Nine big ideas: Appraisal Journal articles that influenced a generation.
In its 75-year history, The Appraisal Journal has published over 4000 articles on all aspects of real estate valuation and appraisal practice. This article looks at nine articles published in The Appraisal Journal that have been repeatedly identified as having a significant impact on a generation of appraisers.
The Appraisal Journal has been the most prominent "peer-reviewed forum of information and ideas on the practice and theory of valuation and analyses of real estate and related interests" (1) since its inception in October 1932. In that time, it has placed before its readers virtually every new idea of merit to emerge from designated appraisers, the academic community, and other interested participants in valuation theory. Perhaps most interesting have been the recorded debates on the ideas: Inwood versus Hoskold; before-tax analysis versus after-tax analysis; cost and sales comparison versus income capitalization. In this the 75th anniversary of its publication, the editorial board thought it would be interesting to look back over the more than 4,000 articles and identify some of those that have had a measurable influence on the readership. The selection criteria were loose but included level of interest, test of time, and practicality. Ultimately nine articles were chosen as most representative of these characteristics.
Many were surveyed in an effort to identify appropriate articles. The Journal's editorial board and review panel members, for example, were asked to reveal their favorites, as were members of its academic review panel. Past presidents of the Appraisal Institute were e-mailed with a similar inquiry. They were asked to acknowledge those articles that have had the biggest influence on them and their careers in appraising. The results of this process were interesting, as the articles noticed were not necessarily groundbreaking. Rather, in many cases, they were simply interesting pieces that had somehow stuck with the reader through the years.
Of course, surveying current members slants the selection process towards contemporary articles. However, every article to have appeared was considered (though most could be quickly dismissed without a complete reading) in order to avoid missing particularly significant works. Past award winners were given particular consideration. (2) The excellent scholarly research volume by James H. Burton, PhD, entitled Evolution of the Income Approach, (3) was also consulted. Burton's work traces the origins of the various ideas, theories, and arguments relating to that aspect of appraisal. This fascinating book is must reading for students of appraisal.
There is no magic to the number settled on for inclusion. Not all "big idea" articles published in the Journal were well written enough to merit including, and some of the really well-written pieces were not profound or original enough. There are bound to be differences of opinion on what has been included and what has been left out. It is doubtful, however, that anyone will object that those included are not worthy of recognition.
From the initial examination of the articles published in The Appraisal Journal and the responses of members and others as to their favorites, several broad categories of topics emerged as fertile ground for likely choices: income capitalization; highest and best use and market analysis; contamination; and miscellaneous/general topics. The articles selected and discussed here are organized by these categories.
A logical starting point for the discussion of the articles is income capitalization, as this category, as might be expected, holds the most choices and begins with the oldest of the articles. This group is followed by those under the broad topic of highest and best use and market analysis, then contamination, and finally the general thought pieces.
Topics Relating to Income Capitalization
There were lots of choices among the income capitalization articles, but the three discussed within this section jumped out. The first article, by S. Edwin Kazdin, deals with the band-of-investment method for developing a capitalization rate, which is still taught in Appraisal Institute curriculum. Kazdin's article also provides a good discussion of the importance of business cycles in rate determination. This is followed by a discussion of Charles B. Akerson's classic article on the Ellwood model, a logical progression from the band of investment. The final article in this category, by Peter E Korpacz and Mark I. Roth, deals with discounted cash flow analysis, which emerged as the income capitalization method that displaced Ellwood.
"Capitalization Rates Under Present Market Conditions," S. Edwin Kazdin (October 1944)
"Capitalization Rates Under Present Market Conditions," by S. Edwin Kazdin, (4) is often cited as a benchmark piece for two reasons: (5) First, it improved the band-of-investment method of developing an overall capitalization rate by using the mortgage constant in the mortgage band instead of the interest rate as suggested by the method's innovator, Thurston H. Ross. (6) Second, it emphasized the importance of fully considering business cycles in determining a rate of capitalization. (7)
The lecture upon which this article is based (8) must have been quite an event, as it begins with a tirade about bad appraisers, lender pressure, and inflated appraisals. (Some things just do not seem to change.) With the war ending and lenders flush with money to lend, the public debt increased to $260 billion (it was $8.3 trillion as of May 22, 2006), and with real estate activity rising quickly, Kazdin warns, "some appraisers have become infected with the germ of ever higher markets" He cautions that markets do not always go up, and appraisers must heed the reality of business cycles.
