Using the restricted report for experience credit.
A major discrepancy exists between a portion of Standard 2 and Advisory Opinion AO-5, which, in fact, was written to explain Standard 2. The popular interpretation of Standard 2, Standards Rule 2-3, Standards Rule 2-5, and Advisory Opinion AO-5 is that the role of those who provide significant professional assistance toward an appraisal assignment must be disclosed. All these sections refer almost exclusively to employees. Any discussions, illustrations, or advisory opinions provided by ICs are not required to be reported. This omission raises important questions about who maintains the work file and true copies of the reports as well as reporting responsibilities to clients.
Depending on the nature of an assignment, an appraisal trainee has the option of undertaking the work as an employee of an appraisal firm or as an IC. The rules that delineate the two positions have been well established by the Internal Revenue Service (IRS) and discussed in previous articles in The Appraisal Journal.(4) The essential question is: If an appraiser accepts an assignment as an IC, does (1) the work product need to be disclosed and reported to the client, (2) he or she have to retain a true copy and supporting files, and (3) the work performed contain sufficient content for him or her to gain experience credit? The popular answer is "yes" to all questions. But a careful reading of the related rules and advisory opinion does not relay the same interpretation.
Rhetorical questions are the same for the legal and accounting professions. Does an attorney have an obligation to disclose the role of the attorney who was employed as an IC to prepare the case for trial? Must the accountant disclose the role of the certified public accountant who worked as a part-time IC during tax season? Does a surveyor need to disclose the participation of a part-time engineer, an IC, who conducted the fieldwork? Further, do these ICs have an obligation to retain the final true copies of the reports and work files?
Every day the medical profession faces the issue of disclosure when employee interns and residents are assigned surgical tasks. Does the main surgeon disclose the role of the head resident who makes a significant contribution? In the appraisal profession, the Appraisal Standards Board (ASB) and the Appraiser Qualification Board (AQB) seem to have no intention of micro-managing every situation that involves helpers. Yet, because the standards rely on the professional judgment and integrity of the appraisers responsible for the content, only they can judge the meaning of "significant professional assistance."
A related question applies to retaining the final true copy and the work files. If the IC does not prepare the final report or sign it, what is the work file requirement? The popular interpretation would probably be that both the final true copy and the work files should be retained. But a careful reading says that the "appraiser" must maintain these records.(5) The IC is not the appraiser. Further, USPAP recognizes that the work assignment could be a highest and best use analysis, data generation or calculation, one of the valuation approaches, a market or marketability analysis, or an estimation of a specific onerous variable such as the discount rate or the going-out capitalization rate. Only those work files that support the analysis outlined in the assignment and performed by the IC need to be maintained by the IC.
The Standards Rule 2-3 requirement that the participation of persons providing "significant professional assistance" should be disclosed implies that the quality of the final report depends on an assistant's work, which might or might not be acceptable. The intent of disclosure is to identify the assistant's role and responsibility. In contrast, if the final report exhibited above-average workmanship in terms of logic and writing, would the client really care who contributed to the work? Would the client really care if no one was damaged and the product was prepared by a group, thus helping to improve quality?
The intent of Standard 2 is the communication of an appraisal report to the client.(6) The Record-Keeping Comment part of the Ethics Provision requires the appraiser to prepare "written records of assignments [including] true copies of written reports,written summaries of oral testimony..., all data and statements required by these Standards, and other information as may be required to support the findings and conclusions of the appraiser."(7) Again, the IC may not be the "appraiser" and may have no contact with the client. Surely, the correct interpretation is that the IC needs to maintain only the relevant work file on the assignment completed, but the appraiser who signs the report must maintain the true complete copies.
According to Standards Rule 2-3, every appraisal report must contain signed certification affirming, among other things, that "no one provided significant professional assistance to the person signing this report (If there are exceptions, the name of each individual providing significant professional assistance must be stated)."(8)
Standards Rule 2-5 says, "An appraiser who signs a real property appraisal report prepared by another in any capacity accepts full responsibility for the appraisal and the contents of the appraisal report."(9) A footnote at the end of this rule refers readers to Advisory Opinion AO-5 for details. The Comment section under this Rule reads:
This requirement is directed to an appraiser acting as an employer or supervisor signing a report of an employee or subcontractor. The employer or supervisor signing the report is as responsible as the individual preparing the appraisal for the content and conclusions of the appraisal and the report.(10)
The word "subcontractor" appears in Standards Rule 2-5 only once, in the Comment section.
ADVISORY OPINION AO-5
Although the ASB has stated clearly that these opinions are only suggestions to help clarify the important standards, they offer the only guidance available. The inconsistency between Standards Rule 2-5 and this advisory opinion is that the word "subcontractor" does not appear in the opinion at all. In addition, AO-5 is totally oriented toward a nonlicensed or an uncertified "assistant," who is an employee only. It does not mention the role of an IC appraiser.
