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December 29, 2008

FAQs for Disaster Victims - Casualty Loss (Valuations and Sections 165 (i))


(6/1/07) Q: A number of concerns have been raised by taxpayers and tax professionals about casualty loss valuations. While the IRS continues to research and develop specific answers to these issues, general guidance follows below.

While we cannot address every question received about property valuation issues, the IRS wants to express to the public that we sincerely recognize the extraordinary damage that can be caused by disasters. We urge taxpayers and tax professionals to act in good faith and make reasonable estimations based on all information available. The IRS is committed to considering each situation on a case-by-case basis. We have extensive experience with disaster situations and will be reasonable in determinations.

As for lost records, when records are not available or it is not feasible to obtain documentation sufficient to re-create records otherwise required, the IRS will consider documentation requirements satisfied by the best reasonably available information presented in good faith.

(6/1/07) Q: The reporting of casualty losses on Form 4684 is cumbersome when using the repairs as evidence of the loss. You must reduce the value of the property after the loss by the amount of the repairs paid out to get the form to compute correctly.

A: Under the law, a personal casualty loss is determined by taking the smaller of:

  • The cost or other basis of the property (reduced by any insurance reimbursement), or
  • The decline in fair market value of the property as measured immediately before and after the casualty (reduced by any insurance reimbursement).

The cost of repairs may, in certain cases, be used to measure the decline in fair market value, but it cannot be used by itself to determine the amount of the loss. When the cost of repairs is determined to be a fair measure of the decline in fair market value, then all you have to do is take the fair market value before the casualty and reduce it by the cost of repairs to arrive at the fair market value after the casualty.

Suggestions for redesign of the form to make the computation less cumbersome and still follow the law are welcome and may be submitted at the Comments on Tax Forms and Publications page, or you may write to: Internal Revenue Service, Individual Forms and Publications Branch, SE:W:CAR:MP:T:I, 1111 Constitution Ave. NW IR 6406, Washington, DC 20224.

(6/1/07) Q: Section 1.165-7(b)(1)(i) indicates the decrease in fair market value is the difference between the property’s value immediately before and immediately after the casualty. What constitutes “immediately after”?

A: To compute the deductible casualty loss, taxpayers need to determine: (1) the difference between the fair market value immediately before and immediately after the casualty and (2) the adjusted basis of the property (usually the cost of the property and improvements). Taxpayers may deduct the smaller of these two amounts minus insurance or any other form of compensation received or expected to be received. One method of determining the decrease in fair market value is an appraisal. An appraisal must reflect only the physical damage to the property and not a general decline in the property’s fair market value. See § 1.165-7(a)(2)(i) of the Income Tax Regulations. Taxpayers may also use the cost to repair or clean up the property (cost-of-repairs method) to determine the decrease in fair market value caused by the casualty. See § 1.165-7(a)(2)(ii).

Although the regulations use the term “immediately after” when referring to the post-casualty value, we recognize that taxpayers’ ability to determine the decrease in the fair market values of their properties, as a result of a disaster, may be restricted by lack of access to the properties and the need to remove water from flooded properties. Under these circumstances, the decrease in fair market value would take into account additional damage sustained to the property as a result of delays due to legal and physical restrictions to taxpayers’ access to their property and the need to remove standing water from the properties.

(6/1/07) Q: If a taxpayer owns several parcels of real estate that are damaged by a presidentially declared disaster, may the taxpayer elect under § 165(i) to claim a casualty loss on one property in the prior year and a casualty loss on other property in the current year?

A: If a taxpayer elects under § 165(i) to deduct in the prior tax year losses attributable to a presidentially declared disaster, the taxpayer must report all related losses that qualify for the election on the prior year tax return (original or amended). See § 1.165-11(d) of the Income Tax Regulations.

(6/1/07) Q: A homeowners/condo association sustained a loss from a disaster and made a special assessment on owners to replace uninsured property. May the homeowners claim the special assessment as a casualty loss?

A: The answer depends on whether the damaged property was owned by the homeowners association or by the individual members as tenants in common.

A homeowners association (including a condominium association) is organized and operated for the purpose of acquiring, constructing, managing, and maintaining "association property." Such property includes real and personal property owned by the organization or owned as tenants in common by the members of the organization. This property is generally referred to as "common elements."

Funds for performance of the activities of the homeowners association are generally derived from assessments of the members and the assessments include real property taxes on association property as well as reserves for capital items such as resurfacing a parking lot, replacement of street lights, construction of a swimming pool, etc. This would include special assessments for any uninsured portion of the cost of repair or replacement of property damaged by a natural disaster.

A casualty loss deduction is only allowed for losses from property owned by the taxpayer. If the common elements are not owned by individual members, but rather by the homeowners association, an individual member would not be entitled to a casualty loss deduction. A member's assessment for the replacement of a capital item, whether or not the item was damaged by a casualty, is in the nature of a contribution to the capital of the homeowners association and is not currently deductible by the member.

However, if the individual members of the homeowners association own the common elements as tenants in common, the individual members may be entitled to casualty loss deductions in proportion to each member’s interest in the damaged common elements.

To compute the amount of a casualty loss, a taxpayer must determine the fair market value of the property both immediately before and immediately after the casualty and compare the decrease in fair market value with the adjusted basis in the property. From the smaller of these two amounts, a taxpayer must subtract any insurance or other form of compensation they have received or reasonably expect to receive. Fair market value may be determined by an appraisal. The cost to repair or clean up the property (cost-of-repairs method) may also be used as a measure of the decrease in fair market value caused by the casualty if the repairs are actually made, are not excessive, are necessary to bring the property back to its condition before the casualty, take care of the damage only, and do not cause the property to be worth more than before the casualty. See Regulations § 1.165-7(a)(2).