[W]e must consider the possibilities for future fluctuations in the business cycle, as we have seen it fluctuate in the past, and the possibility that we may run into a reduction in our present price level. While we analyze conditions as we find them today, we must also consider the possibilities for a change in the future. (9)
The business cycle introduction is followed by the theories of capitalization rate development in which Kazdin discusses the "Make-up of the Rate Theory" (10) and its limitations, i.e., it ignores actual real estate market comparisons and establishes a rate on the basis of highly theoretical computations.
Kazdin also discusses Dr. Thurston Ross's band-of-investment model, which Kazdin modified to account for amortization. Kazdin states that appraisers must be careful about amortization and adjust the overall rate if the amortization rate is either too much or too little as an offset to depreciation. However, he also tells appraisers that "we must constantly compare and test out our conclusions ... the capitalization rates can be no better than the judgment and experience of the appraiser." (11)
The article concludes with an illustration of how minor tweaks by an appraiser to vacancy, expenses, and the capitalization rate can lead to an enormous valuation inflation, which leads in turn to a bad loan. It is up to the loan officer, Kazdin emphasizes, to "appraise appraisers" and employ one "who is honest, who knows his business, who can support his valuations, who is alive to changes, and who can tell his story in simple language." (12)
"Ellwood Without Algebra," Charles B. Akerson (July 1970)
The next significant article on income capitalization is "Ellwood Without Algebra" by Charles B. Akerson. (13) When Fairfax, Virginia, appraiser Richard Parli was preparing to teach the Appraisal Institute's Advanced Income Capitalization course, he called Akerson to gain some insights into this article, as Akerson's work is still included in the course material. According to Parli, Akerson explained that he wrote the article because of his desire to become an Appraisal Institute instructor. At that time, Akerson recalled, there was an unwritten rule that instructors had to be published. Little could Akerson have known of the enormous reception his representation of the Ellwood formula would have on the appraisal community.
Leon W. Ellwood introduced his mortgage-equity method of capitalization at the end of the 1950s. His model began with Kazdin's basic band of investment using the mortgage constant and loan-to-value ratio, but also included several innovative elements: the concept of an investment holding period instead of the property's economic life, incorporation of an increase or decrease in the value of the property, and the principle of equity buildup.
As important as the model was, its algebraic presentation apparently intimidated many appraisers, and it was not immediately widely received. Several fine articles followed with elaborations and interpretations, (14) but it was Akerson's ability to convert the algebraic symbols and formulas into a readable format, and his clear explanations of the relationships represented by the formulas, that allowed the ideas to reach the general appraisal population.
The basic [capitalization] rate normally accounts for the major part of the overall rate; it must cover all income requirements except provision for depreciation or appreciation. The composition of the basic rate is generally defined with an algebraic formula; but it also can be demonstrated by a regular band of investment. The simple band of investment rate--or weighted average--of the mortgage interest rate and equity yield rate is the true basic mortgage-equity capitalization rate for an investment which can be financed with an "interest only" loan. (15)
Akerson was awarded the George L. Schmutz Memorial Award in 1972 for this article, and the Appraisal Institute subsequently published it as a pamphlet entitled An Introduction to Mortgage-Equity Capitalization.
"Changing Emphasis in Appraisal Techniques: The Transition to Discounted Cash Flow," Peter F. Korpacz and Mark I. Roth (January 1983 and April 1983)
The third noteworthy article in this category is "Changing Emphasis in Appraisal Techniques: The Transition to Discounted Cash Flow," written by Peter F. Korpacz and Mark I. Roth. (16) Prior to founding his own firm, Korpacz worked with Landauer Associates, Inc., of New York under John R. White. As Korpacz tells it, White was the impetus for this article. White used computer-generated discounted cash flow (DCF) analysis to list the Pan Am Building in Manhattan, primarily because there were so many leases, most of which were below market, and direct capitalization or DCF with a formula--such as Ellwood--just would not work. Application required use of a mainframe computer with the Quick Model by Decisionex software. This alone added $20,000 to $25,000 to the fee, and necessitated taking the inputs to the Burroughs computer company for processing and printing due to the volume of printouts. (17) The analysis was so well received and made so much sense that they began using it in place of the direct capitalization or mortgage-equity capitalization on all of their major assignments, usually those involving regional malls and office buildings.
