TAJ - Win20 - Whole Issue For Website

The
Appraisal
Journal
WINTER 2020
Volume LXXXVIII, Number 1
F Principles
for Calculating
AVM Performance Metrics
by Hans R. Isakson, PhD,
Mark D. Ecker, PhD, and Lee Kennedy
PAGE 14
Long-Term Leases:
Rent Reset Analysis
by Tony Sevelka, MAI, SRA, AI-GRS
PAGE 30
Revisiting Market Value

and Market Rent
by David C. Lennhoff, MAI, SRA, AI-GRS,
and Richard L. Parli, MAI
PAGE 42
Contents
The Appraisal Journal | Winter 2020 | Volume LXXXVIII, Number 1
ii Mission Statement
iv Profile: The Appraisal Institute’s 2020 President
v A Message from the Editor-in-Chief
vi Annual Conference Announcement
COLUMNS & DEPARTMENTS
1 Cases in Brief
Recent Court Decisions on Real Estate and Valuation
by Benjamin A. Blair, JD
50 Resource Center
2020 Trends and Beyond
by Dan L. Swango, PhD, MAI, SRA
59 Book Review
A Review of Henry J. Wise’s It’s Only an Opinion: An Appraiser in Court
by Warren Klutz, MAI, SRA, AI-GRS
63 Directory of 2019 New Designees
PEER-REVIEWED ARTICLES
Principles for Calculating AVM Performance Metrics

14
by Hans R. Isakson, PhD, Mark D. Ecker, PhD, and Lee Kennedy
30 Long-Term Leases: Rent Reset Analysis

Revisiting Market Value and Market Rent

42
by David C. Lennhoff, MAI, SRA, AI-GRS, and Richard L. Parli, MAI
ANNOUNCEMENTS
67 New Appraisal Institute Publications

68 Article Topics in Need of Authors
69 Manuscript Guide
70 Appraisal Journal Order Form
COVER PHOTO: Getty Images
www.appraisalinstitute.org Winter 2020 • The Appraisal Journal i

The Appraisal Journal
Published by the Appraisal Institute
Jefferson L. Sherman, MAI, AI-GRS, President

Rodman Schley, MAI, SRA, President-Elect
Pledger M. “Jody” Bishop III, MAI, SRA, AI-GRS, Vice President
Stephen S. Wagner, MAI, SRA, AI-GRS, Immediate Past President
Jim Amorin, CAE, MAI, SRA, AI-GRS, Chief Executive Officer
Stephen T. Crosson, MAI, SRA, Editor-in-Chief

Ken Chitester, APR, Director of Communications
Nancy K. Bannon, Managing Editor
Justin Richards, Senior Communications Coordinator
The Appraisal Journal (ISSN 0003-7087) is published quarterly (Winter, Spring, Summer, and Fall). © 2020 by the Appraisal Institute, an Illinois Not-for-Profit Corporation
at 200 W. Madison, Suite 1500, Chicago, Illinois 60606. www.appraisalinstitute.org. All rights reserved. No part of this publication may be reproduced, modified, rewritten,
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Mission Statement: The Appraisal Journal is published to provide a peer-reviewed forum for information and ideas on the practice and theory of valuation and analyses
of real estate and related interests. The Appraisal Journal presents ideas, concepts, and possible appraisal and analytical techniques to be considered; some articles are
for the development and expansion of appraisal theory while others are useful in the evolution of practice.
Disclaimer: The materials presented in this publication represent the opinions and views of the authors. Although these materials may have been reviewed by members
of the Appraisal Institute, the views and opinions expressed herein are not endorsed or approved by the Appraisal Institute as policy unless adopted by the Board of
Directors pursuant to the Bylaws of the Appraisal Institute. While substantial care has been taken to provide accurate and current data and information, the Appraisal
Institute does not warrant the accuracy or timeliness of the data and information contained herein. Further, any principles and conclusions presented in this publication
are subject to court decisions and to local, state, and federal laws and regulations and any revisions of such laws and regulations.
This publication is for educational and informational purposes only with the understanding that the Appraisal Institute is not engaged in rendering legal, accounting,
or other professional advice or services. Nothing in these materials is to be construed as the offering of such advice or services. If expert advice or services are required,
readers are responsible for obtaining such advice or services from appropriate professionals.
Nondiscrimination Policy: Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts
its activities in accordance with applicable federal, state, and local laws.
The Appraisal Institute advances professionalism and ethics, global standards, methodologies, and practices through the professional development of property
economics worldwide.
ii The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

The Appraisal Journal Editorial Board
Stephen T. Crosson, MAI, SRA,* Chair, Dallas, Texas
Larry T. Wright, MAI, SRA, AI-GRS, Vice Chair, Houston, Texas
Julie Friess, SRA, AI-RRS, Sedona, Arizona
Walter E. Gardiner, SRA, AI-RRS, Hammond, Louisiana
Kerry M. Jorgensen, MAI, Sandy, Utah
David C. Lennhoff, MAI, SRA, AI-GRS, Darnestown, Maryland
Mark R. Linné, MAI, SRA, AI-GRS, Lakewood, Colorado
James H. Martin, MAI, Mt. Pleasant, South Carolina
Stephen D. Roach, MAI, SRA, AI-GRS, San Diego, California
The Appraisal Journal Review Panel Barry A. Diskin, PhD, MAI, AI-GRS, Florida State University
Gregory J. Accetta, MAI, AI-GRS, Providence, Rhode Island Donald R. Epley, PhD, MAI, SRA, University of South Alabama
Anthony C. Barna, MAI, SRA, Pittsburgh, Pennsylvania Jeffrey D. Fisher, PhD, Indiana University
C. Kevin Bokoske, MAI, AI-GRS, AI-RRS, Ft. Lauderdale, Florida Terry V. Grissom, PhD,* University of Missouri–Kansas City
George Dell, MAI, SRA,* San Diego, California Thomas W. Hamilton, PhD, MAI,* Roosevelt University
Stephen F. Fanning, MAI, AI-GRS,* Denton, Texas William G. Hardin III, PhD, Florida International University
Kenneth G. Foltz, MAI, SRA, Wilmington, North Carolina Lonnie W. Hendry Jr., Texas Tech University
Jack P. Friedman, PhD, MAI, SRA, Chicago, Illinois Mark Lee Levine, PhD, JD, MAI, University of Denver
Brian L. Goodheim, MAI, SRA, Boulder, Colorado Kenneth M. Lusht, PhD, MAI, SRA,* Florida Gulf Coast University,
Robert M. Greene, PhD, MAI, SRA, AI-GRS, Olympia, Washington Penn State University
John A. Kilpatrick, PhD, MAI, Seattle, Washington Mark E. Moore, PhD, Texas Tech University
S. Warren Klutz III, MAI, SRA, AI-GRS, Bristol, Tennessee Barrett A. Slade, PhD, MAI, Brigham Young University
Douglas M. Laney, MAI, Tucson, Arizona Brent C Smith, PhD, Virginia Commonwealth University
Mark E. Mitchell, MAI, AI-GRS, Louisville, Kentucky Mark A. Sunderman, PhD, University of Memphis
Dan P. Mueller, MAI, St. Paul, Minnesota Grant I. Thrall, PhD, University of Florida
Nathan Pomerantz, MAI, Rehovot, Israel Alan Tidwell, PhD, University of Alabama
Rudy R. Robinson III, MAI, Austin, Texas H. Shelton Weeks, PhD, Florida Gulf Coast University
David J. Sangree, MAI, Cleveland, Ohio John E. Williams, PhD, Morehouse College
John A. Schwartz, MAI, Denver, Colorado Elaine M. Worzala, PhD, College of Charleston
Melanie Sieger, MAI, AI-GRS, Chevy Chase, Maryland
Dan L. Swango, PhD, MAI, SRA, Tucson, Arizona
James D. Vernor, PhD, MAI, Atlanta, Georgia
The Appraisal Journal Academic Review Panel

Tim Allen, PhD, Florida Gulf Coast University
Anjelita Cadena, PhD, University of North Texas
Peter F. Colwell, PhD, University of Illinois
François Des Rosiers, PhD, Laval University
*Statistics Work Group member
www.appraisalinstitute.org Winter 2020 • The Appraisal Journal iii

Profile
About the Appraisal Institute’s 2020 President
Jefferson L. Sherman, MAI, AI-GRS

Jefferson L. Sherman, MAI, AI-GRS, of Highland
Heights, Ohio, is the 2020 president of the Appraisal
Institute. He will serve as immediate past president
in 2021, when he also will chair the National Nom-
inating Committee. He serves this year as chair of
the organization’s Executive Committee and chairs
its policy-setting Board of Directors.
Sherman has served nationally on the Board of

Directors (2000–02), Finance Committee (chair in
2018 and vice chair in 2002), Nominating Commit-
tee (2002), Education Committee (2010–13), Inter-
national Relations Committee (2016), and Strategic
Planning Committee (2017). He has served nearly
continuously on the Region V committee since
1993, including many years as its parliamentarian.
He also has served in chapter roles, including twice
as an Appraisal Institute chapter president in Ohio,
and has worked on two successful chapter merger
teams. Sherman is principal of Sherman Valuation
& Review LLC in Willoughby Hills, Ohio. He has
taught courses for the Appraisal Institute since 1992
in 10 states and in Saudi Arabia. He also has served
on two course development teams and was chief
reviewer for the apartment appraisal course.
Sherman has been a real estate professional for 45

years, including as a broker in Colorado and then
in Michigan. His practice concentrates on the
eminent domain field with emphasis on litigation
review. He opened his original appraisal business,
Johnson and Sherman Inc. in Willoughby, Ohio,
in 1990 with his partner, Marilyn Johnson, who
is now retired. The firm changed to Sherman-
Andrzejczyk Group Inc. in 2000 and transitioned
to Sherman Valuation & Review in 2019. During
his years as a Realtor, he twice served as president
of the Battle Creek (Michigan) Board of Realtors
and was named Realtor of the Year in 1982.
iv The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

From the Editor-in-Chief
Stephen T. Crosson, MAI, SRA
Important Foundational Concepts

Dear Readers:
Welcome to the 2020 Appraisal Journal. Although The second feature article, “Long-Term Leases:
events continue to unfold, we know a challeng- Rent Reset Analysis,” examines the process of
ing and unpredictable year lies ahead of us. periodic rent resetting where there is a long-term
Appraisal professionals will be called upon to use lease. The analysis in such assignments and the
their in-depth understanding of valuation theory ultimate opinion of value depend on the property
and markets to provide clients with the best right to be valued, as indicated in the lease lan-
information possible. We urge you to consult guage. The article summarizes a sample of rent
Appraisal Journal articles as well as other Appraisal reset cases and explores solutions to rent reset
Institute materials to aid in developing solid valuation challenges.
responses to complex situations.
The third feature article, “Revisiting Market
In the current issue, you will find discussions that Value and Market Rent,” explores the evolution
dig into concepts that underpin valuation meth- of appraisal’s fundamental terms, market value and
odologies: reliable comparable analysis and the market rent. The components of each term are
nature of market rent. discussed and the ramifications of vague phrasing
are illustrated, with revised definitions proposed.
The first feature article, “Principles for Calculat-
ing AVM Performance Metrics,” looks at auto- As always, we welcome your comments regarding
mated valuation models (AVMs), their analysis any aspect of The Appraisal Journal.
of comparables, and how AVM performance met-
rics are calculated. These performance metrics are Stephen T. Crosson, MAI, SRA
important indicators of the accuracy and reliabil- Editorial Board Chair and Editor-in-Chief
ity of AVMs. The study demonstrates that the The Appraisal Journal
calculation of performance metrics is not stan-
dardized and tends to overstate AVM reliability.
The article suggests best-practice principles to
improve calculation of performance metrics as
well as the performance of AVMs.
www.appraisalinstitute.org Winter 2020 • The Appraisal Journal v

-
Cases in Brief
by Benjamin A. Blair, JD
Recent Court Decisions on Real Estate

and Valuation
Condemnation blight as appraiser opined that the Pifers suffered $35,000
a compensable taking in damages each year based on reasonable market
rents. Pifer also testified that distributors had
The Pifers are independent operators of a gaso- been interested in leasing the facility, but only
line service station, convenience store, and tow- once the project was complete, and no one
ing service in Mineral Wells, West Virginia. In wanted to lease the property during three years of
April 1996 and October 1998, the state Division road construction.
of Highways held public informational meetings The Division’s appraiser testified that he did
regarding a planned highway interchange project not see evidence of condemnation blight, noting
near the Pifers’ 2.45-acre parcel. Under the plan that the Pifers continued to operate their busi-
chosen in late 1998, the Division would take the ness during all relevant times. But following
Pifers’ land almost in its entirety. In 2001, the deliberations, the jury awarded $2,000 for the
Division informed the Pifers that plan develop- taking, $1,800 for the temporary construction
ment would begin in July 2003 and construction easements, and $175,165 for five years of con-
would begin in spring 2005. struction blight from 2003 to 2007. The Division
Construction did not begin as planned. In appealed the judgment.
April 2008, the Division announced new project The West Virginia Supreme Court of Appeals
plans that would largely spare the Pifers’ prop- noted that while some states simply incorporate
erty. Ultimately, the Division sought to condemn into their constitutions the federal prohibition
a 116-square-foot area for noncontrolled access on private property being taken for public use
right-of-way, and another 477 square feet for a without just compensation, twenty-five states,
temporary construction easement. In March including West Virginia, expand the scope of the
2010, the Division petitioned to condemn the protection to both the taking and damaging of
Pifers’ land, and the matter went to a jury trial. private property. Condemnation blight is one
In addition to seeking the usual compensation way of damaging property that is not taken. Con-
associated with a taking, the Pifers sought dam- demnation blight can be marked by departure of
ages for the unreasonably long period between rental tenants, unmarketability, and declines in
the first public announcement of the project and rentability, capital values, and profits. It would
the filing of the petition. That is, the Pifers be manifestly unjust to permit a public authority
claimed they suffered damages for rental loss due to depreciate property values through precon-
to condemnation blight. demnation activities and then take advantage of
The Pifers’ appraiser testified that he deter- such depreciation by taking the property at a
mined the fair market value of the property taken much lower price.
as $2,000, and the damage to the residue was zero. The West Virginia Supreme Court of Appeals
The threat of condemnation did not affect the agreed with the Division that the date of the tak-
value of the residue, but the primary influence of ing, for purposes of determining the value of the
the condemnation blight was the loss of the Pifers’ property, was March 2010, but the court noted
ability to negotiate a lease on the property with a that the Pifers did not argue that a de facto taking
major fuel distributor from 2001 to 2010. The occurred years earlier; rather they argued they
www.appraisalinstitute.org Winter 2020 • The Appraisal Journal 1

Cases in Brief
were entitled to condemnation blight damages County cannot redefine real property
prior to the taking. This distinction is important, to include non-realty
because a de facto taking may entitle the owner to
establish an earlier date for purposes of property This case arose from a taxation dispute between
valuation and recovery of interest. But condem- the County of Maui (County) and Kaheawa
nation blight damages are, by definition, damages Wind Power (Kaheawa), which leases land on
suffered in anticipation of the taking. the island of Maui to operate a wind farm. At
The court held that if it were to follow the issue was whether the County had the authority
Division’s direction and attempt to force the to include the value of the wind turbines in
Pifers’ damages into a taking analysis, they would Kaheawa’s real property tax assessments and to
vanish, and the Pifers would be deprived of just redefine the term real property for that purpose.
compensation and obliged to absorb economic The 1981 Hawaii Constitution provides that
losses caused by the Division’s protracted delay the taxing power “shall be reserved to the State”
in implementing the project. Instead, the issue is except that “all functions, powers and duties
whether landowners can recover damages related relating to the taxation of real property shall be
to condemnation blight as an element of just exercised exclusively by the counties.” Before
compensation. that amendment’s adoption, all taxing authority
The court noted the theory behind just com- was vested in the state. At the time of the amend-
pensation awards is that the individual property ment’s adoption—and still today—the constitu-
owner should be placed in as good a position as tion does not define the term real property.
he or she would have been but for the establish- In adopting their respective property tax ordi-
ment of the public project. When property own- nances, counties in Hawaii borrowed then-exist-
ers who operate a small business suffer financial ing state statutory language defining real property
loss for several years as a result of the govern- as including improvements erected on or affixed
ment’s precondemnation activities, then the law to the land, and any fixture, including all machin-
should be used to establish a means of recovery. ery and equipment whose use “is necessary to the
The court therefore held that a landowner may utility of such land” or whose removal cannot be
seek damages for condemnation blight as an ele- accomplished without substantial damage to the
ment of just compensation in a condemnation land, buildings, and structures. This definition of
proceeding, but, because some delays in public real property for tax purposes remained the same
projects are inevitable, a landowner must establish for thirty years, until 2013 after Kaheawa chal-
that there has been an unreasonable delay in insti- lenged the County’s authority to include the
tuting the condemnation proceeding following an value of wind turbines within real property
official announcement. Landowners like the Pifers assessments for the 2007–2011 tax years.
must prove that their damages were caused by the In that earlier litigation, the Intermediate Court
condemning authority’s actions or inactions, and of Appeals (ICA) held that wind turbines did not
here, the court agreed with the jury that the Pifers qualify as real property under the existing defini-
offered proof of reasonable certainty of damages. tion. To qualify as a fixture under the earlier defi-
The Division’s appeal was denied. nition of real property, the wind turbines would
need to be necessary to the utility of the land. The
West Virginia Dept. of Transportation v. Pifer ICA looked to common law for guidance regard-
West Virginia Supreme Court of Appeals ing fixtures, including a significant case from Ohio
November 19, 2019 called Zangerle v. Republic Steel Corp. Applying
No. 18-0517 that test, the ICA concluded that wind turbines
2 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

Cases in Brief
were only necessary to the utility of the land given In the amended Constitution, several sections
the particular business that Kaheawa currently distinguished between real and personal prop-
operated. The County appealed, and the state erty, thereby implying that there was some inher-
supreme court denied the appeal. ent difference between the terms. Had the
In response to this litigation, the County delegates intended to provide the counties the
amended its code to include wind turbines and authority to tax personal property, they would
other articles that “would increase the value” of have done so explicitly. However, the court
the underlying realty within the definition of real agreed that it is not clear from the text what the
property. In essence, the County redefined real delegates meant by “real property.”
property to include wind turbines that had just Therefore, only the state legislature has the
been found to be not real property. Under its new power to define real property, and that current
authority from the amended code, the County statutory definition aligns with the prior defini-
again began including value of the wind turbines tion that was held to exclude wind turbines.
in Kaheawa’s real property tax assessments for Unless and until the legislature changes the defi-
the 2014, 2015, and 2016 tax years. Kaheawa nition of real property, or clarifies the “use prong”
appealed those assessments. of the fixture analysis, the common law test from
The Tax Appeals Court decided in favor of Zangerle continues to apply. Applying that test,
Kaheawa. The Tax Appeals Court found that the the court held that wind turbines are only neces-
delegates to the Constitutional Convention had sary to the utility of the land given the particular
never intended to grant the counties the power business that Kaheawa operates; they would not
to redefine the term real property to include per- be useful to the land regardless of the business
sonal property. The County again appealed to carried on upon it. Accordingly, the court held
the state supreme court. that wind turbines are not fixtures and do not
On appeal, the County argued that the consti- constitute real property.
tution transferred the power to define real prop-
erty to the counties and that, accordingly, the Kaheawa Wind Power, LLC v. County of Maui
County had the power to add wind turbines to its Hawai‘i Supreme Court
definition; to adopt its own test based on appraisal January 21, 2020
concepts of use, utility, and value; and to poten- SCAP-17-0000816
tially tax any type of property that satisfied the
test as assessable accessions to realty. In the alter-
native, the County argued that, under the proper Inverse condemnation claim
interpretations of utility and permanence, wind for sewer system backup
turbines constitute real property, even under the
common law fixture test. Raw, untreated sewage from the City of Oroville
The Hawaii Supreme Court disagreed. The (City) sewer main backed up into a private sewer
court acknowledged that in earlier cases, it had lateral in December 2009, invading the sinks, toi-
addressed the counties’ broad scope of authority lets, and drains of a dental practice in an office
to set property tax policy. For example, counties building owned by three dentists. The dentists
are free to classify properties and tax them at dif- filed claims against their insurer, and then the
ferent rates, and they are free to set their own dentists and the insurance company sued the City
methods of assessment. But that authority did for, among other things, inverse condemnation.
not extend to empower counties to redefine what The City filed a cross-claim, asserting that the
constitutes real property. dentists had failed to ensure a backwater valve

Cases in Brief
was properly installed on their private sewer lat- entity is required to compensate owners for
eral in violation of the City’s municipal code. injury to their property arising from the inherent
At trial, the City presented evidence that the dangers of the public improvement.
sewer was built and operated as a gravity-driven Applying a standard of “substantial causation,”
system in which sewage flows downhill to a sew- the state supreme court explained that land
age treatment plant. Manholes provide access owners may establish inverse condemnation lia-
and are designed to allow sewage to escape bility even where the public improvement’s
through the manhole immediately upstream of design, construction, and maintenance was only
the blockage. The City showed that the building one of several concurrent causes, provided the
was constructed after the enactment of the code causal connection between the risks inherent in
provision requiring the installation of backwater the improvement and the harm in question was
valves, which prevent sewage from entering sufficiently robust.
buildings during main line backups, and at the Accordingly, damage to private property must
time of the backup, the building had no back- be substantially caused by an inherent risk pre-
water valve installed. The dentists’ expert con- sented by the deliberate design, construction, or
ceded that a backup valve could have averted maintenance of the public improvement. Under
the incident. such circumstances, whether the damage was
In July 2014, the trial court found the City lia- intentional or the result of negligence is not
ble in inverse condemnation. The court con- determinative. At the core of this test is the
cluded that the evidence showed that there was requirement that, even in the case of multiple
a blockage likely caused by roots; the blockage concurrent causes, the injury to private property
resulted in the sewage backup in the dental office; is an inescapable or unavoidable consequence of
and the property was damaged. But even though the improvement.
the City shared causal responsibility for the dam- The court concluded that, by failing to analyze
age with the dentists, the court ruled that, because inverse condemnation with sufficient focus on
the primary cause of the blockage was root intru- substantial causation from inherent risks associ-
sion—which, in an earlier case, was described as ated with the sewer system, the lower court erred.
an inherent risk of sewer operation—the City was The record supported that the City acted reason-
liable for inverse condemnation. The City ably in adopting the design for the sewer system
appealed the case, which eventually went to the in accordance with accepted practice at that
California Supreme Court. time. The court concluded that ruling for the
Inverse condemnation claims are initiated by dentists would be “airbrushing out of the picture”
property owners seeking compensation for a not only the City’s balance of safety and practical
taking or damage to a property. To resolve considerations, but also the dentists’ noncompli-
inverse condemnation claims and the causal ance with an ordinary planning code require-
questions they raise, courts look to tort and ment that would have eliminated or at least
property law doctrines relevant to analogous dis- mitigated risks of sewage backup damage. Thus,
putes between private parties. From underground the City was not liable in inverse condemnation
excavation projects to street construction, for the damage to the property.
inverse condemnation covers a wide range of
public improvements. Consistent across courts’ City of Oroville v. Superior Ct. of Butte County
assessments of these varied public works is the California Supreme Court
expectation that if an improvement is inher- August 15, 2019
ently dangerous to private property, the public 446 P.3d 304

Cases in Brief
Measure of damages for taking Sharpe and Logan argued that Timchula
to establish private road should be restricted from using the private road
for subdivision of the Timchula property and
The Timchula Living Trust owns Section 21 in a that the road be used for agricultural and resi-
particular township in Albany County, Wyo- dential purposes only, but the viewers did not
ming. Section 21 abuts Sections 15, 16, and 22. recommend that restriction, since no other users
In May 2017, Timchula filed a complaint claim- of that right-of-way had such restrictions. The
ing that the trust property was without legally court adopted this recommendation.
enforceable access, and proposing the construc- Finally, the viewers recommended that Tim
tion of a road. Timchula proposed a route along chula pay $25 per rod to Section 15’s owners and
an existing, two-track road that is already sub- $500 total to the Garsons, based on an evalua-
ject to easements, which would have crossed tion of 25 sales in the area that showed the value
Sections 15 and 16. Section 15 is privately of the property over which the road would cross
owned, while Section 16 is state owned. Tim was $1,000 per acre. The baseline amount gener-
chula later amended the proposed route to avoid ally charged by the state for easements over its
crossing the state’s land in Section 16. land is $25 per rod. The court agreed.
The private road statutes are the sole remedy Section 15’s owners appealed. They contended
for landlocked landowners to obtain access to that the court failed to select the most reasonable
their property. Any persons whose land has no route when it chose the viewers’ proposal instead
outlet to a public road may commence an action of their proposed route. Specifically, they argued
for a private road, located so as to do the least that the viewers’ route was longer, required sub-
possible damage to the lands through which the stantial infill, and traversed the Sharpes’ existing
private road is located. homesite areas with corrals, trailers, and a well.
In their answer to the complaint, Section 15’s In contrast, the Section 22 route had several
owners—Sharpe and Logan—proposed an alter- benefits, including following an existing road
nate route across a different two-track road and an existing powerline.
crossing Section 22 owned by the Garsons. The The Wyoming Supreme Court noted that these
court held a necessity hearing and determined reasons were “decidedly bent” in favor of Section
that the Timchula property satisfied the statu- 15’s owners. It failed to address two of the most
tory requirements for establishment of a private important considerations that led the viewers and
road and that access was necessary. the court to adopt the viewers’ route. The view-
With input from the parties, the court then ers’ route was 2.5 miles closer to the major high-
appointed three “viewers and appraisers,” also way, saving five to ten minutes of driving. The
referred to as “viewers,” to assess the proposed viewers’ route also provided the best opportunity
routes and submit recommendations to the for dependable access despite drifting snow.
court regarding the more reasonable route for The court then turned to the issue of damages.
the road, any conditions or restrictions that In an earlier case, the court held that the mea-
should be placed on the road, and damages. sure of damages for taking a private road was the
In their report, the viewers largely adopted difference in value of the entire parcel before and
Timchula’s proposal, finding that it would the value of the remaining land after the taking,
provide the most convenient access to a public and the legislature had adopted that test. The
road and would require the least new con court said that the legislature’s use of the word
struction and maintenance. The court adopted “shall” means viewers and appraisers must use
the viewers’ report. this method to calculate damages.

