What is USPAP Standard 3?
Standard 3 is the USPAP standard that governs appraisal review: the work an appraiser does when the subject of the assignment is somebody else's appraisal rather than a piece of equipment. It sets how a review is developed. Standard 4, its companion, sets how the review is reported.
Lukes & Lukes is an independent machinery and equipment appraisal firm, and this is what those standards actually require.
By Jared Lukes · CEO & lead appraiserUpdated
Need a value that will hold up in a file? Request an appraisal →
What does USPAP Standard 3 cover?
USPAP Standard 3 covers the development of an appraisal review. In an ordinary assignment the subject is the equipment. In a review assignment the subject is the work of another appraiser, and the reviewer's job is to form an opinion about the quality of that work.
Standard 3 requires the reviewer to identify the problem to be solved, determine an appropriate scope of work for it, and then actually perform the research and analysis that scope calls for. Standards Rule 3-3 sets the core of the work: where the scope calls for it, the reviewer must develop an opinion on whether the analyses are appropriate, whether the opinions and conclusions are credible, and the reasons for any disagreement. The standards are published by The Appraisal Foundation's Appraisal Standards Board. Standard 4 covers the reporting side, so the two are usually discussed together. Neither is limited to real estate: the review standards apply across property types, including the personal property and machinery and equipment work covered by Standards 7 and 8.
Is an appraisal review the same as a second appraisal?
No. An appraisal review does not automatically produce a new value. Many reviews are about whether the original work is credible: whether the premise of value fits the assignment, whether the approaches were applied correctly, whether the evidence in the file supports the conclusion.
A reviewer may develop their own opinion of value as part of the assignment, but that is a separate step that has to be disclosed as such. For equipment, that value opinion is developed under the personal property standard, Standard 7 (Standards Rule 3-3(c)). A reader has to be able to tell whether they are looking at an assessment of someone else's work, an independent value opinion, or both.
- Review without an opinion of value: the reviewer evaluates the quality and credibility of the work as presented.
- Review with an opinion of value: the reviewer also develops their own conclusion, disclosed separately from the review itself.
- Not a review: reading a report and disagreeing with the number. Without a defined scope of work and the analysis behind it, that is an opinion, not a Standard 3 assignment.
What competency does an equipment appraisal reviewer need?
The reviewer needs competency in the thing being reviewed, not general appraisal competency. The comment to Standards Rule 3-1(a) lists familiarity with the specific type of property or asset, the market, the geographic area, the analytic method, and the applicable laws, regulations and guidelines. Reviewing a machinery and equipment appraisal calls for all of that in the asset class under review.
An appraiser fluent in commercial real estate is not automatically qualified to review a CNC shop's equipment appraisal, because the market evidence, the useful-life assumptions and the installed-versus-removed questions are entirely different. The scope of work drives what competency the assignment demands.
Why do lenders order an appraisal review?
Lenders order an appraisal review when someone has to answer for what is in the credit file. An underwriter, a credit committee, an examiner or an auditor may need an independent read on whether the collateral appraisal in front of them is credible and whether it can be relied on for the decision it supports.
That question comes up on a loan being originated, on a workout where an older appraisal is being reconsidered, and in litigation where two appraisals reach different conclusions and someone has to explain why. Our lender collateral appraisal work is built for the same audience and the same scrutiny, and when a review has to be defended on the record, our expert-witness support carries it there.
What makes an appraisal review defensible?
An appraisal review is defensible on the same terms as an appraisal: a clearly stated scope of work, analysis that matches it, and conclusions a reader can follow back to the evidence. A review that says a report is inadequate has to say what specifically was inadequate and why it matters to the value conclusion.
A review that finds the work credible has to show what was checked to reach that finding. Reviews get read closely, often by people looking for a reason to discount them, so the reasoning has to survive that reading. It is the same discipline covered in how to choose an equipment appraiser, applied to the appraisal instead of the asset.
Common questions
Answers, up front.
Does USPAP Standard 3 apply to machinery and equipment appraisals?
Yes. The appraisal review standards are not tied to one property type. They apply to reviews of real property, personal property and business valuation work alike, so a review of a machinery and equipment appraisal is developed under Standard 3 and reported under Standard 4, with the underlying equipment work itself falling under the personal property standards.
What is the difference between Standard 3 and Standard 4?
Standard 3 governs how the review is developed: identifying the problem, setting the scope of work, and performing the analysis. Standard 4 governs how the resulting review is communicated, including what has to be disclosed about the reviewer's own opinion of value if the assignment included one.
Does a reviewer have to inspect the equipment?
It depends on the scope of work the assignment requires. Some reviews are performed on the report and the file alone, and some call for the reviewer to see the assets. What USPAP requires is that the scope be appropriate to the problem being solved and that whatever was and was not done is disclosed plainly, so nobody relying on the review misreads how far it went.