Arbitration for Real Estate Disputes

The real estate business, by its nature, is complex and therefore ripe for misunderstanding and disagreement.  When there is a dispute, the parties have a choice.  They can go through the public courts which are expensive, time consuming, rigid, and offers no privacy.  Or they can engage the services of a qualified and skilled Real Estate Arbitrator.

 

POP QUIZ:  You are a busy business owner.  You are ten years into a 20 year lease for the building that your business operates out of.  The lease has a clause that the rental rate renews at “Market Rent” every five years.  It is renewal time.  Your landlords’ appraiser says that your rent is to go from $15,000/month, to $21,000/month plus all occupancy and common area costs, for the next five years.  But your appraiser says that Current Market Rent is actually only $17,000/month plus utilities.  What do you do?

 

WHAT ARE THE BENEFITS OF ARBITRATION?

Arbitration is a private dispute resolution service.  Compared to the public courts, arbitration has five significant advantages including speed, cost, privacy, flexibility, and expertise.

  1. Faster:  Disputes going through the public court system can often take many years.  The courts are a public institution that typically has a backlog of cases with long wait times.  An arbitration on the other hand is much faster, often completed within a few months.  That is important, because time is money.
  2. Cheaper:  Arbitrations are very cost effective as compared to the expense of a public trial which may often cost in the tens to hundreds of thousands of dollars.  The cost of a particular arbitration depends on the scope and complexity of the issues, however it is often a fraction of the cost of a court action.
  3. Private:  The privacy advantage of an arbitration is often very attractive to many parties especially when the nature of the dispute is sensitive, or some evidence is confidential or proprietary.  The arbitrator is bound by confidentiality and ethics rules to not disclose any details of the dispute, or even that there is a dispute.
  4. Flexible:  The public courts have rigid procedures including the rules of court and the rules of evidence.  The procedures for an arbitration however can be custom designed for the particular nature of each dispute.  For example, for some disputes a fast track “documents only” arbitration may be appropriate.
  5. Expertise:  In the public court system judges are assigned at random.  However, with an arbitration the parties choose the decision maker.  Parties often engage a qualified arbitrator (Q.Arb or C.Arb) that also has additional specialized qualifications, such as an professional appraiser (AACI or CRA) to arbitrate real estate disputes.

 

ENFORCEABILITY

Arbitration awards are enforceable.  Provided that all procedures were correctly followed by the arbitrator an arbitration award is often legally enforceable by the courts, very much like a judgement.

 

POP QUIZ:  You are an investor and you have hired a general contractor to build an apartment building for you.  Your payments to the general contractor are due at certain stages of completion.  The contract says that “a payment of $175,000 is due once the project reaches 25% complete.”  The general contractor says they are at 26% and they want their money now.  You say no, it is at 15% because it isn’t correct to include the delivered but uninstalled material in the percent complete calculation.  Construction has stopped until this dispute is settled.  What do you do?

 

WHAT KIND OF REAL ESTATE DISPUTES CAN BE ARBITRATED?

A Real Estate Arbitrator can help with just about any type of real estate dispute, such as:

  • Lease disputes including interpretation of clauses, rental rate renewals and terms, common area expense allocations, etc.
  • Disputes regarding the interpretation and enforcement of condo/strata rules and regulations.
  • Disputes involving market value, market rent, or other types of value or cost estimates.
  • Issues relating to the allocation of value or cost, such as during creation or dissolution of partnership agreements or other types or shared equity arrangements.
  • Disputes relating to tangible or intangible real estate or property damages and claims.
  • Family disputes over the shared ownership of assets such as cottages, farmland, or revenue properties.

 

HOW DO I GET STARTED?

If all parties to the dispute are open to arbitration then the first step is to engage a qualified and skilled Real Estate Arbitrator.  A professional with the Q.Arb or C.Arb designation is trained and qualified in all aspects of arbitration services.

It is recommended that your Real Estate Arbitrator also has expertise in the real estate industry.   For example, a qualified real estate appraiser (AACI or CRA) has in-depth training and years of experience in all types of real property valuation issues, as well as expertise in a wide variety of real estate consulting and advisory services.  AACI’s and CRA’s are bound by very strict ethical standards which ensure objectivity and confidentiality.

Once you have engaged a qualified and skilled Real Estate Arbitrator the next step is for the parties and the arbitrator to develop an Arbitration Agreement which establishes the scope, jurisdiction, and procedures for the arbitration.

POP QUIZ:  You are a tenant in a condo/strata strip mall.  Your unit is open storage space only, and all the other units are fully developed offices.  The leases say each tenant must pay “…a proportionate share of the total property tax…”  You think “proportionate” means that the tax bill is divided up based on the assessed value of each unit, and on that basis your share of the tax bill is $3,500/year.  However your landlord and all the other tenants say no, the total tax bill is divided up equally based on occupied square feet, and on that basis your share of the tax bill is $7,500/year.  What do you do?