The influence of this article was immediate, and the example in it was quickly incorporated into The Appraisal of Real Estate, beginning with the ninth edition. The problem presented in the article--valuation of the leased fee interest in a multitenanted office building--is commonplace today; at the time, however, it was not. Earlier models, such as the band of investment or Ellwood, lent themselves to normalized or distinctly patterened (K-factor pattern, for example) income streams. The stream in this example, however, was all over the place: each tenant had a unique rollover schedule, with a variety and complexity of escalation provisions for the existing leases. Furthermore, the sale price for the subject revealed an extremely low overall rate and equity dividend rate (3.4% and 2.45%, respectively). Understanding these investment criteria became crucial to developing a credible valuation.
The dilemma for the appraiser in any similar situation is to justify investment criteria outside the range of verifiable comparable data. It is not particular to the Pan Am Building; it is applicable to most existing multitenanted properties. Real estate markets with rapidly escalating rental rates compound the possibility of error; even when the appraiser adjusts the market data, a risk of error remains. (18)
Investors in complex income-producing property at the time were not paying attention to cost new or sales comparison; in their minds, cost had little relevance to the leased fee interest and each property's income expectations were too unique to be compared reliably. Furthermore, investors were not interested in a "contrived single NOI reflecting average or stabilized income expectancy, but they were interested in how much income they were going to receive and when they were going to receive it." (19)
The example in the article involves the valuation of a 951,049-square-foot office building with twenty-one leases. The data is presented in great detail. All necessary inputs are revealed. One particularly unique aspect of the DCF is the reversion: it is based on a second ten-year forecast, with a terminal rate applied to the twentieth-year NOI. (The holding period is ten years. Usual DCF applications would simply apply the terminal rate to year eleven. Korpacz felt the influence of a potentially poor reversionary estimate could be diminished by moving the rate out a second ownership period.)
The detail provided by the authors enabled appraisers to completely understand the methodology. It shortly became standard fare in the appraisal of complex investment property.
Due to unintended editing, the five concluding paragraphs of the article were omitted from the original publication. They appear in the April 1985 "Letters to the Editor" section of the Journal. In their final remarks, the authors emphasize that while the traditional appraisal methods still have applicability in many situations, more and more investors are relying on computer-assisted discounted cash flow analysis. They argue that for appraisers to remain relevant and reliable they must become conversant with the techniques used by the buyers and sellers they attempt to model in their valuations. The authors conclude,
Better market research, detailed sales verification, familiarity with all contemporary market-supported tools, including DCF analysis, statistics, and small business computers, and relevant continuing education may make the difference between the growth and prosperity of appraisers in the 1980s and their ultimate demise. (20)
Highest and Best Use and Marketability Analysis Topics
The broad topic of highest and best use and marketability analysis is another topic that was represented by many articles. The two selected here focus on the two concepts stressed even today in the Appraisal Institute's course Highest & Best Use and Market Analysis: the six-step process for market analysis and feasibility rent.
"Appraisal Should Be Market Study: Techniques of Analysis," G. Vincent Barrett (October 1979)
The first significant article in this category is "Appraisal Should Be Market Study" by G. Vincent Barrett. (21) While working at an architecture and engineering firm as an economics analyst, Barrett noticed that too little attention was being paid to feasibility analysis. The result of this shortcoming was that large projects were being planned and developed for which there was no demand. This issue later emerged on a major scale during the review of the savings and loan crisis of the 1980s, and was identified by Federal Home Loan Bank Board examiners as a major deficiency with appraisals. (22)
Although the concept of market analysis as an integral part of highest and best use analysis had been identified--particularly the shortcomings of the appraisal process relative to market analysis--little had been written about the steps in the procedure, (23) and nothing had appeared in The Appraisal Journal to this point. In this article, however, Barrett recognizes the need for appraisers to improve their market analyses, saying, "Despite the excellent training programs available through the professional societies, many of today's appraisers are not market analysts" The purpose of this article was therefore, "to demonstrate the nature and techniques of comprehensive market analysis, emphasizing the procedures required for new real estate developments." (24)
Barrett's article set forth the groundwork for what was to later emerge as the six-step marketability analysis process. (25) Within the context of a subdivision analysis example, he describes how demand is quantified, then refined by ability to pay, then compared to a forecast of supply, reduced to residual demand, and finally, analyzed for subject capture. As mentioned, a modified version of this procedure is now presented in the Highest & Best Use and Market Analysis course. Instructors of the course will recognize the typical student refrain of "love the concept but no one would pay for the work involved." Barrett also recognized the same issue, the concern "that to suggest appraisal should be comprehensive market analysis is in reality too tall an order; i.e., it may be too time-consuming, too technical, too expensive, and generally outside the purview of the appraisal industry." He goes on to suggest, however, "comprehensive market analysis in all cases could become a part of the appraisal report at little extra cost. After all, once a market study has been completed it becomes part of the database for future reports." (26) Today, with the recent availability of demographic data tailored to this type of work, as provided in the Appraisal Institute's Site To Do Business, for example, these obstacles/excuses for omitting this element of the analysis are all but gone.
