From : THE LAWYERS WEEKLY
July 2, 1999
HEADLINE: Use a specialist real estate appraiser
BYLINE: Paul Martin
The real estate appraisal profession is not unlike medicine or law to the
extent that practitioners require an undergraduate degree followed by a
variety of appraisal-specific courses, an articling period, and finally a
professional peer review.
Graduates are entitled to use the designation AACI (Accredited Appraiser
Canadian Institute) and are entitled, and presumably qualified, to practise
(value) any and all forms of property interests throughout Canada.
In reality, many appraisers take salaried positions with government
agencies, Crown corporations, municipalities or pension funds. Others,
particularly in small market areas, hang out a shingle and go into general
practice appraising everything from farms to plazas.
A few specialize by keying on a particular appraisal function, such as
property assessment or expropriation, or on a particular market segment,
like shopping centres, development land, agricultural properties and
hospitality properties.
As one devotes his/her professional practice to a particular function or
property type, a certain expertise develops that manifests itself in the
following ways:
. Knowledge of historical and emerging market trends and business
practices within the sector.
. Understanding of business operations including break-even efficiencies,
the impact of competition, the fairness and importance of the management and
franchise agreements.
. A perception of the particular techniques used in valuing properties
and businesses for a specific function, like taxation or what expropriating
authorities deem as fair and reasonable compensation for a partial taking,
and injurious affection.
. Knowledge of who the market participants are, including the brokers,
the buyers and sellers. Interacting with market participants is critical for
a number of reasons. First, it is an essential component in developing and
sustaining a data bank of trading information because, in most sub-markets,
transactional details are not public information. Secondly, by interviewing
the participants to a sale, one can ascertain the terms of sale, the buyer's
investment objectives, the length of time it took to sell the property, who
financed the deal and on what terms.
As an appraisal specialist, I have testified at criminal and civil trials
and before The Ontario Municipal Board, The Federal Income Tax Review Board,
The Assessment Review Board and The Land Compensation Board.
In an interesting civil case, a purchaser claimed rescission of an
agreement of purchase and sale and damages some two years after closing
because business revenues declined. My role was to report on whether the
plaintiff's maladies were a result of economic conditions in the hospitality
sector, mismanagement of the enterprise, or misrepresentation by the vendor
as to the business potential.
In another civil case, a client sued his lawyer for lost opportunity and
several million dollars in damages because the solicitor did not close a
hotel transaction on the date set for closing. The vendor used the delay to
nullify the agreement and retain the property.
On examination, it was apparent that the plaintiff's expectation of
future profits far exceeded the industry norm. By providing evidence on the
range in rates of return which are standard for the industry, as well as the
likelihood of future competition in the market area, the suit was settled at
approximately 30 per cent of the plaintiff's claim.
Most expropriation hearings involve a claim for damages or injurious
affection. To the expropriating authority, the specialist may be able to
prove how events such as a future diminution in competitors will mitigate
damages to the claimant's property, or how a change in access would affect
injurious affection to the remaining lands.
To the claimant, the specialist's contribution may be to draw on other
similar situations to prove the likelihood of damages prospectively, such as
occurs with a loss of access.
Provincial property assessors, unless prompted, do not make allowances
for things like functional obsolescence, enterprise value, or business
goodwill. If these issues exist, a specialist is usually needed to prove
their impact on value. The tribunals in property assessment cases that I
have appeared before have shown a willingness to accept qualified
specialists'valuations over the generic mass appraisal techniques used by
assessing authorities.
Between 1992 and 1996, one of the more prevalent areas of my practice was
power of sale appraisals. An informed valuation often helped the lender and
borrower temper their expectations and avoid charges of an improvident sale.
Some lenders did not securitize the chattels and trade name at the time of
advance. This created an appraisal problem for properties like hotels and
motels, which typically sell as a package of land, buildings, chattels and
trade name. In these cases, the unsecuritized assets had to be separately
valued.
To summarize, appraisal specialists are of value when the assignment
involves a unique type of property or resolution of a matter requiring
knowledge of a certain sub-market or a business operating nuance. From a
litigation standpoint, it is usually easier to qualify a specialist as an
expert witness because of his/her relevant experience in the particular
field.
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