complex commercial litigation taking expert valuation skills to the next level 2

Complex Commercial Litigation

Taking Expert Valuation Skills to the Next Level

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Speakers

Drew K. Kapur, Esq.PartnerDuane Morris LLP

Richard Marchitelli, MAI, CRE, FRICSExecutive Managing DirectorCushman & WakefieldU.S. Practice LeaderDispute Analysis and Litigation Support Practice

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“The slower you move, the quicker you die.”

- Ryan Bingham (George Clooney) Up in the Air

Introduction

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“Failing to prepare, is preparing to fail.”

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“The best bridge builders are already on the other side.”

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Appraisers’ Advantages

• Highly defined body of knowledge• Training and education• Extraordinary practical experienceThese assets provide appraisers with a powerful

competitive advantage (that is seldom used) in the litigation arena over other experts providing the same services

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Appraisers’ ChallengesProblems• Resistance to change• Limited resources

Small size Lack of critical mass Limited capital

• Unwillingness to think outside of appraisal “box” “It doesn’t fit the template”

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SpecializationBody of knowledge grows so large that specialization inevitably results•Medicine•Law•Accounting•Appraisal

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Appraisal SpecializationHospitality•Hotels•Gaming (casinos)•Time sharesRetail•Regional malls•Other retailSelf-Storage

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Appraisal SpecializationEnergy and powerSports and entertainment Health Care•Hospitals•Skilled Care•Managed care•Others

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Appraisal SpecializationResidential •Multi-family•Student housing•PUD•Single familyGolf MarinasConvenience stores

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Appraisal SpecializationAirportsWaste•Landfills•RecyclesAgribusinessLitigation Others

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Litigation Support Service ProvidersCompetition consists of •Litigation consulting firms•Accounting firms•Boutiques•Other appraisers

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Why Lit Support SpecialistsSpecial expertise and knowledge in required including understanding•How the real estate and capital markets operate•Valuation theory•Damages theory (separate BOK)

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Why Lit Support Specialists• Nuances of litigation

Legal theories Case and statutory law IRS regulations and guidelines Rules of court Federal Rule 26 Daubert issues and exclusion of a witness Discovery rules

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Why Lit Support SpecialistsHigh stakes litigation requires a specialist willing to make commitments to •Performing the necessary, relevant research and understand the theory of the case•Willingness to testify and have your actions, personal character, and expert report subjected to intense scrutiny•Firm commitment to be available at time of trial to be mentally engaged and available to assist in preparation and during the actual trial

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OpportunitiesWhere they are notWhere they are• Law firms• In-house counsel and corporations• Debt holders (not mortgage departments of

banks)• Property owners• Government (limited opportunities beyond

eminent domain)18

Engagement ProtocolsDuration of an engagement can be weeks, months, or years•Requires team approach with requisite experience, skill sets, and competencies •Billing is normally hourly with periodic (e.g., monthly) invoicing•Expenses are reimbursable•Reimbursement for administrative overhead•Retainers (three basic types)

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Damages ModelUniversal Damages Model

1 2 3 4 5 6 7 8 9 10

Time

Inc

om

e LOST INCOME

Event 1 Event 2

Today

Historical/Estmated"But For" Income

Actual HistoricalIncome

Understanding the engagement1

Are you qualified to be an expert? •Stay within your area(s) of expertise•You cannot be an expert in all things•What you say, can and will be used against you to impeach your credibility for years to come. The litigation arena is a small community in which lawyers and others research and share information regarding the prior testimony, writings, and reports of witnesses.

_ ________________1. Visit www.wisehart-wisehart

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Understanding the engagementDaubert or similar challenges•Methods must be able to be tested•Methods must be accepted and used by your peers•No “junk” science•Other criteria

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Understanding the engagementKnow rules of jurisdiction•Reports

• Written• Oral

•If written report, need to understand the scope, content, and format imposed by the local jurisdiction

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Case Study No. 1Plaintiff is suing for breach of fiduciary duty and overcharges by joint-venture partner•Nine major properties in various stages of completion plus portfolio of dozens of big box stores•Allegations that joint venture partner failed to complete a single construction project on time or on budget, failed to actively lease and sell properties, and overcharged for insurance, management, and maintenance

