From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘litigation

21st Century Valuation Problems

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Did everyone have a great holiday?  It’s been nearly 3 months since I’ve darkened the door of this blog.  Between the holiday season, a couple of very interesting conferences (more on those later) and heading for warmer climates for the winter (MUCH more on that later!), I’ve been terrifically distracted since November.

The trigger to get me off my duff and writing again was a complex Federal Court trial in Missouri last week.  Yes, I was the testifying expert, and yes, my clients prevailed, but that’s not exactly the point.  The point is WHY I was testifying and WHY my clients ultimately prevailed, at least in my humble observation.  The case was a class action concerning the value of a fiber optic telecommunications transmission easement. For a variety of reasons, this case only concerned 789 miles of the easement crossing about 3,250 properties, but the very important lessons learned from this case apply broadly to a variety of modern-day corridor easements.

Earlier in the litigation, the class action had been certified and the Court had held that the responsible party did not have the right to enjoy the easement without compensating the property owners.  The court had held that the defendants had unjustly enriched themselves, and so this trial was narrowly focused on compensation.  That compensation, it was held, would be the fair market value of the easement, and that’s where Greenfield came in.

The defendants proffered a valuation theory called “across the fence”, or “ATF” for short.  ATF models were developed many years ago for easements like railroads and power lines when data on such easements were difficult to come by, and when the change in highest-and-best-use of the property resulting from the easement was minimal, at best.  The ATF theory basically says that the value of the easement is equal to the value of the land taken (usually farmland or forests) plus an “enhancement factor” to equate the more valuable use of the railroad or power line easement.   This enhancement factor would range from 1X for an easement which was no more valuable than the surrounding land to 10X or more for a very valuable easement.  Note that the enhancement factor can be a matter of judgment on the part of the appraiser.  It is supposed to be determined by looking at sales or leases similar easements and similar surrounding properties, but with a dearth of data, the enhancement factor was often just a matter of conjecture.

In addition, ATF valuation required individualized “before-and-after” appraisals of every affected property.  In testimony in Missouri last week, the defendants’ appraiser acknowledged that each “before-and-after” appraisal would cost about $10,000, more or less.  Given that there are 3,250 properties affected by this one easement, that translates into $32.5 million in appraisal fees.  Ahem…..

In addition, the defendants’ appraiser applied a fractional enhancement factor, which he basically simply made up with no data or analysis to support it.  He said that the land devoted to a fiber optic cable telecommunications easement was worth 25% of the value of surrounding pasture and grazing land.  Again, ahem….

Greenfield was called in because modern valuation problems call for modern solutions.  In 2002, the U.S. Fish and Wildlife Service (“FWS”) was faced with the challenge of determining the fair market value of fiber optic cable easements in National Marine Sanctuaries.  Specifically, there were two such easements in the Olympic Marine Sanctuary in Washington State (one each headed to Japan and Alaska) and one in New England.  Faced with the likelihood that Federal land would be used for such easements in the future, and the mandate that private users of public property pay fair market value for such uses, the U.S. Government undertook an extensive review of payments for similar easements, and found that prices ranged from $40,000 per mile to $100,000 per mile.  (In the Missouri case, the defendants’ appraiser, applying pastureland values, a fractional enhancement factor, and a number of other adjustments, arrived at a value of $3.44 per mile.  Ahem, yet again…..)

Shortly after the FWS report, Greenfield undertook our own analysis of telecommunications corridor easement transactions across the U.S.  We gathered over 1,000 transactions dating back to the early 1970’s, with a particular focus on easements where both the grantor and grantee were operating on a level playing field (i.e. — telecom companies versus railroads).  Our findings were solidly supported.  Telecommunications easements are typically valued in America using corridor theory models.  The values of the easements are unrelated to the values of the surrounding land (thus relegating ATF models to the history books).  Corridor easements should (and indeed must) be valued with simple per-foot or per-mile data in a straightforward, easily understood, 21st century model.

The jury in Missouri deliberated about as long as it took to pick a fore-person to affirm the efficacy of corridor valuation models.  The evidence and testimony could not have been more starkly different from the two sides.

The downside?  I would love to have had a piece of that $32.5 million project they proposed.

