San Diegans for Open Government v. City of San Diego

Facts: A business owner applies for a lease to extend their tenancy on government-owned land. Local regulations require the lease include a statement of the property’s fair market value (FMV) as determined by an independent appraiser. The business owner hires and pays for an independent appraiser who uses the discounted cash flow (DCF) valuation approach to estimate the property’s FMV by applying the weighted average cost of capital to future cash flow projections. The local government verifies the appraiser’s methodology and approves the lease.

Claim: A government watchdog organization seeks to invalidate the lease, claiming the appraiser is not independent since they were hired and compensated by the business owner, who was a party in interest in the subject real estate transaction.

Counterclaim: The local government claims the appraiser is independent since they were neither coerced nor asked to target a specific number for the appraisal and the appraiser used a standard methodology of valuation to determining the property’s FMV.

Holding: A California court of appeals holds the lease is valid since the appraiser was not subject to the control or influence of either the business owner or the local government, and being compensated by a party in interest to a real estate transaction does not invalidate the independence of the appraiser. [San Diegans for Open Government v. City of San Diego (March 2, 2016) __CA4th__]

Editor’s note — The four violations of appraiser independence listed in 15 U.S.C. § 1639e include:

  • any action by a participant to the transaction which attempts to influence the appraiser to disregard their independent judgment;
  • deliberate mischaracterization by the appraiser of the appraised value of the property;
  • any action which encourages the appraiser to appraise the property at a targeted value to facilitate the making or pricing of a transaction; and
  • the withholding or the threat to withhold payment for services rendered after the appraisal contract has been fulfilled.

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