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The Federal Rules of Evidence and Daubert: Evaluating Real Property Valuation Witnesses.

abstract

The days when an appraiser, or any potential expert witness, would simply show up for trial to testify are gone. Today there are a battery of tests to be applied in qualifying an expert witness. This article reviews recent U.S. Supreme Court testimonial requirements and related history, distinguishes witness types, and suggests further tests that can be used to qualify or test potential witnesses. This paper is adapted from a presentation the author gave to the Federal Circuit Bar Association in Washington, D.C.

Since the establishment of Federal Rules of Evidence (FRE) by Congress in 1975, [1] many questions have arisen regarding what properly qualifies a person as an "expert witness." The earlier Frye case [2] established fundamental tests, but after FRE postdated and superseded the Frye decision, the U.S. Supreme Court added clarifying tests in the Daubert decision, [3] subsequently expanded by the court's Kumho Tire decision. [4] Since Daubert, there have been more than a thousand decisions rendered, but there are still questions of "bright line" (define) distinctions in the qualification of potential witnesses as experts.

The Supreme Court of Washington in a 1996 opinion held that the Frye standard for admission of novel scientific evidence remains the standard of the state, rejecting adoption of Daubert. The justices noted that trial judges under Daubert, "must analyze opinions involving matters far beyond their knowledge." They also noted that Daubert tests have sometimes been considered problematic when considering behavioral and social science-related expert testimony. [5] Prior to the Kumho Tire decision, a United States District Court in Los Angeles was one of several that held that the testimony of a real property valuation witness did not fall under the scope of Daubert because it did not involve scientific evidence. [6]

Where does content and methodology of the real property valuation witness fall and who should be accepted as an expert witness in real property valuation matters? These issues are the topic of this paper. Examples of common abuses in litigation matters are presented and discussed where quasi-valuation and pseudo-scientific methods and concepts are sometimes applied by real property valuation witnesses. Tests are suggested that may lead to bright line determinations of what will qualify expert testimony in real property valuation matters and perhaps provide concepts that may be applied to other fields where technical and specialized knowledge are involved. [7]

Background: The Federal Rules of Evidence

Matters at issue in federal litigation must be approached by expert witnesses in an objective, unbiased fashion, otherwise they may be irrelevant and fail to meet the requirements of FRE Rules 401 and 402. Rule 403 further provides for "exclusion for risk of unfair prejudice, confusion of issues, misleading the jury or waste of time." Where scientific, technical, or specialized expert witness testimony is involved, the testimony should be applied in keeping with Rule FRE 702, the Daubert ruling, and other rules of evidence that may apply. These rules are intended to ensure that juries hear and ultimately consider only admissible material and relevant evidence when deciding issues in a lawsuit. Objectivity requires application of the scientific method where possible. [8] The notion of expertise must relate the services of an expert to relevant evidence that is produced with given norms or standards for the expert work performed and for related testimony.

Rule 702 states, "If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education may testify thereto in the form of an opinion or otherwise." Emphasis should be placed on the words "...will assist the trier of fact..." Those who have written on the topic have stressed that the rule was not established to open the floodgates of potential testimony, but to increase receptivity to expert witness testimony. Rule 702 does not negate Rule 401.

Daubert established that four factors must be considered to determine whether evidence or testimony is scientific knowledge and ultimately reliable. They include whether the technique or method has been tested (thus revealing its fallibility or validity), whether the known error rate of the technique is acceptable, whether the technique or method has been subjected to peer review, and whether the scientific community generally accepts the technique. The US Court of Appeals subsequently explained that these factors were "illustrative rather than exhaustive," and each was not necessarily relevant in every circumstance. Thus, the court may make somewhat liberal interpretations in individual lawsuits. Subsequent opinions apparently now number into the thousands, but the principles have apparently not changed. Focus should be brought upon these principles in judging the work and potential testimony of particular experts.

Real property appraisals, including mass appraisals, [9] require special and technical knowledge and experience, and involve applications of systematic problem solving processes, standards relating to how the process is to be applied, and tests to see whether the process is objective and reasonable. Valuation has a body of knowledge that has been tested, and accepted, by the courts, and the valuation field is subject to well-defined Standards. [10] Scientific tests exist for certain tools applied in real property valuation, and potential error rates can be estimated or quantified. [11] Peer review is commonly accomplished through Ethics and Standards administrative actions under state certification and/or licensing or by actions of professional organizations against their members.[12] The result of these reviews is reflected in courses, seminars, and Standards. Thus, there is a foundation against which the opinions and proposed testimony of real property expert witnesses can be judged, just as is true with o ther fields in which the federal rules of evidence are applied.

Notwithstanding these qualifications, Kumho Tire clearly establishes that scientific knowledge is not a singular hurdle for the expert witness. As with other expert fields, real property valuation has established principles, an advanced educational program of learning and achievement, required evidences of mastery of necessary skills and technical knowledge, and stringent standards for competency, objectivity, and clarity of presentation. Further, education, training, skills demonstration, and experience are not enough--the real property expert must also demonstrate and be prepared to defend the accuracy and reliability of valuation estimates in every valuation.

In layman's terms, in order for potential witnesses to qualify as expert witnesses, it is not enough for them to demonstrate that they are expert in some field; they must demonstrate expertise, relevantly and reliably applied, in the particular matter that is the subject of their testimony. [13] The field of expertise must be one for which there are standards by which to judge the relevancy and reliability of the expert's findings. These fields may be broadly categorized as scientific, technical, or specialized knowledge endeavors. Tests established by the US Supreme Court, and permitted under common law, are to be applied to assure compliance with these minimum standards.

Foundational Valuation Discipline Matters

Prior to the Great Depression, real property valuations in the United States were akin to the gunslingers of the Old West: there were few standards, but there were good guys, guys that wore the black hats, and those who served as gun for hire. With the advent of the Great Depression, the National Association of Real Estate Boards allowed the formation of the American Institute of Real Estate Appraisers (Institute) in 1932, and within a year the first Code of Ethics was developed for that organization. The central purpose of the Institute was to respond to the period's economic collapse by establishing statements of ethics and standards for valuations so real estate markets and those who depended upon market values could again have confidence in real property valuations. [14] The result was envisioned as a means of reclaiming lost market confidence, establishing more stable future markets, and assuring more reliable real property valuation results.

In the years that followed, little development of appraisal standards occurred until after World War II. A great deal was written about appraisal methodology, but the Code of Ethics was considered sufficient for the time. With the passage and funding of programs that called for massive eminent domain actions following the war (urban renewal and the federal highways programs), elements of the Institute's Code of Ethics that pertained to Standards were incorporated into valuation manuals and associated procedures for the administration of these programs. Legislators, federal and state agency personnel, litigators, and others took Institute courses to prepare them for administrative and litigation work. Through interaction between government agencies, valuation practitioners, the legal profession, and professional appraisal societies, community standards emerged.

