| Uniform
Appraisal Standards for Federal Land Acquisitions (also known as “the
Yellow Book”) December
20, 2000 Published
by the Appraisal Institute (in cooperation with the U.S. Department of
Justice) April 2001 550 W.
Van Buren St., Suite 1000 Chicago,
Illinois 60607 The
Interagency Land Acquisition Conference has developed, promulgated, and
adopted the Uniform Appraisal Standards for Federal Land Acquisitions
and is solely responsible for their content. The Appraisal Institute's
contribution to the Uniform Standards consisted of editorial and
production assistance unrelated to the substance of the Uniform
Standards, and the Appraisal Institute assumes no responsibility for the
content of the Uniform Standards. The Appraisal Institute has published
the Uniform Standards for the Interagency Land Acquisition Conference to
help make them available in hard copy form to interested parties. Printed
in the United States of America ISBN:
0-922154-66-X Available
through Amazon.com: Foreword
The
Interagency Land Acquisition Conference, established on November 27,
1968, by invitation of the Attorney General, is a voluntary organization
composed of representatives from the many federal agencies, engaged in
the acquisition of real estate for public uses. The
Conference adopted, and continues to adhere to, several goals with
respect to land acquisition, including the promulgation of uniform
appraisal standards and guidelines for appraisal reports. The broad
experience of the member representatives of the Interagency Land
Acquisition Conference assures that the federal appraisal standards
developed for land acquisitions are uniform, fair, and efficient. The
Interagency Land Acquisition Conference is chaired by the Assistant
Attorney General for the Environment and Natural Resources Division,
Department of Justice. Its activities are conducted by ad hoc committees
composed of member representatives. While
the vast majority of federal land acquisition is achieved through
voluntary means, sometimes litigation is necessary. With
this in mind, Mr. Eaton has done an admirable job of updating the case
law, expanding the treatment of novel or difficult valuation questions,
and recognizing the vast changes that have recently characterized the
real estate appraisal profession. Publication
of these Standards will ensure that the "Yellow Book" is
available in hard copy to all potential users. The Standards are also
available on the Department of Justice's Internet Web site. Lois
J. Schiffer, Chair Interagency
Land Acquisition Conference Washington,
D.C. http://www.usdoj.gov/enrd/land-ack/land_acquisitions.htm
Table of Contents Purpose
These
Standards have been prepared for use by appraisers to promote uniformity
in the appraisal of real property among the various agencies acquiring
property on behalf of the United States. It should make no difference to
the landowner, whose property is being acquired, which agency is
acquiring the land, or what method of acquisition it uses. Uniformity
and fairness in the treatment of property owners are also the goals of
the Uniform Relocation Assistance and Real Property Acquisition Policies
Act of 1970, P. L. 91-646, as amended, 42 U. S. C §4601, et seq.
Portions of this Act deal with the appraisal of real property and are
cited and discussed herein in the appropriate sections. These Standards
presume full compliance with the pertinent provisions of the Act. The
appraisal of property for purposes of direct voluntary purchase,
exchange, or eminent domain by the United States presents unique
problems not ordinarily encountered in appraisals for sale, tax,
mortgage, ratemaking, insurance, and other purposes. This results
naturally from the fact that the method of appraisal, the elements and
factors to be considered and the weight given them, and the standards of
valuation are determined to a great extent by law. Therefore, the
judgment or opinion of the individual appraiser should be governed by
proper legal standards, whether land is being acquired by voluntary
purchase, exchange, or condemnation. These
Standards have been prepared in recognition of the fact that the vast
majority of federal land acquisitions are accomplished by voluntary
means. However, the utmost objectivity, accuracy, and thoroughness of
appraisals, upon which those acquisitions are based, is essential,
regardless of the government's method of acquisition. The federal
appraisal standards are the same for voluntary acquisitions as they are
for acquisitions by condemnation. Therefore, the purpose of these
Standards is to set forth the general principles applicable to the
appraisal of property for federal land acquisitions by both voluntary
means and condemnation The
rules stated herein are subject to modification under the varying
circumstances of particular agency programs or cases.1
Of course, the application of the general rules can reveal wide
differences of opinion, some of which must ultimately be resolved in
court. Because the amount of compensation to be paid to property owners
when their property is acquired by the government for public use is a
matter of constitutional law, appraisers are cautioned to confer with
counsel for the acquiring agency on legal questions affecting the
valuation and, if condemnation is instituted or appears necessary, with
the representatives of the Department of Justice who will be charged
with the responsibility of preparing the case for trial. In this manner,
specific written legal instructions can resolve doubt about the proper
method of valuation or the application of particular rules to specific
factual situations. Appraisers
and other users should also recognize that these Standards may require
modification in certain specific cases prompted by special legislation
or court order, by stipulations made between an agency and a property
owner in a voluntary acquisition, or by stipulations entered into
between litigants in a condemnation action. Such modifications, however,
should not be undertaken without specific written instructions from the
acquiring agency or its legal counsel.
1 Many
of the land acquisition agencies have adopted appraisal and/ or review
handbooks or manuals, which, in some instances, modify these Standards
to meet their specific acquisition programs. Examples of such manuals/
handbooks include U. S. Fish and Wildlife Service (342 FW 1, Appraisal
Handbook; 342 FW 2, Appraisal Review Handbook); U. S. Forest Service
(Manual FSM 5410; Handbook FSH 5409); U.S. Army Corps of Engineers Real
Estate Engineer Regulations (ER 405-1-12); Bureau of Land Management
Manual (9310). http://www.usdoj.gov/enrd/land-ack/purpose.htm
http://www.usdoj.gov/enrd/land-ack/scope.htm In
acquiring real property, or any interest therein, it is United States'
policy to impartially protect the interests of all concerned. The Fifth
Amendment of the United States Constitution asserts: "nor shall
private property be taken for public use, without just
compensation." Since "the courts early adopted, and have
retained, the concept of market value" 3
as the measure of just compensation, the United States, as a matter of
general policy, bases its land acquisitions on market value appraisals:
"[I] t is the duty of the state, in the conduct of the inquest by
which the compensation is ascertained, to see that it is just, not
merely to the individual whose property is taken, but to the public,
which is to pay for it." 4
3 United
States v. Miller, 317 U. S. 369, 374 (1943). http://www.usdoj.gov/enrd/land-ack/policy.htm
A.
Data
Documentation and Appraisal Reporting Standards Introduction.
Appraisal
preparation, documentation and reporting shall be in conformity with
these Standards, which are compatible with standards and practices of
both the appraisal industry and the current edition of the Uniform
Standards of Professional Appraisal Practice (USPAP). 5
It has been necessary, however, to invoke USPAP's Jurisdictional
Exception Rule in certain instances, so as to conform these Standards
with overriding federal law relating to the valuation of real estate for
government acquisition purposes. 6
Appraisals prepared in accordance with these Standards will be
considered for the purpose of these Standards to constitute a complete
appraisal, as defined by USPAP. 7 The
Standards set out below have been developed in recognition that
government acquisition of private land can create difficult and complex
valuation problems, the solutions to which must be developed with the
utmost care. Therefore, these standards are especially appropriate when
proposed acquisitions are complex, high value, sensitive, or
controversial, or when they must be referred to the Department of
Justice for litigation. Part
I Introduction
A-3.
Table of Contents. The
major parts of the appraisal report and their subheadings should be
listed. Items in the addenda of any report shall be listed individually
in the table of contents. The
appraiser's certification shall also include the appraiser's opinion of
the market value of the property appraised as of the effective date of
the appraisal. If the government's acquisition comprises only a portion
of the whole property, or property rights, appraised, the certification
shall include both the appraiser's opinion of the market value of the
whole property as of the effective date of the appraisal and the
appraiser's opinion of the remainder property's market value after the
government's acquisition, as of the effective date of the appraisal. Appraisers
may also add to their certifications certain items that may be required
by law, the USPAP, and the appraiser's professional organization(s).
However, appraisers should avoid adding certifications that are not
pertinent to the specific appraisal (e. g., that report was prepared in
accordance with the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA)) or that are beyond the scope of the
appraisers' assignment (e. g., certifying an opinion of just
compensation). The appraiser's certification may alternately follow the
appraiser's final estimate of value in the appraisal report. A-5.
Summary of Salient Facts and Conclusions. The
appraiser shall report the major facts and conclusions that led to the
final estimate(s) of value. This summary should include an
identification of the property appraised; the highest and best use of
the property (both before and after the acquisition if a partial
acquisition); brief description of improvements (both before and after
the acquisition if a partial acquisition); the indicated value of the
property by each approach to value employed (both before and after the
acquisition if a partial acquisition); the final estimate of value (both
before and after the acquisition if a partial acquisition); and any
hypothetical conditions, extraordinary assumptions, limiting conditions
or instruction; and the effective date of the appraisal. A-6.
