An Industrial Building Appraisal Done to both USPAP and RICS Red Book Standards

Some British investors wanted to buy a local factory in Torrance, a city of 150,000 residents in Los Angeles County. This was my second request this year to produce an appraisal report which met RICS Global Standards, also known as the “Red Book”. The RICS is the Royal Institution of Chartered Surveyors in London, providing guidance to the British Commonwealth real estate community since 1868. I spent the first 3 years of my career working for a British firm, Jones Lang Wootton, learning under RICS-trained valuers, one of whom became its international president. But it has been a long time.

My first reaction to the request to appraise under both standards was “How much difference could there be between the U.S. and British standards?” I have the 145-page Red Book from 2017 but have not read it in its entirety. I was surprised to find the Red Book to be more comprehensive and explicit than USPAP, the governing standard for the U.S.  Worse yet, USPAP (Uniform Standards of Professional Appraisal Practice) continues to get watered down over the years from powerful non-appraisal organizations. The Red Book promotes higher ethical standards. It also encompasses the International Valuation Standards.

One complicating factor is the Red Book’s reporting requirements based on British vocabulary.  The United States and the United Kingdom are two great nations separated by a common language. My many valuation assignments in the British Commonwealth have been awarded partly due to the inability of my American clients to understand RICS reports, so they hire me instead. British terminology such as “basis of value”, “lettings”, “tenure”, “freehold value”, “marriage value”, and “tittle-tattle”, etc., evoke confusion in American minds, getting me hired to travel to England, Scotland, Australia, Fiji, Jamaica, Barbados, Trinidad, Nigeria, South Africa, etc. as a valuer who can communicate in American English.

Still, the Red Book and USPAP share the same goal of preventing misleading appraisal reports in order to increase the public trust in appraisal reports.  What follows, though, is a chronicle of what happened when the seller hired an MAI to create a USPAP-compliant report and the buyer hired me to do a Red Book-compliant report.

When I arrived at the factory, the owner declined to meet with me, but he did state that he had an MAI appraisal report indicating a value of $9,350,000.  I asked if I could see the appraisal report, and he curtly countered my question with “Why would you want to see that?” I answered, “Most property owners insist that I read the MAI appraisals that they ordered, and I am always interested in what comparable sales were used.  But you are correct in understanding that I was hired to provide an independent estimate of value.”

Per Red Book VPS 1, I discussed with the British clients the scope of work that they wanted done. Right away they wanted me to be alert to any type of deferred maintenance. That was a fortuitous instruction.

The owner’s MAI committed an abdication of professional responsibility with the following remarks:

"This appraisal should not be considered a report on the physical items that are a part of the appraised property.  Although the appraisal may contain information about the physical items being appraised (including their adequacy and/or condition), it should be clearly understood that this information is only to be used as a general guide for property valuation and not as a complete or detailed physical report.  The appraisers are not construction, environmental, or legal experts, and any statement given on these matters should be considered preliminary in nature.

24) The observed condition of the foundation, roof, exterior walls, floors, heating system, plumbing, insulation, electrical service, and all other mechanical and constructions based on a casual inspection only and no detailed inspection was made.  The structures were not checked for building code violations, and it is assumed that all building components meet applicable building codes unless so stated in the report.  

Because no detailed inspection was made, and because such knowledge goes beyond the scope of this appraisal, any observed condition or other comments given in this appraisal should not be taken as a guarantee that a problem does not exist.  Specifically, no guarantee is made as to the adequacy or condition of the foundation, roof, exterior walls, interior walls, floors, heating system, air conditioning system, plumbing, electrical service, insulation, or any other detailed construction matters.  If any interested party were concerned about the existence, condition, or adequacy of any particular building or site component, we would strongly suggest that a construction expert be hired for a detailed investigation."

Here is a little secret about America’s commercial appraisers: Their average age is about 60 years old, and some are too fat and lazy to climb a metal ladder to the roof of a commercial building.  I did, and what I found was a mess up there.  This 30-year-old built-up composition roof, designed for a 25-year-life, had a multitude of patches and was spongy to the step, indicating water damage to the underlying plywood.  An inspection of the ceilings underneath found plastic wrapped portions filled with stained water, despite more than 3 months without rain. I estimated the cost of repairs to be $133,000. The HVAC equipment was also past its prime, and I estimated replacement costs at $24,000.

Although I found 5 industrial property sales in Torrance in 2018, the other appraiser failed to find any of these sales and instead used older local sales and sales from other communities.

When I started my private practice 12 years ago, I had an Israeli client that insisted that I inspect every roof, which was good practice.  When I later mentioned this on an on-line appraisers forum, I was surprised to be rebuked as unethical, because I was supposedly representing myself as a roof expert; it seems that American appraisers are the proverbial “housemaids that don’t do windows”.  Nevertheless, I find it unethical for an appraiser to fail to perform an inspection and ignore obvious damage. I sometimes subsequently advocate a professional roof inspection and let the chips fall where they may.  My own philosophy is: “Condition is relevant to value.” It bothers me to see appraisers fail to do their jobs.

PS: I didn't think this post would be particularly interesting, but one should read the ensuing comments from angry American commercial real estate appraisers, such as: obviously, I must be a lowly residential appraiser because commercial appraisers do not inspect roofs. Or: obviously, I have a lack of appraisal experience, wait until I have 30+ years of experience. (I actually have 34 years of commercial appraisal experience, yet I still inspect a roof of a commercial building). Or the Houston appraiser who claimed I begged him for a job in the 1990s. This may have happened in the 1980s, but in the 1990s I was the chief commercial appraiser of the largest savings and loan association in the USA (not WAMU).

So, if you want your property inspection done right, please call me, not them.  Besides, they are all named "Anonymous".