Written by johnkilpatrick

February 10, 2015 at 7:19 am

Musings of an expert witness

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I JUST spent the entire week in booming, Towson, MD, testifying in a little-known, not-well-covered case called “Allison v. Exxon.” On the surface it seems like a fairly straight-forward case: In 2006, an Exxon station in rural Baltimore County spilled a lot of MTBE-laden gasoline (at least 26,000 gallons). The gasoline flowed into the drinking water aquifer, and contaminated the well water for a fairly large, up-scale neighborhood. Hundreds of houses and dozens of businesses are affected, and after 5+ years, the remediation is still ongoing. A small, preliminary case went to court a couple of years ago (we were not involved) and the significant jury award demonstrated that the subsequent cases, as they went forward, had the potential to be extremely expensive for Exxon and would potentially send a message about MTBE litigation.

The current trial, which has been ongoing for several months, will continue for at least another two months. Then it goes to a jury. As the stakes have gone sky-high, so have the players. Both Exxon and the plaintiffs up’d the ante on law firms. Exxon is now represented by DLA Piper, perhaps the largest corporate law firm in the world. The plaintiffs are represented by Peter Angelos, one of the most successful trial attorneys in America (and, coincidentally, the owner of the home-town Baltimore Orioles.) Naturally, we were called in as real estate valuation experts and economists to measure the monetary damages. I just testified this week, and of course my involvement behind the scenes is ongoing.

I actually testify in fewer cases than people might think. At Greenfield, we do a LOT of litigation support, but we’re glad that our work helps our clients settle the majority of cases outside of the courtroom. (For more on this, see a recent article on the website, Success at the expert witness “business” requires thinking not only about what we do but more importantly thinking about HOW we do it. As such, the past week has caused me to focus a lot of attention on that “how” component, and I’m writing this blog entry more for my own memorialization than anything else.

As I think about the “how”, three things come to mind:

Experts have to be careful with their egos. The best experts have very strong egos — they have to, because in the run-up to trial, their opinions, expertise, and findings are challenged repeated. Good experts have very strong internal editorial systems within their organizations, and are constantly willing to put their own egos aside in favor of the pursuit of excellence. However, to get on the witness stand (and deposition, and meetings with clients, and inevitable reversals), the expert has to be able to withstand a withering intellectual assault. A strong enough ego, however, can be a two-edged sword. A clever opposing attorney can make mince-meat of an egotistical blow-hard on the witness stand. I’ve seen really fine testifying experts simply melt-down under that sort of pressure. It’s not pretty.

Stay at the cutting edge of your body of knowledge, but not beyond it. There is a “safety zone” right at the front edge of the body of knowledge. Whatever the field, there is always a “current body of thought” concerning methods and standards. In real estate valuation, it’s obvious that the older methods have been severely called into question during the current real estate melt-down. As it happens, there are great new methods that have been tested and found superior (hedonic modeling, time-series indices, contingent valuation, etc.). These are well tested and established methods. Ironically, many “old-hands” at testifying in court are too busy playing “witness” and spend very little time maintaining themselves as “experts”. They fail to keep up with the current literature. They may publish, but it’s usually about things that were old-hat 20 years ago. When faced with newer methods from the other side of the courtroom, they have no foundation to comment, and as such do a poor job for their clients.

Keep it simple Ironically, most “expert” work is highly technical. However, every testifying expert should be able to describe and discuss what he or she did in a very short “elevator pitch”. It has to be simple. In my experience, jury members are usually pretty bright, and typically want to be engaged in the “show”. However, they want to know that there is a simple theme to the expert’s work. If it’s too convoluted, even though it may be true, it doesn’t “seem” true, and hence won’t be compelling to the jury.

Written by johnkilpatrick

April 16, 2011 at 9:58 am

Yet more on the Gulf Oil Spill

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The promised white paper is still in the works — plan to finish it this weekend. Unfortunately, this project seems to be evolving in real time. Putting a “freeze frame” on it is problematic, but doable. We’ll unquestionably need to update this as the summer progresses.

Also, as many of you know, I’ve been s-l-o-w-l-y working on a book on Real Estate Litigation Valuation. It’s actually coming together a bit better now, and so I hope to have more info on that soon.

Written by johnkilpatrick

June 10, 2010 at 10:26 am

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