STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
DEPARTMENT OF BUSINESS AND ) PROFESSIONAL REGULATION, )
)
Petitioner, )
)
vs. ) CASE NO. 94-0594
)
KEVIN J. LINDHEIM, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, final hearing in the above-styled case was held on July 22, 1994. The parties, attorneys, witnesses, and court reporter attended the hearing in Ft. Myers. Robert E. Meale, Hearing Officer of the Division of Administrative Hearings, participated by videoconference from Tallahassee.
APPEARANCES
The parties were represented at the hearing as follows: For Petitioner: Theodore R. Gay
Department of Business and Professional Regulation
Division of Real Estate Rhode Building, Phase II
401 Northwest 2nd Avenue, N607 Miami, Florida 33128
For Respondent: Kevin J. Lindheim, pro se
9200 Bonita Beach Road, Suite 210 Bonita Springs, Florida 33923
STATEMENT OF THE ISSUE
The issue in this case is whether Respondent violated various disciplinary provisions, including the Uniform Standards of Appraisal Practice, in preparing a real estate appraisal and, if so, what penalty should be imposed.
PRELIMINARY STATEMENT
By Administrative Complaint dated January 2, 1994, Petitioner alleged that Respondent prepared an appraisal report for the Resolution Trust Corporation that determined the value of certain commercial and multi-family residential property to be $105,000.
The Administrative Complaint alleges that the review appraiser for the Resolution Trust Corporation determined that the report was inadequate. He allegedly demanded and received a refund of the $3200 paid for the appraisal.
The Administrative Complaint alleges that Respondent violated Standards 1 and 2 of the Uniform Standards of Professional Appraisal Practice, as adopted by the Appraisal Foundation and the State of Florida.
Standard 1 allegedly states that the appraiser must be aware of, understand, and correctly employ recognized methods and techniques necessary to produce a credible appraisal. The Administrative Complaint alleges that Respondent omitted several required approaches and was careless in his analysis and choice of methodologies, so that he did not produce a credible appraisal.
Standard Rule 2.2 allegedly identifies a variety of reporting requirements and procedures in the valuation process. The Administrative Complaint alleges that Respondent's appraisal is deficient in reporting, reasoning, and analysis. Paragraphs J and K of Standard Rule 2.2 allegedly require that the appraiser explain and support the exclusion of any usual valuation approach. The Administrative Complaint alleges that Respondent's appraisal omits the Market Data Approach, which allegedly is the most important approach in the valuation of the property.
Based on the foregoing, the Administrative Complaint alleges that Respondent is guilty of committing culpable negligence or breach of trust in a business transaction, in violation of Section 475.624(2), Florida Statutes; failing to use reasonable diligence in developing an appraisal or preparing an appraisal report, in violation of Section 475.624(15); and violating standards for the development or communication of a real estate appraisal or other provision of the Uniform Standards of Professional Appraisal Practice Rules 1-3, 1-4, and 2-2, paragraphs H, J, and K, in violation of Section 475.624(14), Florida Statutes.
At the hearing, Petitioner called one witness and offered into evidence four exhibits. Respondent called one witness and offered into evidence seven exhibits. All exhibits were admitted.
The transcript was filed September 9, 1994. The proposed findings of Petitioner are adopted or adopted in substance, except for those in paragraph 14 not incorporated into the recommended order because they are subordinate.
FINDINGS OF FACT
Background
At all material times, Respondent has been a state certified general real estate appraiser, holding license number RZ 0001017.
While employed by Appraisal First, Inc., Respondent prepared an appraisal for the Resolution Trust Corporation. The subject of the appraisal is property located at 4423 Palm Beach Blvd. in an area known as Tice in unincorporated Lee County.
The purpose of Respondent's appraisal (Appraisal Report) was to estimate the market value of the fee simple interest in the property, based on the highest and best use of the property as of January 21, 1992. This is the effective date of the Appraisal Report.
Pursuant to the directions of the Resolution Trust Corporation, "market value" is defined as:
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, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is consummation of a sale as of a specified date and passing the title from seller to buyer under conditions whereby:
--buyer and seller are typically motivated;
--both parties are well informed or well advised, and each acting in what he considers his own best interest;
--a reasonable time is allowed for exposure in the open market;
--payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
--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.
This definition seeks a value estimate in terms of cash or its equivalent. The terms of all comparable transactions should be identified, analyzed and reported in reasonable detail. If any sales utilized as comparable were influenced by financing terms or concessions, they must be adjusted to their cash equivalent price. Moreover, all units of comparison extracted from these sales must reflect the cash equivalent price.
The property consists of an L-shaped, 24,500 square-foot parcel with
125 feet of frontage on Palm Beach Blvd. The rear of the property runs 50 feet along Bessie Avenue.
Palm Beach Blvd. is State Road 80, which is a major arterial connecting downtown Ft. Myers with I-75. The property, which is west of the I-75/State Road 80 interchange, is about two miles east of downtown Ft. Myers. At the time of the subject appraisal, State Road 80 was four lanes, but was being widened to six lanes east of the subject property to I-75.
The front two-thirds of the subject property is zoned commercial, with the remainder (fronting Bessie Ave.) zoned residential. The commercial zoning permits commercial and residential uses. The residential zoning permits small- lot, single-family detached residential uses, with almost no commercial uses. Under the comprehensive plan, the subject property is designated Central Urban, which presumably permits mixed uses.
