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Land rent reset arbitration in Hawaii: credibility and transparency.

ABSTRACT

Hawaii explicitly requires appraisers who act as arbitrators in land rent reset disputes to follow the Uniform Standards of Professional Appraisal Practice in their analyses and their reporting of rent determinations. In the past, appraisers had obscured the analysis and only reported their rental conclusions to the parties to the dispute. As a result, the intended users were unable to verify the analysis used to reach the rent conclusion. This lack of transparency was damaging the credibility of the appraisal industry in the state. This article explores the circumstances that led to the legislation, suggests why appraisers-arbitrators should follow appropriate minimum analytic and reporting requirements, and discusses how the requirements impact the arbitration process.

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When Hawaii became the fiftieth state, a handful of owners held a very large proportion of its real estate. This concentration of ownership has not changed much since then. For example, in Honolulu County, a small number of owners still controls over 70% of the privately owned land on the island. Landowners (including the State of Hawaii) typically lease their land holdings for long durations so they can retain the land asset yet achieve a return on the asset.

With such a small proportion of land left available for fee simple ownership, leaseholds are the norm for commercial and industrial land. Both the lessors and lessees of commercial and industrial land in Hawaii realized long ago that the duration and terms of land leases are important determinants of how the land can be used by the lessee. If the duration of the lease is too short, the lessee will be unable to finance the real estate or will have insufficient time to amortize an investment in building improvements. If the rent is set at a fixed amount for too long a term, the lessor will find the return on the land asset is far less than what could be achieved under current market conditions. (1) Consequently, long-term land leases of fifty to seventy years have become customary in Hawaii, where the rent is renegotiated periodically (usually every ten years).

Land Rent Renegotiation Practices

Under most of the Hawaii land leases, the lessor and the lessee can agree on a new rent for the ensuing period. If they are unable to agree, they are contractually committed to binding arbitration. When arbitration is needed, the lease often requires the rent for the next period to be determined by a panel of three appraisers (one appointed by the lessor, one appointed by the lessee, and a third one chosen by the two already-appointed appraisers). The majority decision of the three appraiser-arbitrators is binding.

In the past, the arbitration decisions were often issued as a written statement of the rental conclusion by the majority on the panel. However, these statements frequently did not include the support, reasoning, or explanation for the conclusion of the panel. While the lease contracts required the arbitration panel members to be appraisers, many of the appraisers would argue that once they were appointed as arbitrators, they were no longer acting as appraisers and as such their valuations were not covered by the requirements of the Uniform Standards of Professional Appraisal Practice (USPAP). This led to many problematic practices that tarnished the reputation of the appraisal industry in the state. Some of the more notable problematic practices included the following:

* Using a constant, yet unsupported, market land capitalization rate that was higher than the overall capitalization rate for improved properties on the same type of land--which is illogical.

* Finding that the market capitalization rate on land was always 8% without providing any actual market data to support such a rate.

* Using rentals set through arbitration as indications of market rent when such rentals actually only represent a solution to avert an impasse in agreeing on rent.

* Arriving at market rents that were higher than rental offerings in the immediate area of the subject property.

* Using market rent comparables that were the result of decisions by the current arbitrator who had been decisive in determining the comparable's rent as well, or where the comparable rent was established by lessees and lessors after reaching a mutual agreement in lieu of the alternative arbitration process.

* Providing the parties with no data, analysis, or support for the arbitrators' conclusion.

Where the appraiser-arbitrators did not properly consider the exact terms of a rental employed as a comparable, erroneous bases were used to make rent determinations. For example, a rental comparable was used that had been set in a rental agreement established under a contractual default. For this comparable, the lessee had intended to arbitrate the rent offered by the lessor but had just missed the contractual deadline for notifying the lessor of the intent to arbitrate. The rent was then set at the lessor's asking rent because of this contractual default, yet the appraiser-arbitrator used this transaction as an indication of market rent. In another instance, a rental included very low land rents in the initial Five-year period along with six rent-free months. The rent then increased substantially in the last five years of the ten-year rental period. The arbitrator used the average of the annual rents for the ten-year period as the reported rental comparison and never considered the impact of the initial period. Obviously, a higher rent at the end of ten years is worth less than it would be at the beginning of the ten-year period. Therefore, a mere averaging of the overall annual rents was inappropriate.

