Appraisers and the Americans with Disabilities Act.
Effective on January 26, 1993, all businesses whose operations affect interstate commerce must have been in compliance with the public accommodations provisions of this act.(1) Civil remedies for non-compliance are both legal and equitable, and the government can also seek civil penalties. For commercial property appraisers it has become imperative to react competently and professionally to serve these now vulnerable clients.
AMERICANS WITH DISABILITIES ACT
The ADA expands existing rights of disabled Americans. The extent of responsibilities under the ADA is wide, and many of its current provisions are vague. Some aspects of the ADA, however, demand immediate action and are of particular note to appraisers. In "Commercial Real Estate and the ADA: Implications for Appraisers," Aalberts and Clauretie outline the specifics of the ADA.(2) The first section of this article summarizes key points of the ADA; the focus is then how an appraiser should handle noncompliance with the ADA in an appraisal report.
The ADA consists of five parts, or Titles. Appraisers should specifically be concerned with Title III, Section 302, which deals with discrimination against the disabled who are seeking access to "places of public accommodation." Owners, lessees, lessors, and other operators of businesses must engage in the readily achievable removal of architectural and communication barriers that impede disabled people's access to and enjoyment of existing facilities. Accessibility to newly constructed public accommodation and commercial facilities, also of potential importance to appraisers, is covered in Section 303 of Title III.
The impact of the ADA since its passage has been varied. Most of the complaints and litigation until now have involved the Equal Employment Opportunity Commission (EEOC) under Title I, which protects the disabled against employment discrimination. The Justice Department, on the other hand, has seen considerably fewer complaints lodged under Title Ill and its closely related Title II, which addresses removal of barriers to state buildings and public transportation. The Justice Department is responsible for enforcing these two Titles.(3)
To assess the impact of the ADA on real estate appraisers, one must first become acquainted with the terms "disability," "places of public accommodation," and "architectural barriers."
To be protected under the ADA, a person must fit under one of the following three definitions of disabled:
(A) a physical or mental impairment that substantially limits one or more of the major life activities of such individual;
(B) a record of such an impairment; or
(C) being regarded as having such an impairment.(4)
These definitions do not definitively clarify who a disabled person might be, thus making a disability status difficult to determine. Consequently, defining disability status is an ongoing process, determined on a case-by-case basis. The Senate's Labor and Human Resources Committee(5) as well as the ADA's regulations promulgated by the EEOC and the Justice Department(6) provide guidance for analysis.
With the first of the definitions, "a physical or mental impairment" is any physiological disorder, cosmetic disfigurement, or anatomical loss that affects one or more of the various body systems and limits one or more major life activities. Major life activities consist of "caring for oneself, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, and working."(7)
In the second disability definition, a person must have a record of an impairment such as described in the first definition. Someone who previously suffered from heart disease and, as a result, cannot work, is covered under this part.
The third definition of a disability is "regarded as having such a physical or mental impairment which substantially limits a major life activity."(8) A person may not be really disabled, at least under the first two definitions; however, the perception of others who may consider that person disabled can have a prejudicial effect on him or her. An example might be a person with a large facial growth who still can perform all major life activities. Because of the person's appearance, however, an employer may not want to hire or a restaurant may not want to serve him or her. Both actions would be illegal, since they are based on fears, myths, or stereotypes often associated with many disabilities.(9)
Because of the apparent difficulty with these interpretations, those who provide public accommodations must become educated and aware of what may be considered a disability.
Places of public accommodation
Appraisers, whose clients include the owners, tenants, and secured creditors of commercial real estate, must be aware of and concerned with the accommodations requirements of the ADA. Title III's function is to assure that no one shall be discriminated against based on their disability in enjoying a place of public accommodation.(10) ADA regulations provide that a place of public accommodation "means a facility, operated by a private entity, whose operations affect commerce and fall within at least one of the following categories."(11) A facility is any or all portions of a building, including its walks, roads, parking lots, and passageways. Exempted from the ADA are any facilities covered by the Fair Housing Act, aircraft, and railroad cars. The term "private entity" includes not only the owner, but can also include the lessee, the sublessor, and the operator of the business. In effect, this is the same as the coverage of the 1964 Civil Rights Act, which has been interpreted to include virtually all businesses.
