Exhibit_E,_Compliance_Guidance_Letter-2018-03-appraisal-standards.pdf

This Compliance Guidance Letter (CGL) is intended as internal guidance for FAA staff, does not constitute final agency policy or regulation, and is not legally binding in its own right. Use of this guidance outside of the FAA is strictly for informational purposes and no FAA decisions will be made based solely upon the guidance itself. Decisions regarding this guidance will only be made by FAA staff and the specific factual situations being assessed using this guidance. As CGL’s are updated occasionally or incorporated in FAA Order 5190.6, please refer to the FAA Compliance website for the most current version of the information you are referencing.

Federal Aviation Administration

Memorandum Date: August 27, 2018

To: Regional Airports Division Directors, Airport District Office Managers, Compliance Specialists

From: Kevin Willis, Director, Director, Office of Airport Compliance And Management Analysis, ACO-1

Subject: Compliance Guidance Letter 2018-3, Appraisal Standards for the Sale and Disposal of Federally Obligated Airport Property

I. Introduction and Purpose

This Compliance Guidance Letter (CGL) was developed to assist and inform FAA field offices, airport sponsors, and commercial appraisers on the appraisal process required for the sale and leasing of federally obligated property.1 FAA views the appraisal process as an integral and required component to establishing an objective marketable value and protecting the federal investment in our nation’s airports. This CGL describes the FAA-accepted appraisal process and report documentation standards for establishing Fair Market Value (FMV) for the sale, exchange, or leasing of federally obligated property.

Airport sponsors have a federal obligation to establish the FMV for airport property proposed for disposal. With some limited exceptions, lease rates on airport property used for non-aeronautical purposes must be based on FMV.

This CGL supports FAA Order 5190.6B, Airport Compliance Manual in further defining the process for determining FMV. Although this CGL does not address the acquisition of property under federally assisted projects, some FAA guidance related to land acquisition requirements may be similar to FAA guidance for land disposal and leasing of non-aeronautical property applicable

1 The document was developed to address a Department of Transportation, Office of Inspector General, requirement that the FAA Airports Division establish standards regarding appraisals for the sale and disposal of federally obligated property. See DOT-OIG Audit on Venice Airport, AV-2011-180, September 29, 2011 and DOT-OIG Audit on Denver Stapleton International Airport, AV2011057, February 28, 2011. It should also be used as guidance for airport sponsors and appraisers. Field offices are encouraged to share this document with the interested parties. The document becomes effective September 10, 2018, the revision date) to this CGL. Please consult statutory authority for guidance before conducting an appraisal for land acquisition.2

In this CGL, you will find information on these topics:

Governing standards and authorities.

Developing a “scope of work” for procuring an appraiser.

Airport sponsor’s selection of an appraiser.

Features of an appraisal report.

Discussion of the basic valuation process.

Sample Scope of work statements for airport sponsors.

The CGL contains scope of work samples for most appraisal types that airport sponsors may have to conduct. The CGL also cites the relevant standards and governing authorities for conducting each type of scope of work.

How to Use this Document

Become familiar with the requirements for airport appraisals as defined in Federal law and FAA policy beginning with the discussion in Section II. What Do I Need to Know About Appraisals?

Use Exhibit 1: The Airport Real Property Appraisal Process in Section II as a starting point to decide what to do about a specific property that may need an appraisal.

Review Section III. Key Authorities. If you need more information on federal requirements for appraisals, determine if one of the Specific Scopes of Work in Section V applies to your appraisal. The sample scopes of work are appropriate in most cases.

However, if they are not applicable to your particular appraisal, plan to use the General Scope of Work in Exhibit 2

Adapt the letter contained in Section V to provide guidance about your particular appraisal for the airport sponsor and then attach the appropriate Scope of Work.

Examine the definitions of appraisal concepts in the dictionary in Appendix A.

2 For acquisitions of property, sponsors should consult Uniform Relocation Assistance and Real Property Acquisition Policies Act (42 USC 4601 et seq.) and FAA AC 150/5100-17, Land Acquisition and Relocation Assistance for Airport Improvement Program Assisted Projects (see http://www.faa.gov/airports/environmental/relocation_assistance/).

http://www.faa.gov/airports/environmental/relocation_assistance/ http://www.faa.gov/airports/environmental/relocation_assistance

Table of Contents

I. Introduction and Purpose

II. What Do I Need to Know About Appraisals?

Exhibit 1: The Airport Real Property Appraisal Process ……………………………………………... 4 What is an Appraisal? ………………………………………………………………………………… 5 When is an Appraisal Report Required?

What is Fair Market Value?

How Do We Know Rent on an Airport Property is at FMV?

What are the Qualifications of an Appraiser?

Appraiser’s Statement of Competency………………………………………………………………… 12 What is an Acceptable Appraisal Report?

When Is a Review Appraisal Required?