If the members own the common elements damaged by the casualty as tenants in common, they are entitled to a casualty loss deduction for the lesser of: (1) the decline in value of their ownership interest as a result of the casualty or (2) their adjusted basis. From the smaller amount, the member should subtract any insurance or other form of compensation received or expected to be received. With respect to a member claiming the special assessment as a casualty loss, a member could use the amount of the assessment as a measure of the decrease in the fair market value of the common elements caused by the casualty as long as the amount of the assessment is commensurate with the member’s ownership interest in the common elements and the requirements for using the cost-of-repairs method of valuation, described above, are satisfied.

In summary, if the common elements are owned by the homeowners association, the members are not entitled to any casualty loss deduction for damage to the common elements and, therefore, the members may not deduct a special assessment to replace uninsured property (common elements) damaged by a disaster. However, if the common elements are owned by the members of the homeowners association as tenants in common, the members may be entitled to a casualty loss deduction as discussed above.

(6/1/07) Q: How does a taxpayer determine a casualty loss from damaged trees and other landscaping on personal-use residential property when that loss is attributable to a disaster?

A: In determining the amount of a casualty loss from damage to personal-use residential property, trees and other landscaping are considered part of the entire residential property, and are not valued separately or assigned a separate basis, even if purchased separately.

To compute your casualty loss:

  1. Determine your adjusted basis in the entire residential property before the casualty. Your basis is generally the cost of the property, adjusted for improvements and certain other events. For more information on determining your adjusted basis, see Publication 530, Tax information for First-Time Homeowners, and Publication 551, Basis of Assets.
  2. Determine the decrease in fair market value of the entire residential property as a result of the casualty.
  3. From the smaller of these two amounts, subtract insurance and any other form of compensation received or expected to be received.

For residential property, damaged and destroyed trees and other landscaping may adversely affect the fair market value of the entire property by reducing the curb or overall appeal of the property.

One method of determining the decrease in fair market value is to compare an appraisal of the entire residential property, including trees and other landscaping, before the damage caused by the casualty to an appraisal of the entire residential property after the damage caused by the casualty, including damage to trees and other landscaping. Valuation of the damage to a tree by an arborist does not determine the decrease in fair market value of the entire property.

Alternatively, the cost of cleaning up and restoring the residential property, including trees and other landscaping, to its condition before the casualty may be used as evidence of the decrease in fair market value, if the clean-up, repairs, and restoration are actually done, are not excessive, are necessary to bring the property back to its condition before the casualty, take care of the damage only, and do not cause the property to be worth more than before the casualty. For example, if these requirements are satisfied, the cost of removing destroyed or damaged trees (minus any salvage received), pruning and other measures taken to preserve damaged trees, and replanting necessary to restore the property to its approximate value before the casualty may be acceptable as evidence of the decrease in fair market value caused by the casualty. You may not include in your cost of cleaning up and restoring your property the cost of purchasing any capital asset, such as a compact loader or tractor, or the value of the time you spend cleaning up your own property.

The following examples illustrate the points discussed above:

Example 1: A taxpayer lost a large tree in her backyard due to a disaster, but sustained no other property damage. An arborist valued the damage to the tree at $3,000. The taxpayer spent $600 to remove the tree from the yard and grind the stump. Insurance paid $500 for debris removal.

The value of the damage to the tree determined by the arborist does not qualify as a measure of the casualty loss because it does not reflect the decrease in the fair market value of the residential property as a whole, including the residence, land, and improvements. The taxpayer may obtain an appraisal of the entire property to determine any decrease in value resulting from the loss the tree.

Alternatively, the taxpayer may use costs incurred to clean up and to remove the tree as a measure of the decrease in the fair market value of the property provided the costs are not excessive, are necessary to bring the property back to its condition before the casualty, take care of the damage only, and do not cause the property to be worth more than before the casualty. The taxpayer would subtract from the loss any insurance reimbursement for tree removal and clean-up expenses. Under this alternative, the taxpayer has a casualty loss of $100.

Example 2: A taxpayer had a large tree that fell during a disaster and crushed a carport. Among many trees on the property, it was the only tree that was damaged.  The loss of this tree does not affect the fair market value of the entire property.  Homeowners’ insurance reimbursed the taxpayer all costs for repairing the carport and removing the tree.

Insurance paid for all repair costs to bring the property back to its pre-casualty condition and value.  Therefore, the taxpayer has no casualty loss.

For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts.

 (6/1/07) Q: A taxpayer’s residence is damaged by a disaster.  Prior to the disaster  the taxpayer’s basis in the property was $100,000.  The taxpayer receives insurance proceeds of $10,000 for the damage (not for living expenses), but only spends $7,500 for repairs necessary to restore the residence to its condition before the hurricane.  The taxpayer receives no other form of compensation for the damage.  Does the taxpayer have a casualty loss deduction?  Is the difference of $2,500 between the insurance recovery and the repair cost taxable?  What is the adjusted basis of the residence after the repairs?
A: The taxpayer does not have a casualty loss deduction, because the loss is fully covered by insurance.  To compute a casualty loss deduction, a person must:

  1. Determine the adjusted basis in the property before the casualty.
  2. Determine the decrease in fair market value of the property as a result of the casualty (generally by appraisal or using the cost-of-repairs method).
  3. From the smaller of these two amounts, subtract insurance and any other form of compensation received or expected to be received.

See Publication 547, Casualties, Disasters, and Thefts.  In this case, using the cost-of-repairs method to measure the decrease in value caused by the hurricane, the taxpayer sustained a casualty loss of $7,500—the lesser of the $100,000 basis in the residence and the $7,500 cost of repairs.  However, since the $10,000 in insurance exceeds the casualty loss, the taxpayer may not claim a casualty loss deduction on the taxpayer’s federal income tax return.

