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Comments on "Land Rent Reset Arbitration in Hawaii: Credibility and Transparency".

I have just read the excellent article by R. J. Rirchner, SRA, entitled "Land Rent Reset Arbitration in Hawaii: Credibility and Transparency" (Fall 2014). The article, focusing on Hawaii Revised Statutes Section 466K-6, raises some perplexing questions with respect to the requirement that appraiser-arbitrators be bound by the Uniform Standards of Professional Appraisal Practice (USPAP).

1. The article does not appear to identify any difference between an appraiser appointed to act solely as an arbitrator and an appraiser selected to provide both the appraisal basis of the arbitration and to function as a member of the arbitration panel. In the latter instance USPAP compliance would seem unavoidable. It is understandable that appraisers would serve as arbitrators because understanding the complexities of valuation is not something laypersons (like a jury) can readily grasp without instructions from the bench as in a court trial. Having served as an arbitrator in several land rent arbitrations in Hawaii, the selected arbitrators, while real estate appraisers, did not have the duty of performing the appraisals to be used. Rather, all evidence of value was presented by party-engaged real estate appraisers and the arbitrators based their conclusions and decision on that evidence alone.

Arbitration is a quasi-judicial process and, as in a court-litigated matters, the outcome should be based solely on the evidence presented by the parties. Neither a judge nor a jury has responsibility for any potentially avoidable weakness in a party's case. If the effect of the Hawaii statute is to hold an appraiser acting solely as an arbitrator to be bound by USPAP, then the statute creates a potential conflict between the arbitrators and the parties. Clearly, this result does not seem any more practical than holding a judge or jury to be USPAP compliant in a valuation case.

An unintended consequence of the new statute may be an increase in post-arbitration litigation, with USPAP compliance as the basis for a petition to vacate an award. This expands the usual basis for contesting an award, as challenges to arbitration decisions usually require proof that the decision was rendered in an arbitrary and capricious manner.

2. The article discusses many problems associated with the arbitration process, including interpretation of the lease. Experience suggests that such problems are common because many arbitration provisions are not very artfully written or self-explanatory. The solution to this is for the arbitrators to develop an Arbitration Submission Agreement for acceptance by the parties where all requisite definitions and the process to be followed are set forth, including the conduct of hearings. Where legal issues appear to exist, the panel must have the right to engage a qualified attorney to provide advice on those issues.

3. The article suggests the statute will eliminate "baseball arbitration" where the arbitrators choose between the value submitted by Party A and the one submitted by Party B. However, if an agreement was entered into prior to the enactment of the statute wouldn't the agreement prevail over the statute? The intended function of the "baseball arbitrator" is to choose the most credible value presented by the parties rather than conclude a different value. Thus, the function of the arbitrators would seem to be more subject to USPAP Standard 3 (dealing with review appraisals) than Standard 1.

4. Valuation of land in Hawaii is very difficult at best because of the lack of sufficient volume of contemporary land sales to provide a reliable result based on a sales comparison analysis. Thus, artificial methods must be used. Even though these methods may be within the scope of USPAP, the results are not as reliable as direct comparison analysis.

5. The article references the scientific process; however, real estate valuation is not a science and does not readily lend itself to the scientific investigation protocols of observation-hypothesis-experiment-production of results--and to scientific theory (if the evidence supports the hypothesis). That is why the conclusion is called a value estimate. A scientific process suggests that if two, three, four, or more appraisers applied the same process their results would be the same or very similar. Experience suggests that such would be, at best, an aberration rather than the rule. Also, although real estate valuation practice has changed materially over the years, there has been little, if any, change in valuation theory. If valuation were a scientific discipline there would have been significant changes in theories over the years.

There are many ways in which arbitration of real estate values could be universally improved for the benefit of all. Hopefully this excellent article will excite interest resulting in industry-wide studies as to how the process might be improved.

Lloyd D. Hanford Jr., MAI

Rancho Mirage, CA

Author's Response

I thank Mr. Hanford for his critique of my article. I will respond to each of his comments in the same order in which they were presented.

1. Mr. Hanford states there is a difference between an appraiser and an appraiser serving as an arbitrator. He implies the appraiser who serves as an arbitrator should not have to comply with USPAP because that person is solely hearing the evidence presented and arriving at a conclusion that best fits the presentations of the parties. However, it is likely that the parties choose an appraiser to arbitrate the dispute because they recognize that appraisers have the education and training to arrive at a credible valuation, or because the lease document itself states the arbitrator must be an appraiser who is knowledgeable in valuing the type of property in dispute. If this is the reason the parties seek an appraiser as their arbitrator, they are not seeking a jurist. When an appraiser is retained for his or her appraisal skills, the appraiser has an obligation to act as a professional appraiser. USPAP is unavoidable in such conditions.