Barrett concludes by emphasizing the importance of market analysis.
Although market analysis cannot eliminate all the risks from real estate investments, the absence of it could result in unwarranted value judgments and unsound investment practices to the detriment of the industry as a whole. (27)
"Feasibility Income Deficiency," Max J. Derbes, Jr. (January 1989)
A second significant article in this category is Max Derbes's article on "Feasibility Income Deficiency" (28) Derbes was a prolific writer and respected instructor. His specialty was industrial valuation, and he wrote extensively on that topic as well as on the topics of the cost approach and highest and best use. Derbes's article is related to highest and best use; and, in fact, its premise also was incorporated into the Appraisal Institute's Highest & Best Use and Marketability Analysis course and remains one of that course's keystone concepts. In the course, the concept--expressed as the difference between the market rent for the property as it exists versus the feasibility rent for the ideal improvement--is extended to serve as a measurement of total depreciation.
One of the most significant contributions of Derbes's article is its illustration of the basic relationship between cost and the return requirement to the investment: essentially, the relationship between the cost approach and the income capitalization approach. Derbes states, "To accept the theory of feasibility income, the basic relationship between cost or depreciated cost and the return requirement of the investment must be accepted." (29)
The article's intention was to provide an indication of the applicability of the feasibility income concept, and to show how feasibility income deficiency affects the income capitalization approach and the external obsolescence calculations of the cost approach. Derbes finds,
In essence, the detailed analysis of external obsolescence resulting from occupancy loss, rent loss to equilibrium levels, and rent loss to feasibility income fully explains the phenomena of investment properties in a depressed market. (30)
Not much was written in The Appraisal Journal on the topic of environmental contamination until the late 1980s. Once started, however, contamination became a regularly featured topic in the Journal
"The Impact of Hazardous Materials on Property Value," Bill Mundy (April 1992)
In the area of contaminated property valuation, Bill Mundy's article "The Impact of Hazardous Materials on Property Value," (31) is among the most significant. The late 1980s and early 1990s might be considered the era of contamination. (32) During this time, valuations and requirements involving the impact of contamination became particularly prevalent, just as cash equivalency or the Federal Home Loan Bank Board's R-41b regulations had previously been hot button topics. It seemed that suddenly, for example, appraisals for lenders included a new condition relating to environmental considerations. As with other earlier issues, appraisers found themselves without adequate resources to solve this particular problem: very little had been written on the topic of valuing contaminated properties and there were no seminars that dealt with a specific valuation methodology. (33)
At the time, Mundy was doing a lot of litigation valuation relating to the contamination issue and recognized the void in the literature. He had also been invited to become a fellow of the Weimer School of Advanced Studies in Real Estate and Land Economics and needed a research project to develop and present to the faculty and fellows. He received some funding for the project from the Real Estate Counseling Group of America (an elite group of analysts founded by the late William N. Kinnard, Jr.), completed the research, and wrote this article on the theory and method to value contaminated real estate.
Mundy's review of existing research on the topic led him to three discoveries: First, an adequate general theory of how contamination affects property values did not exist. Second, although both severity and persistence of contamination have an effect on value, the two are not necessarily related. Third, the statistical models had not been properly used, and they did not reflect important variables such as lending institution attitudes.
Mundy then presents a theory describing the contamination timetable from discovery to the property's return to full market value.
This difference between cured value and full market value is the residual uncertainty caused by stigma, and should decrease with time as the public's perception of risk subsides--assuming there is no further contamination. The factor of persistence concerns the time between the onset of a problem and the decrease in stigma to the point at which full market value is again reached. The length of time is a function of the severity of the problem and varies with the type and amount of contamination, time to cure as well as how the cure is accomplished, media exposure, real and perceived health risk, and visibility, among other things. (34)
Mundy goes on to suggest a methodology for measuring the effect of contamination on both income and marketability. The article concludes with an example of the methodology for quantifying the total loss in value.
