The 50% FEMA Rule Appraisal Benford's Law in Appraisal The Impact of Water Clarity on Home ...

90 Pages·2017·15.83 MB·English

The
Appraisal
Journal
FALL 2017
Volume LXXXV, Number 4
F The 50% FEMA Rule
Appraisal
by Patricia Staebler, SRA
PAGE 261
Benford’s Law in Appraisal
by Mark Pomykacz, MAI, AI-GRS,
Chris Olmsted, and Katherine Tantinan
PAGE 274
The Impact of Water
Clarity on Home Value
in Northern Wisconsin
by Thomas Kemp, PhD, Irene Ng,
and Haikal Mohammad
PAGE 285
Market Equilibrium Analysis
by Richard L. Parli, MAI, and
Norman G. Miller, PhD
PAGE 307
Contents
The Appraisal Journal | Fall 2017 | Volume LXXXV, Number 4
ii Mission Statement
iv Annual Conference Announcement
v A Message from the Editor-in-Chief
COLUMNS & DEPARTMENTS
251 Cases in Brief
Recent Court Decisions on Real Estate and Valuation
by Scott B. Mueller, JD
317 Book Review
A Review of Richard H. Thaler’s Misbehaving: The Making
of Behavioral Economics
by Brian L. Goodheim, MAI, SRA
322 Announcement of Scholarship Awards
PEER-REVIEWED ARTICLES
261 The 50% FEMA Rule Appraisal
by Patricia Staebler, SRA
274 Benford’s Law in Appraisal
by Mark Pomykacz, MAI, AI-GRS, Chris Olmsted, and Katherine Tantinan
285 The Impact of Water Clarity on Home Value in Northern Wisconsin
by Thomas Kemp, PhD, Irene Ng, and Haikal Mohammad
307 Market Equilibrium Analysis
by Richard L. Parli, MAI, and Norman G. Miller, PhD
ANNOUNCEMENTS
323 New Appraisal Institute Publications
324 Appraisal Institute Designations
325 Article Topics in Need of Authors
326 Manuscript Guide
327 Statement of Ownership
328 Index to Volume LXXXV
332 Appraisal Journal Order Form
COVER PHOTO: AURORA PHOTOS/MASTERFILE
www.appraisalinstitute.org Fall 2017 • The Appraisal Journal i
The Appraisal Journal
Published by the Appraisal Institute
Jim Amorin, MAI, SRA, AI-GRS, President and Acting CEO
James L. Murrett, MAI, SRA, President-Elect
Stephen S. Wagner, MAI, SRA, AI-GRS, Vice President
Scott Robinson, MAI, SRA, AI-GRS, AI-RRS, Immediate Past President
Stephen T. Crosson, MAI, SRA, Editor-in-Chief
Ken Chitester, APR, Director of Communications
Nancy K. Bannon, Managing Editor
Justin Richards, Senior Communications Coordinator
The Appraisal Journal (ISSN 0003-7087) is published quarterly (Winter, Spring, Summer, and Fall). © 2017 by the Appraisal Institute, an Illinois Not-for-Profit Corporation
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Mission Statement: The Appraisal Journal is published to provide a peer-reviewed forum for information and ideas on the practice and theory of valuation and analyses
of real estate and related interests. The Appraisal Journal presents ideas, concepts, and possible appraisal and analytical techniques to be considered; some articles are
for the development and expansion of appraisal theory while others are useful in the evolution of practice.
Disclaimer: The materials presented in this publication represent the opinions and views of the authors. Although these materials may have been reviewed by members
of the Appraisal Institute, the views and opinions expressed herein are not endorsed or approved by the Appraisal Institute as policy unless adopted by the Board of
Directors pursuant to the Bylaws of the Appraisal Institute. While substantial care has been taken to provide accurate and current data and information, the Appraisal
Institute does not warrant the accuracy or timeliness of the data and information contained herein. Further, any principles and conclusions presented in this publication
are subject to court decisions and to local, state, and federal laws and regulations and any revisions of such laws and regulations.