The mere fact that the insurance proceeds exceed the cost of repairs does not in and of itself result in taxable income to the taxpayer.  Any gain from a casualty is determined by the amount of insurance proceeds and any other form of compensation received or expected to be received in excess of the amount of the taxpayer’s adjusted basis in the damaged property prior to the casualty.  In this example, the taxpayer would not recognize any gain because the amount of the insurance proceeds is less than the taxpayer's pre-disaster basis in the residence.

To determine the new basis in the residence, the taxpayer adjusts the pre-disaster basis by taking into account adjustments that decrease basis and adjustments that increase basis.  Casualty loss deductions and compensation for the damage (for example, insurance proceeds) both decrease basis.  See Publication 551, Basis of Assets, page 5.  Note, however, that in this case the taxpayer does not have an allowable casualty loss deduction, so the casualty loss does not affect the taxpayer's basis.  The $10,000 insurance payment reduces the taxpayer's basis in the residence.  The $7,500 spent on repairs to restore the residence to its condition before the disaster increases the taxpayer’s basis in the residence.  Thus, in this situation, the taxpayer’s new basis of the residence is the taxpayer’s pre-disaster basis reduced by the $2,500 difference between the insurance proceeds received and the cost to repair the damage, and is computed as follows:

 Basis before casualty


        Less casualty loss deduction

- 0 -

        Less insurance received($10,000)
        Plus repairs$7,500
 Basis after casualty$97,500

For more information on computing adjusted basis, see Publication 530, Tax information for First-Time Homeowners.
(6/1/07)  Q: How will the IRS will handle water damage "mold issues" as a result of insufficient repairs or whatever the cause. Will there be special reporting on the loss related to mold?
A: Whether individuals may claim damage to their personal-use property from mold as part of a casualty loss depends on the facts and circumstances of each situation.  A key factor to consider is whether the mold damage occurred as a direct result of the disaster  or from some other intervening cause since there must be a causal connection between the casualty event and the loss claimed by the taxpayer.  For example, individuals would not be entitled to deduct as part of their casualty loss mold damage that occurred as a result of insufficient repairs.  The individuals’ casualty loss deduction would be limited to the property damage caused by the disaster.  In addition, if a large amount of time lapsed between the date of the hurricanes and the formation of the mold, this raises the question of whether the mold damage was caused by the disaster or by some other factor.

The formation of mold may qualify as a separate casualty.  A casualty is an event that is identifiable, damaging to property, and sudden, unexpected, and unusual in nature.  An event is sudden if it is swift and precipitous, and not gradual or due to progressive deterioration of property through a steadily operating cause.  An event is unexpected if it is unanticipated and it occurs without the intent of the one who suffers the loss.  An event is unusual if it is extraordinary and nonrecurring, one that does not commonly occur during the activity in which the taxpayer was engaged when the destruction or damage occurred and one that does not commonly occur in the ordinary course of day-to-day living of the taxpayer.  If, under a particular set of facts, the formation of mold is a sudden, unexpected, unusual and identifiable event that caused damage to the individual’s property, then it would qualify as a casualty and the individual may be entitled to deduct the loss for the resulting property damage as a casualty loss under section 165(c)(3) if the individual satisfies the other requirements for the deduction.

 (11/03/2006) Q:  A business building has adjusted basis of $40,000 ($30,000 building and $10,000 land).  Building in 50% destroyed. Insurance is $10,000. Cost to repair is $85,000.   What is the amount of the taxpayer’s casualty loss deduction?

A:  If the business property was damaged but not totally destroyed, the casualty loss is measured by the lesser of the adjusted basis or the decrease in fair market value, minus any other form of compensation (such as insurance reimbursement).  Section 1.165-7(a)(2) of the Income Tax Regulations provides two methods for taxpayers to determine the decrease in fair market value of the property affected by a casualty.  The first method is an appraisal.  An appraisal must reflect only the physical damage to the property and not a general decline in the property’s fair market value.  See § 1.165-7(a)(2)(i).  The second method is the cost to repair the property.  See § 1.165-7(a)(2)(ii).  The cost to repair the damaged property may be used as evidence of the decrease in value if the taxpayer makes the repairs and shows that the repairs: a. are necessary to bring the property back to its condition before the casualty; b. the amount spent for repairs is not excessive; c. the repairs take care of the damage only; and d. the value of the property after the repairs is not, as a result of the repairs, more than the value of the property before the casualty.

Since the property is used in a trade or business, the casualty loss deduction must be computed based on each single identifiable property based on § 1.165-7(b)(2)(i).  Therefore, the taxpayer must compute the loss deduction with respect to the building separately.  If the taxpayer satisfies all of the requirements for the cost of repairs method, then the casualty loss would be measured by comparing the decrease in fair market value (as evidenced by the cost of repairs) to the adjusted basis of the building.  The casualty loss with respect to the building would be the lesser of the decrease in fair market value of the building or the adjusted basis of the building, reduced by insurance compensation.  The deductible casualty loss for the building would be $20,000, computed by using $30,000, which is the lesser of the decrease in fair market value of the building ($85,000) (we are assuming that the $85,000 reflects only the cost to repair the building) or the adjusted basis of the building ($30,000) and subtracting from $30,000 the insurance payment of $10,000 (assuming that the $10,000 insurance compensation covered the loss of the building only). 

The casualty loss must be computed separately for any other improvements to the property.

  • What is the taxpayer’s basis in the building?

Response: The taxpayer’s basis in the damaged building is reduced by the amount of the insurance proceeds received and the amount of the allowable casualty loss deduction attributable to the damaged building.

  • If the taxpayer repairs the partially destroyed building, how do the repair costs affect the computation of the taxpayer’s basis in the building?