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Case Study No. 1Necessary to research, review, and analyze•Investment memoranda and partnership agreements•Detailed history of each property •Numerous financial models and spreadsheets•Pleadings and deposition testimony of important witness•Actual performance of each property from date acquired (all purchased on different dates)

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Case Study No. 1Necessary to research, review, and analyze (cont’d)•Trade areas of each property•Representations made by JV partner regarding rent levels achievable, when stabilized occupancy would be reached, when construction would be completed, when sales would occur, etc.•Comparison of what was promised to what actually took place (control for “noise” in the data)•Compare categories of alleged overcharges to market expenses for same costs

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Case Study No. 2

Indian Nation claim against the State of New York regarding damages for underpayment of 250,000 acres that were purchased by the state in a number of transactions between 1795 and 1824

Claim is for financial damages only. Indian Nation was not asserting right or title to the land

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Case Study No. 2

Issues for the experts•Is there factual evidence proving that the Indian Nation was paid less than market value?•What is the measure of damages

Land value today discounted back to the dates of each purchase?

Difference between what the state actually paid and the property’s market value?

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Case Study No. 2• Difference between payments and market value

How is the difference established? How can the present value of the damages be

calculated when no single index existed over the entire period that could provide a benchmark and the period’s history was often volatile, including bank failures, depressions, natural disasters, and armed conflict (e.g., War of 1812, the Civil War, and two world wars)?

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Case Study No. 3Lender liability case involving luxury condominiums•Construction loan assigned from one lender to another•Second lender taken over by FDIC in 2007•After takeover, the FDIC funded 4 monthly draws and then stops funding•Project remained partially completed; 2008 downturn occurs and damages any prospect for refinancing or completion of construction in the immediate future

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Case Study No. 4

Regional Mall•Anchor store had gone dark due to bankruptcy•Another major anchor department store decided to vacate its space 4 years prematurely (breach of operating agreement)

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Case Study No. 4

• Co-tenancy clauses presented a potentially cascading effect of vacancies

• Needed to develop “but for” or baseline scenario and then project what was likely to happen

• Inputs (assumptions) related to co-tenancy and lease renewals were largely based on retails sales per square foot

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Case Study No. 4

• Additional Problems Complex model to understand/explain Numerous inputs More than one year had elapsed to time of

the mediation (trial); model needed to be updated

• Other expert at mediation was not an appraiser

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Case Study No. 5

Alleged breach of contract by major hotel company•Property located western U.S.•Consisted of a master planned community of luxury home sites, several golf courses, and a large site at center for luxury resort hotel•Contract of sale to resort hotel required construction of luxury resort

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Case Study No. 5

• Hotel company breaches contract and fails to build

• Necessary to develop “but for” scenario Sales of home sites around golf and resort Financial performance of golf courses in

residential communities with luxury resorts

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Case Study No. 5

• Damages resulting from breach of contract Comparison of “but for” scenario (with

luxury resort hotel) to scenario without luxury resort hotel reflecting impact of the breach on residential prices and golf course operations

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Case Study No. 6

Groundwater contamination – Background•Contamination of 1.5 acres of 31.5-acre site•Responsible party accepted cost of remediation•No liability of property owner for cleanup •Contamination is 10 feet and deeper; water table is 6 feet. Therefore, natural features (i.e., not contamination) limit excavation•Restrictions on well drilling imposed

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Case Study No. 6• Case studies of similar properties suggest no

damages• Public water readily available. Property owners in

the area do not drill wellsNecessary to review• Pleadings and deposition testimony• Statutes relating to contaminated properties• Consult with environmental engineers• Valuation and damages literature

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Case Study No. 6Hierarchy of proof in contamination matters•Empirical evidence•Case studies•Interviews and surveys

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Scope of Work – Review/Rebuttal ReportsScope of work may include review•Appraisal report or other expert report (e.g., damages model)•Workfile•Transcript of deposition testimony•Any combination of the aboveIf preparing an appraisal review report, it must comply with Standard 3