The businesses subject to the regulations must fall into one or more of the 12 categories listed in the statute:
1. Places of lodging (e.g., hotels, motels)
2. Establishments serving food or drink (e.g., bars, restaurants)
3. Places of exhibition or entertainment (e.g., motion picture house, theater, stadium, concert hall)
4. Places of public gathering (e.g., auditorium, convention center, lecture hall)
5. Sales or rental establishments (e.g., bakery, grocery store, hardware store, shopping center)
6. Service establishments (e.g., bank; laundromat; barber shop; funeral parlor; gas station; office of a lawyer, accountant, health care provider; hospital; insurance office)
7. Stations used for specified public transportation (e.g., bus terminal, depot)
8. Places of public display or collection (e.g., museum, library, gallery)
9. Places of recreation (e.g., park, zoo, amusement park)
10. Places of education (e.g., nursery, elementary, secondary, private, or other undergraduate or postgraduate school)
11. Social service center establishments (e.g., daycare center, senior citizen center, homeless shelter, food bank, adoption agency)
12. Places of exercise or recreation (e.g., gym, health spa, bowling alley, golf course)
Under Section 303, new construction and altered "commercial facilities" as well as public accommodations must comply with stricter accessibility requirements than existing accommodations. New construction is defined as buildings ready for first occupancy after January 26, 1993, in which an application for a building permit was filed after January 26, 1992. Compliance for these buildings commenced on January 26, 1993. However, commercial facilities - those intended for nonresidential use that affect interstate commerce but which the public cannot normally enter (e.g., a factory or a warehouse) - do not have to accommodate the disabled under Title III, if they fall before these dates. Thus for appraisers in the future, it is important to be aware of these dates and the more stringent requirements when appraising such structures.
In effect, all persons involved in non-residential real estate need to become educated about the demands of Title III and modify their facilities accordingly. The following discussion addresses the requirement that businesses eliminate architectural and other barriers hampering the disabled.
The most crucial requirement for an appraiser under Section 302 focuses on the removal of architectural and, to a lesser extent, communication barriers in existing facilities. Owners and operators of public accommodations have an obligation to remove already existing architectural barriers to the disabled. The rules state that a "public accommodation shall remove architectural barriers in existing facilities, . . . where such removal is readily achievable."(12) Examples given in the final rule are:
* Installing ramps
* Making curb cuts in sidewalks and entrances
* Repositioning shelves
* Rearranging tables, chairs, vending machines, display racks
* Repositioning telephones
* Adding raised marks on elevator control buttons
* Installing flashing alarm lights
* Widening doors
* Installing offset hinges to widen doorways
* Eliminating turnstiles or providing an alternative accessible path
* Installing accessible door hardware
* Installing grab bars in toilet stalls
* Rearranging toilet partitions to increase maneuvering space
* Insulating lavatory pipes under sinks to prevent burns
* Installing raised toilet seats
* Installing a full-length bathroom mirror
* Repositioning the paper towel dispenser in a bathroom
* Creating designated accessible parking spaces
* Installing an accessible paper cup dispenser at an existing inaccessible water fountain
* Removing high-pile, low-density carpeting
* Installing vehicle hand controls
The examples may be formidable to some while minor to others. Some of them will have little bearing on appraisals, such as rearranging tables and installing vehicle hand controls. Further, what constitutes a barrier is still not completely understood. The potential expense incurred in complying with the rule, however, may be offset by the fact that its removal must be readily achievable; that is, "easily accomplishable and able to be carried out without much difficulty or expense."(13) In addition, the Architectural and Transportation Barriers Compliance Board has issued standards in the publication Americans with Disabilities Act Accessibility Guidelines for Buildings and Facilities (ADAAG) that may help in determining what businesses must do to comply.(14) The next section addresses the all-important readily achievable defense to the barrier removal requirement.
What constitutes readily achievable?
The Justice Department recognized the need for a variety of alternatives by realizing that expenditures that are not substantial to one business might prove onerous to another. Therefore, no predetermined level of financial obligations has been issued so that flexibility may be retained in adapting the rules to particular businesses.(15)
The ADA provides certain factors that must be examined: 1) the nature and cost of the action needed; 2) the overall financial resources of the site or sites involved; 3) the geographic separateness, and the administrative or fiscal relationship of the site or sites; 4) if relevant, the overall financial resources of a parent corporation; and 5) if applicable, the type of operation of any parent corporation.(16)
The Justice Department has recommended four priorities to maximize the accessibility to public accommodations: 1) making a public accommodation accessible from public sidewalks, parking, or public transportation (e.g., entrance ramps, wider entrances); 2) achieving accessibility to a public accommodation's goods and services (this can mean adjusting display racks, rearranging tables, and installing ramps within the place of business); 3) gaining accessibility to rest-room facilities (to accomplish this may require the removal of furniture or vending machines, the widening of toilet stalls, and the installation of grab bars); and 4) any "other measure necessary to provide access."(17)
As may be observed, there are many requirements for those who must comply with the ADA's public accommodations' provisions. To encourage enforcement issues of responsibility and legal liability must be addressed.
