CRE Midwest

Choosing the right umpire a critical step in arbitration cases

Choosing the right umpire a critical step in arbitration cases,ph01

In real estate arbitration matters, there are no simple means for challenging an “umpire’s” decision. Unlike the remedies that exist in most professional sports contests, there is no ability to throw the challenge flag or send it back to New York for further review.

As a result, when entering arbitration, it is imperative to choose the right umpire.

My company, Valbridge Property Advistors, recently represented the owner of a significant land parcel on which a substantial mixed-use development sits in Chicago.

Ground leases in urban and suburban areas typically require a “reset” periodically, generally every 10 or 20 years. The reset is based on the procedure noted in the governing ground lease document, but most often requires the estimating of fee value for the underlying land at its highest and best use. When the lessor (land owner) and the lessee (the owner of a substantial mixed-use building development) could not agree on a value for the land on which the property was located and could not agree on a mutual choice for an umpire, the parties entered into arbitration using the American Arbitration Association (AAA).

In this situation, both sides presented their cases, offering respective appraisals and corroborating data. Ultimately, the arbiter, selected from a list from the AAA, considers the evidence and concludes to value.

Given the great market conditions that have existed over the last nine years, we developed what in theory should have been a straightforward approach to estimating the value of the ground based on the highest and best value of the parcel in a mature, land-locked area of the city. Our approach included seven pieces of air-tight, corroborating data that supported our position that the value should be substantial.

While the arbiter or “umpire” was selected from a qualified list of American Arbitration Association candidates, the situation was exacerbated when the umpire felt he was not bound by USPAP guidelines (standard procedures in the appraisal industry) because he was not an appraiser. He was a lawyer. The implication was that although he did not need to adhere to USPAP, he trusted that the appraisers would.

Therein was the major issue—and our inability to challenge the call. The umpire did not know USPAP and did not want to adhere to it. Now, the arbitration was operating under two sets of rules – USPAP for the appraisers and some other standard for the umpire. In any court or quasi-court setting, the greater weight of the evidence prevails when a determination such as value is made by the people making the decision.

The stronger the evidence, usually the better the answer. And conversely. Rules of procedure and evidence are usually followed. When it can be shown that the other appraiser had inaccurate information, there are procedures ensuring that reliance on that indication of value is diminished. These procedures can include rebuttal testimony or a filing of a motion in limine to strike from the record any faulty information if evidence is presented to the contrary.

The umpire did not go into the technicalities of evidence. He decided for himself as to what he would consider as fact and ultimately chose the value of the property himself and did not, apparently, consider all of the appraisals and the guidelines on which appraisals must be developed. Yet because we were in arbitration and not in court, the rules were different and, in this particular case, much more lenient.

All the more reason to choose the umpire wisely.

Before entering arbitration, the lessor and lessee were substantially far apart on the value of the underlying ground. Most of this difference hinged on different opinions of the highest and best use of the parcel. Ultimately, based on the arbiter’s decision, the value of the ground was chosen to increase, but only by a percentage of the difference. But, moreover, there was a cloud over the decision. What were the rules that the umpire was following? Were issues considered that in any other setting would have not been considered?

Based on examples such as these, we contend that with all other considerations being equal, finding the right umpire and the research needed to get to that individual is critical. In fact, in an arbitration case, finding the right umpire may be as fundamental as developing the case that is being presented.

Accordingly, we suggest these five key aspects to finding the right umpire in a valuation case:

1. Insist on an arbiter who is a designated appraiser who will be bound by accepted regulations and standards such as USPAP.

2. Insist on an arbiter with extensive experience in commercial real estate; the more experience—even decades—the better!

3. Look for an arbiter in CRE disciplines other than appraisal and valuation, perhaps as a broker or developer. The experiences and insights that come with these disciplines will give the arbiter a broader and greater understanding and perspectives of matters including property values.

4. Ensure that the arbiter is “unbiased” and “objective.”

5. Investigate the arbiter’s track record to determine, if possible, the types of cases/situations arbitrated, and whether there have been any red flag issues or concerns.

Gary DeClark, senior managing director and principal in the Chicago office of Valbridge Property Advisors, has more than 39 years of experience in commercial real estate appraisal and valuations and other areas of the real estate field. Valbridge Property Advisors has locations across the Midwest.