This publication is for educational and informational purposes only with the understanding that the Appraisal Institute is not engaged in rendering legal, accounting,
or other professional advice or services. Nothing in these materials is to be construed as the offering of such advice or services. If expert advice or services are required,
readers are responsible for obtaining such advice or services from appropriate professionals.
Nondiscrimination Policy: Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts
its activities in accordance with applicable federal, state, and local laws.
The Appraisal Institute advances professionalism and ethics, global standards, methodologies, and practices through the professional development of property
economics worldwide.
ii The Appraisal Journal • Fall 2017 www.appraisalinstitute.org
The Appraisal Journal Editorial Board
Stephen T. Crosson, MAI, SRA,* Chair, Dallas, Texas
Joseph F. Consoli, MAI, Baltimore, Maryland
Karl P. Finkelstein, MAI, Mt. Pleasant, South Carolina
Julie Friess, SRA, Sedona, Arizona
Walter E. Gardiner, SRA, AI-RRS, Hammond, Louisiana
James H. Martin, MAI, Mt. Pleasant, South Carolina
Heather M. Placer, MAI, SRA, Midlothian, Virginia
Stephen D. Roach, MAI, SRA, AI-GRS, San Diego, California
Larry T. Wright, MAI, SRA, AI-GRS, Houston, Texas
The Appraisal Journal Review Panel
Gregory J. Accetta, MAI, AI-GRS, Providence, Rhode Island John A. Schwartz, MAI, Aurora, Colorado
Anthony C. Barna, MAI, SRA, Pittsburgh, Pennsylvania Melanie Sieger, MAI, AI-GRS, Chevy Chase, Maryland
C. Kevin Bokoske, MAI, AI-GRS, AI-RRS, Ft. Lauderdale, Florida Dan L. Swango, PhD, MAI, SRA, Tucson, Arizona
E. Nelson Bowes, MAI, AI-GRS,* Denver, Colorado James D. Vernor, PhD, MAI, Atlanta, Georgia
Robert C. Clark, MAI, Chevy Chase, Maryland
George Dell, MAI, SRA,* San Diego, California The Appraisal Journal Academic Review Panel
Larry O. Dybvig, MAI, Vancouver, British Columbia Tim Allen, PhD, Florida Gulf Coast University
Timothy A. Eisenbraun, MAI, SRA, Southfield, Michigan Peter F. Colwell, PhD, University of Illinois
Stephen F. Fanning, MAI, AI-GRS,* Denton, Texas François Des Rosiers, PhD, Laval University
Kenneth G. Foltz, MAI, SRA, Wilmington, North Carolina Donald R. Epley, PhD, MAI, SRA, University of South Alabama
Jack P. Friedman, PhD, MAI, SRA, Chicago, Illinois Jeffrey D. Fisher, PhD, Indiana University
Brian L. Goodheim, MAI, SRA, Boulder, Colorado Terry V. Grissom, PhD,* University of Missouri–Kansas City
Robert M. Greene, PhD, MAI, SRA, AI-GRS, Olympia, Washington Thomas W. Hamilton, PhD, MAI,* Roosevelt University
Brian M. Holly, MAI, Washington, D.C. William G. Hardin III, PhD, Florida International University
Thomas O. Jackson, PhD, MAI,* College Station, Texas Mark Lee Levine, PhD, JD, MAI, University of Denver
John A. Kilpatrick, PhD, MAI, Seattle, Washington Kenneth M. Lusht, PhD, MAI, SRA,* Florida Gulf Coast University,
Douglas M. Laney, MAI, Tucson, Arizona Penn State University
Calvin M. Lassere, MAI, Atlanta, Georgia Barrett A. Slade, PhD, MAI, Brigham Young University
David C. Lennhoff, MAI, SRA, AI-GRS, Darnestown, Maryland Brent C Smith, PhD, Virginia Commonwealth University
Mark R. Linné, MAI, SRA, AI-GRS, Lakewood, Colorado Mark A. Sunderman, PhD, University of Memphis
Dan P. Mueller, MAI, St. Paul, Minnesota Grant I. Thrall, PhD, University of Florida
Nathan Pomerantz, MAI, Rehovot, Israel Alan Tidwell, PhD, Columbus State University
Rudy R. Robinson III, MAI, Austin, Texas H. Shelton Weeks, PhD, Florida Gulf Coast University
Dennis P. Ryan, PhD, MAI, New York, New York John E. Williams, PhD, Morehouse College
David J. Sangree, MAI, Cleveland, Ohio Elaine M. Worzala, PhD, College of Charleston
*Statistics Work Group member
www.appraisalinstitute.org Fall 2017 • The Appraisal Journal iii

From the Editor­in­Chief
Stephen T. Crosson, MAI, SRA
Water Impacts, Data Analysis
Dear Readers:
The fall issue of The Appraisal Journal contains The fourth feature, “Market Equilibrium Analy­
four feature articles—two addressing issues sis,” by Richard L. Parli, MAI, and Norman G.
