RD Instruction 1922-B

PART 1922 - APPRAISAL

Subpart B - Appraisal of Real Estate Security for Rental, Cooperative,
and Labor Housing Loans and Grants.

## Table of Contents

Section Page

1922.51 General. 1

1922.52 Administrative issues. 1

\(a\) State MFH Appraisal System Manager. 1

\(b\) Contract Appraisals. 2

\(c\) Appraisal format. 2

\(d\) Proposed operation. 2

\(e\) Nondiscrimination appraisal criteria. 3

\(f\) Unacceptable appraisals. 3

\(g\) ASM appraisal duties. 3

\(h\) Income\'s effect on value. 3

\(i\) Prepayment requests. 3

1922.53 Appraisal system components. 4

\(a\) Components for contract appraising. 4

\(b\) Management of appraisal system. 5

1922.54 Steps preliminary to making the appraisal. 6

1922.55 Appraisal review form. 7

1922.56 Appraisal orientation and reviewer training. 7

1922.57 - 1922.100 \[Reserved\] 7

Exhibits A and B \[Reserved\]

Exhibit C: Guide for Multi-Family Contract Appraisal Services.

Exhibit D: Guide for Appraisal of Energy Saving Measures,\
the \"Value-in-Use\" Approach.

oOo

(09-27-06) PN 402

RD Instruction 1922-B

PART 1922 - APPRAISAL

Subpart B - Appraisal of Real Estate Security for Rental,

Cooperative, and Labor Housing Loans and Grants

§ 1922.51 [General]{.underline}.

This subpart prescribes the policies and procedures for appraising Rural
Development financed housing consisting of four or more living units and
related facilities. The Multi-Family Housing (MFH) programs involved are
Rural Rental Housing (RRH), Rural Cooperative Housing (RCH), Farm Labor
Housing (LH), along with prepayment requests. Appraisals of real estate
security with fewer than four housing units or domestic farm LH are to
be appraised in accordance with HB-1-3550 and 1922-1, respectively, when
arriving at the final estimate of value. With a few exceptions outlined
at\
§ 1922.52 (b)(2) of this subpart, private appraisers contracted by Rural
Development will perform appraisals for MFH real estate security. Rural
Development personnel must assure that the justification and
reconciliation of the indicated values for each approach used to
determine appraised values are clearly and completely documented.

§ 1922.52 [Administrative issues]{.underline}.

\(a\) [State MFH Appraisal System Manager]{.underline}. The State MFH
Appraisal System Manager (ASM) and an Assistant are to be appointed, in
writing, by the State Director. Duties of these positions are to
maintain the MFH appraisal system within the State, by:

\(1\) Maintaining acceptable appraisal quality within the State. The ASM
is to conduct a review of every MFH appraisal. Reviews are to include an
examination of all exhibits, formulas, calculations, and other data and
exhibits the appraiser used in the appraisal. All explanations are to be
logical and justify the final value conclusion.

\(2\) Monitoring MFH appraisals for compliance with the statement of
work prior to payment; see §1922.53 (a) of this subpart.

DISTRIBUTION: WSAL Real Property

> Appraisal

## 1

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(09-27-06) PN 402

RD Instruction 1922-B

§ 1922.52 (Con.)

\(b\) [Contract Appraisals]{.underline}.

\(1\) Instructions for contracting with, and monitoring the work of,
appraisers is provided at Exhibit C of this subpart.

\(2\) [Exceptions to the use of contract appraisal
services]{.underline}: With proper documentation the loan approval
official may authorize the ASM to conduct an appraisal under the
following situations:

\(i\) If the cost of the contract appraisal exceeds what is typical for
the size and type of project for a similar market.

\(ii\) When a contractor cannot complete the appraisal within a maximum
time frame of 45 days.

