Why Does the New York Attorney General Require an Appraisal?

The purpose of the appraisal requirement is not simply to put a value on a building.

The Attorney General has responsibility for reviewing certain transactions involving assets owned by not-for-profit and religious corporations. That review is intended to determine whether the price and terms of the transaction are fair and reasonable and whether the transaction serves the best interests of the organization and its members.

A significant part of that review is determining whether the proposed transaction reflects the value of the property and the rights being transferred. The Attorney General and the court rely on the seller’s appraisal when evaluating whether the proposed price properly reflects market value.

In other words, the appraisal gives the organization and the reviewing authorities an independent benchmark for the property’s market value.

That is especially important when an organization is selling a valuable asset that may represent a substantial portion of its assets or may be essential to carrying out its mission.

The Attorney General’s current guidance also explains that when a property is the corporation’s main premises or a house of worship, court approval should be obtained.

When Is an Appraisal Required?

The Charities Bureau’s appraisal guidance states that, in support of a petition for approval of a sale or other transfer of property under Section 12 of the Religious Corporations Law and/or Sections 510, 511, or 511-a of the Not-for-Profit Corporation Law, the Bureau requires an appraisal of the property as an exhibit to the petition.

The Attorney General’s guidance should not be interpreted to mean that every single real estate transaction involving a nonprofit automatically requires an appraisal. The requirement depends on the type of organization, the nature of the transaction, and whether Attorney General or court approval is required.

For example, the Attorney General’s current guidance regarding sales of nonprofit assets explains that if an asset constitutes most of the corporation’s assets, court approval should be obtained. Even if the asset represents a smaller percentage of the organization’s total assets, approval may still be appropriate if the transaction would affect the organization’s ability to carry out its corporate purposes.

For that reason, an organization considering a sale should speak with its attorney early in the process.

When Should a Nonprofit Obtain the Appraisal?

This is one of the most important requirements in the Attorney General’s guidance.

The appraisal should be obtained before the property is marketed and before the organization negotiates with a prospective buyer.

The reason is straightforward: the board should know the property’s fair market value before it begins making decisions about how to sell the asset or what price it should accept.

From an appraisal perspective, this makes a great deal of sense.

If the organization already has a buyer and a negotiated purchase price, the appraisal can become an exercise in confirming a transaction that has essentially already been decided. The purpose of an independent appraisal is to provide an objective valuation that can inform the organization’s decision-making.

At Regional Real Estate Appraisal Service, we believe an appraisal is most useful when it is obtained before the important decisions have already been made, not after the fact.

Who Should Hire the Appraiser?

The appraisal must be prepared for the seller, not the buyer.

The Attorney General’s guidance specifically states that the seller or the seller’s attorney should engage the appraiser. The appraised value should not be adjusted to reflect the needs of a particular buyer.

The Attorney General’s current nonprofit sales guidance likewise states that the corporation or its attorney should retain the independent appraiser and that an appraisal prepared for the purchaser or purchaser’s attorney is not acceptable.

This distinction is important.

A buyer may have its own reasons for wanting a particular value. A lender may have its own underwriting requirements. A broker may have an opinion about what the property could sell for.

But the nonprofit needs an independent valuation prepared for the nonprofit.

Can the Real Estate Broker Prepare the Appraisal?

No.

A broker’s opinion about what a property might sell for is not the same thing as an appraisal prepared by an appropriately licensed or certified appraiser.

The Attorney General’s guidance requires the appraisal to be performed by a licensed or certified independent appraiser, and the appraiser must have no relationship with the buyer or seller that would compromise independence. The appraisal must also comply with the Uniform Standards of Professional Appraisal Practice, commonly referred to as USPAP.

The Attorney General’s current nonprofit guidance specifically states that a real estate agent or broker involved in the sale cannot perform the appraisal and that a broker’s “fair market assessment” is not the same as an appraisal.

That distinction matters when the appraisal is going to be submitted as part of an Attorney General or court approval process.

What Type of Appraiser Does a Nonprofit Need?

The appropriate New York appraisal credential depends on the type of property being appraised.

The Attorney General’s guidance explains that a New York Certified General Real Estate Appraiser is authorized to appraise all types of real property, including commercial property, residential property, and vacant or unimproved land. Certified residential appraisers and licensed residential appraisers have more limited scopes of practice.

This is particularly important for nonprofit organizations because the property being sold may not look like a traditional commercial property.

A church, synagogue, school, community center, nonprofit office, former institutional building, municipal-type facility, or other special-purpose property may require considerably more analysis than a conventional residential property.

