Paul HenryDenlow & HenrySt. Louis/Kansas City

www.denlow.com314-725-5151

2010 Solo Small Firm ConferenceLake of the Ozarks, Missouri

EXPERTS IN LAND VALUATION CASES

Types of experts: Appraisers Owners Engineers / Architects Brokers Arborists Trade Specialists

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Real Estate Valuation in Litigation Real estate litigation

Condemnation

Divorces

Tax appeals

Business litigation

Bankruptcy

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Lesson for Experts: Litigation is different from real world Adversarial

Provide more services: Analysis plus testifying

Critiquing opinions of others

Advocate of their opinion – have to be ready to defend

their opinion

Subject to greater scrutiny

Not for everyone

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Our goals working with experts Make sure they are PREPARED

Guide them through the “do’s and don’ts”

Help protect them by anticipating the issues

Protect them on cross-examination (Okay to be nickel and dimed.)

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Legal definition of fair market value For most types of litigation, traditional

definition of what a “willing buyer and willing seller would agree to” (MAI 16.02)

Condemnation- the value … after considering comparable sales…, capitalization of income, and replacement cost less depreciation,…its highest and best use, using generally accepted appraisal practices. (MAI 9.01 / 9.02)

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Legal definition of highest and best use The uses to which the property may best

be adapted under existing conditions and

those expected in the near future.

Big swings in value

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Highest and Best Use

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Vacant commercial building : to be valued as land or a building to be rehabbed. Offer: $ 257,000

Result: $6,100,000

Highest and best use Feasible

Likelihood of rezoning

Discount factor - risk

Dedication of property

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Highest and best use: Residential vs. Commercial

- Assemblage

- 100’ elevation

- Flood plain

- No commercial frontage

- Commercial vs. residential

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Highest and Best Use - Landlocked property

Private road by necessity

Costs to cure deduction

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AppraisersAppraiser’s role is value – plays only a part in the big

production

Story is often more important than value, or bricks and land

Relate the owner’s story with the land

“Sweat equity”

“Risk taking”

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Appraiser is one actor among many Business specialist – unique location Developers – can explain potential uses of

vacant lot

Brokers – they are in the trenches everyday

Engineers – flood plain issues; traffic issues

Urban planner – highest and best use

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Valuation methods

Income approach

Sales comparison (market) approach

Cost (reproduction) approach

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Income Approach.

$10,000 Gross Income$ 2,000 Expenses$ 8,000 Net Income 10% Capitalization Rate$80,000 Fair Market Value

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Cross-examining on the income approach Fair rental values vs. actual rents

Expenses – made up vs. actual

Capitalization rate

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Sales Comparison Approach Jurors understand this the easiest.

Comparing improved to vacant property.

Comp property purchased by condemning authority.

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Cross-examining the sales comparison approach Adjustments – flipping a coin

Different neighborhood

Different use

Special financing

Distressed sale

Sale to the condemning authority

Price included business

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Cost approach Replacement method

Marshall Swift vs. Actual bids by contractors

Especially appropriate for certain properties, e.g. historic buildings

However, used for most properties

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Cross-examining on cost approach Depreciation – judgment call

Physical

Functional

External

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Owner as an expert Puts “life” in case Owner can testify to value, so long as they

don’t try to act like an appraiser. Wood River Pipeline Company v. Sommer, 757 S.W.2d 265, 267 (Mo.App. 1988).

Owner can be like an “expert” Testify to uses of the property Impacts on their business operations (tie in

to highest and best use)

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Employees Often the owner employs persons with

specialized knowledge. Property managers President of a construction firm permitted

to testify to the acceptable proximity of blasting to electrical lines. Union Electric Company v. Mount, 386 S.W.2d 126, 132 (Mo.App.E.D. 1964)

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Employees – Quarry Example

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Several “traditional” experts testified.

One that mattered most was in-house geologist.

Helped make exhibits to support the other experts.

Engineer Play supporting roles. Do not directly testify to value. Highest and Best use – feasibility tests Engineer in hydraulics and hydrology to

predict flooding on subject property. State ex. rel. Missouri Highway and Transportation Commission v. Horine, 776 S.W.2d 6 (Mo.banc 1989).

Engineer – Flood Plain

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Area taken for sewer easement from Auto Museum and Broker.

Area was future expansion zone for business, but was partially in flood plain.

Engineer used to explain feasibility of building in flood plain.

Engineer – Flood plain

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Engineer – Development Potential

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Engineer – Development Potential

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Engineer – Development Potential

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Architect Function is very much like an engineer. Typically dealing with feasibility relating to

structures vs. the land, itself Leonard Missionary Baptist Church v. Sears,

Roebuck and Company, 42 S.W.3d 833 (Mo.App.E.D. 2001) (Architect permitted to testify to cost of replacement of church as the basis of value. No depreciation deducted. Court affirmed architect’s right to testify as an expert as to cost of replacement.)

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Architect – Hardware Store Example

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Already limited front retail parking lost to road widening.

Architect demonstrated feasibility and move front of building back to recoup parking area.

Land Use Expert Land use, or urban planners Key to analyze complex highest and best

use cases Good ones are hard to find. Can be very expensive – not for every case Can over-shadow the appraisers when the

real battle is over highest and best use.

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Land Use Expert – Downtown

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Condemnor – Property on edge of downtown. Property owners – Downtown had been “redefined”

Broker Besides appraisers and owners, the only

experts that directly give opinions of value. Limited to “Broker’s Opinion of Value”

(339.501.5;Section 339.503.13) Better used as support to appraiser that

market conditions (at the time of the valuation) support the appraiser’s opinion.

Often, in smaller communities, the broker was a party to some of the transactions.

Broker – Branson Example

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Outdated, vacant hotel.

Valued as land. Wide range in

comps. Issue: Valued as

being on “the strip” or off.

City used broker that had worked on many of the sales.

Developer Del-Mar Redevelopment Corporation v.

Associated Garages, Inc., 726 S.W. 2d 866 (Mo.App. 1987)(Car wash developer allowed to testify as to factors affecting proper site selection for a car wash. Opinion as to the fair market value of the subject property was stricken.)

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Contractor Bids for costs to repair damages

GradingWallsFill

Help appraiser with doing a cost analysis Better than cost manuals

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Arborist Valuation of trees Like land use experts, not for every case Alternative – bid from nursery, but not as

effective State ex rel. State Highway v. Commission v.

King Brothers Motel, Inc., 388 S.W.2d 522, 524 (Mo. App. 1965)(Landscape architect's separate valuation of trees admissible. )

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Arborist – Golf Course Example

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Trees used as “buffer” from road torn out to install sewer line.

Trees valued at nearly $200,000

Public Official State ex rel. Missouri Highway and

Transportation Commission v. Gannon, 898 S.W.2d 141 (Mo.App.E.D. 1995). Trial court excluded planning and zoning manager. Court of appeals affirmed, citing lack of foundation for making an opinion.

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Grave Digger – Most unusual expert award!

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Grave Digger

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