Mundy's article on contaminated real estate is significant for two reasons. First, it provided guidance to the valuation community when little existed. Secondly, it inspired a spate of articles on the topic. (35)
The final group of articles deals with broad thought topics. The first, by Charles F. Seymour, was the article that received the most "votes" from those solicited. Interestingly, of the three articles in this category it is the only one that did not win one of The Appraisal Journal's annual article awards.
"More and More of My Reports Are Valueless," Charles F. Seymour (October 1967)
Charles Seymour's "More and More of My Reports Are Valueless," (36) is a somewhat philosophical article that is full of surprisingly contemporary issues. Seymour was, at the time of publication, a practitioner in the Philadelphia area and still enjoys a well-earned reputation as an outstanding public speaker. This piece is good evidence of why.
In the current appraisal vernacular, this article is all about valuation services, scope of work, and intended use and user. Its thesis is that appraisers focus too intensely on exclusively providing opinions of market value, when more times than not the client really does not need or want that conclusion.
The real reason for all appraisal reports--the "function" of the report, as we describe it in our texts--is seldom, if ever, an academic interest in what a property is worth. This valuation is needed for some other reason, such as a guide to a sale or a mortgage, as a basis for real estate or inheritance taxes, or as one factor in a series of factors from which important decisions must be made. (37)
These, of course, are current topics in the Uniform Standards of Professional Appraisal Practice (USPAP), (38) and it is ironical that it is standards and ethics to which the author points as the reason appraisers were reluctant to move towards assignments that better modeled the client's intended use.
The article reveals a number of assignments undertaken by Seymour's firm that did not involve value estimates (thus the title). In the descriptions of the various projects, Seymour discusses topics and methodologies that had not, at that time, received much attention in textbooks or journals. For example, the first project he uses to illustrate his "reports with no value" is a land utilization and marketability study (LUMS). The assignment involved measuring the future need for retail space; in other words, completing a marketability study. A second assignment involved measuring demand for office space, and it employed a similar methodology. The solution to the problem uses the current six-step marketability process, though that process did not appear in The Appraisal Journal until Barrett; Kimball and Bloomberg; and Fanning and Winslow wrote about it in 1979, 1987, and 1988, respectively. (39)
Another topic explored in the article is the bundle of rights theory. Here Seymour addresses another current issue: the valuation of partial interests. He illustrates many of the possible divisions, such as scenic easements, air rights, tunnel easements, and even intangibles and the interesting complications they create in an ad valorem analysis.
When interviewed about this article Seymour expressed some surprise that it was being considered for inclusion as among the most influential articles. He felt some of his other work was probably more noteworthy. This article, however, opened eyes to the broad range of services beyond valuation that an appraiser might pursue; and readers were attracted to the theme, which has managed to retain its relevance.
"The Market in Market Value," Jared Shlaes (October 1984)
Another important article in this category is Jared Shlaes's discussion of the concept of market value, "The Market in Market Value." (40)
Bill Kinnard once remarked to me upon seeing the title of a manuscript submitted to the Journal, "Oh no, not another market value paper." Probably no other topic has attracted as many articles as has the definition of market value. Some of the best have weighed in on it. (41) Yet this fundamental concept, which Shlaes observes "is central to everyday commerce and to at least three of our most cherished rights: just compensation in eminent domain takings, equitable property taxation, and in fair play in the marketplace," remains "to be clearly articulated. The official definitions are clumsy, lax, unrealistic, and self-contradictory, obviously the products of tired committees and overworked jurists." (42)
Shlaes's thesis is simply that the market from which market value is derived--and that is required by the sales comparison approach--must meet certain standards if it is to be sufficient evidence. According to Shlaes,
The requirements of the adequate market are that it produce enough transaction prices, stated in cash or in terms translatable into cash, resulting from the actions of a sufficient number of freely competing, informed, and capable buyers and sellers, to display a clear pattern to a competent observer. The goods and services in which the market deals must be familiar and interchangeable, or at least readily commensurable, so that price comparisons will be easily made. Buyers and sellers must be free to buy or sell as and when they choose. Finally, the market must be identical or sufficiently congruent to the market in which the property being appraised will be offered. (43)
This article's comprehensive discussion also addresses all the applicable relationships: value in use versus value in perception; objective value versus subjective value; value now versus value under ideal conditions; what it is worth versus what you can get for it; market value versus discounted present worth of future benefits; value versus price and cost; market value versus fair value; market value versus most probable selling price; highest price versus price that would be paid by typical purchaser and accepted by a typical seller; value as a point estimate versus value as a range or curve; market versus private transactions; value-price of one property versus value-price of many properties; bid versus asked price; commissionable versus net transactions; etc.
