In VEI Catonsville, LLC v. Einbinder Properties, LLC, 212 Md. App. 286, 68 A.3d 872 (June 25, 2013), the Maryland Court of Special Appeals affirmed the holding of the Circuit Court for Baltimore County that an appraisal of the former Westview Cinema on Baltimore National Pike was prepared in accordance with the Agreement Regarding Right of First Refusal and Option to Purchase (the “Agreement”).
Joseph Einbinder, the then owner of the property, entered into a ground lease for the property with Circuit City Stores, Inc. in 1997. Later the movie theater was removed, and retail stores were built there. Circuit City filed for bankruptcy, and in 2009 it assigned its lease to Vanguard Commercial Development, Inc. Vanguard, in turn, assigned the lease to VEI Catonsville, LLC. In 2010, VEI desired to purchase the property under the terms of the Agreement.
The Agreement provided that the price would be determined by an appraisal and that the “appraisal shall take into account” the right of first refusal and the extension rights of the leasehold under the ground lease, but the Agreement also stated that “appraisal shall not take into account the value of the leasehold improvements then-existing on the Property.”
Ronald Lipman, the appraiser selected by the parties, considered these directions “imprecise, vague, and subject to interpretation.” He opined that had there been no reference to the lease and had the question been the determination of the value of the land without the lease, the proper appraisal method would have been the sales method, and that would have produced a value of $6,050,000. He also stated that by referring to the lease in the instructions, the Agreement required that the appraiser consider the lease in the determination of the leased fee estate or the lessor’s reversionary interest. This he determined by use of the market value method, which produced a value of $7,450,000 based on a capitalization rate (or “cap rate”) of 7 percent.
The Circuit Court for Baltimore County agreed with the use of the latter appraisal method and its result, and the Court of Special Appeals concurred. VEI argued that the appraiser had improperly taken the improvements into account in the determination of the value of the property. The Court, however, supported the view of the appraiser that it was appropriate under the language of the Agreement to take the existence of the improvements into account, but not their value. Taking the existence of the improvements into account meant that the appraiser consider the income stream to be well secured. This had the effect of causing the relatively low (at the time) cap rate to be used, and that caused the value of the property to be set at $7,450,000.
PRACTICE NOTE: Leasehold estates are particularly subject to questions of value, but other interests in real property may pose appraisal issues as well. This case highlights the need for the language in any document that provides for a future determination of the price of the property to specify exactly what should and what should not be considered at the time when an appraisal is made. If the parties and their legal counsel want to be sure that an appraiser will have clear instructions and to reduce the chance that they will have to spend years in litigation arguing about what was meant, they should consider having an appraiser review their proposed language before they finalize the document.
For questions about this, please contact Ed Levin at (410) 576-1900.