by Natalie Mandley and Christopher Stockness
The State of Minnesota recently passed legislation that allows appraisers to provide evaluations in addition to the appraisals they are already licensed to provide to the public. What does this legislation mean and how does it impact you?
What has changed?
The Appraisal Institute provides this explanation of what this legislation means: “In most states, a state-licensed or state-certified real estate appraiser is required to comply with USPAP [Uniform Standards of Professional Appraisal Practice] when developing an opinion of the value of real estate, as is required by the IAEG [Interagency Appraisal and Evaluation Guidelines]. Many financial institutions do not want a USPAP-compliant appraisal when they are permitted to use non-USPAP compliant evaluations. Instead of using the most competent and qualified professional to obtain a market value opinion, financial institutions go to other non-appraiser professionals (i.e., internal bank staff, financial analysts, accountants, brokers/salespersons, etc.) to obtain real estate valuation information. This results in greater risk to the banking system and lost business for appraisers.”
Appraisers in the State of Minnesota may now provide evaluations. Previously, all opinions of value prepared by appraisers had to comply with USPAP, thus excluding them from providing evaluations which do not comply with this set of standards. Non-appraisers, typically financial professionals, could prepare evaluations, as the development and presentation of the opinion of value in an evaluation; however, until August 1, 2021, appraisers could only prepare appraisals (opinions of value that comply with USPAP). When providing an evaluation, an appraiser does not have to comply with USPAP, but must disclose it is not an appraisal when providing the evaluation to the client.
What is an evaluation?
Simply put, appraisals must comply with USPAP, while evaluations do not. In addition, evaluations are restricted to properties below a particular value threshold (less than $500,000 in value), or to opinions of value in certain circumstances. An evaluation is an opinion of value that must follow Interagency Appraisal and Evaluation Guidelines imposed by the federal government, but does not have to comply with USPAP, which governs the opinion of value presented in an appraisal.
What is an appraisal?
Appraisals must comply with the Uniform Standards of Professional Appraisal Practice and, in Minnesota, can only be provided by licensed appraisers. Appraisals generally are more thorough and in-depth than evaluations and are required in most situations involving commercial real estate.
When can an evaluation be used?
For commercial real estate, which is our focus, evaluations are typically allowed if 1) the transaction value is less than $500,000; 2) an appraisal is not required by federal law. Additionally, one may use an evaluation when a recent appraisal has been done and 1) related market conditions have not changed in the interim; and 2) the purpose is refinancing only, with no new funds being loaned. For almost everything else in commercial real estate – transactions with values over $500,000 for which an appraisal has not been recently provided, or where required by federal law – an appraisal is needed.
Although evaluations may be appropriate and cost effective in certain situations, our experience is that most of the valuation work completed at Shenehon Company would not be considered a candidate for an evaluation. However, in instances where an evaluation may be a permitted option, it is our opinion that an appraisal that complies with USPAP is still the appropriate valuation service for clients. Estimating a reasonable and well-supported opinion of value through an evaluation still requires a level of analysis that is consistent with an appraisal and compliance with USPAP is not a significant hinderance in the process but instead aids in providing consistent valuation methodology, allowing appraisers to maintain the trust of clients and the public. Furthermore, in arenas such as the court of law or the Internal Revenue Service, appraisals remain as the accepted form of valuation.
Although this legislation allows appraisers the opportunity to be engaged in assignments that may have otherwise been completed by a less qualified evaluator, we believe there is potential for confusion in the marketplace. For instance, we anticipate there may be confusion about the difference between an appraisal and an evaluation, particularly in terms of the quality of analysis received. Appraisers that choose to take on both evaluations and appraisals will need to take extra care in educating their clients on the differences and to make certain, particularly in performing evaluations, that their role is clearly understood.
We will also be watching to see what role evaluations will have in the marketplace in instances where a valuation is not required by federal law. Valuation work for purposes not regulated by federal law can comprise an extensive amount of potential assignments and it will be interesting to see how appraisal professionals will choose to determine when an evaluation is appropriate rather than appraisal.
We will be monitoring how evaluations will be utilized by appraisers and the valuation industry as both adjust to this change in legislation. A primary concern that we have is that evaluations tend to be a way of providing valuation services at a low-cost point with the tradeoff being that the accuracy and quality of valuation may be sacrificed at the hands of time and money.