SIGNIFICANCE OF NONCOMPLIANCE
As previously indicated, the ADA applies to "any person who owns, leases (or leases to), or operates a place of public accommodation,"(18) which also extends to sub-lessees, management companies, and any other entity that leases or operates.
Allocation of liability has not been specifically addressed in the regulations but the final rule suggests that responsibility be allocated by contract. Joint and several liability has been discussed as a possibility by some commentators.(19) Equitable remedies under the ADA would include injunctive relief, such as forcing a facility to remove the barrier or to explain why it is not readily achievable to do so. The U.S. Attorney General enforces Title III, and lack of compliance may result in civil penalties, not exceeding $50,000 for a first violation, or $100,000 for any additional violations.
Appraisers must be aware of the remedies and penalties that their clients can incur. Clients who are sanctioned are angry clients; they may take out their wrath on their appraisers for not informing them about certain ADA provisions. Whether their claims are valid under the law or even viable may not stop them from pursuing legal recourse against an appraiser. Unfortunately, as revealed here, the consequences for noncompliance are potentially serious.
APPRAISAL ACKNOWLEDGEMENT OF ADA
Because of the potential importance of the ADA to appraisers, the remainder of this article is an investigation of the readily achievable corrections to barriers, their effect on value, and how a real estate appraiser may handle noncompliance with the ADA in the final value estimate. The appraisal industry has acknowledged the existence of the ADA, and the discussion presented here can help appraisers attain the necessary knowledge to comply with the requirements placed on them, specifically the Competency and Departure Provisions of the Uniform Standards of Professional Appraisal Practice (USPAP).
The USPAP has been adopted by The Appraisal Foundation.(20) Members of the organizations belonging to The Appraisal Foundation are subject to the requirements of USPAP. In addition, individual states have adopted USPAP in the licensing and certification of real estate appraisers in their states, thereby extending coverage of USPAP. The Competency Provision of USPAP requires appraisers to either 1) have the knowledge and experience necessary to complete a specific appraisal assignment; or 2) disclose the appraiser's lack of knowledge or experience to the client. Therefore, it is apparent that the Competency Provision of the USPAP requires that appraisers be familiar with the ADA.
The USPAP also contains a Departure Provision that permits limited exceptions to USPAP; however, an appraiser must disclose any limitations. This provision would apply, for example, if the appraiser excluded any known readily achievable changes required to meet the ADA regulations. The appraisal report, however, would then be based on an extraordinary assumption, which must be clearly and accurately stated as a disclosure or limiting condition. The result would be considered a limited appraisal report that may not adequately serve the original purpose of the appraisal request.
The Appraisal Institute's Guide Note 9, "The Consideration of the Americans with Disabilities Act in the Appraisal Process," provides guidance in applying the USPAP to appraisals that may be subject to the ADA.(21) Although real estate appraisers who do not belong to the Appraisal Institute are not required to follow Guide Note 9, it forms a written standard applicable to all appraisers. The guide note recommends that an appraiser inform a client of any possible noncompliance with ADA that was not previously disclosed by the client, and report any condition that might indicate a readily achievable barrier removal.(22) Again, appraisers appear to have an obligation to be familiar with the provisions of the ADA as it affects real estate.
MEASURING THE EFFECT ON VALUE - THEORY
A violation of the ADA may have an adverse effect on the value of the property being appraised. Although an appraiser is not expected to be an expert in ADA requirements, he or she has a duty to possess a certain level of knowledge concerning the ADA and its effect on value. This situation is analogous to an appraiser's responsibility to know something about building materials and construction methods for improved properties. An appraiser is not expected to be an expert in construction but must have sufficient knowledge to inspect and analyze the improvements and report and measure any significant depreciation. Similarly, in light of the ADA, the USPAP, and, where applicable, Guide Note 9, an appraiser must be sufficiently knowledgeable to be able to measure the effect on value of ADA violations.