Cases in Brief
Here, the record showed that the viewers extending into the airspace, and a restriction on
considered before-and-after values, but they erecting or growing any structure or object into
could not reach a consensus and thus did not the airspace. In the declaration, the County esti-
report any such values. They had difficulty mated the compensation for the taking at $4,500.
appraising property already burdened by ease- Mako filed a notice of appeal of the declara-
ments and found it more reasonable to consider tion. The trial court initially concluded that,
what other landowners had paid for easements. as a practical matter, all damages flowing from
But because damages were not calculated in the avigation easement were diminution in
accordance with the statute, the court reversed value to the remainder, since a property owner
the damages award and remanded for the lower rarely has occasion to use the airspace 700 feet
court to reassemble the viewers (or, if necessary, above the property.
appoint new viewers) and instruct them to At trial, both parties retained appraisers to
determine and separately report before-and- testify regarding the appropriate amount of
after values of each separately owned parcel of compensation for the condemned property.
affected land. The judgment designating the Both appraisers concluded that there was a
viewers’ route, however, was affirmed. remainder tract not subject to the easement, but
they reached different final value conclusions.
Sharpe v. Timchula The County’s appraiser attributed $4,492 as the
Wyoming Supreme Court value of the direct taking with no consequential
December 4, 2019 damages. Mako’s appraiser attributed $220,500
453 P.3d 761 to the direct taking and $176,400 as consequen-
tial damages to the remainder. The jury returned
a verdict of $233,100 for Mako, without split-
Consequential damages in ting the amount between direct and consequen-
an avigation easement dispute tial damages. The County appealed, arguing
that there was no “remainder” because the
In 2006, Mako Development (Mako) purchased entire property was affected by the easement
a 6.2-acre parcel near the LaGrange-Callaway and grant of access.
Airport in Troup County, Georgia, for $1 mil- The court of appeals began by noting that,
lion. The Georgia Department of Transportation in assessing whether an award of consequential
later used its eminent domain power to take a damages is appropriate, Georgia law defines
portion of the property while providing Mako the remainder as “property not taken” and “the
compensation of $320,000. The remainder was owner’s land not involved in the easement.”
4.41 acres, all of which was undeveloped and Georgia law also provides that the rights of own-
covered in vegetation. ers of realty include title both downwards and
In 2015, Troup County (County) approved a upwards indefinitely.
large expansion of the airport, including an The court next explained that the purpose of
extension of its runways. The County filed a dec- separating the different types of damages is to
laration of taking against the property, claiming avoid a double recovery for the effects of the
an avigation easement over the entire property easement or partial taking on the owner’s prop-
to allow airplanes to fly over the airspace. The erty value. Here, however, neither appraiser
easement included a restriction on use of airspace used a method of calculating damages that
above 725 feet over the entire contiguous tract, a would have resulted in a double recovery. Both
permanent right of entry to remove objects appraisers calculated the value of the “direct

Cases in Brief
damages” as the value of the air rights, and they was now the manager, the County assessed prop-
calculated the value of the “consequential dam- erty taxes in 2011, 2012, and 2013, valuing
ages” as the effect on the property on the Hunt’s taxable interest in the leasehold at
ground. Thus, even if the easement indeed cov- $35,731,200 using the fee simple value of the
ered the entire property as the County argues, property. Hunt paid the taxes assessed without
the consequential damages would not simply invoking the pay-and-protest provisions of
disappear; they would still need to be accounted South Dakota law. But Hunt then challenged the
for as part of the market value lost due to the County’s valuations by appealing first to the
claiming of the easement. County Commissioners, then to the circuit court.
Accordingly, whether the damages are denom- Rather than focusing on the County’s con
inated as direct or consequential, the difference stitutional authority to tax the leasehold inter-
between the appraisers’ total damage conclu- est altogether, Hunt argued that the County
sions shows the amount of property value taken erred by assessing the property at its fee simple
by the County from Mako and, therefore, the value instead of its leasehold value. Following
amount that each appraiser opined that Mako trial, the court found that the methods of valu-
must be paid to be made whole. The jury’s ver- ation employed by the County were inaccurate
dict was halfway between the appraisers’ num- and unreliable, and observed that the state
bers, so the Court concluded that there was constitution forbids valuing property owned
no improper double recovery, and the jury’s ver- by the United States. Determining that Hunt
dict was left undisturbed. owed taxes only on the leasehold interest, the
court held that the value of the leasehold was
Troup County v. Mako Development, LLC $14.1 million to $15.5 million, varying by year.
Georgia Court of Appeals Neither Hunt nor the County appealed the
October 17, 2019 court’s ruling.
835 S.E.2d 44 Three months later, Hunt filed an application
for an abatement and refund of taxes overpaid
pursuant to statute. That statute provides six rea-
Assessment of taxes against housing sons that taxes may be abated or refunded,
development on military base including that the property is exempt from tax,
but a reduction due to an assessment appeal is
The United States government owns land in not one of the reasons. Accordingly, the applica-
Meade County, South Dakota, that includes Ells- tion was denied by the local commission; even if
worth Air Force Base. In the 1980s, the govern- one of the provisions applied, the commission
ment set aside 235 acres within the base for a was not satisfied that the assessment was invalid,
housing development for base personnel. In inequitable, or unjust.
1990, the government provided Hunt Compa- Hunt appealed the commission’s decision to
nies a 40-year land lease, agreeing that Hunt circuit court, which likewise found that none of
would build 828 housing units on the property. the six provisions applied. The court also rejected
For the first 20 years Hunt held the lease, the Hunt’s argument that it could have elected to
government managed and maintained the devel- pursue either a pay-and-protest suit or apply for
opment, and the County did not assess taxes abatement and refund. The court noted that the
against Hunt during those years. legislature would not have provided two mecha-
When the lease ended in August 2011, Hunt nisms to seek the same relief, one with a 30-day
began managing the development. Because Hunt limitation period (the pay-and-protest provision)

Cases in Brief
and one with a four-year limitation period (the Tax assessment of city watershed
abatement and refund provision). Hunt appealed property requires credible evidence
to the state supreme court, arguing both that the of highest and best use
assessment of Hunt’s leasehold interest violates
the constitution, and that the circuit court erred The City of Newark owns eight parcels in Jeffer-
by denying the abatement and refund. son Township, New Jersey, consisting of approxi-
The South Dakota Supreme Court quickly dis- mately 4,036 acres of vacant land (Subject).
missed the constitutional argument as not prop- Except for 400 acres of open water, which is one
erly before the court. In the earlier valuation of Newark’s reservoirs, the property is heavily
litigation, Hunt challenged the assessment as wooded and is otherwise constrained with steep
unconstitutional because it was based on the fee slopes and rock outcroppings. The property is
simple value of the development. The valuation subject to restrictions of a state law that prohibits
court ruled in Hunt’s favor, reducing the assess- the sale of land used for the purpose or protection
ment to the value of the leasehold. Because nei- of a public water supply; the property is also
ther party appealed, that decision became final, restricted by conservation easements to ensure
thereby terminating further litigation on the that the property would “be retained forever and
issue of the value of Hunt’s taxable interest. predominantly in its natural forested condition.”
On the second issue, the court observed that While the easement deeds prohibit the clear-
South Dakota law provides two avenues of relief cutting of timber, they allow selective cutting of
when a tax is improperly levied against a per- timber so long as it is done under the supervision
son—pay and protest, and abatement of an erro- of a state forester and in accordance with an
neous assessment. The pay-and-protest provisions approved forest management plan.
afford taxpayers broad relief within a limited Jefferson conducted a townwide revaluation in
window, while the erroneous assessment provi- 2006, then performed a reassessment again in
sion provides much narrower relief over a longer 2010 due to the recession. In 2009, the water-
period of time. shed property was assessed at $3,500 per acre; it
Hunt had relief available, yet it chose not to was assessed for $5,000 per acre beginning in
use the pay-and-protest provision that would 2010. Every Jefferson landowner except Newark
have allowed for a refund following a successful had his or her assessment decrease. Newark’s
valuation appeal. The Court noted that it was assessment increased.
“mindful of the enormity of the County’s over- Newark appealed the assessments. At trial,
valuation of Hunt’s leasehold interest,” but the both parties hired appraisers to render an opin-
Court held that it could not interpret the statute ion of value for the Subject for each year at
to avoid that result. The circuit court’s decision issue. Newark’s appraiser conferred with a certi-
was affirmed. fied forester in developing his value opinion.
The parties agreed that the key issue in the dis-
Abatement Appeal of Hunt Companies, Inc. pute was the highest and best use determination
South Dakota Supreme Court for the property.
May 1, 2019 Newark’s appraiser concluded that the highest
2019 S.D. 26 and best use was for woodland management and
sale of the property for purpose of harvesting tim-
ber for sale. Accordingly, he considered sales of
deed-restricted farmland and arrived at an opin-
ion of value of $1,500 per acre. Jefferson’s appraiser

Cases in Brief
considered the encumbrances on the property Jefferson’s appraiser, on the other hand, identi-
and concluded that its highest and best use would fied sales of properties where the purchaser was
be for recreation, determining the most probable motivated to use the land for active and passive
buyer to be a land preservation group or govern- recreation and to preserve the property in perpe-
mental agency. He valued the property as $4,500 tuity. However, the court found that the differ-
to $6,500 per acre, varying by parcel. ences between the comparable properties and the
The tax court noted that the concept of high- subject property were significant. The court con-
est and best use is not only fundamental to valu- cluded that the presence of a conservation ease-
ation but is a crucial determination of market ment on the property had a greater impact than
value. Implicit in such an analysis is the assump- the restrictions on the comparables. There is “no
tion that the proposed use be market driven. logical reason” that a seller would receive the
Newark’s appraiser determined that after the same amount for a property with greater develop-
conservation easements the residual rights of use ment potential and more possible uses than the
of the property consisted of conservation, tim- subject. Thus, Jefferson’s appraiser’s conclusion
bering, and recreation. After considering the was deemed unreliable.
alternatives, the appraiser determined that tim- Neither party presented credible evidence
bering represented the most viable economic use of the value of Newark’s watershed property.
of the property. In arriving at that conclusion, he Consequently, the assessments were affirmed
determined that such buyers would buy the actual by the court.
fee of the property rather than buying lumbering
rights. He could not, however, find a single sale City of Newark v. Township of Jefferson
of land in New Jersey for timbering purposes. New Jersey Tax Court
Another of Newark’s witnesses testified that, to October 3, 2019
his knowledge, forestry in New Jersey was “pretty 31 N.J. Tax 303
much a dead industry.”
Jefferson’s appraiser agreed that he had never
seen a sale in New Jersey of land purchased for Loss of visibility not a compensable taking
timber value. Since highest and best use requires
a market for that particular use, when there are TLC holds a perpetual easement on land owned
no sales in the market, the appraiser cannot con- by Bay Line Railroad (Bay Line). Bay Line
clude that there is demand. Instead, given the expressly granted TLC the right to advertise
conservation easements in place, he concluded using a billboard on Bay Line property near an
that the highest and best use of the property was intersection with Highway 98. The easement
for active and passive recreation. deed provides for a 345-square-foot footprint for
In the court’s view, once Newark’s appraiser the billboard site, express ingress and egress, and
determined that there were no sales of land in a line-of-sight restriction that prohibits Bay Line
New Jersey for timbering, he should have elimi- or any other party from erecting a structure that
nated timbering as a potential highest and best obscures the normal highway view of the bill-
use and considered other uses for which there board. The billboard footprint does not abut the
was demand in the marketplace. Because the highway, but Bay Line’s right-of-way does.
Court rejected his highest and best use conclu- For fifteen years, TLC accessed the billboard
sion, it likewise concluded that his evaluation of by jumping the curb of the highway, since there
sales of properties restricted for agricultural pur- was no dedicated driveway or curb cut to access
poses was not credible. the billboard from the highway. Then, the Flor-

Cases in Brief
ida Department of Transportation (FDOT) established that Bay Line would not take any
acquired the necessary right-of-way for construc- actions to obstruct TLC’s billboard. Further-
tion of a flyover on the highway, which would more, there is no inherent right to use public
elevate the highway by more than twenty feet to highways for commercial purposes, since no per-
allow clearance for trains and to facilitate con- son has a vested right in the maintenance of a
tinuous traffic. FDOT conceded that the bill- public highway in any particular place, and the
board would no longer be visible from the state owes no person a duty to send traffic past
highway once the flyover was completed. its property. Thus, TLC was not entitled to com-
TLC filed a complaint against FDOT for pensation for loss of visibility.
inverse condemnation, claiming the flyover Unlike visibility, however, Florida law does
project violated its rights under the easement for recognize access as a stand-alone property right.
an unobstructed view and access thereto. TLC TLC thus argued that, although the footprint did
asserted that the construction was a compensa- not abut the highway, TLC’s ingress and egress
ble taking because the billboard would no longer rights do abut the highway. The court disagreed,
be commercially viable, and there would be no finding that TLC failed to prove that its access to
legal entry to the billboard footprint. In turn, Bay Line’s property would be diminished as a
FDOT argued that, because the easement did result of the flyover. Neither TLC nor Bay Line
not abut the highway and the deed does not spe- ever applied to FDOT for a curb cut or other per-
cifically describe how the easement may be missible entry from the highway. Furthermore,
accessed, TLC is not entitled to compensation. the flyover plans call for a service road to run par-
The trial court agreed with FDOT, finding that allel to the flyover, which will have a curb cut.
TLC had no compensable property right for loss Thus, the court held that the flyover project does
of visibility and did not incur a loss of access. not result in a denial of TLC’s access to the Bay
TLC appealed. Line property or its easement.
On appeal, TLC presented first the question
of whether private parties may create a contrac- TLC Properties v. Florida Dept. of Transportation
tual property interest, such as a guarantee of an First District Court of Appeals of Florida
unobstructed view, for which compensation is due January 21, 2020
for a taking by a government agency. The court No. 1D17-5034
began by noting that Florida law does not recog-
nize visibility as a stand-alone property right. The
cohort of compensable property interests in Flor- Landlord-tenant dispute regarding
ida has expanded to include leaseholds, ease- renewal of sublease agreement
ments, and personal property as well as intangible
property like contracts. TLC argued that restric- In 2007, the Port Isabel Logistical Offshore Ter-
tive covenants should be added to that list. minal (PILOT) leased 54 acres at Port Isabel,
Landowners may not contract to limit the Texas, from the port’s Navigation District. In
government’s ability to acquire lands for public April 2008, PILOT subleased half of the property
purposes or force the government to compensate to Subsea, an engineering and construction firm
them for damages resulting from a use that that manufactures and installs undersea oil and
does not directly invade their land. Here, the gas pipelines, for use as a spoolbase.
covenant on visibility expresses a building The sublease agreement’s initial term termi-
restriction imposed for the benefit of the owner nated on May 31, 2012. Because PILOT would
of the easement, TLC. But the deed simply need to renew its prime lease with the Navigation

Cases in Brief
District, the sublease agreement required Subsea ally intended to relinquish its right to complain
to provide written notice to PILOT by March 31, about the timeliness. Further, PILOT’s president
2012, if Subsea intended to exercise its option to had testified that the rent payments it accepted
renew the sublease for another five-year term. from Subsea after expiration of the initial lease
Subsea spent over $40 million to improve the term were in the amount prescribed for a hold-
property by, among other things, building a dock, over tenant, not for a tenant which had effec-
building pipe-fabrication facilities, and stabiliz- tively renewed the sublease.
ing the ground with crushed rock. But after the On the issue of trespass damages, the court
Deepwater Horizon oil spill in 2010, drilling noted that the jury was instructed to determine
activity in the Gulf of Mexico slowed dramati- damages by calculating the difference between
cally and Subsea’s facilities on the property went the rent paid by Subsea and the fair market
virtually unused for several years. Accordingly, in rental value of the premises from June 1, 2014,
early 2012, Subsea sought to renegotiate the to December 31, 2016 (just after the date of the
terms of the sublease prior to renewal. trial judgment). Because the jury awarded dam-
Although the evidence was unclear about ages of $634,710, that indicated that the jury
the communications between PILOT and Sub- found the property had a fair market rent of
sea, Subsea did not send written notice of its $1,500 per acre per month, apparently based
intent to renew the sublease before March 31, solely on the testimony of PILOT’s president.
2012. In May 2012, Subsea sent an e-mail to The court observed that a property owner
PILOT’s new president stating that Subsea may testify to the value of his property even if
intended to renew the lease. PILOT did not the owner is not otherwise qualified as a valua-
respond to the notice, believing it was untimely tion expert. But in order for a property owner to
and therefore invalid. Nevertheless, PILOT qualify as a witness to the damages to his prop-
continued to send rent invoices to Subsea erty, the testimony must refer to the market,
for two years, and Subsea paid the invoices. rather than an intrinsic or other value of the
PILOT deemed Subsea to be a holdover tenant property. Under this rule, an owner’s valuation
in violation of the sublease agreement but never testimony fulfills the same role that expert testi-
stated as much to Subsea. mony does; however, it is based on personal
In April 2014, PILOT evicted Subsea and knowledge instead of expertise. While valuation
demanded Subsea vacate the premises by May testimony may not be based solely on specula-
31, but because Subsea believed the sublease had tion, the owner does automatically qualify to
been effectively renewed, it refused to vacate. provide such testimony.
Both parties sued each other. After a two-week PILOT’s president testified that he arrived at a
trial, the jury found that the parties did not orally market rent for the property using an investment
agree to modify the renewal provisions of the model he learned as a business major in college
sublease, Subsea trespassed on PILOT’s property, and based on the amount Subsea spent to con-
and PILOT was entitled to $634,710 in damages struct a dock on the premises using an 11% rate of
for the trespass. Both parties appealed. return. Subsea, in contrast, hired an appraiser to
On appeal, Subsea contended that PILOT perform market research; the appraiser determined
waived its right to complain about the timeliness that the rental values of other properties in the
of the notice of renewal by consciously choosing Navigation District ranged from $800 to $1,500
not to tell Subsea about its position for two per acre per month, but he was not asked to per-
years. The court of appeals, though, disagreed form an appraisal, and he did not offer an opinion
that the evidence established that PILOT actu- of the fair market rental value of the premises.

Cases in Brief
Because a jury has discretion to award damages Two years later, in March 2010, Motiva
within the range of evidence presented at trial, and amended its damages claim, asserting that it
because the damages award fell within the range assigned its rights at a greatly reduced price due
found by Subsea’s expert, the court of appeals con- to the diminution in value caused by the expro-
cluded that the evidence was legally sufficient to priation and the anticipated loss of economic
support the damages award, regardless of whether revenue during construction. In 2017, Motiva
PILOT’s president’s testimony was probative. supplemented its claim to specifically claim dam-
ages to its leasehold interest.
Subsea 7 Port Isabel, LLC v. Following a trial, the trial court summarized
Port Isabel Logistical Offshore Terminal, Inc. the case as presenting two issues: a claim for loss
Court of Appeals of Texas, of profits, and the effect of the expropriation on
Corpus Christi-Edinburg the value of the leasehold. The trial court noted
December 19, 2019 that there was evidence of a change in volume at
No. 13-17-00144-CV the gas station before and after the taking, but
no testimony placed a dollar value on that
change. Instead, Motiva offered the testimony of
Proving diminished value of leasehold a Shell employee involved in the bulk asset sale,
interest in expropriated land who testified that he thought the site was worth
between $2.5 and $5 million, but that Shell only
In connection with a roadway construction received $800,000 for the site because of the
project in Metairie, the Louisiana Department expropriation. Though the witness was involved
of Transportation and Development (DOTD) in negotiating the bulk sale, he had no input
filed suit in 2006 to expropriate land for into the valuation of the site, and there was no
the project. DOTD sought to permanently take other testimony relating to the value of Motiva’s
four feet of land and use an additional ten feet leasehold interest.
during construction. The trial court observed that Motiva’s value of
One of the properties affected was leased to the property was based on a 10- to 15-year income
Shell Oil Company in 1957, which assigned its stream, rather than the value of the property
lease in 1998 to Motiva Enterprises (Motiva), a immediately before and immediately after the
joint venture between Shell and Texaco. The taking. The trial court therefore ruled in favor of
lease gave Motiva the exclusive right to build on DOTD, and Motiva appealed.
the site and to use the site for a gas station. The appeals court noted first that, under
Motiva sued to recover compensation for the full Louisiana law, compensable property includes
extent of its economic loss, including lost profits. both tangible property and intangible property
After the expropriation but before construc- rights, including a leasehold interest. Damage to
tion began, Shell decided to exit the retail busi- an intangible property right that occurs before
ness. Accordingly, Shell sought to divest all the a property is taken is compensable upon proof
gas stations it owned and operated by packaging that the expropriation caused the damage. How-
all stations in each market into a bulk sale to a ever, speculation, conjecture, mere possibility, or
third party. Shell solicited bids for the New unsupported probability are not sufficient to
Orleans market that included the site involved support an award of damages.
in the expropriation. In December 2007, the Values and damages in condemnation proceed-
winning bidder paid $37 million to acquire the ings are not always susceptible of precise proof,
52 Shell-branded gas stations in that market. but the court held that the value must be deter-

Cases in Brief
mined through a recognized method that cannot cation from a bulk sale. Because Motiva failed to
be fundamentally unfair and unjust. While most offer any expert testimony regarding the value of
Louisiana cases discuss leasehold valuation in the the lease before and after the expropriation using
context of a leasehold advantage—when a accepted methodologies, the court held that
tenant’s contract rent is less than market rent at Motiva failed to prove with legal certainty the
the time of the taking—that rule is not always diminished value of its leasehold interest.
exclusively determinative of the lessee’s rights.
In this case, there was no evidence of the Louisiana Dept. of Transportation and
methodology used to determine the value of the Development v. Motiva Enterprises LLC
leasehold interest before the expropriation. Fur- Louisiana Court of Appeal, Fifth Circuit
ther, the $800,000 sale price for the leasehold October 2, 2019
interest after the expropriation was just an allo- 279 So. 3d 1076
About the Author

Benjamin A. Blair, JD, is a partner in the Indianapolis office of the international law firm of Faegre Drinker Biddle &
Reath LLP, where his practice focuses on state and local tax litigation for clients across the United States. A frequent
speaker and author on taxation and valuation issues, Blair holds a juris doctor from the Indiana University Maurer
School of Law, where he also serves as an adjunct professor. Contact: Benjamin.Blair@FaegreDrinker.com

Peer-Reviewed Article
Principles for Calculating

AVM Performance Metrics
by Hans R. Isakson, PhD, Mark D. Ecker, PhD, and Lee Kennedy
Abstract
An analysis of 5.3 million housing sales suggests that there are fundamental shortcomings with how automated
valuation model (AVM) vendors currently calculate their AVM performance metrics, in particular the forecast
standard deviation. The analysis demonstrates that the methodology used to calculate the values of performance
metrics meaningfully impacts an AVM’s credibility. This article proposes consistent methodologies to calculate
AVM performance metrics that comply with well-established appraisal principles and allow a consistent evaluation
and comparison of AVM performance. A case study’s research AVM empirically illustrates that not following these
principles yields overly optimistic AVM performance metric values.
Introduction tant. First, the Interagency Appraisal and Eval

uation Guidelines require, among other things,
An automated valuation model (AVM)1 is a that lending institutions independently assess
computer software program that produces an esti the reliability of the AVMs they use.2 Second,
mate of the market value, called an AVM valua- the Federal Deposit Insurance Corporation
tion, of a subject property given (1) the address of (FDIC), the Board of Governors of the Federal
the subject property, and (2) property sales and Reserve System, and the Office of the Comp
characteristics data. AVM vendors blend many troller of the Currency, have jointly increased
property transactions, acquired from public the de minimis threshold, from $250,000 to
sources or data aggregators, with one or more val $400,000, for residential real estate transactions
uation models, acquired from academic and pro that do not require an appraisal with a physical
fessional publications or developed by their own inspection of the property and neighborhood.3
analysts, into a product called an AVM, the As a result, lenders will be allowed to make
details of which are a closely guarded trade secret. more residential mortgages secured by proper
An AVM produces a valuation along with cer ties that are valued utilizing an AVM rather
tain statistics, called AVM performance metrics, than a traditional appraisal.
that assess the validity, accuracy, and precision of Due to the proprietary intellectual property
the AVM valuation. The focus of this article is contained within an AVM, assessing AVM cred
AVM performance metrics. ibility, i.e., its validity, accuracy, and precision, is
Two recent events have made evaluation of accomplished through an examination of the
overall AVM performance increasingly impor AVM’s performance metrics.4 Typically, users of
1. Throughout this work, the term “AVM” will be used to refer to commercial or professional-grade AVMs that value residential properties.
That is, AVMs whose output is sold by AVM vendors to clients, in contrast to consumer-facing AVMs that typically provide output free of
charge. See Valuation Analytics Workgroup, The State of Automated Valuation Models in the Age of Big Data (Mortgage Bankers
Association (MBA), January 2019), 9–10; downloadable using story link at http://bit.ly/2HAhtvg.
2. Interagency Appraisal and Evaluation Guidelines (December 2, 2010), available at http://bit.ly/InteragencyGuidelines.
3. See Financial Institution Letter FIL-53-2019, “New Appraisal Threshold for Residential Real Estate Loans” (September 27, 2019), available
at http://bit.ly/FIL-53-2019.
4. The terms “AVM performance metric(s)” and “performance metric(s)” are used interchangeably.

AVMs are dependent upon AVM vendors to Review of the Literature

provide reliable performance metrics, for exam
ple, the forecast standard deviation (FSD).5 How Most of the literature regarding AVM perfor
ever, as Kane, Linné, and Johnson state, mance metrics appears in unpublished manu
“Third-party verification is critical.” 6 These scripts,7 self-published books,8 industry websites,9
third parties, including credit rating agencies or recent trade publications.10 Exhibit 1 contains
(such as Fitch, Standard and Poor’s, and a list of common performance metrics, along
Moody’s) and independent AVM testing firms with a glossary of abbreviations and definitions
(such as AVMetrics), assess AVM reliability related to AVM performance metrics. For exam
using performance metrics. ple, Gayler et al. recognize mean percentage sales
The purpose of this study is first to demon error, mean absolute percentage sales error, FSD,
strate that the calculation of performance met and hit rate as important metrics for the evalua
rics is not standardized across the AVM industry tion of the performance of an AVM.11 The Col
or AVM vendors, which can result in AVM ven lateral Risk Management Consortium suggests
dors underreporting their FSDs. Second, five using percentage sales errors, mean percentage
best-practice principles are recommended for sales error, and error buckets to assess AVMs.12
AVMs, and a supporting statistical procedure is CoreLogic recommends evaluating AVMs using
presented to implement these principles. The the mean percentage sales error, median per
discussion explains how these steps would bring centage sales error, FSD, and error buckets.13
AVMs into better alignment with current AVMetrics advocates that no more than 10% of
appraisal practices. Moreover, if these principles AVM valuations should be more than 20%
are respected, then the values of the perfor higher than their corresponding selling prices,
mance metrics associated with any model would suggesting a right tail 20% performance metric.14
be directly comparable to those of another Kirchmeyer and Staas state that median absolute
model. The case study demonstrates that not percentage (sales) errors (MAPEs) of less than
following the valuation principles can result in 10% “are indicative of a strong AVM, while those
an overly optimistic assessment of an AVM’s ranging from 11% to 15% might also be accept
performance. Consequently, it is recommended able for some lending programs.” 15
that AVM vendors adopt the valuation princi Error buckets, also called percent (predicted)
ples and that users of AVMs request conformity error (PE) buckets, count the number of sales
with these principles. that are deemed accurate (i.e., the success rate of
5. The term “FSD” was originally coined by the Federal Home Loan Mortgage Corporation (Freddie Mac) for use with its Home Value Explorer
AVM in the late 1990s to early 2000s. See Exhibit 1 for a list of common performance metrics.
6. M. Steven Kane, Mark R. Linné, and Jeffrey A. Johnson, Practical Applications in Appraisal Valuation Modeling (Appraisal Institute: Chicago,
2004), 171.
7. Peter Rossini and Paul Kershaw, “Automated Valuation Model Accuracy: Some Empirical Testing” (14th Pacific Rim Real Estate Society
Conference, January 2008), available at http://bit.ly/38Ywpzr; and AVMetrics, Automated Valuation Model (AVM) Tests (2018).
8. James Kirchmeyer, “AVMs 101: A Guide to Automated Valuation Models” (Real Info, 2004); James Kirchmeyer and Peter Staas, “AVMs
201: A Practical Guide to the Implementation of Automated Valuation Models” (2008).
9. Veros, “Veros Confidence Score” (2019); Freddie Mac, “Confidence Levels” (2019), available at http://bit.ly/freddiemac_confidencescores.
10. International Association of Assessing Officers, Standard on Automated Valuation Models (AVMs) (July 2018), available at
http://bit.ly/IAAO_AVM; MBA Valuation Analytics Workgroup, State of Automated Valuation Models.
11. Ross Gayler, Debashree Sanyal, Roy Pugh, and Siân King, Best Practice Validation and Comparison for Automated Valuation Models (AVMs)
(CoreLogic, October 2015), available at http://bit.ly/2HYvbbe.
12. Collateral Risk Management Consortium, The CRC Guide to Automated Valuation Model (AVM) Performance Testing (2003), available at
http://bit.ly/2Pq8XTU.
13. CoreLogic, Automated Valuation Model Testing (2011), available at http://bit.ly/AVMtesting.
14. AVMetrics, Automated Valuation Model (AVM) Tests, 25.
15. Kirchmeyer and Staas, “AVMs 201.”