Response: If the taxpayer repairs the damaged building, the cost of the repairs ordinarily is capitalized and added to the taxpayer’s tax basis in the damaged building.

  • What is the authority for the basis information described above?

Response:  Sections 1012 and 1016 of the Internal Revenue Code.  Section 1012 provides, generally, that the basis of property is its cost to the taxpayer.  Section 1016 requires that proper adjustment be made to the basis of property for expenses, receipts, losses, or other items properly chargeable to capital account.

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December 27, 2008

Can't Backdoor Developer's Approach to Valuing Property by Calling it Business Goodwill Loss


Appeals Court Says:  Can't Backdoor Developer's Approach to Valuing Property by Calling it Business Goodwill Loss

By Bradford B. Kuhn, K. Erik Friess, and Rick E. Rayl
December 12, 2008

After years of little attention, business goodwill recently seems to be a hot topic for the appellate courts (see Mesdaq and Aklilu ).  Just this week, the California Court of Appeal rejected a creative effort to turn a real estate claim into a claim for lost business goodwill. 

On December 5, 2008, the Court in City and County of San Francisco v. Coyne (December 5, 2008, A118222) __ Cal.App.4th ___, confirmed that only "ongoing" businesses operating on the property being condemned can recover business goodwill losses.  The Court of Appeal also confirmed that developers of raw land cannot recover anticipated future development profits by characterizing those profits as goodwill losses; the Court equated this theory to the traditionally disapproved "developer's approach" to valuing real estate.

The Decision:

In Coyne, developers of raw land sought to recover the fair market value of their property, along with the future profits of their proposed development.  The developers claimed that the development's anticipated future profits fit within the definition of business goodwill.  The Court of Appeal rejected this claim, finding that:

(1)        the developers did not operate an "ongoing" business on the property, a threshold requirement for recovering business goodwill;

(2)        the developers' anticipated future profits were encompassed in their recovery of the fair market value of the real estate; and

(3)        the developers' appraiser's attempt to re-coup these "losses" through the label of "goodwill" amounted to a back door attempt to recover profits through the disallowed developer's approach to valuation. CLICK HERE TO CONTINUE

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Patel v. Liebermensch, No. S156797
In an action for specific performance of a real estate option contract, a court of appeal ruling reversing a judgment in favor of plaintiff is reversed where: 1) the court of appeal erred in finding the contract was too uncertain to enforce because it lacked the essential terms of time and manner of payment, as the court should have enforced this straightforward option contract; 2) if a contract for the sale of real property specifies no time of payment, a reasonable time is allowed, and the manner of payment is also a term that may be supplied by implication, and was not significantly uncertain in this case; and 3) the court of appeal improperly relied on the parties' conduct after their dispute arose to conclude that they had failed to reach a binding agreement. Read more in DOC...   Read more in PDF...

expert witness appraiser, expert witness appraisal

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December 24, 2008

Forensic Appraiser, Forensic Appraisal

From: Boyd, Brook [mailto:bboyd@windelsmarx.com]

Any real estate lawyer, investor, lender, or other person, who is involved in any transaction that includes "forestland or rural property," should be aware that, effective March 23, 2009, the EPA "All Appropriate Inquiries" rule relating to environmental due diligence is deemed to be amended to include the new ASTM International Standard E2247-08 entitled "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property."
EPA reserves the right to withdraw this rule.  The web link for the new regulation appears below, and I have also copied below the EPA summary of this new regulation.

Brook Boyd
Windels Marx Lane Mittendorf, LLP
156 West 56th Street
New York, New York 10019, USA
Direct Dial:  212-237-1176
E-Mail:  bboyd@windelsmarx.com
General Phone: 212-237-1000
General Fax: 212-262-1215


SUMMARY: EPA is taking direct final action to amend the Standards and Practices for All Appropriate Inquiries to reference a standard practice recently made available by ASTM International, a widely recognized standards development organization. Specifically, this direct final rule amends the All Appropriate Inquiries Rule to reference ASTM International's E2247-08 ``Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property'' and allow for its use to satisfy the statutory requirements for conducting all appropriate inquiries under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
DATES: This rule is effective on March 23, 2009, without further notice, unless EPA receives adverse comment by January 22, 2009. If EPA receives such comment, we will publish a timely withdrawal in the Federal Register informing the public that this rule will not take effect.

Brook Boyd | Windels Marx Lane & Mittendorf, LLP | 156 West 56th Street, New York, New York 10019 | Direct Dial: 212.237.1176 | General Fax: 212.262.1215 | bboyd@windelsmarx.com | www.windelsmarx.com

IRS Circular 230 Disclosure: As required by Federal Regulations, we inform you that any tax advice contained herein was not written or intended to be used (and cannot be used) for the purpose of avoiding federal tax penalties, or for the purpose of promoting, marketing, or recommending any transaction or matter to another party.
This message is sent by a law firm and may contain information that is privileged or confidential. If you received this transmission in error, regardless of whether you are a named recipient, please notify the sender by reply e-mail and delete the message and any attachments.
Forensic Appraiser, Forensic Appraisal
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December 22, 2008

forensic appraiser, The

<a href="http://findarticles.com/p/articles/mi_qa5398/is_200301/ai_n21329605">FindArticles - forensic appraiser, The</a>
<cite>Canadian Appraiser, The, Winter 2003, by Tony Sevelka</cite>
Tony Sevelka


As real estate becomes more complex, disputes are inevitable, and the need for the services of a forensic appraiser increases. Demand for forensic appraisal services tends to correspond to the ebb and flow of the economic cycle. During an economic downturn or recession, there is a greater need for the services of a forensic appraiser, and the reverse holds true when the economy is expanding or performing well. Before describing the practical role of a forensic appraiser in the broad discipline of real estate appraisal, a definitional framework is essential.