The advisory opinion contains language that has long accepted the term "assistant" to mean an employee only.(11) The advisory opinion uses words like closely supervising, training, development, exercising judgment as to, under the direction of, cannot be allowed to perform, has been employed by, working under, the company orientation program, and weekly team meetings.(12)
In addition, although AO-5 offers three illustrations to explain the role of an assistant as someone who has been employed or is a team leader or a partner, there is no illustration, example, reference, or text to describe the role of the IC appraiser.
APPRAISERS WHO ARE INDEPENDENT CONTRACTORS
Advisory Opinion AO-5 does contain minimal discussion on the role of assistants in law and accounting firms.(13) Unfortunately, the discussion is restricted to employees only. Nothing is written about the independent contractor who is asked to prepare a portion of the report for the client (i.e., the appraiser who will sign the final edition).
The IC operates under 20 criteria established by the IRS.(14) Three of the most important rules are discussed here to illustrate this point. First, the IC cannot be controlled in any way by the firm. The work hours cannot be dictated, training is not expected, and training on the company's policy is not compulsory. The only expectation between the IC and the firm is that the engagement be completed successfully, on time, and for a fee.
Second, the IC is asked to complete the assignment based on his or her prerequisite qualifications and reputation for delivering a quality work product. The firm may offer constructive comments on the assignment, but once it is completed, the responsibility of the IC ends and the firm is free to reject or accept parts or all of the work.
Third, the IC is not employed or fired in the traditional sense since an employment agreement does not exist. The ICs pay all their own taxes and relevant expenses.
The ASB would prefer that all appraisers are identified in every report, but the information in Standards Rule 2-5 and AO-5 is not at all clear. Take, for example, the following case.
John accepts an assignment to prepare the income approach for appraisal firm XYZ as an IC appraiser. He is given the work file and adds and prepares additional data and analysis of his own. This information and analysis are returned and explained to the firm, which accepts the work file and pays him the fee. John is not employed as an assistant and does not sign the final true copy of the report. He does not know how his analysis is used in the final estimate of value.
As someone who is not an assistant and does not sign the report, he probably did not do an inspection and his participation probably has not been reported to the client in the final report. Further, assume that the certified appraiser contracted with a number of ICs to assist in the analysis. Must all their contributions be reported to the client? From the information provided by the ASB, the answer is "no." That decision is at the discretion of the appraiser.
According to the AQB, trainees do not need to sign a report to receive experience credit. Therefore, experience credit can be granted if three items can be provided:
1. A suitable log of hours spent on the assignment so that hours can be translated into experience points
2. A complete work file that contains the data and information necessary to complete the assignment
3. An acknowledgment from a licensed certified appraiser that the trainee contributed significantly to the work of the appraiser signing the report.(15)
These criteria lead to several more questions. If a trainee works in a state that allows ICs, does the certified appraiser need to report to the client the contributions of all ICs working on experience requirements, or does reporting rely on the certified appraiser's integrity and judgment? These authors feel that the appraiser who signs the report should make the decision.
If an appraiser trainee does not provide "significant professional assistance," the supervising appraiser is not obligated to report that a trainee made any contribution. In fact, the ASB has indicated that a trainee might be able to provide "significant assistance" but be incapable of providing professional assistance because he or she does not have the level of skill and experience to be considered a "professional."(16) This interpretation precludes the possibility that an appraiser trainee could be acknowledged in the way required in Standards Rule 2-3, and prevents state licensing/certifying boards from being able to validate experience submitted based on appraisal reports that were not signed by the trainee and do not acknowledge the work of a trainee. Proof of experience can be provided if the trainee writes a Restricted Report.
Standards Rule 2-2(c) explains that a Restricted Report differs from a Self-Contained and a Summary Appraisal Report in detail (less in a Restricted Report) and use restriction.
The Restricted Appraisal Report is intended for use only by the client. Before entering into an agreement, the appraiser should establish with the client the situations in which this type of report is to be used, and should ensure that the client understands the restricted utility of the Restricted Appraisal Report.(17)
Most likely, the nature of the assignment given to an appraiser trainee will be a Limited Appraisal in which one or more steps of the complete appraisal process have been omitted. He or she may be expected to provide a written report that is only for the eyes of the appraiser who signs the final estimate of value.
We recommend that a trainee appraiser write a Restricted Report as part of the file memoranda to communicate information and analysis to the appraiser (who is, in effect, the client of the trainee appraiser). The authority of trainees to write a Restricted Report is implied by the AQB in the Experience section, which indicates that the supervising appraiser must accept responsibility by signing and certifying that the work product complies with USPAP.(18) Also, the supervising appraiser is held responsible for reviewing reports written by trainees and personally inspecting the subject property with trainees until he is certain of their competence. Further, the work trainees complete should satisfy the experience requirement for state regulatory officials, who might require additional experience verification beyond an appraisal log.
The supervising appraiser should not have to use trainees' Restricted Reports if he considers them unacceptable. If they are not used, the appraiser need not mention that he received "professional assistance" from the appraiser trainee regardless of the amount of time and expertise the trainee invested in the project. Nevertheless, a Restricted Report gives trainees a way to document experience listed in the appraisal logs.