the AVM) at a given level of precision, typically cial banks insolvencies.23 In the study presented
± 5%, 10%, 15%, and 20%.16 In the study pre here, which focuses on sales where the AVM fails
sented in this article, the notation PExx is used to accurately predict selling prices, the failure rate
to refer to a specific error bucket, at a given ± of an AVM in a particular error bucket (e.g.,
(xx) percentage. For example, PE10 represents PE10) is defined as the frequency (percentage)
the ± 10% error bucket. Kirchmeyer originally with which an AVM fails to predict the value of a
suggested a success rate that at least 50% of target property within the tolerance given by the
AVM valuations should be within ± 10% of sell error bucket (e.g., ± 10%).24
ing prices.17 That is, the (percentage) success In addition, AVM vendors typically provide a
rate of an AVM at PE10 should be at least 50%. confidence score, “which is often interpreted as
More recently, the Mortgage Bankers Associa meaning that the AVM estimate is within plus or
tion reported that “[a]lmost all counties in the minus 10% of the ‘true’ market value of the prop
United States experience [PE10] rates north of erty with a high degree of confidence.” 25 How
70 percent,” 18 suggesting a success rate at PE10 ever, the definition and use of a confidence score
of 70% or more. are not standardized across AVM vendors.26 For
An AVM’s failure rate in a given error bucket is example, Veros describes its confidence score as a
the complement of the AVM’s success rate within measure of accuracy between zero and 100 for
that error bucket. The failure rate is a concept which each decile generally corresponds to a 5%
common in engineering, where it is defined as variance.27 Realtors Property Resources uses an
the frequency with which a component fails.19 RVM confidence score of zero to five stars.28
The failure rate concept is also found in other CoreLogic’s PASS produces a confidence score
fields where the process fails to perform well, between 60 and 100 that measures how well “sales
such as the percent of small business failures,20 data, property information, and comparable sales
the percent of students failing a computer pro support the property valuation process.” 29 Gor
graming course,21 hotel failures,22 and commer don states that a confidence score may or may not
16. Kirchmeyer, “AVMs 101”; R. Slump and A. Arora, “Property Valuations as a Part of the Rating Process, Fitch Ratings” (CRN Presentation,
Las Vegas, NV, 2019); Veros, “Confidence Score: Exceeding Expectations with Meaningful Metrics,” available at http://bit.ly/ConfidenceScore.
17. Kirchmeyer, “AVMs 101.”
18. MBA Valuation Analytics Workgroup, State of Automated Valuation Models, 28.
19. Maxim Finkelstein, “Introduction,” in Failure Rate Modelling for Reliability and Risk. (Springer Series in Reliability Engineering, 2008), 1–84.
20. John Watson, and Jim E. Everett, “Do Small Businesses Have High Failure Rates? Evidence from Australian Retailers,” Journal of Small
Business Management 34, no. 4 (1996): 45–62.
21. Jens Bennedsen and Michael E. Caspersen, “Failure Rates in Introductory Programming,” SIGCSE Bulletin 39, no. 2 (2007): 32–36.
22. Paul Ingram and Joel A. C. Baum, “Chain Affiliation and the Failure of Manhattan Hotels, 1898–1980,” Administrative Science Quarterly
42, no. 1 (March 1997): 68–102.
23. Adam B. Ashcraft, “Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks,” American Economic Review
95, no. 5 (December 2005): 1712–1730.
24. The failure rate of an AVM is not exclusively limited to the ± 10% error bucket. It can be used at any error bucket, for example, the failure
rate ± 5%, 10%, 15%, or 20%. Also see Mark D. Ecker, Hans R. Isakson, and Lee Kennedy, “An Exposition of AVM Performance Metrics,”
Journal of Real Estate Practice and Education (forthcoming 2020); an earlier version of this research is available at http://bit.ly/2PCIemW.
25. James R. Follain and Barbara A. Follain, “AVMs Have Feelings, Too” (FI Consulting, September 4, 2007), available at http://bit.ly/2SFqJEK.
26. The confidence score of an AVM should not be confused with the confidence interval (level) of a statistical estimate. A confidence score
most generally informs the level of the “AVM provider’s confidence in the estimated values,” which may or may not involve a confidence
interval. See CoreLogic, “AVM FAQs” (2014), available at http://bit.ly/393dxzd.
27. Veros, “Veros Confidence Score.”
28. See Realtors Property Resources, “What Is an AVM or RVM® Confidence Score?” (2018), available at http://bit.ly/RPRconfidencescore. The
Realtors Property Resources property database is exclusive to the National Association of Realtors.
29. CoreLogic, “PASS® Automated Valuation Model” (2017), http://bit.ly/2PtPIst. Also see CoreLogic, “Forecast Standard Deviation and AVM
Confidence Scores” (2017), http://bit.ly/3acguO9.

be related to the FSD and that “[s]uch a confusion The clearest mathematical definition of the
of [confidence] scores and lack of connection to FSD is that it is the standard deviation of the per
statistical performance in actual use forces lenders centage sales errors for a collection of valua
to guess at their risk management.” 30 tions.37 However, the method of calculating an
For each individual target property being val FSD for an individual target property is not consis
ued, AVM vendors may also report the target tent, meaning that it is not clear how an AVM
property’s FSD.31 Gayler et al. define an FSD as provider is using the sampling distribution and/or
“the standard deviation of the percentage error, parsing a data set to provide a unique FSD value
where the percentage error describes the relative for any one particular target property.
difference between [AVM] valuation and price.” 32 An AVM report typically contains a high/
Freddie Mac qualifies the value of the FSD gener low range of value based on a ± 1 × FSD confi
ated from its Home Value Explorer (HVE) AVM dence interval around the AVM valuation.38
as high, medium, or low confidence. “High confi This 1 × FSD interval is often interpreted by
dence” requires an FSD of 13 or less. “Medium assuming that the underlying sales errors are
confidence” arises from an FSD between 13 and normally distributed. Under normality, an AVM
20, while “low confidence” occurs for valuations vendor has 68.26% confidence that the true
with an FSD greater than 20.33 market value of the target property lies within
Reporting of the FSD by AVM providers is ± one FSD of the AVM valuation, or 95% confi
ubiquitous; however, the FSD description is not dence that the market value of the target prop
standardized across the industry. For example, erty falls within ± 1.96 × FSD of the AVM
CoreLogic states that “[t]he FSD is a statistic that valuation.39 The assumption of normality allows
measures the likely range or dispersion an AVM the client to use the FSD-based confidence
estimate will fall within, based on the consistency interval to test hypotheses regarding the market
of the information available to the AVM at the value of the target property. Therefore, it
time of estimation.” 34 Matysiak writes that the behooves the AVM vendor to test the distribu
FSD is an “estimate of the amount of variation tion of percentage sales errors for normality
that can occur between the actual sales price and before rendering any FSD-based inference,
the forecast (the most probable market value) including a high/low value range.
made by the AVM.” 35 Gordon offers another defi There are a number of additional studies using
nition, describing the FSD as “an AVM value’s performance metrics. Such studies include one
expected (forecasted) proportional standard by Clapp and O’Connor, who report the mean
deviation around actual subsequent sales price for absolute percentage sales error and its 25th, 50th,
the given property value estimate.” 36 and 75th percentiles to evaluate seven different
30. Douglas Gordon, “Metrics Matter” (Thomson Corp. and National Mortgage News, 2005), available at Freddie Mac http://bit.ly/2vkFsMf.
31. CoreLogic, “AVM FAQs.”
32. Gayler et al., Best Practice Validation and Comparison for AVMs.
33. Freddie Mac, “Confidence Levels” (2020), available at http://bit.ly/freddiemac_confidencescores.
34. CoreLogic, “Forecast Standard Deviation and AVM Confidence Scores” (2017), available at http://bit.ly/3acguO9.
35. George A. Matysiak, The Accuracy of Automated Valuation Models (AVMs) (Brussels, Belgium: The European Group of Valuers’ Association,
May 2017), 7, available at http://bit.ly/2PTnQyp.
36. Gordon, “Metrics Matter,” 1.
37. Gayler et al., Best Practice Validation and Comparison for AVMs, 5. The FSD definition by Gayler et al.—”the standard deviation of the
percentage sales errors”—is used for all FSD calculations performed by the authors in this work.
38. CoreLogic, “Forecast Standard Deviation and AVM Confidence Scores.”
39. See Appendix A, “Statistical Tables,” in Neil A. Weiss, Introductory Statistics, 10th ed. (Pearson, 2016), A2–3.

Exhibit 1 Glossary of Common AVM Performance Metrics
AVM Performance Metric Abbreviation Definition (Source)
Coefficient of Dispersion COD The average percentage deviation of the AVM’s

valuation-to-sales price ratios from the median
AVM valuation-to-sales price ratio (Pokryshevskaya
and Antipov, 2011)
Coefficient of Variation COV The standard deviation divided by the mean

AVM valuation-to-price ratio (Kane, Linné, and
Johnson, 2004)
Confidence Score None A value that indicates the AVM vendor’s confidence
in its AVM valuation (CoreLogic, 2014)
Failure Rate None The complement of the PE bucket (Ecker, Isakson,

and Kennedy, 2020)
Forecast Standard Deviation FSD The standard deviation of a set of percentage

sales errors (Gayler et al., 2015)
Hit Rate None The percentage of properties for which an AVM

returns a value (MBA, 2019)
Mean Percentage Sales Error MPE The mean of a set of percentage sales errors
(CoreLogic, 2011)
Median Absolute Percentage Sales Error MAPE The median of a set of absolute percentage sales errors
(Kirchmeyer and Staas, 2008)
Median Percentage Sales Error None The median of a set of percentage sales errors
(CoreLogic, 2011)
Percentage Predicted Error Bucket PE% The percentage of AVM valuations within a specified
± percentage of selling prices (Kirchmeyer, 2004;
CoreLogic, 2011)
Percentage Sales Error None The AVM valuation minus its selling price, for a target
property, which is then divided by the selling price
(CRC, 2003)
Price-Related Difference PRD The mean valuation-to-selling price ratio divided by the
weighted (by selling prices) mean ratio (IAAO, 2018)
Right Tail 20% None The percentage of AVM valuations more than 20%
higher than their corresponding selling prices
(AVMetrics, 2018)

valuation models.40 Pokryshevskaya and Antipov using internally fitted (regression) valuations. The
use mean average percentage sales error and the data set employed in this empirical demonstra
coefficient of dispersion (COD), which is the tion consists of 53 housing sales in 2012, located
average percentage deviation of the median sales in a submarket of Cedar Falls, Iowa. The proper
error.41 Rossini and Kershaw describe several per ties’ locations are denoted with individual circles
formance metrics for which they also suggest per in Exhibit 2. For the analysis, the first house to
formance thresholds.42 They report the mean sell in 2013 was arbitrarily chosen as the target
absolute percentage sales error, FSD, and COD, property, which is indicated by the filled box (n)
in addition to three error buckets: PE10, PE15, in Exhibit 2. The TVM uses the 53 sales to pro
and PE20. Kane, Linné, and Johnson suggest duce a valuation of $159,427 as of January 1,
using the COD, together with the coefficient of 2013, for the target property. The TVM perfor
variation (COV), both of which assess horizontal mance metrics associated with the target property
equity.43 Lastly, the IAAO advocates an addi are calculated from the 53 comparable property
tional metric, namely, the price-related differ sales based on the internally generated predicted
ence (PRD), which measures the vertical equity values from the regression; the performance met
of the property tax system.44 rics are reported in Exhibit 3.
The TVM performance metrics in Exhibit 3
AVM Valuation Performance Metrics Example are indicative of an acceptable AVM. The TVM
To illustrate the calculations of these perfor performs well with regard to the Rossini and Ker
mance metrics, a research AVM was constructed, shaw thresholds, and the Kirchmeyer error buck
labeled the test valuation model (TVM). The ets, and the TVM’s failure rate (at ± 10%) is
TVM is a regression model containing fifteen 39.6%. With an FSD of 13.4, the TVM earns a
housing characteristics employed as independent “medium confidence” score based on Freddie
variables.45 The purpose of this analysis is to illus Mac’s thresholds (and it is only 0.5 away from
trate that performance metrics are sensitive to attaining a “high confidence” score). Only 4 of
their calculation methodology and to addition the 53 comparable sales (7.5%) have TVM val
ally show how these metrics change when apply ues more than 20% larger than their respective
ing several best-practice principles. selling prices.46 Lastly, the TVM has a PRD value
The following analysis demonstrates how dif of 1.0156, which suggests that it is slightly over
ferent statistical methodologies, using the same valuing inexpensive houses, more so than it
valuation model and the same data set, result in undervalues expensive houses, but the model
different performance metric values. To start, a performs reasonably well for houses close to the
base case of performance metrics is calculated median and mean selling prices.
40. John M. Clapp and Patrick M. O’Connor, “Automated Valuation Models of Time and Space: Best Practice,” Journal of Property Tax
Assessment & Administration 5, no. 2 (2008): 57–67.
41. Elena B. Pokryshevskaya and Evgeny A. Antipov, “Applying a CART-Based Approach for the Diagnostics of Mass Appraisal Models,”
Economics Bulletin 31, no. 3 (2011): 1–8; and IAAO, Standard on Ratio Studies (Kansas City, MO: International Association of Assessing
Officers, April 2013), available at http://bit.ly/2PtgUaT.
42. Rossini and Kershaw, “Automated Valuation Model Accuracy.”
43. Kane, Linné, and Johnson, Practical Applications in Appraisal Valuation Modeling. Horizontal equity is the notion that people in the same
circumstances should be treated the same or that similar properties should have similar tax assessed values. Following the IAAO’s Standard
on Automated Valuation Models (AVMs), both the COD and COV assess horizontal equity as they measure spread of AVM valuation to
selling price ratios about the center (mean ratio for COV and median ratio for COD).
44. IAAO, Standard on Automated Valuation Models (AVMs). Vertical equity means that higher-valued properties have higher assessed values
than lower-valued properties. For this analysis, following IAAO’s Standard on Automated Valuation Models (AVMs), vertical equity is
assessed through the PRD statistic by comparing AVM value to selling price ratios for the most and least expensive houses.
45. See Chapter 8 in Kane, Linné, and Johnson, Practical Applications in Appraisal Valuation Modeling, and Ecker, Isakson, and Kennedy,
“Exposition of AVM Performance Metrics,” for additional details about the model.
46. This is within AVMetrics’ right tail 10% suggested threshold; see AVMetrics, Automated Valuation Model (AVM) Tests.

Exhibit 2 Location of House Sales in Cedar Falls, Iowa
365.6
365.5
365.4
Y
365.3
365.2
365.1
520.0 520.1 520.2 520.3 520.4 520.5

X
¡ 2012 Sales + 2011 Sales n Target Property
Note: The X-Y coordinates are State Plane Coordinates, Iowa North, NAD 1983, where each unit represents 10,000 feet.
The TVM regression-based predicted values for dation methodology to judge how well the model
each of the 53 comparable sales, which produce predicts market values for housing sales that were
the performance metrics seen in Exhibit 3, provide not used to construct the model. A leave-one-out
internal measures of model performance. That is, (LOO) cross-validation procedure is recom
all 53 housing sales that produced the target prop mended. The LOO procedure removes each sale in
erty’s valuation are re-used to determine each com the original data set, one at a time, and generates a
parable sale’s valuation. As such, the resulting valuation for that left-out property from the
metrics in Exhibit 3 tend to be overly optimistic, remaining n – 1 sales.48 This process is repeated
compared to the prediction of a new, external- until each property in the original data set has
from-the-model observation.47 Although the inter been valued. Consequentially, under a LOO vali
nal calculations yield favorable performance metric dation methodology, each house will never be used
values, an AVM should use an external, cross-vali in the model to (indirectly) value itself.
47. “A result of this model development process is that the error mean square MSE will tend to understate the inherent variability in making
future predictions from the selected model.” John Neter, Michael H. Kutner, Christopher J. Nachtsheim, and William Wasserman, Applied
Linear Statistical Models, 4th ed. (McGraw-Hill/Irwin, 1996), 435.
48. Another common validation technique is a k-fold analysis, which is a mass appraisal technique that cycles through valuing 100(k/n) percent
of the data. The leave-one-out (LOO) process is a k-fold analysis that values one observation at a time.

Exhibit 3 TVM Performance Metrics
AVM Metric Value

Mean Sales Error $1,014
Mean Percentage Sales Error (MPE) 0.84%
Median Sales Error $–1,832
Median Percentage Sales Error –1.51%
Mean Absolute Sales Error $13,788
Median Absolute Sales Error $10,611
Mean Absolute Percentage (Sales) Error 9.8%
Median Absolute Percentage (Sales) Error (MAPE) 6.5%
FSD 13.4
Percentage of Estimates within ± 10% (PE10) 32/53 for 60.4%
Failure Rate at ± 10% 21/53 for 39.6%
Percentage of Estimates more than 20% (Right Tail 20%) 4/53 for 7.5%
Coefficient of Variation (COV) of TVM/Sale Price 0.13317 or 13.3
Coefficient of Dispersion (COD) of TVM/Sale Price 9.86
Regression R-Squared (Coefficient of Determination) 0.7272
Adjusted R-Squared 0.6165
PRD of TVM/Sale Price 1.0156
Mean Selling Price of 53 Sales $143,767
Median Selling Price of 53 Sales $130,000
Mean TVM Valuation for 53 Sales $143,062
Median TVM Valuation for 53 Sales $138,650
Lack of Standardization of AVM An analysis that looks at the accuracy and pre
Performance Metrics cision of AVMs by aggregating housing sales to a
Next, an analysis was constructed to empirically common, vendor-reported FSD is called an
illustrate that current methodologies used by “AVM-by-FSD” analysis. This analysis allows
AVM vendors to (self-) report performance met AVM testers to corroborate a vendor-reported
rics—in particular, the FSD—for an individual FSD with an observed FSD. Exhibit 4 shows the
target property are not consistent. Due to the performance of fourteen AVMs, whose identities
inconsistency, it is not clear how an AVM parses are removed for confidentiality, involving
a data set of housing sales to provide a unique 683,802 properties, where the FSD for each of
value (for example, the FSD) for an individual these properties had a vendor-reported value of 8
target property.49 (the horizontal line in Exhibit 4). In Exhibit 4,
49. Some third-party companies independently test commercial AVMs. For example, AVMetrics provides participating AVM vendors with sales
of hundreds of thousands of test properties on a biweekly basis. Vendors are allowed 48 hours from receipt of the test properties to return
AVM valuations, along with an FSD, for each test property. Each test property provided has passed quality checks to ensure that its sale
price is representative of market value (i.e., an arm’s-length transaction) and is unknown to the vendor. AVMetrics then compares each
returned AVM valuation to its corresponding selling prices to calculate the AVM’s performance metrics, including the observed FSD, which is
calculated using all housing sales with a common vendor-reported FSD. AVMetrics uses a proprietary analysis to uncover whether or not the
property’s selling price is truly unknown to the AVM that is valuing it; this includes, but is not limited to, having the vendor report the last
known selling price and date for each test property. See AVMetrics, Automated Valuation Model (AVM) Tests, 3.

Exhibit 4 A
VM Performance for 683,802 Target Properties Valued by Fourteen* AVMs,
Each with a Self-Reported FSD of 8
15
Model 9 Model 10
14
13
12
Observed FSD (%)
11 Model 8
Model 3
10 Model 4
Model 7
Model 11
9
Model 5 8%–Forecasted Standard Deviation

8
Model 6
Model 1 Model 12
7
Model 2
6
–2 –1 0 1 2 3 4 5
Mean Percentage Sales Error (%)
* Two AVMs produce nearly identical results for their mean percentage sales errors and the observed FSDs (Models 11 and 13;
Models 7 and 14), and as a result, only twelve AVMs are presented in this exhibit.
Models 5 and 6 are the AVMs with observed (averaged over fifteen AVMs). That is, the
FSDs (8.1 and 7.7, respectively) closest to their vendor-reported FSD of 12 is underreported by
self-reported value of 8. 8.4 or by 70.3% on average.
As seen in Exhibit 4, a majority of the four Inspecting Exhibit 5, AVMs are consistently
teen AVMs analyzed underreport their FSDs, underreporting their FSDs, with the best perform
with eight models having their observed FSDs ing having vendor-reported FSDs of 7 and 8.
above 9 (when it should be 8). This suggests that Overall, for the 327 total AVM/FSD combina
the vendor-reported FSD of 8 is an overly opti tions, 77.1% (252 of the 327) have underreported
mistic assessment of AVM precision for the their FSDs. Moreover, the average FSD difference
majority of AVMs examined. Most notable in (observed FSD minus vendor-reported FSD) for
Exhibit 4 are Models 8, 9, and 10, which are the all 327 is 4.3 or, on average, a 54.9% underreport
AVMs with the highest observed FSDs (10.7, ing percentage computed using all 5.3 million
13.9, and 13.8, respectively) and deviate by sales. In addition, only 25 AVM/FSD combina
more than 60% from the vendor-reported FSD tions (7.6% of the 327) have their observed FSD
value of 8. within ± 10% of the vendor-reported FSD, which
The underreporting of the FSD is not unique suggests a lack of consistency regarding the FSD
to those test properties with a vendor-reported definition and/or how AVM providers calculate
FSD of 8. Exhibit 5 shows the performance for an FSD for each target property. These findings
most of the 327 total AVM/FSD combinations, are not a trivial matter, as overly optimistic ven
each with at least 100 hits, which results in over dor-reported FSDs make AVMs appear substan
5.3 million housing sales. In Exhibit 5, 138,118 tially more reliable than they actually are.
properties, each with a vendor-reported FSD of AVM providers should adopt and employ uni
12, had a calculated or observed FSD of 20.4 form methodologies when calculating perfor

Exhibit 5 A
VM Performance by Vendor-Reported FSDs for 5.3 Million Target Properties
Valued by as Many as Fifteen AVMs
Vendor- FSD Difference: FSD

Reported Number Observed Observed FSD minus Difference
FSD of AVMs Hits FSD Vendor-Reported FSD (%)
1 5 29,076 9.0 8.0 802.0
2 7 69,671 7.1 5.1 375.0
3 9 406,350 7.6 4.6 152.6
4 12 620,462 7.4 3.4 83.8
5 14 870,006 7.1 2.1 42.7
6 15 485,109 8.0 2.0 33.4
7 14 715,546 8.3 1.3 19.0
8 14 683,802 9.5 1.5 18.5
9 14 305,621 12.5 3.5 38.9
10 15 230,958 15.5 5.5 54.7
11 15 155,956 19.7 8.7 78.8
12 15 138,118 20.4 8.4 70.3
13 15 120,975 22.1 9.1 70.0
14 15 84,143 21.8 7.8 55.4
15 15 74,297 23.7 8.7 58.1
20 12 79,238 27.1 7.1 35.3
25 5 7,475 28.3 3.3 13.4
30 4 3,980 32.0 2.0 6.8
40 1 530 24.9 –15.1 –37.8
Total 327 5,344,833 19.6 4.3 54.9
mance metrics, in particular the FSD and uation model that uses comparable sales to esti
percentage sales errors, to help mitigate the issues mate the target property’s market value, and
mentioned. Moreover, lenders who use FSDs (2) constructing a data set to compute perfor
should demand that vendors align their statisti mance metrics, which may be different from the
cal calculation methodologies to comply with original data set of comparable sales. The follow
well-established appraisal principles, such as ing discusses each valuation principle recom
those set forth in the next section. mended for implementation and then illustrates
the effect of the application of each principle
by recalculating the performance metrics shown
Valuation Principles for AVMs in Exhibit 3.
The first valuation principle that should be
It is suggested that AVMs incorporate four valu incorporated into the AVM-building and valida
ation principles that appraisers already observe tion process is the principle that comparable
when performing traditional appraisals. This properties should be very close substitutes for
would be a logical step for AVM vendors since the target property. Appraisers understand the
both an appraiser and an AVM have the com concept of comparable properties, but it is diffi
mon purpose of valuing exactly one target prop cult to build an AVM that can select a set of
erty. Moreover, these principles, if implemented, comparable properties as well as a well-trained
would provide greater uniformity in assessing appraiser. For all practical purposes, comparable
the reliability of AVMs when (1) building a val properties are essentially equivalent to each

other (and the target property), as these compa Comparable sales should (1) never include the
rable properties and the target property compete target property, even indirectly, (2) be selected
for the same set of buyers.50 Much appraisal and from the same submarket as the target property,
academic literature addresses the issue of substi and (3) be sold as close in time to the valuation
tutability among properties using submarkets. date as possible, but never after it. Therefore, the
For example, Schnare and Struyk, Palm, and third valuation principle for AVMs is that the
Watkins use predefined submarkets, such as ZIP data set should contain no sales that post-date
codes, census block groups, school districts, etc. the valuation date of the target property. That is,
from which comparable properties are selected.51 sales that occur after the valuation date should
Bourassa et al., Goodman and Thibodeau, Tu, not be used to value the target property.53 Doing
and Isakson and Ecker52 use statistical analyses so produces what Thanos, Dube, and Legros call
to allow the housing sales data itself to identify “arrow of time” violations.54
(possibly non-contiguous) submarkets contain To avoid arrow of time violations, the data set
ing similar properties. should not include either the entire post-dated
The second valuation principle that should be sale itself or any individual variable that is post-
incorporated into the AVM-building and valida dated. Mixing and matching pre- and post-dated
tion process is that a property should never be variables for an individual house is especially
used to value itself. Obviously, the sale of a target egregious, because housing characteristics can
property should never be included in the original change over time, for example, because of remod
data set that values itself. Again, appraisers would eling. A common violation of the arrow of time
almost never violate this principle. However, if principle occurs when the assessed value, in a tax
the target property has been recently flipped assessed value AVM, does not comport to the
(bought and resold within a few months), then it date of sale for a comparable house and/or the
is possible for the sale of the target property to be valuation date for the target property.
included in the original data set used by an AVM. The fourth valuation principle that should be
The more common violation of this principle incorporated into AVMs is another time-related
occurs indirectly, when the valuation model uses principle, which provides that sales of comparable
the coefficients that it calculated from all proper properties should span similar market conditions.
ties, including the property being valued, to esti That is, the comparable sales chosen should have
mate that property’s market value. sold during market conditions similar to those that
50. In applying the sales comparison approach, “The goal is to find a set of comparable sales ...as similar as possible to the subject
property to ensure they reflect the actions of similar buyers.” Appraisal Institute, The Appraisal of Real Estate, 14th ed. (Chicago:
Appraisal Institute, 2013), 381. Comparable sales “are located in the same area and are very similar in size, condition and features”
as the target property. Brendon DeSimone, “What Are Comps? Understanding a Key Real Estate Tool” (Zillow, July 13, 2015),
available at http://bit.ly/ZillowComps.
51. Ann B. Schnare and Raymond J. Struyk, “Segmentation in Urban Housing Markets,” Journal of Urban Economics 3, no. 2 (1976): 146–166;
Risa Palm, “Spatial Segmentation of the Urban Housing Market,” Economic Geography 54, no. 3 (1978): 210–221; and Craig A. Watkins,
“The Definition and Identification of Housing Submarkets,” Environment and Planning 33, no. 12 (2001): 2235–2253.
52. Steven C. Bourassa, Foort Hamelink, Martin Hoesli, and Bryan D. MacGregor, “Defining Housing Submarkets,” Journal of Housing
Economics 8, no. 2 (1999): 160–183; Allen C. Goodman and Thomas G. Thibodeau, “Housing Market Segmentation and Hedonic
Prediction Accuracy,” Journal of Housing Economics 12, no. 3 (2003): 181–201; Yong Tu, “Segmentation, Adjustment and
Disequilibrium,” in Housing Economics and Public Policy, ed. Tony O’Sullivan and Kenneth Gibb (Oxford, UK: Blackwell Science, 2003);
and Hans R. Isakson and Mark D. Ecker, “The Influence of Leaking Underground Storage Tanks on Nearby House Prices,” Journal of
Economic Insight 44, no. 1 (2018): 45–67.
53. The calibration and validation of retrospective AVMs can easily include sales that post-date the valuation date. In addition, using the
internal residuals from a regression analysis as sales errors, as demonstrated in Exhibit 3, would also include some predicted values based
upon post-dated sales.
54. Sotirios Thanos, Jean Dubé, and Diègo Legros, “Putting Time into Space: The Temporal Coherence of Spatial Applications in the Housing
Market,” Regional Science and Urban Economics 58 (May 2016): 78–88.

