Caveat Emptor for Deconstruction Appraisals and Appraisers

Greetings from the throes of 2020 tax season!

As a practicing CPA of 19 years, mid-February is when I question my career choices as days disappear in tax and appraisal work with very little sleep. My experiences preparing work for IRS review carries over to my appraisal practice in critical ways.

Good CPAs prepare taxes and provide consultations with meticulous attention to detail; compiling data and documentation to back up every last calculation. When documenting the basis of a rental property you better believe I have spreadsheets breaking out improvements vs. common repairs, with dates of service and receipts saved for all. For an inheritance, I ensure the stepped-up basis ties to an accurate Fair Market Value figure without any guesswork or numbers residing in my head.

Producing appraisals for The Green Mission Inc. and our sister company Probity Appraisal Group is no different.

Valuing deconstructed building materials, fixtures, appliances, and other property included in a donation follows valuation theory based upon IRS defined Fair Market Value. This value is tied to actual market data.

These donated materials are, in general, depreciating personal property. Comparable sales and offers of sale are in abundance on the secondary retail and auction market. Appraising old growth lumber and finding comparable sales is an enjoyable experience compared to a recent antique engagement. It involved tracking down a specific limited edition lithograph, combing through the WorldCat for five hours only to finally land on a determination that the print is worth a whopping twenty bucks.

So, how should these appraisals be valued and what should a taxpayer look for in an appraisal for deconstructed materials?

Ask for a Sample Appraisal

• 1
  A sample appraisal should include full descriptions for each piece of property, a market analysis detailing the current market’s acceptance of the materials, dimensions of the property and a condition report. The report should also include the appraiser’s CV.
• 2
  Comparable sales data upon which the value is concluded should be within the report.
• 3
  A reconciliation between the subject property and comparable sales and the appraiser’s explanation of how this value was reached. The appraiser should identify and isolate the characteristics of value and elements of quality that add or subtract from a property’s value.

Over the past year I have attended numerous appraisal organization seminars hosted by IRS counsel. Each presenter reiterates that the IRS wants you to lay out your argument, provide support, and show that you have compiled the research to back up each value. Every single charitable contribution appraisal we produce is written with the IRS in mind. Gaps in reasoning are closed with detailed analysis and hard data. Outlier sales are not included or identified as such to ensure valuation trends towards the accurate Fair Market Value.

Check the Appraiser’s Credentials

• 1
  Did your appraiser obtain an undergraduate and graduate degree? At what school and in what subject matter? Check out their LinkedIn or website profile and ensure this information is included. Fields of study should lend themselves to a firm understanding of valuation and tax theory and concepts.
• 2
  Is your appraiser an accredited member of one of the three personal property sponsoring organizations of The Appraisal Foundation: American Society of Appraisers (ASA), Appraisers Association of America (AAA), and International Society of Appraisers (ISA). Becoming an accredited member requires in depth classes and exams with the inclusion of having appraisal reports peer reviewed. Simple membership in an organization does not cut it, your appraiser should be accredited. Also, post-2018 a college degree is required for accreditation. Check to see if your appraiser was grandfathered-in prior to 2018 without a degree. I completed the education track of each of the three appraisal organizations required study over the past six months. I became an accredited member of ISA and am on track to complete the other two organizations this year. During one IRS presentation for the AAA, a member of the IRS Art Advisory Service said that IRS examiners will often turn right to the CV page in an appraisal to check the education of the appraiser and if they are accredited members of one of these three organizations.
• 3
  Dig through the appraiser’s website. Look for articles and content discussing appraisal valuation concepts, IRS requirements, a detailed analysis of how deconstructed property is appraised, and current issues within the appraisal and tax community. Question an appraiser without this content.
• 4
  Do a quick sweep of precedent setting case law. Some of these cases include Mann v. US, both the summary judgment of 2019 and the lost appeal of January 2021. The appraisal was deemed unqualified. Loube v. Commissioner, was another case with summary judgment in January 2020. In this case, the same nonprofit and appraiser from Mann were signatories on the 8283. I attended an ASA meeting this past week where IRS counsel presented this case as an example and word of warning for the greater personal property appraiser community. She said that the client’s lack of filling out IRS tax form 8283 made it an easy disallowance before the IRS even had to get into the appraisal valuation, which she said was valued incorrectly. The appraiser would be considered unqualified because they did not value the correct materials. There was no delineated inventory. They performed their appraisal using construction estimating software, which was also used in the Mann case.
• 5
  Speaking of said software. Over the past two decades, deconstruction, reuse, or architectural salvage appraisers (all the same thing) have used construction estimating software such as R.S. Means and Marschall & Swift. This software is meant to estimate the cost of new construction. Simple dimensions types of materials and other details are entered into the software, some depreciation is arbitrarily assigned and out pops a finished appraisal valuation. Some even call this the Cost Approach to Value, which is an inaccurate use of this appraisal valuation approach. The valuations may or may not be an accurate dollar value when appraisers use this software. It does not matter. This is not the way depreciating personal property is valued. Just like any other depreciating personal property, appraisal valuations are tied to actual market data using the Sales Comparison Approach.
• 6
  If you find the appraiser does, in fact, use this software caveat emptor. Within the market, appraiser’s fees are similar. An appraiser using this methodology could crank out an appraisal in about 30 minutes. It takes our staff weeks to properly research each property, document the research and determine the valuations based upon market data in a well written appraisal. You can do the math and see the motivation to continue using the software.
• 7
  Watch for the appraisers claiming to have had zero IRS audits. Appraisers are not notified when an audit occurs. The taxpayer is notified and they may or may not notify the appraiser. There is no way to prove this claim.
• 8
  When a group of appraisers have gathered to start a national organization with the backing of an industry group, promoting decades of experience in the industry, check the website for content. If the website still does not exist, check the appraiser’s website and social media pages for content. If that still does not exist see #6, caveat emptor.
• 9
  USPAP—We notice a trend among the small pool of deconstruction appraisers claiming USPAP compliance. USPAP stands for the Uniform Standards of Professional Appraisal Practice. It is promulgated by The Appraisal Foundation and new version is released every two years. Taking a USPAP course and passing takes 15 hours and an exam. After passing, you just take a refresher course every few years. Taking the course is a great start for an appraiser but it is just that—a start. USPAP has five rules and ten standards. The rules apply to all appraisals (real estate, business valuation, personal property, etc.) but typically the realm of personal property falls under Standard 7 and 8. The rules are critical: Ethics, Record Keeping, Competency, Scope of Work, and Jurisdictional Exception. This should preclude appraisers who only work for a single client, those not keeping accurate records, those who are not competent to appraise the property, and those who cannot follow the linear processes of research and documentation required within the Scope of Work when producing appraisals. Look beyond a simple statement that an appraiser is USPAP Compliant. It is like a CPA stating they understand GAAP, cash v. accrual, and can accurately place a debit and credit. That is a great start but can you properly document and execute a 1031 exchange or accurately account for a non-leveraged ESOP? The fundamentals are great but can you do the work it takes for competent and accurate valuation?