How to solicit for an Appraiser and Review Appraiser………………………………………………... 15 Property Worth More than $1 million…………………………………………………………………. 15 How to Define a Scope of Work………………………………………………………………………. 15 Exhibit 2: Sample General Scope of Work Statement………………………………………………… 16 Shelf Life of an Appraisal……………………………………………………………………………… 19 Resolving Divergent Valuations between Appraisal Reports…………………………………………... 20

III. Key Authorities…………………………………………………………………………………………. 21

a. Federal Law………………………………………………………………………………………… 21

b. Airport Improvement Program Grant Assurances…………………………………………………. 21

c. FAA Order 5190.6B, Compliance Handbook……………………………………………………… 22

d. FAA Order 5100.38D, AIP Handbook……………………………………………………………... 22

e. FAA Revenue Use Policy…………………………………………………………………………... 23

f. FAA Advisory Circular Number 150/5100-17……………………………………………………... 24

g. Uniform Standards of Professional Appraisal Practice (USPAP)……………………………… …. 24

h. Fair Market Value Definitions……………………………………………………………………… 25

IV. Appraising Airport Land at Fair Market Value…………………………………………………………. 29

Appraising Aeronautical Property……………………………………………………………….………. 30 Appraising Non-aeronautical Property…………………………………………………………………... 31 Appraising Leased Airport Land………………………………………………………………….……... 31

V. Sample Scopes of Work……………………………………………………… ……………………… 33

Appraisal Scope of Work: Disposal of Existing Airport Appraisal Scope of Work: Disposal of Non-Aeronautical Airport Land Appraisal Scope of Work: Acquisition of On-Airport Leasehold Appraisal Scope of Work: Concurrent/Interim Lease of On-Airport Property Appraisal Scope of Work: Sale/Lease of Oil/Gas/Mineral Rights Appraisal Scope of Work: Sale/Disposal of Utilities/Pipeline Easement Appraisal Scope of Work: Disposal/Lease of Hotel Appraisal Scope of Work: Disposal/Lease of Golf Course Appraisal Scope of Work: Sale/Lease of Agricultural Land

VI. Sample Letter to Sponsor……………………………………………………………………………… 85 Appendix A: Real Estate Dictionary

II. What Do I Need to Know about Appraisals?

Exhibit 1 provides an overview of when an appraisal of an airport property is required, the basis of valuation, qualifications of appraisers, the type of report required, and how to provide guidance to airport sponsors on hiring an appraiser. It does not contain all of the issues related to airport appraisals, but is a good starting point.

Exhibit 1: The Airport Real Property Appraisal Process

When Does an Airport Need an Appraisal?

- Establishing fair market value for airport property

- Selling or Exchanging Property worth more than $25,0003

- Selling an entire airport with FAA approval

- Establishing rates and charges for non-aeronautical land

What is the Basis of Establishing Value?

- Market Value at the highest and best use as defined by Uniform

Standards of Professional Appraisal Practice (USPAP)4

Qualifications of an Appraiser

- Listed on the National Registry of certified and licensed real estate appraisers:

https://www.asc.gov/National-Registry/NationalRegistry.aspx

- Prefer airport experience and/or experience with specialized properties (e.g., land sales, hotels or golf courses, solar panels, water, oil and mineral rights)

- Experience preparing requests to release airport property

- Extensive knowledge and application of the USPAP

What Kind of Report is Required?

- A written Appraisal Report, as defined by USPAP

- A second Appraisal Report by another appraiser for market values over $1 million

- A written Review Appraisal of two Appraisal Reports

How Do I Provide Guidance to a Sponsor Hiring an Appraiser?

- Sample letter to sponsor in this CGL

- Scope of Work in this CGL (either general or for specific appraisals)

3 Uncomplicated transaction is vacant marketable land without deductions or encumbrances.

4 Uniform Standards of Professional Appraisal Practice can be accessed at http://www.uspap.org/.

http://www.uspap.org https://www.asc.gov/National-Registry/NationalRegistry.aspx

What is an Appraisal?

Title 49 CFR Part 24 Uniform Relocation Assistance (URA) and Real Property Acquisition for Federal and Federally Assisted Programs defines an appraisal in the following way:

The term appraisal means a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information.

FAA uses appraisals to establish the FMV of airport property, as do airport sponsors for determining fees and rates as stated in Grant Assurance 24, Fee and Rental Structure, which states in pertinent part:

The Airport sponsor will maintain a fee and rental structure for the facilities and services at the airport that will make the airport as self-sustaining as possible under the circumstances existing at the particular airport, taking into account such factors as the volume of traffic and economy of collection.

The purpose of this self-sustaining principle is to protect the Federal investment in the nation’s airports (see FAA Order 5190.6B, Chapter 17, which discusses the self-sustaining principle).

FAA’s Policy and Procedures Concerning the Use of Airport Revenue, February 16, 1999, (64 FR 7721) (Revenue Use Policy) interprets the self-sustaining principle to require that airports receive FMV for the sale of airport property and for the leasing of airport property and facilities (land, buildings, other improvements) for non-aeronautical use.

When is an Appraisal Report Required?

Two conditions are required to initiate an appraisal report:

• There is a need to establish FMV for the sale of airport property, the exchange of airport property for off-airport property, or to establish lease rates for non-aeronautical use.

