and that appraisers cannot provide other services.Truth Appraisers can and should be used for many types of services, issues, and assets. Appraisers can provide services for many valuation issues, including estimating value, income, and returns, for any asset type, for any type of client. Appraisers can report their appraisals in various formats from executive summaries to full narratives. Most importantly, since they are uniquely qualified, they should not only be utilized for appraisal reporting, but should be utilized for various consulting services, including feasibility, market analysis, due diligence, arbitration and mediation, and any other activity involving the analysis of real estate or business value, income and returns, its market, and requiring strict objectivity and high standards of professional practice. Appraisers, because of their rigorous training and professional standards, are extremely well qualified to provide numerous consulting (non-appraisal) services involving value, income, and returns. See our services pages for details on all the services available to our clients.
Fallacy / Mistake #2Laypeople confuse market value for value-in-use, investment value, and others.TruthThere are many different kinds of value. Market value is the most commonly appraised. Market value is the basis for loan collateral, condemnation awards, arms-length sales, and others. But the other values must be understood in order to properly utilize the market value information. For example, consider a market value (the value in the eyes of the typical seller and buyer) for a business or real estate of $1,000,000. Further, consider one particular buyer’s investment value, based on his personal investment criteria, of $1,250,000. This particular buyer would be making sound business decisions even if he paid more than market ($1,000,000), so long as he did not pay more than $1,250,000. Federal Appraisal often provides free scoping consulting to guide the client through the value-distinction process, and to ensure the client receives the type of value and service needed. See our services pages for details on all the services available to our clients.
Fallacy / Mistake #3Laypeople confuse the various estates, interests, and assets in real estate and businesses.TruthIn commercial real estate and in businesses, it is essential to understand and differentiate between the various estates, interests, and assets. Depending on the client’s need, different estates, interests, and assets may be appraised differently. Some examples include appraising the fee simple estate for property taxes, while appraising the leased fee estate for a loan, while for condemnation, appraising the leased fee and fee simple for the landlord and leasehold for the tenant. Further, consider appraising the real property at a hotel or mall, while excluding business assets for property in a property tax assessment appeal. Additionally, consider all asset values, incomes and returns for a damage estimate. Lastly consider real, personal, and intangibles in state transfer tax filing or cost segregation study for IRS depreciation. Federal Appraisal often provides free scoping consulting to guide the client through the process of distinguishing between estates, interests, and assets, and to ensure the client receives the type of value and service needed. See our services pages for details on all the services available to our clients.
Fallacy / Mistake #4Laypeople mistakenly believe that assessed value is directly comparable to market value. Laypeople mistakenly believe that book value is equal to market value.TruthAssessed value is rarely directly comparable to market value. In most cases, the assessed value is percentage of market value. The percentage can be referred to the equalization rate, the assessment ratio, or others. It is simply the ratio of assessed value to market value, and should be established by the taxing jurisdiction, consistently throughout the jurisdiction, for the property class. To compare the assessed value to the market value, equalize the assessed value by dividing it by the equalization ratio, then compare the equalized assessed value to the market value. Book value is an accounting defined and derived value and need not have any relationship to market value. Market value is defined and derived by appraisers. Most often, book value does not equal market value. For some accounting purposes book value is needed. When market value is needed, do not use book value. Federal Appraisal often provides free scoping to determine if a tax appeal is needed or whether a tax assessment compares favorably to market value. See our property taxes services pages for details on the related services available to our clients.
Fallacy / Mistake #5Laypeople get confused with the various building area measurements.TruthThere are numerous building area measurements. Some have official definitions and others do not. Some are calculated using engineering precision. Others are negotiated. When buying, renting, or analyzing a building or a unit within a building, be sure to determine how the advertised area is defined, and use a similar definition when comparing the area to other buildings or units. When considering a space, be sure to obtain a net usable square footage estimate.