The subject property comprises two tax parcels. Tax parcel #280 consists of an owner-occupied apartment in a commercial building fronting on Palm Beach Blvd. and a detached walk-in cooler. The apartment has one bedroom and two bathrooms. All of the improvements were built in 1959 and last sold in March 1977 for $35,000. In 1991, Lee County assessed tax parcel #280 at $28,000 for the land and $40,000 for the improvements.
Tax parcel #250 consists of a two-story apartment building consisting of four units on the first level and two units on the second level. The
apartment building has an attached walk-in freezer and limited commercial space fronting on Palm Beach Blvd. These improvements were built in 1950 and last sold in January 1984 for $22,400. The apartments are all one bedroom and one bath. In 1991, Lee County assessed tax parcel #250 at $42,000 for the land and
$40,000 for the improvements.
The Appraisal Report
The Appraisal Report describes the nature and location of recent development activity in the area as follows: "Development along Palm Beach Blvd. has been primarily light commercial with the newest activity nearest the Interstate." Appraisal Report, p. 18. (All page numbers refer to the page handwritten in the stamped space in the lower right-hand corner of the exhibit.)
The Appraisal Report continues:
Proceeding west on Palm Beach Blvd. [from I- 75 toward Ft. Myers], the closer to . . . Tice, the more blighted and undesirable the area becomes. The Blvd. appears dominated by roadside motels
. . . which were popular in the 1950s. The remaining commercial businesses in use are small mom & pop operations including hardware, bakery, and filling stations. The overall condition rating of commercial improvements within Tice is rated "Fair" which is consistent with the subject improvements. There are numerous vacant and abandoned structures as evidenced by an excessive
number of "For Sale" and "For Lease" signs for such a small area. Although the existing commercial usage fronting Palm Beach Blvd. in Tice appears
to be in a declining cycle, the low income resi- dential rental unit demand is healthy. Our rental survey conducted in the income approach revealed high occupancy levels along with stabilized rents for 1bed/1bth units in fair-average condition. As
later discussed in the highest and best use analysis, apartment dwellings compatible with the C-2 zoning would tend to be the most profitable use of vacant sites in lieu of commercial development.
Appraisal Report, pp. 18-19.
Addressing the rehabilitation of the Tice area, the Appraisal Report adds: "The event of commercial rehabilitation throughout the area does not appear likely in the foreseeable future. The probable future trend is to supply the low income residential demand which is increasing within the neighborhood." Appraisal Report, p. 21.
The Appraisal Report describes the site improvements, excluding buildings, as concrete/asphalt paving for rear parking, access from front (Palm Beach Blvd.) to rear (Bessie Ave.) via a dirt road in the rear, a dock-level loading ramp into the cooler, and a chain-link fence enclosing the sides and rear of the property.
The Appraisal Report describes the zoning as C-2, ignoring the rear portion of the property that is zoned residential. This is an immaterial omission under the circumstances.
The Appraisal Report notes that tax parcel #250, which is the two- story apartment building with attached freezer, contains 3360 square feet of leasable space, excluding the freezer. Three of the four first-story apartments are in "poor- fair" condition, and the fourth is in "poor--totally gutted" condition. The two upstairs apartments are in "average" condition. The report states that the freezer is "functional" and contains 576 square feet of space.
The Appraisal Report states that there is no heating or cooling system in the apartment building, except for window units in the second story. The report advises that none of the first- story units meets the minimum building codes.
The Appraisal Report states that tax parcel #280, which is the commercial space, was built in 1950 and contains about 2448 square feet of leasable area, including a 600 square-foot one bedroom/one bathroom apartment. The Appraisal Report states that half of the commercial space is unfinished open space with exposed ceilings and walls. The report adds that the electrical service does not meet minimum building code requirements and that there is no heating or cooling except for a window unit. The Appraisal Report states that the detached cooler is about 900 square feet and operational.
Summarizing the condition of the improvements on the subject property, the Appraisal Report concludes:
Overall, the existing improvements are observed to be in poor to average condition with the exception of the second level apartment units that are rated average. The improvements appear to have nearly exhausted their economic life and are in need of major rehabilitation to achieve the property's highest and best use "As Improved" as later discussed. Excluding the freezer and cooler, the improvements would require the restoration of the property to satisfactory condition without changing the plan, form or style of the structure. The value approach[e]s will later address all forms of depreciation within the structure with related impact on market value.
Appraisal Report, p. 28.
Citing The Dictionary of Real Estate Appraisal (2d ed.), the Appraisal Report defines "highest and best use" as:
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possible [sic], financial feasibility, and maximum profitability.
Appraisal Report, p. 33. Because the subject property is improved, the Appraisal Report states that the analysis of highest and best use will consider the property first "As Though Vacant" and ready for development and then "As Improved." Id.
Analyzing the subject property as though vacant, the Appraisal Report determines that the potential uses for the site are "essentially commercial/residential," based on zoning and designation in the comprehensive plan. Appraisal Report, p. 35. Again stressing the commercial downturn in Tice, the report states
the surrounding multi-family residential rental apartments remain strong. . . . Despite the condition of improvements which ranged from poor to average, both occupancy levels and rents appeared stabilized. As of appraisal date, residential multi-family development conforming to the legal and physical site requirements represents the Highest and Best Use of the site "As Vacant."
Id.
