A Los Angeles office building that Chicago-based LaSalle Advisors Ltd. told investors was worth $265 million at the end of 1993 was appraised in the first quarter of 1994 by another appraiser at only $160 million, Pensions & Investments has learned.
The latter appraisal was commissioned from Cushman & Wakefield Inc. by an unnamed insurance company that refinanced the Fox Plaza office building. The $79 billion California Public Employees Retirement System bought a 50% interest in the mortgage, confirmed Alfonso Fernandez, mortgage investment officer.
Mr. Fernandez declined to identify CalPERS' co-investor. The mortgage was made based on the $160 million appraisal.
The earlier appraisal was conducted by Landauer Associates Inc. as part of a regularly scheduled valuation of LaSalle Advisors' LaSalle Street Fund, a private real estate investment trust.
The 65% discrepancy in the two values is in excess of the 10% range of accepted valuation differences promulgated by the appraisal industry.
In the wake of the discrepancy, and an effort by a pension fund to value its commingled fund units more accurately, the board of directors of the LaSalle Street Fund have amended its appraisal policy. The initiatives are similar to those adopted by Prudential Real Estate Investors upon its admission earlier this year that some properties in two of its commingled fund portfolios were overvalued.
The importance of the overvaluation issue is that manager's fees are based on the sum of the appraisals of properties in a portfolio. The overvalued appraisals fuel returns that lead to increases in allocations from other investors.
Fox Plaza is the major asset in the LaSalle Street Fund. The fund's 44 investors include the pension fund for Bell Atlantic Corp., Cargill Inc., Catepillar Inc., Ford Motor Co., Pacific Gas & Electric Co., Monsanto Co., the Virginia Retirement System, the State of Wisconsin Investment Board and the Public Employee Retirement System of Idaho.
The Idaho fund, in fact, commissioned a report which concluded, preliminarily, that the LaSalle Street Fund, and 10 other commingled funds in which it had invested, were overvalued by an average of 16%.
When asked if Idaho's report mentioned Fox Plaza, Idaho Chief Investment Officer Robert Maynard declined to comment.
Surprisingly, not much changed with the Fox Plaza in the time between the two appraisals. The tenant mix remained the same during the period, and no one stopped paying rent.
Rather, the discrepancy highlights the widely expressed sentiment that a valuation conclusion depends on who hires the appraiser.
Are the aims of an appraisal different depending on who does the hiring?
LaSalle said as much in its bulletin to investors that reported the discrepancy. "The (LaSalle Street Fund) Board concluded that C&W's (Cushman & Wakefield) appraisal appeared entirely consistent with a lender's objective -a confirmation of collateral value under extremely pessimistic assumptions with a foreclosure scenario," states the report dated Aug. 1.
"This is very different from Landauer's assignment, which is to estimate a value in today's investment market at which a buyer and a seller could reasonably agree," according to the report
When asked if there are indeed appraisal differences based on who commissions it, J. Marshall Peck, managing director with LaSalle Advisors said: "I feel the bulletin speaks for itself. We didn't commission this appraisal. It was commissioned by the lender."
"The issue," said Mr. Peck, "is how does appraiser A look at appraising a building and how does appraiser B look at it, and do they come up with the same valuation, and if not, why not.
"No way is it perfect," he said. "Short of a sale, appraisals are an effective proxy."
John Wrzesinski, managing director of Landauer's Chicago office, said there are various purposes for which an appraisal can be written. Appraisals that estimate market value, perspective value, retrospective value, going concern value and investment value are among the numerous types, said Mr. Wrzesinski.
"The purpose of our appraisal was to determine the market value," Mr. Wrzesinski said. "A lender is looking for collateral to support the mortgage."
Nori Gerardo, a real estate consultant with Pension Consulting Alliance dismissed the explanations given by LaSalle and Landauer.
"To my knowledge, there is no such term of art as a lender's appraisal," Ms. Gerardo said. "A firm is given the same instructions regardless of if it's an owner or lender contracting for an appraisal. Notwithstanding that the appraisal was commissioned by a lender, we would still expect to see that value within the range of reasonable tolerances consistent with industry conventions, that is plus or minus 10%."
A representative for the Appraisal Institute, Chicago, also questioned if the instructions to an appraiser would differ depending on who is doing the hiring.
"Theoretically, it shouldn't be," said Ken Thurston, director of screening for the institute. "Both parties are theoretically using market derived information. There are times when there are legitimate instructions in condemnation work, but when we are doing lending work, one would anticipate people being fairly close," he said.
A Cushman & Wakefield spokesman said the company would not comment on the issue. But the LaSalle bulletin as well as a Landauer letter written in response - at LaSalle's request - discusses what it believes was C&W's methodology.
There are three generally accepted approaches to valuing property: the income or discounted cash flow approach, the cash approach and the sales comparables approach.
"The Cushman & Wakefield appraisal presents all three approaches to value but relied primarily on the sales comparable and income approaches in deriving their value conclusions," states the Landauer letter.
Landauer concluded that C&W's conclusions were not credible because they lacked truly comparable sales transactions and used extreme conservatism in applying the income approach.
"The market rents utilized in the Cushman & Wakefield report are held flat for what appears to be three years prior to escalating at the general inflation rate," the letter states.
"This situation effectively implies that the market will never recover from the current depressed rental levels and, in fact effective rental rates will continue to decline over the next three years, which is contrary to the view of the Westside (West Los Angeles) investors we have interviewed."
Landauer is slated to appraise the property sometime during the third quarter.
At its July 14 meeting, the board of the LaSalle Street Fund adopted new valuation initiatives.
Now, an independent review of the fund's valuation policies and practices will be undertaken by an outside consultant.
Also, the fund's audit committee will retain an independent valuation consultant to assist them in the review and approval of appraised values.
The consultant will:
Review appraised reports prior to quarterly board meetings and prepare a report to the audit committee endorsing the appraisal conclusions or identifying issues or assumptions requiring additional focus during the appraisal review.
Suggest informational and analytical enhancements to ensure a high and consistent quality of appraisal reports being delivered to the fund.
Advise the audit committee relative to significant market and property events that could warrant a reappraisal of properties.
Evaluate the performance of individual appraisal firms and advise the audit committee on the need for the replacement or rotation of appraisal firms where appropriate.
Advise the audit committee on the review and selection of new appraisers.