Photographs of Subject Property. Pictures
shall show the front elevation of the major improvements, any unusual
features, views of the abutting properties on either side, and that
property directly opposite, and interior photographs of any unique
features. When a large number of buildings are involved, including
duplicates, one picture may be used for each type. Except for an overall
view, photographs may be bound as pages facing the discussion or
description of the photographs' content, or may be placed in the addenda
of the report. Each
photograph should be numbered, and show the identification of the
property, the date taken, and the name of the person taking the
photograph. The location from which each photograph was taken and the
direction the camera lens was facing should be shown on the plot plan of
the property in the report's addenda. A-7.
Statement of Assumptions and Limiting Conditions. Any
assumptions and limiting conditions that are necessary to the background
of the appraisal shall be stated. Any client agency or special legal
instructions provided the appraiser shall be referenced and a copy of
such instructions shall be included in the addenda of the appraisal
report. 15 A-8.
Scope of the Appraisal. The
appraiser shall describe the scope of investigation and analysis that
was undertaken in making the appraisal. The appraisal's scope should
conform [to] its purpose and intended use. In many cases the intended
use and purpose of the appraisal places specific demands on the scope of
the investigation and analysis presented in the appraisal report. In all
cases, the appraisal report should clearly link the appraisal's scope
with its purpose and intended use. The
applicability of all standard approaches to value shall be discussed and
the exclusion of any approach to value shall be explained. Appraisers
should recognize that the exclusion of an approach to value because it
is not applicable to the specific appraisal problem (e. g., the
exclusion of the cost approach in valuing vacant land, or when the
improvements do not contribute to the highest and best use of the
property under appraisal) does not result in a limited appraisal under
USAP. 17
Therefore, the appraiser should not identify an appraisal as a limited
appraisal when an inapplicable approach to value has not been utilized. A-9.
Purpose of the Appraisal. This
section shall include an explanation of the reason for the appraisal,
and the definition of all value estimates required, and a description of
the property rights appraised, which should be provided to the appraiser
by the client agency. In most instances the purpose of the appraisal
will be to estimate market value as of a specific date. 21
In an appraisal assignment involving a partial acquisition, the purpose
of the appraisal will be to estimate the market value of the whole
property before the acquisition and to estimate the market value of the
remaining property after the acquisition. This
section should specifically identify the intended use and the intended
user of the appraisal report. Generally, the intended user of the
appraisal report will be the client agency, and the intended use of the
appraisal report will be to assist the client agency in its
determination of the amount paid for the property rights acquired or
conveyed. Care should be taken to prepare the appraisal report in a
manner that clearly meets the intended use of the report by the intended
user. It
is imperative that the appraiser utilize the correct definition of
market value. For appraisals prepared under these Standards, appraisers
shall use the following definition of market value: Market
value is the amount in cash, or on terms reasonably equivalent to cash,
for which in all probability the property would have sold on the
effective date of the appraisal, after a reasonable exposure time on the
open competitive market, from a willing and reasonably knowledgeable
seller to a willing and reasonably knowledgeable buyer, with neither
acting under any compulsion to buy or sell, giving due consideration to
all available economic uses of the property at the time of the
appraisal. This
definition must be placed in this section of the appraisal report. No
other definition of market value for purposes of appraisals made under
these Standards is acceptable, 22
unless otherwise required by a specific and cited federal law or
regulation. Contrary to USPAP Standards Rule 1-2(c), this definition of
market value does not call for the estimate of value to be linked to
a specific exposure time estimate, but merely that the property
be exposed on the open market for a reasonable length of time,
given the character of the property and its market. Therefore, the
appraiser's estimate of market value shall not be linked to a
specific exposure time when conducting appraisals for federal land
acquisition purposes under these Standards. 23
It
is recognized that some appraisers' client groups (e. g., relocation
companies, mortgage (lenders) may require appraisers to estimate a marketing
time 24
for the property under appraisal. However, such estimates are
inappropriate for, and must not be included in, appraisal reports
prepared for federal land acquisitions under these Standards. "The
request to provide a reasonable marketing time opinion exceeds the
normal information required for the conduct of the appraisal
process" 25
and is, therefore, beyond the scope of the appraisal assignment under
these Standards. A-10.
Summary of Appraisal Problems. This
section gives the appraiser the opportunity to acquaint the reader of
the appraisal report with the specific appraisal problems, if any, which
have been encountered by the appraiser and that will be discussed in
detail in the body of the appraisal report. Appraisers are encouraged to
take advantage of it. If the property under appraisal is a single-family
residence, the whole of which is being acquired, in an area of plentiful
market data, the appraiser will usually only report that no special
appraisal problems were encountered. However, federal land acquisitions
are seldom that simple. If
the parcel under appraisal includes water rights, minerals, or suspected
mineral values, fixture values, growing crops, or timber values, the
treatment of their contributory value should be discussed, including the
methodology employed to avoid the forbidden summation or cumulative
appraisal. 26
If the valuation of the property required the use of any consulting
reports, the appraiser should describe such reports, the method of
utilization thereof, and the weight or reliance placed thereon. Part
II Factual Data Before Acquisition
27
A-12.
Area, City, and Neighborhood Data. This
data (mostly social and economic) must be kept to an absolute minimum
and should only include such information that directly affects the
appraised property, together with the appraiser's conclusions as to
significant trends. The use of "boilerplate" or demographic
and economic data (often downloaded from the Internet) is unnecessary
and, unless the appraiser demonstrates that the specific data directly
impacts the current market value of the subject property, it should be
excluded. A-13.
Property Data: A-13c.
Fixtures. Fixtures
are to be described in narrative or schedule report form that includes
all fixtures, with a statement of the type and purpose of each. The
current physical condition, relative utility, and obsolescence should be
stated for each item or group included in the appraisal, and whenever
applicable, the repair or replacement requirements to bring the fixture
to a usable condition. Questions
regarding whether an item is, as a matter of law, a fixture (real
estate) or equipment (personality) shall be referred to the agency legal
counsel for clarification. In making this referral, appraisers should
bear in mind that the determination of whether an item is a fixture or
equipment, for federal land acquisition purposes, may or may not be
consistent with laws of the state in which the property is located. 34
In
those instances where specialty fixtures are encountered, or when the
fixtures will represent a substantial portion of the property's value,
consideration should be given to the retention of a fixture valuation
specialist. 35
A-13d.
Use History. State
briefly the purpose for which the improvements were designed and the
dates of original construction and major renovations, additions, and/ or
conversions. Include a ten-year history of the use and occupancy of the
property. 36
If any of the forgoing information is indeterminable, the appraiser must
report that fact. A-13e.
Sales History. Include
a ten-year record of all sales and, if the information is available, any
offers to buy or sell the property under appraisal. If no sale of the
property has occurred in the past ten years, the appraiser shall report
the last sale of the property, irrespective of date. Information
to be reported shall include name of the seller, name of the buyer, date
of sale, price, terms and conditions of sale, 37
and the appraiser's opinion as to whether the sale price represented
market value at the time, and, if not, the reasons for the appraiser's
conclusion. An unsupported statement that the sale did not represent
market value, or was not an arms-length transaction, is unacceptable. A-13f.
Rental History. Report
the historical rental or lease history of the property for at least the
past three years, if this information can be ascertained. All current
leases should be reported, including the date of the lease, name of the
tenant, rental amount, term of the lease, parties responsible for
property expenses, and other pertinent lease provisions. The appraiser
shall state his or her opinion as to whether any existing lease of the
property represents the property's current market or economic rent, and,
if not, the reasons for the appraiser's conclusion. An unsupported
statement that the rent does not represent market or economic rent is
unacceptable. A-13g.
Assessed Value and Annual Tax Load. Include
the current assessment and dollar amount of real estate taxes. If
assessed value is statutorily a percentage of market value, state the
percentage. If the property is not assessed or taxed, the appraiser
should estimate the assessment, state the tax rate, and estimate the
dollar amount of tax. Some
jurisdictions have developed programs wherein property will be assessed
based on its current use rather than its highest and best use. These
programs often relate to farmlands, timberlands, and open space; for
purposes of eligibility, owners may have to agree to leave the property
in its existing use for a certain period of time. 39
In such a case, the appraiser should report both the current assessed
value and taxes for the property's existing use and the estimated
assessed value and tax load for the property at its highest and best
use. A-13h.
