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Finance and economics generally focused on real estate

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Appraisal Institute meeting in San Diego

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I had the pleasure of being invited to speak at the Appraisal Institute’s annual meeting in San Diego last week, which brought together many of the top minds in the valuation field for three days of seminars and business meetings.   While AI is fairly small (only about 23,000 members globally), its influence in the real estate field cannot be understated.  In the U.S., appraisal license law and standards (the Uniform Standards of Professional Appraisal Practice, commonly known as USPAP) owe their genesis to work done by AI back in the 1980’s during the Savings and Loan Crisis, and possession of an AI designation (either MAI or SRA) is frequently cited in  real estate contracts as required for establishing lease renewal rates or other contractual matters.  Courts throughout the land routinely accept testimony from AI members without question.  Real estate regulatory bodies throughout the U.S. are populated by AI members, and rare is the state legislature that will make changes to real estate law without the consultation of AI members.  The AI’s government affairs team in D.C. has influence throughout the real estate arena, which of course today transcends traditional boundaries and includes regulatory efforts of the GAO and SEC, among others.

I was asked asked to deliver an address on advanced statistical methods.  I’ll leave that discussion for another day, and focus on what I learned there — which was significant — rather than what I said.  Other sessions dealt with meaty topics like the attorney/appraiser interface and the complexity of real estate valuation in the financial reporting arena.  Not unexpectedly, there was a tremendous amount of attention paid to technology, which is really leading to an interface between “automated valuation model”-type tools and the individual appraiser.  In short, we may be very close to a day, thanks to technology, when the individual home appraiser is tapping into a more robust set of analytical tools in order to produce collateral valuations with strong statistical support.  Anyone who has been following the mortgage meltdown news for the past few years will understand the significance.

The keynote speaker was Dylan Taylor, CEO/USA of Colliers International.  He riffed off of the title of the book “The Earth is Flat”, and talked about barriers to globalization in the real estate biz which he called “rounders”.  The two principle ones for our field are regulatory barriers (licensure problems, even across 50 states, much less across countries) and capital needed to grow businesses (technology, etc.)  He notes that in most professions, there is a tipping point to consolidation, and uses CPA firms as examples.  The total billings of U.S. CPA firms last year was about $120 Billion, and the big 4 accounted for $80 Billion of that.  The need for technology, increased specialization, etc., will probably stimulate that in appraisal firms (which currently have world-wide billings on the order of $3 Billion, but the top few only account for a small fraction of that).  He says that in the future, there will be a handful of very large appraisal firms plus “boutiques”.  In his view, the boutiques will do quite nicely, but the middle-market appraisal firms will die on the vine.

Taylor notes that USPAP will be generally moving toward International Valuation Standards (“IVS”) in the same way Generally Accepted Accounting Practice (“GAAP”) is moving toward International Financial Reporting Standards (“IFRS”).  The latter sets of standards provide much more “client defined” reporting standards.   He notes, for example, that several aspects of IFRS will cause “disruptive change” in American real estate, such as the way the two different paradigms treat carried interest.

As noted, a separate session dealt with the interface between appraisal and financial reporting.  Earlier this year, the SEC “kicked the can” toward 2013 for U.S. adoption of IFRS.  It was noted that while 90% of GAAP and IFRS are functionally identical, the changes needed to adopt the remaining standards could be so costly and disruptive as to dwarf the problems following adoption of Sarbanes-Oxley.  Nonetheless, some movement in that direction is inevitable.  From a real estate perspective, this may include the elimination of depreciation for financial reporting, substituting annual “mark-to-market” valuations instead.  That is a very different paradigm for property valuation in the U.S.

Other sessions included a presentation from the FDIC’s General Counsel’s office, a presentation on standards and practices for Federal land acquisition, and a VERY informative presentation on “getting published”.

Written by johnkilpatrick

August 8, 2012 at 6:11 am

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