Top Environmental Risks in

Commercial & Residential Appraisals

May 18, 2015

Brought to you by the Metro DC Chapter of the Appraisal Institute

Your Moderator:Peter Houstle - AIDC Executive Director

Your Presenter:Brian Ginter, an appraisal/environmental expert with Pyramid Real EstateConsulting Network and AIDC Board Member

Coming Soon from AIDC• June 15-16 - The Appraiser as an Expert Witness: Preparation and

Testimony - Rockville, MD• June 11 - Legislative Update & Chapter Meeting - A Free Webinar• July 21 - Loss Prevention & Liability Issues for Real Estate Appraisers -

Rockville, MD

Admin• Post questions in chat box on left hand side of screen• Recording & PDF will be posted on AIDC website

Welcome, Intro & A Little Admin

Introduction

Brian A. Ginter, CCIM: Over 32 years as a veteran appraiser, developer, and investor;with four-years developing the appraisal and environmental departments for a regionalcommunity bank.

Note I said - Appraisal & Environmental Departments: “Two Hats” – As it is with mostsmall and mid-sized (and some large) institutions individuals are often required to wear twohats; dealing with both valuation and environmental policy, procedures, and overall riskmanagement.

Like Banks - Appraisers MUST also be able to identify and address property environmentalchallenges and potential influence on value.

Valuation and Environmental due diligence can not exist in silos.

Educating the Client:(Can Be A Challenge)

:1. The Client always knows what they want & need…2. The Appraiser is always provided all the data needed… to accomplish #1.

• Integrity• Rules / Regulations / Guidelines / Licensing• Observe & Report (Communicate)

• Departments do not always speak with each other.• Departments/Individuals often have different wants & needs (agendas)• As Appraisers you are attesting that the report is prepared in accordance with, and subject

to USPAP and FIRREA.

• May be more or less the same… The wants & needs (and agendas) are typically moreapparent.

Responsibility To Report:USPAP 2014 – 2015:

Know - Ethics Rule / Competency Rule / Credible Report.

AO-9: Guidance on USPAP from ASB (TAF)“The Appraisal of Real Property that may be impacted byEnvironmental Contamination”(USPAP 2014-2015 // Journal Article 2003: http://www.real-analytics.com/standards.pdf )

GN 6: Guidance from Appraisal Institute“Consideration of Hazardous Substances in the Appraisal Process”(Guide Notes Effective July 27,2013: http://www.appraisalinstitute.org/assets/1/7/AI_Guide_Notes.pdf )

Interagency Appraisal and Evaluation Guidelines• As-Is Market Value – required• Must update appraisal/evaluation if environmental contamination is found.• “Threatened” Collateral: “…physical aspects of the property that threatens

the adequacy of the institution’s real estate collateral protection”(December 2nd, 2010: https://www.fdic.gov/news/news/financial/2010/fil10082a.pdf )

Ask The Questions / Communicate - Always:

Prior to the Engagement:• Assumption - unless informed otherwise: there are no environmental challenges.• Ask if and for any information available. Review the data provided.• Know what you are appraising.

Prior to the Inspection:• Review Public - Subject Data / Neighborhood Data• When Scheduling the Inspection – Ask if and for any information available.

At the Inspection:• Observe / Observe / Observe… If you see it note it – Ask about it.

(Questions to Ask and What To Look For. See Risk Supplement Except )

Prior to the Engagement:• Assumption - unless informed otherwise: there are no environmental challenges.• Ask if and for any information available. Review the data provided.• Know what you are appraising.

Prior to the Inspection:• Review Public - Subject Data / Neighborhood Data• When Scheduling the Inspection – Ask if and for any information available.

At the Inspection:• Observe / Observe / Observe… If you see it note it – Ask about it.

(Questions to Ask and What To Look For. See Risk Supplement Except )

Communication:Prior to the Engagement:

• Know what you are appraising – Prior to Accepting.Prior to the Inspection:

• If information is discovered during this initial period – Advice the Client Immediately.At the Inspection:

• Observe / Note / Photograph (if possible) / Communicate & Advise - Immediately

Communication:Prior to the Engagement:

• Know what you are appraising – Prior to Accepting.Prior to the Inspection:

• If information is discovered during this initial period – Advice the Client Immediately.At the Inspection:

• Observe / Note / Photograph (if possible) / Communicate & Advise - Immediately

What to Do?