existed as of the target property’s valuation date. double duty,” and could be used to value the tar
Of course, all comparable sales must occur on or get property and also provide, using a LOO strat
before the valuation date, but the question of how egy, the values of the performance metrics.
old the comparable sales can be requires knowl In a regression, the predicted residual sum of
edge of the local market conditions.55 squares (PRESS) statistic has traditionally been
As a general rule, it is easier to control for used to identify unique individual observations
changing market conditions by selecting compa (outliers) and to determine a set of statistically
rable properties closer in time to the valuation significantly independent variables that contrib
date than to build time-related trends into a val ute to explaining the dependent variable.56 The
uation model. It is difficult, at best, to decide the PRESS statistic implements a LOO methodology
appropriate statistical methodology to account that systematically pulls each of the n sales, one
for changing market conditions. It is simpler to at a time, from the original data set and uses the
choose comparable sales that occur closer in time remaining n – 1 sales to estimate the market
to the target property’s valuation date (e.g., that value of that removed property. This process is
hold market conditions constant), than it is to repeated by cycling through each of the n sales,
decide, mathematically, how the model should one at a time, employing the same AVM that was
reflect changing market conditions when the originally used to value the target property.57
sales span changing conditions. If the valuation A PRESS value can be used to calculate (with
model within the AVM does not account for the property’s selling price) the PRESS sales
changing market conditions—or fails to use com error. In fact, any performance metric seen in
parable sales that reflect similar market condi Exhibit 3 can be calculated using the PRESS
tions—then the AVM will produce non-credible value. For example, the PRESS-based FSD for
(biased and/or imprecise) valuations. the target property evaluated using the TVM is
19.6, an increase from the internal prediction-
Improved AVM Performance based FSD of 13.4. Such a large increase in the
Methodology Example FSD indicates that the TVM does not predict
Although the internal metrics presented in new observations nearly as well as it explains the
Exhibit 3 indicate that the TVM is an acceptable house prices for the existing 53 comparable sales
valuation model, the calculation of these metrics and, as a result, the initial FSD of 13.4 is pro
violates the second recommended valuation viding an overly optimistic assessment of the
principle, namely that a property should never be model’s predictive performance.
used to value itself. Specifically, the metrics in Although the PRESS methodology abides by
Exhibit 3 are an internal measure of model per the second valuation principle—a property
formance, because in the test the TVM-predicted should never be used to value itself—it violates
values for each of the 53 houses were created principle three—the data set should contain no
using the regression coefficients already derived sales that post-date the valuation date of the tar
from these 53 houses. As a result, it would be bet get property. In fact, all but the most recent com
ter to use the LOO methodology to provide the parable sale will have at least one sale post-dating
TVM’s performance metrics. In this way, the it. In particular, to value the oldest of the 53 sales
original data set of comparable sales would “do in the Cedar Falls data set, the PRESS procedure
55. For discussions of comparative market analyses, see Simon Stevenson, “Modeling Housing Market Fundamentals: Empirical Evidence of
Extreme Market Conditions,” Real Estate Economics 36, no. 1 (2008): 1–29; Robert Novy-Marx, “Hot and Cold Markets,” Real Estate
Economics 37, no. 1 (2009): 1–22; James VanderHoff, “Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market
Conditions: An Empirical Analysis,” Real Estate Economics 24, no. 3. (1996): 379–406; and David Dale-Johnson and Stanley W. Hamilton,
“Housing Market Conditions, Listing Choice and MLS Market Share,” Real Estate Economics 26, no. 2 (1998): 275–307.
56. Douglas C. Montgomery, Elizabeth A. Peck, and G. Geoffrey Vining, Introduction to Linear Regression Analysis (Hoboken, NJ: John Wiley &
Sons, Inc., 2012).
57. Technically, rerunning of the AVM regression n times is not required, as the PRESS residual can be calculated using the original regression
that valued the target property. See Montgomery, Peck, and Vining, Introduction to Linear Regression Analysis, 598–600.

uses the remaining 52 sales, which each post-date value this oldest comparable property. When
this oldest sale. As a result, none of the PRESS- using a twelve-month moving window, the num
based metrics are presented other than the FSD ber of property sales valuing each of the 53 origi
of 19.6, discussed above. The PRESS methodol nal comparable sales in the original data set
ogy should be modified to abide by the four valu ranged from 40 to 57.
ation principles discussed in the previous section. A GenPRESS predicted value was calculated
This modified LOO procedure is referred to here for each of the original 53 comparable properties
as a “Generalized PRESS” (GenPRESS) method and was used to (re-)calculate the values of the
ology. As long as the AVM uses a set of compara performance metrics reported in Exhibit 6. Any
ble sales to produce its valuation, regardless of substantial difference between the respective sta
the valuation model being a regression or not, tistics in Exhibits 3 and 6 provides an assessment
then the GenPRESS procedure can provide the of “the applicability of the model to data beyond
values of the performance metrics. those on which the model is based.” 59
To enforce the no-post-dated-sales principle of All the GenPRESS-based performance metrics
the GenPRESS methodology, additional housing in Exhibit 6 show a poorly performing AVM
sales are needed to value the oldest comparable compared to the corresponding metrics in Exhibit
properties. For example, if an AVM uses n com 3. In particular, the FSD has risen from 13.4 to
parable sales to value the target property, then 24.7, while the failure rate (at ± 10%) has
the oldest of these n sales cannot be valued using increased from 39.6% to 66.0%. The difference
the remaining n – 1 post-dated sales; new compa in the respective values of the performance met
rable sales would need to be selected. These rics in these two tables is entirely attributed to
newly chosen comparable properties must be employing the GenPRESS methodology in
selected in concordance with the time and sub which no post-dated sales were used to value
market criteria established when picking the each comparable sale. Exhibit 6 reveals that the
original comparable sales used to value the target results seen in Exhibit 3 make the AVM appear
property. Then, the AVM is run, using these to be more accurate, precise, and reliable. As a
newly gathered sales, exactly as it was when valu result, the methodology used to calculate the val
ing the target property, to value each of the orig ues of performance metrics meaningfully impacts
inal comparable sales. an AVM’s credibility.
To calculate the TVM’s GenPRESS regression- Therefore, a fifth principle is applicable when
based predicted value for the oldest of the 53 resampling sales in a cross-validation analysis
properties in the Cedar Falls data set, property to calculate performance metrics. Specifically,
sales in 2011 were gathered. As seen in Exhibit 2, valuations produced by an AVM in a cross-
40 property sales, denoted by the plus (+) sym validation analysis should use the same method-
bol, occurred in the same submarket as the target ology originally used to value the target property.
property in 2011, which is within one year of the That is, the performance metrics associated with
selling date for the oldest sale in the original data a target property (for example, the FSD) should
set (January 1, 2012). A market analysis (House be calculated using the data set that was origi
Price Index) in Rosburg et al. indicates that rela nally used to value the target property using a
tively stable market conditions existed in 2011 leave-one-out methodology.60 The recommen
and 2012 in Cedar Falls.58 As a result, the TVM dation to use the GenPRESS methodology is
was run with these 40 property sales in 2011 to more than just a method to compute the AVM’s
58. See Exhibit 3 in Alicia Rosburg, Hans Isakson, Mark D. Ecker, and Tim Strauss, “Beyond Standardized Test Scores: The Impact of a Public
School Closure on House Prices,” Journal of Housing Research 26, no. 2 (2017): 119–135.
59. Neter et al., Applied Linear Statistical Models, 435.
60. Other philosophical choices exist for cross-validation, such as creating a holdout data set, for example, by setting aside n of the 53
comparable sales in the Cedar Falls data set. The remaining 53 – n sales are then used to value the target property, while the n withheld
sales are used to calculate the values of the performance metrics. See Kane, Linné, and Johnson, Practical Applications in Appraisal
Valuation Modeling, 171. We advocate including all comparable property sales in the original data set to value the target property and then
using the LOO GenPRESS methodology to calculate the values of the performance metrics, primarily because the GenPRESS avoids
sacrificing any comparable sales needed to value the target property.

Exhibit 6 GenPRESS Performance Metrics for the TVM
AVM Metric Value

Mean Sales Error $806
Mean Percentage Sales Error (MPE) 3.5%
Median Sales Error $–5,245
Median Percentage Sales Error –3.1%
Mean Absolute Sales Error $24,374
Median Absolute Sales Error $17,764
Mean Absolute Percentage (Sales) Error 18.2%
Median Absolute Percentage (Sales) Error (MAPE) 13.9%
FSD 24.7
Failure Rate at ± 10% 35/53 for 66.0%
Percentage of Estimates more than 20% (Right Tail 20%) 10/53 for 18.9%
Coefficient of Variation (COV) of TVM/Price 0.23909 or 23.9
Coefficient of Dispersion (COD) of TVM/Price 18.51
PRD of TVM/Price 1.0290
Average Regression R-Squared (Coefficient of Determination) for the 53 Regressions 0.7524
Average Adjusted R-Squared for 53 Regressions 0.6463
Average Number of Sales for 53 Regressions 50
Mean Selling Price of 53 Sales $143,767
Median Selling Price of 53 Sales $130,000
Mean TVM GenPRESS Valuation for 53 Sales $144,573
Median TVM GenPRESS Valuation for 53 Sales $139,216
performance metrics following this fifth princi Discussion and Conclusions

ple. It also provides (1) guidance on how to
resample a sales data set to calculate perfor AVM vendors should adopt the five best-prac
mance metrics, and (2) a straightforward and tice valuation principles recommended in this
consistent method to calculate a unique FSD article, coupled with the GenPRESS methodol
value for each target property. ogy to calculate performance metrics and allow a
The GenPRESS methodology also assesses the more realistic assessment of AVM performance.
AVM’s accuracy for a data set that was not used The example demonstrates that, for the Cedar
to create the model, especially when including Falls data set, applying these five valuation prin
additional comparable properties when valuing ciples together with the GenPRESS methodol
the earliest sales in the original data set. The ogy produces a degradation in the values of
GenPRESS-based performance metrics evaluate performance metrics, as seen in the comparison
the quality of the AVM’s prediction of new or of the results in Exhibit 3 to those in Exhibit 6.
external properties because each target property In other words, not following these principles
is left out of the training data set, in contrast to provides an overly optimistic evaluation of the
the usual internally based predicted value. AVM’s performance.

The research AVM presented demonstrates control standards could lessen the impact of
that the values of performance metrics highly future regulatory mandates of the Consumer
depend upon their calculation methodologies. Financial Protection Board (CFPB).
For example, it was shown that three different Unfortunately, exactly how AVM vendors cal
statistical methodologies produce three different culate performance metrics for any one target
FSD results: the target property’s FSD changes property is part of AVMs’ proprietary intellectual
from 13.4, using regular regression predicted val property. The analysis of 327 AVM/FSD combi
ues, to 19.6, using traditional PRESS predicted nations using 5.3 million sales in this research
values (that allow the use of post-dated sales), suggests that AVM vendors are underreporting
and finally to 24.7, using GenPRESS predicted their FSDs. These overly optimistic vendor-re
values (that do not allow the use of post-dated ported FSDs suggest that implementation of the
sales). In particular, the latter two FSD values five valuation principles, together with the Gen
(19.6 and 24.7) are each calculated using a LOO PRESS methodology, could serve as a means to
methodology. The increase from 19.6 to 24.7 consistently evaluate and compare AVM perfor
reveals the substantial effect of eliminating post- mance. It is fully expected that similar results
dated sales. Moreover, the values of nearly all would be seen for commercial AVMs, as pre
performance metrics substantially deteriorate sented for the TVM for the Cedar Falls data set,
when enforcing the two principles that no prop because Neter et al. have already established
erty should be used in the model to value itself, that internally based metrics produce overly
even indirectly, and no sales should post-date the optimistic results.61
property being valued. What remains unclear is by how much the val
The research also has shown that the vendor- ues of the performance metrics would change,
reported FSDs for commercial AVMs are not especially the FSD, if five valuation principles
nearly as credible as currently being reported. together with the GenPRESS methodology were
The analysis of 5.3 million housing sales indi adopted by AVM vendors. Only through scrutiny
cates that 85.0% of AVMs with a vendor- of the internal workings of AVMs, by the AVM
reported FSD of 15 or below are overly optimistic vendors themselves, can the efficacy of any set of
in their reported precision (by 5.3 or 83.3%, on best-practice principles be determined. In sum,
average). Overall, the observation that AVM AVM vendors are encouraged to adopt a set of
vendors are inconsistent in their calculation of principles, such as those detailed in this work,
confidence scores, along with their underreport that comply with well-established appraisal prac
ing of FSDs, should be a concern for the currently tices and allow AVM clients to trust the credibil
under-regulated AVM industry. Standardization ity and comparability of AVMs, measured
of the calculation of performance metrics should through their performance metrics.
be employed by AVM vendors. Adopting quality
About the Authors

Hans R. Isakson, PhD, is a professor emeritus of economics at the University of Northern Iowa. He has taught under-
graduate and graduate level courses in real estate appraisal at the University of Georgia, Washington State University,
University of Texas at Arlington, and University of Northern Iowa. He has authored and coauthored over forty articles
and has presented dozens of papers on real estate valuation before various academic and professional associations.
He was the corecipient of the Appraisal Institute’s Arthur A. May Award in 1979 for his article “The Impact of Market
Experience upon Appraisers’ Energy Awareness.” He has testified as an expert witness regarding the reliability of
AVMs in over a dozen residential mortgage-backed securities (RMBS) lawsuits. Contact: hans.isakson@uni.edu
Mark D. Ecker, PhD, is a professor of statistics at the University of Northern Iowa. He has authored or coauthored
over three dozen articles and provided statistical consulting services to expert witnesses in numerous high-profile court
61. There may be AVM vendors currently abiding by a set of valuation principles like those mentioned, and as a result, little to no improvement
in AVM credibility would be seen.

cases involving AVMs. His current research includes developing new statistical techniques to measure the value impact
on house prices of proximity to a hog lot, nuclear power plant, or high-quality school. Contact: Mark.Ecker@uni.edu
Lee Kennedy founded AVMetrics in 2005, which focuses on AVM model validation, testing, and collateral consulting.
Prior to founding AVMetrics, he led the Alternative Valuation Group for a large lender. As a recognized expert in the
testing and use of AVMs, and an authority on current AVM regulations and guidelines, Kennedy serves as a frequent
speaker and panelist in the industry. He has published many articles on AVM-related topics and is the editor of
AVMNews as well as a frequent expert witness in cases on AVM usage. Kennedy is a certified residential property
appraiser in California. Contact: Lee.Kennedy@avmetrics.net
Disclosure
The authors have been retained as expert witnesses to assess AVMs in dozens of high-profile cases. Any opinions
or points of view expressed in this study represent a consensus of the authors. Any products and manufacturers
discussed in this article are presented for informational purposes only and do not constitute product approval or
endorsement by the authors.
Additional Reading
Suggested by the Authors
Chagani, Ershad. “The Potential of Machine Learning Real Estate Valuation Models.” Cornell Real Estate Review (blog),
March 28, 2018. http://bit.ly/3cnqwOg.
CoreLogic. “About Automated Valuation Models (AVMs).” 2017. http://bit.ly/2uJyvnL.
Falessi, Davide, Likhita Narayana, Jennifer Fong Thai, and Burak Turhan. “Preserving Order of Data When Validating
Defect Prediction Model.” 2018. http://bit.ly/2TcMqfn.
Additional Resources
Suggested by the Y. T. and Louise Lee Lum Library
Appraisal Institute—Online Store

http://bit.ly/AI_Online_Store
• Education
• Real Estate Finance, Statistics, and Valuation Modeling
• Publications
• A Guide to Appraisal Valuation Modeling
• An Introduction to Statistics for Appraisers
• Practical Applications in Valuation Modeling
Freddie Mac
• Forecast Standard Deviation
http://www.freddiemac.com/hve/fsd.html
• Home Value Explorer AVM

http://bit.ly/freddiemac_HVE

Long-Term Leases:
Rent Reset Analysis
Abstract
A provision for resetting rent is often found in long-term leases, with the objective being to periodically analyze the
value attributed to the leased real estate. The property rights to be valued at each rent reset depend on the language
of the lease, especially the rent reset clause. The lack of specificity associated with use of the term market value has led
to questionable application of the term in rent resets. Inconsistent interpretations of a lease can lead to divergent opin-
ions of value. Sometimes rent resetting provisions have no connection to the terms of the lease or the actual property
rights; this may result in situations where it is difficult to apply conventional appraisal methods. This article summarizes
and discusses a sample of rent reset cases and explores creative valuation solutions to rent reset valuation challenges.
Introduction rent reset is dictated by the provisions of the

lease, and the lease usually calls for arbitration if
Rent reset clauses are typically found in long- the landlord and tenant are unable to negotiate a
term leases for land (unimproved or improved).1 new rent within a specified time frame.
A lease is “a contract in which the rights to use A rent reset analysis for a land lease has the
and occupy land, space, or structures are trans- same objective as for a space lease—quantifying
ferred by the owner to another for a specified a new rent—unless the land lease only calls for a
period of time in return for a specified rent.” 2 A fee simple estimate of land value to which is
lessee’s3 intended use of the leased premises, the applied an annual rate (percentage rate of
time required for recovery or amortization of the return) as specified in the lease.4 The language
capital invested in the business and leasehold of the lease, specifically the rent reset clause,
improvements, and lender requirements for and the market conditions prevailing at the time
financing of leasehold improvements generally of the scheduled rent reset can have a profound
determine the length of the lease term. impact on the rent to be paid by the tenant.
The lease may provide for resetting the rent Over time, a long-term lease may prove unfavor-
periodically during the term of the initial lease or able to either the lessor or lessee, as noted by the
when an option to extend or renew the lease has appeals court in Cook Associates, Inc. v. Utah
been exercised by the tenant. The basis for the School & Inst. Trust:
1. A long-term lease is “[g]enerally a lease agreement extending for ten years or more….The terms and provisions of a long-term lease are set
forth in detail in legally correct and complete form….[T]he tenant may desire, or be required, to do extensive remodeling or, if the property
leased is land, to construct a building or other improvements.” Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th ed. (Chicago:
Appraisal Institute, 2015), s.v. “long-term lease.”
2. Dictionary of Real Estate Appraisal, 6th ed., s.v. “lease.”
3. A lessee is “one who has the right to occupancy and use of the property of another for a period of time according to a lease agreement.”
Dictionary of Real Estate Appraisal, 6th ed., s.v. “lessee.”
4. A fee simple estate is an “[a]bsolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed
by the governmental powers of taxation, eminent domain, police power, and escheat.” Dictionary of Real Estate Appraisal, 6th ed.,
s.v. “fee simple estate.” Also see discussion of property rights in Appraisal Institute, The Appraisal of Real Estate, 14th ed. (Chicago:
Appraisal Institute, 2013), 3–7.

Long-Term Leases: Rent Reset Analysis
Long-term commercial leases, by their nature, are risky. Rental value is measured partially in terms of time, by
Neither side can foretell future market conditions with the month or by the year, et cetera. The parties were
any certainty. We presume that both [parties] bargained not fixing rental value in the lease, they were fixing rent.
for the best terms and conditions each could get. Each They determined such rent by taking a…fixed percent-
party took the risk that unpredictable market forces age of the full value (not the rental value) of the land.
would at some later day render the contractual terms The parties based rent upon the fair market value of the
unfavorable to themselves.5 property rather than upon its rental value for any given
period of time.
The Rent Reset Clause In the Bullock’s case, all that was required was a
point-in-time estimate of the “appraised value of
A lease that calls for an adjustment of rent during the land,” exclusive of buildings and improve-
the life of the lease generally includes a proce- ments, which the court found to mean fair mar-
dure to be followed by the parties to the lease or ket value. The appeals court did not define market
the professional advisors identified and tasked value but relied on the term market value as refer-
with fixing the new rent.6 A rent reset clause can enced in the lease’s repair and maintenance
function to reset rent as an independent exercise clause and the lease’s condemnation clause.10
or in relation to all or some of the subsisting The court noted,
clauses (provisions) in the lease itself.
Analyzing the adjusted or revised rent can be The parties have thus provided for a reduction in rent
a contentious issue. Sometimes the rent reset based upon the difference between the market value of
clause is unclear or ambiguous as to the improve- the land before condemnation and the market value of
ments (if any, and in what condition), property what remained thereafter. And the reduction is calcu-
rights, methods, procedures, formulas, or factors lated in the same manner as that provided for calculat-
that are to be taken into account—or disre- ing rent—five per cent per annum of the predetermined
garded—in estimating the revised rent. If the amount. Since the lease provides that a reduction in
lease itself is to be disregarded, and the objective rent due to partial condemnation is to be measured by
is to estimate the market value of the leased the drop in market value of the property covered by the
premises as if unencumbered, the rights to be val- lease, it may reasonably be inferred that the parties
ued are a fee simple interest.7 Conversely, if reset- were thinking in terms of market value when they
ting the rent involves an analysis of a tenant’s use drafted the provisions of the lease relating to the calcu-
and occupation, it is the rental value8 of the lation of rent. [emphasis added]
leased premises for the rent reset period that is to
be estimated. In relation to these two mutually Market Value and Property Rights
exclusive valuation exercises, the appellate court Definitions of market value often are silent as to
in Bullock’s Inc. v. Security-First National Bank of what property rights are being valued. In his
Los Angeles9 drew a distinction between market 2018 Appraisal Journal article, Sanders examines
value and rental value: the evolution of market value definitions and the
5. 2010 UT App. 284, 243 P.3d 888 (2010), quoting Oakwood Village LLC v. Albertsons, Inc., 2004 UT 101.
6. According to the ruling in Rice v. Ritz Associates, Inc., 88 A.D.2d 513 (N.Y. App. Div. 1982), as long as the selected valuers prepare “the
appraisal…in accordance with the procedures set out in the contract of the lease,” the parties are bound by the result.
7. The interest to be appraised is an element of problem identification, and it is not necessary to consider this a hypothetical condition.
See Stephanie Coleman, Scope of Work, 2nd ed. (Chicago: Appraisal Institute, 2016) and Appraisal Standards Board, USPAP Frequently
Asked Questions, 2020–2021 ed. (Washington, DC: The Appraisal Foundation, 2020), FAQ 240, “Analyzing the Lease When Appraising
Fee Simple Interest.” If an appraiser chooses to premise such an assignment on a hypothetical condition, that would not be inaccurate,
but it is unnecessary.
8. Rental value is derived by a rental comparison analysis employing quantitative or qualitative techniques, either separately or in combination,
in accordance with the reset clause or use clause.
9. Bullock’s Inc. v. Security-First National Bank of Los Angeles, 160 Cal. App. 2d 277, 325 P.2d 185; 1958 Cal. App. LEXIS 2119.
10. In condemnation, market value is based on a fee simple estate (undivided fee rule).

“varied conditions imposed on the hypothetical property is unencumbered by the lease at the
market” inherent in the numerous definitions of time of the rent reset unless the rent reset clause
market value.11 None of the various definitions of manifests a clear intention to disregard the lease.
market value presented by Sanders explicitly con- At the end of the life of the lease, the leased
siders property rights, with the exception of the premises revert to the landlord, and all tenant-
following market value definition suggested by owned leasehold improvements become the
Marchitelli and Korpacz in their 1992 Appraisal property of the landlord unless the tenant is
Journal article: obligated to remove the improvements under
the terms of the lease.
The price in cash and/or other identified terms for which The 1992 Marchitelli and Korpacz definition
the specified real property interest is likely to sell as of of market value as it relates to property rights is
the effective date of appraisal in the real estate market- consistent with the current definition of market
place under all conditions requisite to a fair sale.12 value in The Dictionary of Real Estate Appraisal,
[emphasis added] sixth edition, and in The Appraisal of Real Estate,
fourteenth edition. The most widely accepted
Many definitions of market value emanate components of market value, including a refer-
from eminent domain, where for state and fed- ence to property rights, are incorporated into
eral purposes the market value of condemned the definition:
land is determined based on the unencumbered,
undivided fee, and disregards all other real prop- The most probable price, as of a specified date, in cash,
erty interests.13 Likewise, in most states the val- or in terms equivalent to cash, or in other precisely
uation of real property for assessment purposes revealed terms, for which the specified property rights
denotes property rights in a fee simple type should sell after reasonable exposure in a competitive
interest when there is more than one interest in market under all conditions requisite to a fair sale, with
a property.14 In these two areas of real property the buyer and seller each acting prudently, knowledge-
valuation, the value sought carries a presump- ably, and for self-interest, and assuming that neither is
tion of undivided free and clear title, not bur- under undue duress.15 [emphasis added]
dened by an encumbrance such as a lease, and
legislation to achieve this intended purpose Directly related to the concept of market value
overrides the contractual rights and obligations is the identification of the specific property rights
between a lessor and lessee. to be appraised. When references to “(fair) mar-
When parties enter into a lease in the world of ket value” appear in leases but the term is not
commerce, they agree to be bound by the terms adequately defined, it can cause uncertainty as to
and conditions of the lease. Even if a lease makes how the valuation analysis should proceed.
provision for resetting rent during the life of In the context of a lease involving the division
the lease, the lease remains in effect throughout of property rights between lessor and lessee, if the
the entire term, including any period covered by referenced market value does not specify the
a lease extension or renewal option exercisable property rights to be taken into consideration,
at the discretion of the tenant. In this situation, the analysis for resetting rent should generally be
it may not be appropriate to assume that the taken to include consideration of the lease itself.
11. Michael V. Sanders, “Market Value: What Does It Really Mean?” The Appraisal Journal (Summer 2018): 206.
12. Richard Marchitelli and Peter F. Korpacz, “Market Value: The Elusive Standard,” The Appraisal Journal (July 1992): 318.
13. “[W]hen property that is held in partial estates by multiple owners is condemned, the condemnor pays the fair market value of an
undivided [fee simple] interest in the property rather than the fair market value of each owner’s partial interest.” [citation omitted] Post No.
2874 VFW. v. Redevelopment Auth., 2009 WI 84, 768 N.W. 2d 749.
14. “[A] division of ownership or the independent holding of separate legal interests in taxable property will not affect the mode of assessment.
For instance, mortgagor and mortgagee interests, vendor and vendee interests, landlord and tenant interests, life tenant and remainder
interests and cotenant interests are not separately assessed.” [citation omitted] “[T]he true value of…[real] property for assessment
purposes is to be ascertained as if unencumbered by…a lease.” People ex rel. Gale v. Tax Comm., 17 A.D.2d 225 (1962).
15. Dictionary of Real Estate Appraisal, 6th ed., s.v. “market value.”

