The third approach, which is available only for improved properties, is the “reproduction cost new less depreciation” or “cost” approach to value. In that approach, the appraiser will determine the cost to reproduce the improvements, deduct for physical depreciation and obsolescence, and add that net amount to the fair market value of the land to arrive at the opinion of value. The cost approach can be highly subjective, as the appraiser must estimate depreciation and obsolescence, and is generally disliked by the courts. With a tip of my hat to Casablanca, “I’m shocked, shocked to find” how often appraisers stretch to make their opinions using this approach reach indicated values close to the market or income approaches.
Appraising the Appraisals
With that background, next you need to know what to do if confronted with an appraisal expert during discovery. First, make sure you get a copy of his or her report. Do not settle for just the litigation report; demand the full appraisal report. Under the Uniform Standards of Appraisal Practice (USPAP), the appraiser is almost always required to prepare a written report of the investigation, analysis, support, and opinion. If the appraiser uses the market approach, the report should contain details about the comparable sales he or she relied on in valuing the property and adjustments he or she made to those comparable sales to reflect how they compare to the subject property. The appraiser should also have detailed work files with backup documents, including deeds, on each “comp.” Similarly, if the income approach is used, the report should contain comparable lease transactions, deductions to get from gross rent to net operating income, as well as the basis for the cap rate the appraiser used to determine value. Finally, if the cost approach is used, the appraiser should include the foundation for his or her opinions on the reproduction cost of the improvements (which will generally be some recognized service that estimates the cost of constructing new buildings, such as Marshall and Swift), as well as comparable sales for the land value component of the analysis. A careful review of these documents is critical to an effective cross-examination.
Next, you will want to compare the other side’s appraisal report with your own report, assuming you have one, to identify the key issues on which the appraisers agree or disagree. A simple spreadsheet—in essence, a side-by-side comparison listing each appraiser’s views on the size of the parcel, the size of the improvements, zoning, highest and best use, comparable sales, comparable leases, adjustments to net income, and cap rates—will help you focus on where the appraisers agree or disagree. If the appraisers agree that three comps apply to the subject property, your cross-examination (and eventual argument) should be focused on not only the agreement but also the disagreement. If both sides agree that three are comparable, why did the appraiser use six more that are lower, or higher, than the three not really in dispute?
Get Out in the Field
Once you have reviewed and compared both sides’ appraisals, the next thing you should do is “drive the comps.” Visit each comparable sale and compare its features with the subject property. Look carefully at the comparable. Does it have evidence of contamination? Is it next to an undesirable use? Is there a chicken ranch next door? Is there a fabulous new development across the street? Jurors respond to learning about differences between the comparables and the subject, and they know (or will learn through your cross-examination) the negative (or positive) attributes of the comparable that do not apply to the subject property. Or maybe the comparable is a virtual clone, a Dolly the sheep version of the subject property, and if Dolly sold for X on the date of value, the subject must be worth X on the date of value.
Get Out of the Field
But do not just do field work on the comps—check out the paperwork and county recorders’ data for each comparable to determine whether it was sold for reasons that might affect its price. For example, was the seller subject to a foreclosure proceeding? Was there a court order requiring that the property be sold quickly? Were there judgment liens on the property? You will want all this information available in the event the other side’s appraiser testifies that in his opinion the comparable property was an arm’s-length transaction, with neither the buyer nor the seller being under any compulsion to buy or sell. There is nothing more rewarding on cross than pulling out a certified copy of a foreclosure sale notice that was recorded days before the “fair and open market” sale.
Don’t Forget the Appraiser’s Notes
In many jurisdictions, the appraiser’s notes are fair game, particularly while he or she is on the witness stand. As the cross-examiner, with the court’s permission, you can “frisk” the witness of his or her notes. These notes will generally be part of the appraiser’s file and will include the appraiser’s observations of the property and the neighborhood. The appraiser will almost always take notes when confirming a comparable sale or lease. This confirmation is a key part of determining whether a sale is a fair and open market transaction. I have encountered a number of experts who testify that a sale was at “arm’s length” when their own notes say something akin to “seller had to sell because of financial problems.” Cross-examination does not get much more effective than watching the appraiser read those notes to the jury.
There’s More to Come
This is a start to give you the lay of the land and some ideas of how to cross-examine a real estate appraisal witness. Many cases will require more involved analysis, so we’ll be back in future issues of the newsletter with discussions on topics such as reasonable probability of a change of zoning, the developer’s approach to value, and how not to bore a jury in presenting evidence on reproduction cost.