Addressing the subject property with its current improvements, the
Appraisal Report restates the need for "major rehabilitation" for "optimum fulfillment of the existing uses." Appraisal Report, p. 35. The report mentions the negative contribution of the existing improvements. Noting the current depressed commercial market in Tice, the report states that "the highest and best use of the site would be to convert and rehabilitate the existing improvements into a low-income rental complex." Id. at p. 36.
There are three basic approaches to appraising real property: market data, income, and cost.
The market data approach requires the appraiser to find sales of similar properties and compare them to the subject property. By adjusting the comparables' sales prices, the appraiser estimates the value of the subject property.
The income approach requires the appraiser to find the market rent for similar buildings and applicable capitalization rate. Then, the appraiser estimates the subject property's net income and, using the applicable capitalization rate, converts the net income into estimated value.
The cost approach requires the appraiser to estimate the reproduction cost of the improvements, subtract estimated depreciation, and add the estimated market value of the site.
The first approach used in the Appraisal Report is the cost approach. To find the value of the site without improvements, Respondent used the market data approach to find comparables to the subject site "As Vacant." He found two sales and one listing. The limited number of raw-land sales was due to the built-up nature of the area, according to the Appraisal Report. The sales took place in June and October, 1990, and the listing had been on the market continuously from November 1990 through February 1992.
The first comparable of raw land is at Ortiz Ave. and Palm Beach Blvd., about three blocks east of the subject property. Sold in October 1990 for $100,000, the 18,225 square- foot parcel brought $5.49 per square foot. The parcel was a used car lot with a 1070 square-foot sales office.
As noted by Petitioner's expert, Respondent misstated the area of the first comparable. Because it really contained 25,245 square feet, the sales price was $3.96 per square foot.
The second comparable of raw land is at Terry St. and Palm Beach Blvd., about 10 blocks west of the subject property. Sold in June 1990 for
$115,000, the 17,280 square-foot parcel brought $6.45 per square foot. The parcel was partially asphalted with a chain-link fence and 576 square-foot garage.
The third comparable of raw land is at Palm Beach Blvd. and Palmetto Ave., "approximately 9 blocks east of the subject" property. Appraisal Report,
p. 45. As is clear from the area map on page 17, however, the third comparable is nine blocks west of the subject property. Listed at $127,900, the 25,577 square-foot parcel was priced at $5.00 per square foot. The third comparable is raw land and originally listed for $6.00 per square foot.
After adjustments, the price of each comparable ranged from $4.34-
$4.76 per square foot.
Obviously, Respondent's error on the first comparable, when combined with the small number of comparables, contributed materially to his perception of a recent decline in the local commercial market. Analyzing the details of the two transactions and one listing, the Appraisal Report finds that high- profile commercial sites had depreciated from mid-1990 to early 1992.
Finding good support for the mid-range value, Respondent selected
$4.50 per square foot for the subject property's Palm Beach Blvd. frontage, which consists of 17,500 square feet. Without discussion or explanation, Respondent halved the value of the 7000 square feet fronting on Bessie Ave., so that it was valued at $2.25 per square foot. The result was that the market value of the subject property was $95,000.
The next step in the cost approach required Respondent to add to the value of the raw land the reproduction cost of improvements, less depreciation. Using a standard valuation service, Respondent estimated the reproduction costs of the improvements on each tax parcel separately, due to the differences in the age of the improvements on the two parcels.
The 3360 square feet of apartments on tax parcel #250 yielded a reproduction cost estimate of $84,000. The freezer yielded a reproduction cost estimate of $12,000. Less depreciation of 88 percent and 75 percent respectively, the Appraisal Report finds that the reproduction costs of the buildings on tax parcel #250 equal $13,100.
The 2448 square feet of commercial space on tax parcel #280 yielded a reproduction cost estimate of $62,424. The cooler yielded a reproduction cost estimate of about $17,000. The Appraisal Report treats the one bedroom/two bathroom apartment on tax parcel #280 as part of the commercial space. Less depreciation of 88 percent, the Appraisal Report finds that the reproduction cost of the commercial building on tax parcel #280 equals $7491. The report
neglects to carry over the $17,000 unadjusted cost of the cooler and calculate the post-depreciation value of $4250.
Estimating the adjusted cost of site improvements at $1250 ($5000 less
75 percent depreciation) and the indirect costs of taxes and financing fees at
$1400, Respondent's "total reproduction cost estimate" is $23,168." (Some of the above- described numbers have been rounded off.)
Adding the total reproduction cost estimate of $23,168 to the estimated land value of $95,000, Respondent determines that the total development cost is $118,168. Adding a 5 percent factor for developer profit or cost overruns, the total value under the cost approach is rounded off to
$125,000. Appraisal Report, p. 59.
The Appraisal Report discloses that the market data approach could not be used. The report explains:
Extensive market research revealed no bona-fide sales of mix-use properties similar to the subject (i.e., containing apartments, commercial space, and refrigerated storage space) were available
for analysis. Therefore, without sufficient sales data the MARKET APPROACH WAS OMITTED AS A VALID APPROACH FOR THIS APPRAISAL.
However, submitted for later use in the Income Approach are Small Residential sales of apartment buildings containing four (4) units or less.
Appraisal Report, p. 60.