Guide Note 9 provides that value loss attributable to changes resulting from the ADA is measured in the same manner that curable depreciation from other causes is measured. The guide note cautions that just deducting the cost to cure from the value estimate before the ADA changes may not be proper.(23) Other possible methods are to change the property use so that it is not a public accommodation, or to make the necessary ADA changes over a period of time. Guide Note 9 also provides that there may be a valid reason to exclude consideration of any required ADA changes when appraising a property that does not comply with ADA guidelines because the appraisal "could be required as the logical starting point in a study of the impact of the ADA Regulations."(24) If there are known readily achievable changes, however, the value estimate would be based on an extraordinary assumption, which must be clearly identified to comply with S.R. 2-1(c) of USPAP, the Departure Provision.(25) Finally, Guide Note 9 states that if an appraiser becomes aware of a condition that might constitute a readily achievable barrier removal during the property inspection or during normal research, the appraiser should note the condition(s) in the appraisal report. Obviously, Guide Note 9 places a certain amount of obligation on the members and candidates of the Appraisal Institute in valuing properties subject to the ADA regulations. Although other real estate appraisers are not subject to Appraisal Institute guide notes, there is a strong possibility that the intent of the guide notes could be expanded beyond the Appraisal Institute.
The Appraisal Institute has published a videotape on the ADA and its impact on real estate appraisal.(26) The videotape points out that the four priorities of ADA are: accessible entry, access to goods and services, access to restrooms, and access to common areas. An appraiser should ask the owner if a good faith effort has been made to comply with the ADA. If the building is not in compliance, the appraiser should then find out if the owner has developed an "action plan" to make the necessary corrections. With these questions answered the appraiser can then proceed with the appraisal. The videotape presents three scenarios that an appraiser may encounter: No evidence of noncompliance, noncompliance is apparent, or noncompliance exists but the client requests exclusion of ADA considerations. In the last case the appraiser is cautioned to use a disclaimer. However, it is also pointed out that a disclaimer by itself is not always sufficient. For protection the appraiser needs a working knowledge and awareness of the regulations and their applicability to real estate. A "sharp eye" is also needed when inspecting the property. An appraiser should not claim expertise unless he or she has it. The tape recommends that appraisers follow Guide Note 9 to show good faith efforts to comply with the ADA, and indicates that the ADA is a civil rights act rather than a building code.
In sum, the Appraisal Institute has considered the possible impact of the ADA and its regulations to have major implications on real estate appraisers associated with the organization. It has taken steps to inform and educate real estate appraisers regarding the implications of the ADA law. All real estate appraisers may take advantage of the research and recommendations presented by the Appraisal Institute in their compliance with the ADA regulations. How a real estate appraiser may wish to handle observed noncompliance with ADA regulations is examined next.
NONCOMPLIANCE AND THE COST APPROACH
As previously indicated, an appraiser is expected to have a certain level of knowledge concerning the ADA and its regulations and requirements. Guide Note 9 indicates that the same techniques used to measure curable depreciation may be used in value loss attributable to the ADA. Further, sometimes the cost to cure may be sufficient, while in other instances it may not be adequate.(27) If added construction fees are involved in retrofitting existing properties, then the standard cost calculations may be affected. This is based on the assumption that an appraiser has sufficient knowledge to recognize basic noncompliance with ADA regulations, and when not sure, will obtain or recommend expertise in the area in question.
In addition, an appraiser must recognize that four priorities must be established in complying with the ADA. These were previously identified as access to entry, to goods, to restrooms, and to common areas. Within these four areas there may also be priorities. Immediate, readily achievable priorities will require immediate treatment, while secondary priorities may be corrected later.
The depreciation approach to use in measuring value loss is under the functional obsolescence technique. The Dictionary of Real Estate Appraisal, third edition, defines functional obsolescence as "an element of accrued depreciation resulting from deficiencies or superadequacies in the structure."(28) The Appraisal of Real Estate, tenth edition, refers to functional obsolescence as a "loss in value resulting from defects in design. It can be caused by changes that, over time, have made some aspect of a structure, such as its materials or design, obsolete by current standards."(29) Obviously, the ADA regulations have made many pre-1992 buildings obsolete by current standards concerning accessibility.
