“How to Find, Manage and Coach the Right Expert Witness for Your Real Estate Development Case”

By Barry Gross, President of Developer’s Research and David Parr, a founding partner of the law firm Palmieri, Tyler, Wiener, Wilhelm and Waldron LLP

In this tumultuous economy and resultant battered real estate market, here’s a guarantee:  shovels and blueprints are going to be replaced by gavels and depositions.

The result of a landscape of development projects gone bust will almost certainly be a boom of litigation as builders, investors and contractors seek to recover at least part of the money that was intended to be transformed into homes, offices and stores.

Lawyers involved in these cases are preparing for a landslide of litigation that in many instances will deal with more money and more complex technical issues than they’ve ever experienced.

Experts in land development and real-estate finance who can serve as behind-the-scenes consultants and witnesses are certain to have their day planners full of deposition schedules and their GPS systems locked onto courthouses and lawyers’ offices.

But who are these experts? Where do you find and retain them? How do you determine which one is best for your case?

Don’t be surprised when your first foray into researching those topics produces a plethora of names, numbers and professed expertise spanning complex land-development issues. The challenge – and it may determine the success or failure of your case – is to identify, deploy and manage the expert(s) who make the ideal fit for your specific litigation.

The Litigation Landscape of Real Estate Cases

There are several potential lawsuits likely to arise from the wreckage of a failed project, either in or outside of potential bankruptcies.

Landowners and investors are often stuck with property that in today’s market is worth just a fraction of what is was previously worth or they expected to realize at the height of the market. They also may be left with the liability of partially built improvements that must be either completed or abandoned entirely. They might blame the development firm for bungling the entitlements and putting the project so far behind schedule. They also might say development costs were not accurately projected, resulting in crippling overruns. So they’ll file suit.

The development firm, meanwhile, may be owed millions of dollars for work that was finished but never paid for, and may counter sue the project owner for breach of contract. Various homebuilding companies and other contractors who are owed money might do the same.

Finally, the handful of homebuyers who are left stranded in a half-built development can also be expected to retain lawyers.

The list of potential litigants goes on: A joint venture may sue planning or engineering firms for poorly designing a project; a bank that provided institutional financing may sue the development partnership or the guarantors of loans for land or construction; the contractors who provided services or construction activities at the property may file a mechanics lien for payment of work that was completed.

Other parties may jump in from other directions: The local governmental agency may sue the development firm, the lender and the bonding company for guarantees provided under subdivision improvement bonds. The Homeowners Association may sue the developer for a poorly structured association that is not providing services delineated in the sales literature.

When to Call in the Experts

Presenting a case for either the plaintiffs or the defense in lawsuits that arise from such complex situations will require a depth of outside expertise.

It is hard to overstate the important role that expert witnesses play in the resolution of any complex litigation, and real estate is no exception.  It is well documented that experts hold considerable clout with juries and are essential to a party meeting his burden of proof or refuting a claim by the opponent.  Cases can be won or lost based on the quality of the expert testimony.  One example where the court noted the importance of an expert opinion in deciding a real-estate case is the trial court case of County of San Diego v. Woodward (1986) 186 Cal.App.3d 82 [230 Cal.Rptr. 406].  In Woodward, the court noted, “the County presented the testimony of . . . a well qualified independent appraiser with 32 years in the real estate business,” while the appellants provided “no appraisal and no indication . . . as to why they felt they should have more.”  [Id. at pp. 87, 90.]

The California Evidence Code states that “[a] person is qualified to testify as an expert if he has special knowledge, skill, experience, training, or education sufficient to qualify him as an expert on the subject to which his testimony relates.”  (Evid. Code, § 720, subd. (a); See also Rule 702 of the Federal Rules of Evidence (28 U.S.C.) for the analogous federal rule.)  Thus, experts do not need to be professionals and any person who has special knowledge, skill or experience in an occupation, trade or craft may qualify as an expert in his field.  The determination of whether an individual qualifies as an expert for a particular matter is generally within the discretion of the trial judge in the case.  (Miller v. Los Angeles County Flood Control Dist. (1973) 8 Cal.3d 689, 701 [106 Cal.Rptr. 1, 9].)

