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Q1 2019 Washington Report

Jan. 29, 2019

The Appraisal Institute’s Washington Report and State News quarterly e-newsletter summarizes AI’s recent federal and state legislative, regulatory and related activities in representing the interests of Designated Members, Candidates for Designation, Practicing Affiliates and Affiliates.  

ON THE HILL                                                                                

President Trump on Dec. 21 signed two pieces of legislation that link the Small Business Administration’s appraisal threshold to the threshold for commercial real estate as established by the federal bank regulatory agencies. The legislation is HR 6347, the 7(a) Real Estate Appraisal Harmonization Act, and HR 6348, the Small Business Access to Capital and Efficiency Act.
 
The SBA appraisal threshold has long been set by statute at $250,000. Now, SBA 7(a) and 504 loans involving commercial real estate below $500,000 no longer require an appraisal. 
 
An Appraisal Institute analysis revealed that approximately 65 percent of SBA 7(a) loans already were exempt under the $250,000 threshold level. For loans under the $500,000 threshold, the percentage increased to roughly 77 percent. 
 
Additionally, the National Credit Union Administration is considering a proposal to raise its commercial real estate threshold level to $1 million for credit unions. If the federal bank regulatory agencies follow suit and increase to that level, approximately 90 percent of 7(a) loans would be exempt from appraisal requirements. 
 
It’s worth noting that appraisals are conducted on loans below the required level for a variety of reasons, including the credit worthiness of the borrower, the complexity of the loan application and for general good business sense.
 
 
The Appraisal Institute and the Land Trust Alliance co-signed a letter Nov. 29 urging congressional leaders to advance the Charitable Conservation Easement Program Integrity Act, which would help maintain the integrity of conservation easement donations by closing an apparent loophole related to abusive syndicated tax shelters.
 
The legislation was not finalized by the end of the of last year, but has been reintroduced in the Senate as S. 170. AI co-signed on Jan. 18 an additional support letter for the newly introduced bill,  and anticipates a companion bill will soon be reintroduced in the House. 
 
The Justice Department has taken action against conservation easement syndications, and AI expects more actions against syndicated easement arrangements.
 
 
President Trump on Oct. 5 signed the Federal Aviation Administration Reauthorization Act, legislation that includes new limits on the regulation of non-federally sponsored property. 
 
The law prohibits the FAA from directly or indirectly regulating the acquisition, use, lease, encumbrance, transfer or disposal of land by an airport owner or operator. Further, it requires airport owners or operators receive no less than fair market value for the use; lease; encumbrance; transfer; or disposal of any land, facilities on the land or portion of land; or no more than fair market value for the acquisition of land or facilities on the land. 
 
Shortly before the legislation was signed, the FAA released Compliance Guidance Letter (2018-3), Appraisal Standards for the Sale and Disposal of Federally Obligated Airport Property, which helps FAA field offices, airport sponsors and commercial appraisers understand the process required for the sale and leasing of federally obligated property. The compliance letter states, “FAA views the appraisal process as an integral and required component to establishing an objective marketable value and protecting the federal investment in our nation’s airports.” 
 
Airport sponsors have a federal obligation to establish the fair market value for the disposal of airport property. The letter notes that, with few exceptions, the lease rates on airport property used for non-aeronautical purposes must be based on fair market value. 

IN THE AGENCIES                                                                       

Appraisal Institute President Stephen W. Wagner, MAI, SRA, AI-GRS, and staff from AI’s Washington office on Jan. 15 participated alongside representatives from the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers and the Massachusetts Board of Real Estate Appraisers in bipartisan meetings with members of Congress, urging them to review a proposed increase to the residential appraisal threshold. 
 
The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency proposed raising the residential appraisal threshold from $250,000 to $400,000.
 
The Appraisal Institute is asking appraisers to voice their opposition to the proposed increase. AI created an action alert where its professionals and others can weigh in on this important matter. The action alert provides talking points that appraisers can use in their letters, and AI encourages appraisers to share their own stories and experiences when speaking against the proposal. 
 
Use the AI action alert to make your voice heard.
 
Read the Federal Banking Agencies’ proposed rule.
 
The organizations had previously requested the agencies hold a public hearing on the proposal following an exhaustive review of comments that showed opposition to the proposed residential appraisal threshold increase outweighed other comments  5-to-1. The organizations are also preparing a formal written comment for the record, which ends Feb. 5. 
 