The treatment of land capitalization rates in the rent renegotiations was especially problematic. Typically, the land portion of a real estate investment is the safest portion, and the building improvement portion should have a higher capitalization rate. There are a number of reasons for this.

First, the building depreciates over time and the land does not. Second, improvements generally incur more management costs than vacant land. Third, improvements, whether or not they are occupied, incur Fixed expenses, such as fire insurance and higher real estate taxes.

Fourth, the land lessor typically enjoys a priority position vis-a-vis all other interest holders in the property, securing the rental income stream to the land. When land under lease has been improved by tenants but the tenants then default, the landowner takes back the land and the improvement. In these cases, default means the lessor gains more value than the land that was leased. The lessee loses all investment in the improvements that the lessee has made.

Fifth, an investment in the improvements by a lessee must be recaptured so as to satisfy the return on the investment, as well as the return of the investment, within the economic life of the building improvement or the lease term, whichever is shorter.

Finally, the land investment realizes its return on investment from the potential rental income received from leasing the investment. It realizes the return of investment from the sale of the land at the end of the holding period. This means the land capitalization rate should be lower than the building capitalization rate. Hence, it is also lower than the overall capitalization rate for the improved property.

It was problematic in Hawaii that the high land capitalization rate found in many of the arbitration valuations did not vary on the bases of the quality of the land being leased, the permissible use of the property, the quality of the tenant leasing the property, or the terms of the lease contract. In fact, the rate often used by many appraiser-arbitrators (a uniform 8% in Honolulu) has not changed in many years, even as market rates of return have declined. It was illogical to apply an 8% capitalization rate to land where the appraisers had been applying capitalization rates of between 6.5% and 7.5% to improved properties, yet this is what had been occurring. The appraiser-arbitrators used land capitalization rates reported by landlords without providing any actual market data support. Rates are supposed to be calculated by determining rent and value. Value is always an opinion, and an appraiser must always provide supporting market data for capitalization rates and comparable rents.

Arbitration Legislation

Because the intended users of the arbitration decisions were not given a report describing how the appraiser-arbitrators had reached their conclusions, some became skeptical of the rent reset arbitration process. Several users approached the legislature for a solution, and in 2011 the Hawaii legislature enacted Hawaii Revised Statutes Section 466R-6 (amended in 2014) to require appraisers acting as arbitrators in a rent arbitration to certify compliance with the current Uniform Standards of Professional Appraisal Practice (USPAP) in connection with any arbitration proceeding to determine the fair market value, fair market rental, or fair and reasonable rent of real property. The statute also requires that "the record of an award shall include but not be limited to findings of fact; the state-licensed or certified appraiser's rationale for the award ... and information regarding the evidence, including the data, methodologies, and analysis that provided the basis for the award."

The stated purpose of the legislation is "to bring data, openness, and transparency to a market controlled by few landlords and very few commercial and industrial appraisers." (2) Where once appraiser-arbitrators had been immune to any investigation because they were deemed not to be serving as "appraisers," the statute now puts an appraiser's license at risk if the arbitration process and findings are not found to meet minimum USPAP standards.

After enactment of the new arbitration report requirements, the legislative intent of transparency was frustrated by confidentiality clauses incorporated into agreements governing the individual arbitration panels. In response, in 2014, a provision was added to the law stating, "No agreement between the parties or the appraisers acting as arbitrators shall preclude or deny the requirement to record an award, the record of the award, or any supplementary, dissenting, or explanatory opinions as required by this section." (3)

The amendment ensures that the arbitration matters are publically disclosed. Appraise-arbitrators must file a record of their findings with the State Bureau of Conveyances for potential public review. The record must include the awards along with any supplementary, dissenting, or explanatory opinions on awards. Any interested party may request a copy of a recorded real estate transaction. (4) Failure to comply with these requirements is a violation of the licensing and certification statute.

Hawaii Revised Statutes Section 466R-6 was enacted, in part, to add transparency to what had become a fairly murky process, where the conclusions from arbitration panels often could not be readily reconciled with actual market activity. The legislation's goal was to ensure that arbitrators would both properly analyze market data, and report their analysis and findings so that the parties to the lease could understand how the conclusion was reached.

