Property Tax Counsel Considerations When Choosing a Unit Principle Property Appraiser (Part I)

The following article was prepared by its authors. The opinions expressed in the article represent the authors’ and may not reflect the view and/or opinion of Vallit Advisors and its staff. Views/opinions are based on the specific facts and circumstances of each matter.

State and local property taxation legal counsel may become involved in matters related to a dispute surrounding certain taxable properties owned by their corporate clients. Some of these disputes may involve property that is assessed centrally under the unit principle of property assessment. In such matters, legal counsel may require the professional assistance of an appraiser experienced in unit principle property appraisals. In such instances, there are numerous considerations that legal counsel may make when choosing such an appraisal analyst.

This article is the first in a four-part series describing considerations that legal counsel may make when choosing an appraiser in a unit principle property appraisal context. This part of the series focuses on an introduction to, and the background of, unit principle property appraisal and considerations for choosing the appraiser.

Introduction

State and local property taxation legal counsel (“Counsel”) are often involved in the unit principle property (“UPP”) appraisal aspects of property taxation issues for their corporate clients.

Counsel may become involved in these UPP appraisal issues for property tax planning, property tax return compliance, property tax appeal, and property tax litigation purposes. For all these purposes, Counsel may have to retain, instruct, and/or rely on an Appraiser and defend their appraisal report. 

These Appraisers may conduct the UPP appraisal for an industrial or commercial taxpayer company’s total unit of operating property (the “Total Unit”) and/or property within the Total Unit that is subject to property taxation (the “Subject Property”).

For purposes of this discussion, these various appraisal analyses are referred to collectively as “UPP appraisals.” A UPP appraisal is simply an appraisal of the taxpayer company’s property (e.g., real property, tangible personal property, intangible personal property) as one, economically and functionally integrated assemblage of operating property.

In these circumstances, Counsel may need to retain the services of an Appraiser who performs such UPP appraisal analyses. Depending on the taxation issue, Counsel may retain the Appraiser either as a consulting expert or as a testifying expert.

Counsel should consider Appraisers who have specialized knowledge and experience in:

1. appraising complex properties (including a Total Unit) in the subject industry segment,
2. conducting analyses for the specific subject purpose (e.g., the UPP appraisal of an electric generation power plant for ad valorem property tax purposes), and
3. if required, producing an expert report, and providing expert testimony at a deposition, administrative appeal hearing, and/or a trial.

This discussion provides guidance to Counsel engaged in such tax planning, compliance, appeal, or litigation matters about choosing and working with such an Appraiser.

This discussion summarizes the development and reporting procedures related to a UPP appraisal analysis. And this discussion summarizes the professional standards and practices that an Appraiser generally applies in the UPP appraisal process.

That is, this discussion presents what Counsel needs to consider when choosing a UPP Appraiser for property tax planning, compliance, appeal, or litigation purposes.

Unit Principle Property Appraisal Summary

For purposes of this discussion, the Subject Property in the property taxation matter may include any taxable property component of the taxpayer Total Unit. The Subject Property may, for example, include only the tangible property of an industrial or commercial taxpayer company. Such tangible property may include: 

• natural gas/petroleum distribution/transmission pipelines, 
• natural gas/petroleum processing facilities, 
• natural gas/petroleum/coal-fired power plants, 
• solar energy facilities, 
• wind energy facilities,
• railroad infrastructure,
• telecommunications infrastructure, 
• many more special-use properties.

The Total Unit may include the Subject Property, financial and net working capital assets, identifiable intangible property, real property (e.g., land, buildings, and the rights associated with them), or other assets/property. Said another way, the Total Unit may include all the subject taxpayer company’s operating property, operating as one, economically and functionally integrated unit.

There are generally accepted appraisal approaches and methods for both tangible personal property and intangible personal property.

There are conceptual similarities between these two sets of appraisal approaches and methods. And there are subtle—but important—differences in the analytical procedures and variables applied in these two sets of appraisal approaches and methods.

Considerations regarding the analyst’s knowledge and experience in applying tangible personal property—and intangible personal property—appraisal approaches and methods are discussed below. However, a detailed discussion of these two sets of appraisal approaches and methods is beyond the scope of this discussion.