\(c\) [Appraisal format]{.underline}. The appraisal report format may be
a narrative appraisal or a form appraisal. Form RD 1922-7, \"Appraisal
Report for Multi-Unit Housing,\" or the equivalent forms, FNMA Form 1050
or FHLMC Form 71-A, may be used for MFH appraisals. However, these forms
must be modified, or attachments must be added, so that Uniformed
Standards of Professional Appraisal Practice (USPAP) and Agency
appraisal requirements are met.

\(d\) [Proposed operation]{.underline}. The principle of highest and
best use, the probable use that will support the highest value as of the
appraisal date, is to be addressed for each project appraised and for
all methods of appraisal utilized.

\(e\) [Nondiscrimination appraisal criteria]{.underline}. It is
unlawful, under the Fair Housing Amendments Act of 1988, for a Rural
Development employee or contract appraisal service to do the following
in connection with doing appraisals for 515 rural rental housing or 514
and 516 farm labor housing:

\(1\) To use factors that are discriminatory on the basis of race,
color, religion, sex, handicap, familial status or national origin in
the sale, rental, leasing or financing of housing.

\(2\) To use an appraisal in connection with the sale, rental or
financing of a dwelling, that the appraiser knows, or reasonably should
know, improperly takes into consideration race, color, religion, sex,
handicap, familial status or national origin. All appraisals completed
under the loan programs noted in §1922.52 (e) must comply with this
statute.

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RD Instruction 1922-B

§ 1922.52(e) (Con.)

\(3\) As more fully described at RD Instruction 2024-A, the announcement
process seeking bids for contracted appraisal services will be
publicized to the fullest extent possible and include publications
serving minorities and minority appraisers.

\(f\) [Unacceptable appraisals]{.underline}. When the ASM finds the
appraisal unacceptable, the appraisal report and a copy of review
comments will be returned to the appraiser. A meeting will be scheduled
with the contractor, the ASM, and the Contracting Officer to discuss the
appraisal and contract terms. All contractual actions taken by the
Agency must be through the Contracting Officer and comply with the
Federal Acquisition Regulations (FAR). Continuation of the contract(s)
will be based upon the contractor\'s ability to meet or exceed the
conditions of the contract statement of work.

\(g\) [ASM appraisal duties]{.underline}. The ASM is to perform
appraisals on an as-needed basis according to the circumstances of
Section 1922.52(b)(2). Other duties are to monitor contract appraisals
for compliance with 7 CFR part 3560, subpart P and Chapter 7 of
HB-1-3560 and provide program orientation to the Rural Development
contract appraisers.

\(h\) [Income\'s effect on value]{.underline}. The Income Approach is
typically the primary approach to value for income-producing properties.
This approach is a set of procedures through which an appraiser derives
a value indication for an income-producing property by converting its
anticipated benefits (cash flows and reversion) into property value.
This conversion can be accomplished using direct capitalization or yield
capitalization.

\(i\) [Prepayment requests]{.underline}. For prepayment requests, the
as-is market value, as conventional or unrestricted, is to be concluded.
If the highest and best use of the subject property is not conventional
apartment use, the appraiser should conclude the market value of the
property according to its highest and best use.

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RD Instruction 1922-B

§ 1922.53 [Appraisal System Components]{.underline}.

\(a\) [Components for contract appraising]{.underline}. When using
contract appraisers the State Director will establish a contract
appraisal system, which includes:

\(1\) Appointing a State MFH ASM and assistant ASM to be responsible for
the contract appraisal system maintenance and the review of all MFH
appraisals. These individuals are to have professional training and be
knowledgeable of industry standards.

\(2\) Establishing a priority system for timely completion of appraisals
and appraisal reviews. Time-frames are not to exceed 45 days from the
date the assignment is accepted by the contractor.

\(3\) Establishing a method for monitoring the appraisals utilizing an
appraisal review report form that complies with Standard 3 of USPAP.

\(4\) Maintaining a data base that will establish \"benchmarks\" for
typical project construction costs and typical project expenses and
incomes for use in appraisal reviews.

