Complex Commercial Litigation

2. Complex Commercial Litigation Taking Expert Valuation Skills to the Next Level

3. Speakers Drew K. Kapur, Esq. Partner Duane Morris LLP Richard Marchitelli, MAI, CRE, FRICS Executive Managing Director Cushman & Wakefield U.S. Practice Leader Dispute Analysis and Litigation Support Practice

4. Introduction “The slower you move, the quicker you die.” - Ryan Bingham (George Clooney) Up in the Air

5. “Failing to prepare, is preparing to fail.”

6. “The best bridge builders are already on the other side.”

7. Appraisers’ Advantages • Highly defined body of knowledge • Training and education • Extraordinary practical experience These assets provide appraisers with a powerful competitive advantage (that is seldom used) in the litigation arena over other experts providing the same services

8. Appraisers’ Challenges Problems • Resistance to change • Limited resources • Small size • Lack of critical mass • Limited capital • Unwillingness to think outside of appraisal “box” • “It doesn’t fit the template”

9. Specialization Body of knowledge grows so large that specialization inevitably results • Medicine • Law • Accounting • Appraisal

10. Appraisal Specialization Hospitality • Hotels • Gaming (casinos) • Time shares Retail • Regional malls • Other retail Self-Storage

11. Appraisal Specialization Energy and power Sports and entertainment Health Care • Hospitals • Skilled Care • Managed care • Others

12. Appraisal Specialization Residential • Multi-family • Student housing • PUD • Single family Golf Marinas Convenience stores

13. Appraisal Specialization Airports Waste • Landfills • Recycles Agribusiness Litigation Others

14. Litigation Support Service Providers Competition consists of • Litigation consulting firms • Accounting firms • Boutiques • Other appraisers

15. Why Lit Support Specialists Special expertise and knowledge in required including understanding • How the real estate and capital markets operate • Valuation theory • Damages theory (separate BOK)

16. Why Lit Support Specialists • Nuances of litigation • Legal theories • Case and statutory law • IRS regulations and guidelines • Rules of court • Federal Rule 26 • Daubert issues and exclusion of a witness • Discovery rules

17. Why Lit Support Specialists High stakes litigation requires a specialist willing to make commitments to • Performing the necessary, relevant research and understand the theory of the case • Willingness to testify and have your actions, personal character, and expert report subjected to intense scrutiny • Firm commitment to be available at time of trial to be mentally engaged and available to assist in preparation and during the actual trial

18. Opportunities Where they are not Where they are • Law firms • In-house counsel and corporations • Debt holders (not mortgage departments of banks) • Property owners • Government (limited opportunities beyond eminent domain)

19. Engagement Protocols Duration of an engagement can be weeks, months, or years • Requires team approach with requisite experience, skill sets, and competencies • Billing is normally hourly with periodic (e.g., monthly) invoicing • Expenses are reimbursable • Reimbursement for administrative overhead • Retainers (three basic types)

20. Damages Model

22. Understanding the engagement1 Are you qualified to be an expert? • Stay within your area(s) of expertise • You cannot be an expert in all things • What you say, can and will be used against you to impeach your credibility for years to come. The litigation arena is a small community in which lawyers and others research and share information regarding the prior testimony, writings, and reports of witnesses. _ ________________ 1. Visit www.wisehart-wisehart

23. Understanding the engagement Daubert or similar challenges • Methods must be able to be tested • Methods must be accepted and used by your peers • No “junk” science • Other criteria

24. Understanding the engagement Know rules of jurisdiction • Reports • Written • Oral • If written report, need to understand the scope, content, and format imposed by the local jurisdiction

25. Case Study No. 1 Plaintiff is suing for breach of fiduciary duty and overcharges by joint-venture partner • Nine major properties in various stages of completion plus portfolio of dozens of big box stores • Allegations that joint venture partner failed to complete a single construction project on time or on budget, failed to actively lease and sell properties, and overcharged for insurance, management, and maintenance

26. Case Study No. 1 Necessary to research, review, and analyze • Investment memoranda and partnership agreements • Detailed history of each property • Numerous financial models and spreadsheets • Pleadings and deposition testimony of important witness • Actual performance of each property from date acquired (all purchased on different dates)

27. Case Study No. 1 Necessary to research, review, and analyze (cont’d) • Trade areas of each property • Representations made by JV partner regarding rent levels achievable, when stabilized occupancy would be reached, when construction would be completed, when sales would occur, etc. • Comparison of what was promised to what actually took place (control for “noise” in the data) • Compare categories of alleged overcharges to market expenses for same costs

28. Case Study No. 2 Indian Nation claim against the State of New York regarding damages for underpayment of 250,000 acres that were purchased by the state in a number of transactions between 1795 and 1824 Claim is for financial damages only. Indian Nation was not asserting right or title to the land

29. Case Study No. 2 Issues for the experts • Is there factual evidence proving that the Indian Nation was paid less than market value? • What is the measure of damages • Land value today discounted back to the dates of each purchase? • Difference between what the state actually paid and the property’s market value?