• An airport is selling property, except when the sponsor concludes that the appraisal is uncomplicated and the property value is reasonably determined to be less than 25,000.5

Under this exception, the sponsor must prepare a waiver valuation to document its conclusions.6 A letter to the local FAA office, supported with appropriate documentation of property values and signed by an airport official knowledgeable of the airport’s property

5 Uncomplicated transaction is an exchange of vacant land marketable without deductions or encumbrances.

6 A waiver valuation is not an appraisal. URA Rule appraisal requirements and USPAP standards relating to appraisals do not apply to a waiver valuation. Appraisal practice is provided only by appraisers, whereas valuation services are provided by a variety of professionals and others. Valuation services pertain to all aspects of property value and include services performed both by appraisers and by others. A waiver valuation is to be prepared by a knowledgeable person who is aware of the general market values in the airport. The basic concept is to streamline the process.

values, is acceptable.

What is Fair Market Value?

FAA and Uniform Standards of Professional Appraisal Practice (USPAP) have similar definitions for fair market value, or market value. FMV is the cash value of the property if it were sold in a well-functioning market, assuming an arm’s-length transaction (the buyer and seller are free from any duress), and the property is exposed to the market for a sufficient period of time for buyers to evaluate it.

FAA Order 5190.6B, Appendix Z of the Airport Compliance Manual, defines Fair Market Value:

Fair Market Value. The highest price estimated in terms of money that a property will bring if exposed for sale in the open market allowing a reasonable time to find a purchaser or tenant who buys or rents with knowledge of all the uses to which it is adapted and for which it is capable of being used. It is also frequently referred to as the price at which a willing seller would sell and a willing buyer buy, neither being under abnormal pressure. FMV will fluctuate based on the economic conditions of the area.

Implicit in this definition are the consummation of a sale as of a specified date and the passing of title from seller to buyer under the following conditions:

The buyer and seller are typically motivated.

Both parties are well informed or well advised, and each is acting in what he or she considers his or her own best interest.

A reasonable time is allowed for exposure in the open market.7

Payment is made in terms of cash in U. S. dollars or in terms of comparable financial arrangements.

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.

There is also a discussion of Fair Market Value in FAA Order 5190.6B (see Chapter 17 Self- Sustainability).

7 Reasonable time will vary by type of property. For example, a house with similar characteristics to those in its neighborhood may only require a few weeks or months exposure to the market to establish value, whereas a unique industrial property may require a few years.

FMV is the Required Standard When an Airport Sells or Leases Non-Aeronautical Property

To maintain self-sustainability, airports must satisfy these requirements:

Maintain a rate structure, including for airport property leased or sold, that makes the airport as self-sustaining as possible under the circumstances at the airport (Revenue Use Policy, Section VI.C).

Obtain FMV for any land it leases or sells to the airport sponsor for other municipal purposes, developers, non-aviation commercial interests, or other private individuals.

Charge market rent for leasing airport property for non-aeronautical use as well as determine the market value for the disposal of property that is no longer needed for airport purposes (AIP Grant Assurance 31, Disposal of Land; projects and systems, and

(d) military aeronautical units).

Prohibit the sale of airport property at less than FMV that diverts revenue away from the airport in violation of Grant Assurance 25, Airport Revenue.

Retain sufficient property rights and control of any AIP-funded noise land sold, released, or leased, so that its use and development will always be compatible with airport operations (See FAA APP-400 guidance “Noise Land Management and Requirements for Disposal of Noise Land or Development Land Funded with AIP”, June 2014). The retained property rights must be enforceable and recorded in the local public land records. The FMV appraisal of land to be disposed or leased long term will be subject to the needed sponsor retained rights and restrictions on the land (see appraisal scope of work).

Typical non-aeronautical uses that require FMV include leasing rates for non-aviation facilities (i.e., ground rentals for commercial development, cargo buildings, hotels, car rental facilities, and commercial buildings). Land for these non-aeronautical uses should be appraised based on FMV.

FMV is Not the Standard for Setting Aeronautical Rates and Charges

Rates and charges for the airfield (runways and aircraft movement areas) may not exceed the airport’s capital and operating costs of those facilities. These rates are based on accounting principles without reference to market conditions; an appraisal is not required to set the rates.

Airport sponsors should consult the FAA Policy Regarding Airport Rates and Charges, 78 FR 55330, September 10, 2013 (Rates and Charges Policy).

The FAA does not require that these rates be set higher than the airport’s capital and operating costs. So, unless the airport’s objective is to set rates and charges for hangars, aviation offices, and similar non-movement facilities at FMV, an appraisal is not required.

https://www.faa.gov/airports/environmental/policy_guidance/media/Noise-Land-Management-Disposal-AIP-Funded-Noise-Development-Land.pdf https://www.faa.gov/airports/environmental/policy_guidance/media/Noise-Land-Management-Disposal-AIP-Funded-Noise-Development-Land.pdf https://www.faa.gov/airports/environmental/policy_guidance/media/Noise-Land-Management-Disposal-AIP-Funded-Noise-Development-Land.pdf

How Do We Know Rent on an Airport Property is at FMV?