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Standard 3 Compliance Includes Many thingsStandard 3 compliance includes the following criteria, among others•Date of the review•Effective date of review•Edition of USPAP in effect on the date of the report under review•Other USPAP-imposed requirements

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Standard 3 Compliance Includes Many things• Identify

Report under review Date of that report Effective date of value Value appraised

• Other requirements

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Scope of Work• Whether property will be inspected• Data (e.g., sales, rentals, economic information) is

complete, accurate, and property analyzed, developed, and presented

• Other documents that will be examined as part of the review process

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Scope of WorkExample scope of work – assuming review of appraisal report, workfile, and deposition testimony•Evaluate completeness of report/work•Adequacy and relevance of data presented•Propriety of adjustments to the data•Appropriateness of valuation techniques employed

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Scope of Work• Whether conclusions expressed are appropriate

and reasonable• Identity material errors, if any• Determine whether report under review complies

with generally recognized and accepted valuation principles and damages theory

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Scope of Work• Review deposition testimony for inconsistencies

with written report and conformity with generally recognized appraisal methods and damages principles

• Review workfile for information that may be inconsistent with written report Contradicts written report Data contrary to the appraiser’s opinions that

was either ignored or overlooked.47

Appraisal Review/Rebuttal Reports PresentationDo not make it look like an appraisal or an old-style appraisal reviewUse blank paper, double spacingInclude a table of contentsOrganize with headings that are numberedAvoid bold face or italicized text Make free use of footnotes and attached exhibitsFocus on organization, reasoning, clarity, accuracy, and brevity

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Appraisal Review/Rebuttal Reports

Use active voiceUse first person – avoid referring to yourself in the

third personIf you need to, use party names – avoid using

Plaintiff and DefendantAvoid invective and personal attack on opposing

expertBe professional and courteous

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Appraisal Review/Rebuttal Reports

May want to refer to the report itself as opposed to the opposing expert’s nameDo not use boilerplate (no one is fooled and it suggests a lack of comitment and attention)Do not use rote, meaningless appraiser-like wording (e.g., “misleading”)

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Avoid biased, perconceived reaction - merely because an opposing expert disagrees with you does not mean that he/she is unethical ( the appraiser’s disease).

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Other Lessons

Verify and reconfirm accuracy of all statements you make. This is vitally imortant.

Avoid statements that cannot be forcefully supported Avoid any and all speculation. (If you don’t know

with reasonable certainty, don’t say it)• Do not use of “assumption”

Has pejorative connotation in litigation Use “input” instead

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Other Lessons

• Avoid ambiguity and imprecision Be absolutely clear Think of all opinions expressed and

statements made in terms of ability to be distorted on cross examination or at depositions

• Avoid making statements or relying on information or data that has not been properly confirmed

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Drew K. Kapur, Esq.Partner

Duane Morris LLP


• Role and Issues for Expert Appraisers in Legal Process

• Condemnation and Takings Issues• Severance Damages Issues in Condemnation• Special Damages-Related Issues in

Condemnation• Reasonable Probability Issues in Valuation

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EXPERTS

Generally, your role is as…

•Team Player•Salesman v. Report Writer

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EXPERTS

Discovery…•Listen to the Questions•Understand the Questions•Understand why you are being asked the Questions•Answer the Questions•Shut up (Don’t volunteer any additional information)

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EXPERTS

Examination•Direct

Jury interaction•Cross

Jury interaction less important•Rebuttal

Assignments where you are also testifying on direct

Assignments where your testimony is limited to rebuttal 58

EXPERTSSpecial Issues for AppraisersAdvocacy: • An appraiser must not advocate the cause or

interest of any party or issue. [Ethics Rule, Conduct, USPAP 2012-2013 Edition]

Helping attorney prepare for cross examination Rebuttal

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CONDEMNATION

Just Compensation:•An owner of property is entitled to be put in as good a position pecuniarily as if his property had not been taken.