30. Case Study No. 2 • Difference between payments and market value • How is the difference established? • How can the present value of the damages be calculated when no single index existed over the entire period that could provide a benchmark and the period’s history was often volatile, including bank failures, depressions, natural disasters, and armed conflict (e.g., War of 1812, the Civil War, and two world wars)?

31. Case Study No. 3 Lender liability case involving luxury condominiums • Construction loan assigned from one lender to another • Second lender taken over by FDIC in 2007 • After takeover, the FDIC funded 4 monthly draws and then stops funding • Project remained partially completed; 2008 downturn occurs and damages any prospect for refinancing or completion of construction in the immediate future

32. Case Study No. 4 Regional Mall • Anchor store had gone dark due to bankruptcy • Another major anchor department store decided to vacate its space 4 years prematurely (breach of operating agreement)

33. Case Study No. 4 • Co-tenancy clauses presented a potentially cascading effect of vacancies • Needed to develop “but for” or baseline scenario and then project what was likely to happen • Inputs (assumptions) related to co-tenancy and lease renewals were largely based on retails sales per square foot

34. Case Study No. 4 • Additional Problems • Complex model to understand/explain • Numerous inputs • More than one year had elapsed to time of the mediation (trial); model needed to be updated • Other expert at mediation was not an appraiser

35. Case Study No. 5 Alleged breach of contract by major hotel company • Property located western U.S. • Consisted of a master planned community of luxury home sites, several golf courses, and a large site at center for luxury resort hotel • Contract of sale to resort hotel required construction of luxury resort

36. Case Study No. 5 • Hotel company breaches contract and fails to build • Necessary to develop “but for” scenario • Sales of home sites around golf and resort • Financial performance of golf courses in residential communities with luxury resorts

37. Case Study No. 5 • Damages resulting from breach of contract • Comparison of “but for” scenario (with luxury resort hotel) to scenario without luxury resort hotel reflecting impact of the breach on residential prices and golf course operations

38. Case Study No. 6 Groundwater contamination – Background • Contamination of 1.5 acres of 31.5-acre site • Responsible party accepted cost of remediation • No liability of property owner for cleanup • Contamination is 10 feet and deeper; water table is 6 feet. Therefore, natural features (i.e., not contamination) limit excavation • Restrictions on well drilling imposed

39. Case Study No. 6 • Case studies of similar properties suggest no damages • Public water readily available. Property owners in the area do not drill wells Necessary to review • Pleadings and deposition testimony • Statutes relating to contaminated properties • Consult with environmental engineers • Valuation and damages literature

40. Case Study No. 6 Hierarchy of proof in contamination matters • Empirical evidence • Case studies • Interviews and surveys

41. Scope of Work – Review/Rebuttal Reports Scope of work may include review • Appraisal report or other expert report (e.g., damages model) • Workfile • Transcript of deposition testimony • Any combination of the above If preparing an appraisal review report, it must comply with Standard 3

42. Standard 3 Compliance Includes Many things Standard 3 compliance includes the following criteria, among others • Date of the review • Effective date of review • Edition of USPAP in effect on the date of the report under review • Other USPAP-imposed requirements

43. Standard 3 Compliance Includes Many things • Identify • Report under review • Date of that report • Effective date of value • Value appraised • Other requirements

44. Scope of Work • Whether property will be inspected • Data (e.g., sales, rentals, economic information) is complete, accurate, and property analyzed, developed, and presented • Other documents that will be examined as part of the review process

45. Scope of Work Example scope of work – assuming review of appraisal report, workfile, and deposition testimony • Evaluate completeness of report/work • Adequacy and relevance of data presented • Propriety of adjustments to the data • Appropriateness of valuation techniques employed

46. Scope of Work • Whether conclusions expressed are appropriate and reasonable • Identity material errors, if any • Determine whether report under review complies with generally recognized and accepted valuation principles and damages theory

47. Scope of Work • Review deposition testimony for inconsistencies with written report and conformity with generally recognized appraisal methods and damages principles • Review workfile for information that may be inconsistent with written report • Contradicts written report • Data contrary to the appraiser’s opinions that was either ignored or overlooked.

48. Appraisal Review/Rebuttal Reports Presentation Do not make it look like an appraisal or an old-style appraisal review Use blank paper, double spacing Include a table of contents Organize with headings that are numbered Avoid bold face or italicized text Make free use of footnotes and attached exhibits Focus on organization, reasoning, clarity, accuracy, and brevity

49. Appraisal Review/Rebuttal Reports Use active voice Use first person – avoid referring to yourself in the third person If you need to, use party names – avoid using Plaintiff and Defendant Avoid invective and personal attack on opposing expert Be professional and courteous

50. Appraisal Review/Rebuttal Reports May want to refer to the report itself as opposed to the opposing expert’s name Do not use boilerplate (no one is fooled and it suggests a lack of comitment and attention) Do not use rote, meaningless appraiser-like wording (e.g., “misleading”)