Appraisal practice

The Canadian Edition of The Appraisal of Real Estates describes the practice of the appraisal profession as follows:

Appraisers perform analyses and render opinions or conclusions relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate. Appraisal is defined as the act or process of estimating value. An appraisal is an estimate of value. Real estate appraisal involves selective research into appropriate market areas; the assemblage of pertinent data; the use of appropriate analytical techniques; and the application of knowledge, experience, and professional judgement to develop an appropriate solution to an appraisal problem.

Forensic appraisal

The following definition of forensic appraisal is a modification of the term forensic engineering taken from Black's Law Dictionary, 6th ed., Centennial Edition (1891-1991):

The application of the principles and practice of appraising to the elucidation of questions before courts of law or quasi-judicial boards. Practiced by legally or professionally qualified appraisers who are experts in their field, by both education and experience, and who have experience in the courts and an understanding of jurisprudence. A forensic appraisal engagement may require investigations, studies, evaluations, reports, advice to counsels, advisory opinions, depositions, and/or testimony to assist in the resolution of disputes relating to real property and real property rights in cases before courts, or other lawful tribunals.

The preceding definition of forensic appraisal is similar to that adopted by the Appraisal Institute, and found in The Dictionary of Real Estate Appraisal, 4th ed., 2002, at page 119:

Valuation for litigation (or for potential litigation) purposes, i.e., the application of the principles and practices of appraisal to the clarification of questions before courts of law (or situations that may come before courts of law such as divorce settlements or insurance claims settlements made before actual litigation has begun).

Role of the forensic appraiser The forensic appraiser is involved in many aspects of real estate such as those assignments that are intended for court or tribunal. Some of the areas in which the forensic appraiser may be involved include, but are not limited to:

* mortgage loan portfolio reviews

* mortgage fraud investigations

* mortgage debt recovery exercises

* property profile reconstruction (historical ownership, title research, occupancy, use, etc.)

* preparation of appraisals and appraisal reviews for professional negligence claims, power of sale proceedings, partnership or marital disputes, damage claims, insurance claims, and expropriation

* development of valuation theory and models

* assistance to legal counsel prior to and during court proceedings ground lease and space rental disputes and arbitration

Skill-set requirements

The forensic appraiser requires a broad and diverse skill-set to address the many potential problems encountered in real estate forensic appraisal work. A forensic appraiser should possess:

* an inquisitive mind as well as strong research and analytical skills

* a good attention span and an ability to focus on detail

* an ability to deal with and present complex problems in a systematic and non-technical manner

* an ability to listen, communicate effectively, and work as a team player

* a strong background in valuation theory and practice, as well as generally accepted appraisal principles and practices

* an understanding of land use controls and planning policies

* an understanding of the registry and land title systems and related title documents

* an understanding of regulatory appraisal requirements

* a general understanding of real estate law and evidentiary issues

* an accreditation from a recognized professional real estate organization such as the Canadian Appraisal Institute (AACI), with rigorous academic and practical designation requirements and a commitment to appraisal standards and ethical requirements2

* a commitment to continuing postdesignation education

An effective forensic practice must maintain an extensive library of appraisal literature and real estate case law, and have access to a multiple listing service (MLS). Further, as many disputes can take years before they reach court/ tribunal and a forensic appraiser is retained, it is important to have access to both current and historical real estate data bases, macroeconomic and microeconomic data bases, zoning and official plan documents, and transactional data (sales and leases).


A forensic appraiser should not commit to an engagement unless he or she is satisfied that no pressure will be brought to bear to achieve a preconceived or desired result, and that a professional working relationship can be fostered and sustained. Whether a client's objective is realistic and achievable can seldom be ascertained initially without undertaking some preliminary investigations. Sometimes there may not be a clear client objective, and the assignment is truly exploratory, with future actions dependent on what is uncovered in the process of the initial forensic investigation.

However, one must always maintain his or her independence and objectivity, without which the forensic appraiser has nothing to offer by way of professional expertise, litigation support, and expert testimony. Any concern that legal counsel might attempt a nominal retainer only to keep the appraiser from potentially being hired by opposing counsel can be preempted at the initial pre-engagement encounter by simply requesting that no confidential or privileged information be provided.

Preliminary assessment and engagement

If an action or quasi-judicial proceeding has been commenced, it is advisable to have a clear understanding of the issues in dispute. A prerequisite to involvement in a contemplated court case or quasijudicial hearing should include a review of all applicable file documentation, which may include:

* Statement of Claim

*Statement of Defense

* Agreed Statement of Facts

* Examinations for Discovery

* Existing appraisal reports

* Existing review appraisal reports

* Other related reports (i.e., environmental audits, building condition reports, etc.)

File memoranda

Only after conducting an independent preliminary review of the file is it possible to discuss with legal counsel the type and extent of research that could or should be undertaken to properly address the issues) in dispute. Acceptance or rejection of the legal premise of the case is irrelevant, as the role of the forensic appraiser is to address both sides of the dispute in an objective and unbiased manner.

As litigation is costly, the appraiser has an obligation and professional responsibility to point out the strengths and weaknesses of the client's case with respect to the valuation issues) in dispute, and to develop a problem-solving strategy that is cost-effective, appropriate and timely. Often, a phased approach is the best strategy, with the appraiser reporting his or her progress and findings to counsel weekly, bi-weekly, or monthly, depending on the nature and complexity of the assignment. Counsel should be kept fully informed at all times throughout the investigative process.

