Real Estate Experts: Some Further Observations
Tarantello, Rocky A., Real Estate Issues
In the December 1994 Edition of Real Estate Issues, I presented several issues pertaining to the proper role of real estate Counselors as expert witnesses and suggested how Counselors could resolve the real estate expert versus client advocate conflict. This manuscript attempts to go one step further in distinguishing how real estate counseling differs from real estate appraisal and how attorneys may better utilize real estate Counselors as experts.
The great majority of real estate Counselors are not real estate appraisers. They typically do not write or certify appraisal reports. However, they are still real estate valuation, feasibility, and investment experts. They frequently offer expert advice regarding the valuation of fee interests, mortgage instruments, leaseholds, easements, cash flows, rights of way, profitability, feasibility, pricing strategies, phasing plans, and a myriad of other opinions regarding the value or the investment performance of real estate assets. I think the time has come to clarify the common view that valuation analysis and appraisal are one and the same. They are not! Most real estate analyses are not drafted as certified appraisal reports. Frequently, the total work product consists of nothing more than a summary of data, statement of assumptions, calculations, and conclusions. On other occasions, a certified or narrative report may be inapplicable as the following case illustrates.
A few years ago, a moderate oil spill along the Southern California coastline had forced the closure of several miles of public beaches. In addition to direct clean-up costs and lost tax revenues from temporary business closures, the city attorney felt the city was also entitled to the value of the temporary loss of use (i.e. recreational use) of the public beach. As with any claim for damage, appropriate technical analysis and foundation is requisite to establish a defensible claim. It so happens that there are economic theories, specifically hedonic pricing theory, which deal with the valuation of "lost recreational pleasure" or "use." Standard appraisal methodology is not designed for or even remotely applicable to this unusual case. The case ultimately settled, eliminating the need for each side to prepare the necessary analysis. Despite the "land use" character of the claim, an appraisal report employing traditional appraisal methods would hardly apply to the valuation of such a claim. And although hedonic pricing and property values have been considered in appraisal literature before, it is doubtful that even the most accomplished appraisers have even considered its use, much less applied it as a possible valuation tool. I am not advocating hedonic pricing or any other specific analytical methodology. But I do believe that valuation analyses go beyond "appraisal" and often require the education, skills, and experience of real estate analysts, institutional managers, or real estate forensic specialists outside the appraisal profession.
All appraisals are founded on the principles of economic valuation theory. But the vast majority of real estate analyses do not require strict adherence to appraisal standards or methods. Perhaps the best example of this point is the valuation process exhibited by the public securities markets. On any given business day, every publicly traded business enterprise is revalued resulting in the repricing of all classes of outstanding stock. Reappraisal would require adherence to prescribed appraisal methodology and documentation. For each issue traded, every parcel of property, business asset, and expected earnings stream is revalued on virtually a minute-to-minute basis. Various securities analysts, researchers, and economists collect and interpret the new information; make assumptions about future economic conditions; and apply stringent economic models and theories as every shred of new market information is instantaneously digested and repriced with each stock transaction. …