related to properties near water and two address­ Miller, PhD, takes a look at analysis of market
ing analysis of data. rent data. The article presents a new definition
of market equilibrium that emphasizes stable
The first feature article, “The 50% FEMA Rule rental rates, and equilibrium vacancy is offered as
Appraisal,” by Patricia Staebler, SRA, sum­ an indicator of rent change.
marizes the Federal Emergency Management
Agency’s rule on improvements and repairs You will also find a review of Misbehaving:
of structures located in flood­prone areas. The The Making of Behavioral Economics, a book by
article explores the different valuation methods Nobel Prize winner Richard H. Thaler that
that may be appropriate in a 50% FEMA Rule looks at how our presumption of rational market
appraisal. participants might not be so accurate after all.
Rounding out this issue, you will find the
The second article, “Benford’s Law in Appraisal,” Cases in Brief column, reporting the latest val­
by Mark Pomykacz, MAI, AI­GRS, Chris Olm­ uation cases of interest.
sted, and Katherine Tantinan, outlines the prin­
ciples of Benford’s Law and how they can be used Finally, The Appraisal Journal’s Editorial Board is
to detect database anomalies, including data encouraging individuals to write point­counter­
errors or manipulation. point articles on valuation issues with distinctive
schools of thought. If you are interested in writ­
The third feature, “The Impact of Water Clarity ing such an article, please send your proposal to
on Home Value in Northern Wisconsin,” by me or Nancy Bannon, Managing Editor.
Thomas Kemp, PhD, Irene Ng, and Haikal
Mohammad, demonstrates how the expenses Stephen T. Crosson, MAI, SRA
of water improvement activities can be recouped Editorial Board Chair and Editor-in-Chief
in increased tax dollars related to increased The Appraisal Journal
property valuations.
www.appraisalinstitute.org Fall 2017 • The Appraisal Journal v

Cases in Brief
by Scott B. Mueller, JD
Recent Court Decisions on Real Estate
and Valuation
Whether activity violated Mount Aldie responded that “merely disturb-
conservation easement agreement ing more than 1,000 square feet of earth does not
is matter of material fact constitute the creation of a new opening or
to be decided by lower court clearing” in the context of the easement. Mount
Aldie contended that its acts were consistent
On March 2, 2017, the Supreme Court of Vir- with easement’s buffer limitations, which con-
ginia addressed whether certain forestry opera- tained no requirement for landowner notice
tions violated a conservation easement. and/or permission. The easement agreement
In 2008, a predecessor to Mount Aldie, LLC, limitations provide that
conveyed a conservation easement to the Land
Trust of Virginia, Inc. (LTV). The easement cov- Within the buffer strip there shall be no…earth disturb-
ered a 60-acre tract of forested land bounded in ing activity conducted, except as may be reasonably
part by the Little River. The easement designated necessary for…(c) removal of individual trees present-
a 100-foot-wide strip of property along the edge of ing a danger to persons or property and removal of
the Little River as a buffer. The buffer included a diseased, dead or invasive trees, shrubs or plants…
“historic primitive footpath” known as the Indian or (d) creation and maintenance of foot or horse trails
Spring Trail. Mount Aldie acquired the property with unimproved surfaces.
in 2009 and subsequently conducted commercial
forestry operations within the easement, includ- The circuit court granted LTV’s motion for
ing tree removal and grading for approximately summary judgment, ruling that Mount Aldie
1,100 feet along the Indian Spring Trail. had failed “to give notice and obtain approval.”