If you have any questions regarding this issue, contact Bill Garber, AI’s director of government and external relations, at 202-298-6449 or by email at bgarber@appraisalinstitute.org.
 
 
President Trump has threatened to declare a national emergency to circumvent Congress and build a wall on the southern U.S. border using unobligated funds set aside for military construction projects. The government would utilize eminent domain to claim land on which the wall would be built.
 
This path likely would lead to lengthy court battles, but there exists a legal framework where eminent domain can be used for condemnation of land for certain military purposes — and a valuation component is included. 
 
 
The Appraisal Institute recommends that its professionals pay close attention to investment trends associated with the Opportunity Zones that were created through last year’s tax reform legislation. The U.S. Department of the Treasury has certified 8,700 Opportunity Zones — a process performed in conjunction with state and local government agencies. 
 
Opportunity Zones are designed to spur economic development by providing tax benefits to investors by allowing them to defer tax on any prior gains invested in a Qualified Opportunity Fund until the date on which the investment in a QOF is sold or exchanged, or until Dec. 31, 2026 — whichever comes first. There is a 10 percent exclusion of the deferred gain for QOF investments held for more than five years; when held for more than seven years, the exclusion is 15 percent and when held for 10 or more years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date the QOF investment is sold or exchanged.
 
The rules and regulations for this economic development tool are trickling out, including materials from the IRS. As a result, valuation-related questions are materializing as market activity within Opportunity Zones begins. One issue is the use of a sale from outside an Opportunity Zone as a comparable for one inside an Opportunity Zone, and vice versa. Additionally, data lags may necessitate fully informed market conditions adjustments. Appraisers likely also will be asked to segregate building and land values for tax planning purposes.
 
The IRS offers more information on tax issues with Opportunity Zones. 
 
The Treasury Department provides a complete list of Opportunity Zones through its Community Development Financial Institutions Fund site. Many states offer information on local Opportunity Zones through their departments of commerce and economic development, such as this one from Illinois
 
 
The Appraisal Institute is closely monitoring two large projects at Fannie Mae and Freddie Mac that are proceeding under the direction of the Federal Housing Finance Agency: process modernization (updates to policies and procedures) and the Uniform Appraisal Dataset and Forms redesign initiative. 
 
AI expects this year to be an active one with regard to Fannie Mae and Freddie Mac seller/servicer guideline changes, and AI continues to express concern and raise questions about so-called, “bi-furcated” appraisal assignments, where third-parties may be providing certain property information to appraisers for analysis. Both Fannie and Freddie expressed interest in testing and exploring further developments in this area, and have committed to working with valuation professionals to resolve concerns. 
 
The FHFA Duty to Serve obligations likely remain a point of emphasis for both Fannie and Freddie, including issues such as manufactured housing, energy efficiency and rural appraisal matters. 
 
Work continues on the redesign of the uniform appraisal reporting forms, and late last year, the joint initiative work group released a report on stakeholder feedback, where many of the Appraisal Institute’s comments were summarized or included as issues for the Initiative. Examples include honing in on appraiser and lender liabilities, and conceptual ideas, such as the use of ranges of value verses point in time values. The redesign is expected to continue into 2020, and AI anticipates multiple opportunities for feedback and appraiser involvement. 

IN THE STATES                                                            

New York Gov. Andrew Cuomo on Dec. 28 signed S. 9080, legislation that enacts a comprehensive appraisal management company registration and oversight program. New York is the 49th state to enact such a program.
 
The legislation is intended to bring the state into compliance with portions of the Dodd Frank Act and the federal minimum requirements for AMCs promulgated by the federal bank regulatory agencies. 
 
AMCs operating in the state will be prohibited from imposing unreasonable turnaround times and will be required to pay appraisers within 30 days of the date the appraisal is transmitted to the AMC. They also will be required to compensate appraisers in accordance with the reasonable and customary fee provisions contained in the Truth in Lending Act. AMCs also will have to adopt a “cost-plus” model in which any charges for services performed by the AMC are in addition to the appraiser’s fee. 
 
Beginning on or about April 27, AMCs operating in New York will be required to register with and submit to oversight by the New York Department of State. Providing appraisal management services without first registering will constitute a criminal misdemeanor, in addition to civil and administrative penalties that may be imposed. The New York Department of State will develop an appropriate registration form and likely announce additional rules for implementation.  
 