Choosing a Unit Principle Property Appraiser

Counsel should perform due diligence when choosing the Appraiser. Some potential due diligence criteria may include the following:

1. The qualifications of the Appraiser’s firm
2. The qualifications of the Appraiser
3. Any prior relationships of the Appraiser with the taxpayer company

Choosing the Appraiser’s Firm

There are numerous professional service firms that provide UPP appraisal services. These firms include public accounting firms, consulting firms, appraisal groups within general financial advisory services firms, property appraisal firms, real estate or other business valuation firms, forensic analysis firms, and others.

These firms range from very small, including sole practitioners and small professional practices to quite large firms, with dozens of offices and hundreds of practitioners.

Some firms specialize in the appraisal analysis of certain commercial or industrial taxpayer companies and their Total Units. Moreover, some firms specialize in the discrete appraisal of certain personal and real property that may be subject to ad valorem property taxation. Further, some firms may specialize in the discrete appraisal of certain intangible personal property that may be excluded from a commercial or industrial taxpayer company’s Total Unit for property taxation purposes. 

Some of the firms referenced above specialize in certain industries or industry segments (e.g., public utilities, regulated industry companies, energy companies, construction industry companies, transportation companies, health care companies, engineering companies, etc.). 

Other firms specialize in controversy-related UPP appraisal analyses. These firms primarily specialize in providing UPP appraisal-related consulting expert services and testifying expert services. Such controversies typically involve property assessment disputes in property taxation matters.

In addition, some firms are deliberately generalist. These firms perform both business valuations and property appraisals. These firms may operate across many industries and segments. And these firms may provide services for transactions, financing, taxation, financial accounting, corporate planning, litigation, and many other purposes. 

The institutional qualifications of each firm can be demonstrated in different ways. Some Counsel may prefer firms that specialize in conducting appraisals/valuations for a specific purpose (e.g., property taxation). Other Counsel may prefer firms that are more generalist in nature—that is, firms that do not focus exclusively on engagements for property taxation or for any specific purpose.

Regardless of the type of firm, the selected firm should be capable of showing its professional experience related to conducting a UPP appraisal analysis:

1. specific for the subject property tax planning, compliance, appeal, or litigation purpose, and
2. that can withstand critical review (e.g., a property assessor review, tax litigation cross examination). 

Counsel may also be interested in the firm’s experience related to the subject taxpayer company’s:

1. industry segment, and
2. specific appraisal issue (e.g., property taxation dispute regarding a complex industrial or commercial property).

Choosing the Appraiser

The professional qualifications of the individual Appraiser are also important for Counsel to consider. The Appraiser may provide consulting services to Counsel. Or the Appraiser may provide expert witness services to Counsel. In addition, the Appraiser may also provide other litigation support services.

Accordingly, the professional qualifications of the individual Appraiser should:

1. include relevant, property-specific knowledge and experience, and
2. be able to withstand rigorous contrarian scrutiny (e.g., property tax assessment office legal counsel).

While considering the professional qualifications of the individual Appraiser, Counsel may inquire about that Appraiser’s experience in performing UPP appraisals:

1. related to a property taxation related issue,
2. of the type of Total Unit and/or Subject Property owned by the taxpayer company,
3. in the subject company’s industry segment, and
4. within an appeal, litigation, or other contrarian environment.

Regarding education, many Appraisers have formal education in finance, accounting, and/or economics. In the same respect, many (but not all) Appraisers hold one or more professional valuation credentials granted by a recognized valuation professional organization (“VPO”).

There is no statutory, judicial, or regulatory requirement that an Appraiser possess a particular professional credential. Many industry consultants, economists, professors, forensic accountants, real property appraisers, business valuation analysts, and other types of professionals provide valuation/appraisal services—without having earned a valuation/appraisal-related professional credential.

However, Counsel should consider that the subject property taxation matter may require a “qualified appraiser” to perform a “qualified appraisal.” Said another way, the Appraiser may require specific appraisal knowledge and experience to be accepted as a “qualified appraiser” in the relevant jurisdiction. And the Appraiser’s work product may need to meet certain appraisal industry standards to be accepted as a “qualified appraisal.”