Evidence that Shlaes's article remains relevant and that the definition of value remains a contemporary issue is easy to find. Look, for example, at the confusing distinctions between definitions of use value and value in use, or notice that the Appraisal Standards Board found it necessary to add definitions of price, cost, and value to the 2001 edition of USPAP.
Revisiting these fundamental concepts--and others such as highest and best use, rights appraised, and tangible and intangible assets--benefits the appraisal profession, regardless of the perception that they are basic and uninteresting. When this reexamination is done in the manner in which Shlaes did it, then its value is recognized and appreciated. His article on the topic is set apart from the others by the strong writing and clear and profound thinking. Throughout its 25 pages (quite long by Appraisal Journal standards) it manages to remain comprehensive and compelling. Shlaes believed that this article would prove worthwhile "if it does nothing more than discourage the unthinking use of isolated, ill-understood, or unrepresentative transactions drawn from incongruent or inadequate markets." (44)
This article won the 1984 Robert H. Armstrong Award as the year's best.
"Three Approaches?" McCloud B. Hodges, Jr. (October 1993)
The third general article of note is McCloud B. Hodges, Jr.' s article "Three Approaches?" (45) McCloud Hodges was admired in the Washington, D.C. market as much for his fiercely independent attitude as for his unmistakable brilliance. He was well known for his pioneering work with computer applications. He was a retired military officer turned appraiser and in many ways mirrored the typical appraiser profile in his highly ex-military market. This colorfully written article is a fine example of this independent spirit.
In it, Hodges rails at the routine use by "unthinking" appraisers of the traditional three approaches in every valuation. He laments that this "Stepford Wives" mentality has resulted in the clients, the courts, and the government now insisting on their use, "an astonishing spectacle of mass acceptance of a stultifying environment. No lawyer, legislator, or banker would willingly accept such conditions for the conduct of his or her own business and profession." (46) He places nearly all the blame for these results on appraisers and on "too much work, and too little thinking."
The article traces the evolution of the idea (47) that there are three approaches, and reveals how it is really the result of a misunderstanding of initial concepts and structures, and "the inability of appraisers to appreciate this necessary relationship of variables."
Hodges concludes that the key to the appraisal process is the recognition that the value sought and the class of property involved will determine the applicable method from among those available. Using three approaches when two do not apply, then reconciling them to a neat conclusion, is to "strain the intelligent client's credulity."
This article by Hodges won the 1993 Sanders A. Kahn award for the best article offering a thought-provoking look at practical problems facing the appraisal and real estate industries.
Any list such as this runs the risk of offending those not selected for inclusion in it. That is not the intention. Rather, the purpose is to acquaint new readers (and reacquaint older ones) with some of the best work The Appraisal Journal has presented over its history. Perhaps some will be motivated to read these particular articles, all of which are available through the Appraisal Institute's Lum Library. I guarantee doing so will be a rewarding investment of your time.
A common thread running through many of the articles selected is their applicability to current times. It has been my experience that just about every problem appraisers come across in their daily practices has been confronted by someone else in the past, and more than likely written about in The Appraisal Journal. Let me give an example. A while ago I was contacted to do an assignment for the United States Department of Justice involving the condemnation of an observation tower in the Gettysburg National Military Park. As is my practice, I initiated a literature search, through the Lum Library, of publications relating to observation towers. The response, which was almost immediate, revealed the article, "Land Use: The Second Battle of Gettysburg," by Charles E. Roe, from the January 1974 Appraisal Journal, written nearly 25 years before my assignment. It concerned the very property I was valuing. Since then I have had a similar result on almost every inquiry made (though, I must confess, not to the extent that the very property being analyzed was the subject of the article), from amusement parks, to fiber optic easements within other easements, to newspaper printing plants, to continuing care retirement communities. Someone else, it turns out, has already done the groundwork. All you have to do is look for it.
The Appraisal Journal is simply an invaluable resource for valuation theory and methodology. The nine articles discussed here are ample evidence of how fortunate we have been to have had the Journal available to us for these past 75 years.
(1.) The Appraisal Journal's mission statement.