Major Results Ensuing from the Legislation

The provisions of Hawaii Revised Statutes Section 466R-6 impacts appraiser-arbitrators and the arbitration process in a number of ways.

Use of All Market Data to Reach Conclusion of Rent Value

The first result from the law is that the appraiser-arbitrators have to consider all market data in arriving at a conclusion of rent value. It had been the practice of some appraiser-arbitrators to only consider the evidence presented to them at an arbitration hearing. However, USPAP Standards Rule 1-4 states, "In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results." (5)

This one requirement should have a profound impact on the arbitration process since now the arbitrators are responsible not only for the market data presented to them by the parties to the lease but for all other relevant market data as well. Similar to the requirements of a more conventional appraisal assignment, the appraiser-arbitrator must ensure all relevant market data is considered, whether or not that data is provided by the parties to the arbitration. This could mean an end to the arbitration process where the arbitrator is left with choosing only between the amounts presented by each party ("baseball arbitration").

Use of Actual Market Transactions to Determine Capitalization Rate

The second result from the law is that appraiser-arbitrators have to use actual market transactions to determine the capitalization rate they apply to land values to derive a market rent for the land. This rate is used when the appraiser-arbitrator applies a direct capitalization approach to land valuation to arrive at market rent. The basic algebra for direct capitalization is

Income = Rate x Value. (6)

This formula's other derivations are Rate = Income/ Value or Value = Income/Rate. Note that these formulas do not refer to price but to value. While price is factual, value is always an opinion and requires appraisers to meet minimum standard requirements in its estimation. Value (at a minimum) means an appraiser must adjust transaction prices for the specific conditions of the transaction. Once an appraiser has decided whether or not such an adjustment is warranted, the price becomes a value because it is now an opinion. This means that by using this formula to arrive at a rate, an appraiser is completing an appraisal assignment, and that correct methodology must be applied to select the rate. To arrive at market rent by means of the direct capitalization approach to land valuation (Rent=Rate x Value) the following steps are required:

1. The market value of the fee simple land is estimated (remembering there are several potential valuation methods available). (7)

2. A market land capitalization rate is extracted from market rental data (adjusted for the conditions of the lease), and market sales data (adjusted for the conditions of the sale and other transactional adjustments as necessary).

3. The subject's estimated land market value is multiplied by the market-derived land capitalization rate to arrive at an indication of its market rent.

For this simple algebraic formula to actually produce an indication of the land's market capitalization rate, the rent applied must be market rent as of the effective date of value, and the value applied must be market value as of the effective valuation date.

Before the enactment of Section 466R-6, some appraisers in the state would simply verify rates that lessors claimed they were achieving. They would call large land lessors in the state and ask them what rate they were getting on their land rents. This was felt to be sufficient as a measure of the market rate of return. Under Section 466R-6 this practice should end because USPAP, in Standards Rule 1-4(c), specifically provides that

When an income approach is necessary for credible assignment results, an appraiser must:

(iii) analyze such comparable data as are available to estimate rates of capitalization and/or rates of discount; (8)

While prices and rents are facts that are verifiable by market participants, rates are the relationship between the rent and the value. Rates must be ascertained by judgment. Table 1 shows an example of how some appraisers in Hawaii supported rates for land rents in the past. While the table has been edited, it closely resembles a list provided by lessors and replicated by some appraisers in their reports. Often, such tables would include thirty or more properties, with many of the rents having been set by arbitration or by agreement between the lessor and lessee at a rent renegotiation. The tables would show exactly the same rate of return every time, yet any lengthy list of transactions that arrives at exactly the same rate of return every time is illogical and suspect. The real estate market is simply not that exact or uniform.

At first glance, the list in Table 1 appears to support an 8% land capitalization rate. However, the 8% rate becomes less convincing if evidence such as the following is considered:

* Land zoned IMX-1 and 1-2 in the area was selling for $90 to $150 per square foot.

* Directly across the street from the first rental shown, a four-acre parcel zoned 1-2 sold for $120 per square foot.

* Land adjacent to the last rental shown sold for $130 per square foot.