Some misunderstandings as to the meaning of ations are all the more compelling in the context of real
market value can be directly attributed to the property transactions, where commercial certainty is a
misuse or commingling of terms related to mar- paramount concern. [citation omitted]18
ket value. In appraisal literature, market value
and market rent are not synonymous terms, but
the parties to a lease are free to agree to their Title and Lease Restrictions
own valuation-related definitions.16 For exam-
ple, in Georg Jensen, Inc. v. 130 Prince Associ- Restrictions or encumbrances identified in the
ates, LLC,17 the lease made no distinction abstract of title or the lease that have an impact
between market value and market rent in a rent on the property rights to be appraised, especially
reset involving a space lease; there the lease pro- if an analysis of highest and best use is required,19
vided as follows: should be taken into account in resetting rent for
the leased premises—unless the rent reset clause
Fair market value shall mean the current market rent for stipulates otherwise.20 Premises leased as part of a
similar space within the general geographical area in complex (e.g., shopping center, office campus,
which the building is located, assuming standard esca- industrial park) or as part of a building in a com-
lations with current base years, and all other relevant plex might also be impacted by covenants and
factors as determined by an independent M.A.I. restrictions of other tenancies.21
Appraiser chosen by Landlord. [emphasis added]
Freehold Premise
Any disagreement as to the meaning of terms Analyzing the value of unencumbered land, or
commonly found in appraisal literature and the land assumed to be unencumbered, in fee simple
lease must give way to the meaning ascribed to as part of a two-step procedure in resetting rent
the terms in the lease: requires an estimate of market value based on the
highest and best use.22 Comparative analysis is
[W]hen parties set down their agreement in a clear, the most common method of valuing property,
complete document, their writing should as a rule be provided sufficient and relevant market data are
enforced according to its terms. Evidence outside the available. Comparative analysis is “the process by
four corners of the document as to what was really which a value indication is derived in the sales
intended but unstated or misstated is generally inadmis- comparison approach. Comparative analysis may
sible to add to or vary the writing. That rule imparts employ quantitative or qualitative techniques,
“stability to commercial transactions....” Such consider- either separately or in combination.” 23
16. “Courts therefore look to the definition of a term provided in the contract before considering how a dictionary defines the term.” [citation
omitted] Dannhouser, TD Co. v. TSG Reporting, Inc., 16cv00747 (S.D.N.Y. Jun. 21, 2019).
17. Georg Jensen, Inc. v. 130 Prince Associates, LLC, 2009 NY Slip Op 51483(U).
18. Provident Loan Society of New York v. 190 East 72nd Corporation, N.Y. Sup. 114915/2008.
19. In New York Overnight Partners v. Gordon, 649 N.Y.S. 2d 928, the court found that the appraiser “must take into consideration all
restrictions including current zoning, and all encumbrances on the land, as well as the lease term.” See also discussion in Chapter 16,
“Highest and Best Use Analysis,” in The Appraisal of Real Estate, 14th ed.
20. In Ruth v. SZB Corp., 2 Misc. 2d 631, 636–637, aff’d 2 A.D.2d 970, “the court ruled that because the lease unambiguously provided that the
land be valued ‘free of lease,’ the drafters could not have intended that the arbitrator ‘might give heed to the very lease which so declared’
otherwise and ruled that the land must be valued without considering the lease restrictions,” as cited in Overnight Partners v. Gordon.
21. For example, in Oakwood Village LLC v. Albertsons, Inc., 2004 UT 101, 104 P.3d 1226 (2004), Albertsons at its own expense built a supermar-
ket on a 42,800-square-foot plot under a long-term land lease with no use clause restriction in Oakwood Village shopping center, which
consisted of twenty-six stores, with Albertsons as the anchor tenant. The lease restricted the landlord from leasing space in the shopping center
to other supermarket tenants. After twenty-one years, Albertsons opened a supermarket as the anchor tenant in a new center across the
street. Albertsons had no obligation to remain open and ceased operations in Oakwood Village while continuing to pay rent. Albertsons
intentionally kept the old building vacant to restrict competition with its new store. As a consequence, occupants of three stores followed
Albertsons to the new center, leaving four units vacant and causing a decline in sales of the remaining tenants in Oakwood Village.
22. A use or combination of uses found to be legally permissible, physically possible, financially feasible and maximally productive.
23. Dictionary of Real Estate Appraisal, 6th ed., s.v. “comparative analysis.”

After the market value of the leased premises defined in the lease.27 As noted by the court in
has been estimated, the computation of rent is Klair v. Reese, “In the rent setting context…, valu-
straightforward if the rent reset clause stipulates ation of the land as encumbered by the lease is rea-
the interest rate (rate of return) to be applied to sonable because the land will continue to be
the market value of the subject property. If the encumbered by the lease.” 28 The dissent in No.
rate of return is not stipulated in the rent reset 100 Sail Ventures Ltd. v. Janwest Equities Ltd. made
clause, a second analysis is undertaken to deter- a similar observation, stating “[O]rdinarily a legally
mine the rate of return (i.e., annual rent) that a imposed restriction on the use of land is a factor to
prospective purchaser expects to earn during the be taken into account in fixing its value, even as
period covered by the rent reset (i.e., assumed vacant and unimproved.” 29 In United Equities v.
holding period). The selection or development Mardordic Realty Co.,30 the dissent noted that a
of an appropriate rate of return should reflect the lease may enhance or diminish the value of land:
prevailing rate in the marketplace, which may
be accomplished by relying on primary data, sec- Whether a lease for any term, short or long, increases or
ondary data, or both. Development of the rate of decreases the land value, as compared with its value if
return may employ the following: sold in fee simple, obviously depends on whether the
• Investment returns on sales of single-tenant landlord’s rights under the lease, particularly with
properties leased on an absolute net (care- respect to the right to receive rent, are valuable or not.
free) basis for a term consistent with the A lease in which there is reserved a high rent will
period covered by the rent reset.24 increase the land value. A lease in which the rent
• Investor surveys monitoring actual or reserved is inadequate will decrease the land value, as
expected rates of return. compared with its value free and clear of any leasehold.
• Government or private bond yields avail-
able for a term consistent with the period A lease’s rent reset provision may refer to “mar-
covered by the rent reset. ket rent.” According to The Dictionary of Real
• Band of investment (weighted-average return Estate, sixth edition, market rent is
on typical debt and equity components).25
The most probable rent that a property should bring in
Leasehold Premise a competitive and open market reflecting the conditions
Absent an express provision to the contrary, in the and restrictions of a specified lease agreement, includ-
resetting of rent there is a presumption favoring ing the rental adjustment and revaluation, permitted
valuation of leased premises as encumbered,26 as is uses, use restrictions, expense obligations, term, con-
typical of leases that require an estimate of market cessions, renewal and purchase options, and tenant
rent or some other form of rent as described or improvements (TIs).
24. A capitalization rate based on first-year income in a stepped-up or stepped-down lease should be adjusted to reflect the average income or
to reflect the change in the pattern of income during the term of the comparable lease. See David C. Lennhoff, “Direct Capitalization: It
Might Be Simple But It Isn’t that Easy,” The Appraisal Journal (Winter 2011): 66–73.
25. The Appraisal of Real Estate, 14th ed., 495.
26. See Hotel Plaza Associates v. Wellington Associates, Inc., N.Y.Supr., 55 Misc. 2d 483, 285 N.Y.S.2d 941 (1967), aff’d, N.Y.2d 846, 293
N.Y.S.2d 108, 239 N.E.2d 736 (1968), where “the appraisers erroneously valued the land at its highest and best use, as if it were vacant,
without regard to the fact that the land was encumbered by a lease.” [emphasis added]
27. See Gary R. Menzies, “Choosing the Right Words: Interpreting Rent Review and Renewal Clauses in Commercial Leases,” Alberta Law
Review, 34 Alta. L. Rev. 853 (1996), for a discussion of cases illustrative of subjective and objective approaches to fixing rent. An objective
approach to rent reset is consistent with an analysis of “market rent,” whereas a subjective approach provides that rent for the review
period or renewal term be “fair” or “reasonable” as between the landlord and the tenant “taking into account all factors which would
affect the mind of the landlord and tenant.”
28. Klair v. Reese, 531 A.2d 219 (Del. 1987).
29. No. 100 Sail Ventures Ltd. v. Janwest Equities Ltd., 1993 CanLII 477 (BC CA).
30. United Equities v. Mardordic Realty Co., 8 A.D.2d 398, 187 N.Y.S.2d 714 (N.Y. Appellate Div., 1st Dept., 1959), aff’d 7 N.Y.2d 911 (N.Y.
Court of Appeals, 1960).

If the lease provisions provide that the lease • The appraised value of the demised prem-
itself must be disregarded in resetting rent, this ises shall, in any event, be the value of the
implies that the unexpired term of the lease— land exclusive of buildings or other
including any extensions or renewals—is to be improvements and as if free and unencum-
disregarded as a constraint in any highest and bered during the year in which such value is to
best use analysis of the leased or “demised” prem- be established.36
ises. Examples of lease provisions on disregard- • The market value of the demised premises
ing the lease in the rent reset valuation include shall be determined…in accordance with
the following: its highest and best use as if vacant land,
• [Six percent of] the full and fair value of the exclusive of all or any improvements
land demised which the same would sell for thereon, without regard to the terms and con-
as one parcel considered as vacant and ditions of the present lease but considering as
unimproved, in fee simple, by private con- appropriate the impact of any legal impedi-
tract, free of lease and unencumbered.31 ments to a change of use created by zoning
• [A]n amount per annum equal to 6% of the and other statutes and ordinances.37
fair market value…of the land constituting
the demised premises, considered as vacant,
unimproved and unaffected by this lease.32 Physical and Legal Encumbrances
• Fair Market Rental is defined as “the annual
rental for the demised lands which would In the interpretation of a rent reset clause there
be paid as between persons dealing in is an important distinction between being
good faith and at arm’s length, as if the instructed by a lease to ignore improvements of a
demised lands were vacant, unencumbered physical nature that encumber land and being
and unimproved.” 33 instructed to ignore encumbrances that affect
• The Annual Net Rental shall be…12% of the title.38 The first can be viewed as a physical
appraised value….Said appraisals shall be encumbrance, while the second can be viewed as
made…as if the Leased Land were vacant, unen- a legal encumbrance.
cumbered, unimproved, and not under Lease.34 The California appellate court in Evans v.
• The appraiser must regard the land “as vacant, Faught,39 addressed the issue of title encum-
unimproved and unencumbered by this lease.” 35 brances:
31. Ruth v. SZB Corp., 2 Misc. 2d 631 (1956). The court noted that if the phrase “free of lease” is given its plain and natural meaning, the lease
in its entirety must be eliminated from consideration, whether its provisions spell good or ill fortune for one party or the other.
32. Manhattan Church of Christ, Inc. v. 40 East 80 Apartment Corporation, 2007 NY Slip Op 32554(U).
33. 6524443 Canada Inc. v City of Toronto, 2016 ONSC 7147 (CanLII), upheld on appeal, 6524443 Canada Inc. v. Toronto, 2017 ONCA 486
(CanLII).
34. Funger v. Maizels, 377 A.2d 70 – DC: Court of Appeals, 1977.
35. Archdiocese of New York v. Amedeo Hotels Limited Partnership, 295 A.D.2d 161 (2002), 742 N.Y.S.2d 635.
36. Montreal Trust Co. v. Spendthrift Holdings Limited, (22 March 1984), O.J. No. 296 (Ont. S.C. [unreported]).
37. Humphries Investments, Inc. v. Walsh, 202 Cal. App. 3d 766 (1988), 248 Cal. Rptr. 800. In this lease “ordinances and codes” were in
reference “to the feasibility of any alternative use of the property and/or the likelihood of a future change in that status,” while not ruling
out the existing mobile home park as the potential highest and best use of the demised premises.
38. In Funger v. Maizels, 377 A.2d 70 (D.C. 1977), the appeals court in interpreting part of the rent reset clause stated, “[t]he words ‘vacant’
and ‘unimproved’ have reference to the physical state of the property.”
39. 231 Cal. App. 2d 698 (1965). This case involves an unregistered lease of a portion of a ranch executed for a term of 25 years, with
a lessee (County of Sonoma) right to renew the lease for an additional 25 years, and for the purpose of constructing and maintaining
a powder magazine.

In Shunk [v. Fuller] and Buetel [v. American Mach. Co.] of the rent reset clause in Montreal Trust Com-
it was specifically held that a lease is an encumbrance pany v. Spendthrift Holdings Limited, which stated:
upon the title to the property conveyed.40 We hold, “The value of the land exclusive of buildings or
therefore, that an unrecorded lease which is binding other improvements and as if free and unencum-
upon a purchaser of real property is a limitation affect- bered.” 42 [emphasis added] In addition, the Stan-
ing title since it obviously is a right or interest in land dard Life court looked to the decision in Ruth v.
which subsists in a third person to the diminution of SZB Corporation where the New York court had
the value of the land, but is consistent with the convey- similarly stated, “[T]he full and fair value of the
ance of the title. land demised which would sell for as one parcel
considered as vacant and unimproved, in fee sim-
The Evans court went on to characterize improve- ple, by private contract, free of lease and unencum-
ments on the subject property, consisting of an bered.” 43 [emphasis added] Therefore, it was not
access road and the county powder magazine, as “patently wrong” for the arbitration panel in
physical encumbrances unrelated to title: Standard Life to conclude that
[T]he powder magazine and the road, the presence of [I]t is possible for landlords and tenants to draft docu-
which put plaintiff on notice of the unrecorded lease, ments which would require them to ignore some
were also physical encumbrances upon the land which aspects of market reality existing as of the valuation
he was obliged to accept as burdens since plaintiff was date. However, we do not find that the document we
presumed to have contracted to acquire the land sub- have before us [which makes no reference to ignoring
ject to such physical burdens. encumbrances] is such a document in relation to rele-
vant legislation.
The Evans appeals court concluded that “the sit-
uation presented here is that the encumbrances At the time of the 1989 rent reset, the rental
under consideration are not such as affect only apartment building was subject to rent control
the physical condition of the land [i.e., access legislation, which prevented rents from rising
road and powder house], but its title as well [i.e., to market levels. For the subject apartment
unregistered lease].” building, residential condominium development
represented the highest and best use of the
Encumbrance by Lease property, a use not permitted on leased land in
In Standard Life Assurance Co.41 the Ontario, the Province of Ontario on the date of the
Canada, appeals court refused to overturn a “final rent reset. As a result, the arbitrators fixed the
and binding” 1989 arbitration award as the deci- market value of the land at $4,250,000, based on
sion was not “patently unreasonable,” even a (restricted) highest and best use as a rental
though “the arbitrators’ interpretation of the apartment development, resetting the rent at
lease was wrong.” In a subsequent 2014 rent reset $286,875 per year for a period of 25 years, apply-
dispute, the court ruled that the reference to the ing the prescribed rate of 6.75%. On the basis
arbitrators’ decision being “wrong” was made in of residential condominium development, the
passing and did not form part of the court’s rul- market value of the freehold interest in the
ing. The finding that the arbitration decision was land was $13,500,000, which at the prescribed
not “patently wrong” rested on a point of distinc- rate of 6.75% would have generated annual rent
tion identified by the arbitrators in the language of $911,250. Therefore, from the lessor’s per-
40. By way of analogy, the following have been held to be encumbrances affecting title: building restrictions (Whelan v. Rossiter, 1 Cal. App.
701, 704, 82 P. 1082; Tandy v. Waesch, 154 Cal. 108, 97 P. 69; Bertola v. Allred, 46 Cal. App. 593, 189 P. 489); reservations for rights-of-
way for water pipes and ditches (Tandy, supra); easement for a pipeline (Krotzer v. Clark, 178 Cal. 736, 739, 174 P. 657); and pendency of
condemnation action (Hunt v. Inner Harbor Land Co., 61 Cal. App. 271, 272, 214 P. 998).
41. Standard Life Assurance Co. v. Parc-IX Ltd. (Div. Ct.), 1991 CanLII 7350 (ON SC). In the Standard Life Assurance case, the rent reset clause
called for “the greater of $40,500 and ‘land market rent’ defined as ‘a sum equal to 6 3/4% of the fair market value of the property as if it
were unimproved.’” [emphasis added]
42. Montreal Trust Co. v. Spendthrift Holdings Limited, 42 [1984] O.J. No. 296 (H.C.).
43. Ruth v. SZB Corp. (1956), 153 N.Y.S. 2d 163 (N.Y. Sup. Ct.), aff’d (1956), 158 N.Y.S. 2d 754 (N.Y. Sup. Ct. – App. Div.).

spective, the annual rental loss was found to In Roywood and Gardenview [Royal Trust] the Court of
be $624,375 ($911,250 – $286,875), and the Appeal held that words such as “unimproved” or
undiscounted loss of rent over the 25-year “without buildings or improvements” included “unen-
period amounted to $15,609,375.44 Discounted cumbered.” I am bound by those decisions even if I
at 6.75%, the present value of the lessor’s have some difficulty understanding them. In my opinion
annual rental loss of $624,375 was $7,443,056 an encumbrance is a legal interest in the land that
($624,375 × 11.920811). diminishes its value as opposed to physical buildings
The first 25-year reset period expired in 2014. placed upon the land or physical improvements made to
Again, the parties failed to reach agreement on the land. In any event the present leases do not use any
how the property should be valued. In advance of of the words unencumbered or vacant or unimproved,
the second round of arbitration, the parties they merely refer to the lands. 46
sought a declaration from the court as to whether
the term land market value “should be interpreted The court also concluded that the terms unim-
to include the highest and best possible use of the proved and unencumbered mean two different
land, as if the Property were unimproved and things. It noted that Black’s Law Dictionary, sixth
unencumbered, including the value of the Prop- edition, defines improvement in terms of physical
erty as if it were available for freehold condo- modification:
minium development as of the valuation date
[March 15, 2014].” The court concluded that the A valuable addition made to property (usually real
interpretation of the rent reset clause “is gov- estate) or an amelioration in its condition, amounting to
erned by the 1990 Arbitration Decision, and [les- more than mere repairs or replacement, costing labor or
sor] Manulife is estopped from relitigating it.” 45 capital, and intended to enhance its value, beauty or
As part of the analysis, the court examined a utility or to adapt it for new or further purposes. Gener-
number of prior rent reset rulings interpreting ally has reference to buildings, but may also include any
“fair market value of the property as if it were permanent structure or other development, such as a
unimproved” to mean not only ignoring the street, sidewalks, sewers, utilities, etc. [emphasis added]
improvements but that “the parties also intended
to disregard encumbrances impacting the value On the other hand, Black’s defines encumbrance as
of the land.” Commenting on the distinction a legal interest: “Any right to, or interest in, land
between encumbrances and improvements, the which may subsist in another to diminution of its
court stated as follows: value but consistent with the passing of the fee by
conveyance.” Accordingly, the court concluded
For reasons of which I am uncertain, both the Court of that “a property can be unimproved yet encum-
Appeal in Royal Trust and the Divisional Court in Stan- bered. Conversely, it may be improved and unen-
dard Life inserted the word “unencumbered” into the cumbered. The two words are not synonymous.”
equation so that in both decisions the fair market value In Selective 901 Truman, LLC v. Goodrich &
was based on a notional value of the land that was not Hops Properties West,47 the lessor and lessee were
only unimproved, but also unencumbered. I cannot unable to agree on the “fair rental value” in a rent
locate any explanation in the case law as to how or why reset of a long-term land lease. The lease com-
this occurred. [emphasis added] menced January 1, 1958, for a term of 53 years,
44. The ground lease is for a term of 99 years from March 15, 1964, and the first rent reset was for 25 years from March 15, 1989, with the
next rent reset scheduled for March 15, 2014. Amendments in 1998 to the Condominium Act permit leasehold condominiums provided the
term of the lease is at least 40 years.
45. Manufacturers Life Insurance Co. v. Parc-IX Limited, 2018 ONSC 3625. In 1964, Standard Life acquired Royal Trust Company’s interest in the
property. In 2015, the property was transferred from Standard Life to Manulife.
46. The judge concluded he was no longer bound by the ruling of the Court of Appeal in Royal Trust in light of the later Supreme Court of
Canada ruling in Musqueam Indian Band v. Glass, 2000 SCC 52(CanLII), [2000] 2 S.C.R. 633 and the Court of Appeal ruling in Board of
Regents of Victoria University v. G.E. Canada Real Estate Equity, 2016 ONCA 646 (CanLII), 2016 CarswellOnt 13524, leave to appeal
refused, 2017 CarswellOnt 3571 (S.C.C.).
47. Cal Court of Appeal, 2nd Appellate Dist., 3rd Div., 2019.

allowing for extensions up to 99 years. The leased The arbitrator noted the lease dictated that the
premises consisted of 1.94 acres. In 1962, the lessee appraisals be prepared “in accordance with
built a 34,000-square-foot strip center with paved approved appraisal practices.” 48 The arbitrator
surface parking. The lessor triggered a rent reset for also noted the lease was not ambiguous and that
a 10-year period, effective March 1, 2015, with a “the Subject Property must be appraised assuming
total of 43 years remaining on the lease. The lease’s encumbrances.” The lessor’s appraisal treated the
rent reset and use clauses stated in relevant part: leased premises as if unencumbered by the lease
and valued the land in its “highest and best use” at
At any time or times after ten (10) years from the effective $5.5 million. One of the lessee’s appraisals took
date of this lease such rental may be revised by [Lessor] into account the impact of the unexpired lease
giving thirty (30) days’ advance notice in writing to Lessee. term of 43 years and valued the land at $1,387,000.
Fair rental value of the leased premises shall be deter- Both appraisals, as well as a second appraisal pre-
mined without consideration being given to the effect in pared on behalf of the lessee, were rejected by the
such values of the improvements of Lessee and in accor- arbitrator. The lessor’s appraisal was rejected as it
dance with approved appraisal practices. This land shall failed to account for the impact of the ground
be valued at the time of such revision as determined by lease, which places a burden on the property and
[Lessor] and Lessee, but rental thereon should not be less lowers its value because of the lease’s 43 remaining
than the minimum rental rate hereinbefore set forth, nor years with all the restrictions on use and remain-
more than six percent (6%) per annum of the then ing lease resettings. The lessee’s appraisals were
appraised value of the land. When so revised, such rental rejected as being too low.
shall not be subject again to revision until ten (10) years Instead, the arbitrator turned his attention to
from the effective date of such revision. [emphasis added] the actual sale of the subject property at $3,425,000
(all cash) in December 2014, encumbered by the
Said premises shall be used by Lessee solely and exclu- ground lease, which the lessee had characterized
sively for erection, maintenance and operation of office as “the perfect comparable.” The arbitrator noted
buildings, buildings for general commercial and manu- that the subject property had been extensively
facturing uses, parking lots which shall include a subter- marketed for sale on the open market by a sophis-
ranean parking lot if deemed necessary, and heliport ticated brokerage firm. He concluded that the
roof deck. ...Lessee agrees to comply with all applicable transaction offered the best evidence of the value
laws and regulations with respect to the use of the of the land, as if unimproved, but encumbered by
leased premises. the ground lease. On the basis of the $3,425,000
sale price, the arbitrator fixed the rental value of
The parties failed to reach agreement as to the the leased premises at $205,500 annually by apply-
fair rental value for the 10-year period, and the ing a rate of 6%, as allowed by the lease.
rental dispute proceeded to arbitration. The arbi- The lessor sought to have the arbitrator’s award
trator determined that “fair rental value has vacated, contending,
essentially the same definition as fair market 1. The award was “untethered” from the evi-
value, both leading to assumptions that a buyer is dence, which called for “fair rental value” to
knowledgeable and under no compulsion to buy be determined by appraisals (all rejected by
(or lease), and a seller is otherwise willing to sell the arbitrator), inappropriately taking into
(or lease) under no compulsion to do so.” account the long-term ground lease, and
The central issue was whether the appraisals 2. Application of an improper method, i.e.,
were required to give consideration to the effect of the recent purchase price of the subject
encumbrances on the property, which is burdened property as the foundation for fixing the
by the lease itself for a remaining term of 43 years. “fair rental value.” 49
48. In the award, the arbitrator pointed to Standards Rule 1-4(d) of the Uniform Standards of Professional Appraisal Practice (USPAP), which
provides “an appraiser must analyze the effect on value, if any, of the terms and conditions of the lease(s).”
49. Standards Rule 1-5 of USPAP requires an appraiser to “(a) analyze all agreements of sale, validated offers or third-party offers to sell,
options, and listings of the subject property current as of the effective date of the appraisal if warranted by the intended use of the
appraisal; and (b) analyze all prior sales of the subject property that occurred within a reasonable and applicable time period if relevant
given the intended use of the appraisal and property type.”

The lessor also objected to the inclusion of instruc- • Applying a rate of 6% to the $2,976,037
tive language in the award that purported to guide suggests a fair rental value of $178,562 per
all future rent resets; the language provided, annum, fixed for 10 years.
Future rent resettings shall be determined by appraisal

of the Subject Property as encumbered by the Lease Market Value of Land Assumed
terms, including the remaining time on the Lease Unimproved for Lease Term
and any restrictions on use contained in the Lease or
by conditions and restrictions imposed by the city of In United Equities,52 the majority opinion of the
San Fernando. [Emphasis added by court.] New York appeals court stated that “the land
should be appraised for the best use that it can be
The trial court rejected the lessor’s motion to put to, and not only for the [current] use,” with
vacate the award, a ruling upheld by the appel- the formula for computing rent being “a sum
late court, finding that the arbitrator acted equal to six per cent of the fair market value of the
within his authority in rejecting the appraisal land.” [emphasis added]. The court also ruled
evidence and instead relying on the sale of the that the 21-year renewal term of the lease and a
subject property. The court also found that the further 21-year renewal option had to be taken
inclusion in the award of an instruction to take into account in the highest and best use analysis
into account the lease itself in future rent resets of the land; the court stated, “The only limita-
was consistent with the arbitrator’s mandate. tion upon [market] value, if any, is the number of
To analyze the situation, keep in mind that the years [42] the most advantageous use of the land
December 2014 acquisition of the subject prop- can be enjoyed under the lease.”
erty is a leased fee interest, which includes both The appeals court offered no guidance as to how
the value of the anticipated rent during the the market value (capital value) of such a 42-year
remaining term of the lease and the value of the landholding should be determined, leaving the
reversionary interest upon expiry of the lease.50 matter to the discretion of the appraisers. Presum-
Accordingly, the purchase price of $3,425,000 ably, a prepaid ground lease or purchase of a ground
does not isolate and measure the value of the lease with an equivalent term of 42 years and a
land as a 43-year holding, consistent with the similar highest and best use would reflect the mar-
remaining term of the lease. In other words, the ket value of the subject land, provided such mar-
value of the land is overstated by the present ket data is readily available.53 Alternatively, it may
value of the reversionary interest in the land. be possible to conduct some form of ratio analysis,
• Accepting the lessor’s appraised freehold comparing the value of the land as a 42-year hold-
value of $5,500,000, deferred 43 years, and ing to the freehold value of the same land held in
discounted at, say, 6%, results in a present perpetuity. Of course, the difficulty of financing a
value of $448,963 ($5,500,000 × 0.08163). 42-year landholding would also have to be fac-
Deducting the $448,963 from the purchase tored into any ratio analysis. Assuming a freehold
price of $3,425,000 (leased fee interest) acquisition is equivalent to capitalizing $1 per
results in a market value (capital value) of annum in perpetuity at 6%, it is possible to express
the land (lease) held for a term of 43 years of the value of a fixed-term holding as a ratio or per-
$2,976,037 ($3,425,000 – $448,963).51 centage of value in perpetuity.
50. The arbitrator did observe, however, that “[t]he land will become more valuable in the future and at every resetting. The encumbrance
[lease] on the land will lessen due to the remaining years [shorter unexpired term at every rent reset] under the Lease,” thereby, enhancing
the value of the lessor’s reversionary interest.
51. The market value of the land held for 43 years is 54.1% of the market value of the same land held in perpetuity ($2,976,037 ÷ $5,500,000
= 0.5411 or 54.11%).
52. United Equities v. Mardordic Realty Co., 8 AD.2d 398, 187 N.Y.S.2d 714 (N.Y. App. Div., 1st Dept., 1959), aff’d N.Y.2d 911 (N.Y. Court of
Appeals, 1960).
53. For example, the City of Vancouver in September 2018 estimated the freehold value of a mixed-use site at $8,500,000, and the 60-year
lease was priced at 75% ($6,375,000) of the freehold value, with ground rent payments calculated on this figure. (Administrative Report,
August 21, 2018.) A 40-year ground lease is priced at 60% of the freehold value. (Administrative Report, January 30, 2017.)

