Place: L’Olivier Restaurant, 465 Davis Court, San Francisco in the main dinning room. (415-981-7824) The restaurant is easily accessible via BART (Embarcadero Station) and $5 valet parking is available.

NOTE: The dinner is being partly subsidized by the chapter, so the cost is a low $35. RSVP please by December 4 to Secretary Gil Mitchell at gil.e.mitchell@gmail.com and let him know you are coming. Do not reply to the email address—Gil is the one who needs to know!

President’s Message

Presidents Message

Robin J. Erdmann, ASA

In the midst of dower economic times that are growing worse, we all have to re-examine our priorities and find ways to pare our expenses in an effort to ride out a recession only getting worse. There is little, if any, control we have over the structural issues facing our economy. But the old adage “Cash is King!” is not to be overlooked. With the stock market, one can only wonder “how low can it go”. Unfortunately, more knowledgeable friends tell me another 20%. We shall see.

But, on the issue of paring personal expenses, I had a discussion with a friend today who is asking himself where to cut back on his own expenses. The issue of professional organization dues came up. He and I both belong to several professional appraisal organizations. We discussed the merits of all relative to his current career path. He holds the ASA designation, among others. Should he, or should he not, renew is ASA dues. Due to his current career path, he will have to suspend his appraisal activities for a period to focus on more immediate concerns. In the end, we came to the conclusion that maintaining his ASA designation was very important.

Had he decided to suspend his dues payments, the Society would have reduced his status to AM. But that wasn’t the real issue. It was the perceived value of the ASA designation. I told him that recently, I received a phone call from a private lender inquiring about my services. I asked how he found my name, and he said he searched the ASA directory. I asked about other directories in which I am also listed, and his response was that he preferred to work with ASA members because they were easier to work with, more responsive to specific questions and were more professional regarding what they are most skilled at, and what they aren’t. This, from a person who has been in the real estate industry for decades, and has held high-level positions with a major lender.

The point is, of course, that even though we are hard pressed with personal economic issues, the value of your designation in difficult economic times may be one of your salvations. I remember the 1994-1995 era before I had a designation. It wasn’t pretty.

It’s the goal of the Northern California chapter to provide you with the opportunities to earn your designation, as well as to maintain your designation at a high level of professionalism.

On other issues, the chapter BOD met on Thursday, November 13. The most significant issue we dealt with was setting some policy parameters on educational policy, notably honorarium policy for seminar presenters.

A second issue dealt with our legislative program, and reaching out to the California Chapter of the American Society of Farm Managers & Rural Appraisers (CA ASFMRA). They have expressed an interest in rejoining the California Coalition of Appraisers, which acts as the lobbying arm for our interests in Sacramento. The failure to eliminate the “MAI only” language in AB 1867, which stipulates that only those with the MAI designation are qualified to perform conservation easement appraisals, is a serious issue that needs to be re-addressed in the near future. By broadening out constituent base with the CA ASFMRA, we will have a louder and stronger voice in Sacramento. Their involvement also dovetails with recent efforts in San Antonio bringing ASA, ASFMRA, and RICS (Royal Institute of Chartered Surveyors) closer together not only on a national level, but on a state level, as well.

Erik White

Mike Lewis

We were fortunate to have two excellent dinner speakers, Eric White and Mike Lewis, talk about the new regulations from the California Air Resource Board (CARB). The new regulations have a strong effect on valuing machinery and equipment, especially diesel engines and trucking fleets. The economic impact on the construction and trucking industry will be difficult, at best. Both Eric and Mike could have talked for hours. Eric made a special effort to come from Sacramento to speak, and Mike flew up from Los Angeles just to make his presentation. Thank you, thank you, thank you, to both. And thank you to Gil Mitchell, ASA, and Jack Young for putting the program together.

We will not have a December dinner speaker. Rather, the BOD has decided to conduct an extended business meeting to reassess our progress relative to the goals and objectives we identified at our August retreat. Nevertheless, all members are welcome to attend the BOD meeting.