\(5\) Maintaining a list of qualified appraisers interested in receiving
solicitations. Names of interested appraisers or appraisal firms who are
professionally trained and have experience in appraising multi-family
income producing property will be collected from applicable sources.
Examples of sources are appraisal industry papers, newsletters, local
appraisal chapter newspapers, direct contact, etc.

\(6\) Developing an orientation plan to provide contractors with an
overview of MFH programs. The ASM is to instruct contractors on the
required scope of work of the appraisal report and contract payment
conditions. Materials to be furnished by Rural Development include
sample Operating and Management (O&M) budgets from which a realistic net
operating income (NOI) can be calculated, copies of the subject market
study, the environmental impact assessment, and other relevant
information that can be released under the Freedom of Information Act.

## 4

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RD Instruction 1922-B

§ 1922.53(a) (Con.)

\(7\) Establishing a policy for appraisal completion and submission
similar to those of other appraisals completed in the area. An
extension, not to exceed 30 days, may be granted when it can be
documented that the delay is beyond the appraiser\'s control. Any
extension must be clearly documented by the loan approval official.

\(8\) Review appraisers are to use the [Marshall Valuation
Service]{.underline} as a cost monitoring tool in all appraisal reviews.

\(b\) [Management of appraisal system]{.underline}.

\(1\) Prior to executing a contract, the State Director will assure that
proposed appraisal fees are typical for the area. Prior to payment, the
State Director will review the appraisal for compliance with the
conditions of the contract statement of work. Payments for contracts are
to be charged to the revolving fund using Form RD\
838-B, \"Invoice Receipt Certification.\" Contract appraisers are
expected to provide the appraisal report with attachments and expert
witness services (when applicable) for fees that are typical for work of
similar complexity in the subject market area.

\(2\) The State Director will establish a system for appraisal
monitoring that will return unacceptable appraisals for correction or
additional documentation prior to Rural Development acceptance and
contract payment.

\(3\) The appraisal monitoring system data should be used by the ASM
when determining typical capitalization rates, O&M expenses and incomes,
rents, and construction costs.

\(i\) Establish a data base which can be used for value estimate
purposes. Data is to be developed from the sale/transfer of ownership of
subsidized housing. Sources of this data are State housing agencies,
Rural Development, other governmental housing agencies, and applicable
conventional sales data.

\(ii\) Typical construction costs are to be obtained from a wide variety
of sources as mentioned above. Construction costs can be used from
throughout a particular State or adjoining State when the data is from a
similar market.

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(09-27-06) PN 402

RD Instruction 1922-B

§ 1922.53(b)(3) (Con.)

\(iii\) O&M expense and income data can be obtained from conventional
rental housing markets. Although conventional data must be adjusted to
account for additional expenses unique to subsidized housing (e.g.,
reporting and recordkeeping of tenant information, on site manager,
etc.), expenses and income obtained from State housing authorities,
government housing agencies, and Rural Development year-end audits
should closely represent the typical costs for subsidized housing. When
determining typical project expenses, it is recommended that a grid
containing data from a minimum of 5 comparable projects be developed.

\(4\) A method for prompt payment of contracts will be established:

Instructions for payment of contracts are found in subpart A of Part
2024 and Exhibit D, \"Acquisition, Sales, and Leasing Authority.\" The
request for payment is to be submitted on Form RD 838-B, \"Invoice
Receipt Certification.\" Rural Development is to aid contractors, as
needed, with the proper completion of payment forms.

\(5\) MFH appraisals may contain one or more of the three approaches to
value: the Cost Approach, the Sales Comparison Approach, and the Income
Approach, depending on the scope of work of the assignment. In all Rural
Development appraisals these valuation approaches must support each
other. Industry convention is that they should not vary by more than ten
percent (10%). For Rural Development MFH appraisal purposes, any
variance above industry convention is to have all supporting
justification documented in the reconciliation section of the report.

§ 1922.54 [Steps preliminary to making the appraisal]{.underline}.