Under the income approach, the Appraiser Report finds that the current rents derived from the apartments, which are $9900 annually, are market rate and require no adjustment. The report analyzes the commercial space as commercial storage, rather than commercial retail, due to the unfinished nature of the improvements. The report then derives a market rental rate for the entire commercial area of $9096 annually. Respondent used 1576 square feet for the total combined refrigerated area, rather than the 1476 indicated in the earlier discussion. (Cf. Appraisal Report pp. 54 and 55 with p. 75.) In any event, he calculated an annual rental of $8880 from the cooler and freezer units. After making appropriate adjustments for collections and vacancies, the report estimates that the effective gross income from the subject property is $21,458.
Without actual expense data, Respondent reduced the gross income projection by estimated expenses, leaving annual net operating income of
$13,728. To convert the net operating income into value, Respondent derived an income capitalization rate from comparable sales of apartment units, based on his determination that the highest and best use of the site "As Improved" is conversion of the existing mixed uses into apartment units. Appraisal Report, p. 79.
None of the four comparables is located on Palm Beach Blvd., although all are within two or three blocks of the artery. This fact undermines Respondent's determination of highest and best use and, in this approach, his derived capitalization rate.
In any event, Respondent calculates a capitalization rate range of 10 percent-13 percent and wisely chooses 13 percent. Applying the derived capitalization rate of 13 percent to the net operating income of $13,728, the Appraisal Report calculates an indicated value, as is, of $105,000 under the income approach.
The Appraisal Report next reconciles the values found under each of the approaches: $125,000 under the cost approach and $105,000 under the income approach. The report sensibly deemphasizes the cost approach, given the relative large amounts of depreciation involved. Instead, the report stresses the income approach as "the most likely investment scenario in which an investor would purchase the existing improvements." This approach is driven by Respondent's choice of highest and best use, which, as noted below, is questionable.
Concluding that an investor "would likely be attracted to the subject property not for the existing improvements but alternatively converting all uses into apartment rentals," the Appraisal Report concludes that the value of the fee simple of the subject property is $105,000, as indicated in the income approach.
The Review
At the request of Petitioner, Richard L. Armalavage conducted a review of the Appraisal Report from April through July 1993 (Review). The effective date of the review is June 15, 1993, but it is intended to reflect market conditions as of January 21, 1992.
In the introductory summary, the Review notes that, with one immaterial exception, the items in the Appraisal Report are "in compliance." However, the Review characterizes several items as "minimally acceptable." These items include Respondent's treatment of the highest and best use of the subject property. The Review states: "[Respondent's c]onclusion is that current use is interim; highest and best use is residential multi-family." Review, p. 8.
The Review first focuses on Respondent's determination of highest and best use. The Review states:
My analysis of the neighborhood and the subject property leads me to the conclusion that the highest and best use of subject is for commercial use. The existing improvements are substantially depreciated, with a limited economic life estimated at five years, or an interim timeframe until future
use is more clearly defined for the subject property. The subject neighborhood is in the process of transformation, but has been in general decline for the past several years. The neighborhood appears to be stabilizing, with redevelopment currently taking place and expected to continue in the future. . . .
[With respect to area buildings, t]he condition of many of the properties has been deteriorating, and property value has stabilized or in some cases declined. There has been a sharp increase in crime in this area, and many families and businesses have moved to alternative locations. . . . As a result
of these factors, it is difficult to forecast the probable future use of subject and surrounding properties. However, it is apparent the neighbor- hood is stabilizing and improvement will occur to the market. The betterment of Palm Beach Boulevard will be a stimulant in the future growth of this neighborhood. Due to its close proximity to the central business district of Ft. Myers, and near proximity to the Caloosahatchee River and I-75,
it is certain this area will improve in future years.
The subject neighborhood is disjointed, and a hodge- podge of mixed-use properties in varying stages of economic life. As a result, it is difficult to analyze and requires extensive research and compar- ative analysis. Uses along Palm Beach Boulevard
are mostly commercial, with scattered industrial or other forms of business related uses. Most properties fronting along Palm Beach Boulevard in subject's immediate area are auto related, such as used car lots, transmission repair, body shops, etc. Commercial use consistent with zoning is the reasonable and logical highest and best use of
the property. There are no indications of alter- native uses that would yield maximum returns to
the property, and consistent use with the surrounding neighborhood. There is absolutely no trend of residential use for properties along Palm Beach Boulevard, and it does not appear future use will
be residential apartments. Although subject's optimum use, as improved, is for future redevelop- ment to intensive commercial use, the existing improvements are suitable for commercial use on
an interim basis. The ideal use will be more clearly established in the near future, but it will not be residential rental apartments. Even though the subject and surrounding neighborhood are difficult to analyze due to general age and condition, there is extensive market data of a consistent type to utilize for valuation purposes. The [Appraisal Report] concludes the highest and best use is for residential rental apartments.
This conclusion stymied the appraiser, since it is nearly impossible to document, analyze and support an estimate of value for the subject property on this basis. My survey and analysis of the market produced sufficient information to result in an adequate and reasonable conclusion of value as a commercial use property. A better description of the property and the problems affecting the neighborhood, along with a more intense survey of market data would have allowed the appraiser to provide adequate support for a supportable opinion of value.
The highest and best use of subject is for use
of the existing improvements on an interim basis,
with future redevelopment for retail and office uses. The existing improvements can be utilized for retail use and storage. I have analyzed subject in accordance with this conclusion.
Review, pp. 12-13.