Zoning and Other Land Use Regulations. Identify
the zoning for the subject property. This must be reported in
descriptive terms (e. g., multiple family residential, 5000 sq. ft. of
land per unit) rather than by zoning code (e. g., MF-2). Other local
land use regulations, such as set-back requirements, off-street parking
requirements, and open space requirements, which have an impact on the
highest and best use and value of the property are to be reported. The
appraiser should also note any master, or comprehensive, land use plan
in existence that may affect the utility or value of the property. If
the property was recently rezoned, that must be reported. The appraiser
shall determine whether such rezoning was a result of the government's
project for which the subject property is being acquired. If so, the
appraiser must justify his or her conclusion in this respect and
disregard the rezoning. 40
If the rezoning of the property is imminent or probable, discuss in
detail the investigation and analysis that led to that conclusion under
Section A-14 (Analysis of Highest and Best Use). 41
The mere assertion by an appraiser that a property could be rezoned is
insufficient. 42 Part
III Data Analysis and Conclusions Before Acquisition
44
A-16.
Value Estimate by the Cost Approach. This
section should be in the form of computational data, arranged in
sequence, beginning with reproduction or replacement cost and should
state the source (book, page, including last date of page revision, if a
national service) of all figures used. Entrepreneur's profit, as an
element of reproduction or replacement cost, must be considered and
discussed, and if applicable, should be derived from market data
whenever possible. If the appraiser will place considerable weight on
this approach to value in reaching a final value estimate, consideration
should be given to retaining the services of a contractor or
professional cost estimator to assist in developing the reproduction or
replacement cost estimate. A-17.
Value Estimate by the Sales Comparison Approach. Since
any recent and unforced sale of the property under appraisal can be the
best evidence of its value, 62
any such sale is treated as a comparable sale in this approach to
value. It shall be analyzed like any other comparable sale and given
appropriate weight by the appraiser in concluding a final estimate of
value of the property. As noted in Section A-13e of these Standards, an
unsupported claim that a sale of the subject property was a forced sale
or not indicative of its value is unacceptable. When
appraisers must resort to qualitative adjustments, they must recognize
that this form of comparative analysis will often require more extensive
discussion of the appraiser's reasoning. This methodology may also
require the presentation of a greater number of comparable sales. It is
essential, of course, that the appraiser specifically state whether each
comparable sale is generally either overall superior or inferior to the
property under appraisal. To develop a valid indication of value of the
property under appraisal by the use of qualitative analysis, it is
essential that the comparable sales utilized include both sales that are
overall superior and overall inferior to the property being appraised.
If this is not done, the appraiser will have merely demonstrated that
the property is worth more than a certain amount (if all of the sales
are inferior to the subject property) or less than a certain amount (if
all of the sales are superior to the subject property). In
developing a final value estimate by the sales comparison approach, the
appraiser shall explain the comparative weight given to each comparable
sale, no matter whether quantitative or qualitative adjustments, or a
combination thereof, are used. A comparative adjustment chart, or graph,
is recommended and may assist the appraiser in explaining his or her
analysis in this regard.
A-18.
Value Estimate by the Income Capitalization Approach. The
appraisal report shall include adequate factual data to support each
figure and factor used 72
and should be arranged in detailed form to show at least (a) estimated
gross economic, or market, rent or income; (b) allowance for vacancy and
credit losses; (c) an itemized estimate of total expenses; and (d) an
itemized estimate of the reserves for replacements, if applicable. As
with a recent and unforced sale of the property under appraisal, 74
if the property is actually rented, its current rent is often the best
evidence of its economic, or market, rent and should be given
appropriate consideration by the appraiser in estimating the gross
economic rent of the property. Likewise, the appraiser should attempt to
obtain at least the last three years' historical income and expense
statements for the property. These can generally be developed into a
reliable reconstructed operating statement. If this historical income
and expense information is available, it should be included in this
section or in the appraisal report's addenda. A-19.
Correlation and Final Value Estimate. The
appraiser shall explain the reasoning applied to arrive at the final
opinion of value and how the results of each approach to value were
weighed in that opinion, and the reliability of each approach to value
for solving the particular appraisal problem. Part
IV Factual Data After Acquisition
76
A-21.
Neighborhood Factors. The
appraiser shall describe the government project for which the property
is being acquired and its impact, if any, on the neighborhood and the
remainder property. The degree of detail regarding the government's
project included in this section should relate directly to the
complexity of the government's project and its impact on the remainder
property. 77
The aspects of the government's construction that will result in damages
to the remainder property should especially be described in detail. A-22b.
Improvements. The
appraiser shall describe those improvements remaining in whole or in
part. 79 A-22f.
Zoning and Other Land Use Regulations. The
appraiser shall report the influence of zoning and other land use
regulations on the remainder property. 82
Specific attention should be given to the probability of a rezone,
either up or down, of the property caused by the government's project
and the possibility that, because of the acquisition, the remainder
property has become non-conforming to land use regulations, in areas
such as lot area requirements, setbacks, and off-street parking. Part
V Data Analysis and Conclusions After Acquisition
83
A-24.
Land Valuation. The
appraiser shall estimate the market value of the remainder land for its
highest and best use, as if vacant and available for such use. 89 A-25.
Value Estimate by Cost Approach. For
cost approach application and reporting requirements, see Section A-16. A-26.
Value Estimate by Sales Comparison Approach. For
sales comparison approach application and reporting requirements, see
Section A-17. Part
VI Acquisition Analysis
90
If
damages have been measured by a cost to cure, the appraiser must
justify the cost to cure 91
and demonstrate that the cost to cure is less than the damage would be
if the cure was not undertaken. A-31.
Explanation of Special Benefits. The
appraiser shall identify any special benefits accruing to the remainder
property and explain how and why those benefits have occurred. Part
VII Exhibits and Addenda
A-34.
Detail of Comparative Data. 93This
data may be included in the body of the report. Photographs of the
comparative properties must be included. A-35.
Plot Plan. A
plot plan should help the reader to visualize the property and the scope
of the appraisal considerations. The plot plan should depict the entire
subject property, including dimensions and street frontages. Structural
improvements should be shown in their approximate locations. Significant
on-site improvements and easements should also be shown. The dimensions
of improvements should be noted. The plot plan should include a
directional north arrow. The location from which each of the subject
photographs was taken should be identified on the plot plan, as well as
the photograph identification number and the direction in which the
photo was taken. In
the case of a partial acquisition, the plot plan should identify the
remainder area and its dimensions. Significant construction features, if
any, of the government project for which the property is being acquired
should be shown. If the subject property or area acquired is complex, a
separate plot plan of the remainder property may be desirable. A-36.
Floor Plan. Floor
plans are required only when they are necessary to describe a unique
property feature or the value estimate. A-38.
Other Pertinent Exhibits. These
would include, for example, any written instructions given the appraiser
by the agency or its legal counsel, any specialist reports (such as
timber appraisals, environmental studies, mineral or water rights
studies or appraisals, reproduction cost estimates, cost to cure
estimates, fixture valuations), any pertinent title documents (such as
leases or easements), and any charts or illustrations that may have been
referenced in the body of the report. A-39.
Qualifications of Appraiser. Include
the qualifications of all appraisers or technicians who made significant
contributions to the completion of the appraisal assignment. If
appraisal reports are being prepared for trial purposes, appraisers must
insure that the content of their qualifications conform with Rule 26(
a)( 2)( B) of the Federal Rules of Civil Procedure, as described in
Section D-2 of these Standards. 5.
The Appraisal Foundation, Uniform Standards of Professional Appraisal
Practice (USPAP), 2000 ed. 7.
"Complete Appraisal: the act or process of developing an
opinion of value or an opinion of value developed without invoking the
DEPARTURE RULE." USPAP, Definitions. USPAP's Departure Rule relates
to the acceptance of an appraisal assignment in which the appraiser's
scope of work is less than, or different from, the work that would be
required by USPAP's specific requirements. 9.
"Limited Appraisal: the act or process of developing an
opinion of value or an opinion of value developed under and resulting
from invoking the DEPARTURE RULE." USPAP, Definitions. USPAP's
Departure Rule relates to the acceptance of an appraisal assignment in
which the appraiser's scope of work is less than, or different from, the
work that would be required by USPAP's specific requirements. 10.
This "checklist" is not an integral part of these Standards,
nor is it intended to be used as part of a formal appraisal review, but
has been included merely for easy reference by appraisers and reviewers.
11.
This Table is not an integral part of these Standards, but has been
included merely for easy reference by appraisers and reviewers. 12.
USPAP, Standards Rule 2-2. 14.
Appraisers should recognize that USPAP changes frequently and that
future changes may require additional jurisdictional exceptions, which
are not noted in Section D-1 of these Standards. In such an instance,
appraisers will have to identify and report such additional
jurisdictional exceptions. 15.