The appraisal will be made when the applicant has been found to be
eligible and sufficient information has been developed to enable the
appraiser to evaluate the property. Plans and specifications for the
building, site improvements, environmental assessment, and other
relevant material is to be furnished to the appraiser. Plans are to be
in sufficient detail for the appraiser to determine the size and type of
structures to be built or improved, the materials to be used, and the
site improvements. As a general rule, an appraisal and review will be
completed prior to the obligation of funds.

## 6

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RD Instruction 1922-B

§ 1922.55 [Appraisal review form]{.underline}.

An appraisal review report form that complies with Standard 3 of USPAP
will be used to review all MFH appraisals involving four or more units.
The ASM will assure that an appraisal review is conducted on all
appraisals.

§ 1922.56 [Appraisal orientation and reviewer training]{.underline}.

Appraisal orientation will be provided by the State ASM upon request.
Annual meetings with contractors are considered essential for the
successful implementation and maintenance of contracts.

Additional appraisal organization training courses for appraising and
appraisal reviews are to be provided on an annual schedule for each
employee designated as ASM and Assistant ASM. It is imperative that
these individuals be knowledgeable and keep current of the appraisal
industry.

§§ 1922.57 - 1922.100 \[Reserved\]

Exhibits A and B \[Reserved\]

Exhibit C -- Guide for Multi-Family Housing Contract Appraisal Service

Exhibit D -- Guide for Appraisal Energy Saving Measures, the
"Value-in-Use" Approach

oOo

## 7

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(09-27-06) PN 402

EXHIBIT C

## 

## 

## GUIDE FOR MULTI-FAMILY HOUSING CONTRACT APPRAISAL SERVICES 

## 

## TABLE OF CONTENTS

Page

Part I General 1

Part II Program Responsibilities 1

A. Government Inspection of Property 1

B. Preparation of Procurement Request 1

Part III Evaluation of Offers 4

A. Negotiated Procurement 4

B. Basis for Contract Award 5

(09-27-06) PN 402

RD Instruction 1922-B

Exhibit C

Page 1

## GUIDE FOR MULTI-FAMILY HOUSING CONTRACT APPRAISAL SERVICES 

Part I. [General]{.underline}.

This Guide provides guidance for the procurement of contract appraisal
services for multi-family housing (MFH) properties. Contract appraisal
authorities are in RD Instruction 2024-A.

Part II. [Program Responsibilities]{.underline}.

A. [Government Inspection of Property]{.underline}. In accordance with
Subpart A of Part 2024, contract services shall not involve
decision-making or other inherently Governmental functions. Accordingly,
prior to initiating procurement action for appraisal of MFH property,
program personnel will conduct an on-site inspection of the dwelling
and/or building site. The purpose of the inspection is to determine the
following:

1\. Eligibility of the dwelling and/or site in accordance with Subpart B
of 7 CFR Part 3560.

2\. Thermal performance of the dwelling in accordance with Subpart A of
7 CFR Part 1924.

3\. Rural area determinations in accordance with Subpart A of 7 CFR Part
3560.

4\. Environmental program compliance in accordance with Subpart G of 7
CFR Part 1940.

5\. Repairs necessary to ensure the property meets Rural Development
program property requirements. (This list of repairs will be provided to
the contractor on RD Form 1924-13, \"Estimate and Certificate of Actual
Cost.\") This form is to be made a part of the appraisal document.

B. [Preparation of Procurement Request]{.underline}. Program personnel
will prepare and submit Form RD 1955-62, \"Request for Contract Services
for Custodial/Inventory Property or Program Services,\" to the
Contracting Officer (CO) to initiate procurement for contract appraisal
services. The following provides guidance, in addition to the Forms
Manual Insert for Form RD 1955-62, for the preparation of the
procurement request:

(09-27-06) PN 402

RD Instruction 1922-B

Exhibit C

Page 2

1\. [Statement of Work]{.underline}. An integral part of the procurement
request is the description of work requested or the Statement of Work
(SOW). A sample SOW for contract appraisal services is provided in
Chapter 7, Attachment 7-D of HB-1-3560. Program personnel should review
the requirements in the sample to ensure that the work requirements are
expressed in concise, accurate and comprehensible terms. It may be
necessary to modify the sample SOW to ensure the final SOW addresses
particular requirements and circumstances. The objective is to develop a
SOW that sets forth minimum standards which will provide Rural
Development with a method of determining if the contractor will meet the
contractual requirements.