The appraiser still has to make judgments about “similar” returns and what properties are “comparable” when analyzing data on property sales and rentals. Various appraisal and real estate research organizations periodically publish guidelines to aid appraisers in developing parameters for rates of returns applicable to different forms of property. The appraiser will have to specifically take account of the restrictions on the use of airport property (e.g., height restrictions or the need to go through security) when establishing rates.

One way to think about establishing rental rates based on FMV is to answer the question: How much would an airport tenant pay monthly to buy the property, allowing the airport sponsor to make a rate of return on its investment (the property’s value), that is similar to what a property owner in the local geographic area might earn on comparable properties? This concept is similar to a mortgage payment, except market rent considers 100 percent of the property’s value and reflects the overall investor/owner demanded rate of return on their property value. Of course, the appraiser will not use such a formula as the sole basis of the appraisal, but this approach is a useful way of thinking about what a market rate rental represents.

Here is a simplified example of a market rent required on a typical airport ground lease which requires the tenant to construct its own building and pay all operating expenses including any real estate tax on its development and use of the property:

• Appraised Fair Market Value (FMV) - An appraiser has completed an appraisal of airport land based on recent market land sales with highest best use for industrial development similar to the proposed development of airport land (without access to the ramp) and has concluded that the FMV of the land is $10 per square foot of a typical building lot.

• Cap Rate - The appraiser determines that a local owner/investor currently would expect to earn about 8 percent annually on a ground lease for industrial development after vacancy and land owner management expenses are paid.

• Vacancy Rate -The appraiser finds that in the region’s property market, ground rent leases for industrial properties have a 3 percent vacancy rate.

• Annual Management Fee Rate - The airport land owner can expect to incur another 5 percent of gross rent annually for airport management expense on the leased property.

Given the above values, what would be the estimated FMV gross rent (before deducting any airport expenses) charged on a ground lease of airport land, ignoring (for this illustration) all other factors or assuming they have zero impact in this case?

In equation form:

Gross Annual Rent @ FMV = (CAP Rate x Appraised FMV)/(1-Vacancy Rate-Annual Management Fee Rate)

Gross Rent @ FMV = (8% x $10) / (1- .03 – .05) = $8.70 per square foot/ year (rounded).

The Gross Rent, therefore, to be received on the airport land with an FMV of $10/sq. ft. for a market required 8% return on value is $8.70 per square foot/year before expenses.

What are the Qualifications of an Appraiser?

The sponsor must ensure appraisals are conducted by qualified appraisers. Each state adopted the USPAP as the governing standards within their jurisdictions. They also developed licensure standards, which meet or exceed the recommendations of the Appraisal Foundation. All appraisers should be registered in a National Registry certified or licensed by a U.S. state, territory, or possession to perform appraisals in connection with federally related real estate transactions (https://www.asc.gov/National-Registry/NationalRegistry.aspx). Although there is variation from state to state, the most common categories of licensing are Appraisal Trainee, Residential Appraiser, Certified Residential Appraiser, and Certified General Appraiser.

Airport properties should be appraised by either a Certified Residential Appraiser (for residences, usually involved in Part 150 noise issues) or a Certified General Appraiser (who may appraise any type of property). Preference should be given to an appraiser having extensive airport valuation experience involving the type of property being assessed at airports of similar or larger size.

All states have a provision for a Temporary Practice Permit for licensed or certified appraisers from other states who may wish to do appraisal work outside of the state or states in which they are licensed or certified. Such permits are intended to fulfill the appraisal needs of a state, especially when demand exceeds the number of available qualified appraisers within the state.

The following exhibit from FAA AC 150/5100-17, Land Acquisition and Relocation Assistance for Airport Improvement Program (AIP) Assisted Projects summarizes the desirable qualifications of an appraiser. Airport sponsors should consult FAA AC 150/5100-17, Chapter 2. “Real Estate Appraisal” for further information about Qualifications, Appraisal Management, and Conflict of Interest.

https://www.asc.gov/National-Registry/NationalRegistry.aspx

APPRAISER AND REVIEW APPRAISER QUALIFICATIONS

The qualifications of an appraiser and review appraiser must be adequate for the proposed appraisal assignment. The sponsor should seek to hire the best-qualified appraiser for the type of property, the complexity of the acquisition (i.e., whole or partial taking), familiarity and expertise in the local real estate market, and as applicable experience with acquisitions subject to eminent domain. Also, the appraiser must not have any apparent conflict of interest in the property to be acquired, or potentially with a current or prior client relationship with property owners. An appraiser under consideration for an assignment should be able to submit a resume' of qualifications citing some or all of the following qualification criteria.

Professional Designations:

American Institute of Real Estate Appraisers: Member Appraisal Institute (MAI) and Residential Member (RM) National Association of Independent Fee Appraisers: (IFA) American Society of Appraisers: (ASA) International Right-of-Way Association: (SR/WA) American Society of Farm Managers and Rural Appraisers: (ASFRM) National Association of Master Appraisers Other National and local appraisal organization which grant designations upon completion of educational and experience requirements.