The Review commences with an analysis of the value of the raw land, as part of the cost approach. The Review estimates the value of the raw land at
$104,000, not $95,000 as stated in the Appraisal Report. The Review's estimate is based on 10-20 listings and five land sales, including the two land sales used in the Appraisal Report. The Review corrects the Appraisal Report by substituting 25,245 square feet and $3.96 per square foot for 18,225 square feet and $5.49 per square foot that Respondent had incorrectly stated for one of his sales.
The Review does not segregate value between the portion
of the property fronting Palm Beach Blvd. and the rear portion of the property along Bessie Ave. The Review explains that the bulk of the zoning is commercial, and the rear portion supports the commercial use of the front portion.
However, the RS-1 zoning for the rear third of the subject property allows almost no commercial uses in a district that is intended to be reserved for small-lot, single-family detached residences. The Review presumes the availability of rezoning.
The Review does not find as "unreasonable" the $9000 disparity between the estimated values of the raw land in the Review and Appraisal Report. But the Review states that the limited number of sales and the mistakes in the computation of the area of one of the comparables "decreases the adequacy of the [Appraisal Report]." Review, p. 33.
The five sale comparables used in the Review are all along Palm Beach Blvd., within 1.5 miles of the subject property. Three of the comparables are raw land. The other two comparables have immaterial improvements.
As for the cost valuation, the Review ignores the second-story apartments. If Mr. Armalavage is correct (unlike Respondent, he could not inspect the apartments due to the nature of his assignment), the condition of the upstairs apartments had deteriorated from average at the time of the Appraisal Report to uninhabitable at the time of the Review. The apartment building is in "total disrepair" and the plumbing requires "total reinstallation" in order to comply with code. As of its effective date, rather than the effective date of the Appraisal Report, the Review concludes that the logical use of the apartment is storage or rehabilitation and reconstruction for retail storefront units.
After making the appropriate adjustments, the Review finds that the total value of the depreciated improvements, including developer profit, is
$25,300. With land value of $104,000, the value under the cost approach is
$129,000, which is about $4000 higher than Respondent's result under the cost approach. After correcting for Respondent's omission of the cooler, the two estimates are about the same, but, again, the Review concludes that the Appraisal Report is deficient due to limitations in analysis attributable to "inadequate reporting and numerous errors." Review, p. 51.
The biggest difference between the Appraisal Report and the Review is that the latter includes an estimate of value based on the market data approach. The Review includes six improved building sales, which were culled from a survey of about 15 sales of improved property near the subject property. The Review warns:
Although each of the properties has unique characteristics making them dissimilar in many ways, they are similar enough to reflect a reasonable estimate of value for the subject property. At the very least, the sales information is helpful in establishing a range of values (brackets value) for the subject property in
its improved condition. The omission of the Market Data Approach in the [Appraisal Report] is the most glaring mistake in the analysis.
There is extensive market information available for analysis, even though much of it is somewhat
dissimilar to subject due to unique characteristics. The omission of this approach in the [Appraisal Report] is considered detrimental in the correlation process for estimating value of the subject property. In the case of subject, the large amount of market data available for analysis is quite beneficial in corroborating value, and contributes in the other approaches for estimates of depreciation in the
cost approach, and economic life and rent potential in the income approach. The omission of this approach in the [Appraisal Report] is considered
an unacceptable departure from the basic reporting requirements set forth by the Appraisal Foundation.
Review, p. 56.
The Review finds that the value of the subject property, under the market data approach, is somewhere between $122,500 and $134,750 and finally estimates the value as $128,000.
Turning to the income approach, the Review notes that the subject property is, as of early 1993, used as a storage operation with the residential apartment located in the commercial building in use, but with the apartment buildings unused and unusable.
The Review again rejects residential use, either in the future or, based on the current condition of the improvements, even on an interim basis. The Review states that the highest and best use of the property is commercial, either unimproved retail and storage in its current condition or retail storefront after rehabilitation. The cost of rehabilitation would be about $15 per square foot and would add about 5-10 years to the useful life of the building. The useful life of the present improvements, "as is," is about five years.
The Review forecasts operating incomes based on two alternatives. In "as is" condition, the Review calculates that the gross income would be about
$20,000 annually. After expenses, the net operating income would be about
$10,000 annually.
In the alternative, the Review analyzes the income of the property if converted to conventional storefront. The gross income would be about $34,892 annually. After expenses, the net operating income would be about $20,300 annually.
Deriving a capitalization rate of 11 percent, the value of the net income of the property "as is" is $91,000. The value of the net income of the property, if renovated, is $184,500. After adjustment for the cost of renovations, the final value of the renovated property is $113,000.
The Review concludes that, based on the income approach, the estimated value of the subject property is $91,000- $113,000, which is ultimately estimated to be $100,000.
The Review then reconciles the values of $129,000 from the cost approach, $128,000 from the market data approach, and $100,000 from the income approach. Noting that "[d]emand for this location appears to be disjointed, and there is no clear trend of future use patterns at this time," the Review estimates that the value of the subject property is $120,000. The Review asserts:
The subject property is best suited for an owner/user of the property with future renovation to an alternative form of commercial use. Minimal renovations could extend the useful life of the improvements by five, possibly ten years. The age and condition of the subject improvements weakens the valuation of subject by the cost approach, and the limited income producing capabilities of properties in this general location weaken the
income approach. There are numerous sale properties to utilize for comparison with subject, however,
the sales required numerous adjustments which reduces the effectiveness of the market comparison approach. Even so, the extent of sales information has a significant influence in the valuation. As a result, I have given consideration to all three approaches to value, with greatest weight on the Market Data Approach.
