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Marijuana Appraisals: Still Hazy
by David Brauner, Senior Broker OREP
If you’re old enough you remember a time when marijuana was considered a serious drug and people went to prison for selling it. Little did we know that in 2019, “pot” would be legal in 10 states.
If you live in one of the states where the sale of marijuana is legal, you may be wondering if you can appraise properties where the substance is grown- commonly called a marijuana farm. There are two questions really that we’ve had asked: what do professional standards have to say and is it covered by your errors and omissions insurance.
First, if you live in a state where the sale of marijuana is illegal, the experts say it is best to decline the assignment for reasons we will get to shortly. If you live in a state where it is legal, the answer is a bit more complex.
E&O Coverage
A typical Exclusion in appraiser errors and omissions policy reads something like this:
The Company will not defend or pay any claim: Based on or arising out of any dishonest, intentionally wrongful, fraudulent, criminal or malicious act or omission by the Named Insured.
According to Neil McGowan J.D., M.B.A., Director Professional Liability Insurance Programs, McGowan Program Administrators, he believes that carriers should defend and provide coverage if the claim is brought at a state court level in states where consumption, possession, and cultivation of marijuana is legal. “However, if marijuana is illegal under state laws, or if the case is brought at a federal level or under federal regulations, coverage should be declined,” said McGowan. But he is quick to add that there is no clear guidance from the carriers on this issue yet. “Therefore, my personal belief means zilch.”
“The carriers typically regard marijuana as illegal and criminal due to federal law,” McGowan said. “Therefore they decline to cover claims if they arise from a criminal act. Aiding and abetting is the other problem. In general, anyone who aids, abets, or conspires to commit a crime is just as guilty as the principals of that crime. For now, we can cede that the companies cultivating or selling marijuana are, in fact, criminally liable for their acts. Federal aiding and abetting statutes and interpreting case law require that an accomplice intend to facilitate the commission of a crime. The argument in support of legality is that third party service providers (such as appraisers) tend not to care whether their customers sell marijuana or remain in the industry. They may know that their actions facilitate the selling of marijuana, but they do not necessarily intend for it to be so. This gets really murky because prosecutors argue against this interpretation. What this means is that each case that gets brought will go to a jury or get plead out before.”
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McGowan adds, “Section 1956 is the primary money laundering statute. It makes it a crime for anyone to conduct a financial transaction when they know that the money comes from specified illegal activity (including revenue from marijuana sales) and they either intend to promote the illegal activity and are helping them to evade taxes or know that the transaction is designed to conceal the source of funds. Depending on the prosecutor/ claimant, there is a good argument that appraising a marijuana farm promotes the illegal activity.”
USPAP and Pot
What do the Uniform Standards of Professional Appraisal Practice (USPAP) have to say about appraising marijuana farms/facilities? Tim Andersen, MAI, author of the risk management course How to Raise Appraisal Quality & Minimize Risk (7 hrs.), offered by OREP free to its insureds, says “The basis for the highest and best use (h&bu) analyses is that the use of the site must be legal. If it is not legal, then a use cannot be the site’s h&bu, either as vacant or as improved. Therefore, to appraise a property as a marijuana farm, unless such a use was legal, would be a USPAP violation for h&bu reasons.”
Andersen continues that even if it is legal, if it is not financially feasible, then it cannot be the h&bu, either. “To determine the financial feasibility of an agricultural facility is WAY beyond the training and capacity of a state certified residential appraiser who, for that very reason, should not even think of taking such an assignment. To assume such competence, when it is not really there, is a serious USPAP violation.”
