St. Thomas University Creates Real Estate Hall of Fame

By Scott Carlson, Finance & Commerce

Reprinted with permission from Finance & Commerce.

Aviation has one. So do bass fishing, radio broadcasting, professional hockey and rock music.

Soon, there will also be a hall of fame for Minnesota real estate pros.

The head of the Shenehon Center for Real Estate at the University of St. Thomas has created the Minnesota Real Estate Hall of Fame to recognize Minnesotans who have been innovators and successful leaders in the field.

The Hall of Fame idea is also the latest in the Shenehon Center’s attempts to establish itself as a storehouse of real estate knowledge; earlier this year; the center established the Minnesota Commercial Real Estate Survey and Index; a sort of biannual “consumer confidence” survey of decision-makers in the sector.

“Creating the Minnesota Real Estate Hall of Fame gives UST the ability to honor; preserve and perpetuate the outstanding accomplishments of men and women in real estate,” said Herb Tousley. “We just want to give people an award that would recognize their achievement over a long period of time.”

The Shenehon Center plans to honor two to four inaugural Hall of Fame members at an induction ceremony Oct. 27, at Schulze Auditorium on St. Thomas’ Minneapolis campus. Tony Downs, a senior fellow at the Brookings Institution in Washington, D.C., will be the featured speaker.

The Shenehon Center plans to announce the names of the inductees during the first week of October.

“We are very excited about it, “Tousley said.

Tousley said he and a group of his St. Thomas real estate professors came up with the idea last fall after searching for something that could be a signature event at St. Thomas’ real estate center.

“When we started looking around, there were a lot of groups doing a real estate person of the year but there really wasn’t a real estate hall of fame,” Tousley said.

In June, the St. Thomas Real Estate Advisory Board received 17 nominees for the Real Estate Hall of Fame and is now reviewing that list, he said.

“The basic criterion for acceptance into the Hall of Fame is that an inductee will have an outstanding business performance coupled with a high standard of ethics and sense of community.” Tousley said.

Credibility in the Tax Court

By Timothy A. Rye, Appraiser

Three recent tax appeal cases illustrate that comprehensive research and attention to detail are key components of credibility in the Tax Court. The burden of proof weighs heavily on the appraiser; indeed, it may make or break a case. To prevail in court, the appraiser must submit evidence that the assumptions, comparable data, and methodologies used in the appraisal are relevant and accurate.

Eden Prairie Mall LLC v. County of Hennepin
October 13, 2009

The assessor’s estimated market value, upon which property taxes are based, is presumed accurate until proven otherwise. In this 2009 case, the Eden Prairie Mall tax assessments for tax years 2005 and 2006 were challenged. After hearing evidence from both sides, the Court did not find either appraiser’s opinion credible. Rather, the Court relied on selected components from each expert’s appraisal to arrive at its own value conclusion. In the final analysis, the Court’s value for tax year 2005 was nearly $23 million higher than the 2005 assessed value, and its value for tax year 2006 was $20 million higher than the 2006 assessed value.

The Court determines credibility based on, “the quality of the work, the adherence to relevant meaningful industry standards, the witness’s comportment and persuasiveness on the stand, their candor and ability to explain their analyses.” Further, the Court states that it will “rely upon the testimony and appraisals of the experts to assist us in our determination of value.” If the Court is not satisfied with the work of either side’s appraiser, it may take on the role of appraiser. The Court took bits and pieces from the experts’ appraisals and cobbled them together to arrive at an alternative value. When the Court, rather than the appraiser, determines value, it sends a strong message to attorneys, appraisers, and property owners. In this decision, it appears that the whole was greater than the sum of its parts.

The Shoppes of Woodbury Village v. County of Washington
November 12, 2009

In this tax appeal case, the assessor’s estimated market values for tax years 2006 through 2008 were upheld. The subject property, built in 2001, is a 15-unit retail building with a net rentable area of 21,836 square feet. In addition to the building, there is a pipeline easement on the edge of the property. Although the exact location of the pipe is unknown, half of the easement (30 feet) encumbers the subject property. At trial, the county’s expert was found ineligible to testify. Further, the Court determined that the Petitioner’s appraisal report was fatally flawed in all three approaches to value and could not be used to refute the assessor’s estimated market value.

According to the Court, an assessor’s estimate of market value is assumed valid unless credible evidence that the assessor’s value is incorrect is introduced. Although the Court did not explain how much or what type of evidence is sufficiently credible to overcome that presumption, it detailed the fatal flaws in the taxpayer’s appraisal report as follows:

The sales comparison approach: the Court determined that the comparables were substantially different from the Subject (different uses, different sizes, and different classifications – one comparable was a condominium); additional adjustments were necessary; and the appraiser excluded a more recent sale (at a higher price) of one of the comparables from the report without justification.

The income approach: the appraiser used only 11 of the 14 leases in place for the Subject, but did not provide evidence to support the decision to exclude the remaining leases; the actual vacancy rates were considerably lower than the vacancy rates used; the capitalization rate was distorted because the data was accumulated from the sale of older buildings; and the appraiser did not use appropriate expenses.

