Appraisals Are Causing DamageIt is clear from feedback from avariety of appraisers that there is great debate within theappraisal community as to the veracity of many appraisals and themethodology. It is very clear to me that the methodology iscompletely wrong and that some appraisers just did whatever theywere instructed to do. Just because this is the way appraisersalways did it and it proved totally wrong, is every reason tochange it.In discussions with friends who run banks and sit onboards of trustees of major pension funds, as well as many of mycapital markets colleagues, it is clear that almost nobody believesappraised values any more. They are either too frothy in good timesor overly negative in bad times, but rarely correct. For banks theyare dangerous. In good times they lead to bad lending decisions,and in current times they lead regulators to require banks toforeclose even when the loan is current on interest and theborrower is a responsible owner. Pension funds revalue assets byappraised value in some cases and that undervalues assetscurrently. CMBS resolutions of defaults require appraisals and theyare frequently wrong and lead to bad outcomes. As proof we knowthat each side gets its appraiser and the results are usually verydifferent. As a former lender, I know that it is easy to get someappraiser to gin up whatever was needed to justify a loan, evenwhen the value was known to be too high. The whole system andmethodology is badly in need of new rules and procedures.Appraiserswho responded to my blog admitted that they merely reflect thecurrent thinking of investors- as though there was some universaledict among all investors. How do they explain that some investorsgot out of the market in 2007, while others got in. Which set ofinvestors were the appraisers reflecting. Why do a 10 year cashflow and projected terminal values and discount rates if at thestart you are trying to reflect the current investor thinking. Thatjust proves the projections have to be architected to fit theanswer which was pre determined to reflect current market prices.It is all nonsense. That is why MAI stands for made as directed.The appraisers have actually admitted in several responses to myblog and my column in Hotel News Now, that they do make theirappraisal fit what the borrowers or lenders demand.It is time thatthe Appraisal Institute convene a roundtable to include bankers,investors, pension trustees and underwriters to set new methodologyso that appraisals do what they should, provide a true, independentvaluation with all the potential risks brought to the fore offuture events. We had thought after 1990 and the new rules then,that things might change, but they only got worse. It is time fortrue resetting of the definition of what is an appraisal and how isit to be accomplished to give real ranges of values. I am nottrying to eliminate appraisals, just to make them much moreaccurate and usable so they are not misused as they have been andcontinue to be.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.