2. Mr. Hanford correctly points out that appraisers who serve as arbitrators should carefully craft the agreements for arbitration and be certain that legal expertise is employed in developing the definitions and procedures that will be followed in the arbitration.

3. Mr. Hanford suggests that "baseball arbitration," where the arbitrator chooses the most credible valuation as the winner, would be allowed under USPAP. This would be true if the lease and the submission agreement allow the appraiser serving as an arbitrator to solely choose the most credible presentation. However, most leases require the arbitrator to arrive at the arbitrator's personal conclusion, asking the appraiser-arbitrator to do more than only render an opinion of the soundness of each presentation. When the arbitrator signs an award where that the outcome is the arbitrator's opinion, Standards 1 and 2 apply. If the appraiser serving as an arbitrator solely renders an opinion of the quality of the two appraisals presented in arbitration, Standard 3's analysis and reporting requirements are unavoidable.

4. Mr. Hanford states valuation of land in Hawaii can be difficult because there is often a lack of similar sales data. This is true. He goes on to state that often "artificial methods" are necessary but are not as reliable as valuations that use an abundance of sales data. The Appraisal of Real Estate, fourteenth edition, provides several methods to valuing land. The text does not label any of these methods as "artificial." While some of these methods require several steps to accomplish, they should not be ignored because they are difficult. When an appraiser uses more data in varying methods of measurement and arrives at the same general conclusion, the valuation's credibility is enhanced. If other valuation methods lead to differing conclusions, the appraiser should not automatically assume the more complex method is in error. The method's outcome may be telling the appraiser to look at the underlying assumptions used in the other approaches. It may be pointing out a flaw in those methods. Other approaches can provide tests of the reasonableness of the answer derived from the focal approach.

5. Mr. Hanford states real estate valuation is not a science. His basis for this assertion is (1) "scientific process suggests that if two, three, four, or more appraisers applied the same process their results would be the same or very similar. Experience suggests that such would be, at best, an aberration rather than the rule"; and (2) there has been little, if any, change in valuation theory. 1 am surprised that this article has led me to have to defend appraisal practice as a science. If it is not a scientific practice, then it must be argued it is an art. I hold that appraisal practice is a science. Appraisers are required to dispassionately look at the evidence (data) available to measure an estimate of how the market would perceive the value of the property. The means by which appraisers answer these questions are scientific in method. Appraisers gather facts, analyze those facts to see where they lead, test the analysis undertaken, and report the findings so that others may also test the outcome. The methods appraisers use have changed over time as the ability to analyze more data more quickly has emerged. Yet, even if no change had occurred, the methods and perspective employed to answer appraisal questions would remain scientific. The fact that two or more appraisers arrive at differing results can be due to appraisers actually solving different appraisal problems for the same property. Different definitions, conditions, and/or assumptions can cause very different outcomes. However, another reason there may be a difference is that one of the appraisers has developed a report to please the client. USPAP addresses this situation, and appraisers serve the public best when they follow the minimum standards set forth in USPAP, which require appraisers to act independently, impartially, and objectively. The main difference between a scientist and an artist is that the scientist is acting objectively in search of the truth. The artist is acting subjectively and presenting an opinion that may or may not represent the truth. Scientists present their findings and evidence, welcoming a critique to prove the process undertaken is correct or flawed. Artists present their work as a statement and could not care less if you agree or not. Pity the appraiser who claims to be an artist and is then asked by counsel, "How much of your report is art?" As Christopher Hitchens said, "That which can be asserted without evidence, can be dismissed without evidence."

Without a scientific process to answer the appraisal question, and a report that lays out how the answer was derived, the reader is asked to accept the appraiser's opinion without evidence. Only a full disclosure of the "what" and "how" allows us to judge credibility. The question before us is whether we are a profession that states "here are the facts that support the opinion," or "here are the opinions that support the facts." I choose the former.

R. J. Kirchner, SRH

Kailua Kona, Hawaii
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Author:Hanford, Lloyd D., Jr.
Publication:Appraisal Journal
Article Type:Letter to the editor
Date:Jan 1, 2015
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