The cost approach: the appraiser did not rely on final construction costs despite the fact that the subject is a “fairly new” building (2001); reported physical deterioration was not supported by the photographs or the testimony; and the land valuation was not based upon comparable properties (according to the Court).

The pipeline easement on the property: the appraiser accounted for the presence of a pipeline by applying a discount to the comparable land sales and adding 50 basis points of risk to the capitalization rate. The Court did not accept the negative impact of the pipeline due to the lack of evidence presented. Thus, adjustments for the pipeline constituted an additional flaw.

Despite the fact that the Respondent’s witness was disqualified, the Petitioner did not prevail. The appraiser’s failure to pay attention to detail and several erroneous judgments on his part resulted in the Court’s upholding the assessed market value. The Court cited the relevancy, completeness, and timeliness of data presented; the relationship between the Subject’s actual rental rates and the ones upon which the appraiser relied; and the justification of adjustments or assumptions. Attention to detail sets the stage for a successful tax appeal and, in this case, the Petitioner’s expert did not produce a reliable appraisal for the client.

Geneva Exchange Fund XVII, LLC, v. County of Dakota
November 19, 2009

Accurate data is essential to the expert’s credibility. In this tax appeal, the subject property is a Class C multi-tenant single-story office/warehouse built in 1996. The building is approximately 50,283 square feet of which 52% is office space and 48% is warehouse space. Due primarily to inadequate verification of data and a lack of attention to detail, the Petitioner’s expert failed to sway the Court. The Petitioner’s sales comparison analysis was flawed. Although he used the net rentable area (NRA) as the unit for comparison, he did not verify the NRA for his comparables. As a result, he potentially understated the value conclusion. In addition, the comparable sales had significantly lower office percentages than the subject and the locations of the comparables were further from the subject than the comparables selected by the Respondent’s expert. The Court found this approach to be lacking in sufficient detail and no weight was given to the sales comparison approach of the Petitioner’s expert.

In the cost approach to value, the Petitioner’s appraisal included a flawed land analysis. He failed to inspect the land comparables, which led to inaccurate adjustments. In addition, his comparables were located in superior zoning districts further from the subject than the comparables in the Respondent’s report. Thus, the Court questioned the reliability and the quality of the cost approach by the Petitioner’s expert.

In the income approach, the Court noted that the Petitioner’s expert did not investigate all of the leases for each comparable building, leaving the possibility that the leases used were not representative of the building as a whole. The Court also suggested that the comparable rentals’ lack of similarity with the subject resulted in an inaccurate rental rate. The capitalization rate of the Petitioner was found unreliable because the appraiser failed to identify the sources used to calculate the capitalization rate via the band of investments method and he failed to identify what information from the comparable sales was included in the capitalization rate calculation. Thus, the capitalization rate conclusion was found unreliable.

In sum, the Court found the Petitioner’s expert unreliable and/or not adequately credible due to insufficient detail and the failure to verify the information upon which he relied.

In summary:

  • The success of the expert relies not only on the validity of the value conclusion, but on the quality of the individual building blocks of the appraisal.
  • The assessor’s estimate of market value is presumed correct unless proven otherwise.
  • The Court is willing to reject the experts’ appraisals and conduct its own valuation.

The Importance of an Expert Witness

By: Wendy S. Cell

In December 2009 Shenehon Company provided expert testimony on behalf of the city of Minneapolis (defendant) regarding the viability of a 21-story condominium project near Loring Park. The city council denied plaintiff’s application for two conditional use permits, two variances, and a site plan review for height, setback, and capacity. Plaintiff filed the lawsuit alleging violations of procedural due process, substantive due process, and equal protection. District Court dismissed plaintiff’s substantive due process and equal protection claims. Because defendant was found liable for a violation of procedural due process, a second phase of trial was necessary to hear evidence on the issue of damages. Plaintiff sought compensatory damages in excess of $11 million for the profits he claims would have been realized had the project been approved and built. The court found Shenehon’s analysis and testimony to be more credible and awarded $0 in damages.

Credibility is the heart of every case. This case demonstrates the importance of retaining an expert witness to prepare a thorough analysis and to provide independent testimony. Robert Strachota of Shenehon Company testified on behalf of defendant while real estate developer and plaintiff, Bradley Hoyt, testified on his own behalf. Mr. Strachota prepared a clear, logical, and well-supported analysis and presentation. He utilized a recognized valuation method and demonstrated his knowledge regarding the subject matter. Mr. Strachota provided expert testimony about his appraisal to assist the trier of fact in understanding the material. In contrast, plaintiff relied on his own informal estimates which were unsupported by any documentation or market evidence. Because Mr. Strachota studied market data and analyzed each market factor, the court found his evidence more persuasive.