Good news! We have a tentative date for a one day MTS Report Writing seminar to be presented by our very own Bob Podwalny FASA, who has been coaxed into sticking around long enough before he globe-trots again, teaching his MTS expertise. For now, we are targeting Thursday, February 19, 2009. The location is yet to be determined.

And, Dave Lewis, ASA has completed developing his Zoning and Site Analysis seminar, and about all that is left to do is identify a date, and obtain OREA approval for continuing education. Dave’s seminar will be a sell out! Watch for more information forthcoming.

Finally, kudos’s to Nancy Stacy, ASA, Roger Rapport, ASA, and Robin J. Erdmann, ASA for their presentations to the Napa Valley Cruisers on Saturday, November 22. The event was hosted by Dick Long at “Dick’s Rod Shop”. Dick Long, the owner, has an outstanding vintage auto collection complete with its own metal fabrication shop and private auto museum. Huge wall murals depict American Graffiti-type 1950’s scenes complete with embedded humor. All of the autos in the murals are owned or have been owned by the Long’s, and the drivers of two cars depict Dick and his wife at the ages they were when that particular car was acquired. Unfortunately, the collection is not open to the public.

The club’s Education Chair, Ron Stahlecker, invited all three to make presentations on different aspects of appraisal reflecting our varying disciplines. Robin opened and introduced some facts about ASA. Roger’s presentation focused on appraising autos (Roger was in 7^th Heaven), and Nancy provided some insights into jewelry appraisals, buying for lasting value and when and where not to buy. Nancy brought along several pieces for display. The presentation came about because Robin had previously appraised Ron’s B&B (Stahlecker House) in Napa, and noticed the he also rebuilt classic cars. The intent was to invite Ron to speak to the NorCal chapter, but somehow, the tables got turned, and we found ourselves having a delightful day among serious hardcore auto enthusiasts.

Hope you had a Happy Thanksgiving, and best wishes for the Christmas holiday season!

Upcoming Events

January program meeting at 6:30 on Thursday, January, 8 2009 at L’Olivier Restaurant, 465 Davis Court, San Francisco in the main dinning room. (415-981-7824) RSVP please by January 2 to Secretary Gil Mitchell at gil.e.mitchell@gmail.com

Legislative Corner

Theory behind a Crisis

Part II

Charles B. Warren ASA

Roosevelt became president. It was a plausible theory in the era that an economy could be managed. If Ford could integrate auto production from the iron ore and rubber to the Model A's rolling out of the dealers, why not? After all, it seemed to work for Stalin. Notwithstanding the fact that these examples were illusory, some good came from the experience.

The sponsor member associations of the Appraisal Foundation were largely Depression creations. Why?

Professor Wally Smith, emeritus of UC Berkeley, had a lecture "FHA - The Movie" in which he describes the dilemma of high replacement costs and minimal market being solved by FHA which redefined value (long term warranted value), an income approach. They also brought new money to the game and were willing to lend against that value, which, absent "real world" measurement, had to be appraised.

This is the germ of an idea that might be relevant today. Let's take a look at some more recent circumstances and concepts. Twenty years ago we had another mortgage bubble, commonly known as the Savings and Loan Crisis. One similarity is that a large amount of unwarranted lending resulted in large inventories of product for which there was insufficient demand. There were two possible solutions. Wells Fargo Bank was well enough capitalized that it worked through its problems, a hold-to-maturity sort of approach. In about 1995 they announced they had unloaded all their problem properties and earned their cost of funds.

The other alternative was the Resolution Trust Corporation (RTC) which took over failed institutions' assets and peddled them right away, taking the loss between book value and price. The official cost was around $100 billion.

The appraisal term for a situation where excessive supply is put on a market depressing price is "blockage". Selling or buying 100 shares of, say, Bank of America won't affect the price. Buying or selling 100 million shares, about a day's trading volume, probably will. Selling a day's trading volume of mortgage backed securities didn't dent the liquidity of the market in 2004. Selling or attempting to sell the same face value of securities today might.

The two approaches to resolving an excess of supply, Wells and RTC, are results of a difference in opinion about another technical term, highest and best use. Among the conditions of a "highest and best" use is that it yields the greatest present net value to the property. Statements about the future involve assumptions about the time value of money.