Given this additional market data, the reader might question how the appraiser justified the 8% rate of return. Obviously, if a parcel could sell for $130 per square foot and only rent for $5.00 per square foot, the rate for the land would be approximately 3.85% ($5.00/$130 = 3.846%). While the lessor might claim to be achieving a rate of 8% for the land, actual market data would show the lessor is not.

A more credible way of determining the market rate for the land would be to do the following:

1. Look at the contracted land rent and adjust it for specific conditions of the contract to arrive at an indication of market rent at the time the rent was set.

2. Determine by a direct market comparison approach the market value of the underlying land as of the date the rent was set

3. Divide the indicated rent by the indicated market value to arrive at an indicated capitalization rate for the land.

The resulting land capitalization rate would then be supported by market data. By actually using market data to derive indicated land capitalization rates, appraiser-arbitrators arrive at more credible conclusions.

Use and Reporting of a Systematic Process to Estimate Value

The third result ensuing from the statute is that appraiser-arbitrators need to follow and report a proven systematic process for estimating values. This is essentially good appraisal practice, which requires appraisers to utilize a scientific process to arrive at market rents, values, and rates. As The Appraisal of Real Estate, 14th edition, states,
   Professional appraisal practice applies the scientific
   processes of economic analyses (i.e., the valuation
   process) and the professional purposes of appraisal
   are to develop conclusions in an impartial, objective
   manner, without bias or any desire on the part of
   appraisers to accommodate their own interests or the
   interests of their clients. To form sound conclusions,
   appraisers avoid personal beliefs or biases and search
   for market evidence to support their appraisal opinions.
   It is this level of independence and freedom from
   either personal views or personal financial gain, and
   strict adherence to scientific principles contained in
   the valuation process, that separate the profession of
   appraisal from other fields that also deal with real
   estate values. (9)


A scientific process always requires the researcher not only to properly research and test the findings, but also to report those findings in sufficient detail to allow the reader to reexamine them to determine if they are credible. For determining values and rents used to calculate rates, such a process requires an appraiser to follow multiple steps.

The first step in the process is to identify the problem to be solved. This requires the appraiser-arbitrator to carefully read the lease contract to determine exactly what they are required to estimate. Contracts can vary significantly. By a careful reading of the contract, the appraiser should be able to define the value to be estimated, the terms to be considered, and the process to be followed. Unfortunately, many of the subject contracts do not clearly define the terminology therein. The contracts often do not specify whether the rent is to be calculated for the remaining term (which may be very short), or as if entering the initial term. They often fail to state whether the rent is for the land as it was when initially leased (possibly ungraded and without utilities), or as it is now. This lack of clarity is especially evident when it comes to the definition of the rent to be calculated. Contracts appear to use terms interchangeably, such as fair and reasonable rent, market rent, fair market rent, the then land value multiplied by the prevailing rate of return for such land, or simply rent; but contracts rarefy provide a definition of these terms. Therefore, the first order of business should always be to define the terms and the value to be estimated. Because this is a matter of contract law, agreement of the parties must be reached on the definition of the terms, or the terms must be defined by a legal authority. Defining the terms used within a contract is beyond the professional expertise of a real estate appraiser. The reader should note that the U.S. Supreme Court has stated that adjectives such as fair do not alter the basic definition of market value. (10) It can be contended that this holds for fair market rent and fair and reasonable market rent as well.

The second step in the process is to determine the purpose of the assignment. The purpose of an arbitration of a land rent dispute is often to find a fair and equitable solution that meets the requirements of the contract, USPAP, and the law.

The third step is to determine the scope of work required to solve the appraisal problem. Once the problem and purpose of the assignment is identified, the appraiser can determine what scope of work is appropriate for the solution to the problem. In land rent arbitrations, the appraiser-arbitrator is often asked to consider appraisals provided by appraisers who are acting as professional witnesses. Because the law requires the appraiser-arbitrator to certify compliance with USPAP, the appraiser should be careful to define the scope of work so as not only to ensure compliance with Standards Rules 1 and 2, but also with Standards Rule 3 (dealing with appraisal review). When an appraiser critiques an appraisal (i.e., forms an opinion of the report's credibility), adherence to Standards Rule 3 is required. The scope of work should include consideration of all valuation methodologies that can lead to credible results, and the appraiser-arbitrator should be prepared to explain the elimination of any method from consideration. The appraiser is obligated to apply all valuation methodologies that are necessary to develop credible results. In USPAP, the Comment on Scope of Work Acceptability states,
   An appraiser must be prepared to support the decision
   to exclude any investigation, information, method, or
   technique that would appear relevant to the client,
   another intended user, or the appraiser's peers. (11)