(2.) The Appraisal Journal has regularly recognized outstanding articles with various awards. Early on there was the George Schmutz Memorial Award, then the Robert H. Armstrong Award and the Sanders A. Kahn Award (these two were merged into the current Armstrong/Kahn Award); there was the outstanding residential award by the editorial board, and finally the Swango Award. Schmutz was a major contributor to appraisal literature as well as an outstanding appraisal instructor. He was president of American Institute of Real Estate Appraisers in 1940 and published three major books on appraisal. Armstrong was chairman of the Appraisal Journal Editorial Board from 1945 to 1955 and also a well-regarded writer on valuation. Kahn was also an author and made significant contributions regarding the topic of the entrepreneur as a factor of production. Dan L. Swango was editor-in-chief of the Journal from 1995 through 2001; his award specifically recognizes the best article by a practitioner.
(3.) James H. Burton, Evolution of the Income Approach (Chicago: American Institute of Real Estate Appraisers, 1982).
(4.) S. Edwin Kazdin, "Capitalization Rates Under Present Market Conditions," The Appraisal Journal (October 1944): 305-317.
(5.) Burton, 97.
(6.) Thurston H. Ross, "Rate of Capitalization," The Appraisal Journal (July 1937): 211-218.
(7.) Burton credits Robert H. Armstrong with being the first appraiser to recognize the significance of business and real estate cycles in forecasting income.
(8.) Based on a lecture delivered in the course Appraising for Lending Institutions at New York University, May 11, 1944.
(9.) Kazdin, 306.
(10.) This is what we now refer to as the build-up method, which suggests a capitalization rate can be built by adding to the safe rate a penalty for illiquidity, additional risk, and management.
(11.) Kazdin, 315.
(12.) Ibid., 316.
(13.) Charles b. Akerson, "Ellwood Without Algebra," The Appraisal Journal (July 1970): 325-335.
(14.) For example, James E. Gibbons, "Mortgage-equity Capitalization: Ellwood Method," The Appraisal Journal (April 1966): 196-202; and Paul F. Wendt, "Ellwood, Inwood, and the Internal Rate of Return," The Appraisal Journal (October 1967): 561-574. Although Ellwood published his Ellwood Tables for Real Estate Appraising and Financing in 1959 and wrote about related mortgage-equity topics, for example, "Influence of the Available Mortgage on Value," The Appraisal Journal (October 1949): 446-453, he did not have an article of note on the Ellwood "system" in The Appraisal Journal.
(15.) Akerson, 328.
(16.) Peter F. Korpacz and Mark I. Roth, "Changing Emphasis in Appraisal Techniques: The Transition to Discounted Cash Row," The Appraisal Journal (January 1983): 21-44; (April 1983): 315-316.
(17.) Burroughs merged with Sperry Corporation in 1986 to form UNISYS Corporation.
(18.) Korpacz and Roth (January 1983): 22.
(19.) ibid., 23.
(20.) Korpacz and Roth (April 1983): 316.
(21.) G. Vincent Barrett, "Appraisal Should Be Market Study: Techniques of Analysis," The Appraisal Journal (October 1979): 538-555.
(22.) Memorandum R-41b, FHLBB Office of Examinations and Supervision (March 12, 1982) contained an outline of appraisal contents that included the requirement to, "address itself to the market/economic feasibility prospects in sufficient detail to support the appraiser's forecast of probable success and the conclusion of highest and best use."
(23.) Articles such as Richard U. Ratcliff's, "Appraisal Is Market Analysis," The Appraisal Journal (October 1975): 485-490, for example, identified the problem but did not provide a practical solution.
(24.) Barrett, 540.
(25.) Appraisal institute, The Appraisal of Real Estate, 12th ed. (Chicago: Appraisal Institute, 2001), 286.
(26.) Barrett, 555.
(28.) Max J. Derbes, Jr., "Feasibility Income Deficiency," The Appraisal Journal (January 1989): 88-98.
(29.) Ibid., 96.
(30.) Ibid., 98.
(31.) Bill Mundy, "The Impact of Hazardous Materials on Property Value," The Appraisal Journal (April 1992): 155-162.
(32.) A series of federal laws enacted during the mid-1970s to mid-1980s brought increased attention to the impact of environmental contamination. These laws include the Resource Conservation and Recovery Act of 1976 (RCRA), the Toxic Substances Control Act of 1976 (TSCA), the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), and the Superfund Amendments and Reauthorization Act of 1985 (SARA).