At Regional Real Estate Appraisal Service, we understand that the physical building is only part of the valuation question. The appraiser also needs to understand the land, zoning, development potential, market conditions, property rights, and the property’s highest and best use.

The Appraiser Must Be Independent

Independence is a central requirement.

The appraisal must be performed by a licensed or certified appraiser who has no relationship with the buyer or seller, including their board members, officers, key employees, relatives, or attorneys. The appraisal must comply with USPAP, which establishes professional and ethical requirements for developing and reporting real property appraisals.

The goal is an appraisal that stands on its own.

The appraiser is not supposed to advocate for the nonprofit, the buyer, or the seller. The appraiser’s role is to develop a credible opinion of market value based on the relevant characteristics and market evidence.

How Old Can the Appraisal Be?

The Attorney General’s guidance states that the appraisal should generally be dated no more than 12 months before the execution of the Purchase and Sale Agreement.

The comparable sales used in the appraisal are also subject to specific timing expectations.

Generally, the comparable sales should have closed no more than 12 months before the date of the appraisal. If older comparable sales are used, the appraiser should explain why they were selected, whether newer sales were available, and why the newer sales were not used.

This is another reason why timing matters.

Real estate markets change. A valuation based on market conditions from several years ago may not accurately represent what a property is worth today.

What Does the Appraisal Need to Analyze?

The Attorney General’s requirements go beyond simply providing an estimated market value.

The appraisal should contain enough analysis for the Attorney General and court to understand how the appraiser arrived at the value conclusion.

Comparable Sales and Adjustments

The appraisal should include an adjustment grid or similar analysis showing how the comparable sales differ from the subject property.

Adjustments may consider factors such as:

• Property rights conveyed
• Financing terms
• Physical characteristics
• Land and building characteristics
• Zoning
• Market conditions
• Use restrictions
• Required or discretionary approvals

If significant adjustments are made, the appraiser should explain the differences between the comparable and the subject property, why the comparable was selected, and the weight given to that sale in the valuation analysis.

This is where professional appraisal judgment becomes especially important.

A list of three properties that sold nearby does not, by itself, establish the value of a nonprofit property. The appraiser needs to determine whether those properties are actually comparable and explain the differences.

Development Rights and FAR

For appraisals using the sales comparison approach, the Attorney General’s guidance requires consideration of the property’s development rights and a full floor-area-ratio, or FAR, analysis.

The appraiser should consider the value of those development rights whether the property is vacant or contains an existing building.

This can be particularly important with older nonprofit and religious properties.

A building may have been used as a church, school, community center, or other institutional facility for decades. But the property’s current use is not necessarily the same thing as its highest and best use.

There may be development potential associated with the land that needs to be considered in the valuation.

Value Per Square Foot

The Attorney General also expects the appraisal to analyze the value on a per-square-foot basis.

The appraisal should clearly explain the basis for the concluded value and show how the value relates to the property’s total square footage.

This doesn’t mean that the value per square foot is the only thing that determines value.

It is a tool for analyzing and communicating the valuation conclusion and allowing the reviewer to understand how the appraiser reconciled the available market data.

Highest and Best Use

The appraiser must use the valuation approaches necessary to produce a credible appraisal and support the property’s highest and best use.

Depending on the property, the appropriate approaches may include:

• Sales comparison approach
• Cost approach
• Income capitalization approach

The appraiser should explain why an approach was developed or why an approach was not necessary.

This is particularly relevant for special-purpose nonprofit properties.

A building’s current nonprofit use does not automatically establish its market value. The appraiser needs to consider what use is legally permissible, physically possible, financially feasible, and maximally productive under the applicable appraisal analysis.

What If the Nonprofit Wants to Sell for Less Than the Appraised Value?

This is an important situation that organizations should understand.

A proposed sale price below the appraised value does not simply disappear from consideration.

The Attorney General’s guidance states that if the organization wants to transfer the property for less than the appraised value, the petition must provide a complete explanation of why the organization is doing so. The explanation should be reflected in the appropriate board and, when applicable, member resolutions.

If the organization disagrees with the appraised value based on its marketing efforts and wants to accept a lower offer, the petition should include information such as:

• Marketing performed
• Offers received
• A detailed history of the marketing process
• Actions taken by the broker or representative marketing the property

The Charities Bureau may consider this information when determining whether the transaction is fair and reasonable.

This is one reason I believe the appraisal should be viewed as an important decision-making tool, rather than simply another document needed to get through the approval process.

Is an Appraisal Always Required When a Religious Organization Transfers Property?

There is an important exception.

The Attorney General’s appraisal guidance states that an appraisal is generally not necessary when a solvent religious corporation conveys real property to another religious corporation or to a membership, educational, municipal, or other not-for-profit corporation for nominal consideration.

