Defendant bank is the indenture trustee of a bankrupt municipality. The litigation stems from the plan for the adjustment of the municipality’s debts. The plan includes valuations for lease agreements on city-owned golf courses, parks and other property.
Question(s) For Expert Witness
1. Are the municipality’s expert’s appraisals of city-owned recreational properties accurate? 2. Did he apply an appropriate methodology?
Expert Witness Response
An appraisal of the fair market value of the possessory (leasehold) interest in the subject property must by definition consider the most probable price that this interest should sell for as of a specified date, in a competitive market, after reasonable exposure, with cash or cash equivalent terms, and assuming the buyer and seller are each acting prudently, knowledgeably, in self interest and without duress. Because a knowledgeable buyer of a possessory interest in the subject would be buying the right to receive an expected net cash flow from the property, an appraisal by necessity must evaluate the net income which would be derived from this interest, as well as any capital expenditures necessary to achieve this income. The method which best reflects investor thinking in this kind of appraisal assignment, and therefore the generally accepted method in appraisal practice, is discounted cash flow analysis. Sales of possessory interests in similar properties would also by their nature incorporate these critical bottom line issues, if such sales could be confirmed. Significantly, counter to the existing lease agreement for the appraised property, and counter to the typical methodology of knowledgeable sellers and buyers, plaintiff’s expert: • Segregated the four parts of the appraised property for individual valuation; • Provided value conclusions assuming term extensions beyond September 1, 2048; • Did not evaluate and capitalize the net cash flow that a potential buyer would expect to receive over the remaining term of the subject lease; and • Did not account for capital expenditures necessary to achieve expected net income. The credibility of the expert’s opinions and conclusions are brought into serious question, first, in light of overriding problems with the foundation of his analysis as just discussed, and second, in context of many other deficiencies in the application of appraisal principles and appraisal practice as expressed herein. Concerns about the appropriateness of his analysis, and the credibility of his opinions and conclusions, are compounded in many parts of the appraisal by insufficient information about sales data, and insufficient explanation concerning his rationale for value conclusions. These concerns and inadequacies, taken as a whole, bring into question the appropriateness of his appraisal report, which has an appearance of being misleading.
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Michael Morgenstern
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