You have asked the questions.You have communicated with your client and they say…

This webinar is developed to provide guidance for typical assignments where thevaluation of environmental challenge properties is NOT the requirement. Simplyoutlined; valuing environmentally challenged properties is a three step process:

Step 1: Determine UNIMPAIRED VALUEStep 2: Determine Property Value Diminution

(Cost Effects + Use Effects + Risk Effects)Step 3: Estimate IMPAIRED VALUE…

But, that’s another webinar, a few text books, and maybe a couple of classes… to getstarted.

Note: any determination of value impact due to condition or environmental impairment isan increase to the Scope or Work for typical assignments.

What to Do?

Tell Me A Story

Don’t Leave Me Hanging

Don’t Make Mistakes

As a Reviewer there are two criteria foundation sets I adhere to…

For specific details and points you only have three ways to address…

Right

Wrong

Subjective

The motivations and options may very, but these same points holdtrue for your client.The motivations and options may very, but these same points holdtrue for your client.

What to Do? – Typical Property

Typical General Assumption:

The appraiser has noted any adverse conditions (needed repairs, depreciation, the presence of hazardouswastes, toxic substances, etc.) discovered during the “normal” due diligence process or observed during theinspection.. Unless otherwise stated, the appraiser has no knowledge of any hidden or unapparent repairs oradverse environmental conditions (including the presence of hazardous wastes, toxic substances, etc.) thatwould have an effect on report conclusions. The appraiser is not be responsible for any such conditions thatmay currently or in the future affect the property; or for any engineering or testing that might be required todiscover whether such conditions exist.

The appraiser makes no guarantees or warranties, expressed or implied, regarding the condition of theproperty. Because the appraiser is not an expert in the field of environmental hazards, the appraisal reportmust not be considered as an environmental assessment of the property.

…Private water wells and private septic systems are assumed adequate for the current/proposed use and incompliance with federal, state, or local health safety standards.

Hypothetical Conditions & Extraordinary or Special Assumptions

FIRREA & USPAP – “as is” and “as if”

“As Is” Value Requirement:- Required for all Federally Related transactions- Must consider any effects of environmental

contamination

LENDERS:Appraisal/Valuation cannot be premised on uncertainty

- FIRREA requires a market value “as is”. When an appraisal ispremised upon a hypothetical condition, the value is “as if” thecondition were true, not “as is”.

- An appraisal report for FRT purposes could include a valuepremised on a hypothetical condition as long as the appraisalreport also includes a market value “as is”.

What to Do? – Challenged Property

Valuation – as if UNIMPAIRED:

Hypothetical Conditions / Hypothetical ValuesProperty KNOWN TO BE CONTAMINATED:

• Must NOT be misleading• Client must be advised of the limitation• ETHICS RULE: Disclose contamination, explain purpose of HC,

and state that HC may affect resultsExtraordinary Assumptions

Property BELIEVED FREE OF CONTAMINATION or STATUSUNCERTAIN due to lack of or conflicting information:

• Assumes factual information about environmental status• May be necessary since Appraisers are NOT the experts• Insufficient to waive obligations in standard Assumptions &

Limiting Conditions

Hypothetical Conditions & Extraordinary or Special Assumptions

What to Do? – Challenged PropertyWhat to Do? – Challenged Property

Typical Extraordinary Assumption Structure:

Collateral Risk Assessment / Client Notes – Observations may contribute to report analysis and conclusions:

Positive Property Factors:• None.

Negative Property Factors:• None.

Observation Points (subject / market / any point that may affect the client’s decision to engage in the transaction):• Deferred Maintenance / Required Repairs / Health & Safety Issues:

A. Roof & Mortar issues on the southeast corner of the subject structure (Photographs Attached). RoofInspection by qualified individual recommended.

B. No health & safety issues, associated with the subject property, were reported at the time of this writing.(Subject to Assumptions & Limiting Conditions)

• Environmental Observations:A. Observation #1: Identify & RecommendB. Observation #2: Identify & Recommend

Extraordinary Assumption: The appraiser has identified the above repair and/or environmental conditions and providedrecommendations. It is assumed, specific to these observations, the recommended actions will not identify or have an effect on any ofthe communicated report conclusions. The appraiser reserves the right to amend report conclusions should this be proven untrue.

NOTE: Amending report conclusions based on the impact of recommended actions is an increase Scope of Work, requiringcompetency specific to those conditions identified.