Functional obsolescence is further broken down into curable and incurable. For the item in question to be curable, the cost of replacing it must be the same as or less than the expected increase in value. "Curable functional obsolescence is measured as the cost to cure the condition."(30) (Incurable functional obsolescence is discussed later in this article.) Curable functional obsolescence may result from a deficiency requiring an addition or a deficiency requiring substitution or modernization.(31)
To measure the loss in value of an ADA deficiency requiring an addition, for example, assume that in an inspection of the subject property the appraiser observes the lack of a curb cut from the parking lot to the entrance of the building.(32) Further assume that the cost to cure - construct a curb cut - is less than or equal to the expected increase in value; therefore, correcting the lack of a curb cut is considered curable. The value loss is measured as follows:(33)
Cost to construct a curb cut $1,500
Less: Cost to construct a curb cut if the curb were being installed new on the date of the appraisal $1,000
Loss in value $ 500
In the case of an ADA deficiency that requires substitution or modification, for example, assume that an appraiser observes that the two separate entrance doors to the building are 30 inches wide, versus the minimum requirement of 32 inches and the preferable width of 36 inches.(34) Because both doors lead to the same vestibule, it is only necessary to replace one door to meet ADA regulations.(35) The loss in value is calculated as follows:
Cost of existing door in cost estimate $1,000 Less: Physical deterioration charged $ 300 Less: Salvage value $ 0 Plus: Removal costs +$ 400 Plus: Cost of replacing new door +$1,600
Loss in value $2,700
These calculations of loss in value caused by curable deficiencies apply regardless of whether an appraiser uses the reproduction cost or replacement cost method.(36) Incurable functional obsolescence "cannot be practically or economically corrected"(37) and may be caused by a deficiency or superadequacy. In addition, for ADA purposes it must be assumed that the item in question is not in the readily achievable category. Further, incurable functional obsolescence for a deficiency is applicable when an appraiser is asked not to consider the ADA requirements. (In such an instance an appraiser must be careful, and Guide Note 9 recommends an appropriate limiting condition as well as an appropriate statement in the purpose and conclusion sections of the report.(38)) There are two types of incurable functional deficiencies: "an item not included in the cost new that should be, or an item included in the cost new that should not be."(39) The first type measures loss via income, while the second measures loss by cost.(40) An example of the measure of loss for an item that has not been included in the cost new but should be, or for which an appraiser is requested to ignore the ADA implications, may be as follows. Assume a two-story office building does not have an elevator to the second floor.(41) If an elevator were included in the cost new estimate, it would cost $120,000. Because of the lack of an elevator, the net operating income (NOI) to the property is $15,000 per year less than it would be if it had the elevator. A capitalization rate developed in the income capitalization approach for the subject property is 10%. If the cost to add an elevator to the existing building is $180,000, then the elevator is considered incurable functional obsolescence. The value loss is estimated as follows:
NOI loss divided by cap rate $150,000
Less: Cost if in cost new estimate $120,000
Estimated incurable functional obsolescence $ 30,000
This method is applicable for either reproduction or replacement cost estimates.
In reproduction cost estimates, an appraiser may encounter incurable functional obsolescence from an ADA deficiency that is included in the cost estimate. The cost of the deficiency should not be included in the cost estimate, however, because it does not meet ADA standards. In this case the incurable functional obsolescence is measured by the current cost new, less physical deterioration already charged, less the value added.(42) For example, assume that the subject property has a 24-foot-long, 3-foot-high sloping ramp for disabled access with a slope of 1:8 (13%), while the maximum recommended slope is 1:12 (8% slope) with a maximum rise of 30 inches over 30 feet.(43) Compliance with the ADA would require construction of a longer ramp and a landing within the ramp. (To comply with the ADAAG the new ramp would need to be 36 feet long, which is 6 feet over the recommended length of 30 feet - therefore a landing is required within the ramp.) Assume the cost to cure the deficiency exceeds any added value to the property resulting from the longer ramp.
Reproduction cost new $14,100 Less: Physical deterioration $ 4,700 Less: Value added $ 0
Loss in value $ 9,400
In the replacement cost calculation the shorter ramp would not be in the cost estimate because in new construction a ramp meeting the requirements of the ADA would be considered.
The treatment of noncompliance with ADA regulations in the cost approach is under the category of functional obsolescence. The first step an appraiser must take is to decide if the deficiency is readily achievable. If the item is readily achievable, then the appraiser must decide if it is curable or incurable. Incurable functional obsolescence (a deficiency or superadequacy that is impracticable or not economical to correct) places the deficiency into the ADA category of nonreadily achievable. Except when incurable functional obsolescence is included in the cost estimate, the methods of handling noncompliance apply to both the replacement cost and the reproduction cost approaches.