Review, p. 90.
The Review concludes with a final discussion of the Appraisal Report and alleges that Respondent violated the provisions that he is charged with violating in the Administrative Complaint.
The Uniform Standards of Professional Appraisal Practice
The Uniform Standards of Professional Appraisal Practice (USPAP) sets forth standards of practice for appraisers. USPAP Standard 1 is: "In developing a real property appraisal, an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal." The accompanying "comment" explains that the development of a "competent appraisal" is a product of the "requirements" of USPAP Standards Rules 1-1 and 1-5 and the "appraisal guidelines" of USPAP Standards Rules 1-2, 1-3, and 1-4.
USPAP Standards Rule 1-1 requires, among other things, that an appraiser "not commit a substantial error of omission or commission that significantly affects an appraisal" and "not render appraisal services in a careless or negligent manner, such as a series of errors that, considered individually, may not significantly affect the results of an appraisal, but which, when considered in the aggregate, would be misleading." USPAP Standards Rule 1-1(b) and (c). The comment accompanying USPAP Standards Rule 1-1(c) "explains" that carelessness or negligence is "not excuse[d]" by the fact that the carelessness or negligence does not cause an error that "significantly affects [the appraiser's] opinions or conclusions." However, nothing in USPAP suggests that the comments are part of the rules.
USPAP Standards Rule 1-3 sets forth the following "appraisal guidelines" that an appraiser "must observe":
consider the effect on use and value of the following factors: existing land use
regulations, reasonably probable modifications of such land use regulations, economic demand, the physical adaptability of the real estate, neighborhood trends, and the highest and best use of the real estate;
recognize that land is appraised as though vacant and available for development to its highest and best use and that the appraisal of improvements is based on their actual contribution to the site.
The comment to USPAP Standards Rule 1-3(a) states in part:
Further, an appraiser must avoid making an unsupported assumption or premise about neighborhood decline, effective age, and remaining life. In considering highest and best use, an appraiser should develop the concept to the extent that is required for a proper solution of the appraisal problem being considered.
The pertinent portion of USPAP Rule 1-4 sets forth the following "specific appraisal guidelines" that the appraiser "must observe," "when applicable":
value the site by an appropriate appraisal method or technique;
collect, verify, analyze, and reconcile:
such comparable cost data as are available
to estimate the cost new of the improvements (if any);
such comparable data as are available to estimate the difference between cost new and the present worth of the improvements (accrued depreciation);
such comparable sales data, adequately identified and described, as are available to indicate a value conclusion;
such comparable rental data as are available to estimate the market rental of the
property being appraised;
such comparable operating expense data as are available to estimate the operating expenses of the property being appraised;
such comparable data as are available to estimate rates of capitalization and/or rates of discount.
The comment to USPAP Standards Rule 1-4(b) states that it "covers the three approaches to value."
USPAP Standards Rule 2-2(h), (j), and (k) states that "each written real property appraisal report must":
(h) set forth the information considered, the appraisal procedures followed, and the reasoning
that supports the analyses, opinions, and conclusions;
* * *
explain and support the exclusion of any of the usual valuation approaches;
set forth any additional information that may be appropriate to show compliance with, or clearly identify and explain permitted departures from the requires of Standard 1[.]
The comment under USPAP Standards Rule 2-2(h) explains that the requirement:
calls for the appraiser to summarize the data considered and the procedures that were followed. Each item must be addressed in the depth and detail required by its significance to the appraisal. The appraiser must be certain that sufficient information is provided so that the client, the users of the report, and the public will understand it and will not be misled or confused. The substantive content of the report, not its size, determines its compliance with this specific reporting guideline.
The comment under USPAP Standards Rule 2-2(k) adds:
This requirements calls for a written appraisal report or other written communication concerning the results of an appraisal to contain sufficient information to indicate that the appraiser complied with the requirements of Standard 1, including the requirements governing any permitted departures from the appraisal guidelines. The amount of detail required will vary with the significance of the information to the appraisal.
* * *
Ultimate Findings
There is no evidence that Respondent is guilty of culpable negligence or breach of trust in the preparation of the Appraisal Report.
There is some evidence that Respondent failed to use reasonable diligence in the preparation of the Appraisal Report. However, based on all the circumstances, Petitioner has not proved by clear and convincing evidence that Respondent has violated this statutory provision.
The closer questions are presented by the USPAP. The allegations concerning USPAP Standard 1 are that Respondent omitted a required valuation approach and was careless in his analysis and selection of methodologies in producing a credible appraisal. The USPAP rules specifically cited in the Administrative Complaint set forth "guidelines" and requirements. The guidelines cover the identification of the highest and best use of the subject property and the use of the three conventional approaches to valuation. The requirements are that the appraisal report state the information considered, the appraisal procedures followed, and the reasoning in support of the analyses, opinions, and conclusions; explain and support the exclusion of any of the usual valuation approaches; and state any additional information appropriate to show compliance or justify noncompliance with the "requirements" of Standard 1.
The valuation approaches and determination of highest and best use are crucial elements of an appraisal.