 

About Suncorp Valuations

Real estate disputes are often very complex and can involve a lot of money.  Do you have the time and patience to wind your way through the public courts for all to see?  Or would you be better served to engage the services of an objective, qualified and skilled Real Estate Arbitrator from Suncorp Valuations that has expertise in the real estate industry and speaks your language?

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

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What Factors Have Been Influencing Canadian Construction Costs in 2020 and 2021?

Many factors influence building costs.  These factors fall under the general categories of material costs, services costs, and labour costs.

Looking at material costs, there are many sub-categories such as framing lumber, concrete, steel, gyproc, insulation, etc.  Each of these sub-categories are impacted by supply and demand forces in their particular market which ultimately influences the cost for that item.

Looking at framing lumber, these costs have risen significantly during the past year mainly due to a rapid rise in housing starts.  On the other hand, labour costs have flattened or in some cases fallen with some sub-trades and in some regions during the past year due to mass layoffs and high unemployment caused by the COVID pandemic.

Although there are innumerable factors that influence building costs, during the last ten years the overall trend has been inflationary.

During the first year of the pandemic, there has been a great deal of volatility, but the overall trend has been inflationary as well.

According to Stats Canada, Canadian residential construction costs increased by 12% between Q1 2020 and Q1 2021.

We have observed in some cases that although building material costs have recently risen significantly, some developers are decreasing profit margins or taking some other steps to lessen the inflationary impact.

As an example, statistical data indicates that overall building costs in the Vancouver region rose 3.7% from Q4-2019 to Q4-2020, and that during the same period the cost of single family housing rose 6.6%.

 

What is the current outlook for building cost trends for 2021 and 2022?

This short-term rate of building cost inflation is unsustainable.  Therefore, at some point in 2021 or 2022 the pace of increase should slow to levels that are more traditional.  There may even be a period of deflation to some degree as the markets re-adjust.  However, with so many different factors at play it is impossible to predict the nature and timing of this change in trends.

 

How does this affect Insurance Appraisals?

During normal business cycles, Suncorp’s professional staff monitor a wide variety of data sources to support building cost estimates for a wide variety of building types, and in a wide variety of locations.  This includes analysis of statistical data from Stats Canada, RS Means, Marshall & Swift, and many other reliable sources.  We also collect and analyze market data in the form of actual costs from current construction projects.

During times of economic instability, such as the COVID pandemic, market forces become volatile.  This volatility affects the many factors that influence building costs.  As such, it becomes challenging to accurately estimate building costs during these periods.  For example, statistical reports often have a 3-6 month lag time.  Accordingly, the recommendation by many brokers is to have a professional appraisal done at regular intervals so long term market factors such as economic and even monetary factors (exchange rates) are considered to arrive at an accurate value.

Technical Reviews

Have you ever considered getting a second opinion on an appraisal, cost estimate report, reserve fund study / depreciation report, or consulting report? Here is an option, the Technical Review. You can even get a Technical Review of a Technical Review.

What is a Technical Review?

A Technical Review is an unbiased and objective formal written critique of a report that was prepared by another firm.

The purpose of a Technical Review is to form an opinion on if a subject report is credible and reliable.  The opinion is supported in the Technical Review report by detailed analysis of any errors or deficiencies observed in the subject report.

Technical Reviews are prepared by Suncorp’s Senior Consultants whom have completed additional training and have experience in this specialization.  Technical Reviews prepared by Suncorp are prepared in alignment with the Review Standards of either the Uniform Standards of Professional Appraisal Practice (USPAP), or the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP).

What are Technical Reviews used for?

Technical Reviews are most often prepared for different types of litigation support, and at various stages including pre-claim analysis, or to assist with preparation for cross examination.

Technical Reviews are also often commissioned as part of a due diligence process.  For example, a private equity lender may require a Technical Review of an appraisal report to help determine the credibility and reliability of an appraisal submitted as part of a mortgage application.

Scope of a Technical Review

The scope of a Technical Review has a very wide range, from a basic standards compliancy up to a full audit of work-files.

All Technical Reviews include a standards compliancy review against the set of standards under which the subject report was prepared, which could be either USPAP, CUSPAP, RICS Red Book, International Valuation Standards, etc.  This stage also includes a review of methodology employed within the subject report.

Technical Reviews may also include additional steps depending on our clients need.  These can include verification of factual data reported within the Subject Report, re-inspection of the subject property, additional market research, or even a full audit of the entire process and work-file.  Often our clients may have specific questions or issues they may want us to investigate.

It is important to note that a Technical Review does not provide an alternate opinion.  For example if the subject report is an appraisal report, the Technical Review does not include an alternate opinion of value.  However if the client also needs that alternate opinion of value, Suncorp is available to provide that service under separate cover.

Geographical Considerations

Depending on the scope, Technical Reviews may be conducted on reports developed on properties located virtually anywhere.

For example if the subject report is a Reserve Fund Study on a property located in, say Texas, and the scope of review is limited to a standards and methodology review, then the location of Suncorp’s reviewer is not an issue.