NONCOMPLIANCE AND THE SALES COMPARISON APPROACH
As indicated previously, an appraiser is expected to have identified certain areas of noncompliance with the ADA regulations and requirements. In the cost approach, noncompliance is considered a matter of functional obsolescence. In the sales comparison approach the noncompliance may be considered under the physical characteristic category of "functional utility," an area in which to make comparisons between the comparable property and the subject property.(44) The Appraisal of Real Estate, tenth edition, notes that "the appraiser must be careful not to assume that an element of comparison affects value unless its influence is indicated by the market data."(45) Further, "The value added or lost by the presence or absence of a differing item in a comparable property does not usually equal the cost of installing or removing the item."(46) Although there are several techniques available to measure adjustments, the most commonly used technique, referred to as "comparative analysis," uses one of two methods. Paired-data analysis involves comparing two or more market sales to show the size of adjustment for a single characteristic, and relative comparison analysis examines relationships without quantification.(47)
In using paired-data analysis when considering the implications of the ADA, an appraiser seeks to identify comparable sales that comply with the ADA and comparable sales that have not been retrofitted to meet the ADA regulations and requirements. If all other things are equal, the difference between sale prices should indicate the discount, or premium, that the market is willing to pay for ADA compliance. For example, assume that two similar office buildings have recently sold and a sale price difference can be isolated to sale A, which has an elevator, and sale B, which does not have an elevator. Both sales are assumed to comply with the ADA in all other categories, or the violations are insignificant and the market does not recognize them in the purchase price. If sale A sold for an adjusted price of $855,000 and sale B sold for an adjusted price of $819,000, then the premium paid for the elevator to comply with the ADA is $36,000. If the subject office building contains [TABULAR DATA FOR TABLE 1 OMITTED] an elevator that meets ADA requirements then the comparable sales that do not have an elevator would need to be adjusted upward by $36,000.(48)
In the relative comparison technique an appraiser analyzes the sales without regard to quantification. This may be relevant when it is not possible to derive dollar adjustments, as in paired-data analysis. An appraiser analyzes sales for the different factors of comparison and indicates whether the comparable sale is superior, equal, or inferior to the subject property. An overall rating is given to each comparable sale and the sales are arrayed according to some unit of comparison. For example, in Table 1, assume that sales are evaluated according to the factors of location, condition, and compliance with the ADA.
The comparable sales are then arrayed, as in the example:
Dollars per Net Comparable Square Foot Adjustment
B $78.00 Negative A $75.00 Equal C $69.00 Positive
From this array an appraiser can reconcile a unit of comparison applicable to the subject property. Sale B indicates a downward (negative) direction in the price per square foot, sale C indicates an upward (positive) direction in the price per square foot, and sale A indicates a unit price that should be somewhat similar to that for the subject property.
To handle noncompliance with the ADA in the sales comparison approach, an appraiser looks to the market for deviations in sale prices based on functional utility. The recommended technique involves either paired sales or relative comparison analysis. Either of these techniques requires that the appraiser add to the list of questions used when verifying sales. Whether the purchaser recognized noncompliance with the ADA, and if so, whether the purchase price was adjusted accordingly need to be determined.
NONCOMPLIANCE AND THE INCOME APPROACH
In the income capitalization approach the value estimate is based on the income-producing capabilities of the subject property. This value approach is based on the premise that the greater the income is the greater is the value. The two techniques used in the income capitalization approach are the direct capitalization technique, which uses a stabilized income stream, and the discounted cash flow (DCF) technique, which applies to variable income streams. In theory, any ongoing adjustments for noncompliance with ADA regulations and requirements will be reflected in the income generated by the property. In the direct capitalization technique, however, an appraiser must be careful not to include any expenditures for capital improvements in the expense estimates because they do not occur on an annual basis.(49) Rather, any readily achievable expenses for compliance with the ADA should be deducted from the final value estimate as a necessary cost. For example, assume the value estimate for an office/warehouse complex is $1,500,000 but there is an estimated cost of $20,000 in readily achievable items to bring the complex into compliance with ADA regulations and maintain the present income stream. The final value estimate will then be shown as $1,480,000 ($1,500,000 less $20,000 compliance cost).(50) In the direct capitalization approach an appraiser must not stop at deducting the cost of current compliance but must also examine the effect that compliance will have on the net income in future years.(51) If there are expenditures that may be necessary in future years to comply with the ADA, the appraiser must incorporate those into the stabilized income estimate.
