May 10, 2010

The Rapidly Changing Appraisal Landscape
by Brian Block, CEA

As with all prior financial crises the fallout always impacts the appraisal community; think of Enron and the Sarbanes-Oxley legislation that followed; think of the saving and loans crisis and the regulation of appraisers that followed. This most recent crisis is no different; the legislators are at it again. So far the legislation is stalled and with luck will remain so. So where we and what are these tides of change flowing through the landscape?

Currently about 95% of all appraisal activity is real estate related and the remaining 5% is personal property and business valuation. The personal property category covers all other asset classes including the machinery & equipment (M&E) that we at the AMEA are involved in. So far personal property appraisal practice is unregulated by any federal statutes and hopefully it will remain that way. For the most part the regulations that are in existence and those that are proposed are all aimed at the real estate component of appraisal activity. Unfortunately we in the personal property category are swept along by the tide.

So what are the major tides that are flowing? The first major tide is the concept of “Mark-to- Market”. This idea first arose after the Enron debacle. The structures to implement the concept have been evolving since that time. Since the financial meltdown of 2008, there is a great pressure to enforce this concept. It is important to remember that this is an accounting concept and it imposes on the financial reporting a requirement to ensure all assets carried on the balance sheet of a corporation are stated at “Fair Value”. This is of course in response to the “creative financial engineering” that took place on the balance sheets during the Enron era. Of course there is a wide range of asset classes to deal with, ranging from investments to ink wells. Each class has its own peculiarities and the simple concept of “Mark-to-Market” suddenly becomes very complex indeed. As a consequence all the accounting rules that have been put in place since Enron are designed to arrive at a meaningful definition of Fair Value.

Flowing from the “Mark-to-Market” concept is the need to identify the markets. Now the role of the market makers becomes significant. The market makers are the sources of current market data. In the field of M&E, the MDNA along with a few other organizations, is one of a very few organizations that bring together the market makers and have access to current market data. This of course presents an opportunity for both the MDNA and the AMEA as will be discussed in a few moments.

The second major tide flowing is that of accountability. The implementation of “Mark-to-Market” is largely an accounting responsibility. Since Sarbanes-Oxley this responsibility comes with the threat of “sudden death”; remember Arthur Anderson! The accounting professionals want to deal with appraisers and market makers that are professional and can be held accountable for the services they provide. The MDNA and the AMEA both have a code of conduct (ethics) which enables recourse in the event that unethical behaviour occurs. In addition the AMEA certifies appraisers as individuals and imposes the requirement of keeping current and participating in continuing education.

The third major tide is that of professionalism and qualifications. A great deal of the defence from the appraisal community against increasing regulation has been a drive to increase the qualifications and standards for the appraisers. In the M & E universe, appraisers come in two flavours; the graduate who has all the theoretical knowledge and familiarity with the regulatory requirements but no experience and the crusty old auctioneer / dealer who has the years of real world experience and is in touch the market every day but struggles with the regulatory requirements. The ideal of course is the combine these two resources to arrive at a combination which can deal with all the requirements of the accounting community. This combination of course is what the MDNA / AMEA has to offer.

All of these tides are converging to create a demand for the accredited M&E appraiser who will be part of a team to address the “Mark-to-Market” needs of the accounting profession. The M & E appraiser needs not only to have access to the market data, but also have an understanding of the issues that the other professionals have to deal with in meeting all the regulatory requirements of “Mark-to-Market.