2\. [Other considerations]{.underline}. The following provides other
requirements which should be taken into consideration in the development
of the procurement request. Program personnel should discuss these
considerations with the CO.

a\. [Government furnished material]{.underline}. The Government shall
provide the following for use in the performance of the requirements in
the SOW:

\(i\) Legal description and/or address of the property to be appraised;
list of property repairs, if appropriate; plan and specification for new
construction; environmental assessment; approved budget of operating and
maintenance expenses, if applicable; copies of floor plans and elevation
views; tenant waiting lists, if appropriate; and any other information
necessary for the contractor to complete the appraisal.

\(ii\) Form RD 1924-13, \"Estimate and Certificate of Actual Cost,\" if
appropriate.

\(iii\) Appropriate Rural Development Instructions and Regulations will
be available for review at
[\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_]{.underline} during working hours.

The SOW and a completed Attachment 7-E, from Chapter 7 of HB-1-3560,
will be furnished to potential offerors.

b\. [Preparation of proposals]{.underline}. To be considered for award,
offerors shall submit a proposal which clearly documents the offeror\'s
ability to accomplish the requirements in the SOW. As a minimum,
offerors should furnish the following with their proposals:

RD Instruction 1922-B

Exhibit C

Page 3

\(i\) A brief written summary of experience and qualifications of key
person(s) or firms expected to perform the requirements specified in the
SOW.

\(ii\) Provide all necessary documentation and certifications that
substantiate that the offeror is certified, licensed and/or authorized
to perform MFH appraisals within the area specified in the SOW.

\(iii\) At a minimum two (2) written statements of performance from
individuals or firms (including Rural Development if possible) for whom
the offeror has performed similar professional services. These
statements shall include the name, address, and telephone number of the
reference.

c\. [Professional insurance coverage]{.underline}. The contractor shall
maintain professional insurance coverage in accordance with local and
State government statutes.

d\. [Technical considerations]{.underline}. Personnel proposed for work
on the contract must demonstrate knowledge, skill, and experience in
appraising income producing MFH property.

e\. [Orientation meeting]{.underline}. After contract award, the
contractor shall attend an orientation meeting with the Contracting
Officer Representative (COR) for the purpose of acquainting the
contractor with Rural Development. The COR shall respond to questions,
further amplify and clarify the appraisal process, and provide copies of
appropriate Rural Development regulations and procedures. It is the
contractor\'s responsibility to be knowledgeable of Rural Development's
appraisal policy and procedures, to understand the required scope of
work of the appraisal assignment, and to ensure that his/her employees
are prepared and trained to perform the requirements specified in the
contract on contract effective date.

f\. [Progress reports]{.underline}. The Contractor shall provide a
written report of the status of assigned tasks to the COR (insert report
interval, i.e., weekly, bi-weekly).

(09-27-06) PN 402

RD Instruction 1922-B

Exhibit C

Page 4

g\. [Inspection and acceptance]{.underline}. The CO or the COR shall
inspect and accept the supplies and/or services to be provided under
this contract. No payment shall be made until the work is accepted. If
deficiencies are noted in the inspection, the appraisal shall be
returned to the contractor for correction within (specify time period
for correction, i.e., hours, days) at no additional cost to the
Government.

The COR shall serve as the duly authorized representative of the CO.

Part III. [Evaluation of Offers]{.underline}.