Licensing and Certification under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA): State laws implementing FIRREA will require appraisers to meet the mandated educational and experience requirements to secure either a license or certification. State law may only require the license or certification for FIRREA mandated transactions (i.e., typically Federally insured real estate loans), or may be required for all appraisal activity within the state. The Appraisal Qualification Board of the Appraisal Foundation established by FIRREA, instituted appraiser qualifications for a state license or certification. A licensed or certified appraiser may only perform appraisals consistent with the Uniform Standards of Professional Appraisal Practice (USPAP) as required under FIRREA.

Adherence to USPAP requires appraisers to meet specific appraisal standards and a code of ethics in accepting and performing appraisals. The appraisal requirements contained in 49 CFR

24.103 have been determined to meet the requirements of USPAP, (Appraisal Foundation Determination, September 1990).

Educational Background: Completion of recognized course work in professional real estate appraisal principles, processes, and practices. Course providers may be colleges and universities, professional appraisal organizations, and accredited business and professional schools.

Experience: Verifiable experience in the types of property to be appraised. Experience and acceptance as an expert appraisal witness in eminent domain and other court proceedings.

Experience with the before and after appraisal process for determining just compensation and the value of partial acquisitions such as easements.

Client References: Verifiable listing of appraisal clients.

Geographic Area of Expertise: Area where the appraiser has an established practice. Some appraisers and appraisal firms may have a national scope, while often appraisers limit their work to specific local areas where they have developed adequate market databases and are fully familiar with the local markets and real estate trends.

Appraiser’s Statement of Competency

Under USPAP, appraisers are required to possess the necessary competence to produce credible results in their appraisal report. An appraiser must disclose any lack of knowledge or experience necessary to complete an assignment before accepting the assignment. This disclosure is particularly important with regard to sub-specialties like airport property.

It is the responsibility of appraisers to determine whether or not they are competent with regard to a particular assignment. Factors that determine competency may include:

Familiarity and experience level with regard to specific types of appraisals Regional familiarity The use of a particular appraisal Use of an analytical method in developing the appraisal

If appraisers determine they are not competent to accept a particular assignment, they have three mandatory actions.

First, the appraiser will work with another appraiser who possesses the requisite knowledge to produce credible results. Second, they will take specific steps to educate themselves and develop the necessary knowledge to competently complete the appraisal; and third, if these standards cannot be met, the appraiser must withdraw from the assignment.

What is an Acceptable Appraisal Report?

The FAA will only accept an Appraisal Report that meets the essential steps outlined in USPAP, 2016-2017 Edition. USPAP Standards Rule 2-2 requires the content of an Appraisal Report to be consistent with the intended use of the appraisal and contain this information at a minimum:

1. state the identity of the client and any intended users, by name or type;

2. state the intended use of the appraisal;

3. describe information sufficient to identify the real estate involved in the appraisal, including the physical and economic property characteristics relevant to the assignment;

4. state the real property interest appraised;

5. state the type and definition of value and cite the source of the definition;

6. state the effective date of the appraisal and the date of the report;

7. summarize the scope of work used to develop the appraisal;

8. summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions; exclusion of the sales comparison approach, cost approach, or income approach must be explained;

9. state the use of the real estate existing as of the date of value and the use of the real estate reflected in the appraisal; and, when an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion;

10. clearly and conspicuously: state all extraordinary assumptions and hypothetical conditions; and

11. state that their use might have affected the assignment results; and

12. include a signed certification in accordance with Standards Rule 2-3.

A Restricted Appraisal Report, another option allowable under USPAP, is inappropriate and unacceptable for FAA use.

When Is a Review Appraisal Required?

The review appraiser will ensure the appraisal process, the resulting FMV, and appraisal report meet minimum USPAP standards and FAA requirements. Two independent Appraisal Reports and a Review Appraisal are required for the disposal of the high value property ($1 million) or more. In the case of large land disposals or subdivision sales, FAA AC 150/5100-17 recommends hiring a review appraiser before hiring appraisers. This review appraiser may assist in defining appraisal scope of work.

FAA AC 150/5100-17, Figure 2-2 Appraisal Report Requirements provides a description of the appraisal process, report content, and statutory authority, which are summarized in the following table.

http://commerce.appraisalfoundation.org/html/2006%20USPAP/std2.htm#2_3

Appraisal Report Requirements

Appraisal Process Detailed Report Content 49 CFR 24

Define the Appraisal Problem Identify and Locate the Real Estate

Identify the Property Rights to be Valued Establish Date(s) of Value Estimate

Identify the Use of the Appraisal Define Value to be Estimated

Identify Limiting Conditions and Limitations

Parcel Number as shown on Exhibit "A"

Project Influences Disregarded Existing Ownership: fee, easement, tenant Options/contracts

Date of Value, Date of Inspection Statement of Owner

Accompaniment Statement of Limiting Conditions

49 CFR

24.103(a)

49 CFR

24.103(a)(1)

Preliminary Analysis and Data Collection Area, Zoning, Utilities, General: Specific: Market Improvements