The LTV sought an injunction from the circuit Mount Aldie appealed, arguing that the circuit
court to require Mount Aldie to return the prop- court had erred in its construction of the
erty to its prior condition. The LTV alleged easement.
Mount Aldie’s commercial forestry operations On appeal, the appellate court agreed with
had violated the easement. It argued that Mount Mount Aldie that the term “new opening or
Aldie violated the easement by proceeding clearing” means a newly created area cleared of
within the riparian buffer to destroy the Indian standing timber and/or brush, not merely the act
Spring Trail “in order to construct some sort of of disturbing the earth. Also, the appellate court
road in its place.” The LTV also argued that noted that the buffer had been set apart from the
Mount Aldie had violated certain provisions of rest of the tract for treatment under the ease-
the easement; specifically the provision stating, ment, and there was no explicit notice/permis-
sion requirement for activities within the buffer.
No more than one new opening or clearing, and no The appellate court stated that it refused to read
new opening or clearings greater than 1,000 square requirements into the agreement that were not
feet in the forest are permitted for noncommercial pur- included by the parties. Therefore, the court
poses, unless approved in advance and in writing by ruled Mount Aldie’s admissions that it disturbed
Land Trust of Virginia, Inc. more than 1,000 square feet of earth within the
www.appraisalinstitute.org Fall 2017 • The Appraisal Journal 251
Cases in Brief
buffer without giving prior notice or receiving On April 14, 2004, the banks subordinated
permission did not prove LTV’s claim that their interests in the deeds of trust to PLT’s right
Mount Aldie breached the easement. to enforce the easement. Also on April 14, 2004,
The appellate court further considered whether RP Golf filed its 2003 partnership tax return
Mount Aldie had conducted permitted activities claiming a $16.4 million tax deduction for the
within the buffer and had disturbed the earth easement. The Commissioner subsequently disal-
only as reasonably necessary in the process. The lowed RP Golf’s deduction because it was “not
appellate court held that the issue of whether the protected in perpetuity and therefore was not a
work Mount Aldie performed within the buffer qualified conservation contribution.” The tax
was allowed under the easement is a disputed court upheld the Commissioner’s decision and
issue of material fact. The court reversed the RP Golf filed an appeal.
judgment of the circuit court and remanded the The appeals court noted that under the US
matter for further proceedings. Code a “qualified conservation contribution” is a
contribution of (1) a real property interest, (2) to
Mount Aldie, LLC v. Land Trust of Virginia, Inc. a qualified organization, (3) exclusively for con-
Supreme Court of Virginia servation purposes; the court only looked at the
March 2, 2017 third requirement in the present case. The
Record No. 160305 appeals court recognized the code does not define
the phrase “protected in perpetuity,” but the
Commissioner’s regulations elaborate on the
Mortgage subordination required protected-in-perpetuity requirement:
before time of conservation easement gift
in order to claim tax deduction
[N]o deduction will be permitted under this section
for an interest in property which is subject to a mort-
RP Golf, LLC, claimed a charitable deduction of gage unless the mortgagee subordinates its rights in
$16.4 million on its 2003 tax return for donating the property to the right of the qualified organization
an easement to the Platte County Land Trust to enforce the conservation purposes of the gift in
(PLT). The Commissioner of Internal Revenue perpetuity.
