A real estate appraisal is an opinion of value of the real property rights -- including the land and the improvements to the land. The land rights could include parcels owned in fee, portions of land parcels owned in fee, permanent easement rights (in which case the owner does not sell the land, but conveys a permanent interest for the buyer to use the land), or a combination of fee rights and easement rights. The improvements could include any or all of the assets, including water treatment plants/facilities, wastewater treatment plants/facilities, water mains, wastewater mains, lift stations and pumps, storage facilities, and wells. Also included could be buildings that are used as part of the water or wastewater operation.

The real estate appraiser works with the seller and the buyer to develop a scope of work for the assignment that will identify all of the assets to be included in the appraisal assignment. The scope of work is an essential component of the assignment in that it assures the proper development of an analysis and opinion that is meaningful and meets the intended use of the valuation assignment’s intended users. If the seller and buyer have already prepared an asset purchase agreement, the assets to be appraised are most likely identified in the agreement.

The appraiser develops an opinion (or opinions) of value by following a series of steps known as the appraisal process. The appraisal process for a utility system is basically the same as the process for any other property type (i.e., a residence or agricultural parcel of a retail building, etc.). Although the general framework of the process is the same, the application of the valuation approaches (cost approach, sales comparison approach, and income capitalization approach) will utilize different types of data for utility system assignments.

There is no specific designation, certification, or qualification that pertains to any type of appraisal assignment. However, all states have a real estate appraisal licensing act that pertains to all appraisal assignments performed in that state.  Refer to the licensing act of the state for additional details. 

Not necessarily. There are professional appraisal standards that apply to all real estate appraisers (the Uniform Standards of Professional Appraisal Practice, “USPAP”). Explicit in USPAP is the requirement for the appraiser to only accept assignments for which the appraiser is competent to complete. Competency pertains to (1) property type and interest; (2) market; (3) geographic location; (4) Intended use; (5) laws and regulations; and, (6) analytic methods and procedures. Competency is achieved by a combination of experience and education. The benchmark or standard of “competency” is explained in USPAP as the appraiser holding the knowledge and experience necessary to develop the credible assignment results in an ethical manner and that meet the intended user’s intended use. The assignment results must also comply with USPAP and any other applicable rules or professional standards.

The appraisal of utility systems is a complex process that, unlike typical appraisal assignments, includes a substantial amount of “property” that is underground. In order for the appraisal of a utility system to have credible results, the services of an experienced professional engineer are necessary. The professional engineer provides an independent assessment and report that is relied on by the appraiser in the valuation process. The accuracy and completeness of the third-party (engineering) report, which includes a detailed itemized inventory of the assets, impact the accuracy and reliability of the appraisal report. The engineering report includes an estimate of the reproduction cost new (RCN) of the assets and a reproduction cost new less depreciation (RCNLD) calculation. A thorough engineering report will also address capital investments necessary to repair, replace and maintain the assets in a manner that meets regulatory requirements.

Similar to other appraisal assignments, the inclusion of one, two, or all three valuation approaches is determined by the appraiser based upon a number of factors, including available market data, scope of work elements with the client, and the intended use of the appraisal report.

Real estate appraisals are developed based upon a specific value definition.  There are many definitions of market value and there are terms that are synonymous with market value, including fair value, fair market value, fair cash value, etc.  Fair value legislation regulating utility system transactions typically requires market value opinions by the valuation experts.

The communication of the appraiser’s analysis and opinions can be presented orally, in a short/brief letter format, or a detailed report that includes all of the explanations, descriptions, and market data in the report. The decision of what format is best suited for the client is determined by the appraiser based upon the client's intended use of the assignment results. For instance, if the seller (the city or village) seeks a value opinion (or range of value) to be used in a committee meeting to plan or make internal decisions, a verbal report may be appropriate. However, if the appraisal is required in order to meet the requirements of the utilities board or some other authority or agency, a detailed comprehensive report is appropriate.

No. Once the appraiser collects relevant market data, analyzes the data, and forms an opinion, the opinion is the same whether it is communicated to the client orally or via a voluminous report. 

An appraisal is not a predictor of price or a statement of what a particular buyer will agree to pay for the property. An appraisal of market value is an opinion of what a typical purchaser might pay for a property based upon relevant market data, and assuming the buyer (and seller) are knowledgeable, not under duress, and acting in their own best interest. Many properties sell at prices below or above “market value”; and, public utility systems are no different.

There are many influences to value for all appraisal assignments; and, the appraisals of utility systems are no different. Factors such as age/condition of the assets, the efficiency of the operations, and the ability of the system to expand to meet the potential demand resulting from the future growth of the community are significant factors.

The appraisal opinion is only as good as the quality and quantity of information available to the appraiser for the assignment. Some communities (sellers) are able to provide detailed cost, replacement, and repair information going back 50+ years. In some cases, the seller may not have detailed records, which will require the engineer and/or the appraiser to make specific assumptions (referred to in USPAP as extraordinary assumptions). It is important for the client (and intended users) to understand that the reliance on extraordinary assumptions in the development of the appraisal opinion may impact the assignment results; and, the appraisal opinion is subject to change once the appraiser (and engineer) receive more detailed, accurate, and complete information about the system assets.

A significant component of the appraisal assignment is the collection of relevant data. It is recommended that once the appraiser is retained, the appraiser provides the client with a checklist of items that are beneficial to the development of the opinion. The sooner the appraiser receives the necessary information, the sooner the analysis process can begin. If the appraiser has the benefit of reviewing the available information prior to the inspection of the property, the process will be more efficient as the appraiser will have the opportunity to ask for clarification and/or additional information at the inspection.

It is recommended that officials from the community (the clerk, mayor, administrator, etc.), as well as department heads (public works, water department, etc.), be available to explain the assets included, lead the inspection to the various sites, and provide contact information for the appraiser if needed (engineering firm, consulting firm, attorney, accountant, service providers, contractors, etc.)