In 1968 the Institute began a major overhaul of its Code of Ethics, attempting to expand the area of Standards. The result produced stronger Ethics statements, but less definite statements of Standards. Nonetheless, through the courses and seminars of the Institute, the Society of Real Estate Appraisers, and others, and through the peer review processes of those organizations that had strong Standards/Ethics enforcement practices, stronger de facto valuation Standards began to emerge. For instance, there was a frequent market requirement that Institute MAI-designated appraisers be the only ones who would be acceptable for valuing properties for many banks, insurance companies, developers, mortgage issuers, agencies, and others. The requirement was perceived by users of appraisal services as a better assurance of accurate and capable work. Additionally, there was an ongoing peer review process to reduce the chances of future errors or losses.

During much of this time, although professional societies continued to improve the quality of valuations produced by their members, and advanced the levels of skill and knowledge necessary for professional valuers, the market continued to experience mixed results. Banks, savings and loans, and individual investors often relied upon individuals with even limited real estate experience. They were frequently called upon to testify in litigation matters. A combination of limited rules to qualify experts and the certain states that qualified any owner of real property as an expert witness caused who-do-you-trust contests for juries and courts alike. Unfortunately, many concluded from these experiences that valuations were just an estimate or only someone's opinion, failing to recognize the existing Standards for valuations, which were frequently violated, and the levels of expertise that existed in the valuation discipline.

In the early 1980s, the Institute again undertook a major overhaul in articulating and enforcing its ethics and standards. As the Institute's national president, I appointed the first Appraisal Standards Board in the United States in 1981, and within two years most major valuation organizations had established their own Boards or equivalents. By 1985 there was extensive dialog among these organizations. Statements of Standards, which already closely followed the Institute's content and format, began to coalesce. When Congress began investigations of the causes of the nation's financial institutions' collapse in the late-1980s, the professional societies' Standards and Ethics statements became the foundation for appraisal Standards under Title 11 of FIRREA. [15] Subsequently a national Appraisal Standards Board was established and it functions today under the Appraisal Foundation. Its Standards are a refinement of the community standards [16] that had evolved decades earlier.

Because of the importance of real estate to our economy and to individual wealth, every American citizen has a significant financial stake in the health of real estate markets and the avoidance of real estate abuses. This is particularly true within our legal system. This crucial role demanded that a means be developed to distinguish between good appraisals and bad appraisals. Like the gunslinger era, we can still find the gun for hire in real property valuation matters, as is true in other disciplines. Many gunslingers are capable presenters, but good presentations by themselves do not produce credible, reliable, and otherwise qualified expert witnesses by simply applying truth by assertion. A good valuation, then, must first meet established Standards requirements and then be capable of effective presentation by a qualified expert.

To meet these and other public requirements, the Appraisal Standards Board of the Appraisal Foundation implemented the Uniform Standards of Professional Appraisal Practice (USPAP) in April 1987. Standard 1 established standards for performance of real property appraisals and Standard 2 pertains to how they are reported. Standard 3 was established to provide basic rules for real property appraisal reviews. Standards 4 and 5 respectively cover the performance and reporting of consulting (non-valuation) real estate work, and Standard 6 pertains to mass appraisals. [17] These are bound together by a Code of Ethics and are periodically supplemented through Statements on Appraisal Standards and by Advisory Opinions. Although USPAP was established initially for certain federal financial transactions, related state licensing and certification programs for appraisers migrated USPAP to all jurisdictional levels, thereby resulting in common community standards" at national, state, and local levels. [18] Enforcement of Standards is applied through Boards of Appraisal in each state, the District of Columbia, and five territories. Professional appraisal societies also play a key role, with expulsion from membership a possible outcome for violation of ethical conduct or the standards.

Testing the Boundaries of Expertise

During the 1950s and 1960s, there was developing case law relating to appraisals for eminent domain. In general, case law followed the concepts of existing appraisal Standards that were recognized within the real estate valuation profession, but departures occurred in areas where the courts found little precedent or had insufficient information to do otherwise. Reliability of valuation estimates suffered where experts could simply go through the paces of what was typically found in appraisals, but were not held to the tests of available Standards. Many court disputes over valuation revolved around issues of highest and best use, less frequently centering upon underlying appraisal methods, techniques, and theories. Although today's statements of appraisal Standards and the accompanying body of knowledge regarding appraisals have developed significantly over the past three decades, each is now being challenged with new theories, particularly in the field of toxic tort litigation.

Early in the Twentieth Century; real property valuation was called "the science of appraising." This reflected the roots of valuation theory in classical economics, associated concepts, and methodologies. Significant theoretical and technical writing on appraisal topics appeared in the Century's first three decades. With abuses that occurred prior to the 1930s, the horseback appraiser, the repeat sales of the Brooklyn Bridge, and fraudulent valuations to support financial transactions, the Institute's first focus was on ethics because many practitioners believed there was general agreement about methodologies. Most of the principles recognized early in the Century still survive, and are at the heart of real property valuation. Sometimes confusing is the argument over whether real property valuation is an art or a science. The field of real property valuation is not alone in this issue. Most types of economic analysis share in the art versus science debate.

The art versus science argument will probably be resolved at the same time we determine whether there is sound associated with the tree falling in a forest with no one around. It is, of course, important to establish a potential expert witness's qualifications, experience, and training for the area of proposed testimony. But it is at least equally important to determine what an expert must do when scientific activities are performed and what must be accomplished when such activities are combined with other activities that might be called art. For example, a brain surgeon deals with science in diagnosis, evaluation, and medical decisions. However, interpretations involve an art form (applications of intuition, experience, and judgment) and art is certainly involved for at least portions of surgical procedures. These principles apply to any endeavor that applies scientific procedures. Thus, multiple tests are necessary, not a single characterization such as art or science. In real estate, for example, did the real property valuation expert properly conduct scientific portions of the research and analysis work? [19] If not, the work may fail on this test alone. If properly completed, did the remaining analysis and reasoning within applicable Standards produce results that are relevant, appropriate, credible, and reliable given the nature of the litigation? These questions are consistent with the battery of qualifying tests that extend through Daubert.

In general, there is sufficient agreement among professionals in the real estate field regarding valuation methods, techniques, and concepts for reliable real property valuations to be performed on a fair and equitable basis, whether for plaintiffs or defendants. Figure 1, for example, charts the real property Valuation Process. This process is fundamental to individual property valuations and implicit in USPAP. Surgeon's manuals do not say, "Take a knife, open up the patient, take out the bad part, and sew up the patient," but the valuation field has attempted to state its professional process in layman's terms. The result, intended to aid public understanding, belies the extent of skill and knowledge required to accomplish each part of the process.

During the eminent domain era that followed World War II, condemnors and condemnees sometimes sought valuers who would value low or high, depending upon which party they represented. Valuers who engaged in such practices knowingly have been considered unethical since the 1930s, but relatively little weight or focus was given to Standards that existed for judging their expertise in each litigation matter. Today there is common agreement that Standards and related statements of ethics do not permit either liberal or conservative valuations, only reliable ones made in accordance with generally accepted valuation practices and related Standards.