There is Great Value in Deconstruction!

I get equal parts tired and annoyed when I hear an appraiser claim to be “conservative.” Conservativism is generally a good thing in a finance related field but even more important is accuracy. Because so many appraisers are potentially plugging numbers into cost software, they are relying upon square footage estimates to try their case at hitting a sweet spot of value per square foot. However, when appraisals are done using the correct valuation methodology and taking a full inventory of everything donated, the values vary widely. It should be remembered that there is amazing value in donated building materials! This is fantastic and will continue to drive taxpayers to choose deconstruction over demolition while simultaneously triggering a greater demand for classic pre-owned architectural salvage material over newly manufactured. For taxpayers, there are some general trends we have noticed, which tend to hold true across projects when it comes to valuation.

• 1
  Salvaged lumber, especially antique and old growth continues to tick upwards in value. This has been especially true over the past decade with North America holding a significant market share of reclaimed lumber in a 2019 study due to “the growing housing sector in the region and increasing awareness regarding green buildings. As reclaimed lumber does not include cutting forests, which helps in preserving wildlife species, the product demand is expected to remain high in the future. The U.S. accounted for the largest revenue share in the North American market due to its growing population, construction activities, and increasing raw material availability.” Check out the link in footnotes for the study across world markets and forecast estimates.1 Projects with a lot of lumber will generally have a higher value.
• 2
  Some materials have similar or inelastic values nationwide. For example, a hollow core six panel door, in decent condition is never going to be worth more than $10-20…unless there is inclusion of a jamb or if the door has some amazing hardware. We have amassed hundreds of comparable sales data for building materials like this and notice consistency across markets. We have found similar statistics for basic windows, garage doors, basic bathroom vanities, low-to-mid brand appliances, and typical light fixtures.
• 3
  The secondary retail market demand shapes value; specifically, current decorating and architectural trends. Some of my favorite conversations are with my brilliant art and decorator colleagues from AAA. A conversation with them on what consumers are currently incorporating into modern homes proves out in appraised values. An early 20th century Arts & Crafts Mission style wrought iron sconce with inlaid yellow slag might appraise higher than an 18th century hand-forged Louis XVI style lantern. People are decorating with the Mission style and are not eager to bring back poor Louis XVI. What is incredibly exciting about deconstruction is that highly prized styles like Art Deco, Arts & Crafts, Stickley style, mid-century modern, design styles like that of Saarinen and van der Rohe, and abstract minimalist architectural elements are being salvaged from deconstruction projects and incorporated into new construction and home décor seamlessly.
• 4
  Antique bricks and stone as well as material like slate roofing appear to be able to last another thousand years and appraise strongly on the secondary retail market. Finding a home full of Chicago brick, showing the quintessential elements of being hand-made in that huge period of building after the Great Chicago Fire of 1871 appraises well and is being built into new structures.
• 5
  With the rise of resale conduits including eBay with many other competitors entering the market, the savvy consumer quickly realizes that they can purchase a Viking six burner range with double convection ovens and an interior griddle for $4-5k used and keep it for the next few decades. There is a huge trend for consumers to buy high-end appliances on the secondary retail market because those appliances are built to last. We have seen values tick up steadily as we pull comparable sales for each new appraisal.

I love the deconstruction industry! I love that I can apply my tax and appraisal knowledge to producing high quality detail rich appraisals for our clients. I have appreciated recruiting and working with our expanded staff of researchers and appraisers allowing us to meet demand. This tax deduction can continue to hit each element of the Triple Bottom Line for taxpayers, the building industry, and society in general with a continued move away from demolition and towards deconstruction. But as stated at the beginning, caveat emptor. Ensure your appraiser and appraisal are both qualified to IRS and appraisal organization specifications. This will enable taxpayers to donate with confidence with a good understanding of just how their donation is being valued, and just as importantly, with the data in the appraisal report to back it up.

Reference Links:

¹ https://www.grandviewresearch.com/industry-analysis/reclaimed-lumber-market