Expanding Intended Users? Not So Fast
Q. A few months ago, I appraised a small commercial building in town with a value estimate of $2.5 million. The appraisal was prepared for a Limited Partnership made up of three individual investors who were funding a loan so the buyer could purchase the property.
I agreed to take on the assignment because I knew all the parties involved. The buyer was a decent guy who had run into some personal and financial difficulties, but he had a good reputation. The three investors wanted to help him get back on his feet by providing the loan.
I delivered the report to the Limited Partnership, was paid, and heard through the grapevine that the transaction closed. I didn’t think much more about it until I received a strange email from one of the partners. He asked if I could prepare a “revised” appraisal report because the Limited Partnership was in final discussions to sell the loan.
He requested that the new report be addressed to a trust and asked me to sign a statement naming that entity as my new client. The statement went on to say that not only the trust, but also its employees, agents, affiliates, successors, and assigns could rely on the report. It further extended reliance to any current or prospective purchaser, investor, servicer, or rating agency, and even allowed the report to be quoted in offering materials. It also required me to cooperate with questions from any of those parties in connection with a securitization or related transaction.
I about spit out my coffee. I couldn’t believe they assumed this would be acceptable.
I responded that I was sorry, but no way. The only intended user of my appraisal was the Limited Partnership identified in the engagement letter. They are not authorized to share the report with third parties, and I do not permit any third party to rely on it. I also made it clear that I would not agree, either explicitly or implicitly, to expand the intended users. I recommended that any third party obtain its own independent appraisal for underwriting or investment purposes.
Do you think I’m right? And is there anything else I should say to protect myself?
A: I absolutely think you’re right. You accepted the assignment based on your familiarity with the parties involved. The partners have no right to distribute your report to unknown third parties, and you have no obligation to participate in their transaction. If asked, you are fully within your rights to decline this new assignment. As proposed, this new entity is too open-ended and too risky.
And good for you for having a clear, written engagement letter that defines the client and intended user.
More "Claudia Says..." Q&A Series