There are two methods of evaluating offers: (1) Negotiated Procurement,
and (2) Basis for Contract Award. The CO will consult with program
personnel to: (1) Develop evaluation criteria, (2) determine the method
of evaluating offers; and (3) conduct a technical review of proposals.
While cost is an important criteria in determining the best offer
received, due consideration should also be given to the qualifications
and experience of the offerors as it relates to the requirements
specified in the SOW. The following provides additional information to
be considered during this process:

A. [Negotiated procurement]{.underline}. Negotiated procurement is a
formal evaluation process which must be used for all contracts \$25,000
and over. This process involves:

\(1\) Develop evaluation criteria and assigning weight factors. The
following is provided for consideration when developing evaluation
criteria:

a\. Experience and knowledge of the person(s) proposed to perform the
requirements in the SOW.

b\. Commitment of the offeror to perform the requirements specified in
the SOW.

c\. Technical approach of the offeror to perform the requirements
specified in the SOW.

(How does the offeror plan to accomplish the requirements prescribed in
the SOW? Is the offeror experienced in conducting MFH appraisals?)

RD Instruction 1922-B

Exhibit C

Page 5

\(2\) Convene the technical evaluation committee to evaluate all
technical proposals received;

\(3\) Establish the competitive range;

\(4\) Negotiate with offerors in the competitive range;

\(5\) Receive best and final offers from offerors;

\(6\) Evaluate best and final offers;

\(7\) Source selection; and

\(8\) Debrief unsuccessful offerors.

B. [Basis for Contract Award]{.underline}. This method will be used in
evaluating proposals for small purchases under \$25,000. This process
accomplishes the same results as the negotiated procurement process, but
does not require the formal technical evaluation committee or
negotiations with the offerors. The evaluation of each proposal will be
based on how well it demonstrates the offeror\'s ability to perform the
SOW. The following is provided for consideration when developing the
solicitation for contractors:

"The Government intends to award a contract resulting from this
solicitation on the basis of price and other factors. The other factors
are documented evidence of professional training, experience, a proposal
which demonstrates how the offeror will perform the requirements
specified in the SOW. The Government may reject any or all offers, or
award a contract on the basis of initial offers received without
discussions. The Government can accept and award a contract for other
than the lowest price offered. Therefore, each initial offer should
provide the offeror\'s best price and a written proposal as outlined
above."

oOo

(09-27-06) PN 402

RD Instruction 1922-B

Exhibit D

Page 1

## Guide for Appraisal of Energy Saving Measures,

## the \"Value-in-Use\" Approach

[Introduction]{.underline}.

This guide may be used for appraisal of energy savings measures or for
estimating the impact of energy saving measures on market value.

The described methodology, indicated in this guide, is an adaptation of
the procedure for Life Cycle Cost Analysis developed by the Department
of Energy and published in 10 CFR Part 436. This methodology is
applicable for use on those energy savings measures which have been
approved by the State Director and/or are otherwise acceptable in
accordance with Rural Development procedures and policy.

[Definitions]{.underline}.

[Value-in-Use]{.underline}. The value of an economic good to its
owner/user/investor based upon its expected productivity or savings.

[Energy Saving Measure]{.underline}. Any device, equipment, material,
process, construction method, system, structure or combination thereof
that will result in a reduction of energy usage when compared to
conventional energy related practice in the area of the project.

[Conventional Energy Related Practice]{.underline}. Any device,
equipment, material, process, construction method, system, structure or
combination thereof as they relate to energy usage, that are common to a
particular area and/or are required by local, State or federal
regulations or standards.

[Representative Structure]{.underline}. A building or facility similar
in all ways to the proposed or existing building or facility with the
exception that conventional energy related practice has been substituted
for the proposed energy saving measures.

[Economic Life]{.underline}. The period of time over which the energy
saving measure may reasonably be expected to perform the function for
which it was designed or intended without major renewal or overhaul.

[Study Period]{.underline}. The period of time equal to the economic
life of the energy saving measure or 25 years, whichever is shorter.

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RD Instruction 1922-B

Exhibit D

Page 2

[Annual Energy Cost Savings]{.underline}. The difference in the first
year cost of energy of the proposed or existing building or facility as
compared to the energy cost of its representative structure. For the
purpose of this methodology the cost of energy may be based upon the
unit fuel cost applicable in the project area at the time of the
appraisal.