If the value estimate is based on DCF analysis, then it is acceptable to treat the expenditure associated with ADA compliance in the year in which the expense occurs.(52) DCF analysis is particularly relevant when there may be variable expenditures on ADA items over a period of years because the NOI will vary each year based on the expenditures. For example, assume that a property needs several structural repairs not associated with the ADA, such as roof replacement and foundation repair, to maintain the integrity of the building. The cost of repair to these items may be of such magnitude that several ADA items will be considered as not readily achievable until the income is sufficient to place them in the readily achievable category. For example, assume that a property has foundation repairs in year 1 of $200,000 and there are $20,000 in readily achievable ADA items. In year 2 the roof requires $75,000 in repairs and the ADA expenditure is $40,000. In year 3 it may be necessary to spend $50,000 to complete the required ADA modifications. In year 3 the structural repairs have been completed and the income the property is generating is considered sufficient to meet the $50,000 ADA required items. Because of the cost of the structural repairs in year 1 and year 2, there was not sufficient income for complete ADA compliance. After the third year the property will comply with ADA requirements. Because the ADA expenditures are nonrecurring items they do not readily fit into the replacement allowance category under expenses. The DCF technique is well suited to treat the variable cash flows that may occur with ADA compliance.
The techniques to handle noncompliance with ADA requirements in the income approach depend on the effect of the expenditures on the income stream. In direct capitalization, nonrecurring expenses should be deducted from the final value estimate. In DCF analysis the expenses are deducted in the year in which they occur. Because the expenses are nonrecurring, they are not placed in the reserves category.
The ADA requires a certain level of expertise from an appraiser to properly value real estate. The amount of expertise is dictated by the USPAP, specifically the Competency and Departure Provisions. In addition, appraisers associated with the Appraisal Institute are subjected to Guide Note 9 in the application of USPAP. The ADA has identified readily achievable corrections to several barriers to access for disabled persons. The expenditures necessary to provide accessibility may have an effect on the value of real estate. It is the effects of these expenditures that concern real estate appraisers. Not only must an appraiser recognize noncompliance with the ADA but he or she must be able to measure the effect of noncompliance on value, where appropriate.
The three approaches to value require different methods in the treatment of noncompliance with the ADA. In the cost approach, noncompliance is treated as functional obsolescence, and is handled in the same manner as other types of curable and incurable functional obsolescence. In the sales comparison approach, value differences are determined by examining the reaction of buyers in the marketplace. In the income approach the effects on the income stream of the necessary expenditures for ADA compliance are examined. In all three approaches, an appraiser is required to obtain additional information to properly measure the effects on value.
Clearly, real estate appraisers must become knowledgeable about the various facets of the ADA regulations. Not only must they do so to comply with national, state, and professional organization requirements, but not doing so may cause them to fail to adequately meet the needs of their clients. Appraisers do not need to become experts in the ADA, just as they do not need to be experts in architecture or building construction, but they must have sufficient knowledge to recognize noncompliance and its effect on value.
1. "Nondiscrimination on the Basis of Disability by Public Accommodations and in Commercial Facilities," 28 Code of Federal Regulations Part 36 (1993).
2. Robert J. Aalberts and Terrence M. Clauretie, "Commercial Real Estate and the Americans with Disabilities Act: Implications for Appraisers," The Appraisal Journal (July 1992): 53-58.
3. Randall Samborn, "A Quiet Birthday," The National Law Journal (March 1, 1993): 1 and 42.
4. Americans with Disabilities Act (ADA), 42 U.S. Code (1992): Section 12102(2).
5. U.S. Congress, Senate, Committee on Labor and Human Resources, The Americans with Disabilities Act of 1989, S. Rept. 101-116 to Accompany S. 933, 101st Cong. 1st Sess., 1989.
6. "Nondiscrimination on the Basis of Disability by Public Accommodations and in Commercial Facilities."
7. Ibid., Section 36.104(2).
9. Robert J. Aalberts, "Barrier Removal in Existing Buildings under the Americans with Disabilities Act," Real Estate Finance (Fall 1993): 53-58.
10. ADA, 42 U.S. Code, Sections 12101-12213 (1992).
11. "Nondiscrimination on the Basis of Disability by Public Accommodations and in Commercial Facilities," Section 36.104(5).
12. Ibid., Section 36.304.
13. ADA, Section 12181(9).
14. "ADA Accessibility Guidelines for Buildings and Facilities," 36 Code of Federal Regulations Part 1191, Appendix (1993).