Following the establishment of USPAP, there has been a growing movement among some appraisers to redefine the entire process of real property valuation. In terms of Daubert, this group would either redefine how USPAP Standards would be met or maintain that they do not apply to their field of expertise. The group is comprised of valuers, economists, statisticians, or others and has undertaken at least three principal points of attack:

1. Market Value. Statutory and case law clearly combine to make market value the standard for situations requiring fair, equal, and just measures of value. Market value is the only value type that is capable of performing the role of yardstick in such situations, whether eminent domain, contract or property dispute, or toxic tort matter. [20] Recent cases indicate that some experts appear not so much intent on changing the concept of market value, or its definition, as they are on ignoring it or applying new concepts of the word "market." [21]

2. Market Concepts. For retailers, the market is where their sales come from. The same is true for real estate, whether dealing with purchasers or prospective tenants. Developers, for example, perform market research among larger population groups to discover, quantify, and analyze from that population who might constitute a market for their product (called a "submarket"). The new breed of experts tend to ignore this market concept as too restrictive, instead assuming market data from Miami, Florida (or elsewhere) can be directly applied to any other city or town in the United States. They tend to substitute personal (or client) standards or theories that frequently are crafted to cleverly obscure the fact that they do not deal with relevant market information or processes. Further, these experts commonly rely upon area-wide analyses of groups of properties, where statistical results can be crafted or manipulated, rather than to develop analyses based upon individual properties where validation of the accurac y and reliability of value estimates is possible. These bypass a crucial step in the valuation process--validation of the fact that the sales used for comparison also meet the tests of market value.

3. Market Analysis Methods. When analyzing the market value of an individual property, the Principle of Substitution applies an important economic concept. Simply stated, it recognizes that buyers can buy land and build a new structure, buy an equally satisfactory substitute property, or put their money into some other form of equivalent investment. The Cost Approach, Sales Comparison Approach, and Income Approach are well-recognized applications of this Principle, and are quintessential Daubert tests for real property valuations. Each approach relies upon direct market comparison methods, and results in value indications for an individual property. In mass appraising, a universe of properties, or larger groups of sales transactions are used, again to derive individual property value estimates. The new breed of experts commonly uses none of these methods, even though they sometimes claim they do. Instead, they substitute methods that cannot accurately and reliably produce value estimates for individual proper ties. Hence, they cannot reliably produce market value estimates for larger groups of properties . [22]

Today the courts face a dilemma when confronted by real estate experts. Clearly these potential witnesses should not be the next gunslinger to come through the saloon doors, but how can one know who is entering? What are the requirements for real estate expertise, particularly for real property valuation experts, and how should the tests of current rules of evidence be met? [23] As was usually true for those sitting in the saloon, it is not difficult for the qualified professional to distinguish between the expert and the gun for hire. But, applications of the rules of evidence pertaining to scientific witnesses are still developing and are unclear as they apply to real estate experts. Further, until the courts focus on market value, recognize USPAP, and generally accepted valuation methods in matters pertaining to real property valuation, it will be difficult to even determine generically who a real property valuation expert is, let alone what it is that they should do.

The solution to any puzzle must start somewhere. For real property valuation matters, the beginning is to establish that the appropriate answer for real estate litigation matters involving economic impairment (damage), compensation (eminent domain), or most real estate disputes is a function of the concept of market value. This notion is clearly supported by applicable laws and related real estate litigation precedents. Next, an expert is not determined by credentials or claims alone, but whether the individual in the particular matter can, and does, knowledgeably and competently comply with applicable Standards and apply accepted methods that will result in accurate and reliable market value estimates. By definition, this result is tested at the property level. These tests are logical and empirically supportable in the context of FRE.

An Illustration: Witness Assertions in Toxic Tort Matters

To prepare for evaluations and suggestions that follow, it should be helpful to review sample issues that face the courts where purported real property valuation experts are involved. To establish the situations and related issues that may provide clues regarding identification of expert witnesses and positions they commonly adopt, I will draw from my experiences in the toxic tort litigation field. Because of ongoing litigation matters I will generalize, recognizing that the process of generalization leaves some issues too broad or overstated, but intending to establish foundations that can readily be understood. [24]

My experiences indicate that there is a general theme in how many toxic tort cases are viewed by some experts. Positions commonly stated in their work, which will be commented upon later in this paper, include:

1. Local and national evidence clearly establish that contamination results in a loss of property value. In general, this effect is automatic where contamination is involved and commonly applies in circumstances where no actual physical property damage is present. Further, geographic areas far remote from the property in question can be used for the selection of comparables or for case studies that can be applied as though they were comparables. There is no need to identify or examine cause and effect. relationships--contamination and damages go hand in hand.

2. Property value losses may be direct (actual physical damage) or indirect (stigma and other area-wide losses). Damages may be manifested in many ways, but market value effects are not necessarily an important means of quantification.

3. Appraisals of individual properties are too expensive and impractical because of the scale of the damages in larger cases; it is better to look at losses on an area-wide basis, then allocate damage to individual properties.

4. Because individual property appraisals are not involved, no appraisals are necessary; thus, other non-property specific economic and statistical methods may be applied to establish and quantify the amount of property value loss without USPAP considerations. Non-appraisal methods are actually preferred because untainted data required for appraisals may not be available.

5. The Uniform Standards for Professional Appraisal Practice (USPAP) may or may not be applicable to toxic tort damage estimates depending upon what work is provided and the background of the expert. Non-valuation experts need not follow USPAP or generally accepted valuation methods. The Standards are applicable to individual appraisals and to certain aspects of consulting engagements. However, other elements of the analysis and conclusions are outside the scope of USPAP. Specifically excluded from USPAP are estimates of property value loss that are made on an area-wide basis, as contrasted with appraisals of individual properties.

6. Available transaction data for properties in a class area are frequently invalid for comparison purposes in determining property value losses. Sales of properties in contaminated areas (e.g., plume contour or Superfund area) are impacted by the contamination and thus cannot contribute to measures of value loss. Further, such sales may show continuous growth, but cannot show the true growth that would have occurred absent the contaminating conditions.

7. Property values are set and changed by the actions of knowledgeable market participants. These include brokers, lenders, appraisers, city officials, county officials, experts in the contamination field, and others. Most of the owners, previous buyers, and sellers of properties in a Class Action lawsuit are not knowledgeable or reasonably informed market participants. Further, many of the buyers and sellers of property class real estate may also suffer from some form of duress. Clearly one would not choose property in a contaminated area over property in a clean area unless one is not knowledgeable or is forced in some way to do so. These perceptions, whether contamination is present or not, create damages that are attributable to trespass, nuisance, and/or stigma even if direct property damage does not occur.

8. For knowledgeable market participants, risk and uncertainty are crucial elements of the market decision. Where there is concern over future uncertainties, even if there were no actual contamination, there is a loss in property value attributable to market perceptions of risk and uncertainty. Thus, market interviews and survey research (opinion polls) are frequently more important than actual sales transactions data in a litigation matter. If interviews indicate that loans are available at all, the loans are made unknowing of the contamination effect.

9. Property damage can be subtle. Special research techniques are required to determine contamination damages. For example, the contaminating condition may have an initial effect of simply reducing market demand; prices begin to lower, owners leave the area, renter occupancies increase, maintenance declines, rental rates drop, crime increases, and long-range patterns are set without a precipitous change in market indicators anywhere in this cycle. The result is economic property damage. It is unnecessary to look for other cause and effect relationships.

10. Data from nearby areas outside a property class are suspect and may be totally unusable for comparisons; the damage from the defendants' actions is broad reaching and pervasive. Additionally, it is well known that contamination may be present in non-class areas of a contaminated community, and thus prices or other data may already reflect the effects of other contamination.

