Appraising for Litigation: What Makes an Appraisal for Litigation Unique?
By: John T. Schmick
"Hire an appraiser. Tell him/her that the trial is in three weeks." Sound familiar? The sentiments conveyed in this simple statement are all too common in the appraisal business as controversies regarding the value of assets, property, partnerships, etc. arise. Settling such valuation differences may require the engagement of legal counsel and/or other experts. Unfortunately, the appraiser is often the last member of the litigation team to be selected. The litigation appraisal is unique because the appraiser's job is to present evidence of value to those who try the facts. It is usually much more complicated than an appraisal for general purposes; case-specific data examples may be more difficult to obtain and it requires more time to complete. Engaging an experienced appraiser early in the litigation process benefits everyone involved.
Litigation to resolve value-related disputes is more likely to be successful using a team approach. The appraiser alone cannot be expected to know the subject property or business as well as the owner does. He/she cannot be expected to know all the relevant points of law that might be useful in the litigation. Nor is he/she an expert in land planning issues, construction costs, economic outlooks or business trends. While not every litigation assignment requires input from all of the above, the use of additional experts provides a good foundation for the appraiser. Having a broader view and more facts allows the appraiser to answer questions from the judge or jury with confidence.
Defining the Appraisal Problem
The starting point of any appraisal assignment is to define the appraisal problem. For the appraiser on a litigation team, this first step might be more accurately described as stating the appraisal hypothesis. Rather than saying "this is the issue", it is helpful to start with the question, "Is this the issue?". With the controversy clearly identified, the appraiser has a point of reference from which to balance the desire to accept the case and the uncertainty (fear) of whether or not there is enough market data to measure the impact of the identified issue. If the dispute is valid, the team will find enough relevant market data to determine a value and present it to the judge or jury. If it is not a viable issue, the appraiser can decline the assignment. He/she is not yet caught up in the emotions of winning the case.
In defining the issues for litigation purposes, the comments and opinions of all team members are useful. Certainly, the property owner knows the history of the property and can bring to the discussion any future plans. Typically, business partners will know the financial facts, past and present, of their business, as well as the factors which may affect future performance. The attorney may know of cases involving similar disputes that the appraiser will want to study. Finally, experts like land planners, engineers, financial officers, economic analysts and industry advisors can bring their unique viewpoints to the discussion table. Clearly, the more perspectives the better when determining what can reasonably be done to mitigate damages identified in a litigation case. To the extent that the litigation team does not have these other experts, or they do not actively participate, the appraiser is at a disadvantage in that he/she may not anticipate all the issues that might be raised in the course of the assignment.
A Phased Approach
Once the parameters of the assignment have been discussed, the appraiser can begin the 'phased approach' study. Typically, in a standard or general appraisal, the only question to be answered is 'what is the current value?' of the property, partnership, or business interest. In litigation appraisals, however, determining value is somewhat more complicated. In the area of real estate, for example, there are partial takings of property in eminent domain proceedings. The appraiser is concerned with value before the taking and value after the taking. In essence, two appraisals are made of the property in order to measure a specific aspect of the taking. In business valuation, the appraiser may be asked to determine value for a dissenting shareholder dispute (the abused parties claim that they were not adequately or fairly compensated for their interests). Whether for real estate or for business valuations, the appraiser develops a hypothesis regarding the disputed value. The next step is to determine whether there is enough market evidence (or a market-based rationale) to measure the issue and support the hypothesis. Finally, the litigation appraiser uses the market evidence to arrive at an opinion of value which is presented to those who are trying the facts: usually, a commissioner, judge or jury.
During Phase I of the assignment, the appraiser conducts preliminary research to either validate or reject the hypothesis on the valuation issue. He or she further defines the issues, determines what data is available to measure the damage or loss, and begins to establish methods of presenting the issue in his/her report. It is also during Phase I that the appraiser provides direction to the other team members as to what information, exhibits, or research will be needed from them if and when the decision is made to proceed. At this point, all of the team members can begin to understand the scope of the assignment and to consider the possibility of negotiating a settlement. If a settlement can be reached, there is significant financial benefit; the appraisal related costs of trial preparation and the costs of the trial itself are eliminated.
In some cases, there may be insufficient market data to support the valuation hypothesis. The appraiser should inform the other team members as soon as possible so that a decision can be made as to the next step. This might involve additional targeted research or a mutual decision to not proceed with the second phase of the case which is preparation for trial. It is not uncommon for legal counsel to seek a second opinion at this point and to proceed to trial with another expert appraiser.