Appraisers must bear in mind that if a client or legal instruction has
not been provided to them in writing, it is not considered a binding
instruction. Therefore, if the appraiser accepts a verbal instruction of
the client or legal counsel, the appraiser becomes wholly responsible
for it. Reference to a client or legal instruction a copy of which is
not in the addenda of the appraisal report, will not be acceptable
justification for acceptance or adoption of the instruction, and may
result in disapproval of the appraisal report. 16.
See Sections D-3 and D-4 regarding this practice. 19.
"Extraordinary assumptions presume as fact otherwise uncertain
information about physical, legal, or economic characteristics of the
subject property or about conditions external to the property, such as
market conditions or trends, or the integrity of data used in an
analysis." USPAP, Definitions. 20.
Note that hypothetical conditions and extraordinary assumptions fall
within USPAP's Standard Rule 1-2, which contains binding requirements
from which departure is not permitted. 21.
For a discussion of the legal requirements regarding the effective date
of value, see footnote 125 in Section B-2 of these Standards. 23.
For a discussion of the legal basis for this standard, which results in
a jurisdictional exception under USPAP, see Section B-2 of these
Standards. 24.
Marketing time refers to the period of time it would take to sell the
appraised property, after the effective date of the appraisal, at its
appraised value. 25.
USPAP, Advisory Opinion 7. 28.
Beneficial factors may include such items as desirable views, proximity
to desirable public or cultural facilities, or proximity to dedicated
open space or green belts. Detrimental factors may include such items as
offensive odors, undesirable land uses, contamination, and noxious
weeds. Farm properties can be especially impacted by natural
environmental factors such as noxious weeds, frost, incidence of hail,
floods and droughts, and variations in crop yields. Appraisers should
list and describe those beneficial and detrimental factors that may
impact the utility and value of the land. 29.
For this purpose, appraisers should refer to Federal Emergency
Management Administration (FEMA) flood hazard map 39.
Many of these programs provide that an owner who converts his or her
land from the existing use early must pay back taxes for a certain
period of years based on the value of the property for its highest and
best use, plus a substantial penalty. These back taxes and penalties
become an encumbrance on the land when it is converted to an alternate
use. However, since appraisers should estimate the market value of
property as if free and clear, the indebtedness, or potential
indebtedness, imposed under these programs is not to be considered by
the appraiser in estimating the property's market value. 40.
For the legal basis for this standard, see Section B-10. Under USPAP,
invocation of this standard would result in an appraisal prepared under
a hypothetical condition. 41.
For a discussion of the extent of the required investigation, which must
be taken by the appraiser in this regard, see Section D-6. 42.
See Section D-6; Section B-23. 45.
See Section B-3. 48.
The legal basis and reasoning for this specific Standard may be found in
Section B-11. 49.
For instance, if an appraiser determined that the larger parcel was a
ten-acre tract out of a total ownership of 200 acres, the unit (e. g.,
per sq. ft.; per acre) value may well be different for the smaller
tract, and the appraiser would utilize comparable sales similar in size
to the 10 acre larger parcel, rather than sales similar in size to the
entire 200 acre ownership. 50.
See Section B-3 for the legal basis of this statement. 55.
For a discussion of the courts' view of this technique of valuation, see
Section B-8 of these Standards. 58.
For a discussion and examples of discount rate extraction from sales,
see Appendix B of the Appraisal Institute's and American Society of Farm
Managers and Rural Appraisers' Handbook for their seminar "Federal
Land Exchanges and Acquisitions: Appraisal Issues and
Applications." 60.
Ibid., 371-74. 64.
For a description of the verification process required by these
Standards for such sales see Section D-9. 67.
The Appraisal of Real Estate, 11th ed. (Chicago: Appraisal Institute,
1996), 440. 71.
See Section B-2 of these Standards. 74.
See Section A-17 of these Standards. 77.
For example, if the government's acquisition was a fee acquisition of a
portion of the property for inclusion in a wildlife refuge without any
substantial construction, the description of the government’s project
could probably be brief. If, on the other hand, the government's
acquisition was a permanent easement through the parcel for construction
of a flood control levee with associated temporary construction
easements, a detailed description of the government's project may be
necessary. Such a description might include such things as height of the
levee; width at the base and at the top of the levee; degree of side
slopes of the levee; finish material (e. g., rip rap, seeded soil) of
the slopes; any provisions for access over the levee; any provisions for
drainage; duration of temporary construction easements and the use to
which the government will put the easement areas during construction;
anticipated condition of the temporary construction easement areas at
termination; and anticipated impact on future flooding, as compared to
historical flooding. http://www.usdoj.gov/enrd/land-ack/data.htm
Introduction http://www.usdoj.gov/enrd/land-ack/data_part1.htm
Part
II. Factual Data Before Acquisition: http://www.usdoj.gov/enrd/land-ack/data_part2.htm
A-12.
Area, City and Neighborhood Data A-13.
Property Data Part
III. Data Analysis and Conclusions Before Acquisition: http://www.usdoj.gov/enrd/land-ack/data_part3.htm
http://www.usdoj.gov/enrd/land-ack/data_part4.htm
Part
V. Data Analysis and Conclusions After Acquisition: http://www.usdoj.gov/enrd/land-ack/data_part5.htm
Part
VI. Acquisition Analysis: http://www.usdoj.gov/enrd/land-ack/data_part6.htm
Part
VII. Exhibits and Addenda: http://www.usdoj.gov/enrd/land-ack/data_part7.htm
B.
Legal
Basis for Appraisal Standards for Federal Land Acquisitions B-1.
Federal Law Controls.
Since the experience of many appraisers primarily involves non-public
acquisition appraisals, or conducting appraisals under various state
laws, it is particularly important that appraisers bear in mind that in
federal acquisitions, because the meaning of just compensation is
a matter of fundamental constitutional interpretation, questions with
respect to compensation are to be resolved in accordance with federal
rather than state law. 94
Because federal law differs in some important aspects from the law of
some states, it is incumbent upon both the attorney and the appraiser to
make certain that they understand the applicable federal law as it
affects the appraisal process in the estimation of market value, which
will generally be the basis for determining just compensation for
property acquired by the United States for public purposes. While state
law once controlled procedural matters, since the adoption in 1951 of
Rule 71A, Federal Rules of Civil Procedure, procedural as well as
substantive matters in federal condemnation cases are controlled by
federal law. 95
State
law is sometimes referred to, though not necessarily followed, in
resolving the nature of property rights acquired. The Supreme Court of
the United States has stated that "[t]hough the meaning of
'property' ...in the Fifth Amendment is a federal question, it will
normally obtain its content by reference to local law." 96
It has been judicially made clear that "[t]his does not mean,
however, that every local idiosyncrasy or artificiality in a state's
concepts, or the incidents thereof, necessarily will be accepted." 97
It is also established that the United States may elect to acquire
whatever interest it deems necessary whether or not the state recognizes
the definition of the interest selected. 98
B-2.
Market Value Criterion.
Under established law, the criterion for just compensation is the market
value of the property taken. As stated by the U. S. Supreme Court: The
United States has the authority to take private property for public use
by eminent domain, but is obliged by the Fifth Amendment to provide
"just compensation" to the owner thereof. "Just
Compensation," we have held, means in most cases the fair market
value of the property on the date it is appropriated. "Under this
standard, the owner is entitled to receive 'what a willing buyer would
pay in cash to a willing seller' at the time of the taking." 99
On
a number of occasions, the Supreme Court has addressed the issue of
market value, as the measure of just compensation, in federal
condemnation cases. The following definition of market value has been
adopted for use by appraisers in applying these Standards to their
appraisals and reports prepared for federal land acquisitions: Market
value is the amount in cash, or on terms reasonably equivalent to cash,
for which in all probability the property would have sold on the
effective date of the appraisal, after a reasonable exposure time on the
open competitive market, from a willing and reasonably knowledgeable
seller to a willing and reasonably knowledgeable buyer, with neither
acting under any compulsion to buy or sell, giving due consideration to
all available economic uses of the property at the time of the
appraisal. This
definition is based on a compendium of Supreme Court decisions regarding
the definition of market value for federal eminent domain purposes. 100
As with most definitions of market value, this one contains various
implicit elements, some of which have "been hedged with certain
refinements developed over the years in the interest of effectuating the
constitutional guarantee" of just compensation. 101
In
ascertaining market value, consideration should be given to all matters
that might be brought forward and reasonably be given substantial
bargaining weight by persons of ordinary prudence, but no consideration
whatever should be given to matters not affecting market value. 102
In developing the generally applied rule that market value is the
measure of just compensation, the federal courts have employed
variations of the term market value; as explained by the Supreme
Court in United States v. Miller, 317 U. S. 369, 374 (1943)
(internal citations omitted): The
owner has been said to be entitled to the "value," the
"market value," and the "fair market value" of what
is taken. The term "fair" hardly adds anything to the phrase
"market value," which denotes what "it fairly may be
believed that a purchaser in fair market conditions would have
given," or, more concisely, "market value fairly
determined." It
is clear from these decisions that the adding of adjectives, such as fair
or cash to the The
Supreme Court has cautioned that: strict
adherence to the criterion of market value may involve elements, which,
though they affect such value, must in fairness be eliminated in a
condemnation case, as where the formula is attempted to be applied as
between an owner who may not want to part with his land because of its
special adaptability to his own use, and a taker who needs the land
because of its peculiar fitness for the taker's purposes. These elements
must be disregarded by the fact-finding body in arriving at
"fair" market value. 103
Likewise,
since market value is the test, no consideration should be given in the
appraisal to any special value of the property to the owner not directly
reflected in the market value. 104
In
this connection, the Supreme Court has noted that "[t]he value
compensable under the Fifth Amendment, therefore, is only that value,
which is capable of transfer from owner to owner and thus of exchange
for some equivalent. Its measure is the amount of that equivalent."