The valuation of land rent can involve several possible methods of valuation, including direct rental comparison, rental extraction, rental allocation, direct capitalization, a land rent residual method, and subdivision development analysis. (12) Each approach should be considered to determine whether it is appropriate and can lead to credible results. Support for elimination of any of the approaches should be cited in the work file.

The fourth step is the collection and verification of data to be used in the appraisal methodologies. The availability of data and how well it can be verified are often major issues. The lack of sufficient data can often lead to the elimination of one or more of the methodologies. As part of the data collection process, the appraiser-arbitrators must consider whether rents that were set under compulsion meet the definition of market rent. The current definition of market rent in The Dictionary of Real Estate Appraisal, 5th edition, is as follows:
   The most probable rent that a property should bring in
   a competitive and open market reflecting all conditions
   and restrictions of the lease agreement, including
   permitted uses, use restrictions, expense obligations,
   term, concessions, renewal and purchase options, and
   tenant improvements (TIs). (13)


It had been the practice of some appraisers to treat rents in agreements between a lessor and a lessee at a rental renegotiation of a long-term lease, or rents set by arbitration panels as being equivalent to market rent. A look at the circumstances of how these rents were set should make the appraiser suspect of whether they actually represent market rent. When the parties to a long-term land lease arrive at the period where the rent is to be reset, both know the lessee is going to pay rent for that property one way or another. Both are locked into a longer contract. The lessee does not have the opportunity to consider other space or to threaten to vacate the space. The lessor does not have the right to offer the space to others. This means that no matter how the rent is reset for the next period, it is not be through a competitive and open market The only alternative for either party is to resort to arbitration, which is an uncertain, costly, and lengthy process. A rent that is established under these conditions may eventually be found to be equivalent to market rent, but first must be tested against other market rentals to determine whether the element of compulsion resulted in a rent that requires an adjustment for the conditions related to how it was set Appraisal Institute Guide Note 11, while directed at the use of distressed sales in the sales comparison approach, sheds light on the proper way to treat rents established in such a manner:
   When the objective of the assignment is market
   value, ideally each comp selected for use in the sales
   comparison approach should have sold under the
   conditions specified in the definition of market value
   being used. For example, the buyer and seller should
   have been typically motivated. The seller should not
   have been under any compulsion to sell, nor the buyer
   under any compulsion to buy. The marketing effort
   and exposure time on the market should have been
   typical for that property type in that market. Payment
   should have been in cash or terms equivalent to cash;
   i.e., the seller should not have granted cash or non-cash
   concessions to bring a sale at the stated price.
   When the conditions of the sale do not reflect the
   conditions outlined in the market value definition, either
   (1) the appraiser must consider making adjustments for
   such differences if it is to be used as a comp, or (2) the
   sale must not be used as a comp. (14)


Obviously, the same can be said about using rental comparables to arrive at market rent or market rates of return. When the conditions of the rental do not reflect the conditions outlined in the market rent definition, then the appraiser must consider making adjustments for such differences if it is to be used as a comp, or the rental must not be used as a comp.

Of course, the appraiser must also determine whether the terms of the lease being considered as a comparable are similar to, inferior to, or superior to the subject. For example, does the comparable:

* Have a similar duration to allow financing and amortization of building improvements?

* Have similar rent reset intervals?

* Have rent fixed for longer periods, or is the rent stated for the entire lease duration?

* Have requirements that the tenant improve the property to a certain level?

All of these conditions must be examined by the appraiser to determine their impact on the rent and rate of return.

The fifth step in this scientific process is the actual application of appraisal valuation methodologies. Having identified the problem to be solved, the assignment purpose, the scope of work, and the data to be used to arrive at the solution, the appraiser can now apply the data in the various available appraisal methodologies to solve the problem.