Market Research & Analysis
Typically, at the end of the Phase I, the appraiser has reached a preliminary conclusion as to the highest and best use of the property and/or the value of the disputed business interest or real estate. In complicated litigation appraisals, other experts on the team can provide some of the background used in this part of the analysis, as well as aid in the preparation of exhibits to clearly support the appraiser's value conclusion. The appraiser will now begin the process of reviewing and selecting the market transaction data to provide a solid basis for the final valuation opinion(s).
During the review and selection process, the appraiser often will formulate a selection methodology based on the type of property being appraised as well as its characteristics. While formulating the criteria for selecting market transactions to estimate value, the appraiser must always keep in mind the appraisal hypothesis or issue to be measured. If, for example, access is an issue, the appraiser may look for transactions which emphasize data on the impact of changes to access. If visibility is an issue, the appraiser will select transactions which include specific references to the quality or type of visibility. If parking has been altered, the appraiser may look for transactions from which to develop mathematical or economic models which measure the losses due to changes in parking. Because of its specific, and often narrow focus, the real estate appraisal for litigation usually involves reviewing and selecting a greater number of transactions than is generally found in a standard valuation appraisal.
In valuing business interests, the appraiser will rely on economic data from the past, present trend analyses and projections for the future, as well as relevant judicial rulings. In arguing for a perceived loss of business opportunities, for example, he or she will search for data indicating that certain measurable losses occurred as a direct result of a change. Minority stockholder disputes are frequently the subject of litigation appraisals in business valuation, and an experienced appraiser will thoroughly review the rights and contracts as well as the limitations on them.
In some cases, it is difficult to identify the relevant transaction data or the data related to the valuation issue may be limited. In these situations, the appraiser may also rely on anecdotal evidence in comparing the data to the appraisal issue. In terms of using anecdotal evidence and non-traditional data, a successful litigation appraiser does not limit himself or herself exclusively to historic methodologies, traditional arguments or data sources. The sign of a good professional is a willingness to research new areas and to try new methods. The appraiser seeks to expand the body of knowledge in appraisal practice and theory by reviewing legal cases and other relevant publications to improve his or her abilities to identify and measure valuation issues. It is frequently within the context of litigation that new theories and methodologies are developed and tested. This is usually well beyond the scope of the standard single value market appraisal.
Infrequently, an assignment may come along that is so unusual that there is no precedent in the local market and little guidance in the appraisal literature. In this situation, a litigation appraiser may look to other disciplines for models, literature or professional opinions that can be related to the valuation issue. This is yet another reason to assemble a strong litigation team and to expect to spend more time on research and preparation before trial.
Preparing the Report
The final step in any appraisal assignment is the preparation of the written report. Currently, USPAP (Uniform Standards of Professional Appraisal Practice) recognizes six different options for appraisal reports. These include either a limited analysis or full analysis presented in a format option referred to as one of the following: a restricted report, summary report or self-contained report. Depending upon the nature and complexity of the litigation and the client's needs, the appraiser will determine which of these is required to adequately communicate his or her research, analysis and valuation opinion.
Beyond meeting the USPAP requirements for standard appraisals, the appraisal for litigation purposes involves additional in-depth studies focusing on specific, relevant issue(s). In partial taking cases, for example, the appraiser will actually conduct two separate valuations: one indicating value before the taking and one indicating value after the taking. Linking these two analyses, is a narrative in which the appraiser fully outlines and describes the nature of the taking and all of its potential impacts on the property. If the property includes a business, then a before and after appraisal of the business damages will also be required. It is important to recognize that while the appraiser identifies and measures the impact of the taking, legal precedents and rulings determine compensability. If necessary, the appraiser will request a letter of instruction from the team's attorney(s) or the court identifying any aspects of the taking which will not be included in the measure of damages (not compensable). Although it is time-consuming, it is essential that this section be accurate and complete. Ultimately, such attention to detail results in a savings of both time and money, as areas of agreement can be reviewed quickly, and the energies of all parties can be focused on presenting the opinion of value. Such savings clearly benefit the commissioner, judge or jury.
Conclusion
Valuation controversies are frequently settled prior to trial. The report submitted by the appraiser is often used as the basis for negotiating a settlement. The appraisal done for litigation purposes becomes more complex than a standard market value appraisal for financing, because it has a very specific, unique emphasis. It is the individual nature of each case which makes it so time consuming. The appraiser cannot simply assemble a list of comparable sales transactions and form an opinion as to the measure of, or magnitude of, a particular appraisal issue. It is beneficial for the appraiser to use the team approach, including other experts as needed, to identify, measure and communicate the valuation issues to the judge or jury. Rather than being added to the litigation team as an afterthought, the appraiser should be added to the team early in the litigation process to assist in identification of areas of dispute, the valuation process and preparation for trial. 
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