 
The Massachusetts Supreme Judicial Court on Nov. 26 ruled that the prohibition on appraiser bias contained in the Uniform Standards of Professional Appraisal Practice and the Appraisal Institute’s Code of Ethics and Certification Standard, or the appearance of bias, applies only to individuals and not to an appraiser’s employer.
 
 
The Court’s ruling is consistent with the position advanced in the amici curiae brief submitted by the Appraisal Institute and the Massachusetts Board of Real Estate Appraisers. At stake was the ability of appraisers who perform services in Massachusetts to engage in the valuation of properties when the appraisers’ employers provide other services, such as brokerage, leasing and asset management.
 
The case stems from the attempted repurchase of a commercial property in Boston by Fidelity Real Estate Company, LLC, from Buffalo-Water I, LLC, a subsidiary of a national real estate company. Fidelity sold the property to Buffalo-Water in 2004, but leased back the building and maintained an option to repurchase it during the final year of its lease. In 2016, Fidelity exercised its right to repurchase the property. 
 
Fidelity and Buffalo-Water were unable to agree upon the purchase price, and each party retained an appraiser who held the MAI designation from the Appraisal Institute and had at least a decade of experience valuing Boston commercial properties, as required in the option agreement. Since the parties’ own appraisals differed by more than 5 percent, they were required to retain a third, independent appraiser with the MAI designation to establish the property’s fair market value. The parties agreed to engage Cushman & Wakefield and outlined terms of the appraisal services in an engagement agreement signed by the parties and the Cushman appraiser selected to perform the appraisal. Compliance with both USPAP and the AI Code of Ethics and Certification Standard was required because the appraisal was performed by a state-certified appraiser holding the MAI designation. 
 
The Cushman appraiser in April 2017 submitted an appraisal establishing the fair market value of the property. The appraisal contained a “Certification of Appraisal” stating, “We have no present or prospective interest in the property that is the subject of this report ... no personal interest with respect to the parties involved,” and “no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.”
 
Following transmittal of the appraisal, Buffalo-Water discovered that in December 2016, before Cushman was engaged to conduct the appraisal, Fidelity had retained the firm for a national representation contract. Buffalo-Water communicated this information to Fidelity and claimed that Fidelity’s pre-existing relationship with Cushman should have been disclosed and created an impermissible conflict of interest that invalidated the appraisal. 
 
Buffalo-Water filed a verified complaint against Fidelity requesting declaratory judgment that the appearance of bias on the part of Cushman in favor of Fidelity rendered the appraisal invalid and non-binding, and that Fidelity breached a covenant of good faith and fair dealing. 
 
Well-settled case law in Massachusetts — the “Eliot Rule” — establishes that when parties agree that the fair value of a property will be determined by an appraiser, a judge may not invalidate the appraiser’s determination unless the appraisal process or decision was tainted by fraud, corruption, dishonesty or bad faith. Eliot v. Coulter, 322 Mass. 86, 91, 76 N.E.2d 19 (1947). The Eliot Rule was reaffirmed in a 1985 opinion that stated that a judge may not invalidate “the determination of appraisers selected by agreement to resolve a dispute” unless the appraisal process or decision was tainted on one of these four grounds. Nelson v. Maiorana, 395 Mass. 87, 89, 478 N.E.2d 945 (1985).
 
The trial court dismissed the complaint, concluding that the facts alleged by Buffalo-Water “do not amount to the kind of bad faith, fraud or corruption required for a court to invalidate an independent appraisal agreed to by the parties.” 
 
Buffalo-Water appealed the Superior Court’s decision, and the Supreme Judicial Court agreed to consider the case. 
 
The Court stated in its opinion, “The issue on appeal is whether we should modify this common-law rule and allow a judge to invalidate an appraisal intended by the parties to provide a final, binding valuation of a property where there is the appearance of bias, not on the part of the individual who conducted the appraisal, but on the part of the entity that employed the individual appraiser.”
 
AI and MBREA stated in their amici brief, “The relevant standards and ethics rules governing appraisers have always prohibited bias in appraisals, and have never required disclosures related to an individual appraiser's employer, let alone the employer's parent company and/or affiliates.” The amici brief further stated, “Standards and ethics rules consistently focus on the potential conflicts of the individual appraiser, who is bound to act independently, objectively and without bias.”
 