15. An exception provided in the ADA regulations is an allowable monetary limit applicable in providing an accessible "path of travel" to an altered primary function (the major activity intended for the facility) area. The cost to make the path of travel accessible does not have to exceed 20% of the cost of alterations to the primary function area. See "Nondiscrimination on the Basis of Disability by Public Accommodations and in Commercial Facilities," Section 36.403.
16. ADA, Section 12181(9)A-D.
17. "Nondiscrimination on the Basis of Disability by Public Accommodations and in Commercial Facilities," Section 36.304(c)1-4.
18. ADA, Section 12181(2).
19. R. J. Altman, "New Disabilities Act Regs Draw Mixed Reactions," The National Law, Journal (August 12, 1991):10.
20. The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice, (Washington, D.C.: The Appraisal Foundation, 1995).
21. Appraisal Institute. Guide Note 9: The Consideration of the Americans with Disabilities Act in the Appraisal Process (Chicago: Appraisal Institute, 1993).
22. Ibid., D-28.
23. Ibid., D-26.
25. Uniform Standards of Professional Appraisal Practice, 1995.
26. Appraisal Institute, A Clear Path: The Americans with Disabilities Act and Its Impact on Real Estate Appraisal videotape (Chicago: Appraisal Institute, 1993).
27. Guide Note 9: The Consideration of the Americans with Disabilities Act in the Appraisal Process, D-26.
28. Appraisal Institute, The Dictionary of Real Estate Appraisal, 3d ed. (Chicago: Appraisal institute, 1993), 154-155.
29. Appraisal Institute, The Appraisal of Real Estate, 10th ed. (Chicago: Appraisal Institute, 1992), 257 and 352.
30. Ibid., 352.
31. Curable functional obsolescence may also result from a superadequacy, which The Dictionary of Real Estate Appraisal, third edition, defines as "an excess in the capacity or quality of a structure or structural component." For the purpose of ADA compliance as analyzed in this article, a superadequacy may be considered to be not applicable.
32. ADA, Section 4.1.2(1).
33. The depreciation procedures for the cost approach are adapted from those presented in chapter 16 of The Appraisal of Real Estate, tenth edition. Cost estimates are adapted from those presented by the Institute of Real Estate Management, ADA Title III: Compliance Made Practical (Chicago: Institute of Real Estate Management, 1992), 27.
34. ADA, Section 4.1.3(5).
35. Ibid., 4.1.3(7).
36. The Appraisal of Real Estate, 10th ed., 353-355.
37. The Dictionary of Real Estate Appraisal, 3d ed., 179-180.
38. Guide Note 9: The Consideration of the Americans with Disabilities Act in the Appraisal Process.
39. The Appraisal of Real Estate, 10th ed., 355.
40. When measuring income loss it is important for an appraiser to be aware that the income loss resulting from functional obsolescence may differ from the general income and expense ratio because some expenses may be affected by the deficiency while others may not. (Ibid., 356.)
41. ADA, Section 4.1.3(5).
42. The Appraisal of Real Estate, 10th ed., 356.
43. ADA, Section 4.8.1.
44. The Appraisal of Real Estate, 10th ed., 383.
45. Ibid., 385.
46. Ibid., 383.
47. Ibid., 385.
48. It is understood that when paired-sales analysis is applied, an adjustment amount should be derived from more than one paired sale, but when there are limited data, the technique should not be discarded because there is no more than one paired sale. (See Ibid.)
49. Ibid., 452.
50. For example, see Aalberts and Clauretie, 355.
52. The Appraisal of Real Estate, 10th ed., 452.
Bulger, Brian. "Impact of the ADA Exceeds Predictions." The National Law Journal (February 28, 1994): S7-S9. Institute of Real Estate Management. ADA Title III: Compliance Made Practical Chicago: Institute of Real Estate Management, 1992.
Williams, Martha R. and Marcia L. Russell. ADA Handbook USA: Real Estate Education Company, 1993.
Richard W. Hoyt, MAI, SRA, PhD, is associate professor of real estate at the University of Nevada, Las Vegas, and is also a commercial appraiser with Dunn & Associates, Las Vegas. He received a PhD from the University of Arkansas, and is past chair of the Research Advisory Board. Dr. Hoyt has published widely.
Robert J. Aalberts is the Ernst Lied Professor of Legal Studies at the University of Nevada, Las Vegas. He received a JD from Loyola University and an MA from the University of Missouri, Columbia. His articles have appeared in a number of real estate-related publications.
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|Author:||Hoyt, Richard W.; Aalberts, Robert J.|
|Date:||Jul 1, 1995|
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