The sixth step is to weigh the strengths and weaknesses of the analyses completed. The scientific process requires the appraiser to reconcile the various findings to arrive at a solution to the problem. An often-neglected part of reconciliation is a discussion of how the different methods based on varying data tend to support a conclusion. As Mundy states in his Appraisal Journal article, "The Scientific Method and the Appraisal Process":
   The multimethod/multitrait approach is an important
   scientific technique for analyzing data. It is based on the
   premise that independent analyses of discrete sets of
   data will yield results that tend to validate one another.
   When multiple approaches are used with discrete sets
   of data the reliability of the result should improve. (15)


The conclusions reached are more credible when several methods based on different sets of data produce similar results.

The seventh and final step is to report the entire process in sufficient detail so that the reader can determine whether or not the appraiser has met the minimum requirements for analyzing the data and reporting the findings. In this step, the appraiser provides a certification in conformity with Standards Rule 2-3 (and possibly Standards Rule 3-3 if review work is completed) that confirms the results are the appraiser's own work and conclusions, that the conclusions are unbiased, that the report was prepared in compliance with USPAP, and discloses whether the appraiser has completed any other services involving the property in the last three years. This final aspect affects appraisers in Hawaii, where in some instances an appraiser-arbitrator had valued the subject property for one of the parties as part of the initial rent negotiation but had not disclosed this work in the appraisal certification while serving as an arbitrator. The difference between the valuation completed before the arbitration and the one completed as part of the arbitration would have been difficult to explain as they differed substantially and would have given rise to credibility issues.

This last step in this scientific process is likely the most important to ensue from the statutory requirements. Appraiser-arbitrators now have to show the users of their work the entire process by which the conclusions were obtained. When the statute states the appraiser-arbitrator must certify compliance with USPAP, it does not state only with part of USPAP. The appraiser-arbitrator is now obligated by statute to comply with

* The Ethics Rule, Scope of Work Rule, and report record-keeping requirements

* The analysis provisions of Standard 1

* The reviewing analysis requirements of Standard 3 (if the appraiser has been asked to do appraisal review work as part of the arbitration)

* The reporting requirements of Standard 2, including a signed certification in the work file and the report to the intended users stating whether the appraiser has complied with the USPAP, including Standards 1, 2, and 3 (if the appraiser has been asked to do appraisal review work as part of the arbitration).

Resistance to Improved Arbitration Practices

Some have suggested that the requirements in the statute may be unworkable or may make it too difficult for the arbitrators to arrive at a majority conclusion. However, keep in mind that the leases in question often require the lessor and lessee to look to appraisers, and only appraisers, as arbitrators of such disputes. This is because the appraisal profession has, over its long history, proven itself a credible resource for estimating market values and market rents. Appraisers gained credibility by showing users what information was used, how it was used, and why such information supported the results arrived at. Under the former system of arbitrating lease disputes, the users of these professional appraisal services were often left with legitimate questions as to how the appraiser-arbitrators arrived at their conclusions. The parties to the arbitration were simply provided an award letter that included no data, no analysis, and no reconciliation. They could not replicate the arbitrators' process because it was never disclosed to them. The lack of transparency left the process open to questions of collusion, bias, and incompetence. The impact could only be negative.

The statute's requirement that appraiser-arbitrators abide by the minimum requirements of USPAP in their analysis, reporting, and review work means the reports issued to the parties of the dispute need to show how the outcome was reached. It also means a paper trail exists for intended users to follow if they find the results are not credible. The users can verily the data and attempt to replicate the appraiser's steps to test them. While documented support for the conclusions of the arbitration does not eliminate disagreement over an outcome, it does provide evidence that a time-tested process was used and allow that process to be scrutinized. All of this enhances the credibility of the appraisal industry and help it comply with the provisions of the Ethics Rule of USPAP which states, "An appraiser must promote and preserve the public trust inherent in appraisal practice by observing the highest standards of professional ethics." (16)

To conduct themselves as appraisal professionals means the arbitrators have to put more effort into arriving at and reporting their analyses and conclusions. The market does not hire appraisers as arbitrators because of their training as arbitrators. The market hires appraisers to be arbitrators because they are well-trained, outstanding estimators of market value and market rent.