Respondent selected residential use as the highest and best use of the subject property. However, there has been no residential redevelopment in the area, and the value of frontage on Palm Beach Blvd. suggests a commercial use. Even on an "As Improved" basis, the subject property does not seem to find its highest and best use in residential uses. The apartments were in bad shape when Respondent appraised them and not surprisingly became worse over time. Code violations rendered continued habitation of the apartments a questionable proposition. The cooler and freezer were in good working order, and less would be required to maintain the existing space as commercial storage.
On the other hand, Mr. Armalavage's solution is not unassailable. It requires rezoning one-third of the property (The residential zoning of the rear third of the property was uncovered by Mr. Armalavage, not Respondent.) The crime described in the Review would seem to affect retail, especially storefront, commercial as much as residential.
The problem Respondent and Mr. Armalavage faced in determining the property's highest and best use is one of timing. It is unlikely that the highest and best used of the subject property will ultimately be residential, given the arterial frontage and emerging commercial nature of the area.
However, interim uses must also be considered, especially given the transitional nature of the area. Mr. Armalavage's interim commercial uses seem more reasonable than Respondent's interim residential uses, but this is in part due to developments after the Appraisal Report.
On balance, though, Petitioner has not proved by clear and convincing evidence that Respondent, in identifying the subject property's highest and best use, failed to observe the guideline of consideration of the highest and best use of the subject property, or that Respondent failed to recognize that the appraisal of the improvements is limited to their actual contribution to the site. Likewise, Petitioner has not proved by clear and convincing evidence that Respondent, in identifying the subject property's highest and best use, failed to set forth the highest and best use or the reasoning that supported his determination. Respondent's reasoning is not highly persuasive, but it is
present. To borrow Mr. Armalavage's phrase, Respondent's efforts in determining the subject property's highest and best use are "minimally acceptable."
Respondent also made numerous sloppy mistakes in his analysis. His use of the cost approach to valuation was particularly sloppy. He omitted a
$4250 item. He made a large error on one of two actual sales. Magnified by the small sample size, the error may have contributed to Respondent's perception of commercial depreciation, which may have helped mislead him as to the highest and best use of the property. Without significant analysis, Respondent arbitrarily halved the value of the rear third of the property.
On the other hand, Mr. Armalavage's cost approach presumes without discussion the rezoning of the rear third of the subject property. The Review also considers the condition of the apartments as they were at the time of the Review, not as they were at the time of the Appraisal Report. However, Mr. Armalavage's comparables for the raw land are far superior to Respondent's comparables and, perhaps more than any other factor, signal a lack of effort on Respondent's part, at least in preparing the cost approach.
Despite the superior quality of the Review when compared to the Appraisal Report as to the cost approach, the difference in their final values is $4000--which is eliminated if one adds to Respondent's cost valuation the depreciated value of the omitted cooler.
Respondent's income approach is impaired by two factors. Given the condition of the apartments, his residential rental values are too low, although this deficiency is partly offset by Respondent's selection of a relatively high capitalization rate. Obviously, an investor purchasing improvements at the end of their useful lives would demand a relatively rapid return of his investment.
Second, Respondent secures questionable comparables, partly due to his determination of highest and best use. Respondent chose apartment complexes that varied from the subject property's apartment building in three important respects: condition, size, and location.
On the other hand, Mr. Armalavage's income approach raises questions in his reliance upon conversion to relatively profitable storefront uses, in a crime-infested area, and a relatively low capitalization rate, given the transitional nature of the area and, in the "as is" alternative, the poor condition of the improvements.
Under the income approach, the Appraisal Report estimates the value of the subject property, "as is," at $105,000. Under the same approach, the Review estimates the value of the subject property, "as is," at $91,000 and, if renovated as storefront retail, at $113,000, with a final estimate of $100,000. The difference between Respondent's value and Mr. Armalavage's value is between
$5000-$14,000.
The biggest objection of Mr. Armalavage to the Appraisal Report is its omission of the market data approach, which is typically the cornerstone of a real estate appraisal. Respondent's decision to omit the market data approach was due to his claimed inability to find true comparables. There is some inconsistency in Respondent's inability to find suitable comparables for the market data approach and his ability to find suitable comparables for deriving a capitalization rate and market rents under the income approach. However, the suitability of the comparables used in the income approach may be judged by looser standards because they were used, in this case, to determine a
capitalization rate, which appears to exist in a fairly narrow range, and a market rent for merely the residential component of the subject property.
Respondent's inability to find comparables is partly justified by the unique nature of the subject property, which derived, at the time of the Appraisal Report, substantial value from residential, general commercial storage, and refrigerated storage uses. In a small urban market, the subject property allows few, if any, comparables that do not require so much adjustment as to obscure the initial hard data (i.e., sales prices) behind a miasma of price adjustments based upon layer after layer of presumptions on the part of the appraiser.
Again, Respondent's failure may be evaluated in the context of the market data approach used by Mr. Armalavage, who himself describes the neighborhood as "disjointed" and a "hodge- podge of mixed-use properties in varying stages of economic life." These features impede all aspects of appraisal, from selecting highest and best use to finding comparables.
But Mr. Armalavage reasons that the difficulty of the task means only that more effort must be expended to find the appraisal solution. In finding comparables for his market data approach, Mr. Armalavage concedes that they are dissimilar in many ways, but are "similar enough to reflect a reasonable estimate of value." Implicitly acknowledging that his comparables may not similar enough even for that purpose, though, Mr. Armalavage adds in his next sentence: "At the very least, the sales information is helpful in establishing a range of value "
After consideration of such variables as location, condition of improvements, current use, highest and best use, prices, and date of sales, Petitioner failed to establish by clear and convincing evidence that the comparables cited in the Review were of such a nature as to preclude the omission of the market data approach in the Appraisal Report.