11. The most effective analysis tools available for analyzing and quantifying damages in toxic tort situations include:

a. General economic analysis--this analysis shows that as the contamination in the property class areas has become known to the public (it is sometimes never really recognized or understood by the residents), the properties in the class areas have fared worse than other elements of the community. General economic differences can be used as units of comparison for direct analysis or sales adjustments.

b. Market interviews--this analysis involves holding interviews with people who evidence knowledge that contamination affects property values, talk to individuals in other market areas, find those who believe that contamination almost certainly causes economic harm, perform surveys that qualify people who have negative reactions to the circumstances or areas involved in the litigation, and perform statistical analyses of their responses. Even limited evidence is sufficient to support a damage assertion. It is not necessary to rely upon market value estimates to do so.

c. Analogous cases--these studies entail looking at other market areas, usually in other cities, to ascertain what will happen in a particular situation. To do this, one looks at the literature concerning contamination's effect on property values and reviews a series of case studies from other areas. These will establish the fact that property values losses are frequently much more than what would be estimated from less sophisticated valuation methods. Further, lessons learned from other communities establish direct comparisons for properties in a given litigation area that are similar to comparables of the Sales Comparison Approach.

d. Multiple regression analysis--to apply these analyses, one must recognize that regression studies permit more detailed analysis of broader areas. Using regression we can study entire sections of the greater community, or even the community as a whole, to develop a basis for damage estimates. These techniques are widely accepted and avoid the need to make individual property studies, which would be virtually invalid anyway, as discussed above. Regression models must have high explanatory capabilities, but need not produce accurate results if the focus is only on one or more variables used in the process.

e. Conjoint analysis--this statistical method emphasizes that it and various other statistical tests apply the tests of Daubert and other legal requirements by providing scientific or technical expertise in an unbiased fashion. Although these techniques are not normal and customary valuation techniques, they are normal and customary analysis techniques used in other scientific inquiry and measurement, hence, they meet the necessary legal tests.

f. Comparative analysis of data and trends--these studies analyze publicly available sales transactions data (and MLS data where available). Studying these data, one can study averages and the movements of averages over time to establish the relatively lower and slower growth, or absolute declines, in property values in the property class areas. Differences signify damage. (It is possible for such properties to increase in value over time and still be damaged--this arises when their growth is at a slower growth rate than the rate experienced by uncontaminated properties.) A 2% difference translates into over 10% property damage in just five years. Taken over a 50-year economic life, this damage translates into a 170% difference between contaminated and uncontaminated property.

g. Public opinion polls--surveys can establish that the market for properties in the property class areas comes from the entire city in which the contamination area is located. Scientific survey research (public opinion polls), among market participants from broad areas or even other communities, can establish differentials between property class areas and other areas of the community. From these differences, one can quantify the extent of loss due to contamination from the defendants. (Although some might refer to this process as Contingent Valuation, the process will be applied in such away that we can call it something else, while still nor attempting to appraise individual properties.)

h. Control groups--these comparison groups can be applied where other sales comparisons are not available or to supplement those that are. One can establish control groups of properties away from a litigation property or area to use for comparison purposes. It matters not that the control area has only superficial similarities and can be demonstrated to represent different markets. What is important is that the area be far enough removed to avoid possible alleged effects of the litigation situation.

i. Matched pairs sales analysis--because valuation methodology provides for paired sales analysis, a substitute method can be applied. This involves application of a pseudo-comparison approach in which properties with relatively similar physical characteristics, but located in different markets, are used as "comparables." Any differences in price are entirely related to and measure economic harm (damages). The difference of markets and market areas is insignificant because, "all properties that are physically similar should sell for about the same price."

12. Because appraisal methods are unnecessary (and probably inappropriate), there is less (or no) need to focus on a particular date of value. The analysis can be a study of a time period, within which the damage can be observed and quantified. Property damage will be dealt with on an average basis within a property class area and the time frame is less important because the damage is an average over a period which includes a particular date.

13. I hold a PhD and/or professional designation in the real property valuation field:

a. If I am a PhD or other non-valuer expert, I am not subject to USPAP standards because I am not an appraiser.

b. If I am an appraiser, USPAP standards may apply, but I can relax or redefine key standards and valuation processes because they are difficult or impossible to apply to large groups of properties at once.

14. These methods and considerations are reasonable and customary for our professional field, and will be supported by other outside experts.

To evaluate the expertise required for reliable valuation or related results and to evaluate positions such as those just summarized, we must first turn our focus to an objective framework in which appropriate analysis can be performed and identify related issues of expertise.

An Objective Framework for Valuers' Analysis of Possible Compensable Toxic Tort Loss

When litigation relating to real property is involved, market value is the appropriate basis for estimating compensable loss; thus, if plaintiffs assert property damage, such damage must be capable of estimation and validation in terms of market value to be valid. (This does not ignore that some litigation may involve fire losses, and thus deal with insurable value, or that a given lawsuit might require identification and application of another type of value than market value because of special circumstances.)

For analysis purposes, it is possible to establish a test hypothesis that "actions of defendants created some degree of property loss that is compensable," and then to develop a work program that focuses on discovery and quantification of any such losses that can be found. This approach forces objective, standards-complying research to ferret out reasonable conclusions by which to judge the test hypothesis. It should reasonably begin a process that meets the evidentiary requirements cited above, but does not ensure compliance. The research and analysis methods selected, and how they are applied, are also crucial.

Valid real estate research must recognize that real estate markets are diverse, somewhat inefficient, and complex. The decision to purchase or sell a given property differs substantially from the aggregate of all buying and selling decisions--i.e., people do not buy and sell because the market acts in a particular way. Instead, they buy and sell for individual motivations and are rarely controlled by the actions of the market at large. Markets values reflect the individual decisions of those who comprise the market for the property or properties in question.

Various indirect analysis methods such as general econometric models may be useful in broader studies to support the possibility of a compensable loss. However, the plaintiffs must be able to provide credible evidence that there is a demonstrable cause and effect relationship between defendant's activities (over time if appropriate) and an economic harm to plaintiffs' properties measurable in market value terms.

The concept of market value is crucial to the court, to the parties in litigation, and to the public at large. Without a recognizable, reliable standard by which to judge monetary damages, any expert's testimony may foster a fraud upon the court, the parties, and the public. [25] Market value has long standing in courts. Its problems largely have been due to failures to apply or uphold the standards of the time, situations for which comparison data are scarce, or attempts to apply market value reasoning in circumstances for which the market value definition does not address all issues at trial. Nonetheless, the market value concept has persevered and is the applicable standard in toxic tort matters.

When market value is involved, USPAP and other professional Standards establish the guidelines that are recognized and applied in the marketplace and are the foundations for Rule 702 and Daubert determinations. These Standards have been developed to dissuade untrained individuals and unscrupulous practitioners from misuses of the market value concept, to reduce misunderstandings, and to foster confidence and dependability in matters relating to real estate activities in the United States. [26] The Standards are built upon the principle that market value estimates can be reasonably produced by scientific research and the application of recognized objective technical processes. This does not negate the contribution of judgment, but judgment should be recognized as a process that is used in conjunction with proper research, not as a substitute.

