DISCLAIMER: Copyright 2010

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1 DISCLAIMER: The opinions set forth herein reflect the viewpoint of the Appraisal Institute and Appraisal Institute of Canada at the time of publication but do not necessarily reflect the viewpoint of each individual member. While a great deal of care has been taken to provide accurate and current information, neither the Appraisal Institute, the Appraisal Institute of Canada, the UBC Real Estate Division, nor its editors and staff assume responsibility for the accuracy of the data contained herein. Further, the general principles and conclusions presented in this text are subject to local, provincial, and federal laws and regulations, court cases, and any revisions of the same. This publication is sold for educational purposes with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice. Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved. No part of this book may be reproduced in any form without written permission from the Appraisal Institute of Canada. Published by the UBC Real Estate Division. Printed in Vancouver, Canada.

2 CHAPTER 1 REAL PROPERTY AND ITS APPRAISAL Land is investigated and analyzed in a variety of disciplines government, the law, economics, geography, and environmental studies.

3 1.2 The Appraisal of Real Estate Third Canadian Edition CONCEPTS OF LAND Geographic and Environmental Government and Legal

4 Chapter 1 - Real Property and Its Appraisal Werner, R.J. and Kratovil, R Real Estate Law, 10th ed. Englewood Cliffs, N.J.: Prentice-Hall, Inc. p4.

5 1.4 The Appraisal of Real Estate Third Canadian Edition Figure 1.1: Land to the Sky and Depths Economic 2 See "1991 Analysis of Property Rights and the Constitution - Government of Canada Collection" dsp-psd.tpsgc.gc.ca/collection-r/lopbdp/bp/bp268-e.htm 3 Wendt, P.F Real Estate Appraisal: Review and Outlook. Athens, Ga.: University of Georgia Press. p. 17.

6 Chapter 1 Real Property and Its Appraisal 1.5 Social 4 See also Roe, C.E "Land Use: The Second Battle of Gettysburg". The Appraisal Journal. October pp U.S. 113 (1896). Quoted in Babcock, R.F. and Feurer, D.A. "Land as a Commodity Affected with a Public Interest" in Andrews, R.N.L Land in America. Lexington, Mass.: D.C. Heath and Company. p Ibid., 31.

7 1.6 The Appraisal of Real Estate Third Canadian Edition REAL ESTATE, REAL PROPERTY, AND PERSONAL PROPERTY 7 For more information on the government s control of land use, see Anne Warner La Forest Anger & Honsberger Law of Real Property, Third Edition. Aurora, ON: Canada Law Book, and Eaton, J.D Real Estate Valuation in Litigation, 2nd ed. Chicago, IL: Appraisal Institute.

8 Chapter 1 Real Property and Its Appraisal 1.7 The distinction between real estate and real property is fundamental to appraisal. real estate Land, buildings, and other affixed improvements, as a tangible entity. real property The interests, benefits, and rights inherent in the ownership of real estate. Source: Canadian Uniform Standards of Professional Appraisal Practice, Figure 1.2: Estates in Land Indeterminate Duration Estates Defined Duration Freehold Includes a Future Interest or Possession Leasehold Estate for Years Fee Simple Estate Life Estate Estate from Period to Period Estate at Will Fee Simple Absolute Fee Simple Defeasible Leased Fee Interest Estate at Sufferance