105
The Court goes on to state: "If exchanges of similar property have
been frequent, the inference is strong that the equivalent arrived at by
the haggling of the market would probably have been offered and
accepted, and it is thus that the 'market price' becomes so important a
standard of reference." 106
Accordingly, it is the market price, which arises from the
"haggling of the market," which is being sought. When
price-controlled property is taken, the controlled price, being the only
lawful market price, is the normal measure of just compensation, 107
as "The Fifth Amendment allows the owner only the fair market value
of his property; it does not guarantee him a return on his
investment." 108
It
is significant that the federal definition of market value is based on
the presumption that the property, prior to the effective date of
valuation, was on the open market for a reasonable length of time to
find a buyer who was ready, willing, and able to consummate a purchase
on the effective date of valuation. The federal courts have not
attempted to define a reasonable length of time, probably in
recognition of the fact that such length of time may vary dependent upon
a myriad of factors, such as property type, market conditions, property
location, and price range of property. Nor have the federal courts
required that an estimate of market value be linked to a
specified exposure time on the open market, only that it be reasonable
under the circumstances. For
that reason, appraisers should not link their estimates of market value
made for federal acquisition purposes to a specific exposure time. To do
so places a limiting condition on the estimate that is not required for
federal land acquisition purposes, and one which may be found to be
unacceptable by the federal courts. The
question of what constitutes reasonably knowledgeable buyers and
sellers, within the context of market value, has been addressed. It has
been found that reasonably knowledgeable does not require buyers
and sellers to be all-knowing, but rather to have the knowledge
possessed by the "typical 'willing buyer-willing seller'" in
the marketplace: "The market from which a fair market value may be
ascertained need not contain only legally trained (or advised) persons
who fully investigate current land use regulations; ignorance of the law
is every buyer's right." 109
Consideration should be given to "a relevant market made up of
investors who are real but are speculating in whole or major part."
110
As the same court explained in a later appeal: The
uncontroverted evidence of an active real estate market compels the
conclusion that the typical 'willing buyer-willing seller' requirement
of fair market value had been met; it would be inappropriate for a court
to substitute its own judgment of value for that of the market. While an
[appraiser]might be justified in adjusting the fair market value figure
by discarding aberrational values based upon sales between related
entities or fraudulent sales to widows and orphans, an [appraiser]may
not discard an entire market as aberrational. 111
The
Supreme Court has ruled that any alteration in the market value of the
property being acquired that is attributable to the project for which it
is being acquired must be disregarded. 112
This subject is discussed in detail in Section B-10. The market value,
which is sought, is not merely theoretical or hypothetical; it
represents, insofar as it is possible to estimate it, the actual selling
price. As has been judicially declared: "where 'private property is
taken for public use, and there is a market price prevailing at the time
and place of the taking, that price is just compensation. '" 113
Even
though "[t]he Court has repeatedly held that just compensation
normally is to be measured by 'the market value of the property at the
time of the taking contemporaneously paid in money, '" 114
it has also recognized that deviation from this measure of just
compensation has sometimes been required "' when market value has
been too difficult to find, or when its application would result in
manifest injustice to owner or public. '" 115
As explained by Justice Douglas: The
Court in its construction of the constitutional provision has been
careful not to reduce the concept of "just compensation" to a
formula. The political ethics reflected in the Fifth Amendment reject
confiscation as a measure of justice. But the Amendment does not contain
any definite standards of fairness by which the measure of "just
compensation" is to be determined. The Court in an endeavor to find
working rules that will do substantial justice has adopted practical
standards, including that of market value. But it has refused to make a
fetish even of market value, since that may not be the best measure of
value in some cases. 116
This
should not be construed to mean that in all instances in which highly
similar comparable sales are unavailable, the courts will disavow the
market value measure of compensation. As the Supreme Court explained: There
may have been, for example, so few sales of similar property that we
cannot predict with any assurance that the prices paid would have been
repeated in the sale we postulate of the property taken. We then say
that there is 'no market' for the property in question. But that does
not put out of hand the bearing, which the scattered sales may have on
what an ordinary purchaser would have paid for the claimant's property.
We simply must be wary that we give these sparse sales less weight than
we accord 'market' price, and take into consideration those special
circumstances in other sales, which would not have affected our
hypothetical buyer. 117
The
Court has also made it clear that "[t]he ascertainment of
compensation is a judicial function, and no power exists in any other
department of the government to declare what the compensation shall be
or to prescribe any binding rule in that regard" 118
because the meaning of just compensation is a matter of
fundamental constitutional interpretation, and the ability to make
binding interpretations of the Constitution rests only with the United
States Supreme Court. In
short, while the "Court has never attempted to prescribe a rigid
rule for determining what is 'just compensation' under all circumstances
and in all cases ...market value has normally been accepted as a just
standard." 119
Thus, these Standards are based on the premise that the compensation for
federal land acquisitions will be measured by the relatively
objective working rule 120
of market value as established by the Supreme Court over 100 years ago. 121
It is also for that reason that appraisers are instructed by these
Standards to estimate the market value of property being acquired by the
government, rather than to estimate the just compensation due for the
property acquired. The determination of "just compensation" is
beyond the scope of the appraiser's assignment, expertise, and
authority. If the circumstances of a particular case render the market
value measure "too difficult to find, or when its application would
result in manifest injustice to owner or public," 122
that determination will be made by the court in accordance with
applicable law. Buildings
and improvements, 123
timber, crops, sand, gravel, minerals, oil, and so forth, in or upon the
property are to be considered to the extent that they enhance the market
value of the property as a whole. The total value of the property shall
not be estimated by adding the values of such separate items to the
value of the land, and the fact that the various items are in separate
ownerships does not alter this rule. It must be remembered that it is
the market value of the entire property that is the standard of
valuation, and not the total of the money values of the separate items.
This subject is discussed in greater detail in Section B-13 of these
Standards. The
mere possibility of the existence of minerals, oil, or gas is not
sufficient to affect market value. Such a possibility can be given
consideration only when there is sufficient probability of the presence
of mineral, oil, or gas as to affect market value and when that
probability would be given weight by a prudent person in bargaining. Government-constructed
buildings and improvements put on the property during the government's
prior occupancy (e.g., when the government begins construction of the
public improvement prior to the transfer of title and the effective date
of the appraisal, or when the government made improvements as a prior
lessee of the property) are often excluded from consideration in
estimating market value, depending upon the specific facts of the case.
Therefore, appraisers who encounter government-constructed improvements
on the property to be appraised as of the effective date of the
appraisal should request written instructions from the client agency or
legal counsel on how the improvements should be treated. 124
As
a general rule, the property being acquired should be valued as of the
time of acquisition, or as near that time as is possible. 125
When the appraisal is made after the taking, no consideration whatever
should be given to physical changes, particularly improvements made by
the condemnor, or changes in value occurring after the taking. Likewise,
as discussed in Section B-10, no consideration should be given to or
allowance made for enhancement or diminution in value of the property
attributable to or resulting from the project or from the government's
special need for the property, other than that due to physical
deterioration within the reasonable control of the owner, whether such
changes in value occur before or after the time of acquisition. B-3.
Highest and Best Use.