There have been some attempts to minimize the impact of the law. The purported strategies include the following:

* Claiming the client in the arbitration is one entity, i.e., the parties to the lease. This is done in an attempt to reduce the reporting requirements to a restricted appraisal report.

* Asking the parties to specifically exempt the arbitrators from any damages.

* Simply regurgitating the data and analysis provided as evidence at the arbitration hearing without providing any of the appraiser-arbitrator's own data findings and analysis.

* Requiring the parties to the lease to sign confidentiality clauses whereby the results of the arbitration cannot be shared with outside parties.

However, each of these attempts to maintain the former status quo of obscurity should fail based on closer examination. Arbitration always involves a dispute between two parties. While it may be possible to identify the client for arbitration as both parties (even though USPAP never specifies the client in a plural sense), if the parties are represented by legal counsel, the intended users are likely to include others besides the lessor and lessee. USPAP is specific in stating that a restricted report can only be used if the client is the only intended user. This would mean a restricted report would not be allowed under USPAP, which states, "When the intended users include parties other than the client, an Appraisal Report must be provided." (17) USPAP also states, "Intended users of the report might include parties such as lenders, employees of government agencies, partners of a client, and a client's attorney and accountant." (18)

While the parties may exempt the appraiser-arbitrator from direct financial damages, the agreement does not render the appraiser-arbitrator immune to discipline for licensing infractions or professional misconduct. The term "appraiser-arbitrator" involves acting as an appraiser and carries all of the responsibilities that go with completing the assignment. USPAP applies to the appraiser as an individual. The appraiser cannot avoid responsibility for the data used, the analysis applied, or the conclusion reached by claiming that was done by someone else. Standards Rule 2-3 requirements include the following certifications:
   The reported analyses, opinions, and conclusions are
   limited only by the reported assumptions and limiting
   conditions and are my personal, impartial, and unbiased
   professional analyses, opinions, and conclusions. (19)

   My analyses, opinions, and conclusions were developed,
   and this report has been prepared, in conformity
   with the Uniform Standards of Professional Appraisal
   Practice. (20)


USPAP goes on to state,
   In an assignment that includes only assignment
   results developed by the real property appraiser(s),
   any appraiser(s) who signs a certification accepts full
   responsibility for all elements of the certification, for
   the assignment results, and for the contents of the
   appraisal report. (21)


This should make it abundantly clear that once an appraiser-arbitrator signs the arbitration conclusion, the appraiser-arbitrator has taken ownership of the data, analysis and conclusion in their entirety.

Conclusion

The appraisal industry loses credibility when it allows practitioners work in the shadows and conceal from scrutiny the steps they take in the valuation process. Such was the case in Hawaii. The state legislature, therefore, stepped in to bring transparency to what has been a very opaque process. The work of appraisers who serve as arbitrators is now subject to review not only by the parties but also by the public at large. The changes allow users to verify the data and the analysis employed by appraiser-arbitrators, allowing a level of examination that did not exist previously.

It is the transparency of the process that makes an appraiser a professional. A conclusion that relies on verifiable data and testable analysis is the foundation of a credible appraisal service. No reader of an appraisal should have to make a leap of faith that the results were developed correctly. Showing users of appraisal services how the solutions to their appraisal problems were researched and solved only strengthens the credibility of the appraisal industry.

Web Connections

Internet resources suggested by the Y. T. and Louise Lee Lum Library

Lincoln Institute, Land and Property Values in the U.S. http://www.lincolninst.edu/subcenters/landwalues/price-and-quantity.asp

National Association of Realtors, Field Guide to Ground Leases http://www.realtor.org/field-guides/field-guide-to-ground-leases

NCREIF--Database with valuation/lease data and transaction data http://www.ncreif.org/data.aspx

NNNex.com Net Lease Exchangelnvestment and market research http://www.annex.com/page_resources.asp?ref=3

Society of Industrial and Office Realtors--Resources http://www.sior.com/resources

(1.) Tory Sevelka, "Ground Leases: Rent Reset Valuation Issues," The Appraisal Journal (Fall 2011): 314-326.

(2.) Hawaii House Bill 1830 (2014), Section 1, preamble.

