Lack of “three approaches” gets experienced appraiser “Dauberted”

BVWireIssue #86-4
November 18, 2009

First, the federal district court found the defendants breached a twenty-year lease for a nursing home facility and owed the plaintiff/landlord over $370,000 in back rent. The landlord also claimed over $10 million in lost future payments, and presented a credentialed BV expert—the director of a valuation/litigation practice with more than 500 past valuations—to provide the proof. The defendants challenged the expert under Daubert, claiming she lacked specific healthcare experience and her report was unreliable.

The court quickly found her education and experience more than sufficient to qualify as an expert. But when it came to her report, the expert relied on just two emails regarding rental offers (both rejected by the landlord) and a Medicaid formula to conclude a fair rental value of $55,000 per month.

Where were the three approaches? “An appropriate appraisal of the nursing home facility should involve some combination of the three traditional valuation approaches—income, market (comparable sales), and cost,” the federal district court observed. “Nothing in the…record” suggested that the two email proposals represented fair market value, and the expert failed to explain how the Medicaid formula might determine private lease values or how she generally arrived at the $55,000 figure. “An expert must offer good reason to think that her approach produces an accurate estimate using professional methods, and this estimate must be testable,” the court said, before striking the expert’s report. Look for a complete abstract of Lock Realty Corp. v. U.S. Health LP (Sept. 14, 2009) in the January 2009 Business Valuation Update™. The full-text of the court’s opinion will be available at BVLaw™.
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