Suncorp’s Technical Reviews Services

Suncorp Valuations can provide Technical Review services on a wide variety of report types including Real Property Appraisals, Machinery & Equipment Appraisals, Insurance Appraisals, Reserve Fund Studies and Depreciation Reports, and related Consulting Reports.

 

 

For a Second Opinion, Call Suncorp Today.

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Appraisers – An Essential Service

During times of crisis, emergencies, or other types of disruption, authorities often order closures of non-essential businesses and services.

During these times, essential services are permitted to continue operations.  In fact, they are expected to remain in operation.  Why?  Because, among other reasons, essential services are necessary to preserve basic societal and economic functions.

The Appraisal industry is recognized as an Essential Service in most jurisdictions. 

What makes appraisals an Essential Service?  The banking, finance and insurance industries are Essential Services as they provide basic economic functions.  The appraisal industry is part of the supply chain to the banking, finance and insurance industry, thus appraisals are an Essential Service.

Being recognized as an Essential Service is an important responsibility placed on the shoulders of the appraisal industry.  We do not take this lightly.  We understand that it is our duty to continue providing high quality professional services while doing our best to protect the health and safety of the public and the appraiser(s).

The COVID-19 crisis affects appraiser’s ability to do property inspections.  Travel and inspection safety are not new territory to a professional appraiser.  We routinely encounter all kinds of risks while in the field, and managing inspection risk is part of our training.  At Suncorp Valuations, we added pre-inspection procedures and questions to identify potential COVID-19 issues as much as reasonably possible.  When we do identify a risk, we communicate with our client immediately to identify ways to mitigate the risk.

At Suncorp Valuations, we have also developed alternatives to full inspections such as desktop analysis or exterior only inspections with preliminary reports, to be followed by a final report once we are able to complete a full inspection.  This is a good example of how we continue to serve the public and support a functioning economy, while minimizing risk to all parties.

Here at Suncorp we are committed to remain in full operation during the COVID-19 crisis, however keeping governmental guidelines and protocols in place to limit exposure for our clients and staff.

A Second Look at The Hard Market and Accreditation of Appraisals

As the Insurance Market Tightens, Professional Appraisal Standards Matter.

Recently we have been fielding a lot of inquiries on accreditation as insurance companies and financing institutions emphasize the need for accurate values and where they are coming from. Accreditation matters and the market circumstances are highlighting this. Please find a previously issued Blog on Accreditation and how Suncorp meets the challenge to match insurers and financiers expectations. We know some firms limit their liability to the fees charged, however with accreditation comes liability insurance.

Like many other professions, the appraisal profession has developed professional practice standards. These standards describe the mandatory scope of work and report content required to provide clients and the public with credible and competent valuation services.

In the US the predominate appraisal standards are known as the Uniform Standards of Professional Appraisal Practice (USPAP).  USPAP is maintained by the Appraisal Standards Board which was established by the US Congress in 1989.  USPAP is updated every two years, and sets mandatory standards for ethics, competency, appraisals of real property, personal property and business interests, and conducting technical reviews.

Canadian appraisers followed USPAP until 2001 when the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) were introduced.  CUSPAP is published by the Appraisal Institute of Canada and is also updated every two years.  CUSPAP is similar to USPAP, however it also sets mandatory standards for reserve fund studies, and appraisals of machinery and equipment.

The “RICS Valuation Global Standards,” which is published by the Royal Institution of Chartered Surveyors (RICS), is widely viewed as mandatory appraisal and consulting standards outside of North America.

USPAP, CUSPAP, and RICS are each recognized globally as premier top tier valuation standards. These standards are accepted and, in many cases, required by all levels of government, lenders, investors and the courts.

How do you know if your appraisal report complies with these standards? A starting point is to ensure that the signing appraiser holds one of the following professional appraisal designations:

ASA – American Society of Appraisers
AACI – Appraisal Institute of Canada
MRICS – Royal Institute of Chartered Surveyors
MAI – Appraisal Institute

In addition to ensuring quality and credibility, adherence to professional standards is also important for errors and omissions insurance coverage. If a party suffers a loss as a result of a faulty appraisal, and the E&O insurance carrier determines there is willful non-compliance then coverage may be denied. Willful non-compliance may occur if an appraisal does not meet professional standards, or if the signing appraiser does not have a professional appraisal designation (ASA, AACI, MRICS, or MAI).

It is recommended that when one engages an appraiser that the service contract stipulates that the services to be provided must be in full compliance with either USPAP, CUSPAP or RICS; and that the report must be signed by a fully qualified appraiser that holds a recognized appraisal designation.

At Suncorp, all appraisal services we provide are fully compliant with either USPAP, CUSPAP, or RICS, and in many cases exceed the minimal standards.  All Suncorp Valuation Consultants have either earned or are working towards a professional appraisal qualification.  Furthermore, all Suncorp appraisal reports go through a rigorous quality control procedure and are then signed by a Senior Valuation Consultant (ASA or AACI) prior to being released to our client.

 

 

Contact Suncorp today for all your valuations needs.

 

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