Market value is to be determined with reference to the property's highest
and best use, that is: The
highest and most profitable use for which the property is adaptable and
needed or likely to be needed in the reasonably near future... 126
Such
use "is to be considered, not necessarily as the measure of value,
but to the full
"Ordinarily,
the highest and best use for property sought to be condemned is the use
to which it is subjected at the time of the taking. This is true because
economic demands normally result in an owner's putting his land to the
most advantageous use." 128
In the conduct of appraisals for federal land acquisition purposes,
there is a presumption that the existing use of land is its highest and
best use. 129
Therefore, when there is a claim that the highest and best use of a
property is something other than the property's existing use, the burden
of proving that different highest and best use is on the party making
the claim. 130
However,
if the property is clearly adaptable to a use other than the existing
use, its marketable potential for such use should be considered to the
extent that potential affects market value. 131
But, market value cannot be predicated upon potential uses that are
speculative and conjectural; as the Supreme Court has said: Elements
affecting value that depend upon events or combinations of occurrences,
which, while within the realm of possibility, are not fairly shown to be
reasonably probable should be excluded from consideration, for that
would be to allow mere speculation and conjecture to become a guide for
the ascertainment of value–a thing to be condemned in business
transactions as well as in judicial ascertainment of truth. 132
A
proposed highest and best use requires a showing of reasonable
probability that the In
no event may an appraisal be made on the basis of one use for the land
while the improvements are valued on the basis a different, inconsistent
use. (See A-14, "Analysis of Highest and Best Use"). Various
parts of a single property may have different highest and best uses as
long as these uses are not inconsistent (e.g., residential or commercial
along road or highway frontage and agricultural use for the rear land). 135
These differences, however, may enter into the determination of the
larger parcel, which is discussed in Section B-11. In no event is it
proper that the different uses be valued independently and merely added
together to derive a value for the whole property. 136
Highest
and best use cannot be predicated on a demand created solely by the
project for which the property is acquired (e.g., rock quarry, when the
only market is the highway project for which property was acquired.). 137
A proposed highest and best use cannot be the use for which the
government is acquiring the property (e.g., missile test range, habitat
conservation, airfield, park), unless there is a prospect and
competitive demand for that use The
Supreme Court has recognized the existence of a 'principle, which
excludes enhancement of value resulting from the government's special or
extraordinary demand for the property. ' ...The focal point of the
'special or extraordinary' standard is that values resulting from the
urgency or uniqueness of the government's need for the property or from
the uniqueness of the use to which the property will be put do not
reflect what a willing buyer would pay to a willing seller... [I]t is
clear that government projects may render property valuable for a unique
purpose. Value for such a purpose, if considered, would cause 'the
market to be an unfair indication of value, ' because there is no market
apart from the government's demand. 139
Likewise,
"[t]he benefit a real estate development produces for a community
or the amenity contribution provided by a planned project (i.e., the
public space in a park-like area) is not considered in the appraiser's
analysis of highest and best use. Highest and best use is driven by
economic considerations and market forces, not by public interest."
140
Therefore, "a non-economic highest and best use is not a proper
basis for the estimate of market value [thus]a highest and best use of
conservation, preservation, or other use that requires the property to
be withheld from economic production in perpetuity, is not a valid use
upon which to estimate market value." 141
The
Department of Justice's "view is that an appraisal premised on a
highest and best use of 'preservation, ' 'conservation, ' 'natural
lands' and the like is not an appraisal of 'fair market value' and is
unacceptable for both direct purchase and eminent domain acquisitions.
That view is largely based on the principles of eminent domain law from
which we conclude that a non-economic use is not a proper basis for
assessing fair market value, that a value premised on a highest and best
use of 'preservation' or the like does not represent a 'market' value,
and certainly does not represent a 'fair' value." 142
Therefore, the Department of Justice will not approve any appraisal
report for federal acquisition purposes wherein the value estimate is
based upon an uneconomic highest and best use. Nor will it approve any
appraisal report that incorporates a definition of highest and best use
that includes the concept of non-economic uses. (See A-14,
"Analysis of Highest and Best Use.") When
determining the highest and best use of land riparian to navigable
water, there are special considerations that must be taken into account.
See discussion in Section B-14. Because
the highest and best use is a most important consideration in estimating
market value, it must be dealt with specifically in appraisal reports.
Many things must be considered in determining the highest and best use
of property and each potential use must be analyzed in terms of its
physical possibility, legal permissibility, financial feasibility, and
its degree of profitability. That use, which meets the first three tests
and is the most profitable use (i.e., results in the highest value) is
the property's highest and best use. Important
practical applications of highest and best use estimates arise in
connection with partial acquisitions, such as flowage, conservation,
clearance or other types of easements. The value of the remainder, after
a partial acquisition, is governed largely by its highest and best use.
If, for example, what was essentially farmland before the acquisition
has become lakefront property having a highest and best use for
recreational home sites, the important principle of offsetting special
benefits discussed in Section B-12, might become applicable. However, if
the acquisition causes the remainder property to have a less valuable
highest and best use, the difference between the values of the property
before and after the acquisition will reflect both the diminution in the
value of the remainder resulting from the acquisition as well as the
value of the land or property interest actually acquired. This is more
fully discussed in Section B-11 of these Standards. Concerning
partial acquisitions, the appraiser must consider any material change in
the intensity of use within a highest and best use classification: for
example, when a balanced farm in the before position becomes an
unbalanced farm in the after position because of the partial acquisition
by the government. 143
The highest and best use classification of an agricultural farm would
cover both positions. However, the two intensities of that use, a
balanced versus an unbalanced farm, would identify the need to carefully
re-analyze the comparative ratings of each of the comparable sales in
the after position, or even the need to use different comparable sales
in the after position than were used before the government's
acquisition. B-4.
Sales Comparison Approach to Value.
Arms length transactions in lands in the vicinity of and comparable to
the land under appraisement, 144
reasonably near the time of acquisition, are the best evidence of market
value, 145
but not to the extent of exclusion of other relevant evidence of value. 146
Such transactions are commonly referred to as comparable sales, and the
process of forming an opinion of the property's market value through
comparison of such sales transactions with the subject property is known
as the sales comparison approach to value. Too often it has been found
in appraisal reports that, under the circumstances of the case, the most
reliable approach to value has been over-shadowed by the time,
attention, and detail given to other less reliable approaches to value. Comparison
of sales transactions to the subject property being appraised is the
essence of the sales comparison approach to value. The basic elements of
comparison to be considered °
Property rights conveyed Accepting
the truism that all three of the usual approaches to value are based on
market data The
important role of the sales comparison approach to value in appraisals
for federal land acquisitions is illustrated by the Supreme Court's
statement that: "Where private property is taken for public use,
and there is a market price prevailing at the time and place of the
taking, that price is just compensation." 148
Or, as put by the 10th Circuit: "The best evidence of such value is
like and comparable sales within a reasonable time preceding the
condemnation." 149
The sales comparison approach normally should be stressed and care
should be taken that it does not get lost among other evidence
concerning what the courts often view as less reliable approaches to
value. Because it is the most easily understood approach to value, it
often develops the most acceptable and convincing evidence of the market
value of the property to both the courts and the parties to the
transaction. It
is imperative to verify sales amounts and to ascertain whether terms and
conditions of a sale were conventional and under open competitive market
conditions. This requires interviews and discussions with the seller,
buyer, the closing agency, or the broker handling the transaction and
the verification of recordation, which is the only avenue of
verification not based upon statements of persons other than the
appraiser. Verification must be accomplished by competent and reliable
personnel, and if the case goes into condemnation, the sale must be
personally verified by the appraiser who will testify. The
extent of sales verification will vary with the circumstances of each
sale, including the specific parties involved in the sale and the
importance and weight ultimately given to the sale in the final estimate
of value. Sales must be evaluated under two criteria: the weight, if
any, to be given them by the appraiser in arriving at an estimate of
market value of the property under appraisal, and the admissibility of
such sale if the acquisition must be by condemnation. Although the
criteria for these evaluations are similar, they are not identical, and
the result of one evaluation does not necessary dictate the result of
the other. For instance, a sale that is found to be inadmissible does
not necessarily have to be entirely excluded from the appraiser's
consideration in deriving an estimate of market value (e.g., see
discussion of "offers" in Section B-16 of these Standards).
Nor is a sale, which the appraiser concluded should be given no weight
necessarily inadmissible. The criteria for the evaluation of sales for
purposes of admissibility will be discussed below. Sections A-17, and
D-9 discuss the criteria and required verification process for various
categories of sales to determine the weight, if any, these sales should
be given by the appraiser. However,
in determining when to consider, and if so how much weight to give sales
in their appraisals, appraisers should recognize that the criteria
established for the admissibility of sales by the federal courts were
established for legitimate and persuasive reasons. Therefore, one of the
factors that should be considered in the selection and weighing of
comparables sales is their admissibility. Forced
sales, i.e., sales made under some form of legal (as distinguished from
economic) compulsion, are generally not admissible in a condemnation
trial. 150
"A forced sale is one which has no probative value whatever and
therefore must be excluded from evidence." 151"The
phrase 'forced sale' is used in the law of condemnation to describe a
sale of property, which is inadmissible as evidence of value because
elements of compulsion so affected the seller that the sale could not be
said to be fairly representative of market value at the time made. This
conception of a forced or compulsive sale includes force or compulsion
as a result of some kind of legal process." 152
It has been held that a comparable sale was not under compulsion,
coercion or compromise, such as to be inadmissible in evidence, if the
witness testifies or if it is otherwise shown, that the public records
do not disclose that the sale was at foreclosure, under deed of trust
securing an indebtedness, at execution or attachment, at auction, under
the pressure of the exercise of the power of eminent domain, or under
other coercion sui generis Р types of legal compulsion generally
disclosed by public records. 153
The motivation behind other transactions can be shown, but only as
affecting the weight that should be afforded a sale, not as to its
admissibility. 154
Sales
to a condemning authority are often inadmissible. (See Section B-18,
"Price paid by government entity for similar property.") The
reasons for excluding sales to a condemning authority are not
applicable, however, to sales by a condemning authority. Sales
between members of a family or closely related business entities are not
arms-length transactions, and since they may involve other factors than
market value considerations, such sales are generally inadmissible.