Every expert one side brings to court will need to be matched by the other side. In litigation surrounding a failed development project, there is a potential need for expert consultants and witnesses in at least the following areas:

• Project revenues:       An expert may be needed to review initial revenue projections and      update them to the current time.       The basic qualifications for testimony in this area include      knowledge of the project and competitor’s projects in the marketplace over      the full life cycle of the project.
• Cost estimating: An expert would be required to review the      plans and specifications to determine if initial estimates were reasonable      and any increases or decreases to these estimates were appropriate.  Qualifications include the ability to      read and understand engineering and architectural plans and having a strong      background in understanding field operations.
• Determination of land residual value:  The experts should have broad knowledge      in developing cash flow schedules, including a strong knowledge of present      value theory and understanding what really goes on “under the      hood” in a real estate development project.
• Underwriting issues:       For preparation of a project analysis, there are certain estimates      that are made, such as the percentage of revenues used for sales and      marketing or the cost to construct a certain type of house in a certain      locality, when information is not readily available.  It is important that experts understand      these ratios are estimates.
• Accounting:  An      expert may be required to determine if accounting was performed      properly.  Each accounting expert      should be a licensed CPA with a specific background in real estate      development.
• Project due diligence:       An expert may be required to review the history of the project to      determine if the entitlements were appropriate for the project and/or if      concessions made to local government agencies were in accordance with      contemporary standards.  The basic      expert qualifications should include knowledge of the Subdivision Map Act,      the California Environmental Quality Act and familiarity with the      development process.
• Construction issues:       The expert should have field experience that will enable the expert      to make reasonable judgments of whether improvements were installed in      accordance with the plans.
• Grading issues:       Many projects, especially those in hillside areas or flood control      regions, are the source of major lawsuits.       The expert should have the tools available, especially knowledge of      specific grading computer programs, to allow a comprehensive evaluation of      data to determine if the grading operation was run in the most efficient      manner.
• Project scheduling:       The expert should have a working knowledge of project scheduling      software and the ability to understand which items are precedents to other      items so that the schedule can provide a roadmap for project execution.
• Common interest subdivisions:  Often, lawsuits arise between the      developer and purchasers of property in a subdivision.  An expert in this area should have a      strong knowledge of the standards and practices of the Department of Real      Estate, as well as an understanding of potential construction defect      litigation.
• Public finance:       During the past 10 years, public finance in the way of Community      Facilities District formations has provided significant benefits to      developers.  Unfortunately, as the      market has changed in the past several years, the perceived benefits of      public finance have acted as a detriment to a project.  The expert should be able to testify on      creation of the special districts and the impact they have a project’s      viability.
• Damages:  The expert      should have a broad working knowledge of all the items described above in      order to support the claim for damages at the conclusion of the      trial.  As stated above, an expert      should understand the development process, the construction process, the sales      and marketing process.  The expert      should also possess the ability to provide courtroom exhibits for use in      the trial.

Expert Witnesses Versus Consultants to the Legal Team

An important distinction needs to be drawn between an expert retained by an attorney for the attorney’s own use, and an expert who will testify as an expert in a trial.

Information produced by an expert for the attorney’s own use is generally protected from being discovered by the opponent by reason of the attorney work product privilege.  (Scotsman Mfg. Co. v. Superior Court (1966) 242 Cal.App.2d 527, 531 [51 Cal.Rptr. 511, 514].) Counsel often needs to discuss the strengths and weaknesses of the case with an expert in confidence and without the threat of disclosure in discovery.  A consulting expert can fill this role by sharing opinions, conducting investigations, and preparing reports that are all not discoverable so long as the expert is not named as a witness at the trial.

However, the privilege is destroyed once that expert is designated as a prospective witness at a trial. (Scotsman Mfg. Co. v. Superior Court, supra 242 Cal.App.2d at p. 531.)  Upon such a designation, the product of the expert’s employment is subject to discovery under California Code of Civil Procedure Section 2034.210, subdivision (c).  (National Steel Products Co. v. Superior Court (1985) 164 Cal.App.3d 476, 488 [210 Cal.Rptr. 535, 542].)

When the same expert’s status changes from a confidential consultant to a testifying expert, scope of discovery should be limited to those issues upon which the consultant is retained to testify, with work product protection remaining for other issues and subjects.  However, there are few bright lines in this area and counsel should recognize the risk that all work done by the testifying expert could be subject to discovery by opposing counsel.

The experts must be experienced and prepared for analysis and testimony required at both depositions and the trial.  Many individuals or organizations are inexperienced in legal procedures and may often make simple mistakes that affect the trial.  An expert should understand that use of e-mail almost always leaves a “smoking gun” that can be used against the client.