9 1.8 The Appraisal of Real Estate Third Canadian Edition Table 1.1: Distinctions Between Real Estate, Personal Property, and Trade Fixtures Real Estate Characteristics Items that have been installed or attached to the land or building in a rather permanent manner. All real estate improvements were once personal property; when attached to the land, they become real estate. Examples Land Buildings Fixtures e.g., plumbing, lighting, heating, and airconditioning in a residential property Personal Property Characteristics Movable items of property that are not permanently affixed to, or part of, the real estate. Personal property is not endowed with the rights of real property ownership. Examples Furniture and furnishings not built into the structure such as refrigerators and freestanding shelves Items such as bookshelves and window treatments installed by a tenant that, under specific lease terms, may be removed at the termination of the lease Trade Fixtures Characteristics Unlike fixtures, which are regarded in law as part of the real estate, trade fixtures are not real estate endowed with the rights of real property ownership. They are personal property regardless of how they are affixed. A trade fixture is to be removed by the tenant when the lease expires unless this right has been surrendered in the lease. Also known as a chattel fixture. Examples Restaurant booths Gasoline station pumps Storage tanks Fitness equipment in a health club Plumbing, lighting, heating, and air-conditioning in an industrial building Industrial equipment such as air hoses, water pipelines, craneways, and bus ducts 8 Personal Property is "identifiable portable and tangible objects which are considered by the general public as being "personal", e.g. furnishings, artwork, antiques, gems and jewellery, collectibles, machinery and equipment; all property, tangible and intangible, that is not classified as real estate." (CUSPAP 2008)

10 Chapter 1 Real Property and Its Appraisal 1.9 Table 1.2: Criteria for Distinguishing Between Personal Property and Fixtures Criteria The manner in which the item is affixed The character of the item and its adaptation to the real estate The intention of the party who attached the item Explanation Generally an item is considered personal property if it can be removed without serious injury to the real estate or to itself. There are exceptions to this rule. Items that are specifically constructed for use in a particular building or installed to carry out the purpose for which the building was erected are generally considered permanent parts of the building. Frequently the terms of the lease reveal whether the item is permanent or is to be removed at some future time. Source: Werner, R.J. and Kratovil, R.J Real Estate Law, 10th ed. Englewood Cliffs, N.J.: Prentice-Hall, Inc. pp APPRAISAL PRACTICE

11 1.10 The Appraisal of Real Estate Third Canadian Edition

12 Chapter 1 Real Property and Its Appraisal 1.11 CANADIAN UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (CUSPAP) Current standards of the Appraisal Institute of Canada (AIC), developed for appraisers and the users of appraisal services by the Standards Committee of the AIC. The intent of the Standards is to promote and maintain a high level of public trust in professional appraisal practice by establishing requirements for appraisal, review, and consulting assignments. These Standards begin with the Ethics Standard, which sets out the requirements for integrity, impartiality, objectivity, independent judgement, and ethical conduct. The Standards apply to all activities of any member involving an analysis, opinion or conclusion relating to the nature, quality, utility, or value of a specified interest in or aspects of identified real estate. Adherents must develop and communicate his or her analysis, opinions, and advice in a manner that will be meaningful to the client, that will not be misleading in the marketplace, and that will be in compliance with these Standards.

13 1.12 The Appraisal of Real Estate Third Canadian Edition Table 1.3: Comparison of Appraisal, Appraisal Consulting, and Appraisal Review Appraisal Definition Characteristics A formal opinion of value: prepared as a result of a retainer; intended for reliance by identified parties, and for which the appraiser assumes responsibility; the act or process of developing an opinion of value. Appraisal involves selective research into appropriate market areas, the assemblage of pertinent data, the use of appropriate analytical techniques, and the application of knowledge, experience, and professional judgement to develop an appropriate solution to an appraisal problem. The appraiser provides the client with an opinion of real property value that reflects all pertinent market evidence. Examples Appraisal Consulting An opinion of market value for a fee simple estate, leasehold estate or other estate (i.e., to assist in mortgage lending decisions, to assist in purchase or sale decisions) An opinion of investment value or some other properly defined value of an identified interest in real estate as of a given date (i.e., for insurance purposes, for relocation purposes, for property tax appeal work) Definition Characteristics The act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results. Current market activity and evidence are studied to form a conclusion that is not in itself a value indication. An appraiser develops a value opinion in an appraisal consulting assignment as part of the process of answering some other question about real estate, such as whether a proposed use of a given property is economically feasible. Appraisal Review Definition Characteristics The act or process of developing and communicating an opinion about all or part of an appraisal. A reviewer examines the work of another appraiser and expresses an opinion about the quality of that work. Definitions cited from the Definitions section of the Canadian Uniform Standards of Professional Appraisal Practice (2010 edition)