Fallacy / Mistake #6Laypeople get confused with gross and net leases.TruthSometimes the landlord pays for the operating expenses, common area maintenance, utilities, real estate taxes, insurance, advertising, and capital repairs. Sometimes the landlord pays only some of these expenses. Sometimes the tenant pays all or nearly all of these expenses. A gross lease is one where the landlord pays the expense(s). A net lease is one where the tenant pays the expense(s). A “triple net” lease is not officially defined but is generally meant to describe a lease where the tenant pays operating expenses, utilities, and taxes: however, because operating expenses is not a universally defined term and other expenses may also be included or excluded, the term “triple net” lease, is the cause of common, and costly confusion. When renting or analyzing a lease, be sure to obtain and understand the lease’s definition of gross, net, and triple net, and do not assume your definition is the same at the landlord’s. See our lease auditing services pages for details on the related services available to our clients
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Business Interruption Caused by COVID-19 and Appraisal Issues
Federal Appraisal will continue to serve our Clients during the COVID-19 crisis. COVID-19 may cause business interruptions, damages, and lost income. Federal Appraisal provides appraisals of real property, businesses and business intangibles, and personal property, for business interruptions, damages, and lost income. Additionally, our business interruption advisory services include consultation, negotiations, litigation, and testimony.
COVID-19 continues to cause unprecedented disruption in businesses globally. In the realm of the crisis, several businesses have filed insurance claims related to business interruption; however, there has been great disagreement between insurance companies and businesses on both the validity and eligibility of business interruption claims caused by COVID-19. Those attempting to make claims argue that viruses and/or viral pandemics are not explicitly excluded from business interruption coverage; yet their claims have been rejected by insurers without substantial investigation. Ongoing disputes have led to federal lawsuits that have been filed against several insurers who have denied business interruption claims as a result of COVID-19.
Certain spokespeople from prestigious insurance companies have defended the industry by claiming that viral outbreaks and pandemics are uninsured and uninsurable within their current offerings. Further arguments include the notion that the novel COVID-19 virus does not result in physical or property damage. Additionally, due to both national and state regulations, businesses are not eligible to trigger civil disturbance clauses because businesses as a whole and not specific businesses, are being mandated to temporarily close. Defendants of businesses argue on the contrary that the reason they pay for business interruption coverage is because their business is sensitive to interruptions. Certain lawyers also argue that physical damage is still occurred though the microscopic particles resulting from the virus. Nearly 300 federal lawsuits were filed against insurance companies between March and April of 2020 pertaining to Covid-19 disputes. Lawyers anticipate 100’s if not 1000’s of more COVID-19 related claims to proceed in the coming months. Future litigation is expected to gyrate around wrongful death, injuries, workplace discrimination, insurance, employer liability, safety, and privacy concerns. Certain prosecutors also expect traditional complaints to be looped in conjunction to COVID-19 disputes that may exacerbate whistleblowing.
Currently, certain policies such as the Pandemic Risk Insurance Act are being drafted that may require insurers to cover up to a stated number of losses with limits backed by the federal government. Opposing parties raise the concern that the federal government’s intervention in private contracts between independent parties may be unconstitutional. Furthermore, if such pandemic payouts were to be issued by insurance companies, current and future policyholders may witness increased insurance costs.
Those interested in learning more about our services and operations can view our statement concerning COVID-19, or email mark@federalappraisal.com.
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Judge Nullifies IDFPR Proceedings
Press Release: August 2017
Contact: Mark Pomykacz, MAI, ASA FOR IMMEDIATE RELEASE
Telephone: 908-534-3590 September 7, 2017
Email: Mark@FederalAppraisal.com
Website: www.federalappraisal.com
Appraiser Mark Pomykacz wins significant appeal against the IDFPR concerning Marquis Ethanol Plant
Cook and Putnam Counties, Illinois (September 7, 2017) – On July 7, 2017, Judge Sophia H. Hall of the Circuit Court of Cook County, Illinois, granted Mark Pomykacz summary judgment against the Illinois Department of Financial and Professional Regulation (“IDFPR”). Furthermore, the Court found that the IDFPR administrative proceedings against Mr. Pomykacz are null and void. The Court vacated both the IDFPR reprimand and the fine. The full ruling is available at http://federalappraisal.com/pressreleasenullifiedidfprproceedings. The IDFPR did not appeal the decision. This case began in July 2013.
