Have English courts opened Pandora’s box? The U.K. High Court has ruled that Colliers International overvalued a German property in December 2005, and the servicer of the CMBS securitization that included the loan is due a refund (plus interest and fees).
Back in 2005, Colliers International appraisers valued a German property at €135 million. Based on that valuation, Credit Suisse provided an 80 percent loan (€110 million), which was then securitized and transferred to Titan to include in its €1 billion securitization offering. (Oh, those were the days!) Then the main tenant went bankrupt in the crash, the building lost 90 percent of its value, and Titan sued Colliers to recoup some of its losses. After five years, the courts have ruled that Colliers did indeed overvalue the building by 25 percent and owes €32 million plus interest and fees to the servicer.
There was no indication of criminal intent or nefarious doings — just an overly optimistic appraisal in a market that was bubbling up. The court ruled that this was negligent.
Hindsight is always 20/20. Looking back, it’s easy to see the property was overvalued. But looking forward in 2005? The sky was the limit. And no one forced Credit Suisse to provide an 80 percent loan. Nor did anyone twist Titan’s arm to roll the loan into a securitized pool. Presumably, investors also willingly bought a piece of the ever-expanding pie — until it wasn’t ever expanding.
I have to believe this ruling is going cause a tsunami of similar lawsuits now because all the buildings at that time were overvalued and overleveraged and then oversecuritized.
And I’m not the only one seeing more of these cases in the future. James Walton, a partner at Rosling King (the law firm that brought the suit against Colliers) was quoted as saying:
“This is the first time that a UK Court has been faced with a claim brought against a negligent property valuer where the loan advanced by the original lender has been securitized. As a result of this judgment, it is very likely we will see a greater appetite to recover losses suffered during the collapse of the commercial property market across Europe during the recession. There is a perception that these claims may now be time-barred, but that perception is wrong.”
But when it comes to valuations, how much is art, and how much is science? If a firm is truly negligent, then yes, hang them from the yardarms. But where does negligence begin and a cloudy crystal ball end? Can appraisers be wrong, but not negligent? I would think so, but then again, I’m not a CMBS servicer holding useless loans. I might have a different viewpoint if I were.
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Sheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.