• Capitalizing Year-1 income at, say, 6%, of rent will take into account the subsisting terms
results in a factor of 16.667 (1 ÷ 0.06).54 A and conditions of the lease, unless the rent reset
42-year holding at the same rate, compared clause manifests a contrary intension. When
to a perpetual ownership, results in a factor addressing a rent reset for an option to extend or
of 15.225, and indicates a capital value renew a lease, courts have generally ruled that
equivalent to 91.35% (15.225 ÷ 16.667) of the option is for the benefit of the tenant, and
the freehold value,55 before considering a that the new rent should reflect continuation
further adjustment for constraints associ- of the existing use, as contemplated by the use
ated with financing a 42-year landholding. clause in the original lease.56
• Loading the capitalization rate by, say, 150 If the lease itself must be considered at the rent
basis points to 7.5%, to reflect financing reset date, the remaining life of the lease in con-
constraints, the present value factor of 1 per cert with the use clause and prevailing market
annum at 7.5% for 42 years is 12.694, and conditions can constrain highest and best use
represents 76.16% of the freehold value analysis and, in turn, the amount of rent for the
(perpetual ownership) of one per annum in leased premises if the lease itself must be consid-
perpetuity at 6% (12.694 ÷ 16.667). ered. Permissive or expansive use clauses allow-
ing for “any lawful use” tend to result in higher
The ratio analysis is rate sensitive, and the rents than for specific use clauses, all other things
value estimate will vary with the rates selected. being equal. Any leasehold improvements
Other creative solutions could be explored, as remaining in the leased premises at the end of
there is no textbook solution to this type of the life of the lease become the property of the
appraisal problem. landlord unless the lease instructs the tenant to
remove the leasehold improvements.
A highest and best use that forms the founda-
Conclusion tion for a rent adjustment and stems from a rent
reset clause that assumes leased premises are
An examination of the title abstract and a thor- unimproved and unencumbered (contrary to the
ough reading of an executed copy of the lease— actual physical state and legal status of the leased
including any schedules and amendments, paying premises) may cause the lessee financial hard-
particular attention to the rent reset clause—are ship.57 The present leasehold improvements may
essential to an understanding of how rent should not generate rent sufficient to support rent deter-
be reset and what factors should be taken into mined on the basis of highest and best use in fee
account or disregarded in the context of the simple, and the remaining lease term or the sub-
specified or identified property rights. sisting terms and conditions of the lease may pre-
As a general rule, a rent reset clause that calls clude the lessee from achieving the (unrestricted)
for an estimate of market rent or some other form highest and best use.58
54. A 99-year holding of one per annum discounted at 6% accounts for approximately 97% (16.615 ÷ 16.667) of a holding in perpetuity
at the same rate.
55. See Kwek Sian Choo and Dionne Hoh, Determining the Value of Leasehold Land: A Closer Look at “Bala’s Table” (Singapore: Centre for
Liveable Cities, 2017), available at http://bit.ly/389efdN.
56. In DBN North Beach, LLC v. Debs, the California Court of Appeal (4th Appellate Dist., 3rd Div., 2009) acknowledged that during the first
10 years of a 20-year lease extension “[t]he terms of the lease and common sense indicate that a resetting of the lease amount is to be
according to ‘fair market rental value’ of the property... as contemplated by the lease [use clause], not as bare land [unencumbered by the
lease], on a ‘highest and best use’ basis, as a mixed-use residential and commercial project.” It stated, “An interpretation that the rent
during the option terms is to be based upon the highest and best use of the property despite the purposes for which lessor and lessee
agreed it could be used, would be economically and commercially unreasonable and violate the intent of the parties.”
57. The courts have held that “economic hardship is not a reason to rewrite a lease made between two sophisticated commercial entities.”
853 Seventh Ave. Owners, LLC v. W & HM Realty Co., LLC, 2005 N.Y. Slip Op. 03770 [18 A.D.3d 241] May 10, 2005.
58. See Ruth v. SZB Corp., (1956) 153 N.Y.S.2d 163 (N.Y. Sup. Ct.), aff’d (1956), 158 N.Y.S.2d 754 (N.Y. Sup. Ct., App. Div.), stating, “land
to be valued in accordance with the [rent reset] formula of the underling lease [in highest and best use], without treating as an element of
value the restrictions on [use and] user flowing from the lease.”

When the objective of a rent reset clause is to About the Author

estimate market value, it is generally in the con- Tony Sevelka, MAI, SRA, AI-GRS, FRICS, AACI,
text of the fee simple interest in the leased prem- P.App., is the founder of International Forensic &
ises consisting of unimproved and unencumbered Litigation Appraisal Services Inc. and International
land. If the rent reset clause instructs the appraiser Valuation Consultants Inc. He has been an appraiser
to ignore the lease itself, it is inappropriate to since 1972, specializing in forensic appraisal and review,
reset rent for the leased premises selecting only litigation support, and arbitration in rent reset disputes.
favorable lease terms and covenants, and vice He holds a BGS in real estate studies from Thompson
versa, as the lease cannot be disregarded and Rivers University. Contact: www.intval.com
embraced simultaneously.
Appraisal Institute
• Education—Advanced Market Analysis and Highest and Best Use
https://www.appraisalinstitute.org/education/
• Lum Library External Resources Knowledge Base [Login required]

• Information Files—Land
• Information Files—Property rights
• Information Files—Value
• Practice Standards and Guide Notes

https://www.appraisalinstitute.org/professional-practice/
• Publications
https://www.appraisalinstitute.org/store/
• The Appraisal of Real Estate
• Market Analysis for Real Estate, second edition
Calkain—Lease-related reports
https://www.calkain.com/research/
CCIM Site to Do Business

https://www.stdb.com
National Association of Realtors—Research and statistics

https://www.nar.realtor/research-and-statistics
National Real Estate Investor

https://www.nreionline.com
NCREIF—Commercial data resources and research

https://www.ncreif.org/
Society of Industrial and Office Realtors—Transactions and data

https://sior.com/transactions-and-data/transactions
US Department of Transportation, Federal Highway Administration—Realty

https://www.fhwa.dot.gov/real_estate/index.cfm

Revisiting Market Value

and Market Rent
by David C. Lennhoff, MAI, SRA, AI-GRS, and Richard L. Parli, MAI
Abstract
It is hard to imagine more fundamental terminology in appraisal than market value and market rent. After all, usually
these identify the question being answered in an appraisal, and if the question is wrong the answer cannot be right.
Over the years, these two terms have been written about, modified, and debated. Still, even with a definition revi-
sion as recently as 2020, the two terms remain ambiguous and potentially confusing. The ramifications are serious.
Appraisers supposedly providing opinions about the same thing end up answering different questions. The reader,
client, and public in general are left confused. Public trust is diminished. This article addresses the remaining ambiguity
in the terms, as currently defined, and offers suggested revisions that should clear up the confusion.
Introduction conventional definitions of both terms create a

gray area, which can lead to confusion.
Let’s be clear: definitions matter. Without clear This article considers the definitions of both
and concise definitions, the meaning of any word market value and market rent and addresses
can be misunderstood. aspects in each that are ambiguous and inconsis
Professionals sometimes use basic industry tent. The purpose of the discussion is to clarify
terms without giving enough thought to their these concepts so they can be uniformly applied.
underlying meanings. Professionals sometimes, In addition, the article will consider the options
through no fault of their own, appear to be that market value and market rent provide to
inconsistent because of definitions that are the appraiser. Finally, new, clearer definitions of
unclear or poorly crafted. The ongoing con each will be offered.
troversy over the rights to be appraised is an
excellent example of the type of problems impre
cise definitions can create.1 The equally funda Background of Current Definitions
mental terms market value and its companion,
market rent, have a similar definitional problem. Market Value
Both terms involve value opinions, and assign In 1971, William Kinnard penned the following
ments for both are appraisals.2 But many fail definition of market value:
to fully grasp how these two terms reflect hypo
thetical transactions that involve activity Market Value can be regarded as the price a willing
prior to and as of the effective date of value— buyer would pay, and a willing seller would accept, with
not after the effective date of value. In other each acting rationally on the basis of available market
words, an opinion of market value and market information, under no undue pressure or constraint,
rent both answer questions of “what would have” with no fraud or collusion present. It represents Value in
rather than “what should.” Unfortunately, the Exchange for interests in real estate.3
1. See for example David C. Lennhoff and Richard L. Parli, “Through the Looking-Glass: Debunking the ‘Dark Store’ Idiom,” The Appraisal
Journal (Summer 2019): 180–190.
2. See Appraisal Standards Board, Advisory Opinion 21 in USPAP Advisory Opinions (Washington, DC: The Appraisal Foundation, 2020), Line
201, which notes that an estimate of market rent is an appraisal.
3. William N. Kinnard Jr., Income Property Valuation (Lexington, MA: Heath Lexington Books, 1971), 12.

This definition covers all the necessary bases site to a fair sale, with the buyer and seller each acting
while allowing flexibility as to what is being val prudently, knowledgeably, and assuming the price is not
ued—the interests in real estate. It is simple, affected by undue duress. Implicit in this definition is the
unambiguous, and allows for adaptation to differ consummation of a sale as of a specified date and pass-
ent circumstances. In contrast, the nearly con ing of title from seller to buyer under conditions whereby:
temporaneous sixth edition of The Appraisal of 1. buyer and seller are typically motivated;
Real Estate (1973) did not offer a formal defini 2. both parties are well informed or well advised, and
tion but presented three ambiguous alternatives.4 each acting in what he or she considers to be his
It was not until the 1975 publication of Real or her interest;
Estate Appraisal Terminology that a formal defini 3. a reasonable time is allowed for exposure on the
tion of market value was presented.5 That defini open market;
tion has been carried forward, virtually untouched, 4. payment is made in terms of cash in U.S. Dollars or
as the current definition in The Dictionary of Real in terms of financial arrangements comparable
Estate Appraisal, sixth edition.6 Although there thereto; and
are many current definitions of market value, most 5. the price represents the normal consideration for
are quite similar. According to The Dictionary of the property sold unaffected by special or creative
Real Estate Appraisal, sixth edition, financing or sales concessions granted by anyone
associated with the sale.8
The most widely accepted components of market value
are incorporated in the following definition: The most This definition was formalized with the enactment
probable price, as of a specified date, in cash, or in of the Financial Institutions Reform, Recovery,
terms equivalent to cash, or in other precisely revealed and Enforcement Act of 1989 (FIRREA).9 While
terms, for which the specified property rights should there are alternative definitions that are applicable
sell after reasonable exposure in a competitive market to different situations,10 the discussion here will
under all conditions requisite to a fair sale, with the focus only on the one that incorporates “the most
buyer and seller each acting prudently, knowledgeably, widely accepted components of market value.”
and for self-interest, and assuming that neither is under
undue duress.7 Market Rent
The definition of market rent has gone through an
Through time, this definition of market value evolution similar to that of market value. In The
has been modified—shortened in body but elon Appraisal of Real Estate, sixth edition (1973), the
gated through explanatory conditions. One nota concept of “economic rent” is identified and linked
ble alternative definition was introduced in the to its source (“based upon current rentals being
1984 edition of Real Estate Appraisal Terminology: paid for comparable space”).11 Economic rent was
later distinguished from market rent and defined
The most probable price which a property will bring in a to mean “the amount of rent necessary to provide
competitive and open market under all conditions requi- an adequate return on development cost.” 12
4. Appraisal Institute, The Appraisal of Real Estate, 6th ed. (Chicago: Appraisal Institute, 1973). It notes three alternative “widely accepted”
definitions that embody “the subjective premise” of market value. (Page 25). In addition, a later reference simply states, “The market value
estimate has been defined as an interpretation of the reactions of typical users and investors in the market.” (Page 273)
5. Byrl N. Boyce, ed., Real Estate Appraisal Terminology (Cambridge, MA: AIREA and SREA, 1975), s.v. “market value.”
6. Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th ed. (Chicago: Appraisal Institute, 2015), s.v. “market value.”
7. Dictionary of Real Estate Appraisal, 6th ed., s.v. “market value.”
8. Byrl N. Boyce, ed., Real Estate Appraisal Terminology (Cambridge, MA: Ballinger Publishing for the Society of Real Estate Appraisers 1984),
161. There were six conditions in the 1984 definition, which included a statement that “financing, if any, is on terms generally available in
the community at the specified date and typical for the property type in its locale”; this element was subsequently dropped.
9. Federal Register 55, no. 163 (August 22, 1990): 34228–34229.
10. See for example, Interagency Land Acquisition Conference, Uniform Appraisal Standards for Federal Land Acquisitions (UASFLA), 2016 ed.
(Washington, DC: US Government Printing Office, 2016), available at http://bit.ly/UASFLA.
11. See for example The Appraisal of Real Estate, 6th ed., 315.
12. Dictionary of Real Estate Appraisal, 6th ed., s.v. “economic rent.”

With the publication of The Dictionary of Real Market Value Issues

Estate Appraisal in 1984, the term changed to
“market rent.” The method of obtaining market The current definition of market value has four
rent was dropped from the definition of market major deficiencies; these are related to issues of
rent in the fourth edition (2002) of The Dictio- timing, financing phase, exposure time, and
nary of Real Estate Appraisal, and five “condi undue duress.
tions” were added to the definition at that time.13
That definition has been carried forward into Timing
the current Dictionary of Real Estate Appraisal, A careful read of the definition of market value
sixth edition (2015), where market rent is defined leads one to believe that the value being sought
as follows: could be the amount for which the property
should sell—that is, during the period immedi
The most probable rent that a property should bring in ately following the effective date of appraisal.
a competitive and open market reflecting the conditions This conflicts with how an operative part of
and restrictions of a specified lease agreement, includ- the definition—a reasonable time for exposure
ing the rental adjustment and revaluation, permitted in a competitive market—expects the timing to
uses, use restrictions, expense obligations, term, con- be interpreted.
cessions, renewal and purchase options, and tenant Appraisers preparing market value appraisals
improvements (TIs). accept that the history of a subject property
hypothetically includes a period of market expo
In February 2020, a revised iteration of the defini sure that immediately precedes the effective date
tion of market rent was approved by the Appraisal of value.14 However, an inconsistency exists in
Institute Board of Directors. It reads as follows: that the definition mandates that the determina
tion be what the property should sell for while
The most probable rent that a property should bring in also mandating that the property has been on the
a competitive and open market under all the conditions market for a reasonable exposure period. And the
requisite to a fair lease transaction, the lessee and the inconsistency extends to how the definition is
lessor each acting prudently and knowledgeably, and applied when appraisers favor the “reasonable
assuming the rent is not affected by undue stimulus. exposure time” phrase while ignoring the gram
Implicit in this definition is the execution of a lease as of matical discrepancy. However, if the roles were
a specified date under conditions whereby: reversed, every market value appraisal would
• Lessee and lessor are typically motivated; become a prospective appraisal, dependent on
• Both parties are well informed or well advised, and marketing time, answering a different question
acting in what they consider their best interests; entirely: how much should this property sell for if
• Payment is made in terms of cash or in terms of the owner put it on the market on the effective
financial arrangements comparable thereto; and date of appraisal?
• The rent reflects specified terms and conditions, There are certainly legitimate reasons for pro
such as permitted uses, use restrictions, expense spective market value appraisals. But according
obligations, duration, concessions, rental adjust- to the definition, even in such cases the value
ments and revaluations, renewal and purchase would be double prospective—first for the future
options, and tenant improvements (TIs). effective date and second for the future sale’s
expected sale date beyond the effective date.15
This 2020 definition of market rent includes par
allels to the definition of market value; therefore, Financing
it is important to explore concerns with the defi The availability and price of financing affects
nition of market value. the value of real estate on both the macro and
13. Appraisal Institute, The Dictionary of Real Estate Appraisal, 4th ed. (Chicago: Appraisal Institute, 2002), s.v. “market rent.” Interestingly, one
of the conditions of market rent was “a reasonable time is allowed for exposure in the open market.”
14. For the formal definition of exposure time see Dictionary of Real Estate Appraisal, 6th ed., s.v. “exposure time.”
15. Prospective appraisals for relocation companies are not to be confused with market value appraisals. Relocation companies are seeking an
“anticipated sale price,” which includes an estimate of marketing time (up to 120 days) as well as the forecasted (future) sale price.

micro levels. The general availability of financ such a property under these terms? The impact
ing and the loan-to-value ratio can be signifi of the advantageous financing on the property
cant factors that influence property value, and can be calculated just as easily as the effect of
the specific financing terms in a transaction can the same conditions on a comparable. In short, a
also affect the price.16 simple clarification of what is being valued is all
However, it is only on the micro level that that is necessary.
appraisers address financing directly—and only
as it pertains to a comparable, e.g., an adjustment Exposure Time
to answer the question, what would the compara Just as financing can influence a property’s mar
ble have sold for if it had sold in cash or its equiv ket value, so can exposure time. The current
alent? There is only an indirect requirement to market value definition calls for “reasonable expo
address the general availability and price of sure.” However, the impact on property value of
financing as they impact the subject property. It a variation from reasonable exposure is consid
is, in essence, contained in the all-inclusive ered only in terms of a comparable. The Appraisal
phrase “in cash, or in terms equivalent to cash, or of Real Estate, fourteenth edition, notes that
in other precisely revealed terms.” Which one is “some arm’s-length sales may reflect atypical
it? They all qualify as candidates for market motivations or sale conditions due to unusual tax
value. As such, the “cash equivalence” inclusion considerations, lack of exposure on the open mar-
in the list is redundant. ket, [emphasis added] or the complexity of emi
The definition of market value references (in an nent domain proceedings.” (Page 410)
open-ended manner) the financing of a property, The presumption is that the subject property is
but it seems almost irrelevant to the goal of being valued after having been exposed to a com
establishing a uniform basis of value. Why should petitive market for a reasonable period. But can
it matter, as long as the financing is in “precisely market value be determined for a property whose
revealed terms”? This ambiguity produces a exposure period has been different than “reason
choice: either the definition requires an “all able”? In fact, a not-so-rare appraisal assignment
cash” conclusion or it allows for any financing of market value can call for a value conclusion
alternative. The point is, the term market value assuming a “quick sale” or an “auction sale,” in
should be able to accommodate any of these just the same way as an unqualified opinion of
qualifications. value can. The determination of market value for
While the current definition is ambiguous, a property under such conditions would involve
the body of knowledge clearly favors the “cash” the same computations, but in reverse, as with a
standard for the subject property, and the only comparable. The standard that the subject mar
consideration for alternative financing is with ket value only applies to a property that has had
comparable properties (and their adjustment “reasonable exposure in a competitive market” is
under the transactional category). In fact, The unnecessarily restrictive. Again, a simple clarifi
Appraisal of Real Estate, fourteenth edition, cation of what is being valued is all that is needed.
ignores the possibility that something other than
cash can be contemplated by a seller, calling the Undue Duress
adjustment “cash equivalency calculations.” 17 But The current definition of market value ends with
can market value be determined for a property “assuming that neither [buyer nor seller] is under
whose sale will include non-cash equivalency? undue duress.” [emphasis added] This phrase
Consider an owner intending to sell a prop raises two questions: Is there ever a level of
erty while holding a mortgage at precisely duress that is not “undue”? And, can there ever
revealed, but clearly below-market, terms. The be any duress that is consistent with the concept
owner is interested in the property’s value under of a fair sale?
these circumstances. Market value should be In a technical sense, the answer to both ques
able to accommodate such assumptions, answer tions is no. Duress is defined by Merriam-Webster
ing the question, what is the market value of as “compulsion by threat” and by the Business


Dictionary as “coercion to effect an unwilling ble. As such, the current definition’s reference to
person’s agreement to a transaction.” 18 Whether duress is unnecessary and confusing.
it be compulsion or coercion, the result is abso The Uniform Appraisal Standards for Federal
lute. Duress is either present or it is not; and any Land Acquisitions (UASFLA) “set forth the guid
presence is in complete opposition to the notion ing principles, legal requirements, and practical
of a “fair sale.” It cannot be a fair sale if there is implications for the appraisal of property in all
duress in either party. types of federal acquisitions.” 20 The current edi
Can duress be accounted for in the same way tion includes the following mandatory definition
other factors are under the category of conditions of market value:
of sale? Possibly, but not by measuring directly the
impact of duress on the subject property or com Market value is the amount in cash, or on terms reason-
parable. The impact would be manifested indi ably equivalent to cash, for which in all probability the
rectly in the exposure period. It is nearly property would have sold [emphasis added] on the
axiomatic that a transaction cannot occur under effective date of value, after a reasonable exposure time
conditions of duress and also have a reasonable on the open competitive market, from a willing and rea-
exposure time. For example, suppose a seller is sonably knowledgeable seller to a willing and reason-
under duress and prices the property intention ably knowledgeable buyer, with neither acting under
ally low in order to consummate a quick sale. In any compulsion to buy or sell, giving due consideration
such a case, the sale price and the marketing to all available economic uses of the property.21
period might be outliers.19 The former would be a
reason for the latter. Or, suppose a buyer is under This definition has several elements that are
duress (e.g., a 1031 exchange deadline) and offers unique to federal acquisition valuations. First and
full price for a property that just came on the foremost, the provisions of the UASFLA require
market. If most properties of this type sell below the value to be based on an economic highest
listing price, the short exposure period would be and best use. Secondly, the appraiser must assume
an outlier. It is cautioned that there is no substi a reasonable exposure time has occurred but
tute for personal confirmation in determining cannot link the value to a specific opinion of
the validity of a conditions of sale adjustment. exposure time. This second requirement will
Of course, a transaction could involve a dis necessarily result in a jurisdictional exception to
tressed seller or a distressed buyer and not violate the Uniform Standards of Professional Appraisal
the “undue duress” standard. In such a case, no Practice, which requires, “when reasonable expo
conditions of sale adjustment would be appropri sure time is a component of the definition of the
ate. Consider the property owner who is faced value opinion being developed, the appraiser
with imminent foreclosure unless a sale can be must also develop an opinion of reasonable expo
consummated, thereby providing the funds nec sure time linked to that value opinion.” 22
essary to satisfy the mortgage. The owner would Most important to the topic of this article,
certainly qualify as being under duress, but the however, is the specific wording “would have
consequential transaction would only be differ sold.” Here it is clear the amount sought is to
ent from a typical arm’s-length sale in exposure reflect prior exposure on the market preceding
period and presumably sale price; that is, the the effective date of value. This is quite different
owner would consummate a quick sale (through from the wording in the previously cited market
a reduced price), and the most probable selling value definition, which provides the value is
price would be predicated on a quick sale. Again, what the property “should sell for after reason
a market value opinion should be equally flexi able exposure.”
18. See www.merriam-webster.com and www.businessdictionary.com.

19. There is also the possibility that the seller comes under duress during the marketing period. In such a case, the marketing period may be
reasonable, but the sale price would indicate an outlier.
20. UASFLA, 2016 ed., 3.
21. UASFLA, 2016 ed., Section 1.2.4.
22. Appraisal Standards Board, Comment in Standards Rule 1-2, “Problem Identification,” Uniform Standards of Professional Appraisal Practice
(Washington, DC: The Appraisal Foundation, 2020), Lines 467–471.

Ramifications The most probable price, as of a specified date, in cash

The immediate question is, do these seemingly or in other precisely revealed terms, for which the
minor issues in the definitions matter? Yes, they specified property rights would have sold assuming
do. First, these issues create confusion. Second, a specified exposure period in a competitive market,
these issues mean it is unlikely that the value will under all conditions requisite to a fair sale, with the
be right because the valuation answers the wrong buyer and seller each acting prudently, knowledgeably,
question. In an improving market it is likely the and for self-interest.
most probable selling price (the prospective
value) will exceed market value. In a deteriorat
ing market the opposite would be expected. In a Market Rent Issues
flat market the numbers might be the same, but
the conclusion would be similar to a situation in The newly adopted definition of market rent con
which the overall capitalization rate equals the tinues the problematic issue of exposure period
overall yield rate (when income and value are and marketing time. As with the market value
expected to remain level over the projection/ definition, the current market rent definition
holding period). In such a case, the numbers are makes it clear that it is seeking an opinion of how
the same, but a capitalization rate is still not the much in rent the property should bring after being
same as a yield rate. As noted by Harold D. exposed to the open market.25 However, unlike
Albritton, “This question becomes of great con the definition of market value, the definition of
cern when the subject of the appraisal is a special market rent includes no reference to a reasonable
ized manufacturing facility, large resort, or other exposure period so there is nothing to correct the
‘limited-market’ property which may require one reference to the future. Thus, the current defini
or more years to find a qualified purchaser.” 23 tion indicates that it is future rent that is of issue
and, consequently, a (reasonable?) marketing
A New Definition of Market Value time should be associated with the rent. But no
Albritton was correct, and prescient, in con such treatment has been associated with market
cluding, “any estimate of market value must pre rent; instead, it is generally treated as if it had
sume theoretical exposure has occurred by the been subject to an exposure period and is there
appraisal date. Otherwise, the value must be pro fore effective on the date of value. This treat
jected to some future date and labeled something ment is inconsistent.
other than market value.” 24 The prevailing defi For instance, consider the appraisal of a vacant,
nitions of market value and market rent, however, multitenant building. After proper market analy
are not clear about this. The definitions in the sis it is concluded that the building should cap
UASFLA, on the other hand, are perfectly clear. ture 5,000 square feet of demand per quarter.
Those definitions, however, contain some con Although unstated, market rent has an effective
tent that is specific to federal acquisition valua date contemporaneous with the valuation date.
tion and do not always apply to other valuation The question is whether the first portion of space
assignments. The prohibition on linking the is absorbed on the valuation date or whether it
value to exposure time, for example, would not is absorbed at the end of the first quarter. That is,
work other than in federal acquisition situations. is it assumed that the space has been exposed to
A new definition to replace the current, widely the market or is it assumed that the space must
used definition is needed—one that is clear, face a marketing period? This determination will
concise, flexible, and universally applicable. clearly influence the value by influencing the
Therefore, the following new universal defini length of the total absorption period. The impact
tion for market value is proposed: could be compounded if market rents are chang
23. Harold D. Albritton, “A Critique of the Prevailing Definition of Market Value,” The Appraisal Journal (April 1980), 202–203.
24. Albritton, “Critique of Prevailing Definition of Market Value,” 203. We would contend that this statement is equally applicable to market rent.
25. The Appraisal of Real Estate, fourteenth edition, adds confusion with the explanation that market rent is the “rental income a property
would command.” (Page 447)

ing—say increasing at 1% per quarter. In the lat opinion of the market value of the leased fee
ter case, the actual market rent should be interest, then an adjustment for occupancy may
concluded to be 1% higher when the space is not be necessary and the rent may be limited to
actually absorbed and linked to a marketing contract rent.
period of one quarter. Therefore, the following Definitions are often taken for granted. They
new definition for market rent is proposed: are recited and incorporated into appraisals with
out real thought as to their meaning. Inconsis
Market rent is the most probable rent in cash that a tencies and poorly constructed definitions
property would have brought on the effective date of survive for otherwise inexplicably long periods.26
value assuming specific exposure in a competitive and The ramifications are serious. Appraisers suppos
open market and reflecting all conditions and restric- edly providing opinions about the same thing
tions typical of that market. (type of value, category of asset, and rights
appraised, for example) end up answering com
pletely different questions. The reader, client,
Conclusion and public in general are left confused as to why
the resultant numbers are so different. Public
It is important to recognize that the terms market trust is diminished.
value and market rent as stand-alone terms are Cleaning up the definitions of market value
insufficient. Each requires the answer to the and market rent is not that difficult. By doing so
question, market value or market rent of what? If the confusion and uncertainty created by the
what is being valued is an empty building, then careless wording are eliminated. The appraisal
the market value would reflect that condition will be clear as to what is being estimated, and
and the rent would be market rent. If the prop differences between otherwise well-prepared
erty is fully leased, and the market value is an appraisals should be diminished.
About the Authors

David C. Lennhoff, MAI, SRA, AI-GRS, is a senior director with Altus Group US, Inc., which is officed in McLean,
Virginia. His practice centers on litigation valuation and expert testimony relating to appraisal methodology, USPAP,
and allocating assets of a going concern. He has taught nationally and internationally for the Appraisal Institute,
recently in Tokyo, Japan; Beijing and Shanghai, China; Berlin, Germany; and Seoul, South Korea. He has been a
development team member for most of the Appraisal Institute’s income capitalization courses and was editor of
its Capitalization Theory and Techniques Study Guide, third edition. He also was lead developer for the Appraisal
Institute’s asset allocation course, Fundamentals of Separating Real Property, Personal Property, and Intangible
Business Assets, and editor of the two accompanying business enterprise value anthologies, and he authored the
Small Hotel/Motel Valuation seminar. He is a member of RECGA, a national organization of analysts and academi-
cians founded by the late William N. Kinnard Jr., PhD. He is a past editor-in-chief of and frequent contributor
to The Appraisal Journal, and a past recipient of the Journal’s Armstrong/Kahn Award and Swango Award.
Contact: david.lennhoff@altusgroup.com
Richard L. Parli, MAI, is president of Parli Appraisal, Inc., a full-service appraisal firm located in Fairfax, Virginia. He
has been involved in the development of numerous Appraisal Institute courses and seminars, is a coauthor of the
Appraisal Institute text The Valuation of Apartment Properties, and is a professional faculty member of the Johns
Hopkins Carey Graduate School of Business. He has an MBA in finance from the Pennsylvania State University and
is a principal member of the Real Estate Counseling Group of America. He is a three-time recipient of The Appraisal
Journal’s Armstrong/Kahn Award. Contact: rparli@parliappraisal.com
26. See discussion in David C. Lennhoff and Richard L. Parli, “A Higher and Better Definition,” The Appraisal Journal (Winter 2004): 48–49.