If analysis of research results indicate that some compensable loss has occurred from defendants' actions, it is necessary to quantify that loss so that plaintiffs will receive no less than, nor more than, the compensation they are due. Similarly, where no compensable loss is found, it is appropriate for all parties and for the public at large that the absence of compensable damage be properly supported and that no compensation be paid. The process of quantification requires that there be a common standard, or yardstick, not a sliding and indefinite scale.

There is an important distinction between broad economic analyses and those that directly relate to market value. Market value studies must be capable of validation by analysis methods that apply to the field of real estate valuation or appraising. It is common and appropriate for market value studies to include broader economic and area-wide analyses; however, they must be tied to conventional Standards regarding their performance and relevance. The broad studies do not substitute for more direct market value analysis methods.

The Valuation Process is explained by the Appraisal Institute, the Institute's successor (a merger with the Society of Real Estate Appraisers), in its text and various courses and seminars. The process is observed in various forms worldwide and is built upon the scientific method. Its basic elements are foundations for USPAP Standards 1 and 2. It is incumbent upon an appraiser, identified by USPAP as one who estimates/defines values of identified property interests, to apply the methods that are a part of this process. Where departure is necessary and appropriate, a full disclosure of the facts and circumstances and bases for the departure, are required by Standards.

Real property experts may be divided into a number of professional categories. The application of these categories to the work and proposed testimony of a real estate expert aids in determining what Standards should be applied and how it should be reported:

1. Appraisal or valuation experts--those who deal with market value or other defined types of value (if applicable) and the quantification of specific compensable amounts and those who perform other valuation services such as mass appraising or other valuation services. These services must comply with USPAP and other applicable Standards. [27]

2. Real estate consultant experts--those who deal with the act or process of providing information, analysis of real estate data, and recommendations or conclusions on diversified problems in real estate, other than estimating value. Their services must comply with USPAP and other applicable Standards. In particular, it is incumbent on the real estate consultant to assure that there is no confusion between valuation and non-valuation services. When valuation services are involved in total or in part, the consultant must also comply with USPAP valuation Standards. [28]

3. Other experts--those who do not necessarily meet the USPAP Standards because their services do not fall under either of the first two categories; for example, a cost estimator, a civil engineer, a statistician, an economist, or other person engaged in a specific support role not involving appraising or consulting. Standards for such services may not be set forth in the fashion of USPAP Standards, thus requiring other evidence to comply with evidence rules cited above. Their services may be used by appraisal exerts, in which case under USPAP the appraiser must meet certain requirements in order to place reliance upon the other experts opinions. Clearly, if the other experts' work is incorporated as an estimate of value, the other expert is performing appraisal services and USPAP tests must be applied. Damages or property value loss are estimates of market value and are subject to USPAP.

4. Dual services experts--those who may perform two or more of the above categories in any given litigation matter.

When research concerning the test hypothesis posed above indicates that there is insufficient evidence to support an estimate of compensable loss, it is unnecessary to perform property valuations. Individual valuations in large cases would be prohibitively expensive and time consuming and may provide no addition to knowledge. In such cases, the real estate expert may perform market studies and pricing analyses, but the result will be reported as a consulting report under USPAP unless individual property market values are estimated. Conversely, where compensable losses are estimated, appraisal or valuation services must be performed, and generally accepted valuation methods and Standards must be applied. [29]

Damage to property creates a potential property interest. For example, some real estate is sold in fee excepting rights to actual or potential litigation claims against others. However, USPAP cautions against summation approaches in which elements constituting the bundle of rights (or physical components) are valued separately, then summed for an indication of the defined value of the whole. The sum of the parts may not equal the market value of the whole. [30] Similarly, cautions must be exercised in estimating the value of a component without an understanding of the defined value of the whole. Thus, attempts to estimate damages without regard to valuation of the entirety places the estimator in peril of a Standards violation.

Even if the expert asserts that mass appraisal techniques are being applied, validation of the results is necessary. This requires focus on representative evidence regarding relevant market evidence or analysis of market values for individual properties. Mass appraisals result in the valuation of individual properties considered within the mass of properties included in the appraisal. However, depending upon the application, the values derived may not be market values. Further, the process of mass appraising is not one of simply considering many properties at once. Mass appraising is a widely applied valuation discipline with its own standards. [31]

Plaintiff experts customarily have more extensive access to plaintiffs and their properties than defendants' experts, thus allowing plaintiff experts more detailed property and data analysis. For defendant experts to meet the requirements of USPAP or other conventional Standards, it is important that defendant counsel take steps to assist their experts in obtaining necessary information that is otherwise unavailable to the experts. For example, controlled property inspections should be scheduled in sufficient quantities for properties that are essential to analysis. The experts should be afforded access to all relevant discovery materials and should participate in establishing questions for interrogatories and depositions. Rather than signaling that the expert has adopted an advocacy position, these steps can be handled in such a way to preserve the expert's objective, unbiased position.

Evaluation of Witness Assertions in Toxic Tort Matters

With the preceding discussion as a foundation, we can summarize points that should be considered in evaluating the competency, relevancy, and appropriateness of real property valuation witnesses and their testimony. The tests apply whether the appraiser has been engaged by the plaintiff or the defendant. To apply our previous example, the following discussion considers the list of 14 pseudo-expert positions itemized above that are sometimes taken in whole, or in part, by some experts in contradiction of Standards or appropriate tests of FRE:

1. Contamination and related toxic tort matters may or may not create a compensable damage. This issue of damages is not one of generalization, regardless of who expresses the opinion. Economic impairment is a function of a particular market's reaction to a situation or event and, as is true with virtually any market situation, the result is dependent upon each particular market. For a witness to carry personal biases that affect the outcome of what purports to be an unbiased opinion is inappropriate and should be guarded against in objective research. For valuation witnesses, biased work violates ethical requirements of the Standards. The use of transactions from geographic areas far remote from the appraisal at hand and case studies from other market areas are no more relevant to the valuation of groups of properties than they are to an individual parcel.

2. Market value is the appropriate yardstick for the quantification of economic impairment to real property that results from causation attributable to a defendant. The market value concept eliminates the need for speculation because market value is the present worth of anticipated future benefits. By deriving accurate and competent market value estimates, whatever the market may think or believe of the future is incorporated into their market transactions. Hence, speculative adjustments are duplicative and incorrect. Many so-called stigma estimates are actually speculations about how future markets may act.

3. Economic impairment is measured at the property level. Where groups of properties are involved, mass appraisal techniques are available and can be performed within the requirements of applicable Standards either for analytical or valuation purposes. Frequently, the class certification process results in larger and more difficult aggregations of diverse submarket areas, often difficult, if not impossible, to value without developing a series of models for the markets they combine. Class certification not based on this consideration does not waive the underlying evidentiary requirements for estimating economic harm. Thus, for larger and more complex class areas, class areas should be organized into smaller, more manageable areas, or it should be recognized that the time for and cost of performing studies required to derive market value estimates will be higher because multiple markets and diverse properties are involved.