Counsel should also be aware that there are VPOs that offer valuation/appraisal-related training, examination, credentialing, and education programs. There are business valuation professional credentials, and there are property appraisal professional credentials. Both sets of professional credentials may be relevant to the subject property taxation-related appraisal assignment.

Some of the well-recognized professional credentials—and the related VPOs—in the business valuation and property appraisal disciplines include the following:

1. The accredited in business valuation (“ABV”) credential, granted by the American Institute of Certified Public Accountants (“AICPA”).
2. The accredited senior appraiser (“ASA”) credential, granted by the American Society of Appraisers. The ASA credential may be granted for (a) business valuation, (b) personal property, (c) machinery & technical specialties, (d) real property, and more.
3. The certified valuation analyst (“CVA”) credential, granted by the National Association of Certified Valuators and Analysts (“NACVA”).
4. The member appraisal institute (“MAI”) credential is granted by the Appraisal Institute (“AI”). The MAI credential is granted to professionals who offer appraisal (among other) services related to real property.

Counsel—and the Appraiser—may (depending on the qualifications of the Appraiser) need to rely on real property, personal property, business valuation, or other property appraisers within the context of developing the UPP appraisal.

Each of the VPOs has created its own set of requirements for a candidate to earn their professional credential. Typically, the VPO credentialing requirements include a college education, a minimum amount of practical experience, participation in technical courses/specialized training programs, reviews of demonstration valuation/appraisal reports, recommendations from current VPO members, and the passing of a comprehensive examination.

Further, each VPO has continuing ethical standards requirements and professional education requirements.

Counsel should consider that the subject property taxation related assignment may include elements of both a business valuation and a property appraisal. Therefore, Counsel may need to retain both business valuation appraisers and property appraisers as part of the appraisal team.

In addition to the above-mentioned VPO credentials, many Appraisers are either certified public accountants (“CPAs”) or chartered financial analysts (“CFAs”).

The CPA credential involves a uniform national examination and state-specific accountancy licensing requirements. Many CPAs are (but are not required to be) members of the AICPA. The CFA credential is granted by the Chartered Financial Analyst Institute (“CFAI”).

Separate from any of the above VPOs, the Appraisal Foundation’s Appraisal Standards Board promulgates the Uniform Standards of Professional Appraisal Practice (“USPAP”).

The USPAP: 

• Standards 1 and 2 pertain to the development and reporting of real property appraisals.
• Standards 3 and 4 pertain to the development and reporting of appraisal reviews.
• Standards 5 and 6 pertain to the development and reporting of mass appraisals.
• Standards 7 and 8 pertain to the development and reporting of personal property appraisals.
• Standards 9 and 10 pertain to the development of and reporting of a business valuation or intangible asset valuation.

The UPP appraisal assignment may involve consideration of the value of all the taxpayer company’s real property, tangible personal property, and intangible personal property. Therefore, the selected Appraiser should be familiar with the relevant above-listed components of USPAP.

The Appraiser and the Taxpayer Company Relationship

Counsel may inquire regarding any potential independence issues when retaining the appraisal firm or the individual Appraiser. There may exist a “lack-of-independence” concern if the appraisal firm or the Appraiser regularly provides appraisal services to the subject taxpayer company. That is, any such association may present the appearance of a bias. 

However, appraisal industry standards, such as USPAP, require that the Appraiser be independent of the subject taxpayer company. Further, appraisals performed for financing, transaction, or litigation purposes require that the Appraiser be independent of the subject taxpayer company. 

Conclusion

This article is the first in a four-part series describing considerations that Counsel may make when choosing an Appraiser in a UPP appraisal context. This part of the series focused on an introduction to, and the background of, UPP appraisal and considerations for choosing the Appraiser.

Connor J. Thurman is a Manager with Vallit Advisors, LLC. Mr. Thurman has over 6 years of experience in business valuation, tangible and intangible asset appraisal, and various other litigation services. He has written numerous articles in professional and peer-reviewed journals covering a variety of topics in his areas of expertise and has presented on these topics via webinars and conferences. He is an Accredited Senior Appraiser (ASA) with the American Society of Appraisers and is Accredited in Business Valuation (ABV) with the American Institute of Certified Public Accountants.

Mr. Thurman can be reached at 443-482-9500 Ext 114 or cthurman@vallitadvisors.com