(Commissioner) disallowed the deduction, find-
ing RP Golf did not make a “qualified contribu- The appeals court noted that prior court deci-
tion easement.” sions have held that the Commissioner’s regula-
In 1997 and 1998, RP Golf acquired land in tions require any existing mortgage on the
Platte County, Missouri, and developed two pri- donated property to be subordinated at the time
vate golf clubs there. To fund the purchase, RP of the gift. Therefore, to take the qualified con-
Golf obtained loans from two banks and both servation contribution deduction, the banks
loans were secured by deeds of trust. would need have had to subordinate their mort-
In December 2003, RP Golf granted a perma- gages before RP Golf conveyed the easement in
nent conservation easement to PLT. The ease- December 2003.
ment’s purpose was to “further the policies of the RP Golf argued it had secured oral agreements
State of Missouri designed to foster the preserva- with the banks to subordinate their mortgages
tion of open space and open areas, conservation before the conveyance to PLT. The appeals court
of the state’s forest, soil, water, plant and wildlife found, however, that RP Golf failed to prove the
habitats, and other natural and scenic resources.” existence of the oral agreements.
252 The Appraisal Journal • Fall 2017 www.appraisalinstitute.org
Cases in Brief
The appeals court concluded that because the tion, the taxpayer retains the burden to prove
banks’ mortgages were not subordinated before the market value of the property. The tax court
the charitable conveyance occurred in December noted KCP’s expert appraiser declined to value
2003, RP Golf was not entitled to the $16.4 mil- the outlot, not because doing so was inappro-
lion deduction on its 2003 tax return for a quali- priate or because the outlot had no value,
fied conservation contribution. The appeals court but because he was unsure how to value it. The
affirmed the judgment of the tax court. only evidence in the record was the opinion
of the county’s expert, who valued the outlot
RP Golf, SB Golf, LLC, Tax Matters Partner v. at $462,600. Moreover, the fact that KCP listed
Commissioner of Internal Revenue the outlot for sale as a discrete parcel contra-
United States Court of Appeals, Eighth Circuit dicts its contention that the outlot had no sepa-
June 26, 2017 rate value.
KCP also argued that the tax court should not
have separately valued the outlot under the
Outlot can be assessed as excess land income approach “because the ‘outlot’ does not
produce income whatsoever” and it is not “legally
This property tax case concerns the market recognized.” The tax court disagreed, noting that
value of a multi-tenant retail shopping center the question was not whether the outlot was a
in Hastings, Minnesota, as of January 2, 2010, separate, legally recognized parcel, but whether it
January 2, 2011, and January 2, 2012. In Novem- was excess land. The tax court cited The Appraisal
ber 2014, the tax court ruled that the assessed of Real Estate, fourteenth edition, definition of
value of the subject property understated its excess land, which states: “Excess land has the
market value as of all three valuation dates. potential to be sold separately and must be val-
Property owner KCP Hastings (KCP) appealed ued separately.” The court said the fact KCP
this, and the Minnesota Supreme Court affirmed listed the outlot for sale undercut its claim that
the tax court’s findings concerning the gross the outlot was not excess land.
building area, and the tax court’s rejection of Finally, KCP contended the tax court should
the sales comparison approach used by KCP’s not have valued the outlot under the income
expert. The supreme court also remanded the approach, because it effectively used the sales
matter for further valuation under the dis- comparison approach. The tax court noted that
counted cash flow approach. it did not value the subject property under
In August 2016 the tax court held an eviden- either the income approach or the sales compar-
tiary hearing and issued its decision in December ison approach, but it valued the entire property
2016. Both parties then moved for amended under all three approaches to value. The tax
findings and conclusions. KCP argued that the court then outlined the procedures it would fol-
tax court erred in assigning to KCP the burden low to reach a final order for judgment.
to prove that the outlot was not excess land.
KCP claimed that because the outlot is not a KCP Hastings, LLC v. County of Dakota
separate parcel there is “no outlot in the assess- Minnesota Tax Court
ments.” The tax court disagreed, finding that Regular Division, Dakota County
under Minnesota law the assessor’s estimated April 27, 2017
market value is presumed valid. In addition, 2017 WL 1750381
even if the taxpayer overcomes this presump-
www.appraisalinstitute.org Fall 2017 • The Appraisal Journal 253