Recognizing the Top Environmental RisksWhat Do You See?

If you See It

PhotographIt…Note It

Underground Storage Tanks:

Underground Storage Tanks:

Underground Storage Tanks:

Above-Ground Storage Tanks:

Above-Ground Storage Tanks:

Damaged Storage Tanks:

Storage Drums & Other Storage:

Storage Drums & Other Storage:

Asbestos:

Asbestos:

Lead Based Paint:

Water & Mold:

Waste Treatment:

Dumps / Landfills / Junkyards:

Ground Monitoring:

Hydraulic Lifts (Floor Drains):

Hydraulic Elevators:

Transformers / Capacitors:

Other:

Other:

Other:

Other:

Other:

Other – Medical / Bio:

Other - Odor:

Other - Noise:

Wetlands:

Private Wells:

Private Septic:

Understanding The Client:To work for your client you should understand your client.

These Are A Start…

• Comptroller’s Handbook – Commercial Real Estate Lending (8/2013): * OCC Revised Guidance (18-pt.checklist) on Environmental Risk Management (Pg 69 & 70). http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/cre.pdf

• Interagency Appraisal and Evaluation Guidelines (12/2010):https://www.fdic.gov/news/news/financial/2010/fil10082a.pdf )

• Want to get really good; try reviewing (these are the main ones):• SBA Guidelines• FANNIE MAE/FREDIE MAC• FHA/HUD Lending Guidelines• FDIC Guidelines• FIRREA Guidelines

• Bank Clients: Try getting copies of their environmental lending policy/guidelines.

Never Stop Asking Questions orGathering Information

Service Providers –Appraisers/Environmental

Engineers/EDR

Appraisal Institute, NationalAssociation of Realtors,

CCIM, other organizations

EBA, MBA and otherNational & Regional Banking

Organizations

Governmental Agencies(there’s always a report)

What tools are available to improve your knowledge?(Linkage)

HAZARDOUS WASTE / RISK SUPPLEMENT - Excerpt

HAZARDOUS WASTE / RISK SUPPLEMENT - Excerpt

Best Practices

Lenders:• Provide environmental reports/data to appraiser• Provide appraiser at least “best guess” cost/timing of remaining

investigation and remediation for use in valuation process• Qualify and/or Quantify a) environmental risk, b) cleanup risk (risk

matrix?)

Appraisers:• Consider environmental status of subject & comparable sales• Use actual data from 3rd party experts (ask for it)• Use EA (or HC) if appropriate, not misleading• If UNIMPAIRED or low risk, generally no value impact• If IMPAIRED or moderate/high risk, request or recommend additional

investigation, remedial cost estimate (do NOT require)• Consider COST, USE, RISK Effects and STAGE OF REMEDIATION (before,

during, after) on property marketability, use, and valuation• Reasonably comply with AO-9, GN 6, IVS, OCC, FDIC guidance

Unique Perspective:Thought & Questions:

• Were You Aware - Under FIRREA appraisers (and banking clients) must address market/valuationinfluences when presented with or observed evidence of an environmental problem? YES/NO

• How have you addressed the challenge of integrating the appraisal and environmental due diligenceprocess? A) Rely on standard A & L B)Use Extraordinary Assumptions & Hypothetical ConditionsC) Increased Communication D) Ignore

• Given the current regulatory focus have you seen increased scrutiny on environmental riskmanagement, from your clients? YES/NO // To what level? A) Greater Identification B) GreaterCommentary/Explanation C) Provide Valuation Effects D) None or the above E) All of the above

• What are your REALITY CONCERNS?

• What are your BEST PRACTICES recommendations?

Thank you!

Coming Soon from AIDC• June 15-16 - The Appraiser as an Expert Witness: Preparation and

Testimony - Rockville, MD• June 11 - Legislative Update & Chapter Meeting - A Free Webinar• July 21 - Loss Prevention & Liability Issues for Real Estate

Appraisers - Rockville, MD

Contact BrianBrian A. Ginter, CCIMDirector - Executive StaffPyramid Real Estate Consulting Network, LLC5250 Valley Forge Drive, Suite #805Alexandria, VA 22304E-Mail: b.ginter@ThePyramidNetwork.comOffice 703-969-6997

Contact AIDCwww.AppraisalinstituteDC.org301-924-1020info@AppraisalinstituteDC.org