Handling Tenant-Owned Improvements in the Realty/Personalty Report in the Agency’s Appraisal
This article will discuss the handling of tenant-owned improvements in the acquisition process, depending on whether the improvement is classified as realty or personalty and importance of the realty/personalty report in the Agency’s appraisal.
A business, as a tenant, makes an improvement to the real estate by installing three roof-top air conditioners. Their lease states that the landlord disclaims any ownership of the improvements or that the business has the right or obligation to remove such items at the expiration of the lease. An Agency is acquiring the real property where the business is operating and the three roof-top air conditioners are not listed on the appraisal as real property. Is the business eligible for a relocation payment to move the roof top air conditioners they paid to install?
Any item within a taking is either realty (the Agency buys it) or personalty (the Agency moves it). If these items are not acquired, then they can be moved. In the instant situation, roof top air conditioners are typically real estate. However they were not listed in the appraisal, so we have a difficult situation. However a much better answer is to say that such items need to be properly categorized. We probably need to go back to the beginning and handle this properly.
- Are the air conditioners realty or personalty?
- Did the appraisal include a realty/personalty report identifying these items as such; then valuing items considered to be realty and inventorying any personal property?
- If this report was not included, was it required by the appraisal scope of work (SOW)?
- Was there an appraisal SOW?
Often, there is confusion about items of realty that are purchased as part of the real estate and items of personalty that will not be acquired, but moved/relocated under the relocation assistance program.
49 CFR 24.103(a)(1) and (a)(2)(i), including related Appendix A language of the 2005 Uniform Act (URA) implementing regulations were created to clearly identify and categorize these two classes of items. The Agency is now required to prepare a realty/personalty report that identifies all items appraised as real property and included in the offer of just compensation to the property owner or tenant owner for such items. Additionally, items of personalty in or on the property are required to be identified.
In the instant case, it appears that the appraiser/review appraiser may not have addressed the realty/personalty issues as required by the URA regulations as the improvements in question are not identified or listed in the appraisal. Additionally, there may also be an issue with the appraiser’s adherence to the appraisal scope of work (SOW) assuming it required a realty/personalty report.
During the early planning for any project involving real estate acquisition, the task of identifying impacted items that are realty or personalty must be accomplished. Usually this is done during the early planning phase of a project, but not later than when the appraisal problem or SOW is defined for each parcel to be acquired. The appraisal SOW is specifically required by 49 CFR 24.103(a)(1).
Usually the Agency’s review appraiser will be involved in the process of developing an appraisal SOW for parcels to be acquired on the project. The review appraiser may also coordinate the development of the appraisal SOW with the relocation agent assigned to the project or Agency legal counsel, if the identification or categorization of the items are problematic.
The following is the process of how this type of situation is usually is handled depending on whether the items are realty or personalty.
In the case of a tenant owner, such items of real estate are generally referred to as tenant-owned improvements. In other situations, a tenant owner may not be involved, but items of personalty and realty still need to be sorted out so the Agency and the property owner know what is being purchased with the real estate and what will be moved/relocated.
The Agency can accomplish this in one of several ways. Usually the preparation of the required realty/personalty report is assigned to the real estate appraiser as referenced in the URA regulations as noted above. Often the relocation agent and/or review appraiser assigned to the parcel will also participate in the inspection of properties involving tenant-owned improvements with the property owner and the tenant owner, as appropriate. This should also be done where there is both realty and personalty items that are being impacted by the acquisition, regardless of whether a tenant is involved.
If there is not mutual agreement or some question exists as to what is realty versus personalty, legal counsel should be consulted relative to applicable State law on the matter, so a determination can be made.
The realty/personalty report can be done by the appraiser or sometimes a specialist appraiser, such as a machinery and equipment (M & E) appraiser who may be retained by the appraiser or Agency to value such items, depending on what the SOW requires. The specialist report is then appropriately considered and incorporated into the appraisal report by the appraiser. The review appraiser then considers the appraisal report, including any specialist report and approves or recommends approval of the appraisal. If the tenant-owned improvements are considered realty, the tenant owner would be made an offer based on the amount of the approved just compensation for those items..
If the tenant owner accepts the offer and the owner of the real estate has disclaimed interest in the tenant-owned improvements, a purchase agreement would be signed by the tenant owner and the Agency.
If the tenant owner does not accept the offer or the property owner refuses to disclaim his/her interest, then all parties may have to be named in the condemnation complaint and the ownership and value would be resolved in a judicial proceeding.
If the air conditioners in this situation are classified as realty, then upon payment of just compensation, the items belong to the Agency and the business owner has no eligibility for reimbursement of moving costs. Another scenario could involve the same circumstances as above, except the tenant owner is paid for the items, but is given the option to purchase or retain the right to salvage and remove the air conditioners from the building. In this case the cost of the removal of the air conditioners is not eligible for moving cost reimbursement.
Assume the air conditioners are considered personalty by the jurisdiction where the Agency is acquiring. In that case their value would not be included in the estimate of just compensation by the appraiser. Such items would be listed in the realty/personalty report as items of personal property that would be relocated by the tenant owner or property owner depending on who owned them. If that was the case, there may be eligibility for relocation moving costs, including the cost of disconnection, transport and reconnection of the items.
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