When value is in dispute, the parties often engage competing experts to assist the court in rendering a decision. A recent New Jersey appellate decision concluded that in such cases simple averaging of the valuations reached by competing experts “is not an appropriate methodology for assessing divergent values.”
In Pansini Custom Design Associates, LLC, et al. v. City of Ocean City, et al., 407 N.J. Super. 137 (App. Div. 2009) a dispute arose between an owner and the city over development of a former United States Coast Guard Life Saving Station designated as a historic structure by the city’s zoning ordinance. After litigating over the requirements of the zoning ordinance for some time, the last obstacle to development was the owner’s duty under the ordinance to place the property for sale at “fair market value.” To determine fair market value, the parties once again returned to the court.
The trial court heard appraisal testimony from three expert witnesses, one for each party and a third for an objector to the development, and criticized all the appraisal methods used. In spite of these criticisms, the trial court established a fair market value by averaging the three highest figures used by the town and objector and the three lowest figures used by the developer. The objector appealed.
On appeal, the Appellate Division rejected the trial court’s decision to simply average appraisals as an “unacceptable” and “flawed” abdication of the court’s responsibility to reach “a reasoned, just and factually supported conclusion.” The court first held that “a simple mathematical formula” cannot substitute for a court’s obligation to weigh the experts’ testimony and credibility. Next, the court found that “averaging, whether of appraisals or comparable sales, is not an appropriate methodology for assessing divergent values” because it fails to account for the unique facts and circumstances of the property being appraised. Finally, the court agreed with other courts that accepting averaging would encourage and “result in appraisals slanted to the extreme.” The appeals court, accordingly, ordered a new trial on valuation.
This decision raises a few questions, including the extent to which Pansini may be applied to valuations other than those involving real property. Other New Jersey cases involving real property, including some cited by the Pansini court, support the proposition that mere averaging of expert valuations is improper. However, there appear to be no decisions prohibiting averaging in other contexts, and at least one trial court in a business valuation dispute has simply averaged the figures offered by two experts, citing difficulty in its ability to draw a distinction between the expert valuations. Therefore, despite its broad language, it is not clear whether the Pansini decision extends beyond real property valuation disputes.
Another open issue is the extent to which Pansini may constrain a court from accepting part but not all of an expert’s opinion or elements from different experts’ opinions in arriving at a determination of fair value. In a prior decision concerning tax assessments, the Appellate Division has held that a trial judge “was certainly free to utilize those aspects of [an expert’s] testimony he found cogent and reject others.” That court there also found that the judge had not erred in using elements of the expert’s testimony to reach an different conclusion from that of the expert. The Pansini decision does not expressly foreclose a court from parsing expert opinions in a similar fashion. However, because Pansini requires the valuation decision to be based on a “reasoned and considered valuation techniques,” it will caution trial courts that they are not free to just pick and choose elements from different valuation experts’ testimony to craft an entirely new result