Appraising owner-user properties

Why sales comparison often carries weight

Owner-users consider location, physical utility and acquisition cost. Sales comparison analyzes transactions involving properties that serve similar needs in the same or competing markets. Price per sq.ft. may be a useful unit of comparison; price per front foot can matter where frontage drives market behavior. Neither measure substitutes for analysis of the property's characteristics.

Comparable sales should be examined for differences in rights conveyed, financing, sale conditions, timing, location, condition and functional utility. Sales data may be more useful than rental data in a market dominated by owner occupancy. In another market, sales may be sparse or involve properties with materially different uses.

The weight given to sales comparison should follow the quality and comparability of the evidence, not a rule that all owner-user properties must be valued the same way.

When the income approach is useful

An owner-occupied property may also be suitable for leasing. If market participants would consider its rental potential, an income approach can help explain that part of the market. The analysis needs support for market rent, vacancy, operating expenses and the capitalization or discount rate.

For an unleased property, a hypothetical rental analysis should not be described as an existing contract income stream. Leasing costs, tenant improvements and the time needed to reach occupancy may matter. If the subject has atypical features, the appraiser should examine whether those features support rental demand or limit it.

An income approach can be a useful crosscheck when supported by evidence. Adding a weakly supported calculation solely to increase the number of approaches does not make the appraisal more persuasive. The cost approach should also be considered where relevant, including some newer or specialized improvements.

Lender requirements are assignment-specific

There is no blanket federal regulatory rule requiring exactly two valuation approaches for every owner-user commercial property.

The federal Interagency Appraisal and Evaluation Guidelines, section IX call for approaches that are applicable and necessary to the assignment and disclosure of the rationale for an omitted approach. They do not impose a blanket requirement for exactly two approaches.

A lender's engagement letter may set additional expectations. Those expectations should be identified before work begins, along with the intended users, interest appraised and effective date. The appraiser then explains the methods used, any omissions and the reconciliation of the evidence.

IRS use does not automatically require an income approach

Estate, gift and charitable contribution assignments have different purposes and documentation requirements. An anticipated IRS review does not by itself establish that an income approach must be included for every owner-user property.

The IRS Real Property Valuation Guidelines, section 4.48.6.2.4 direct IRS appraisers to consider appropriate market, income and cost approaches, use professional judgment to select methods, and explain omitted approaches. This is internal guidance for IRS personnel, not a complete statement of a taxpayer's requirements for a particular transaction.

The report should explain why its methods fit the property and intended use. A property suitable for both owner occupancy and investment may warrant sales and income analysis. A property with no reliable rental market needs a different explanation. Neither situation supports a promise of audit acceptance or regulatory compliance based only on the number of approaches.

Defining the assignment

For an owner-user appraisal, provide the property address, current use, occupancy, building and site information, intended use of the appraisal and any lender engagement requirements. Existing leases, proposed leasing plans or unusual operating improvements should be identified rather than assumed away.