Sales involving the exchange of property are generally not admissible
because they are considered unreliable indicators of market value and
introduce too many collateral issues. As has been explained: If
evidence of ...an exchange is to be considered as proof of present
valuation, the values of such exchanged lands obviously must be proved
by the same standards as attends proof of value of the property being
condemned. Then it becomes the task of the trial judge to determine
ordinarily whether such collateral issues would be so confusing or so
lengthy as to cause him to rule out any effort to prove value of the
condemned tract in such a fashion. 155
Sales
that include personal property (e.g., the sale of a farm that includes
the farm equipment and/ or livestock), are likewise considered
inadmissible, unless they can accurately be adjusted to reflect only the
real property transaction. Distress sales and sales with a typical
financing terms are of questionable reliability and should be used only
with great care. If want of available market data necessitates reference
to such a sale or sales, it is important that proper adjustments be
made. Sales
after the date of acquisition are not per se inadmissible (contrary to
popular belief) and with appropriate caution and restraint may be
utilized by the appraiser if they meet the usual standards of
comparability and are not otherwise incompetent as evidence of value. 156
Sales transacted on or before the date of acquisition are the preferred
support for an appraisal and if such sales are available and adequate,
there is little justification for using post-acquisition sales. Use of
post-acquisition sales should be avoided where they reflect artificially
inflated or depressed values resulting from the acquisition itself or
from the government's project, 157
or if they significantly post-date the acquisition date. A
binding and unconditional contract of sale, even where title has yet to
be conveyed, is generally competent admissible evidence of value and may
be utilized by the appraiser as a comparable sale. 158
However, it is essential that the contract be binding and
unconditional. Mere offers and unexercised options, by contrast, are
inadmissible as evidence of value and, therefore, the appraiser should
give little or no weight to such options, except to the extent that they
may set limits of value. 159
See Section B-16. The
consideration and weight accorded to sales of other lands is determined
by the reliability of the data collected and verified and by the
application of the three tests of proximity (in time, in location, and
in physical and economic similarity). But, the appraiser should
thoroughly investigate sales that were considered though not relied upon
as direct comparables in reaching a final estimate of market value. Such
research material should be retained in the appraiser's file. When the
comparability, thus admissibility, of a sale is disputed in the course
of a valuation trial, it is a well-recognized principle of law that the
determination of admissibility rests within the sound discretion of the
presiding judge, whose ruling is subject to review only for abuse of
discretion. 160
Retention of all data considered by the appraiser in concluding a value
estimate will insure that adequate market data will be available for
presentation to a trier of fact if the acquisition has to be
accomplished by condemnation. B-5.
Prior Sales of the Identical Property.
Prior sales of the same property, reasonably recent and not forced, are
extremely probative evidence of market value. 161
Accordingly, the appraiser has an obligation to determine what the owner
paid for the property. Adjustments for changes in market conditions may
have to be made, or the prior sale may have been made under
circumstances that render it irrelevant to the determination of the
market value as of the date of valuation, but each appraisal report must
include a statement with respect to the consideration accorded to the
immediate past sale of the property under appraisal. The
admission into evidence of a sale of the property being acquired is
extremely pertinent, and thus courts have sustained such admissions even
when a considerable period of time has elapsed between the sale and the
date of valuation. 162
Not only must the appraisal report include the latest sale of the
property (regardless of when it was made) with whatever statement is
deemed relevant to the value as of the effective date of appraisal and
any adjustments made to reflect current value, but these Standards also
require the reporting of all sales of the subject property within 10
years of the date of valuation. (See Section A-13e.) B-6.
Cost Approach.
While it is acknowledged that appraisers have a professional obligation
to apply the cost approach to value whenever the results of the approach
will assist in estimating the value of the property, 163
appraisers need to recognize that the cost approach is generally viewed
by the courts as the least reliable method of valuation. 164
Orgel summarized the courts' view as follows: In
the first place, reproduction cost should be regarded as setting the
upper limit upon a valuation derived by any other method... In the
second place, structural cost should be recognized as an inferior
measure of value, to be given weight only in those cases where more
satisfactory evidence based on actual sales or on earning power is not
available. In the third place, whenever reproduction cost is offered as
evidence, the court should make every effort to assure a full deduction
for those elusive forms of depreciation, obsolescence and inadequacy,
[which] are so often disregarded by all but the most careful appraisers.
165
The
courts have made clear that this approach should never be relied upon
"when no one would think of reproducing the property," 166
or when no prudent investor would reproduce it for the figure or amount
given as replacement or reproduction cost. 167
In
this approach, the market value of the bare land is added to the
depreciated reproduction or replacement cost of the improvements to
arrive at an indication of the value of the property. The value of the
land bare and subject to improvement is generally estimated by a study
of comparable sales (i.e., by application of the sales comparison
approach). The estimate of the reproduction or replacement cost of the
improvements is based on current local-market cost of labor and
materials for construction of improvements. All forms of depreciation
are deducted from the cost new estimate, as discussed hereinafter. This
approach to value is most generally used as a check on the estimate of
value indicated by the sales comparison approach and for appraising
highly improved properties where there are no known comparable sales in
the area. In
the case of special purpose properties 168
that are not generally bought and sold, it is sometimes necessary to
resort to reproduction cost new less depreciation for want of any more
reliable method of valuation. 169
It is important to remember that if it is necessary to resort to the
cost approach, all forms of depreciation–physical deterioration,
functional obsolescence, and external (or economic) obsolescence–must
be accurately reflected and deducted from the reproduction or
replacement cost before the value of the land and improvements are added
together to develop an indication of market value by the cost approach.
Whenever the cost approach is utilized and it can be determined at what
time and at what cost the improvements were erected, a trending up– or
down, as appropriate– of such initial costs becomes an important part
of the analysis. It
should be noted that many of the reported cases speak in terms of
reproduction cost new less depreciation and use the words reproduction
and replacement interchangeably. The appraiser should
recognize the distinction between reproduction cost and replacement
cost. Reproduction cost has been defined as the present cost of
reproducing the improvement with an exact replica, and replacement cost
as the present cost of replacing the improvement with one having equal
utility. 170
If the cost approach is applicable, the appraiser may use either the
reproduction or replacement cost method, but must account for all forms
of depreciation appropriate under the particular method chosen:
"[T]he cost basis selected for a particular appraisal must be
clearly explained in the [appraisal]report to avoid
misunderstanding." 171
Caution
must be exercised in selecting the cost approach as the primary means of
estimating market value because the courts are skeptical about the
reliability of this approach, as demonstrated in United States v.
49,375 Square Feet of Land in Borough of Manhattan, 92 F. Supp. 384,
378-388 (S. D. N. Y. 1950), affirmed per curiam sub. nom. United
States v. Tishman Realty and Constr. Co., 193 F. 2d 180 (2nd Cir
1952), cert. denied, 343 U. S. 928, as follows: A
third method of appraisal is somewhat tentatively and timidly put
forward by the claimant, namely, the reproduction method. Here an expert
is called upon to give his version of the sound value of the building by
estimating what it would cost to reproduce it, and then deducting a fair
amount for depreciation. This "method" is perhaps the most
excellent example conceivable to demonstrate that none of such
abstractions ought to have a place in the search for market value,
generally speaking. [172]
. . .[I]gnoring the fact that on the figures an absurd result is
reached, it is apparent that the reproduction method is in itself absurd
in the ordinary case, because even in ordinary times it is ridiculous to
suppose that anyone would think of reproducing this or any like
property, and that same thing would be true in a vast majority of cases.
B-7.
Income Capitalization Approach.