Once retained, an open dialogue and co-operative spirit must be established and maintained with counsel and any other professionals involved in the assignment. As counsel develops its theory and new theories emerge, or opposing counsel advances its theory, or proposes new theories, the forensic appraiser will be called upon to provide ongoing litigation support by way of advice and research, including preparation of reports for internal use and/or legal proceedings. Be prepared to speak frankly to legal counsel about any findings, whether favourable or unfavourable.

Forensic appraisal work is demanding and challenging, and can be allconsuming. A file can go on for years, punctuated by a series of stops and frantic starts. Success in forensic appraising is measured by the ability to help counsel resolve disputes before they get to court or arbitration.

Tales from the forensic files

Over the years, a number of forensic investigations involving a variety of valuation issues have been undertaken. A sample of the investigations undertaken and the findings stemming from those investigations are briefly described in the following case summaries.

Altered affidavits and tainted transactional data

As part of an investigation of a lender's portfolio of residential mortgage loans, a number of form appraisals were examined. Background checks on each property included a search of the MLS of the local real estate board. It soon became apparent that the asking prices on the expired listings of the appraised properties were less than the appraised values.

Because of the concerns raised by the initial findings, a title search of each property was undertaken. A close examination of each title deed revealed that the consideration shown on the affidavit page had been altered and significantly increased to suggest a much higher purchase price. There was a pattern of collusion in every instance involving the same appraiser and the same lawyer. It is likely that a co-operating mortgage underwriter facilitated these same transactions. By declaring a much higher purchase price, a higher loan amount than was warranted was obtained. An unfortunate spin-off effect is the tainting of the transactional data pool on which appraisers rely in monitoring residential price trends and developing estimates of value.

Creating value fabricated transactional data

On review of an appraisal of a commercial property in mid-town Toronto, it seemed remarkable and rather fortuitous that the appraiser was able to find five recent comparable sales, all reflecting a consideration of $1,200,000. The appraiser must have perceived a rising market, as he appraised the subject property at $1,250,000, some $50,000 more than the value suggested by the five perfect comparable sales. What are the odds of such good fortune befalling the appraiser to have been blessed with such excellent transactional data? It didn't take much for the alarm bells to go off. As it turned out, although the five comparable sales had actually taken place, the reported sale prices of four of the transactions were fraudulently misstated. All five properties were very dissimilar with the lot and building areas grossly inaccurate, and the locations of three of the properties far removed, two of which were in an entirely different region from the subject property. Further, the appraiser failed to mention the pending sale of the subject property at $1,125,000, with the vendor reportedly receiving only $1,025,000 as the prospective purchaser paid $100,000 to buy out an existing retail tenant.

Inadequate lease and zoning analysis

An investigation was undertaken of the valuation of two failed gas bars in connection with a claim for negligence brought by a financial institution against an appraisal company and two of its appraisers. The two recently constructed discount gas bars carried the same corporate banner (one anchored by a variety store and the other by a donut shop and tunnel car wash). They were situated nearly opposite each other on a stretch of a two-way road allowance (not at an intersection) in a community with a population of less than 10,000. The average daily traffic volume along the roadway on which the gas bars were situated was less than 4,500 vehicles. Both gas bars were under long-term 10-year leases, with options to renew. In addition to the obvious lack of economic viability of either new gas bar, and both being in direct competition with each other for gasoline sales, the appraisers failed to notice that the leases showed the tenants and landlords of both facilities as having the same corporate mailing address. Further, even though the appraisers claimed to have read the leases, they failed to distinguish between landlord and tenant improvements. Both properties were grossly overvalued based on the non-arm's length leases. Our investigations and reviews brought about an out-of-court settlement at an undisclosed amount.

On another occasion, a 'post mortem' was conducted on a small quasi-retail strip plaza, which at the time of our investigation was entirely vacant. In reconstructing the fate of this facility, the documentation in the original loan file was examined. All there was to go on was the appraisal report relied upon by the lender when the loan was advanced, and the leasing information in the loan file. The facility consisted of a four-unit quasi-retail strip plaza of 6,400 square feet, and a discount gas bar and kiosk zoned highway commercial. Some 1,800 square feet of the facility had never been occupied, although a donut shop was slated to occupy the space. On-site parking was available for 24 vehicles. The lease in respect of a fast food takeout pizza establishment occupying 1,000 square feet of the strip plaza was for a term of five years, with three five-year renewal options. The rent was fixed at the same rate during the initial five-year lease term and the first two five-year renewal option periods. Two other units comprising 3,600 square feet were leased for a term of five years and 10 years. The gas bar and kiosk was under a separate five-year lease.

Why the rest of the strip plaza (the 1,800 square feet proposed donut shop) had never been leased was a mystery until the other leases were summarized and the zoning by-law and its parking provisions analyzed. According to the zoning by-law, the space that had been occupied by the pizza establishment required a minimum of 10 parking spaces, and 14 parking spaces were required to support the other two quasicommercial tenants and the gas bar and kiosk. With no additional parking available to accommodate the proposed 1,800 square feet donut shop, no occupancy permit would be issued. As long as the pizza lease remained in effect, the remaining 1,800 square feet of quasiretail space in the strip plaza could not be leased, and would remain sterilized (except for use as storage).

The appraiser never read the leases or the zoning by-law, and certainly did not link the two together to assess their collective impact on the utility and value of the property. The appraiser also overlooked other critical factors, including $343,000 in tenant inducements, which should have been accounted for in establishing the net effective rent (market rent). Consequently, the quasi-retail facility was grossly overvalued.