(Supply & Demand): Identification of Special Features Identification of Adverse

49 CFR

24.103(a)(2), (4)

Geographic Subject Applicable Sub-market Influences Social Site & Imps. Competing Supply Market Analysis

Economic Costs/Income Sales/Listings Neighborhood Analysis Govt. Interest Rates Vacancies/Absorption 5 Year Sales History of Property

Environ. Use/Ownership Demand Studies Encumbrances Highest and Best Use Analysis

As Vacant and Available As Improved

Support and Analysis Presented 49 CFR 24.103(a)(2)

Land/Site Value Estimate

Sales Comparison, Subdivision Approach, Income Capitalization (Land Residual)

49 CFR

24.103(a)(3)

Application of the Three Approaches to Value

Sales Comparison, Income, Cost Approaches (As Applicable)

Comparable Sales Verified Adjustments Explained

Data and Analysis Presented for Each Sale

Income & Expense Data Verified

Capitalization Rate Support Provided

Cost Source, Depreciation Supported

49 CFR

24.103(a)(3)

Reconciliation Reasoning presented, relative strengths and weaknesses of the approaches discussed

49 CFR

24.103(a)(5), (6)

Report of Defined Value

Appraisal Report Appraisers Certification

Before & After Analysis (Partial Acquisitions)

49 CFR

24.103(a)(5)(6)

How to Solicit for an Appraiser and Review Appraiser

Airport sponsors can use FAA AC 150/5100-14 as a guide for soliciting and procuring an appraiser; however, there is no requirement to do so. When hiring appraisers, airport sponsors should rely on the applicable legal authority and local procedures governing procurement. FAA requires that the appraisers and review appraiser be from different appraisal organizations.

Property worth more than $1 million

When an airport property is worth more than gross value of $1 million, FAA requires a sponsor to engage two independent appraisers and a review appraiser. One regular appraisal and a review appraisal are sufficient for gross values under $1 million. If the two appraisal reports of the property show divergent fair market values, it is the responsibility of the review appraiser to determine the FMV based on the information in the two appraisal reports and the review appraiser’s own views of the market at that time.

How to Define a Scope of Work

The sponsor’s appraisal assignment (solicitation) must contain a scope of work statement to ensure an appraisal report acceptable to the FAA. Exhibit 2 provides a sample general scope of work statement to use in procuring a qualified appraiser. The scope of work should be commensurate with the complexity of the appraisal problem and at a minimum include the following:

a. Purpose and/or function8 of the appraisal (e.g., appraise fair market value).

b. Requirement that the appraiser must perform an appraisal and develop an Appraisal

Report, as defined under USPAP.

c. Description of the sponsor as the client and any other intended user, each of which must receive a written Appraisal Report. The FAA is always considered an intended user of the appraisal report.

d. Definition of the estate being appraised, e.g., fee simple, easement, or leased fee.

e. Assumptions and limiting conditions affecting the appraisal.

f. Data search requirements and parameters.

g. Identification of the technology requirements, including approaches to value, to be used to analyze the data.

h. Other specifications required to adequately appraise the property and meet FAA and other regulatory requirements.

8 “Purpose” is sometimes called “Type” and “Function” is sometimes called “Definition of Value.”

Exhibit 2: Sample General Scope of Work Statement

The property to be appraised is roughly X acres of land located at ________________________.

Attached are the legal description and a copy of the plat of the property (and, if applicable, a copy of the proposed lease). The sponsor currently owns (or had owned or leased) this property in fee and the real property will be conveyed or leased subject to the identified retained real property rights and encumbrances (see Assumptions and Limiting Conditions).

This appraisal of the property is subject to the following scope of work, intended use, intended user, definition of market value, certifications and statement of assumptions, and limiting conditions. The appraiser may expand the scope of work to include any additional research or analysis determined necessary for a credible appraisal of the fair market value of the subject property and to meet the identified standards and requirements.

SCOPE OF WORK: The appraiser will provide an appraisal and appraisal report in accordance with Uniform Standards of Professional Appraisal Practice (USPAP) and FAA requirements.

The appraiser must at a minimum:

• Inspect the neighborhood and local area noting utility and transportation infrastructure to the extent required for the highest and best use of the property.

• Adequately describe the physical characteristics of the property being appraised including known and observed encumbrances, title information, location, zoning (current, proposed, and probability of rezoning), present use, stage of development, concurrency with local and regional land use plans, an analysis and supported determination of highest and best use, and adequate sales history of the property (e.g., when acquired and amount paid).

• Adequately describe and analyze all relevant market data and activity as of the date of value.

• Inspect research, analyze, and verify comparable sales with public sources and with a party to the transaction, buyer, seller or broker, or attorney.

• Appraise the current fair market value of the property, as defined below. If the property is to be appraised based on a date in the past, the “retrospective appraisal” specification must be met by the appraiser (see Assumptions and Limiting Conditions).

• Analyze current or proposed leases, if any, and prepare an estimate of the leased fee value of the property. Explain any variance between the leased fee and the fee simple market value of the property.