The court found plaintiff’s estimates of revenue, costs, and profit highly conjectural and optimistically speculative. Plaintiff’s testimony was based solely on his own informal estimates and was unsupported by contemporaneous documentation. Plaintiff had no feasibility analysis, no agreement with a contractor, no lending commitment or other formal plan for financing, no building permits, no final building plans, no pre-sales, and no marketing plan. Plaintiff’s profit projections hinged upon the accuracy of each of his sanguine construction and market assumptions. Any inaccuracy in plaintiff’s assumptions would have had a dramatic impact on the bottom line actually realized.

The court found that Mr. Strachota’s analysis was based on more realistic assumptions and was supported by actual experiences of other projects under development during the timeframe. Mr. Strachota studied and testified specifically to the condominium market, condominium development, unit mix, construction period, unit pricing, absorption, development costs, and marketing. Mr. Strachota’s experience established him as knowledgeable regarding new development projects, in general, and condominium projects, in particular. Mr. Strachota testified that plaintiff actually would have lost $10 to $20 million had he pursued this project during the timeframe in question.

The courts generally rely on expert testimony and this case is no different. Here, plaintiff presented no testimony by an appraiser and the only evidence of value he presented was his own opinion. He failed to present convincing testimony or documentation to substantiate his opinion as to his claim of lost profits. In sum, the court found plaintiff’s claim of damages remote and speculative.

Applying the Principle of Consistent Use

Shenehon Company is pleased to announce that the International Right of Way Association will publish an article by John T. Schmick in the May/June 2010 issue of Right of Way.

John reviews what happens to value when the principle of Consistent Use is applied incorrectly. The basic concept is that land and improvements must be valued on the same basis. Once the highest and best use (HBU) of land as vacant is established, the principle of consistent use requires that the improvement be valued on that same basis. Inappropriate application of this principle leads to appraisal errors that may invalidate the opinion being offered. Two common errors are discussed in the article.

The first is the use of a building residual methodology to create a hybrid property value where the building component is valued on one basis and the land component is valued on another basis. The resulting hybrid value is inaccurate and not supported by market data. Another common error is an inappropriate application of the consistent use principle so as to subrogate highest and best use requirements. This second type of error is a violation of the Uniform Standards of Professional Appraisal Practice.

Application errors involving the concept of consistent use often surface when the appraiser encounters a property where the improvement is near the end of its economic life and may be an interim use. Another tricky area is when the property is in an area which is transitioning from one type of use to another. A link to the article will be forthcoming.

Visit the International Right of Way Association Website

Bob Strachota to Chair IBA’s Board of Governors

Bob Strachota has been elected Chair of the Institute of Business Appraisers (IBA) Board of Governors. As Chair of the Board of Governors, Bob Strachota will be responsible for participating in strategic planning, overseeing Board of Governor meetings and activities, and other Boards and Committees. IBA is very pleased that Bob has offered his strong commitment to ensure IBA’s continued efforts to improve member participation and governance, IBA’s business valuation curriculum, and its accreditations, standards, and membership benefits.

IBA’s Chairs of the Board of Governors are elected by the Board of Governors to three year terms. IBA Regional Governors oversee regional educational events, help support members in their regions, host the IBA National Conference, and provide IBA Headquarters with input and feedback about IBA’s policies and programs. All IBA’s Regional Governors hold the CBA designation. Local chapters are active in several states and metropolitan areas providing members with networking and educational opportunities. For more information about existing local chapters, or starting one in your area, contact your local Regional Governor or IBA Headquarters.

The Institute of Business Appraisers was the first organization to adopt business appraisal standards and ethics codes. Established in 1978, the Institute was the pioneer in business appraisal education and professional accreditation. IBA offers the following designations: Certified Business Appraiser (CBA), Accredited in Business Appraisal Review (ABAR), Business Valuator Accredited in Litigation (BVAL) and Master Certified Business Appraiser (MCBA).


Investment Properties: Valuing Partially Completed Construction Projects – By Robert H. Brown

Appraising investment properties which are incomplete is complicated in the best of times. Developing a reliable valuation in the current economic downturn requires attention to detail and methodology. Shenehon Company has provided fair market values of partially completed residential, industrial, office and retail projects in various stages of development ranging from footings-only-in-place to a nearly finished state. The methods we’ve been using for a number of years are consistent with those recently proposed by the International Valuation Standards Council for accounting for investment property under construction.

When valuing real property, most appraisers rely on the three basic valuation techniques (cost approach, income approach and market approach) to arrive at a reasonable range of value. The market approach is based on sales of comparable properties. Since very few investment properties transfer among market participants during the construction phases, using the market approach to determine the value of partially completed projects is precluded.

Likewise, if the appraiser relies exclusively on costs (the cost approach), the value estimate is artificially low because this technique does not take into consideration the entrepreneurial risks and incentives of the marketplace. The risks associated with a partially completed project are much higher than those associated with a completed one.

To adequately value unfinished construction projects, the appraiser assumes that the project is complete as of the valuation. Using this hypothetical situation, the appraiser now applies the three standard valuation techniques adjusting, as necessary, to account for the unfinished nature of the subject. It is common to adjust for: remaining construction and financing costs; the costs of leasing the property to a stabilized occupancy; and the development profit requirement necessary to attract a buyer to assume the risks inherent in the successful completion of a project.