4. Non-valuation methods can be effective in analyzing larger areas including multitudes of properties and can supply evidence as to indications that economic harm may or may not have occurred within defined areas. They cannot, however, derive market value estimates by which to apply the bright line test of economic impairment. When and if non-valuation models can perform valuation tasks, they will be incorporated into valuation methodologies and will have statements of applicable Standards. Despite the apparent persuasiveness of certain statistical procedures, including many applications of hedonic modeling of the acid test, does the method produce a reliable estimate of market value at the property level that can be validated in keeping with Standards.

5. USPAP provides the courts with an extraordinary tool by which expert witnesses and their testimony can be judged. USPAP articulates community standards for real property valuation without regard as to who performs the valuation. Their Standards are applicable to all toxic tort situations in which the issue of economic harm to real property is at issue. Witnesses who attempt to redefine litigation issues for convenience, or for client accommodation, do not meet the public needs of the courts and do not comply with appropriate community Standards.

6. It is true that some market data, as is true with controlled scientific experiments, may be tainted. However, in the world of real estate this does not necessarily mean that the data in such markets should be ignored. If, for example, homes in a given area subject to a contamination event sell for 10% less after the event, why would that fact not be the most important market evidence available after all other things being equal? I have observed a tendency for some experts to reject mostly all market data within a contamination area and to substitute speculative information from other areas that may have little, if any, comparability. This leads to substitution of hypotheses and speculations for factual data. [32]

7. Expert position number 7, like many of their assertions, begins with a statement with which many will agree and progresses to unfounded conclusions. It is not unusual for them to seek the exclusion of factual data by assuming that the market would not act as they did if they knew what the expert knows or thinks. If this premise can be established, the expert is free to engage in hypothesis and speculation, abandoning the real world in which quantifications can be derived. Often the data that the expert attempts to exclude is the best evidence of that expert's error. For example, one expert says a market is not knowledgeable because "it does not have adequate knowledge about a groundwater plume." The expert ignores hundreds of media releases about the contamination, evidence regarding disclosures by sellers and brokers, mailers received by area residents, town hall meetings, and the like. Instead he narrowly defines market knowledge as a function of the arguable location of one or more underground plumes, t he actual locations of which are argued by scientists, and assumes that this is the only relevant knowledge even in the face of contrary evidence.

8. Risk and uncertainty are market factors and the market's reaction is reflected in the prices market participants pay for real estate. Using risk and uncertainty as though they were considerations that override and are separate from the market's actions, some experts create hypothetical prices and price differentials based upon their own assessments of risk and/or uncertainty. Some also attempt to validate their opinions with public surveys. At best, the surveys I have seen in some expert reports are conjectural and speculative. They have not been taken from areas that can validly represent the market(s) involved in particular litigation. Market interviews are important in market studies and the results help to better understand available sales information. However, they do not serve as a substitution for factual data and do not establish market value. Interviews can aid in discovery of market facts and in verifications, such as lending practices and terms.

9. Explanations using logical progressions of subtle damage measures are frequently crafted to use persuasion and speculation that will appeal to a particular audience, but may not have relevance to the real estate markets in question. Logic is important in research and analysis processes, but logic does not substitute for the facts being examined. Further, market preferences of particular submarkets may literally defy logic or the preferences of those who may participate in other submarkets. Objective research requires that the researcher perform studies regardless of personal biases or attitudes and in a way that, if bias is present, it can be overcome. If these tests cannot be met, the expert cannot function as an independent, unbiased expert. (Again, see USPAP SR 1-1[a].)

10. There is no rule that says any data must be absolutely eliminated from some form of consideration. This is a matter of the facts and circumstances at hand. To the contrary, it is important to understand surrounding properties to best understand those in a particular area, such as a litigation class area. The attempt to exclude an analysis of nearby properties is frequently motivated by the expert's desire to seek evidence in a given area, even though that area is not a comparable market area. This practice should raise questions as to the expert's objectivity and the relevance of any area selected for which significant reason for its use cannot be established.

11. Although individual commentary on each of the methods suggested by certain experts is possible, full discussion of each is beyond the scope of this paper. It should be noted that only one of the methods is a generally recognized valuation or mass appraisal method. Multiple regression analysis is an important tool of mass appraisals when properly applied, but common usage by experts does not meet the validation tests of mass appraising. Without proper market validations, the experts cannot produce market value estimates using these methods. Under proper circumstances, many of the methods could be used for market studies, but they do not lend themselves to market value estimation as commonly applied. Further, by inserting many of these methods into the expert's work, confusion can be introduced into the court by focusing on whether the particular method was performed in a proper way rather than whether it was even relevant. In some instances, an expert's seeming mastery of some of the methods is used to imp licitly establish bona fides, at least persuasively. They should not be allowed unless they are accurately performed and proved relevant, and unless they will "....assist the trier of fact" [33] in issues before the court.

12. Markets change over time as a response to many influences. Thus, it is crucial that a date of value is established for when the claims of economic impairment are alleged to begin. Similarly, if the economic effect was likely to have existed over some period of time, that period must also be identified. Cause and effect situations, require that the effect of all other influences be eliminated before the effect of a particular cause can be quantified. For example, general real estate price declines were experienced in the United States in the late 1980s. It would be incorrect to say that all declines in price in a given area are attributable to alleged contamination causes if prices declined in general at the same time because of general economic conditions. Further, averages can be manipulated and their findings can be misleading. Averages do not compensate for failures to resolve cause and effect questions, determination of economic changes that affect specific time periods, or a failure to deal with avai lable facts. Market value is not an average, regardless of whether a value considers few or many data examples. In statistics, averages are not determinative of a particular outcome; they are simply tendencies.

13. The Curriculum Vitae of an expert witness is important and should be judged on content rather than length and form. For real estate experts, it is of less relevance what a particular expert calls himself or herself than whether that individual performs the tasks in a manner that is appropriate and supportable, given the nature of the expert's testimony Thus, an economist who makes no effort to value particular parcels of real estate should not be qualified as a value in that instance and the individual's work should not be interpreted as a valuation. Distinction should be drawn between whether the individual is an expert in some instances and whether he or she is an expert in the particular matters for which the opinions are offered before the court. The highly qualified brain surgeon may be a lousy witness as an auto mechanic and may not even qualify for medical matters pertaining to the eyes, ears, nose, and throat. [34]

14. In helping the court to understand the nature of the expert's services and the purposes for which the testimony is offered, it is essential that the expert be explicit in these matters. "Our professional field," unless clearly identified, is indefinite, unhelpful, and may be misleading. There is no reason why the expert's report cannot be responsive to at least the expert's understandings of the types of Daubert and other related tests that will be applied to the expert's work. It is frequently necessary for experts to rely upon the opinions of other experts. When this occurs, the reliance should be disclosed. There should also be a disclosure of the steps taken by the expert making such reliance to validate and to understand the work of the other expert, if any, to assure that the reliance was appropriate, relevant, and proper." [35]

Although these points are brief, risking oversimplification, and there are many circumstances in which defendants' experts may also err, several conclusions can be drawn from the above examples.

1. The FRE address an important need, that of aiding the courts, which are seldom expert in matters that purported experts are offered for testimony, to establish a decision making process relative to the relevancy and reliability of expert witness testimony.

2. It must be recognized that focus sometimes may be directed away from appropriate FRE tests when experts can demonstrate that they have expertise, but not necessarily for the specific matter for which they are to testify.