Faulty and inadequate appraisal practices

Using syndicated mortgage funds through a mortgage broker involving investment by thousands of individuals, a real estate developer financed his development projects. His operations were investigated by the provincial government, and included a shopping centre with office space. Financing of this project was supported by an appraisal commissioned and prepared on behalf of the developer, indicating a market value of $29,000,000. As part of the investigation, a review of the appraisal was undertaken, from which it became evident that many of the retail tenancies were not arm's length and the rental income attributed to their space was not sustainable. It was also obvious from the names of the retailers, that many were not commonly recognized within the retailing industry. As for the bona fide tenants, a number of which were provided rent-free periods, rental payments were either absolute net or semi-gross. The appraiser who prepared the report on which the loan was funded made no independent inquiries as to the legitimacy of the leases or confirmation through analysis of rents in competing facilities of the reported rents as being at market.

While accepting the existing reported lease rents at face value, inappropriately treating all of the lease rents as net absolute (fully net) and relying on them in estimating the value of the property, the appraiser incorrectly claimed to be estimating the market value of the 'fee simple' interest. The inappropriate leases and grossly overstated rents provided for an artificial occupancy of 94.1%, which the appraiser stabilized at 95.0%. This grossly overstated income, after adjustment for non-recoverable expenses, was valued on the basis of a 10-year Discounted Cash Flow (DCF) model. Some allowance was made for leasing commissions when the leases rolled over, with the rents fixed for five-year terms. Based on a discount rate of 12%, which was linked to an annual inflation factor of 5% compounded annually, the appraiser concluded with a value estimate of $29,000,000. An inflationary component of 5% coupled with a discount rate of 12% results in an overall capitalization rate (i.e., real rate of return) of 6.67% (1.12 / 1.05 = 1.0667).

Despite the appraiser stating that the property was zoned 'light industrial,' and listing "most assembly and manufacturing uses within a wholly enclosed building... [and] other uses includ[ing] retail and service outlet if accessory to a manufacturing use, restaurant, production and transmission establishment, public garage, car wash, parking lot and light service shops" as permitted uses, and that "[t]he official plan...designates the subject property and surrounding lands... as industrial," remarkably, the appraiser concluded that "[t]he subject property's existing use appears to be a legal and conforming use under the existing zoning designation" and that "the highest and best use of the subject property is the continuation of the existing use as a[n] enclosed retail mall and office complex." Also, the building area represented 94.1% of the site area, even though according to the appraiser the permitted gross floor area was restricted to 87.3% of the lot area. Parking requirements were not mentioned, nor was there any indication given of the availability and number of on-site parking spaces to support the existing retail and office complex.

A superficial and meaningless cost approach, with an unsupported land and building value, for this income-producing facility was included in the report. Actual costs of the recently constructed facility (which included retention of some old skeletal industrial structures) were not disclosed, and acquisition particulars of the property were not provided even though the property had been acquired within three years of completion of the project.

Because of the significant shortcomings of the original appraisal and concern over the reported value of $29,000,000, an updated appraisal from a different appraiser was commissioned, which indicated a maximum value of $5,000,000 for the facility, only 12 months after the date of the original appraisal. It appears that the original appraiser had questionable experience with this type of real estate, and failed in his professional obligations by blindly accepting information from the property owner.

Deficient mortgage underwriting practices

A review was undertaken of the mortgage portfolio of a financial institution when their lending practices were called into question. As a starting point, a computer printout of the entire mortgage loan portfolio was obtained. From the printout, some two dozen specific loans were selected for a thorough review, for which the complete loan file was examined. One of the loans made in respect of a new medical office building, located near a hospital, was in default, and while there were many critical deficiencies in the appraisal report that had been relied upon in making the loan, the underwriting left much to be desired. The total loan amount had been advanced even though the building was not fully occupied, which would have been evident from inspection of the building and confirmation of individual tenant occupancies. A pencilled notation in the file showing a figure multiplied by 12 formed the basis on which the full loan amount had been advanced. This figure had been misconstrued as the monthly rental when, in fact, it was representative of the annual rental income from the complex, which was mostly unoccupied. Further, a license for the lab could not be obtained from the Province, and the pharmacy was not required to pay rent until the building had been issued a lab license and achieved a certain percentage of occupancy.

As for the appraisal, prepared on an 'assumptive' premise, but for the sloppy underwriting and a desire not to go public, and depending on the instructions to the appraiser, a case might have been made to pursue a claim of negligence against the appraiser, even though the lender was contributarily negligent. A value estimate based on an 'assumptive' premise is not an indication of the market value of the property in its 'as is' condition. Without the lab license, the property could not attract doctors as tenants, and the value of the property was severely diminished.

In another instance, the mortgages on two prime single-tenant industrial properties, each leased to a government agency, had gone into default. The property owner was a lawyer. A search of title revealed that both properties were encumbered by a number of mortgages that, in total, exceeded the market value of each property. It turned out that the lawyer had secured financing from a number of financial institutions, each believing that they held a valid first charge against the properties.

All of these financial institutions had allowed the property owner to perform the legal work on his own behalf to their financial detriment. The good news was that our lender client held the only valid first mortgage registered against each property.


As illustrated by the sample of case studies presented, sometimes the forensic efforts produced unexpected and surprising findings. In the forensic files mentioned, an appraiser sensitive to the need for sound appraisal practices would have been able to prevent many of the problems and attendant financial losses from ever having occurred. An absence of independent verification of property-specific information was a major contributing factor to the financial losses sustained in all of the forensic files examined. Protecting against fraud requires financial institutions exercise prudence in their underwriting practices and to be vigilant in their appraisal review functions, whether performed internally or externally.

End notes:

Appraisal Institute of Canada, The Appraisal of Real Estate, Canadian Edition (Chicago: Appraisal Institute, 1992): 9.

2 An undesignated individual has not been tested for competency, has no obligation to follow generally accepted appraisal standards, and does not have to adhere to the ethical obligations imposed by the professional body.

By Tony Sevelka, AACI, P.App

Tony Sevelka, AACI, P.App is the President of International Valuation Consultants Inc. in Mississauga, Ontario.