• Report the appraiser’s analysis, opinions, and conclusions in the appraisal report. The appraisal report must include the plat or a sketch of the property and provide the location and dimensions of any improvements. The appraisal report must include adequate photographs of the subject property and of the comparable sales and provide location maps of the property and comparable sales.

Exhibit 2: Sample General Scope of Work Statement continued

• The land must be appraised at an economic highest and best use as described in the Uniform Appraisal Standards for Federal Land Acquisitions at paragraph A-14, Analysis of highest and best use (see http://www.usdoj.gov/enrd/land-ack/yb2001.pdf ). As applicable, the appraiser in estimating the market value of the airport land shall consider the development potential of airport land parcels considering the location of airport land and any potential plottage (for combining it) with adjoining development land.

INTENDED USE: The intended use of this appraisal is to provide an appraised current fair market value (or as of the date of value specified for a retrospective appraised fair market value) of the fee simple and leased fee interest, as is applicable.

INTENDED USER: The intended user of this appraisal report is the sponsor and the FAA. The sponsor and FAA will rely on the appraisal and appraisal report to document the current fair market value of the real property.

DEFINITION OF MARKET VALUE: The market value is 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 the consummation of a sale as of a specified date and the passing of title from seller to buyer under these conditions:

• Buyer and seller are typically motivated,

• Both parties are well informed or well advised, and each acting in what he or she considers his or her 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 comparable financial arrangements.

• 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.

http://www.usdoj.gov/enrd/land-ack/yb2001.pdf

Exhibit 2: Sample General Scope of Work Statement continued

CERTIFICATION: The appraiser must provide a certification consistent with USPAP requirements. Changes to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization are permitted.

ASSUMPTIONS AND LIMITING CONDITIONS: The appraiser must state all relevant assumptions and limiting conditions necessary. In addition, the sponsor may provide other assumptions and conditions that may be required for the particular appraisal assignment, such as:

• The data search requirements and parameters that may be required for the assignment.

• The (sponsor) will advise and provide the appraiser the legal description of the airports retained property rights (recorded or to be recorded), e.g., easements, deed restrictions, or other restrictions and encumbrances on the property to protect and enhance airport operations and to acknowledge and protect overflight of the property.

The appraiser must appraise the market value of the property subject to the airport retention of the described property rights.

• Identification of the technology requirements, including approaches to value to be used to analyze the data.

• Needed soil studies, potential zoning changes, etc.

• As applicable, any information on property contamination to be provided and considered by the appraiser in making the appraisal.

• Retrospective Appraisal Requirements: If a value for a date or event in the past is required (e.g., as of past lease date or disposal date) the following specification must be inserted into the scope of work: The date of value for this appraisal is (specific date in the past). In conformance to USPAP,9 market data subsequent to this effective date may be considered in developing a retrospective value as a confirmation of trends that would reasonably be considered by a buyer or seller as of the date of value. For this retrospective appraisal, the appraiser will determine a logical cut-off date after which market data cannot be used to reflect the relevant market as of the date of value.

9 Statement of Appraisal Standards #3, Retrospective Value Opinions, Uniform Standards of Appraisal Practice, Appraisal Foundation

Scopes of work adapted to specific types of property are provided later in this document, in Section V. Sample Scopes of Work.

Shelf Life of an Appraisal

Appraisals are essentially a snapshot of value that is taken at a particular time. This short shelf-life is why the date of valuation is so important in determining the validity of an appraisal. The market for all types of real estate is subject to change overtime. Values can increase or decrease, depending on a myriad of external factors.

Appraisals can be prospective, retrospective or contemporary:

Prospective: Appraisals that anticipate the construction of some type of improvement require prospective values that designate some point in the future when the improvement will either be completed and/or stabilized, and that value may be several years beyond the date the appraisal is actually delivered.

Retrospective: retrospective appraisals require appraisers to determine the value based on some preceding event, such as a date of death for purposes of settling an estate, or a preceding date that may be tied to a condemnation or other event.

Contemporary: Appraisals for conditions on or about the date of valuation are contemporary.

FAA and State agencies prefer contemporary appraisals over retrospective or prospective appraisals. However, on occasion, there is a need to use prospective and retrospective appraisals to resolve compliance problems. ACO-100 and APP-400 should be consulted before making a decision. For contemporary appraisals, it is generally recognized that an older appraisal is less reliable than a newer appraisal.