3. Because an expert has expertise in a given field should not qualify that expert for testimony without meeting tests appropriate to the particular application of his or her expertise.

4. If an analytical tool evidences a recognized scientific method, this recognition is not an endorsement for use in every analysis situation and does not guarantee that the tool is properly applied.

5. Standards exist in many fields and standards appropriate to the particular litigation should be identified and considered in the witness qualification processes. Where litigation involves real property valuation issues, USPAP has developed a prominent statement of community standards.

6. Market value is a crucial yardstick for real property valuation litigation matters, as it is for many other types of litigation dealing with valuation.

Conclusions

The preceding discussions suggest a number of FRE-and Daubert-type tests that can be used to evaluate whether the real estate valuation expert, the expert's work, and the proposed expert's testimony meet necessary litigation requirements. These include:

1. Has the expert reasonably stated the problem being addressed in the context of the particular litigation?

2. Is there a clear and unequivocal identification of the property or properties involved?

3. Is there a full and reliable disclosure of all pertinent facts and circumstances that relate to the valuation or valuation-related issues?

4. Have standards appropriate for the work been identified and have they been reasonably applied?

5. Are terms used by the expert properly identified and defined, including citations by which their meaning and use can be judged by non-experts?

6. Was an appropriate definition of market value cited and has the expert consistently applied generally accepted valuation methods to estimate market value, in keeping with USPAP Standards? If the litigation involves non-market value issues, is an appropriate definition of value included, explained, and justified in accordance with Standards?

7. Is a date of valuation cited, is the date appropriate, and has the expert consistently applied data and analyses that will validly result in a value estimate as of that date? If more than one date, or a series of dates is involved, have the same tests been met?

8. Are the expert's work, report, and related testimony clearly directed to the issues for which the testimony is offered, or do they contain boilerplate, unsupported opinions, and speculation?

9. Can the expert demonstrate proper application of generally accepted valuation methods, including those applicable to scientific procedures applied in the work?

10. Was the scope of work set forth by the expert appropriate for the intended litigation purpose and were all facts discovered during the research period properly disclosed and analyzed?

11. Do the work, report, and testimony evidence an objective attitude of the expert, or does the result reflect bias or accommodation for the client's interest? Although this is ultimately a decision for the trier of fact, the question should be raised by the appraiser throughout his or her work and by the appraiser's client.

12. Does the expert adequately develop and conduct a research program so that reasonable support is developed for conclusions, or do conclusions reflect speculation and conjecture? Are appropriate disclosures made?

13. Are the work and testimony presented in such a way that it would not tend to mislead?

14. Has the expert shown recognition that the work is designed for litigation purposes and that it must be presented in such a fashion that it expresses the expert's best attempt to help the court and to meet reasonable FRE and Daubert tests?

15. Do scientific procedures that have associated confidence interval and other tests of accuracy and significance, include these measures and the expert's assessment of the accuracy and reliability of the findings?

16. Are the results reasonable and supported, and are they relevant to the specific determinations for which the expert's testimony is offered?

17. Can the ultimate reliability of the valuer's results be demonstrated and supported by credible market evidence?

Although these tests are stated in the context of valuation witnesses, their essence can be applied to many expert fields. In brief, the expert must perform work in compliance with identifiable Standards, evidence objectivity, clarity of thought and presentation, and demonstrate competency; relevancy; and reliability. Anyone can state an opinion. The expert does so by meeting these tests.

The real property valuation is, to some extent, unique in the since that Standards have been developed for the performance of its experts. Those Standards do not eliminate new and novel concepts and theories, but they do require exposure and testing of those ideas among peers before judges and juries are required to opine upon them. They also provide a foundation for evaluating the testimony of expert witnesses in the context of FRE and Daubert.

Some say that Standards are too limiting or that they hinder intellectual freedom. They argue, for example, that market value is a developing concept sometimes requiring a Standards departure from generally accepted valuation practices in particular applications. Some try to force the concept of market value to perform tasks for which it is not intended. [36] Each of these should be viewed with skepticism. To the extent that dynamic forces are present, new applications are found and new methods are introduced, there are established means whereby they can be recognized and approved when they meet the tests of industry Standards. Meanwhile, Standards such as USPAP and related tests such as those offered above, are available to guide the courts in determining who is properly qualified as an expert valuation witness, and based upon the work performed, whether they should be qualified in particular litigation.

John D. Dorchester, Jr., MAI, CRE, is a former national president of the American Institute of Real Estate Appraisers. His real estate appraisal and consulting business focuses on litigation and litigation support. He has testified in numerous litigation matters including the Exxon Valdez oil spill state cases, the Irvine Company disputes, the Cayuga Indian land claims, and a variety of environmental cases. He provides research and counsel to a number of governmental and private sector clients.

(1.) The new FRE became effective July 1, 1975 following a 10-year development period. Chief justice Warren in 1965 appointed an advisory committee to study and draft a comprehensive statement of the rules. After years of debate and controversy, Congress in January 1975 amended proposals transmitted from the Supreme Court, clearing the way for the FRE to become effective in mid-year.

(2.) Frye v. United States, 293 F. 1013, 1014 (D.C. Cir. 1923).

(3.) Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).

(4.) Kumho Tire Co. v. Carmichael, 119 S. Ct. 1167 (1999).

(5.) State of Washington v. Copeland, 922 P.2d 1304 (Wash. 1996).

(6.) United States v. Frances Gherini, et al. United States District Court for Southern California, 1999.

(7.) Some of these issues are raised in Attacking and Defending the Appraisal Report in Litigation, a seminar of the Appraisal Institute. Also, see Richard J. Roddewig's comments in "Environment and the Appraiser," Appraisal Journal (October 1999).

(8.) The scientific method is a process that involves observation, development of a theory, establishment of a hypothesis, and testing. Unfortunately, it does not always distinguish between a fact, a theory, and a hypothesis. The Valuation Process applies principles of the scientific method as a model, based upon economic principles (particularly substitution) as the hypothesis. The model is widely applied by appraisers and by the marketplace. It is noteworthy that the founders of appraisal practice in the United States referred to the science of appraising in the same sense that they referred to the science of economics.

(9.) Mass appraisals are valuations that consider many rather than a single property as their subject and are commonly performed in valuation of properties for ad valorem property tax purposes, and have special standards requirements when used in any application. The techniques can be applied in situations requiring analysis of multiple properties.

(10.) These particularly include the Uniform Standards of Professional Appraisal Practice, discussed later in this paper. Also important is the Uniform Appraisal Standards far Federal Land Acquisitions (UASFLA), widely used in the federal jurisdiction.

(11.) Where statistical processes are applied, multiple regression analysis, time series analyses, and many other procedures provide for analyses of potential errors associated with the process and, for a given data set, are repeatable. The systematic Valuation Process applied by real property valuers is intended to reduce the range of error and in common market usage, valuations are expected to be competent within a range of tolerance.

(12.) There are many publications, but not all are peer review quality or have such intent. For example, Appraisal Journal articles are reviewed by an Editorial Board prior to publication, but acceptance by the journal does not signify that there is broad acceptance of the subject matter of the article or approval by the Appraisal Institute. Rather, publication here, as with many other periodicals, provides for new and innovative thought, whether widely accepted at the time of publication or not. Despite the seeming logic of Daubert's peer review test, a great deal of published information does not meet the test of stating industry standards or even acceptable practices.