Copyright Appraisal Institute of Canada Winter 2003
Provided by ProQuest Information and Learning Company. All rights Reserved

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December 21, 2008

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Valuation Methods for Eminent Domain Purposes May Differ


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Case Name: E. Tenn. Natural Gas Co. v. 7.74 Acres (Click here for the full text of the case)

Court: United States Court of Appeals for the 4th Circuit

Date: May 22, 2007

Expert: Real Estate Appraisers. Frank Porter & Dennis Gruelle

Issue: Whether the expert testimony of appraisers is admissible to show that the best use of Plaintiff’s property was as commercial real estate.

Summary of case: A gas company exercised eminent domain over plaintiff’s land to create a fifty-foot wide easement for a gas pipeline and plaintiff sued for just compensation. The expert testimony on each side disputed the testimony on the other side, but the jury in the lower court ruled for the plaintiff.

Role of the expert: Plaintiff’s expert appraisers valued the land as being most appropriate for commercial use before the pipeline was built and most appropriate for residential or agricultural use after the pipeline was built.

Challenges to the Expert's testimony: Defendant challenged the basis of Porter and Gruelle’s just compensation calculations. In these calculations, the appraisers compared plaintiff’s property to other similar property to determine the decrease in value caused by the gas pipeline. The court ruled that the lower court’s decision to admit the expert testimony was reasonable because it met the Daubert Standard and was not an abuse of discretion.

Summary prepared by C. Wood, Student, University of California, Hastings College of the Law


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Real Estate News

The Harris Company,
Real Estate Appraiser / Consultant
5780 West Centinela Avenue, Building 1, Suite 408
Los Angeles, California 90045
310.337.1973  harris_curtis@sbcglobal.net

real estste news, commercial appraiser news, residential appraiser news

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December 16, 2008

Regulatory Barriers Clearinghouse

Regulatory Barriers Clearinghouse
Strategy-of-the-Month Club
December 2008
The affordable housing shortage continues to be a major
issue for many state and local governments, and is being
further exacerbated by the recent - and steep - rise in
unemployment. Limited land availability, a lack of
financial resources, and policies instituted during (and
more appropriate to) better economic times can hinder
affordable housing development, but the problem is often
compounded by a multitude of regulatory barriers. When
municipalities allow restrictive zoning policies, high
development fees, and lengthy approval processes to
persist in an already adverse housing market, it's as
though both homebuilders and homebuyers are having the
welcome mat pulled out from under them.
A new report prepared for the National Association of
Home Builders provides a comprehensive look at a wide
variety of strategies that can be implemented at the
state and local levels to overcome these barriers and
increase affordable housing production. The report,
Research on State and Local Means of Increasing
Affordable Housing, catalogues 65 land use and financial
strategies, and provides descriptions, funding
mechanisms, pros and cons, and real world examples for
each strategy.
The report provides detailed information on tools such
as overlay zoning, density bonus policies, land banking,
and mixed-use development programs that can be deployed
to increase affordable housing production. Other
strategies in the report, such as impact fee waivers,
rehabilitation codes, tax credits, and incentives for
infill development, can help reduce construction costs
and make affordable housing development more
economically viable. The report also lists examples of
successful media campaigns and marketing resources that
help overcome NIMBYism and gain community support for
proposed affordable housing projects. In addition to
detailed descriptions and case studies, readers will
also find listings of additional resources for each
strategy and example provided in the report.
To view the report in its entirety, please visit
We hope this information proves useful to you in your
efforts to grow your region's affordable housing stock.
If you have regulatory reform strategies or resources
that you'd like to share, email us at
 rbcsubmit@huduser.org, call us at 1-800-245-2691 (option
4), or visit our website at www.regbarriers.org. On
behalf of HUD's Office of Policy Development and
Research, the management and staff of the Regulatory
Barriers Clearinghouse wishes each of our valued
constituents a safe and enjoyable holiday season. We
appreciate both your efforts toward, and your interest
in, bringing housing within reach for hard working
American families.
Feel free to forward this message to anyone who is
working to reduce regulatory barriers to affordable
  appraiser, appraisal
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December 09, 2008

COMMERCIAL LISTING DATABASE GROWING, commercial appraiser, commercial appraisal

commercial appraiser, commercial appraisal

The Triangle Commercial Association of REALTORS®, NC, has joined the growing list of boards and brokerages contributing properties for sale or lease to CommercialSource.com, NAR's commercial listings database operated by ePropertyData. Other recent contributors include the Pensacola Association of REALTORS®, FL, and Prudential Zack Shore, NJ. CommercialSource.com is gaining popularity as the essential database for getting commercial properties promoted nationwide, says the REALTORS® Commercial Alliance. Read more, Click here.

commercial appraiser, commercial appraisal

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December 01, 2008

This edition of InterNACHIcomsop was revised and approved as an International Standard on 11/24/2008, and supersedes all previous editions.
Includes InterNACHIcomsop-2008 document pack.

International Standards of Practice for
Inspecting Commercial Properties
1. Purpose
2. Definitions
3. Use
4. Inspection
5. Research
6. Walk-Through Survey
7. Report
8. Limitations, Exceptions and Exclusions
9. Ethics
end sop
10. Inspection Agreement
11. Request for Documents and Persons with Knowledge
12. Consultant Contract
13. Thermal Imaging Addendum
14. Accessibility
15. Green Features
16. Fire Door Inspections
17. Future of Standard
18. Recommended Courses
19. Recommended Reporting Software

How to make your own clean copy of this SOP.

1. Purpose
1.1 The purpose of this document is to define good practice and to establish a reasonable approach for the performance of an inspection of a commercial property.
commercial appraiser, commercial appraisal

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