Appraisal Institute
• Education
http://www.appraisalinstitute.org/assets/1/7/aiedcat.pdf
• Guide Notes to the Standards of Professional Appraisal Practice

https://www.appraisalinstitute.org/assets/1/7/AI_Guide_Notes.pdf
• Lum Library, Knowledge Base [Login required]

Information Files—Value
• Property Rights Symposium Discussion Paper

http://bit.ly/SymposiumPaper

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by Dan L. Swango, PhD, MAI, SRA
2020 Trends and Beyond

Editor’s Note
This column reports the prognostications of real estate and economic experts going into 2020. In the Emerging
Trends in Real Estate survey discussed here, the economic experts ranked “epidemics” dead last in importance
of issues for 2020. They were wrong. As we go to press, the COVID-19 virus has spread around the world
and been declared a pandemic. This Black Swan event has shaken economies as well as life in general. It is
too soon to tell the full extent of its effects or how long they will last. We hope the discussion in this edition
of Resource Center will provide an interesting perspective on where we were and how dramatically events can
change markets. A future Resource Center column will discuss Black Swan events.
A
new year and a new decade are underway, able online with a free
and you may be seeing media stories download at http://bit.ly
related to the future of real estate. This /PWCTrends2020. The
edition of Resource Center discusses all man- Emerging Trends outlook
ner of resources that summarize the state of real report is now in its forty-
estate markets and offer forecasts on the antici- first year of publication.
pated future of markets. Its goal is to “provide an
Even though real estate market supply, demand, outlook on real estate
and influences are primarily local, analysts and investment and develop-
valuers are wise to be familiar with national and ment trends, real estate
regional changes and trends, as well as market finance and capital mar-
cultural changes that impact the realms of eco- kets, property sectors, metropolitan areas, and
nomics and finance. other real estate issues throughout the United
States and Canada.” (Page 1)
This widely respected publication reflects the
Emerging Trends in Real Estate 20201 views of 750 experts in their specialties, who
were personally interviewed by ULI and PwC
One of the standard resources for a real estate researchers, and over 1,500 survey responses.
market outlook is Emerging Trends in Real There is no black box or marketing slant involved
Estate. This report is published annually by in this report. The names of the members of the
PricewaterhouseCoopers (PwC) and the Urban Editorial Leadership Team, authors, contributors,
Land Institute (ULI). The 2020 edition is avail- advisers, and contributing researchers are shown
For easy, direct access to the URL addresses noted throughout this article, read this column online. Go to http://bit.ly/TAJ_articles and click on
“Latest Issue.” (Login required.) If using the print copy, the longer URLs have been shortened for easier entry.
1. In the Spring 2018 issue of The Appraisal Journal we looked at the 39th issue of Emerging Trends in Real Estate 2018. Take a look back to
see what the publication had to say about the outlook then.

Resource Center
on Page ii; the names of interviewees are listed mance, which “reinforces the optimism about
near the end of the report (Page 96). The affilia- real estate’s ability to withstand a recession.”
tions of those interviewed and surveyed are char- The experts point out, however, that there are
acterized as follows: several areas of relative softness in the economy.
• Private property owner or commercial They suggest,
real estate developer, 27.6%
• Real estate advisory or service firm, 23.6% A defensive strategy might not be such a bad idea right
• Homebuilder or residential land developer, now. For a few years now, commercial property has
12% been “priced to perfection,” meaning that there is little
• Private equity real estate investor, 11% in the way of a safety margin for negative surprises…
• Bank lenders, 6.5% The “emerging trend” for real estate demand in the
• Investment manager/adviser, 6.5% decade ahead is … for dramatically softer demand …
• Equity REIT or publicly listed real estate confidence is one thing, complacency is another. …
property company, 4% some serious attention should be given to the prospects
• Private REITs, institutional lenders, for an extended downshifting in the economy and its
mortgage REIT, debt investor, securitized implication for commercial property demand in the
lender, and others, 12.6% decade ahead. (Page 6)
The content of Emerging Trends in Real Estate Also noted is the environment where capital
2020 is divided into four chapters: “Shifting continues to chase real estate, despite the need
Focus to the Decade Ahead,” “Markets to for some caution.
Watch,” “Property Type Outlook,” and “Emerg-
ing Trends in Canadian Real Estate.” In all sec- The conundrum is real. Investment managers are not
tions, the narrative offers cogent facts, analysis, paid to sit on cash. And yet there is serious risk in an
and conclusions. approach that deploys the capital just because it is there.
The mantra encapsulating a reasoning that one or
Chapter 1, “Shifting Focus to the Decade another investment area must be chosen so that money
Ahead,” in essence presents cautious optimism. can be put to work goes by the acronym “TINA”—
Even in a long, relatively good economic recov- “There Is No Alternative. … There is no doubt about
ery cycle, there are reasons for concern and care- the pressure of capital. The volume of private-equity
fulness—the very fact that the economy has been dry powder is now estimated to exceed $2 trillion,
expanding, and real estate investment healthy with 5 percent or more allocated to real estate. So
for years may be disquieting to some. much money is looking to be deployed in safe fixed-
The report confirms that technology will con- income investments that $12 trillion is now parked in
tinue to present disruption—rendering both risk negative-interest-rate debt instruments in Europe and
and opportunity. The disruption by technology Asia.” (Page 7)
has and will influence demand for various prop-
erty types, uses, design, and features. Change is This chapter draws attention to the risk of anal-
ever present, of course, and accelerates, with ysis relying solely on measures of central ten-
change occurring faster and increasing in terms dency in data:
of both size and scope. One REIT executive
respondent was quoted, “Don’t ask me what One underlying lesson is this: most economic reporting
inning we are in. We are playing cricket!” There and most discussion of real estate markets focus on one
is a satisfaction with current real estate perfor- statistical feature: central tendency, as measured by

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averages and medians. That makes for overreliance on a ing a boost in gross domestic product (GDP)
blunt instrument—as well as encouraging herd behav- from this population’s productivity.
ior. Much more important is the distribution of the
data—the shape of the data curve, its tails, and where a What does it mean for real estate? “None of us
market falls on that distribution. And, for analytical pur- really know,” said our aforementioned promi-
poses, it is helpful to take an unconventional look at the nent interviewee. “We need to put our minds to
way markets that are apparently dissimilar may have fresh thinking and need imagination to consider
surprisingly similar characteristics. (Page 11) the real estate, social, and economic implica-
tions as succeeding generations have not only
The “Shifting Focus” chapter offers a number more years, but better years in which to live,
of other take-aways related to areas of antici- work, and play. (Pages 15–17)
pated change.
• Building features. Climate change is caus- •
Housing problems. Affordability is expected
ing change in features expected in rental to impact housing. The trend is toward a
properties to deal with increasing tempera- reduction in the share of housing made up of
tures. (Page 9) detached single-unit residences. The report
• Capital sources. Capital is widely available, observes that “price recovery [following the
evolving to include an assortment of sources. Great Recession] has outstripped household
In the future, expect more variety in the income. …Rental apartments are also feel-
types of debt funding suppliers. ing the squeeze. …universally [housing
• Demographic changes. One trend already affordability conditions] are ‘challenging…’
underway and expected to continue is the with “construction costs accelerating well
state-to-state population shift. Losses gener- beyond the level of inflation and the increase
ally are affecting northern states, such as New in nominal incomes.” (Pages 12–13)
York and Illinois, while southern states, such •
Community design. We can expect more
as Florida, Georgia, Texas, and North Caro- housing and office properties designed with
lina, are seeing gains. The top-ten growth an increased emphasis on community feel,
markets mentioned in this section are Aus- common areas, and live/work/play in planned
tin, Raleigh/Durham, Nashville, Charlotte, mixed-use environments. (Pages 13–15)
Boston, Dallas/Ft. Worth, Orlando, Atlanta, •
Technology. The march of technology will
Los Angeles, and Seattle. (Pages 10–11) continue to influence real estate, affecting
A second demographic change is the location preferences and desirability of vari-
aging population. Exhibit 1-12, “Growth in ous property types, uses, design, and fea-
Number of Older Americans,” illustrates the tures. Technology’s impact on the retail
expected growth in the population over age sector is well known. Dispersion of technol-
75. The report’s experts acknowledge that ogies such as artificial intelligence (AI) will
there are many unknowns to this change: similarly transform the nature of work and
replace millions of jobs. Exhibit 1-17,
An increase in the population of older Ameri- “Internet of Things Applications Depen-
cans does not necessarily signal a higher dent on the Adoption of 5G,” shows the
“dependency ratio” and a presumed “genera- variety of commercial enterprises that will
tional burden.” ... scientific advances in medi- be impacted by 5G services, including man-
cine and in healthy lifestyles may have positive ufacturing, health care, media and utilities.
implications for seniors’ income potential, yield- While the specific impacts of new technolo-

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gies remain unknown, what can be safely opment prospects in our annual survey.” The
said is that all property types will be top 10 and the “Next 10 Impressive Metro Areas”
impacted by technology and escalating are individually discussed.
property technology—“proptech”—along The other five groupings of markets, however,
with management and marketing of real are clustered “according to relationships between
estate, with more information digitized for the overall prospect scores and other rankings,
analysis and fast response. (Pages 19–21) such as investment flows or population size and
• Infrastructure. Infrastructure deterioration growth rates. For each grouping, a brief explana-
is a major national problem, and state and tion of common characteristics linking the mar-
local infrastructure expenditures are expected kets is offered.” (Page 23)
for rebuilding. The federal governments in For the market rankings, the researchers aug-
2019 promised a $2 trillion in infrastructure mented numbers about size, growth, structure,
investment, but the American Society of geography, and such with meeting with local
Civil Engineers has calculated that the experts in ULI district council focus groups. The
need is for $4.5 trillion between now and results for the 80 metro markets studied are sum-
2025. The Emerging Trends report notes, marized in a number of exhibits:
“Three-quarters of all infrastructure invest- • “Overall Real Estate Prospects” (Exhibit 2-1)
ments occur at the state and local levels • “Homebuilding Prospects” (Exhibit 2-2)
funded by a combination of resources, only • “Local Market Perspective: Investor
some of which are dependent upon federal Demand” (Exhibit 2-3)
funding. ... the trend in the meantime will • “Local Market Perspective: Development/
likely be more influenced by action at the Redevelopment Opportunities” (Exhibit 2-4)
state and local levels.” (Page 22). • “U.S. Industrial Property Buy/Hold/Sell
Recommendations” (Exhibit 2-5)
Chapter 2, “Markets to Watch,” in Emerging • “U.S. Office Property Buy/Hold/Sell
Trends presents six non-conventional groupings Recommendations” (Exhibit 2-6)
in discussing 80 markets: • “U.S. Multifamily Property Buy/Hold/Sell
1. The Top 20 Markets by Overall Prospects Recommendations” (Exhibit 2-8)
2. Major Capital Magnets • “U.S. Retail Property Buy/Hold/Sell
3. Stalwarts, Surprises, and Determined Recommendations” (Exhibit 2-9)
Competitors • “U.S. Hotel Property Buy/Hold/Sell
4. Markets Aligning with Expectations Recommendations” (Exhibit 2-11)2
5. Treasures Ripe for Discovery?
6. Potpourri: Thrifty Choices, Boutiques, The section Markets That Are Major Capital
and Special Situations Magnets discusses individually the markets that
are magnets for investment. These include Man-
In discussing Top 20 Markets, the report notes hattan (with 10% of the nation’s office space),
that these are the markets “that received the Chicago, California’s Inland Empire, Northern
highest scores for overall investment and devel- New Jersey (with its disproportionately high
2. The report includes an interesting map ranking states according to individual income tax levels. States with the lowest individual income tax
rates include Alaska, Florida, South Dakota, and Wyoming. States with the highest individual income tax include California, Hawaii, New
Jersey, and New York. See Exhibit 2-7, Page 34.

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concentrations of industrial property), Houston, In Chapter 3, “Property Type Outlook,” Emerg-

Phoenix, San Diego, Oakland/East Bay, and ing Trends turns its attention to the performance of
Miami. The report notes that over 17% of total various property sectors as they relate to function-
U.S. transactions over the past three years have ality and how real estate is used. This chapter
occurred in these markets. begins with an interesting overview chart on “Pros-
In the section Stalwarts, Surprises, and Deter- pects for Major Commercial Property Types, 2018–
mined Competitors, 12 markets are examined. 2020” (Exhibit 3-1), which shows a side-by-side
This dozen accounted for about 11% of national comparison of investment prospects and develop-
real estate investment in 2016–2018, and 11.7% ment prospects for commercial property types.
in the first half of 2019. The markets addressed The discussion then drills down into the data
here include Philadelphia, Long Island, Fairfield and survey results related to the industrial sector,
County (CT), Westchester County (NY), New multifamily housing (including special focus on
York’s other four boroughs, Minneapolis/St. Paul, senior housing and student housing), single-fam-
Sacramento, Kansas City, Las Vegas, Baltimore, ily housing, multi-use property, office property
Washington DC, and Detroit. The report then (including special focus on medical office),
moves on to discussing Markets Aligning with hotels, and retail and its subsectors.
Expectations, which include several Florida mar-
kets (Ft. Lauderdale, Palm Beach, Tallahassee, Finally, Chapter 4, “Emerging Trends in Cana-
Daytona Beach/Deltona, and Gainesville), Rich- dian Real Estate,” wraps up Emerging Trends in
mond, Maryland suburbs of Washington DC, Bir- Real Estate 2020 with a report on business pros-
mingham, San Antonio, Honolulu, Cleveland, pects and housing trends in Canada. Here, special
Albuquerque, Omaha, Tucson, and Buffalo. note is made of “the rise of real estate as a service
The section Treasures Ripe for Discovery (REaaS) [which] is transforming all areas of real
looks at markets that survey respondents viewed estate. Although coworking is the most common
quite favorably but “are not attracting investment example of REaaS, the concept cuts across prop-
flows consistent with their perceived overall pros- erty types. As the gig economy becomes more
pects.” These markets include Jacksonville, Salt prevalent in Canada, all space—whether residen-
Lake City, Cincinnati, Louisville, Columbus, tial, office, or retail—will increasingly be viewed
Pittsburgh, Greenville (SC), Oklahoma City, as a service that is rentable.” (Page 77) The report
Boise, Des Moines, Spokane, Cape Coral/Ft. notes there has been a significant uptick in discus-
Myers/Naples, Tacoma, and Jersey City. sion among survey respondents related to “prop-
The report also examines various markets in a tech” developments. The interviewees believe
catch-all category, Potpourri: Thrifty Choices, that artificial intelligence, drones, autonomous
Boutiques, and Special Situations. The markets vehicles, robotics, 3-D modeling, and virtual real-
here include some areas with potential but over- ity will have an impact on the real estate industry.3
looked by most others. The 11 markets discussed
are St. Louis, Memphis, New Orleans, Provi- Recommendation. Emerging Trends in Real Estate
dence, Hartford, Virginia Beach/Norfolk, Mil- 2020 is a worthy read for real estate valuers, bro-
waukee, Madison, Knoxville, Chattanooga, and kers, lenders, and others in the field. Emerging
Portland (ME). Trends is a decidedly citable resource, used and
3. Those interested in additional information on market trends in Canada should consult Morguard’s 2020 Canadian Economic Outlook and
Market Fundamentals, at https://bit.ly/37Xr3Dq, and “Tech and Service Sector Will Drive Canadian Commercial Real Estate Market in 2020:
Survey,” from The Logic, at https://bit.ly/2t76F3W.

Resource Center
referenced for over forty years. In addition to the “NAR Real Estate Forecast Summit.” Presenta-
data and analysis, it has names of a host of exception downloadable slides, video summary, and
tional experts in their respective specialties— news release at https://bit.ly/2FI1M40.
potentially valuable resources for valuers and
researchers. Valuers who are looking for even “Housing 2020 Forecast.” Realtor.com at https://
more predictions for 2020 and beyond will want bit.ly/3ayYSwF. This forecast contains expecta-
to take a look at another PwC publication, Real tions for existing-home sale price change, home
Estate 2020—Building the Future (https://pwc sales volume, housing starts, ownership rates, and
.to/30969yG), which looks at the changing real mortgage rates; supply and demand factors
estate landscape and its implications for the real behind home sales; affordability; myth vs. reality
estate investment community. Both Emerging for understanding millennials in the real estate
Trends in Real Estate 2020 and Real Estate 2020— market; what buyers and sellers can expect; metro
Building the Future are quite readable and quot- area sales and price growth breakdown; and the
able, with narrative backed by facts and survey/ outlook and analysis for the “top housing markets
interview results with sources indicated. Opin- of 2020”: Boise City; McAllen-Edinburg-Mission
ions are evident where they appear. (TX); Tucson; Chattanooga (TN-GA); Colum-
bia (SC); Rochester (NY); Colorado Springs;
Winston-Salem; Charleston; and Memphis
Trend Discussions in Association (TN-MS-AR).
Publications
From the Counselors of Real Estate
A number of real estate–related organizations 2019–2020 Top Ten
have weighed in with forecasts for the coming Issues Affecting Real
year, coming decade, and beyond. The following Estate. Report at https://
are items of particular interest. bit.ly/37YPS23. Topics
discussed include infra-
From the National Association of Realtors structure problems and
“Realtor.com Market Outlook.” Presentation costs; housing, particu-
downloadable slides at https://bit.ly/2R9Uk76. larly affordability for
millennials and Gen Z;4
“Construction and Housing Starts Outlook for weather and changing
2019–2028.” Economist Outlook Blog at https:// climate risks; rapid advances in technology and
bit.ly/36LXFQi. resulting problems in cybersecurity, back office
data handling, and specialized skills needed;
“U.S. Real Estate Market Outlook.” Presentation position in economic cycles; political division;
downloadable slides at https://bit.ly/2NfgZO8. capital market risk; population migration and
change; volatility and confidence (financial mar-
“Housing Experts Discuss 2020 Outlook, Hous- ket jitters, performance expectations, and falter-
ing Innovation at Realtors’ Expo.” News release ing demand for residential and commercial
at https://bit.ly/2Nj2KIa. property assets); and public and private indebt-
4. “Millennials”—variously defined, but usually considered people born between 1980 and 1996/2000, now in the 20/24 to 40 age range;
“Gen Z” (also called iGen or post-millennials)—variously defined, but usually considered people born between 1997/2000 and 2020, now
in childhood to age 23.

Resource Center
edness (concern about US consumer debt, delin- for valuers and analysts. It deals with economic
quency rates, and budget deficits). comparisons, sample lease comparisons, and net
present value of occupancy for each lease.
“Cybersecurity of Building Technology: Smart
Cities and Smart Buildings Require Smart Protec- “Valuing Retail Properties.” CIRE article at
tion.” Real Estate Issues at https://bit.ly/35Pztvq. https://bit.ly/2NOCWEb. This article provides a
number of significant insights into the thinking
From the CCIM Institute process for valuation and evaluation of retail
The CCIM Institute’s magazine, Commercial properties. A graph points out the difference
Investment Real Estate (CIRE), offers a number of between investor sales and owner-occupant sales
articles on real estate trends, which are listed (price per square foot) from 2016–2018, which
below. To browse issues for additional articles, go illustrates the margin or difference.
to http://bit.ly/browseCIRE.
“Adapt or Die.” CIRE article at https://bit.ly
“The Retail Revolution Will Be Online.” CIRE /2ui7qHV. In this article, tech experts weigh in
article at https://bit.ly/2uhskGZ, with on- on innovation and its impact on all sectors of
demand linked webinar “Retail e-Volution: commercial real estate.
Predictions for 2025.” This article looks to
the future of retail and influences like autono- “Fitting Plans for the Future.” CIRE article at
mous vehicles for supply lines and consumer https://bit.ly/2TRGTvP. This article examines
deliveries; key design changes likely in retail; new FASB standards for revenues, leases, and
and elimination of some legacy metrics for how loan impairments that affect revenue recogni-
activity is measured. tion, lease accounting, and related matters. This
discussion is important for valuers because it pro-
“Market Trends in Commercial Real Estate.” vides some insight into what market participants,
CIRE article at https://bit.ly/30Gjwqp. This arti- particularly buyers, consider in their investment
cle includes information on capitalization rates decision making. The article is supplemented by
for quick service restaurant properties; recent an embedded webinar video.
developments in land use (pop-up stores, pop-up
parks) and mixed-use property recent develop- 4Q19/1Q20 Commercial Real Estate Insights
ments; and apartment trends, such as increasing Report. Online version at https://bit.ly/2TMdfrM,
need for very short-term storage with security for downloadable PDF at https://bit.ly/2RfcNjR.
deliveries from e-retailers, and box/carton dis- This report addresses the outlook for commercial
posal and recycling provisions. real estate; provides the Green Street Advisors’
Commercial Property Price Index (overall and
“Understanding Quantitative Analysis.” CIRE for commercial real estate sectors);5 examines
article at https://bit.ly/2unR1Bu. This article capital sources; and discusses what could go
deals with analyzing leases, particularly proposed wrong in 2020. This report is well done and well
leases for office space. This is an excellent read documented.
5. As of December 2019. Green Street Advisors (https://www.greenstreetadvisors.com/) is a firm involved in REIT pricing, valuation, and outlook.

Resource Center
From Nareit estate as a service. This report relies on research

Outlook for the Economy, Real Estate and REITs including surveys with analysis by the authors.
in 2020: What to Look for in Uncharted Waters.
Nareit’s latest Economic Outlook report at “#CW2020Trends: What to Watch in Commer-
https://bit.ly/2tbNdTE. This report includes a cial Real Estate.” Cushman & Wakefield info-
link to Nareit’s “T-Tracker” quarterly operating graphic at http://bit.ly/38qe64Z. Lists top-ten
performance series, which has worthy informa- trends for 2020.
tion about past and current trends in REIT
returns. Real Estate and Housing Reports. Wells-Fargo
report series at https://bit.ly/2tM9rvJ. The reports
offer commentary and guides on developments
Trend Discussions within and economic trends in commercial real estate
the Real Estate Industry and housing, with specific analysis of apartments,
office space, student housing, and housing demo-
Across the real estate industry, players also have graphics as well as quarterly “chartbooks.” Also
offered their prognostications. includes US Economic Forecast table for 2020–
2021 at http://bit.ly/2PMoBJd.
“Why Smart Building Technology Buzz Is Living
Up to the Hype.” IoT6 World Today article at “8 Real Estate Market Predictions for 2020.”
https://bit.ly/2tVVStn. Millionacres [Motley Fool] article at https://bit
.ly/2TljNNT. Commentary addresses the outlook
“Smart Buildings Take Hold: 8 Ways Smart Tech for retail, rent control, mortgage rates; home-
Is Transforming Commercial Buildings.” Build- building, venture capital funding, affordable
ing Design and Construction article at https://bit housing, opportunity zones; and clashes over
.ly/30gfapO. multifamily housing developments.
Stability Amid Uncertainty: 2020 U.S. Real Estate

Market Outlook. CBRE report at https://bit.ly Trend Discussions in General Media
/2FIi397. Report addresses overall US outlook as
well as outlook by sector; report is supplemented The following is a sampling of recent articles in the
with a video. general media on business and technology devel-
opments that have implications for the real estate
Deloitte Insights: 2020 Commercial Real Estate industry and property uses, features, and values.
Outlook. Deloitte Center for Financial Services
report; downloadable PDF at https://bit.ly From The Wall Street Journal (WSJ)
/30de6Tt. Report includes sections on the real “Crowdfunding Firms Blow Up the Model
estate industry of tomorrow; sector performance to Survive in Real Estate.” WSJ article at
and expectations for 2020; digitization and per- https://on.wsj.com/2NdJBHR.
sonalization of tenant experience; unlocking the
value of data; artificial intelligence as the analyt- “The Office of Tomorrow.” WSJ article at
ics backbone; cybersecurity and privacy; and real https://on.wsj.com/30c2rnH.
6. “IoT” is an acronym for the “internet of things.”

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“One Architect’s Radical Vision to Replace “A Glimpse of Our Connected Tech Future,
the Open Office.” WSJ article at https://on Courtesy of CES 2020.” NYTimes article at
.wsj.com/2shygPI. https://nyti.ms/37QVZ8m.
“Tech That Will Change Your Life in 2020.” WSJ From Forbes
article at https://on.wsj.com/2uDi63X. “2020 Real Estate Outlook: Expert Predictions
for Mortgage Rates, Home Prices, Tech, and
“Manufacturers Showcase AI Developments at More.” Forbes article at https://bit.ly/35LmLh3.
CES.” WSJ article at https://on.wsj.com/2Tcaa3P. This article offers general forecasting and is
based on some well-founded research from cited
From The Washington Post (WaPo) resources.
“Experts Predict What the 2020 Housing Market
Will Bring.” WaPo article at https://wapo.st “Lower Interest Rates and the Long-Term Out-
/2R3IPhA. This article looks at the outlook for look for Commercial Real Estate.” Forbes article
2020 using information from Redfin, Zillow, at https://bit.ly/36KjtM9.
Realtor.com, Mortgage Bankers Association,
National Association of Realtors, National Asso- “The Future Is Now: Five Smart Building Fea-
ciation of Homebuilders, and Bankrate.com. tures Transforming Today’s Workplace.” Forbes
article at https://bit.ly/2sm4FVi.
“The Conundrum Affordable Housing Poses for
the Nation.” WaPo article at https://wapo.st
/2sZm7iR. Conclusion
From The New York Times (NYTimes) The outlook publications discussed here offer
“What You Need to Know about 5G in 2020.” significant information on trends expected to
NYTimes article at https://nyti.ms/3awXbzi. impact real estate development, capital invest-
This article looks at the emerging 5G system ment, and financial prospects. Analysts and
and how it will impact not only phones, but valuers should take advantage of the many
also the internet of things and developments in resources available that help them key into
artificial intelligence. issues on the horizon.
About the Author

Dan L. Swango, PhD, MAI, SRA, is president of Swango Real Estate Counseling and Valuation International
in Tucson, Arizona. He is experienced in valuation and consulting involving equity investment, debt security, risk
reduction, profit optimization, estate planning and settlement, buy/sell opportunities, and eminent domain. Swango
is an instructor and communicator with domestic and international experience. He is namesake of The Appraisal
Journal’s Swango Award, past Editorial Board chair and editor-in-chief of The Appraisal Journal, and a current member
of the Journal’s Review Panel. Contact: danswango@yahoo.com
If you know of additional resources of interest to real estate analysts and valuers—or would like to suggest topics for
this column—please contact the author.