[Olson v. United States, 292 U.S. 246 (1934)]

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CONDEMNATION

Fair Market Value:•What a willing Seller would accept and a willing Buyer would pay, neither being under any compulsion to act

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CONDEMNATIONTakings:•Total: Single component of Just Compensation

Value of property•Partial: Two components of Just Compensation

Value of Property Diminution of value of remainder (Severance

Damages) Two formulas to calculate Just Compensation

in a partial taking case62

CONDEMNATION

1. “Per Se” Analysis Value of property + Severance damages = Just

compensation

• Accurate, but not practical

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CONDEMNATION

2. “Before and After” Analysis Value of property before taking (as unaffected by the taking) – Value of property after the taking

= Just compensation

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CONDEMNATIONSeverance Damages•Compensable (protectable property rights}

1. Loss of parking/vehicle display2. Lot size/shape/building envelope3. On-site circulation4. Drainage/grading

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Sharkey’s Bar & Grill – Taking

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Sharkey’s Bar & Grill – Area #1

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Sharkey’s Bar & Grill – Area #2

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CONDEMNATION

Severance Damages•Compensable (protectable property rights}

5. Proximity6. Noise/dust/fumes

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New St. Mary’s Cemetery #1

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CONDEMNATIONSeverance Damages•Compensable (protectable property rights}

7. Nonconformance with zoning / land use controls

- Pre-existing, non-conforming status8. Cures (interior / exterior)

- Cannot exceed damages

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Olga’s Diner #1

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Olga’s Diner #2

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Olga’s Diner #3

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Olga’s Diner #4

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Olga’s Diner #5

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Olga’s Diner #6

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Olga’s Diner #7

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Olga’s Diner #8

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Olga’s Diner #9

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CONDEMNATIONSeverance Damages•Noncompensable (nonprotectable property rights): Consistent with definition of Just Compensation?

1. Access per se- Right of reasonable access- “Police power”

2. Circuity of travel- No property right

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3. Diversion of traffic- No property right

4. Visibility- View in (nonprotectable)- View out (protectable)

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CONDEMNATIONSeverance Damages Utah Department of Transportation v. Admiral Beverage, 275 P.3d 693 (Utah 2011) 1. Recognition that it is extremely difficult for an appraiser to segregate and apportion market value based on artificial distinctions between protectable and nonprotectable property rights

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CONDEMNATIONSeverance Damages

Utah Department of Transportation v. Admiral Beverage, 275 P.3d 693 (Utah 2011) 2. No set of conventions that appraisers can readily apply when they are asked to value a property in reference to protected and nonprotected property rights; impossible to isolate and identify the values associated with loss of view and loss of visibility

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Utah Department of Transportation v. Admiral Beverage, 275 P.3d 693 (Utah 2011) 3. Comparable sales are not available in which buyers and sellers ignore value that can be attributed to categories of certain nonprotectable property rights

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Utah Department of Transportation v. Admiral Beverage, 275 P.3d 693 (Utah 2011) 4. “Given the extreme difficulty, if not impossibility, of properly apportioning value based on artificial distinctions between protectable and nonprotectable property rights,… [appraisers must] resort to rank speculation when attempting to exclude the loss of visibility from fair market value.” 89


5. Business loss / lost profit- Speculation- Highest and Best use v. business loss / lost

profit* Gallonage

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CONDEMNATIONSpecial Damages-Related Issues1.Condemnation v. Ad Valorem Assessment Appeals

– Noncompensable / nonprotectable property rights)

2.Benefits– General benefits– Special benefits

* “Before and After” analysis* Offset damages

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CONDEMNATIONSpecial Damages-Related Issues

3. Temporary takings / construction easements–Duration–Area impacted

* Area encumbered only* Remainder of site

–Valuation* Rental value* Discounted After value

4. Permanent easements92

REASONABLE PROBABILITYDate of value (snapshot in time)•Existing conditions•Future conditions

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REASONABLE PROBABILITYDate of value (snapshot)•Existing conditions•Future conditions

Zoning Change

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Variance

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Site Plan approval

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• Role and Issues for Expert Appraisers in Legal Process

• Condemnation and Takings Issues• Severance Damages Issues in

Condemnation• Special Damages-Related Issues in

Condemnation• Reasonable Probability Issues in Valuation

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Contact Information

Drew K. KapurDuane Morris [email protected]

Richard MarchitelliCushman & [email protected]

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complex commercial litigation taking expert valuation skills to the next level 2

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