(3.) Hawaii Revised Statutes Section 466K-6(d).

(4.) Ibid., Section 466K-6(a) and (c).

(5.) Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice 2014-2015 ed. (Washington, DC: The Appraisal Foundation, 2014), U-19; Lines 582-583.

(6.) Appraisal Institute, The Appraisal of Real Estate, 14th ed. (Chicago: Appraisal Institute, 2013), 492.

(7.) Ibid., 365.

(8.) Uniform Standards of Professional Appraisal Practice, 2014-2015, U-19; Lines 592, 597-598.

(9.) The Appraisal of Real Estate, 14th ed., 717.

(10.) United States v. Miller, 317 U.S. 369, 374 (1943).

(11.) Uniform Standards of Professional Appraisal Practice, 2014-2015, U-14; Lines 238-440.

(12.) The Appraisal of Real Estate, 14th ed., 364-376.

(13.) Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010), s.v. "market rent."

(14.) Guide Note 11, Comparable Selection in "Comparable Selection in a Declining Market," Guide Notes to the Standards of Professional Appraisal Practice of the Appraisal Institute (Chicago: Appraisal Institute, 2013); available at http://www.appraisalinstitute.org/assets/1/7/guide-note-11.pdf.

(15.) Bill Mundy, "The Scientific Method and the Appraisal Process," The Appraisal Journal (October 1992): 495.

(16.) Uniform Standards of Professional Appraisal Practice, 2014-2015 ed., U-7; Lines 217-218.

(17.) Comment, Standards Rule 2-2, Ibid., U-21, Lines 659-661.

(18.) Ibid., U-22, Lines 684-685.

(19.) Ibid., U-26, Lines 816-818.

(20.) Ibid., Lines 834-835.

(21.) Comment, Standards Rule 2-3, Ibid., U-26, Lines 846-849.

R. J. Kirchner, SRA, is a principal in Paradise Appraisals, LLC, in Kailua Kona, Hawaii. He has held an SRA designation since 1988. Kirchner is a certified general real estate appraiser in the state of Hawaii, and he does appraisals throughout Hawaii. His practice includes commercial and industrial real estate valuation, high-end home valuation, eminent domain, service as an arbitrator in land rent disputes, litigation support, and review work. He was an initial member of the Minnesota State Licensing Board, and currently serves on the advisory panel for the Regulated Industries Complaints Office of the State of Hawaii. Contact: rj@pahawaii.com
Table 1 Eight Land Parcels Purported to Have the Same 8% Rate of
Return

                       Usable
                      Land Area            Lease or    Effective
Street Address         Sq. Ft.    Zoning   Extension     Date

### Kam Hwy            429,800    IMX-1    Extension    5/1/2010
### Dillingham Blvd    128,060    IMX-1    New Lease   2/28/2010
### Kakoi Street        44,000     1-2     New Lease   11/1/2009
### Mapunapuna St       35,000     1-2     New Lease    1/1/2013
### Waiwai Loop         25,000     1-2     New Lease    1/1/2012
### lliwai Street       43,560    IMX-1    New Lease    6/1/2012
### Dillingham Blvd     80,000     1-2     New Lease    8/1/2012
### Kam Hwy             16,000    IMX-1    New Lease   11/1/2012

                                    Rate                   Land
                                     of                   Value/
Street Address           Rent      Return   Land Value    Sq. Ft.

### Kam Hwy           $1,283,333     8%     $16,041,667   $37.32
### Dillingham Blvd     $500,049     8%      $6,250,609   $48.81
### Kakoi Street        $236,000     8%      $2,950,000   $67.05
### Mapunapuna St       $186,550     8%      $2,331,875   $66.63
### Waiwai Loop         $145,000     8%      $1,812,500   $72.50
### lliwai Street       $196,020     8%      $2,450,250   $56.25
### Dillingham Blvd     $340,000     8%      $4,250,000   $53.13
### Kam Hwy              $80,000     8%      $1,000,000   $62.50

Note: IMX-1 zoning is industrial-commercial mixed use; 1-2 zoning is
intensive industrial use.
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Author:Kirchner, R.J.
Publication:Appraisal Journal
Geographic Code:1U9HI
Date:Sep 22, 2014
Words:6704
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