(13.) USPAP Standards Rule 1-1(a) states, for example, "In developing a real property appraisal an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal."

(14.) There are many definitions of market value, but virtually all are built upon the same premise. As used herein, wherever market value is referenced, I will apply the following market value definition: "The amount in cash, or on terms reasonably equivalent to cash, for which in all probability the property would be sold by a knowledgeable owner willing but not obligated to sell to a knowledgeable purchaser who desired but is not obligated to buy. In ascertaining that figure, consideration should be given to all matters that might be brought forward and reasonably be given substantial weight in bargaining by persons of ordinary prudence, but no consideration whatever should be given to matters not affecting market value." Interagency Land Acquisition Conference, Uniform Appraisal Standards for Federal Land Acquisitions (1992) (quoting United States v. 50 Acres of Land, 469 U.S. 24, 29 [1984]).

(15.) The Financial Institutions Reform Recovery and Enforcement Act of 1987.

(16.) Community standards were cited in many early court cases involving real estate valuations. Particularly in the state courts, in the absence of formal industry standards, what was generally recognized in the applicable market area or community was a principal standards test.

(17.) Other USPAP Standards pertain to non-real property valuations. They include the development and reporting of personal property valuations (Standards 7 and 8), and business valuations (Standards 9 and 10).

(18.) It is important to note that USPAP Standards provide under their Departure Rule that certain sections of the Standards are classified as specific rather than binding requirements. Rather than a relaxation of the Standards, this provision facilitates the application of Standards in a wide array of situations. Stringent requirements are placed upon an appraiser who invokes the Departure Rule, including the burden of proof that the opinions or conclusions produced will be credible given the purpose of the assignment and the use of his or her opinions.

(19.) For example, if an appraiser purports to apply survey research in order to infer some statistical result, were the scientific standards of sampling frame, questionnaire design, survey research conduct, tabulations, and other elements met? If data are eliminated from an appraiser's analysis, what support is offered for their deletion from the analysis model? If a so-called "control group" is selected for comparison, what evidence is offered to establish the market validity of that area's comparability? In short, what scientific principles, if any, can be applied to these processes, and were they applied properly?

(20.) Other value definitions result in inability to test the validity of valuation estimates in a fair and just context of the open market. For example, assessed value may be based on market value, or it may not. Investment value is particular to a given investor and value-in-use applies only to a given user making a particular application of a property. Intrinsic value has little meaning unless there is an outside stimulus (such as the market) to quantify the notion of worth. Going concern value measures the worth of a business, not its component parts. More than 100 value types have been identified.

(21.) This is not to say, however, that there is not a continuous, insidious attack on the nature, definition, and/or applicability of market value. See for example the author's paper, "Market Value is Not an Ideology: The Attack on Market Value Continues Through Public Interest Value and its Family," available through the Appraisal Institute.

(22.) As an example, an appraiser may apply his or her judgment in the selection of a database of 100 sales from a universe of sales that is vastly larger. From the non-statistical sample, a series of averages are calculated and from these averages statistical inferences are drawn. This form of analysis, which is only one of several that could be cited, carries implied accuracy because of the precision of the calculations, but its failure to properly apply statistical standards, as well as the standards of comparability incorporated into the Valuation Process, create results that are fatally flawed.

(23.) For example, FRE 402 requires that evidence which is not relevant is not admissible. FRE 401 defines relevant evidence as "evidence having the tendency to make the existence of any fact that is of consequence to the action more probable or less probable than it would be without the evidence." Finally, FRE 702 provides that "[i]f scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence *** a witness qualified as an expert by knowledge, skill, experience, training, or education, may testimony thereto in the form of an opinion or otherwise." The courts have broad discretion to determine relevance and reliability of expert testimony, but these decisions must relate to the particular facts and circumstances of the case.

(24.) Portions of the following discussions are taken from a paper presented by the author to the Federal Circuit Bar Association in Washington, D.C. May 20, 1999.

(25.) For example, where would our standard of measures be with an elastic yardstick, clocks that failed to apply the same time standard, speedometers and odometers that could be set back, or school test scores that could be based on good looks, athletic ability or judgment?

(26.) US Standards are similar to those in most other countries. The International Valuation Standards Committee has developed Standards for over 50 nations. It has been determined that, while international Standards are more general, US Standards do not differ in principle.

(27.) USPAP Standards include Standards 1 and 2 for appraisers, Standard 3 for those who review and critique valuations, and Standard 6 for those who perform mass appraisals. Standards 7 through 10 apply to other types of valuation. Other applicable standards include those imposed as Supplemental Standards by responsible professional societies, applicable standards pertaining to specific statistical or other processes applied, and the like.

(28.) The reader is reminded that USPAP Standards 1 and 2 relate specifically to valuations, whereas Standards 4 and 5 relate to non-valuation consulting. As provided by the Standards, when engaging in a consultation matter, under the Standards an individual is required to comply with Standards 1 and 2 if the matter also involves valuation as defined by the Standards.

(29.) It is particularly important to stress the importance of the Departure Rule and the concepts of specific and binding requirements within the Standards. Note also that the appraiser is required by USPAP to "state and explain any permitted departures from specific requirements of STANDARD 1, and the reason for excluding any of the usual valuation approaches." This will include a statement of the rule from which the departure is invoked.

(30.) There are many examples of this principle. For example, one could not validly estimate the market value of land for commercial purposes and then add an estimated cost of a new residence that failed to develop that highest and best use. (This also violates other economic principles.) Similarly, one could not add the face (market) value of an onerous (non-market) mortgage and a presumed equity value as though the mortgage was at market. The same is true of attempts to add together value estimates of diverse lease interests, each of which is encumbered by special, non-market considerations.

(31.) Note for example USPAP Standard 6. Also, various standards of the International Association of Assessing Officers cover mass appraisal valuation procedures.

(32.) The reader is again reminded of USPAP Standards Rule 1-1(a) which requires correct employment of "recognized methods and techniques that are necessary to produce a credible appraisal."

(33.) Fed. R. Evid. 702.

(34.) For the new breed experts' position 1 3b, I mentioned that some experts attempt to avoid USPAP Standards by simply defining them away. USPAP ethics provisions attempt to preclude such practices by prohibiting valuers from producing or distributing false or misleading reports. Accordingly, if the purpose for which a valuation is intended is market value, the size of the work at hand does not provide a basis to avoid the requirements for estimating market value. Thus, a position adopted by the valuer in opposition to this requirement would violate USPAP Standards unless it could be properly qualified under the Standards as a departure.

(35.) Guide Note 3 of the Appraisal Institute's Supplemental Standards provides professional guidance for reliance on "Reports Prepared by Others." The principles this Guide Note establishes are appropriate to any expert's reliance upon other expert opinions.

(36.)For example, as the nation emerged from the collapse of savings and loans, many banks and other financial institutions in the early 1980s attempted to require market value appraisals as of future dates. This notion is foreign to the market value definition because of the speculation a future date introduces into the valuation analysis.
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Author:Dorchester Jr., John D.
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Date:Jul 1, 2000
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