If an organization is chosen as an expert witness, one person should be designated the “Testifier” and this person should be insulated from exposure to any facts that could be harmful to the client.

Others in the organization should screen damaging documents from the Testifier.  This practice will assist in providing a clean record for use in conclusion of the dispute.  Under attorney- client privilege, if the Testifier should happen to discover information that is damaging to the case, the Testifier should be removed from the case and another expert witness should be hired.  The expert also must understand that there is a requirement to provide all documents reviewed, prepared or relied on during the assignment.  As a result, preparation of information that may prove harmful should not be memorialized in writing.

Don’t Leave a Virtual “Smoking Gun”

The expert witness should be well-versed in the rules of discovery.  As all successful litigating attorneys understand, emails often leave a “smoking gun” for the other side’s representatives to review.  In addition to the overt information contained in emails, there is also the covert information contained in emails.  This covert information is the result of email recipients inadvertently forwarding a chain of emails to other parties.  In many cases these chains of emails may include 10 to 20 other emails that provide a simple roadmap for an adversarial attorney to follow.  Other information contained in a chain of emails includes recipients that the other side may not have considered deposing.

There is also the danger of hitting the “Reply to All” key on Microsoft’s Outlook that sends incriminating information to third parties that are later available in discovery.  If a client deleted an email in the normal course of business and later was requested to provide all email activity, he or she may not have remembered emails that were deleted.  However, the parties in the “Reply to All” list may still have copies of the email which could be presented to the other side.  This may have the effect of discrediting testimony of the client.

An even worse circumstance would occur if the client ignored the subpoena for all emails and then deleted the emails after receiving a subpoena.  If, during the discovery phase, the other side were to subpoena off-line data backups, they may be able to pinpoint that emails were deleted after the subpoena was issued.  This would certainly have the impact of making the client appear to be hiding something from the other side, and possibly result in sanctions for the improper destruction of evidence.  Such sanctions could include disqualification of the expert who deleted the e mails, monetary sanctions or even an inability to present expert testimony on the issue with which the expert was involved.

If the expert witness was inexperienced, he or she may communicate with the client and the attorney using emails.  If emails are not properly managed, the communication between the lawyer, the client and the expert witness may weaken a client’s position.  In addition to providing information to the other side, emails, which are dated, also can provide anyone with a “what did he know and when” trail of information that would certainly be unhelpful at trial.

We strongly suggest that there be little, if any, communication between an expert witness and attorney using email correspondence.  We also recommend that all communication occur via telephone or face-to-face meetings.  (It should also be understood text messages fall under the broader category of email correspondence.)

The expert witness should also be cognizant of keeping sequential runs of financial analysis.  A careful review of previous versions of analysis may reveal that the expert considered a rejected course of action.  Oftentimes, the idea that an expert considered an alternative that was rejected may provide a roadmap to be followed by the adversarial attorney.  The idea that an alternative was available to the client but was rejected could provide a line of questions in trial that would weaken the client’s position.

Finally, the expert should keep written notes of meetings and correspondence with the trial team to a minimum, since the communication could be exploited during deposition or trial.  An experienced attorney will request all handwritten notes from the expert prior to deposition, which again could reveal information and weaken the client’s position.

In conclusion, the historic nature of the real-estate collapse calls for an equally weighted response from the legal profession. The basic guidelines outlined here will serve legal professionals not just in a case or two, but time and again. So they should be treated not just as another “quick tip list”, but as a solid framework for what might become a major chunk of any given law firm’s future business.

Barry Gross has been a nationally recognized expert in land development & analysis for more than three decades. In 1997, he founded Developers Research to provide due diligence services for real estate developers with a focus on land development costs and scheduling. He is an expert in all aspects of real-estate development, including in-depth analyses to inform judgments about a property’s value or development potential; efficiency of land plans; and reduction of development costs. www.dev-res.com

David Parr is a founding partner of the Orange County law firm Palmieri, Tyler, Wiener, Wilhelm and Waldron LLP.  In addition to his general business practice, Mr. Parr specializes in the formation, financing, operation and, during recessions like the current one, restructuring of joint ventures, limited partnerships and limited liability companies involved in real estate development.  The Palmieri Tyler firm also handles numerous real estate and construction-related litigation matters, many of which involve the selection and use of expert witnesses. www.ptwww.com