The Review reaches values of $129,000 under the cost approach,
$128,000 under the market data approach, and $100,000 under the income approach and concludes that the value of the property is $120,000. The Appraisal Report reaches values of $125,000 under the cost approach and $105,000 under the income approach and concludes that the value of the property is $105,000. The discrepancy of $15,000, or 14 percent, between the two final value estimates, which is attributable to the final reconciliations performed by each appraiser, is not significant.
The absence of a significant discrepancy is not determinative of the outcome, especially where, as here, the appraised property is of relatively low value. But the significance of discrepancies between the challenged appraisal and the appraisal offered by Petitioner is still a factor in evaluating the extent to which Respondent has complied with the applicable professional standards.
In this case, Respondent's analysis was often flawed, but the mistakes--even cumulatively--were immaterial. Also, the subject property was a difficult appraising challenge, given the age, condition, and varied types of improvements and the uncertain future of the area.
On balance, Petitioner failed to prove by clear and convincing evidence that Respondent's appraisal, although likely inferior to Mr.
Armalavage's appraisal, violated any of the cited provisions of law governing the preparation of appraisals.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter and the parties. Section 120.57(1), Florida Statutes. (All references to Sections are to Florida Statutes.)
The Florida Real Estate Appraisal Board is authorized to discipline the licenses of appraisers guilty of culpable negligence or breach of trust in any business transaction; failing to exercise reasonable diligence in developing an appraisal or preparing an appraisal report; or violating any standard of the Uniform Standards of Professional Appraisal Practice for the development or communication of a real estate appraisal. Section 475.624(2), (15), and (14).
Petitioner must prove the material allegations against Respondent by clear and convincing evidence. Ferris v. Turlington, 510 So. 2d 292 (Fla. 1987).
For the reasons set forth in the findings of fact, Petitioner has failed to prove by clear and convincing evidence the material allegations of the Administrative Complaint.
Based on the foregoing, it is hereby
RECOMMENDED that the Florida Board of Real Estate Appraisers enter a final order dismissing the Administrative Complaint against Respondent.
ENTERED on September 16, 1994, in Tallahassee, Florida.
ROBERT E. MEALE
Hearing Officer
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-1550
(904) 488-9675
Filed with the Clerk of the Division of Administrative Hearings on September 16, 1994.
COPIES FURNISHED:
Darlene F. Keller, Division Director Division of Real Estate
West Robinson Street Post Office Box 1900 Orlando, FL 32802-1900
Jack McRay, General Counsel Department of Professional Regulation 1940 North Monroe Street
Tallahassee, FL 32399-0792
Theodore R. Gay
Department of Business and Professional Regulation
Division of Real Estate Rhode Building, Phase II
NW 2d Avenue N607 Miami, FL 33128
Kevin J. Lindheim, pro se
9200 Bonita Beach Rd., Suite 210 Bonita Springs, FL 33923
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.
| Issue Date | Proceedings |
|---|---|
| Feb. 23, 1995 | Final Order filed. |
| Sep. 16, 1994 | Recommended Order sent out. CASE CLOSED. Hearing held 07/22/94 |
| Sep. 15, 1994 | Letter to REM from Kevin J. Lindheim (re: Proposed Recommended Orders) filed. |
| Sep. 14, 1994 | Petitioner`s Proposed Recommended Order filed. |
| Sep. 09, 1994 | Transcript filed. (of 7-22-94 hearing) |
| Aug. 29, 1994 | Order On Proposed Recommended Orders sent out. (parties shall file their proposed recommended order by 9/14/94) |
| Jul. 29, 1994 | Petitioner`s Exhibits 1-4 & Respondent`s Exhibits 1-7 (ALL TAGGED) filed. |
| Jul. 22, 1994 | CASE STATUS: Hearing Held. |
| Jun. 22, 1994 | (Petitioner) Motion for Continuance filed. |
| Jun. 22, 1994 | Order sent out. (Petitioner`s Motion for Continuance is denied) |
| Jun. 22, 1994 | (Petitioner) Motion for Continuance filed. |
| May 13, 1994 | Order Continuing and Rescheduling Formal Hearing sent out. (Video Hearing set for 7/22/94; 9:00am; Ft. Myers) |
| May 02, 1994 | (Petitioner) Motion for Continuance filed. |
| Apr. 29, 1994 | (Petitioner) Notice of Substitute Counsel filed. |
| Mar. 03, 1994 | Notice of Hearing sent out. (hearing set for 5/16/94; 10:00am; Ft. Myers) |
| Feb. 22, 1994 | (Petitioner) Unilateral Response to Initial Order filed. |
| Feb. 14, 1994 | Letter. to REM from Kevin J. Kindheim re: Reply to Initial Order filed. |
| Feb. 08, 1994 | Initial Order issued. |
| Feb. 03, 1994 | Agency referral letter; Administrative Complaint; Election of Rights;Agency Action letter filed. |
| Issue Date | Document | Summary |
|---|---|---|
| Feb. 17, 1995 | Agency Final Order | |
| Sep. 16, 1994 | Recommended Order | Appraiser not proved to have violated Uniform Standards of Professional Appraisal Practices standards by omitting market data approach, selecting questionable highest and best use and several errors. |