What is an appropriate amount of time before an appraisal needs to be updated to incorporate any potential changes that may have occurred in the marketplace?10

In general, for FAA review of sale or lease of properties, if a matter has not gone to contract one year from the date of submission of the appraisal, then a new appraisal report is needed. USPAP specifies that each time an appraiser produces a report, it is considered a completely new appraisal assignment and must be treated as such by the appraiser to remain in compliance with the standards. The new report is not required to have the same level of effort as the original report. In a slow moving market, with little or no activity, the appraiser’s level of effort should be more

10 Within the appraisal profession, there is no defined time. Certain government agencies such as the Federal Housing Administration (FHA) specify that an original appraisal report can only be updated one time using the Appraisal Update Report (AUR). An appraisal with no AUR has a 150-day validity period (120-day validity period for the original appraisal plus 30-day extension period as permitted by HUD). An appraisal with an AUR has a 240-day validity period. Typically, banks and other institutional lenders consider six months to be the optimum timeframe for appraisals pertaining to commercial property, but will often times have properties appraised every several years for purposes of collateral management. Other government agencies at the federal and state level address this problem on a case-by-case basis often times with a chief appraiser in the department having the authority to update appraisals.

modest than when several relevant property sales need to be taken into account. The same advice would apply to any review appraisals. When market activity is minimal, the level of effort of the review appraiser would be less than when many new properties have to be considered in the new appraisal report.

Regardless of the nomenclature used, when a client seeks a more current value or analysis of a property that was previously appraised, this analysis is not an extension of the previously completed assignment. It is a new assignment. In cases where the delay in accepting the appraisal is due to FAA review and approval beyond the one-year period, ACO should be contacted.

Resolving Divergent Valuations between Appraisal Reports

In all cases, the sale of airport property or the leasing of non-aeronautical property must be based on a fair market value determination. In some instances, however, there may be a dispute over the market value of the property. At the request of the FAA, the sponsor’s review appraiser may make a determination of the subject property’s FMV, taking account of credible and verifiable valuation information in appraisal reports and other factors the review appraiser deems appropriate.

Additionally, the sale price or lease rate offered by the sponsor and ultimately accepted to meet applicable Federal obligations must always reflect the existing fair market value of the property.

I. Key Authorities

This section focuses on key authorities for the sale and disposal of airport property. For issues that involve acquisition of property, the reader should consult the FAA website on Acquiring Land for Airports and Relocation assistance, which at the time of this writing was available at the following site:

a. Federal Law

49 United States Code (U.S.C.) § 47101(a) (13) Fee and Rental Structure 49 United States Code (U.S.C.) § 47107(b) Use of Airport Revenue 49 United States Code (U.S.C.) § 47107(c) Acquiring Land

b. Airport Improvement Program Grant Assurances

5. Preserving Rights and Powers

24. Fee and Rental Structure

25. Airport Revenues

31. Disposal of land

1. Self-Sustainability Principle

Federal law and FAA policy, including the Revenue Use Policy, require airport sponsors maintain a fee and rental structure that makes the airport as financially self-sustaining as possible under the specific circumstances at the airport. As stated in Title 49 U.S.C. § 47101(a) (13), “airports should be as self-sustaining as possible under the circumstances existing at each airport particular airport and in establishing new fees, rates, and charges.”

Airport sponsors also have a responsibility to ensure the airport maintains a rate and fee schedule that conforms to the grant assurances and is consistent with the FAA’s Rates and Charges Policy. FAA’s Revenue Use Policy requires federally obligated airports to charge market rent for leasing airport property for non-aeronautical use and dispose of airport property at fair market value. The self-sustainability Principle recognizes that each airport situation is different as well as the circumstances that may affect an airport’s ability to pursue self-sustainability. The primary goal is to maintain the utility of the federal investment in the airport.

c. FAA Order 5190.6B, Airport Compliance Manual

The Airport Compliance Manual provides guidance to FAA personnel on interpreting and administering the various continuing commitments airport sponsors make to the U.S. Government when they accept grants of federal funds or federal property for airport purposes.

Chapter 17. Self-Sustainability discusses the airport sponsor’s responsibility to be as self-sustaining as possible. Each airport sponsor is required under Grant Assurance 24 to maintain a fee and rental structure, which covers the airport’s aggregate operational costs to the greatest practical extent. Fair market pricing or value of airport facilities can be determined by reference to negotiated fees charged for similar uses of the airport or by appraisal of comparable properties.

However, in view of the various restrictions on the use of property on an airport (i.e., limits on the use of airport property and height restrictions) appraisers may often need to account for such restrictions when comparing on-airport with off-airport commercial non-aeronautical properties in making fair market value determinations. Failure to receive fair market value under airport circumstances where it is required may be viewed as revenue diversion by the federal or state agency providing the grant and may result in the requirement to repay the grant, financial penalties, and the loss of an airport’s eligibility to receive future grants.

d. FAA Order 5100.38D, AIP Handbook

The AIP Handbook at paragraph 5-68 describes the land disposal requirements under 49 U.S.C., § 47107(c) (2), Grant Assurance 31. The sponsor is required to promptly dispose of AIP-funded land when the land is no longer needed for eligible current or planned airport purposes.

The federal share portion of the proceeds on the sale of noise land or land for airport purposes must be reinvested in eligible airport projects and programs. Table 1 provides the order of reinvestment preferences described in Grant Assurance 31.

Table 1. Order of Preference Applying Sale Proceeds of AIP-Funded Land per 49 USC § 47107(c)(4)

Order Order of preference to apply the federal share of the fair market value

1 Reinvestment in an approved noise compatibility project.

2 Reinvestment in an approved project that is eligible for funding under 49 U.S.C., § 47117(e).