By Joshua J. Malancuk, CPA, CMI, Certified General Appraiser, Level II Assessor-Appraiser – President JM Tax Advocates LLC, firstname.lastname@example.org, 317.674.8390 x 100
and Lawrence W. Mitchell, MAI, Certified General Appraiser, Level II Assessor-Appraiser – Senior Managing Director, Valbridge Property Advisors, email@example.com, 317.687.2747 x 11
Indiana’s USPAP Exception and Ramifications to Taxpayer Appeals
Uniform Standards of Professional Appraisal Practice (“USPAP”) was born out of the Savings and Loan Bailout when fraudulent appraisals were the cause of many defaults. At that time, the federal and state oversight boards mandated that real estate appraisers follow these standards in order to protect the public from bad appraisals. In the first part of this article, we discussed how Indiana County Assessors and “professional appraisers” are exempt from USPAP when developing their market value-in-use assessed values, but why would this jurisdictional exception exist with Indiana law? Wouldn’t USPAP also serve to protect the Indiana public from bad assessment appraisals and assessment practices as well?
Under USPAP, the Ethics Rule states that an appraiser must not perform an assignment with bias, must not advocate the cause or interest of any party or issue, and must not accept an assignment that includes the reporting of predetermined opinions and conclusions. This rule clearly allows “professional appraisers” to defend assessment accuracy and corresponding mass appraisal methodology at public hearings. However, bias, as permitted by Indiana’s current assessment system, can sometimes become problematic when “professional appraiser” firms develop county mass appraisal assessments while also advocating for the county’s interests at PTABOA and/or IBTR appeals. Permitting the same individuals to serve both roles, acting as appraiser and advocate, undermines public trust with the overall county mass appraisal credibility and reliability. Following the Ethics Rule would suggest that these two functions be served by separate, independent professional service firms to avoid questions about whether predetermined values (i.e., values need to be X level with no supporting validating data) are being developed during mass appraisals. Separating advocacy and assessment roles would also help calm any public scrutiny regarding the overall motivations of “professional appraisers” relative to creating fair and equitable assessments (i.e., if economic compensation increases to the same professional appraisal firm for future advocacy assignments at the IBTR, why formulate a just or accurate value at the local level?) while serving Indiana counties.
According to USPAP, the Competency Rule requires an Appraiser to have sufficient knowledge and experience to complete an assignment competently including the recognition and compliance with laws or regulations that apply to the appraiser or to the assignment. Competency challenges become apparent when assessing certain complex properties (i.e., hotels, senior communities, large industrial properties, regional malls, etc.) because developing credible values for these property types require more specialized valuation knowledge and training than is typically afforded to most Indiana County Assessors. Therefore, involving a qualified real estate appraiser, potentially at the state level, to oversee more complex county assessment appraisals would improve Indiana counties’ assessment reliability and accuracy.
Competency can also come into play with ad valorem appraisal reviews. We have noted a number of instances where assessors or third-party “professional appraisers” have taken specific steps to review certified real estate appraisals during tax appeal proceedings. While this practice is currently allowed based upon Indiana’s statutory USPAP exception, having an unqualified individual provide an appraisal review is clearly a USPAP Competency Rule violation and possibly other USPAP standards as well. These practices should be prohibited due to the propensity for misleading evidence presented to the county board and/or state Indiana Board of Tax Review assessing officials while rendering tax appeal decisions. It is unfortunate to think that many well-supported tax appeals, including those that are documented with market value-in-use appraisals, could be inadvertently pushed to state or tax court level reviews due to bias, competency issues, or unqualified appraisal reviews thus costing individual taxpayers and/or county government additional monies that could otherwise be avoided to support these appeals.
To-date, County Assessors, their employees, “professional appraisers”, and property tax representatives are solely subject to the DLGF and, if part of the International Association of Assessing Officials (“IAAO”) membership group, IAAO member ethics requirements and guidelines, but not USPAP standards. IAAO does contemplate following USPAP rules within its code of ethics. Specifically, IAAO ethical rule ER 5-1, states “it is unethical to fail to observe the requirements of the Uniform Standards of Professional Appraisal Practice.” However, IAAO also contains a provision that permits a jurisdictional exception for any state where maintaining USPAP standards would be a violation of that state’s law.
It was stated in part 1 of this article that current Indiana administrative code (per 50 IAC 27-1-3(5)) contradicts Indiana licensure statute (per IC 25-34.1-3-8(h)) with respect to USPAP compliance for annual trending and how the conflicting requirements should be addressed with clarifying language in Indiana statute. This raises a question as to whether Indiana County Assessors and “professional appraisers” should also fall under USPAP requirements for periodic general reassessments. Clearly, the conflicting language creates a loophole for assessment irregularities and unfair assessment administration practices that must be changed for the best interests of Indiana taxpayers. Assuming future legislation is successfully passed, what should a realistic USPAP compliance implementation plan look like for Indiana County Assessors?
It would be unrealistic to expect Indiana County Assessors to adopt full USPAP compliance by completing current Indiana real estate appraiser licensure requirements. However, we believe that it would improve public trust in the Indiana assessment system and also safeguard Indiana taxpayer interests to reform state licensure statute by requiring Indiana County Assessors and “professional appraisers” to comply with current USPAP Ethics and Competency standards relative to their future annual trending and general reassessment responsibilities. From a practical standpoint, implementing the Ethics USPAP standard would require separate, independent “professional appraiser” firms to handle county mass appraisal and advocacy functions. To satisfy the Competency standard, involving qualified Certified Appraisers at the county level assessment process, including appraisal reviews, would help to improve overall assessment quality for the more complex property types.
In summary, revising Indiana statute to add language for mandated County Assessor compliance with USPAP Ethics and Competency standards would help to balance the scales and expedite Indiana property taxpayers’ due process for property tax appeals while improving the overall quality and reliability of Indiana property tax assessments. While these steps would not require County Assessors to become licensed real estate appraisers, these changes could serve to narrow the wide gap that currently exists in the fundamental performance requirements between County Assessors, third-party mass appraisal consultants, and certified real estate appraisers.