(33.) The few exceptions include an Armstrong Award--winning article, John D. Dorchester, Jr., "Environmental Pollution: Valuation in a Changing World," The Appraisal Journal (July 1991): 289-302, which provided an overview of environmental issues in the United States at the time; a couple of excellent articles by Peter J. Patchin, "Valuation of Contaminated Properties," The Appraisal Journal (January 1988): 7-16, and "Contaminated Properties--Stigma Revisited," The Appraisal Journal (April 1991): 167-172; a short piece by Anthony J. Rinaldi, "Contaminated Properties- -Valuation Solutions," The Appraisal Journal (July 1991): 377-381; and notes on the topic, such as Richard A. Neustein, "Estimating Value Diminution by the Income Approach," The Appraisal Journal (April 1992): 283-287; besides these articles, nothing substantial had appeared in the Journal. The Environmental Watch newsletter, which was published quarterly by the Appraisal Institute (and the predecessor organization, the American Institute of Real Estate Appraisers) from January 1988 to Winter/Spring 1995, did a good job of addressing the topic. Patchin's 1988 article states that the development of techniques for valuing contaminated properties was still "in its infancy." He acknowledges having completed only 10 such appraisals at the time he wrote it. That article has some particularly good insights into issues of indemnities, liability to the public, and stigma. Mundy also published a good discussion on stigma in his article "Stigma and Value," The Appraisal Journal (January 1992): 7-13.
(34.) Mundy, "Impact of Hazardous Materials," 158-159.
(35.) Evidence of this is easily seen by comparing the number of the articles on the topics of hazardous waste, environmental issues, and contaminated property listed in the Readers' Guide to The Appraisal Journal 1970-1980 with those in the Readers' Guide to The Appraisal Journal 1988-1993. There are none on valuation methodology in the former and more than fifteen in the latter.
(36.) Charles F. Seymour, "More and More of My Reports Are Valueless," The Appraisal Journal (October 1967): 453-463.
(37.) Ibid., 453.
(38.) Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice, 2006 ed. (Washington, DC: The Appraisal Foundation, 2006).
(39.) Barrett; J. R. Kimball and Barbara S. Bloomberg, "Office Space Demand Analysis," The Appraisal Journal (October 1987): 567-577; and Stephen F. Fanning and Jody Winslow, "Guidelines for Defining the Scope of Market Analysis in Appraisal Assignments," The Appraisal Journal (October 1988): 466-476. As an interesting side note, Fanning explained that the process as we now know it and about which they wrote was actually taken from James A. Graaskamp, the renowned University of Wisconsin professor of real estate who influenced so many of today's leading valuation thinkers. Its name, "six-step process," was coined by Michael Milgrom, an Appraisal Institute staff editor.
(40.) Jared Shlaes, "The Market in Market Value," The Appraisal Journal (October 1984): 494-518.
(41.) Many are footnoted by Shlaes, including Thurston Ross, Halbert Smith, Charles Seymour, Kerry Vandell, and James Boykin, and these are just the Appraisal Journal article references. Others not referenced by Shlaes should not be overlooked, especially Harold D. Albritton, whose paper remains one of the very best written on the topic, see Harold D. Albritton, "A Critique of the Prevailing Definition of Market Value," The Appraisal Journal (April 1980): 199-205.
(42.) Shlaes, 496.
(43.) Ibid., 518.
(45.) McCloud B. Hodges, Jr., "Three Approaches?" The Appraisal Journal (October 1993): 553-564; a reprint of this article appears in the Winter 2007 issue of The Appraisal Journal.
(46.) Ibid., 564.
(47.) From Alfred Marshall to Arthur Mertzke to James Bonbright and Frederick Babcock.
David C. Lennhoff, MAI, SRA, is president of PGH Consulting, whose headquarters is in Austin, Texas. He has been active nationally in the Appraisal Institute since 1982 in education, standards, and admissions. He has taught Appraisal Institute courses and seminars nationally and internationally, most recently in Beijing, China; Seoul, South Korea; and Mexico City, Mexico. He is editor of the text, A Business Enterprise Value Anthology, and was a technical consultant and section reviewer for both the 11th and 12th editions of The Appraisal of Real Estate, and content reviewer for The Dictionary of Real Estate Appraisal, 4th edition; Appraising Industrial Properties; and Hotels and Motels: Valuations and Market Studies. He has been a frequent contributor to The Appraisal Journal and won the Armstrong/Kahn Award for most outstanding article in 2004. Lennhoff graduated from the University of Kentucky, Lexington and lives in the Washington, DC area. Contact: T 301-926-7323; E-mail: firstname.lastname@example.org
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|Author:||Lennhoff, David C.|
|Date:||Jan 1, 2007|
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