Book Review
by Warren Klutz, MAI, SRA, AI-GRS
Chronicles of an Appraiser
T
he chronicles of Henry “Hank” J. Wise’s
thirty-five-year career as an appraiser and
witness are dispensed with humor and
humility in It’s Only an Opinion: An Appraiser
in Court. The author’s experiences are as varied
as his education, which includes an academic
background in political science and economics
and teaching for the Appraisal Institute, the
University of North Carolina, and West Geor-
gia College. Wise’s participation in diverse
appraisal litigation assignments provide the
background for lessons learned throughout the
author’s professional life, which he candidly
shares with the reader.
One of the early lessons learned by the author
is from a seemingly innocuous factual error he
made when a lender client furnished an incom-
plete photocopy of a survey with a missing
dimension he understandably overlooked, which
resulted in a value error of less than one-half per-
cent that was discovered during court testimony.
The error resulted in the lender client going
through the foreclosure process twice, and the
author’s errors and omissions insurance carrier
was obligated to pay back the appraisal fee and
about $25,000 in other costs to the lender client
as a settlement. Yes, it was the same lender client
that furnished the incomplete copy of the survey. It’s Only an Opinion: An Appraiser in Court
Wise uses this event to advise that appraisers sel- by Henry J. Wise
dom get into trouble for an error in judgment but Published by Old Stone Press, Louisville, KY, 2019,
can get into serious trouble for a factual error. 216 pages; $24.95 softcover, $7.99 Kindle
The lesson conveyed is to check all the facts per-
sonally and trust no one to do your job.
Chapter 2 is devoted to the author’s journey in ers as well as their related designations. The
becoming an appraiser, earning the Appraisal expert witness function is explained in Chapter
Institute’s MAI designation in addition to two 3. Chapter 4, “Appraisal Is a Stinking Business,”
master’s degrees, and the certified business follows, with a discussion about a condemnation
appraiser (CBA) certification. Information is court case involving a rendering plant used for
provided detailing a brief history of the Appraisal converting dead horses, cows, spoiled meat, and
Institute and the Society of Real Estate Apprais- restaurant grease into marketable commodities

Book Review
used in various products. The courts in Georgia from hearing the superior qualifications of the
allow testimony and awards for loss of business other side’s expert witness.
value in condemnation cases, and the ruling on The definition of an appraisal is discussed in
the rendering plant case clarified Georgia law Chapter 7 along with different report types and
when a condemnation results in the closing of a what should be included in the report. Form
business. Additional unique, instructive assign- reports are mentioned as the type usually used
ments are discussed in Chapter 5. by the Georgia Department of Transportation
In Chapter 6, “Litigation Support,” the author and other state departments of transportation.
opines that the expert witness has about two While much of the work performed for litigation
minutes of the jurors’ attention after they have involved appraisals prepared for departments
listened to a pronouncement of the appraiser’s of transportation and other condemning author-
qualifications. He suggests the jurors are not ities, the author’s work is not limited to this
going to listen to the appraiser’s arguments after segment of the appraisal business. Chapter 8,
the initial two minutes but will decide which “Up to Our Ass in Alligators,” discusses one
expert witness they like better. In order for the of the most significant studies performed by
expert witness to have a jury’s trust, the jury must the author and his firm—appraisal of the Ever-
like the witness. Further, Wise maintains the jury glades. This assignment involved the study of
members must like the witness before they will approximately 2,500 sales in the East Everglades
accept the opinions offered. and Big Cypress swamp to be used by the Envi-
Wise stresses the importance of his professional ronment and National Resources Division
designations, advanced academic degrees, pub- (ENRD) of the US Department of Justice in the
lishing, and election to office in professional condemnation of more than 2,000 separate
associations as avenues for gaining credibility parcels in the Everglades. A key point of this
and distinguishing himself as an expert. Wise chapter is “what to do when there is too much
notes that quite often, knowledgeable opposing data.” In this instance, the analysis incorporated
a stepwise multilinear regression model to deter-
mine the impact on value for ten to eleven
In Chapter 6, “Litigation Support,” the author variables, such as location on a paved road,
proximity to a bridge to gain access, and date of
opines that the expert witness has about two minutes sale. (Interested readers can access the study at
http://bit.ly/ENRD_everglades.)
of the jurors’ attention after they have listened to a In Chapter 9, marketability and liquidity dis-
counting are discussed, especially in relation to
pronouncement of the appraiser’s qualifications. family limited partnerships, limited liability
companies, limited liability partnerships, and
minority interests. The author’s skills in business
legal counsel will attempt to dispense with the valuation expanded his client base. Various case
expert voir dire (establishment of the expert’s studies involving the appraisal of mines, miner-
qualifications) if the qualifications of the oppo- als, caves, and wells will be of interest to most
nent’s appraiser are far superior to those of their real estate appraisers. Some appraisers’ appetites
witness. The opposing legal counsel will simply for business valuation entry may be whetted by
accept the appraiser as a qualified expert witness the author’s brief discussion of business appraisal
before the voir dire in order to prevent the jury techniques and opportunities.

Book Review
Wise’s experiences with the appraisal of rail- explained through examples the author has used
road right of ways, pipelines, fiber optics, and in teaching, and these give the reader a clear
community antenna television corridors are understanding of the terminology used in con-
presented. Eminent domain, inverse condem demnation appraising. Consequential damages
nation, and the cost of litigating are explained and proximity damages are discussed in Chapter
in layman’s terms with examples that provide 16, along with business value loss available in
recommended reading for parties embroiled in condemnation cases within some jurisdictions.
such affairs. Chapter 13 offers advice to property
owners who may find themselves dealing with
condemnation authorities. An interesting and Eminent domain, inverse condemnation, and the
frank discussion on percentages used for tempo-
rary and permanent easement values is presented, cost of litigating are explained in layman’s terms
and a somewhat unique discount adjustment is
suggested when temporary easements are based with examples that provide recommended reading
on land rent for the time covered by the ease-
ment. The crux of most disputed condemnation for parties embroiled in such affairs.
cases involves the difference in highest and best
use opinions of the property after the taking as
perceived by the opposing parties’ appraisers. Here, Wise uses entertaining and interesting
Usually, not much difference is found between scenarios to illustrate concepts. The importance
the dueling appraisal witnesses regarding the of highest and best use determination for con-
value of the acquisition; however, the larger condemnation appraising is demonstrated through
demnation awards are attributable to the dam- an example where a shopping center’s potential
ages (loss in value after the taking), and several use dramatically changed after a highway project
examples demonstrate the point. impacted the access to the property. The case
In Chapter 15, on senior living facilities, the was settled when the property owner-developer
author examines units of comparison, differences produced two competing shopping-center devel-
in level of services offered by segments of the opers as witnesses to testify regarding the impact
market, property tax considerations, and extract- on value caused by loss of adequate access to
ing business value of the going concern. Apprais- the condemned property and how this resulted
ers are cautioned to exclude values for intangibles, in a change in highest and best use. Normally,
such as membership payments, personal property, changes in access, such as installation of high-
a trained and organized workforce, and business way medians, are not compensable as they are
value that should not be considered in appraising considered police actions for safety. However,
senior living facilities for real property tax pur- when the access after taking results in a change
poses. Wise suggests clues that indicate a prop- in highest and best use, compensation may be
erty has intangibles, including the number of available to the property owner as exhibited in
persons employed to operate the property, the the shopping center case.
degree of a trained workforce required, the cost of Another example looks at the author’s
consumables, and the level of services offered. involvement with a court case dealing with the
The author also examines the types of benefits Oceana Naval Air Station in Virginia Beach,
and damages that affect valuations in condem- Virginia. This assignment is used to demonstrate
nation. Special benefits and general benefits are how he estimated loss in value to a number of

Book Review
properties in close proximity to increased Navy The author’s humorous experience during
flight operations and the accompanying noise cross-examination in that case provides an inter-
caused by low-flying fighter jets. Demonstration esting conclusion to the subject of business value
of the use of Day-Night Level Decibel or DNL loss in Chapter 18.
measurement techniques by the author in the A broad appraiser audience will benefit from
Oceana Naval Air Station case should provide the techniques, appraisal models, and life
appraisers with a model for estimating property encounters offered by Henry J. Wise in It’s Only
value loss in other scenarios where noise impacts An Opinion: An Appraiser in Court. Wise exam-
the market acceptance or dissatisfaction with ines a variety of appraisal subjects using his per-
varying noise levels. Almost 3,700 sales and sonal experiences, and the reader will certainly
resales of the same houses, before and after the relate to the perspectives he presents. New
substantially increased flight operations, were appraisers will find it an excellent supplement
analyzed using SAS software. to their textbooks, and experienced appraisers
For appraisal assignments involving hotels, will receive a dose of motivation and stimulation
nursing homes, hospitals, and other property to review and delve deeper into the use of addi-
types that have an element of intangible value, tional appraisal tools and methods.
about half of the states permit the property
owner to claim business damages in condemna-
tion cases. Sometimes a property owner’s finan- About the Reviewer
cial records do not reflect receipts that should Warren Klutz, MAI, SRA, AI-GRS, MS, MBA, CCIM,
be estimated, and Wise encountered such a is the principal in the firm Warren Klutz & Co., based in
case in appraising an adult entertainment store. Bristol, Tennessee.
To obtain books reviewed in The Appraisal Journal, please contact your local or online bookseller.

Directory of 2019 New Designees
Appraisal Institute Members Earning

Their Designations during 2019
The Appraisal Institute’s designations have long educational requirements, exams, and reviews to
been recognized as marks of excellence in the earn the designations, and they keep current in
field of real estate valuation and analysis. their knowledge through participation in con-
Achieving an Appraisal Institute designation tinuing education programs.
signifies that an appraiser has gone above and The Appraisal Institute congratulates the fol-
beyond the education and experience needed for lowing new designees.
state certification. Members submit to rigorous
Evan Abramowitz, MAI Vahid Felipe Beebe, MAI Eben P. Bryant, MAI,* AI-GRS
Jill M. Adams, MAI,* AI-GRS Todd Belcher, SRA Stephen G. Bryant, MAI
Hernan Agurto, MAI* Clayton Belger, MAI Marianne H. Busher, MAI
Mary Allen, SRA Joseph P. Benincasa, MAI Stacey L. Cantola, MAI
Masayo Kimoto Allen, MAI* Dale K. Berry, MAI Cesar Servando Cantu Martinez,
Paul A. Ambrose, MAI* Brandon Gregory Bess, MAI MAI,* SRA,* AI-GRS
Adam Anderson, MAI, AI-GRS William M. Best, MAI Rick L. Carlile, MAI,* SRA
Matthew D. Anderson, MAI Nikolas R. Bex, MAI Lynn Carmichael, MAI,* AI-GRS
Scott Matthew Anderson, MAI Amy Blackman, MAI Jill M. Carnahan, MAI
Madhuri Rosemary Anji, MAI Scott M. Blasingame, MAI Mark Cartin, MAI
Lorraine M. Apiecionek, MAI,* Ben R. Bolinger, MAI,* SRA Rolando F. Castro, MAI
AI-GRS Gregory A. Bonneville, MAI Kyle Catlett, MAI
Jerardo Arciniega, MAI Stacey D. Bosch, SRA,* AI-RRS Deborah A. Cerilli, SRA
James E. Arnett, MAI Michel I. Bourbonnais, MAI David E. Chamberlain, MAI
Jonathan W. Asker, SRA,* AI-RRS Matthew D. Boxberger, MAI Jonathan Chambre, MAI
Robert S. Bacon, MAI Mary J. Brasel, MAI,* AI-GRS Tony Chapman, MAI
David Baehr, MAI Daniel R. Brauning, SRA,* AI-RRS Michael Chappell, MAI
Wyona Rene Bagley, MAI Douglas A. Bremer, MAI John A. Charters, MAI
Jeremy Bagott, MAI,* AI-GRS David G. Brewer, AI-GRS Robert S. Chelus, AI-GRS
Timothy J. Bailey, AI-GRS James B. Bridge, MAI Lana D. Chiappetta, MAI,* AI-GRS
Chesney S. Baker, MAI,* AI-GRS Charles Brigden, MAI Michael F. Clifford, MAI
David Todd Ballenger, SRA,* AI-GRS Colby Brockman, MAI Erik N. Coglianese, MAI
Jonathan B. Banz, MAI,* AI-GRS Julie A. Bromann, AI-GRS Jonathan D. Cole, SRA
Barak A. Baruch, MAI Brandon Miles Brooks, MAI Malcolm H. Coleman, MAI,* AI-GRS
Blair E. Bates, MAI,* AI-GRS Gary Stephen Brown, MAI Timothy Comer, MAI
Daniel E. Bates, MAI Matthew Brown, MAI William A. Condon, AI-GRS
F. Blynn Beall, MAI Michael S. Brown, SRA Clayton P. Conn, MAI
*Indicates previously earned designation.

Matthew M. Connolly, AI-GRS Sean Raymond Elston, MAI Timothy S. Graham, SRA
William P. Converse, MAI Matthew Todd Ericson, MAI Christopher S. Grajek, MAI
Joseph A. Cormier-Knopp, MAI David J. Eshelman, SRA,* AI-RRS Jason Albert Graves, MAI
Richard G. Corsa, MAI,* AI-GRS Andrew T. Essington, MAI,* AI-GRS Nickolas J. Graves, MAI
Charles A. Corson, MAI John B. Evans, SRA Randal Grenier, MAI
Constance M. Covert, MAI,* AI-GRS Virginia C. Evely, MAI Jeffrey Haderthauer, SRA
Megan F. Craig, SRA Stephen Ewan, MAI Daniel Haire, MAI
Cary Lee Crain, MAI John D. Fahland, MAI,* SRA,* AI-RRS Jonathan A. Hale, SRA
Joseph D. Crescio, MAI Nicholas Farrar, MAI Carrie Rae Hall, MAI
Dennis G. Cronk, MAI,* AI-GRS Greg A. Farrell, MAI,* SRA,* AI-GRS, John W. Hallmark, SRA
Elizabeth S. Cross, MAI AI-RRS Melissa J. Hamilton, MAI
Kelly A. Crouch, MAI Rachel A. Feldman, SRA,* AI-RRS Sierra Hamilton, AI-GRS
Tommie M. Crowell, MAI,* SRA,* Thomas S. Fernwood, MAI,* AI-GRS Ronald H. Hand, MAI
AI-GRS Blake Andrew Fertitta, MAI James Hannum, SRA,* AI-RRS
Lourdes N. Cruz Negron, MAI,* Sean T. Finnerty, MAI Phillip D. Hanshew, MAI,* AI-GRS
AI-GRS Derek Fisher, MAI Russell B. Hardeman, MAI
John P. Daly, MAI,* AI-GRS Brendan M. Flynn, MAI Danny Boyd Harrison Jr., MAI,*
Jeffrey Dang, MAI Emmitt L. Ford, AI-GRS AI-GRS
Carlos A. de la Fuente Herrera, MAI,* Maureen Fox, MAI David R. Harry, MAI,* AI-GRS
SRA Donald P. Franklin, MAI Robert Alan Hartner, MAI
Daniel J. Dean, SRA,* AI-RRS Matthew V. Franklin, MAI Dustin Hawkins, MAI
Ralph John DeBee Jr., MAI David Fuglsang, MAI D. Randall Henderson, MAI
Jan L. Decker, MAI,* SRA,* AI-GRS Sherrie Lisa Galderisi, SRA,* AI-RRS Devin J. Henery, MAI
Luis F. Delgado-Robles, SRA Laura Gallagher, SRA Michael H. Henry, SRA
Sean Delzell, MAI Patrick K. Gallagher, SRA John C. Hereford, MAI
Ryals Blake Dent, MAI Joslyn Galloway, SRA Oscar L. Hill Jr., MAI,* SRA,* AI-GRS
Brent Dickey, MAI Michael J. Garcia, MAI Evan J. Himel, MAI
Eric Dicus, MAI Bradley Brownell Gauchat, MAI Norman Clement Hingle, SRA
Jacob Christian Dietz, MAI Ionut “John” Gavrilescu, MAI Teresa M. Hoberg, MAI
Bruce E. Diller, MAI,* SRA,* AI-GRS Alan R. Geerdes, MAI Tina C. Holton, MAI
Jose R. Diogo, SRA,* AI-RRS Eric R. Geiser, SRA Matthew Holtz, MAI
Michael L. Dixon, MAI Howard C. Gelbtuch, MAI,* SRA,* Samuel R. Horner, MAI,* AI-GRS
Andrew W. Dorr, MAI AI-GRS Kelly L. Horton, SRA
Matthew Dostoomian, MAI Trenton J. Gelmici, MAI Thomas P. Horton, MAI
Jim R. Driskill, MAI, SRA M. Andrew George, MAI,* SRA Donna J. Howard, MAI
Douglas V. Duda, MAI, SRA* Gregory T. Gerken, MAI,* AI-GRS Andrew Hoyle, MAI
Gregory A. Dupes, MAI Cyndi J. Gianneschi, AI-GRS Lauren L. Hubel, MAI
Lane Duplechin, SRA Michael Gillespie, MAI Caleb D. Huene, MAI
Ryan Dynes, MAI Tim Paul Gillespie, MAI Jacqueline L. Hujar, MAI, AI-GRS
Richard Duane Earley, MAI Benjamin T. Godbey, MAI,* AI-GRS Christine C. Hume, MAI,* AI-GRS
Matthew B. Elder, MAI Marsha L. Goff, MAI,* AI-GRS Matthew A. Hummel, MAI
Niccola L. Ellefson, MAI,* AI-GRS Arthur M. Goldsmith, MAI,* AI-GRS David Ibarra, MAI
Brent Elliott, MAI Laura A. Gourlay, MAI,* AI-GRS Stephen D. Ihrig, SRA
Chad M. Ellis, MAI Brian T. Graham, MAI Ronald W. Inman, SRA,* AI-RRS

Jaime Isern, MAI, SRA Michele A. Lawrence, AI-GRS Kendall S. Mitchell, MAI
David L. Ivey, AI-GRS Blaine W. Layton, MAI,* AI-GRS, Matthew Heffernan Mitchell, MAI
Charles E. Jack, MAI,* AI-GRS AI-RRS* Travis J. Mleynek, MAI
Timothy Jackson, MAI Daniel Lee, MAI, AI-GRS* Herman H. Monge, MAI
Sondra Jacobowitz, AI-GRS Julia A. Lee, SRA Mauricio Montanez, MAI
Eric C. Jennings, MAI,* AI-GRS Michael Lennon, MAI David W. Moore, MAI
Pedro Davi Jimenez, MAI Clint H. Lentfer, SRA Mark Moore, MAI
Tyler Seth Johnson, MAI Jason A. Letman, MAI,* AI-GRS Philip E. Moore Jr., MAI,* AI-GRS
William “Bill” W. Johnson, MAI Amber Chi Lin, MAI Deborah Elaine Moran, SRA,* AI-RRS
Thaddeus Clayton Jones, MAI Terry P. Little Jr., MAI Greyson Steele Morgan, MAI
George L. Kallhoff, AI-GRS Elaine Liz-Ramirez, MAI,* AI-GRS Jordan Chase Moses, MAI
Ryan Kane, MAI Joseph G. Lolli, AI-GRS Michael L. Mullenix, MAI,* SRA,*
Vince M. Kapadia, MAI Micah Long, SRA AI-GRS
Trisha L. Karki, MAI, AI-GRS* Susan E. Long, SRA,* AI-RRS David Naranjo, SRA
Alden Katagihara, MAI Kimberly A. Lorenz, MAI, SRA* Bradley Jeff Neese, MAI
Michael Kern, MAI,* AI-GRS Thomas W. Lott, MAI,* AI-GRS Samuel Nelson, MAI
Jess E. Ketchum, MAI Jonathan Granville Lowe, SRA Georgia L. Nichols, MAI,* AI-GRS
Nadeem Khawaja, SRA,* AI-RRS Christine L. Mackaman, MAI,* L. Rae Nomura, MAI
Brian N. Kirkpatrick, SRA AI-GRS Maria A. Nucci, SRA
Sushuma R. Kistner, MAI,* AI-GRS Joshua D. Mackoff, MAI William P. O'Bryan, MAI
Jon Kline, MAI,* AI-GRS Matthew M. Magdziarz, MAI,* Chad O'Hair, MAI
Edward Knoedler, MAI AI-GRS Robert A. Ohana Jr., MAI
Kevin Kochensparger, AI-GRS Robert R. Mancini, MAI Kevin O'Harra, SRA
Robin M. Kong, MAI Bracken J. Mannion, MAI,* AI-GRS Shannon Okada, MAI
Mark J. Kopcho, SRA,* AI-RRS Jeremy Gordon March, SRA Seun O. Olatoye-Ojo, MAI
Deloris L. Kraft-Longoria, MAI,* Jeb Marsh, MAI Bonnie J. Oletzke, SRA,* AI-RRS
AI-GRS Callen C. Martin, MAI Kara A. Olson, MAI
Peter A. Krumm, SRA,* AI-RRS Lucas Kevin Martin, MAI Brian A. O'Neill, AI-GRS
Jonathan G. Kuzma, MAI Rickey D. Martin, MAI James M. O'Neill, MAI,* AI-GRS
Thomas P. LaBelle, MAI,* AI-GRS Nicholas Masella Jr., MAI Stephen R. O'Toole, MAI
Eileen M. Lach, MAI Derek R. Mason, MAI J. Dexter Outlaw, MAI
Gregory P. Laikind, MAI Kenneth E. Matlin, MAI,* SRA,* Shawn H. Overton, SRA, AI-RRS
Adam L. Lalim, SRA,* AI-RRS AI-GRS John C. Palmer, MAI
Francine K. Lam, MAI,* AI-GRS John Francis McAlpine, MAI Eric M. Pantelic, MAI
Laura Lamont, SRA Amy C. McClellan, MAI, SRA* Michael E. Patterson, MAI,* SRA
Charles Gregory Lamunyan, SRA,* Steven W. McClelland, SRA, AI-RRS Terri F. Patton, MAI,* AI-GRS
AI-RRS Robert McCormack, SRA,* AI-RRS Brent D. Pederson, MAI
William J. Lanciloti Jr., SRA,* AI-RRS Neill F. McDonald, MAI,* AI-GRS Steven Pejza, MAI
Susan Landau, SRA Nicole McDonnell, MAI Robert J. Perkins, MAI,* AI-GRS
Wade J. Landreville, MAI Timothy McFadden, MAI,* AI-GRS Thomas E. Peters, MAI
Alberto E. Lanza-Barriere, MAI Samuel J. McGehee, MAI Brandon Petiya, MAI
Jack R. Lavoie, SRA,* AI-RRS Brenda McNaney, AI-GRS Joseph E. Petrocine, MAI,* AI-GRS
David A. Lawrence, MAI,* SRA,* Andrew Meschewski, MAI J. Michael Phillips, MAI
AI-GRS, AI-RRS* Garrett J. Mickal, MAI J. Nathan Pippin, SRA

Louis J. Pitoni, SRA Linda M. Sepso, SRA,* AI-RRS Jonathan James Uhl, SRA,* AI-RRS
Richard A. Plock, MAI Jonathan T. Serpa, MAI John H. Urubek, MAI,* AI-GRS
Matt Pomeroy, MAI Derek R. Shaner, MAI Sarah Jane VandenBerg, SRA, AI-RRS
Courtney R. Prentice, MAI, SRA Don Paul Shearer, MAI Cynthia W. Vandiver, SRA,* AI-RRS
Matthew Bryan Pridgen, MAI Nao Shibata, MAI Andrew J. Vinton, SRA
Jeffrey Stuart Protzel, MAI Bettina D. Sholk, MAI,* AI-GRS S. Joseph Vlaskovits, MAI
William S. Purtell, SRA Matthew C. Sloan, MAI,* SRA Ashley R. Voitier, AI-GRS
David C. Randall, MAI,* AI-GRS Alison K. Smeltzer, SRA,* AI-RRS Charles E. Volk, SRA
Andrew M. Re, SRA Mark V. Smeltzer Jr., MAI, AI-GRS Allan Waller, SRA
Katherine B. Rector, MAI Corey S. Smith, MAI,* AI-GRS John F. Walter, MAI
J. Michael Redd Jr., MAI Zachary C. Smith, MAI Bradley G. Wardrop, MAI,* SRA
Todd A. Redington, SRA,* AI-RRS Kurt F. Smook, MAI John F. Watt, MAI
Christopher D. Remund, MAI Janet Snyder, MAI J. Marshall West, MAI, SRA
Kristin B. Repp, MAI Richard M. Solomon, SRA Louis Whitaker, SRA
Alexis Reyes, AI-GRS Daniel Scott Stadnick, SRA Janice M. Wildman, MAI,* AI-GRS
Blake A. Ridings, MAI Jason Frank Stastny, MAI Lisa C. Wilkens, AI-RRS
Nikolas Ivan Rieser, MAI Janet M. Steuck, MAI Carrie M. Williams, SRA
Alison E. Roach, MAI John B. Stevely, MAI,* AI-GRS David A. Williams, MAI,* AI-GRS
Kathryn C. Robinson, MAI Christopher B. Stickney, MAI Lindsey M. Willis, MAI,* AI-GRS
Ricardo Rodriguez, MAI Aaron D. Still, MAI Michael W. Wilson, MAI
Michael J. Rohm, MAI Zane C. Stone, MAI Jonathan Winn, MAI
James A. Rohrig, MAI,* AI-GRS Christian K. Stott, MAI Richard F. Wolf, MAI,* SRA, AI-GRS
Eric E. Roman, MAI Jeffrey T. Strottman, MAI,* SRA,* Christopher P. Wong, MAI
Joseph B. Rosen, MAI,* SRA,* AI-GRS Linda L. Woodward, SRA,* AI-RRS
AI-GRS William H. Summerour, MAI Stephen M. Worthy, AI-GRS
Melissa Roundtree, MAI Beth L. Surber, MAI Xian Yang, MAI
Jefferson I. Ruiz, SRA,* AI-RRS Greg C. Sutton, MAI Bryson T. Young, MAI
Benjamin L. Rumsey, MAI Philip J. Swartz, AI-GRS,* AI-RRS Megan Zanchettin, MAI
Anne M. Ruscak, MAI,* AI-GRS Daniel J. Sydor, MAI Adam K. Zimmerman, MAI
Timothy W. Ryan, MAI Andrea J. Sylvester, MAI
Marcos E. Salas, MAI, SRA,* AI-RRS* Mark Tekirian, MAI
Mark Timothy Saleh, MAI Robert Edward Terry, MAI
Steve Salerno, MAI Brad Tharp, MAI, SRA*
Arturo M. Salinas, MAI Ashleigh Thoman, MAI
Michele Salvati, MAI Jacob P. Throndsen, MAI
Anthony L. Salvitti Jr., MAI, SRA* Ann Thurman, SRA
Barton C. Sands, MAI Lisa E. Toback, MAI
Taylor Santoro, MAI Sean Toddy, MAI
B. Kyle Saylors, MAI,* SRA Dwight N. Tokuda, AI-RRS
Gregory K. Schmid, MAI Gretchen Tolksdorf, SRA
Daniel Schmidt, MAI John Tolve, MAI
Eric J. Schmitt, MAI Lewis Tonks, AI-GRS
Robert G. Schwarz, MAI,* AI-GRS Matthew Trimble, MAI
William B. Seippel, MAI Megan G. Tursi, MAI,* AI-GRS

Appraisal Institute Publications
Risk Management for Real Estate Appraisers

and Appraisal Firms
by Peter T. Christensen, Esq., with contributing author Claudia L. Gaglione, Esq.
Facing a lawsuit is a scenario that most appraisers

would rather not think about, but it is a reality
of the valuation profession. Risk Management
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Presenting information based on published
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ers get sued, the elements of the most common
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Strategies for mitigating risks relating to the
operation of appraisal firms are also discussed.
Risk Management for Real Estate Appraisers and
Appraisal Firms will help appraisers assess their
liability and take steps to lessen their risk and
protect their appraisal practices.
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The

Revisiting Market Value

COLUMNS & DEPARTMENTS

63 Directory of 2019 New Designees

Principles for Calculating AVM Performance Metrics

30 Long-Term Leases: Rent Reset Analysis

Revisiting Market Value and Market Rent

67 New Appraisal Institute Publications

COVER PHOTO: Getty Images

www.appraisalinstitute.org Winter 2020 • The Appraisal Journal i

Jefferson L. Sherman, MAI, AI-GRS, President

Stephen T. Crosson, MAI, SRA, Editor-in-Chief

Design and production services provided by Grayton Integrated Publishing: www.graytonpub.com.

ii The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

The Appraisal Journal Academic Review Panel

*Statistics Work Group member

www.appraisalinstitute.org Winter 2020 • The Appraisal Journal iii

Jefferson L. Sherman, MAI, AI-GRS

Sherman has served nationally on the Board of

Sherman has been a real estate professional for 45

iv The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

Important Foundational Concepts

www.appraisalinstitute.org Winter 2020 • The Appraisal Journal v

Recent Court Decisions on Real Estate

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2 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

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4 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

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6 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

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8 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

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10 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

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12 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

About the Author

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Principles for Calculating

Introduction tant. First, the Interagency Appraisal and Eval­

14 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

AVMs are dependent upon AVM vendors to Review of the Literature

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Exhibit 1 Glossary of Common AVM Performance Metrics

AVM Performance Metric Abbreviation Definition (Source)

Coefficient of Dispersion COD The average percentage deviation of the AVM’s

Coefficient of Variation COV The standard deviation divided by the mean

Failure Rate None The complement of the PE bucket (Ecker, Isakson,

Forecast Standard Deviation FSD The standard deviation of a set of percentage

Hit Rate None The percentage of properties for which an AVM

18 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

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Exhibit 2 Location of House Sales in Cedar Falls, Iowa

520.0 520.1 520.2 520.3 520.4 520.5

¡ 2012 Sales + 2011 Sales n Target Property

20 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

Exhibit 3 TVM Performance Metrics

AVM Metric Value

www.appraisalinstitute.org Winter 2020 • The Appraisal Journal 21

Model 5 8%–Forecasted Standard Deviation

22 The Appraisal Journal • Winter 2020 www.appraisalinstitute.org

30 Long-Term Leases: Rent Reset Analysis

Introduction tant. First, the Interagency Appraisal and Eval

performance metrics following this fifth princi Discussion and Conclusions