Selling immediately at a depressed price implies a high time value of money, or rate of return. Holding and working out implies either a lower rate of return or a belief that prices are only temporarily depressed; maybe both. If Wells made money and the RTC lost money, then the highest and best use of at least Wells Fargo's portfolio of problems was working them out. If today the value of mortgage backed paper is low, it at least suggests that the highest and best use of that instrument may in not be selling it.

Another appraisal concept comes into play here, fractional interest valuation. There are circumstances where, given a property divided in parts, the whole is either equal to, greater than or less than the sum of the parts. Am told that as of Friday the 10th of October, 2008 there were a large number of shares traded on the New York Stock Exchange in which a pro-ration of the companies' cash exceeded the closing price of the stock (the companies' cash on hand exceeded market capitalization).

Discounted value of shares is considered normal in illiquid private companies but not in publicly traded ones. The opposite is usually true.

The implication is that illiquidity infects our public markets. If it has spread so far, then how can we believe that less liquid markets, such as mortgage backed securities are unaffected? While liquidation of the companies for their cash may neither be practical or even advisable, it does suggest an opportunity for unusually good long run returns.

Similarly, the present price of the mortgage products may be less than a value predicated on working them out.

This comes into another element of the rate of return, risk. It's also perversely cyclical, like the illiquidity premium. When risk is really highest, the top of the cycle, it's also less well compensated. There are really two types of risk, cyclical and systemic. During the early 1990's office buildings were priced as though rents would never rise.

That was to say that it would never make sense to build offices again.

If that had been true it would have been systemic risk. As it was, the rate of return demanded by buyers at the time was simply at a cyclical maximum, high enough that it completely over-rode the long term systemic probability that vacancies would go down, rents up and office buildings would again be feasible. A more famous pundit and investor said, "Stay alive 'til '95. Be in heaven in '97." Sam Zell's crystal ball was pretty clear.

So, what am I driving at? A back-of-the-cocktail napkin analysis might go like this. Start with a group of individual loans representing an aggregate of $X of debt. What sort of markup is necessary to justify turning those loans into a mortgage backed security (MBS)? I don't know, but if it wasn't a profitable activity, nobody would have done it, at least not unless they were obliged to liquidate the individual loans to raise capital. So now the package is worth some function of X, aX, with a>1. The same question arises in packaging the MBS into a Collateralized Debt Obligation (CDO). So, now the original package has a new aggregate value, abX, with both a and b>1.

There isn't anything wrong with the concept. It's just a version of buying, loans in this case, in bulk wholesale and selling the pieces retail. That is, there's nothing wrong until the merchandise turns out to be defective and the customers are lined up at the customer service department to return it. If the customer service department isn't available, maybe they go to eBay or Craigslist. In the former case, the merchandise is going to have to be marked down by the returns department to move it if it can't be returned to the supplier. In the latter case, is there enough liquidity to absorb the supply at all, and if so, at what price? Probably it will not be retail.

NorCal Officers

L to R: Bob Lentz, Treasurer, Gil Mitchell, Secretary; Robin Erdmann, Chapter President, Jim Brown, Region 5 Governor, Will Schnitzer, Immediate Past Chapter President, Doug Baxter, Chapter Vice-Chair

Chapter officers:

Chapter President Robin J. Erdmann, ASA (RP)

Chapter Vice President Douglas S. Baxter (PP)

Chapter Secretary Gil Mitchell, ASA (MTS)

Chapter Treasurer Robert P. Lentz III, ASA (BV)

Chapter Past Chair William C. Schnitzer, ASA (RP)

Discipline Directors and Associate Directors:

Business Valuation    Jim Schilt, ASA               /    Alan Karbousky, ASA
   Gems & Jewelry     Nancy Stacy, ASA          /              Maury Woulf
                             Master Gemologist Appraiser
                  MTS     Gil Mitchell, ASA             /                           tba
Personal Property     Roger Rapport, ASA         /                           tba
      Real Property     Will Schnitzer, ASA         /                           tba