However, if the crop is very small, with its growth just a side income for the homeowner, can the residential appraiser then take that into consideration as s/he values the house? Andersen still says no, since that crop is likely grown in other than the real estate, perhaps even hydroponically. “To grow dope requires a lot of electricity, water, equipment and so forth. Is the house’s electrical system sturdy enough to handle the strain on the grow lights and other electric equipment will generate? If so, then the house likely suffers from a functional obsolescence– super adequacy,” Andersen says. “If not, then the house could burn down. Lenders want to know such physical characteristics of the property. Generally this stuff is not grown outside, since it is too easy for competitors to see/steal. This equipment is not real estate, thus would not be part of a real estate appraisal. To fail to and analyze (for depreciation purposes) the property’s physical characteristics is a serious USPAP violation.”
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And there is more to consider, according to Andersen. “Growing recreational marijuana is legal in Colorado but its transport out of the state is not. And it is in the sale that the money is derived. Suppose some legal growers are arrested/prosecuted for carrying the crop across state lines or international boundaries. It is therefore likely that the DEA (Drug Enforcement Administration) would confiscate the house in which the growers grew the dope, which supersedes any mortgage lien,” Andersen says. “This clearly is not what a lender looks for in making a mortgage loan. It is therefore likely the lender, in mitigating its losses, would name the appraiser as a defendant, something the appraiser does not want. To mislead the lender (i.e., the client – even unintentionally) is a serious USPAP violation,” Andersen says.
Then there is comp selection to consider. “Where is the appraiser going to get comps? Local MLSs are not going to make an issue of the presence of a marijuana crop and the necessary equipment, nor will the public record. The appraisers who just assume the grow lights, etc. somehow add to value, without market evidence, are making a serious error. To just assume is a USPAP violation, since the appraiser must have market support for any such assumptions,” says Andersen.
Andersen concludes with the obvious, “My advice to an appraiser faced with this challenge would be to walk away – quickly – and forget to send an invoice. I do not want to think of what a state appraisal board would do with this. I doubt it would go in the appraiser’s favor.”
About the Author
David Brauner is the Publisher of Working RE magazine and Senior Broker at OREP, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 50 states. He has provided E&O insurance to appraisers for over 25 years. He can be contacted at dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873. Visit OREP.org today for comprehensive coverage at competitive rates.
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by Michael Ford, AGA, SCGREA, GAA, RAA, Realtor®
Respectfully, the issue is not at all murky to me. Whether E&O covers an appraiser doing ‘grow houses’ (which would NOT typically be a house at all) is a business decision of the carrier. If being done on a commercial level (ie more than reasonable personal consumption) it is a business and the impact of that business on the property must be considered.
I have appraised legal MJ sales facilities in L.A. that had actually been seized and resold by DOJ. The tenants business caused the owner of a five-unit commercial to lose his property because he knowingly leased it for the retail sales of MJ.
As an appraiser I can appraise such property (and have); however, I am required to disclose that the use is in violation of federal law; and that owners of the property (or their tenants) could be arrested and the property could be seized. I also note that my state (California) conditionally allows marijuana cultivation; as do some cities however I am not opining about state or municipal compliance when the property does not conform to federal law. An exception is in non federally regulated loan transactions (normally hard money loans) I address whether the city MJ laws are in apparent conformity-but I still disclose the federal issue. The loan investors can make of their own minds.
All the finessing and parsing of language; reinterpretation of laws and debateable legal or philosophical arguments are distractions.
As the world exists today; with respect to all transactions, MJ farms cannot be done without disclosure of illegal use & discussion of the possible impact. Any appraiser that does not already understand this needs to refresh themselves on the requirements to be competent.
I also respectfully submit that all such uses are complex appraisals, and should only be considered by certified appraisers.
Personally, I would not include my E&O coverage, and I’d add a statement that no E&O provider currently covers appraisals for such property.
-by Robert
I appreciate that you need content and headlines to attract readers. I suggest the next few headlines. Can appraiser’s unite? What can be done to inform the public about the new FNMA hybrids? Do realtors know of the new hybrid’s (in my experience no). Is there really a shortage of appraiser’s. Does the appraisal process actually slow down closings. What is the real turn time for appraisals (in other words lets challenge there “statements)Does the public know or care that they have been paying 2Xs the actual appraise fee? How can we make the public aware?
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