[Annual Operation and Maintenance Cost]{.underline}. The incremental
cost to operate and maintain an energy saving measure as compared to the
operation and maintenance (O&M) costs of its representative structure.

[Methodology]{.underline}.

Worksheet A (attached) may be used to organize the information and
calculations of the Value-in-Use appraisal.

Step 1: Identify the energy saving measures.

Step 2: Identify the representative structure upon which energy cost
savings, incremental construction cost and incremental O&M costs will be
based.

Step 3: Determine the study period of the energy saving measure (item C
on worksheet). The study period is equal to the economic life of the
energy saving measure or 25 years, whichever is shorter.

In determining the economic life, consideration may be given to
obsolescence, age, durability and reliability of components, cost and
complexity of O&M procedures and the likelihood that the owner will
carry out the necessary O&M or undertake necessary repairs. In this
regard, the availability of qualified service personnel, spare parts and
the quality of O&M manuals as well as warranties and long term service
contracts may be considered.

Ordinary energy saving measures which depend upon the operation of
mechanical subsystems are not assigned a useful life greater than 15
years. Furthermore, of these systems, only durable, low maintenance,
non-complex systems with well documented O&M procedures, located in
areas having ready access to service personnel are assigned a useful
life as high as 15 years.

If the study periods of identified energy saving measures differ, the
energy saving measures having similar study periods should be grouped
together. Each of these groups will form the basis of a separate
Value-in-Use computation. The composite Value-in-Use is simply the sum
of the Value-in-Use computed for each of these groups.

RD Instruction 1922-B

Exhibit D

Page 3

Step 4: Determine the first year annual energy cost savings (item D on
worksheet). This determination may be made from information provided by
the proponent of the project, an energy auditor, the
manufacturer/supplier of the energy saving measure or as determined by
Rural Development analysis of the proposed energy saving measures. If
energy cost savings cannot be reasonably determined using accepted
calculation procedures, or if the savings are otherwise indeterminable,
the Value-in-Use methodology is not applicable. It may be possible in
some of these instances, however, to establish a minimum level for
expected energy cost savings. This savings may be used in the
Value-in-Use analysis. The annual energy cost savings may be increased
by 10 percent for proposed or newly implemented energy saving measures
to approximate the value of energy savings that may not be reflected in
the current average price of fuel.

Step 5: Determine the annual O&M cost of the energy saving measures as
compared to the representative structure (item E on worksheet). These
costs include service contracts, energy required to operate the energy
saving measure (Pumps, motors, blowers, etc.), insurance, chemicals,
minor repairs and/or replacement of components and other costs necessary
to operate and maintain the energy saving measures. For the purpose of
this method, the total incremental O&M cost may be averaged over its
study period without regard to the actual timing of the costs. Unless
other information is available, the annual incremental O&M costs may be
assumed equal to one (1) percent of the incremental construction cost of
the energy saving measure as compared to its representative structure.
Energy saving measures which have no mechanical system operations may be
assumed to have zero annual O&M cost unless other information indicates
that another incremental cost is appropriate. If annual energy cost
savings are increased by 10 percent as described in step 4, then
applicable energy related O&M costs should be similarly increased by 10
percent.

Step 6: Determine the inflation modified uniform present worth factor as
it applies to the energy savings measure, from the applicable Tables
(B-1 through B-10) published by the Department of Energy in 10 CFR Part
436. (These tables will be kept current and supplied to the appraisers
by the Architect or Engineer in each State.) These modified uniform
present worth factors are based on a real rate of return of 7 percent
and are adjusted for the relative price inflation of various fuels ever
a period of 25 years. They are tabulated for each Department of Energy
Region and type of facility (Residential, Commercial or Industrial).
(See Items D and E on worksheet.)