However, if consideration is provided, an appraisal is required under the guidance. The Charities Bureau also encourages organizations to obtain an appraisal for nominal-consideration transfers when possible so the organization is fully informed about the value of the asset it is conveying.

The Attorney General’s current guidance similarly identifies the nominal-consideration exception for qualifying religious corporations under Religious Corporations Law §12(8).

Because exceptions can depend on the precise structure of the organization and transaction, this is an area where the organization’s attorney should be involved.

What Certifications Must Be Included?

The appraisal must contain required certification statements, including statements addressing the appraiser’s independence and lack of bias.

The appraiser must also certify that the appraisal report has been prepared in conformity with USPAP.

These aren’t merely boilerplate statements.

For an appraisal being submitted to the Attorney General or court, independence, competency, methodology, and compliance with professional standards are fundamental to the credibility of the report.

Why You Shouldn’t Wait Until You Have a Buyer

One of the biggest practical takeaways from the Attorney General’s guidance is timing.

The organization should obtain the appraisal before marketing the property and before negotiating with a buyer.

That allows the board to understand the property’s market value before making decisions about pricing and offers.

Waiting until after a purchase agreement has already been negotiated can create unnecessary complications, particularly if the eventual appraisal differs substantially from the agreed-upon purchase price.

An appraisal obtained early gives the organization an independent valuation that can help inform the marketing and negotiation process from the beginning.

Selling a Nonprofit Building Is Different From Selling an Ordinary Property

Nonprofit and religious properties can have characteristics that make their valuation more complicated than a typical commercial property.

A former church, school, community center, nonprofit headquarters, or institutional building may have:

• Specialized construction
• Large assembly areas
• Unique floor plans
• Significant deferred maintenance
• Zoning restrictions
• Special-use limitations
• Development potential
• Excess land
• Limited comparable sales
• Conversion potential
• Multiple potential highest and best uses

The appraiser needs to determine which characteristics actually affect market value.

At Regional Real Estate Appraisal Service, our approach is to look beyond the simple question of “What did another building sell for?”

The more important question is:

“What does the market tell us this particular property is worth, considering its physical characteristics, legal rights, location, market conditions, and highest and best use?”

That distinction becomes especially important when the appraisal will be reviewed by the Attorney General or a court.

What Should a Nonprofit Do Before Selling Its Property?

If your organization is considering selling a building or other real property in New York, it is worth discussing the transaction with your attorney and appraiser before putting the property on the market.

The process should generally include:

• Determine whether Attorney General or court approval is required.
• Consult the organization’s attorney regarding the appropriate legal procedure.
• Engage an independent, appropriately licensed or certified appraiser.
• Make sure the appraiser is retained by the seller or seller’s attorney.
• Obtain the appraisal before marketing and negotiating with a buyer when possible.
• Make sure the appraisal addresses the property’s appropriate valuation approaches and highest and best use.
• Review zoning, development rights, and FAR where applicable.
• Make sure the appraisal meets the Attorney General’s requirements regarding comparable sales and analysis.
• Keep the appraisal current through the transaction.
• If the proposed sale price is below the appraised value, document the reasons and marketing history.
• Include the appraisal with the petition when required.

The Bottom Line

For a New York nonprofit or religious corporation involved in a property transaction requiring Attorney General or court approval, an appraisal is much more than a formality.

The New York Attorney General’s Charities Bureau uses the appraisal to help evaluate whether the proposed transaction reflects the property’s market value and whether the price and terms are fair and reasonable to the organization.

The appraisal should be independent, current, properly supported, and prepared by an appropriately qualified appraiser. Just as importantly, the organization should obtain the appraisal early enough for the valuation to actually inform its decisions.

At Regional Real Estate Appraisal Service, we understand that an appraisal prepared for a nonprofit or religious organization may ultimately be reviewed by attorneys, board members, the Attorney General, and potentially the court. Our role is to provide an independent, well-supported opinion of value that explains not only what the property is worth, but how that conclusion was reached.

If your organization is considering selling a nonprofit building, church, school, community facility, office building, or other real property in New York, obtaining the appraisal early in the process can help ensure that the organization understands the asset it is preparing to transfer.

Important note: The New York Attorney General’s appraisal guidance is not a substitute for legal advice concerning a particular transaction. Organizations should consult their attorney regarding whether Attorney General or court approval is required and how the applicable requirements apply to their specific circumstances.

The New York Attorney General’s current resources on nonprofit transactions and its appraisal guidance are available through the New York Attorney General’s Charities Bureau.