17.5.2 Valuation Processing: Appraisal Scope-of-Work

A. There can be great variation in how a Cooperative is structured. According to the Uniform Standards of Professional Appraisal Practice (USPAP), the determination of Scope-of-Work is an ongoing process in an assignment. Information or conditions discovered during the course of an assignment may cause the appraiser to reconsider the scope-of-work. Therefore, the guidance set forth below may be modified on a case-by-case basis to assure compliance with USPAP and that the results of the appraisal assignment will be reliable for making underwriting decisions.

B. There are three major elements for the appraisal assignment: General Requirements, Valuation as a Market Rate Rental Project, and Market Analysis for Continued Use as a Cooperative.

1. General Requirements.

   • Selection of the Appraiser . The lender must select a qualified Appraiser in accordance with Chapter 7. It should be noted that the appraisal of a Cooperative is very specialized. Lenders should base their selection of an Appraiser on their experience for this type of assignment and upon their familiarity with the subject’s market area.

• Value Definition . Appraisers must use the following definition published by Federal Regulatory agencies:

“Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• 1. buyer and seller are typically motivated;
• 2. both parties are well informed or well advised and acting in what they consider their own best interests;
• 3. a reasonable time is allowed for exposure in the open market;
• 4. payment is made in cash or by financial arrangements comparable thereto; and
• 5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

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The value shall be estimated assuming that all repairs have been completed as of the date of the appraisal.

• Inspection of the Subject and Comparables . The primary appraiser designated by the lender and accepted by HUD must physically inspect the subject (both exterior and interior) and all of the comparables used as part of the analysis and must sign the Certification within the appraisal report and the supporting HUD forms.

• 1. The primary appraiser must inspect at least one of each bedroom/unit type. The total number of units inspected must equal or exceed 5% of the total number of units for projects of up to 200 units, or 4% of the total number of units/beds for projects greater than 200 units. If the characteristics and/or condition of the subject indicate that a higher level of inspection is necessary, it is the appraiser's responsibility to expand the scope of the work as is necessitated by the observations made by the primary appraiser during the inspection of the subject. This is especially important where the improvements are high-rise structures whereby individual units within demonstrate varying degrees of light and view qualities. If there are hazardous conditions or other factors that preclude a thorough inspection of the interior, the appraiser must clearly indicate these circumstances in the appraisal report.
• 2. Large Projects . For projects exceeding 500 units, the appraiser must consult with the processing office to agree on a reasonable number of units to be inspected. In addition, the appraiser may employ assistants to inspect individual units. The purpose of allowing assistants is to encourage a thorough inspection. The names and qualifications of these assistants must be disclosed in the appraisal report, but they are not required to sign the report.
• 3. The primary appraiser must inspect all the comparables used in deriving an estimate of value, including land comparables (if applicable), improved comparables sales, expense comparables and rental comparables. The appraiser must verify the condition of the comparables at the time of transfer/rental with management or other personnel familiar with the property. Contact information must be documented in the appraisal report.

• Required Appraisal Report Exhibits . In accordance with the requirements of Chapter 7 and the programmatic requirements of Section 223(f).

• Review of the CNA and Environmental Report (including the Phase 1 ESA). The appraiser must review the CNA and environmental report prior to completing the assignment, comment on any remarkable findings and their impact (if any) on value.

  • Required Approaches . In accordance with the requirements of Chapter 7 and the programmatic requirements of Section 223(f).

• Estimation of Remaining Economic Life (REL) . In accordance with the requirements of Chapter 7 and the programmatic requirements of Section 223(f).

• HUD Forms . All of the usual forms for Section 223(f) should be employed, (HUD-92264, 92264A, 92273 and 92274) following the outstanding instructions for Section 223(f). The HUD-92264 shall be completed based on usage as rental apartments.

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• Additional Appraisal Work Required by the lender or other Intended Users . The appraiser is bound by USPAP to complete the appraisal assignment in compliance with the requirements of the person or entity who ordered the report and to satisfy the needs of identified intended users.

• Reconciliation and Conclusion . The appraiser must briefly reconcile the information presented; clearly indicating what data is the most relevant and supports the report’s conclusions. The appraiser’s conclusions must indicate whether or not the subject can expect to enjoy long-term use as a Cooperative; and whether or not the proposed carrying charge is within market limits and is affordable for the typical shareholder.

Report Content and Format . In accordance with the requirements of Chapter 7.

2. Valuation as a Market Rate Rental Project . Follow all current procedures in Chapter 7 for Section 223(f) Appraisal and Appraisal Review, including these additional instructions:

   • Use of the Subject . The appraiser shall assume a hypothetical use of the subject as a market rate rental project, except that income from any units subject to rent control will assume the current controlled rental amount.

• Estimate of Effective Gross Income . The estimate of Effective Gross Income shall be made using market rental housing comparables that are equivalent to the subject in location, size and style. Actual rents should be used for any rented units in the Cooperative that are subject to rent control. Market rents must be used for any subsidized units. Vacancy and collection losses should also be market derived, but in no event will a residential occupancy rate greater than 93% and a commercial occupancy rate at the lesser of the actual occupancy rate or 90% be used.

• Expense Analysis . The Expense analysis should accurately reflect usage as a market rate rental project. Appropriate weight should be given to the most recent three-year history for items such as repairs, maintenance and common utilities. Other items such as taxes and management expense should be based on rental apartment market data.

3. Market Analysis for Continued Use as a Cooperative . The appraisal report must also contain a Level A, Level B or Level C Market Analysis of the local market, depending on market complexity, with an emphasis on Cooperatives. The purpose of the analysis is to determine the ability of the subject to continue usage as a Cooperative Housing project. The detailed requirements for performing a Level A, B or C analysis can be found in “Market Analysis for Real Estate”, published by the Appraisal Institute.

   • Assumptions . The study should assume that management has budgeting and operations under control, which can be demonstrated by an illustration of past year’s maintenance charge history.

• Financial Statement Review . Special Assessments should be explained, and a review of the last three years financial statements is required. The footnotes to the Cooperative’s yearly financial statement are a typical source of details regarding past, current and upcoming issues. There should be a discussion of any material or atypical items as to their impact on value. In addition, the appraiser will complete a HUD-92274 using comparable Cooperative projects and also analyze the past three years of records and any unaudited records from the most current period, if deemed reliable, to ascertain if the proposed maintenance charge is adequate to continue operations.

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• Cost of Occupancy/Cost of Ownership Analysis . The typical monthly maintenance charge by unit type should be compared to the competing project’s monthly maintenance charges by unit type and will serve as a variable for Cost-of-Occupancy/Cost-of-Ownership calculations to ascertain and support market-oriented unit pricing. The appraiser will complete a HUD-92273 for each major Cooperative unit type using other units from other Cooperative projects as comparables to compare monthly carrying charges and to determine if the proposed monthly fee is realistic and affordable for the subject’s market area.

4. Appraisal Review . HUD Multifamily Staff Appraisers will review the appraisal in accordance with USPAP Standard 3. The appraisal review must include a comparison of the subject’s proposed monthly carrying charges based on the new financing to what the various units would rent for if the subject were operated as a rental project. A Cooperative Housing project’s feasibility for continued use as a Cooperative is questionable if monthly carrying charges significantly exceed what units could actually rent for. A downward trend in rents versus no change or an upward trend in carrying charges is an indication of an unhealthy Cooperative Housing project/market.