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RD Instruction 1922-B

Exhibit D

Page 4

Step 7: Determine the uniform present worth factor for future annually
recurring costs. (See Item E on worksheet.) This factor is given in
table LA-2 of 10 CFR Part 436. (These tables will be provided by the
State Architect and/or Engineer.) It is used in conjunction with the
annual O&M costs determined in Step 5. Note: The O&M costs may contain a
fuel use component. For the purpose of this methodology, the simplifying
assumption is made that use of the factor given in Table A-2 for
non-fuel and for fuel related O&M costs would not significantly reduce
the accuracy of the Value-in-Use determination. If fuel usage, however,
is a significant portion of the O&M costs as determined by the
appraiser, it may be shown separately under a second category of O&M
expense. (See item E 2 of worksheet.)

The appropriate discount factor for fuel related O&M costs would then be
found in the applicable table of Tables B-1 through B-10 for the type of
fuel used in operation and/or maintenance activities.

Step 6: Compute the Value-in-Use following the steps shown in Worksheet
A. (See Item F on worksheet.)

[Appraisal]{.underline}. (See Item G on worksheet.)

The total estimated property value is determined by adding the computed
Value-in-Use or the incremental construction cost of the energy saving
measures (whichever is lower) to the estimated value of the
representative structure.

[Value-in-Use and Cost Effectiveness]{.underline}.

In general, an energy saving measure(s) will be considered cost
effective, from the point of view of Federal government investment, when
the Value-in-Use is greater than the incremental construction cost of
the energy saving measure. If the incremental construction cost exceeds
the Value-in-Use the energy saving measure may still be cost effective
when:

1\. Salvage value of energy saving measures having economic lives
greater than 25 years is significant; or

2\. The economic life of the energy saving measure is greater than the
economic life of the alternative conventional energy related practice.

In these instances further analysis may be necessary to determine
cost-effectiveness. In most instances, however, the Value-in-Use will be
an acceptable estimate for the cost-effective limit of Rural Development
investments in energy saving measures.

RD Instruction 1922-B

Exhibit D

Page 5

## WORKSHEET \"A\"

PROJECT: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

ADDRESS: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

ENERGY SAVING MEASURES:

(List)

A. DEPARTMENT OF ENERGY (DOE) REGION \_\_\_\_\_\_\_\_\_\_\_

B. TYPE OF FUEL SAVED \_\_\_\_\_\_\_\_\_\_\_

C. STUDY PERIOD \_\_\_\_\_\_\_\_\_\_ (YEARS)

## [CALCULATION OF VALUE-IN-USE]{.underline}

PRESENT WORTH

[\$/YEAR]{.underline} \_[FACTOR (1)]{.underline}\_\_\_

D. [ANNUAL ENERGY COST SAVINGS]{.underline} \_\_\_\_\_\_\_\_ X
\_\_\_\_\_\_\_\_\_\_\_\_\_\_ = \_\_\_\_\_\_\_\_

From Table B \"V1\"

E. INCREMENTAL ANNUAL O&M COSTS

E-1 [GENERAL O&M]{.underline} \_\_\_\_\_\_\_\_ X
\_\_\_\_\_\_\_\_\_\_\_\_\_\_ = \_\_\_\_\_\_\_\_

From Table A-2 \"V2\"

E-2 [FUEL RELATED O&M (optional)]{.underline}\_\_\_\_\_\_\_\_ X
\_\_\_\_\_\_\_\_\_\_\_\_\_\_ = \_\_\_\_\_\_\_\_

From Table 5 \"V3\"

Fuel Type:\_\_\_\_\_\_\_\_\_\_

F. [VALUE-IN-USE]{.underline} = \"V1\" - \"V2\" - \"V3\" =
\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_

G. INCREMENTAL CONSTRUCTION COST: \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_

APPRAISAL OF ENERGY SAVING MEASURE (2): \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_

[NOTES]{.underline}

\(1\) Present Worth factors are published by the Department of Energy in
10 CFR Part 436, \"Methodology and Procedures for Life Cycle Cost
Analysis.\"

\(2\) Lower of Line F or Line G.

oOo

(09-27-06) PN 402