IMPLICATIONS AND RECOMMENDATIONS
As long as reporting an IC's contribution is left to the discretion of the appraiser signing the report and no further clarification is provided in Standard 2 and the Ethics Provision, appraisers will continue to use ICs as helpers and not always report their contributions. The fear is that appraisers may assume more latitude in reporting their use of ICs.
Naturally, there would be greater reliance on appraisers' integrity and competence to deliver a quality product. The positive side is that clients do not usually express concern when reports are of high quality. The tradeoff is that clients will be less certain that the appraiser signing the report is the one who did the work.
In addition, state appraiser boards rely on affidavits, experience logs, and appraisal reports as examples of a work product. A signature on the report or an acknowledgment of the trainee's work within the report ensures experience credit. If neither one exists, a state board can verify experience credit only by asking for a work file, which can be difficult to obtain, or sending an investigator to the office to examine the work files - a tremendous investment in budget and personnel. State boards cannot grant experience credit efficiently using these methods. Further, a state board will have greater difficulty investigating a complaint if two sets of files are maintained: one by the appraiser who signs the report and retains the true copy, and the other by the IC who has detailed records of any analysis conducted and data verified. The best approach is to include the trainee's Restricted Report in the written file to explain the analysis.
This recommendation uses the same principle of regulatory authority as that used by local and state governments. Nothing can be read into a regulation that does not exist explicitly. Although the ASB probably intended that the participation of all helpers, ICs, and assistants be reported if they significantly contributed, the language in USPAP is simply unclear. The reporting of the IC's contribution is up to the certified appraiser's integrity and judgment.
Also, it is perfectly plausible for the certified appraiser to reject the IC's analysis altogether. Further, the IC's analysis may only confirm the conclusions that were already known by the contracting firm, and might not be used in the final analysis.
An IC appraiser needs to write a Restricted Report, give it to the appraiser, and retain a copy as part of the file memoranda. The report will serve to organize the files, formalize the relationship, and restrict the use of the information. In addition, ICs can submit these signed reports to state regulatory authorities for experience credit.
Author's note: The views expressed in this article are strictly those of the authors.
1. The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (Washington, D.C.: The Appraisal Foundation, 1998).
2. USPAP, Standard 2, 17-25; Advisory Opinion AO-5, 103-105.
3. Ibid., 104.
4. Donald R. Epley and Edward Milam, "The New URAR and Independent Contractor Status," The Appraisal Journal (October 1994): 514-517; Barry Frank and Jeffrey Cooper, "Real Estate Appraisers: Independent Contractors or Employees?," The Appraisal Journal (January 1994): 20-25.
5. Standards Rule 2-2(viii), 23; USPAP, Ethics Provision, 3.
6. USPAP, Preamble, 1; Standard 2, 17-25.
7. Ethics Provision, 3.
8. S.R. 2-3, 24.
9. S.R. 2-5, 25.
11. Epley and Milam, 514-517; Frank and Cooper, 20-25.
12. AO-5, 103-105.
13. Ibid., 104.
14. Epley and Milam, 514-517; Frank and Cooper, 20-25.
15. An acknowledgment can take one of two forms. The first is a statement within the certification required under S.R. 2-2 that names all individuals. The second is a prepared statement provided by the state regulatory authority that contains specific wording and typically is inserted into the report on a separate page following the certification. based on the authors' communication with the ASB in June 1997, the meaning of the phrase "significant professional assistance" should be interpreted to mean "estimation of value," so that only helpers who significantly contributed to the final value estimate must be identified. Interesting questions arise in situations wherein there is a disagreement between the appraiser and the helper, or the helper estimates value but the appraiser decides not to use the helper's analysis in the report. Experience credit for licensing purposes could be awarded in both cases.
16. Telephone interview with the Chair of ASB, June 1997.
17. S.R. 2-2(c), 22-23.
18. "Interpretations of the Appraiser Qualification Criteria of the Trainee, Licensed, Certified Residential, and Certified General Real Property Appraisal Classifications," memo issued by the AQB, September 3, 1997, Experience 3(1) a,b, 4.
Derbes, Max Jr., "Ethics in the Appraisal Profession," Right of Way (March/April 1996): 23-28.
Donald R. Epley, MAI, SRA, PhD, is a professor of real estate at Washington State University. Pullman. He has been a course and seminar instructor for the Appraisal Institute and has written previously for The Appraisal Journal. Mr. Epley is also the editor of The Journal of Real Estate Practice and Education, published by the American Real Estate Society.
Richard Hoyt, MAI, PhD, is a professor of real estate at the University of Nevada, Las Vegas, and a real estate consultant. He received his PhD in business administration from the University of Arkansas, Fayetteville. He currently teaches the professional standards course for the Appraisal Institute. Mr. Hoyt received the Armstrong/Kahn Award for most outstanding original article published in The Appraisal Journal in 1997.
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|Author:||Epley, Donald R.; Hoyt, Richard|
|Date:||Jan 1, 1999|
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