The Court stated in its opinion, which agreed with the argument advanced by AI and MBREA, that “In determining whether to invalidate an appraisal, we look to the conduct of the individual appraiser or appraisers responsible for the valuation, not to the conduct of their employer. This rule is in keeping with the USPAP and the Code of Ethics.”
 
The opinion goes on to say that the parties “…could have required disclosure of any information concerning Cushman’s business dealings with Buffalo-Water or Fidelity that might create an appearance of bias, and agreed to invalidate the appraisal if such a disclosure was not made.” However, no such provision was included in any agreement between the parties. 
 
Importantly, the Court found that any purported appearance of bias arising from Cushman’s national representation contract with Fidelity did not fall within the rubric of “fraud, corruption, dishonesty or bad faith” that would result in a court invalidating an appraisal. The Court separately declined to modify the Eliot Rule to add “appearance of bias” as a common-law ground for the invalidation of an appraisal. 
 
 
The Appraisal Institute reports that all 50 states and the District of Columbia will have legislative sessions this year. The sessions can range from 30 calendar days (Virginia) to an unlimited duration in 11 states. Forty-five states and D.C. already are in session, while the remaining states — Alabama, Florida, Louisiana, Nevada and Oklahoma — will convene shortly. 
 
AI’s Washington office has worked with many chapters, regions and state coalitions to develop government relations agendas for the year, and will spend the coming months working with those organizations to executive the initiatives. AI National is continuously monitoring legislative activity in each state and will notify chapters and other stakeholders of issues that affect AI professionals and the valuation profession.
 
Legislative activity this year will include:
 
Evaluations
Several states are considering legislation that amends appraiser licensing laws so appraisers can perform for financial institutions evaluation that do not comply with the Uniform Standards of Professional Appraisal Practice when a USPAP-compliant appraisal is not required by federal law. Appraisers in 44 states are prohibited from providing evaluations that only comply with the Interagency Appraisal and Evaluation Guidelines. 
 
Statutes of repose
A few states are considering enacting statutes of repose that limit the amount of time an appraiser can be sued civilly or have disciplinary action taken against them after completing an evaluation. These efforts build upon recent enactments in Minnesota, Oregon and Tennessee, and upon preexisting statutes of repose in Kentucky, North Carolina and South Dakota. 
 
Minimum appraiser qualifications
Many states are rewriting their appraiser licensing laws — specifically those regarding college-level education requirements and experience hour requirements — as a result of changes that the Appraisal Standards Board made to the Real Property Appraiser Qualification Criteria, which took effect last May.
 
The rewriting of the qualification criteria is the fourth major one since it was first established in 1991. Some states are implementing all changes, while others are changing only the college-level education requirements, leaving the required number of experience hours as they were established in 2015.
 
Appraisal standards
Work continues in several states on legislation to allow appraisers to utilize standards of valuation practice in addition to the Uniform Standards of Professional Appraisal Practice when performing appraisals for purposes other than federally regulated lending transactions. Additionally, permanent extensions are sought for laws scheduled to sunset that grant appraisers some relief from USPAP. 
 
Appraisal management company oversight and regulation
Massachusetts is the only state without some form of comprehensive appraisal management company regulation; however, officials continue to work on legislation that likely will pass this year.
 
Many other states are taking a second look at their AMC laws to ensure they meet the federal minimum requirements because strict restrictions on AMCs for federally related transactions took effect Aug. 10, 2018, in states that elected not to register and supervise AMCs. However, 26 states were granted extensions by the ASC, so they will not yet be evaluated for compliance, and there is no impact on an AMCs’ ability to engage in federally related transactions. Additionally, the ASC will not audit states for compliance with the National Registry fee requirements until 2020. 
 
Most legislative activity in this area has focused on: 1) the prohibition on previously sanctioned appraisers having ownership interests in AMCs; 2) removing a 30-day grace period during which an AMC can remove an appraiser from its panel without cause and without notification requirements or the opportunity to respond; and 3) granting state appraiser licensing agencies the authority to collect and remit the National Registry fees from AMCs. 

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The Appraisal Institute's Washington office wants to know if AI professionals have relationships with critical policymakers, or are aware of a burgeoning issue of opportunity or concern. Please contact any member of the AI Government Relations Committee or Washington office staff with more information.    
 

 

 

 

 

 

 

 

 

 

 

 

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