The ruling means that the IDFPR, the Illinois agency that regulates federallyrelated real estate appraisals, had no jurisdiction over Mark Pomykacz’s appraisal, which was prepared for the purpose of determining the proper property taxation of the Marquis Energy Ethanol Plant and litigation support. The appraisal included business, personal property, and real estate appraisal opinions. The Circuit Court affirmed that the IDFPR regulatory jurisdiction was limited strictly to federally related appraisals of real estate, which means appraisals prepared for the purpose of underwriting loans collateralized by real estate made by federally regulated banks. Appraisals completed for property tax appeal purposes are not federally related transactions, and business and personal property appraisals are not real estate appraisals.
“This ruling finally brings closure to a case that never should have started and that lasted years longer than it should have,” said Mr. Pomykacz. “Finally, I can begin to reclaim my good reputation. This is a clear example of government overzealousness and overreach, and of the government’s inability to correct its mistakes. The IDFPR simply had no jurisdiction over, and no competence with, this kind of appraisal. Not only has the IDFPR caused substantial harm to me, it has caused substantial harm to my client and to thousands of taxpayers in Putnam County. The total losses caused by the IDFPR amount to millions of dollars”.
The case concerned an expert appraisal prepared by Mr. Pomykacz of the Marquis Energy Ethanol Plant located in Hennepin, Putnam County, Illinois, with value conclusions in 2008 and 2011. Mr. Pomykacz was hired by the Illinois Valley Community College (“IVCC”) as part of their appeal of and litigation concerning the property taxes on the plant. Mr. Pomykacz’ appraisal indicated values of the whole plant of approximately $140 million and $169 million and indicated real property values between $90 million and $168 million, depending on legal determinations. This is significantly higher than the assessor’s market value of approximately $56 million for the real property. If the tax assessment was corrected to the values found by Mr. Pomykacz, then it would have led to an increase in tax revenues of millions of dollars. The property owner reportedly spent approximately $180 million to build the plant, which was new in 2008, and the plant was expanded before 2011. Both the plant owner and the tax assessor were named as defendants in the IVCC appeal litigation. Reportedly the tax assessor filed the complaint with the IDFPR regarding Mr. Pomykacz’ appraisal.
The IDFPR’s complaint against Mr. Pomykacz’ appraisal included a number of allegations, all of which Mr. Pomykacz says are the results of the IDFPR’s incompetence with business and personal property appraisal, and with property tax appraisals, and with appraisals written for litigation. Mr. Pomykacz said “No reasonable person might expect the IDFPR to have such expertise, since their jurisdiction was limited to just real estate appraisals for federally related transactions; however, the IDFPR believed it had jurisdiction and expertise on many appraisal types and purposes. An objective and properly experienced review appraiser would have recognized that my appraisal meets all appraisal standards applicable to an ethanol refinery appraisal written for business, personal and real property value for property tax appeal and litigation purposes.” The IDFPR review of Mr. Pomykacz’ appraisal was completed by the appraisal coordinator for the IDFPR, who admitted during testimony that he had never completed an appraisal of an ethanol refinery. The appraisal coordinator possessed no advanced appraisal designations and had no competency with business or personal property appraisals or with property tax litigation appraisal work concerning complex properties.
The IDFPR prematurely published their action while the case was still under appeal. Mr. Pomykacz was granted a stay against the IDFPR’s action in January 2016, but not before the IVCC, in a press release on July 15, 2015, (https://www.ivcc.edu/board.aspx?id=27016) announced that they were dropping their property tax appeal against the ethanol refinery, citing unsustainable ongoing litigation costs. They reportedly had invested over $750,000 in their case up to that point.
If you would like more information about this topic, please visit one of the links below, or contact Mark Pomykacz at 908-534-3590 or by email at Mark@FederalAppraisal.com.
Federal Appraisal Press Release JUDGE NULLIFIES IDFPR PROCEEDINGS September 7, 2017
Judge Hall Final Order and Decision July 7, 2017
Judge Hall Order Motion for Stay January 12, 2016
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