14 Chapter 1 Real Property and Its Appraisal 1.13 Figure 1.3: Valuation Services and Appraisal Practice Other Roles (e.g., brokerage, property management) Valuation Services Other Services Appraisal, Appraisal Review, and Appraisal Consulting Pertains to aspects of value Performed by individual acting as an appraiser Obligation to comply with USPAP Performance and reporting requirements (Standards 1-10) Record keeping and workfile requirements Source: Uniform Standards of Professional Appraisal Practice, ed., Advisory Opinion 21, A-69 Appraisal Reporting Options

15 1.14 The Appraisal of Real Estate Third Canadian Edition Purpose and Intended Use of an Appraisal An appraiser produces a report that is appropriate for the intended use, and is incapable of misleading the intended user. CUSPAP does not dictate the form, format, or style of reporting. These are functions of the needs of users and appraisers. The substantive content of a report determines its compliance. The purpose and the intended use of an appraisal are related, but distinct, concepts. Purpose of an Appraisal: The stated reason for an appraisal assignment, i.e., to develop an opinion of the defined value of any real property interest or to conduct an evaluation study (consulting assignment) pertaining to real property decisions. Intended Use of an Appraisal: The manner in which a client will employ the information contained in an appraisal report. Appraisals are commonly used in situations involving the transfer of ownership, financing and credit, litigation, taxation, and investment counselling and in other business decision-making.

16 Chapter 1 Real Property and Its Appraisal 1.15 Table 1.4: Typical Uses of Appraisals Transfer of ownership To help prospective buyers set offering prices To help prospective sellers determine acceptable selling prices To establish a basis for real property exchanges To establish a basis for reorganizing or merging the ownership of multiple properties To determine the terms of a sale price for a proposed transaction Financing and credit To develop an opinion of the value of the security offered for a proposed mortgage loan To provide an investor with a sound basis for deciding whether to purchase real estate mortgages, bonds, or other types of securities To establish a basis for a decision to insure or underwrite a loan on real property Litigation Expropriation proceedings To develop an opinion of the market value of a property as a whole i.e., before a taking To develop an opinion of the market value of the remainder after a taking To estimate the damages to a property created by a taking Property divisions To develop an opinion of the market value of a property in contract disputes To develop an opinion of the market value of partnership interests Environmental litigation To estimate damages created by violations of environmental laws To estimate damages created by environmental accidents Tax matters To develop an opinion of assessed value To separate assets into depreciable (or capital recapture) items such as buildings and nondepreciable items such as land, and to estimate applicable depreciation (or capital recapture) rates To develop an opinion of the value of the real estate component of an estate plan that represents the foundation for future capital gains, often in the context of an inheritance To determine gift tax credits Investment counselling, decision-making, and accounting To set rent schedules and lease provisions To determine the feasibility of a construction or renovation program To help corporations or third parties purchase homes for transferred employees To serve the needs of insurers, adjusters, and policyholders To facilitate corporate mergers, the issuance of stock or the revision of book value To develop an opinion of liquidation value for forced sale or auction proceedings To counsel clients by considering their investment goals, alternatives, resources, constraints, and the timing of their activities To advise planners, zoning authorities, and courts, among others, on the probable effects of proposed actions To assist in arbitrating valuation issues To analyze supply and demand trends in a market To ascertain the status of real estate markets To value fixed assets and assist in asset value allocations

17 1.16 The Appraisal of Real Estate Third Canadian Edition Appraiser Liability Appraisers may be held liable for professional violations or related misconduct. liability In appraisal, a legal obligation to render services in compliance with professional standards and to refrain from malpractice, which includes negligence, misrepresentation, fraud, and breach of contract.

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