While the courts generally favor the sales comparison approach to value,
there are, of course, some income-producing properties for which the
income capitalization approach is particularly relevant. 173
However, even when valuing that type of property where there are an
adequate number of comparable sales available with which to develop an
indication of market value, the sales comparison approach to value must
also be developed and considered by the appraiser in arriving at a final
value opinion. While the degree of reliance placed on the various
approaches to value is a matter for the appraiser's judgment, in making
that judgment the appraiser should consider both the courts' obvious
preference for the sales comparison approach and the fact that
"[h]istorically, the capitalization of income approach to value has
been suspect." 174 This
cautionary note is warranted because the income capitalization approach
often requires the appraiser to use a myriad of factors and variables,
the accuracy of which cannot clearly and easily be demonstrated by
direct market data. This is particularly true when discounted cash flow
(DCF) analysis, or other forms of yield capitalization, is employed. Nevertheless,
as the same court quoted above has noted: "The capitalization of
income approach has become acceptable in recognition of situations where
income producing potential is a key element for both buyer and seller in
many negotiations in arriving at a fair price." 175
"The fact ...that a valuation reached has in it baffling elements
of speculation and surmise does not mean that it should not be employed.
One guess may be better than another guess, since not all guesses have
in them the same element of intelligence. The realization that a
considerable amount of conjecture is involved should not paralyze the
function of deciding, but it should induce humility. Dogmatism is
clearly out of order in a modern valuation case." 176
That
does not mean, however, that the various factors utilized by an
appraiser can be used without justification and adequate market support.
Another court explains: [T]he
capitalization of income method may be appropriate in certain cases, but
where such method is used all of the factors that must necessarily be
taken into account should be established by proper evidence. Where
several of the elements or factors ...are without objective evidential
support, that method is faulty and can obviously lead to unfounded and
enhanced valuations. Again, it appears clear that comparable sales are
the best evidence of value of condemned land, which sales on the whole
reflect the principle of a willing seller and a willing buyer concluding
arms-length negotiations. The income capitalization method is justified
mainly when better evidence is not available. Great care must be taken,
or such valuations can reach wonderland proportions…. One
of the most critical factors applied in the income capitalization
approach is, of course, the capitalization or discount rate. "It
would seem apparent that if a capitalization rate is to be set, it
should be ascertained by reference to the best evidence— the most
similar property—as well as dissimilar investments if that proves
necessary. 'The selection of a capitalization rate by comparison is
perhaps the most widely accepted approach. It recognizes the
behavioristic nature of economics, because by comparison one gets the
reaction of people in the market place. " 178
For these reasons, appraisers utilizing the income capitalization
approach in the valuation of property for federal acquisition are
encouraged to make rate selections by comparison, as discussed in
Section A-18. In
using the income capitalization approach, care should be taken to
consider only income that the property itself will produce tilde;— not
income produced from a business enterprise conducted on the property.
When the public requires the land upon which a business is located, the
business is not taken and the value estimate developed by the appraiser
should include no incremental value for loss of the business or its
profits. 179
Accordingly, the rule against admitting evidence of profits or income,
either past or future, from a business conducted on the property
condemned has been applied to farmlands as well as to other lands. 180
It is not improper, however, to consider the uses to which a property
can be put, including the character and extent of the business carried
on, as distinguished from the profits from that business, the facilities
for doing the business, and location of the property as a point
commanding trade from the surrounding area, or otherwise. 181
Therefore, when valuing property that typically sells on the basis of
income production, it is appropriate to consider the amount of business
conducted on the site. For instance, one common unit of comparison in
valuing service stations is price per gallon of gasoline pumped; for
taverns a unit of comparison is often price per keg of beer sold; and
for funeral home the price per case. Also, of course, many commercial
properties will be rented based on a percentage of the gross sales of
the business located on the property. In these situations, business
volumes may be considered but with the sole reference to the market
value of the land. 182
The
income to be capitalized in the income capitalization approach is the
market or economic rent of the property being appraised. The appraiser
should not consider the fact that a property may be under lease to a
third party, except to the extent that the rent specified in the lease
may be indicative of the property's market rent. The value to be
estimated is the market value of the property as a whole, not the value
of the various interests into which it may have been carved. This topic
is discussed in greater detail in Section B-19. It
is generally recognized that it is improper to appraise the market value
of a property, for federal acquisition purposes, by capitalizing the net
income from a non-existent, hypothetical improvement proposed as the
highest and best use for the subject land, and then deducting for
development costs of the hypothetical improvement. 183
Property
having a highest and best use for mineral production may be appraised by
an income approach. This is not, however, an approach that should be
used by an appraiser who is not thoroughly experienced in appraising
mineral properties. Even when used by an appraiser experienced in the
field, this can be a highly speculative appraisal method that must be
used with great care. Because of the complexity of applying the income
capitalization approach to mineral property, it is discussed in greater
detail in Section D-11. B-8.
Development Approach.
The development approach 184
is a method of appraising undeveloped acreage having a highest and best
use for subdivision into lots. This approach consists of estimating a
final sale price for the total number of lots into which the property
could best be divided and then deducting all costs of development,
including the developer's anticipated profit. The remaining sum, the residual,
is said to represent the market value of the raw land. 185
This
highly sensitive and complex method of valuation involves the creation
of a detailed development plan for the property including streets,
utilities, lot sizes and locations; a market study to locate comparable
finished lots and selling prices; an estimate of the time lag between
the effective date of the appraisal and the date when the subdivision
would be approved and construction of the subdivision infrastructure
completed, making the lots marketable; an absorption analysis to
estimate how quickly the lots can be absorbed by the market; an analysis
of the direct costs of development, including the costs of surveying,
design, engineering, permitting, grading, clearing, sewers, street
paving, curbs and gutters, water lines and other utilities; an analysis
of indirect costs, including financing, insurance, real property taxes,
sales, advertising, accounting, legal and closing costs, and project
overhead and supervision; an estimate of developer's expected profit;
and the determination of an appropriate discount rate. Finally, all of
the income and expenses have to be scheduled over the period of
permitting, development, and sellout so that the income stream can be
discounted back to a present value. When
comparable sales are available with which to accurately estimate the
property's market value, the development approach should not be relied
upon as the primary indicator of value, as it is considerably more prone
to error. However, even when adequate comparable sales are available,
the development approach can be utilized to test both the highest
and best use conclusion 186
and to support the indicated value of the property by the sales
comparison approach to value. Although
"[t]here is some authority for the proposition that valuation
evidence based on the lot method of appraisal should never be admitted
in condemnation cases involving unimproved raw land," 187
the federal courts have, as noted above, admitted such evidence in
appropriate cases, but only if the proponent also offers credible
evidence of the costs of subdivision. 188
There must also be a showing "that the property was 'needed or
likely to be needed in the reasonably near future' for residential
subdivision." 189
The development approach is particularly applicable in instances wherein
the land being appraised has a highest and best use for subdivision
purposes and there are no comparable sales available with which to
develop an indication of value by the sales comparison approach.
Application of the development approach is further discussed in Section
A-15. B-9.
Conjectural and Speculative Evidence.
In seeking to determine market value, there should be taken into account
all considerations that might fairly be brought forward and reasonably
be given substantial weight in bargaining between buyer and seller.
However, the Supreme Court has stated that: "Elements affecting
value that depend upon events or combinations of occurrences, which,
while within the realm of possibility, are not fairly shown to be
reasonably probable, should be excluded from consideration." 190
B-10.
Enhancement or Diminution in Value Due to the Project.
"The [Supreme]Court early recognized that the 'market value' of
property condemned can be affected, adversely or favorably, by the
imminence of the very project that makes the condemnation necessary. And
it was perceived that to permit compensation to be either reduced or
increased because of an alteration in market value attributable to the
project itself would not lead to the 'just compensation' that the
Constitution requires." 191
With that recognition came the creation of the scope of the project
rule, which provides that the United States cannot be charged in
federal land acquisitions for values it has created in constructing the
project for which the property is being acquired; nor can an owner be
penalized for any diminution in value attributable to the project. 192
Accordingly, any increase or decrease in the market value of real
property prior to the date of valuation caused by the public improvement
for which such property is acquired, or by the likelihood that the
property would be acquired for such improvement, other than that due to
the physical deterioration within the reasonable control of the owner,
must be disregarded in estimating the market value of the property for
federal acquisition purposes. 193
Before
the scope of the project rule can be applied, it first must be
determined whether a government "project" exists for purposes
of the rule. To constitute a project there are three legal requirements
that must be met: there must be a public purpose requiring the
acquisition of land, the particular lands required for the public
purpose must be identified, and finally, such imminent acquisition must
be evident to the public. 194
The critical consideration in the application of this rule is whether
the "lands were probably within the scope of the project from the
time the Government was committed to it." If they were, no
enhancement or diminution in value attributable to the project 195
is to be considered in estimating market value; if they were not, but
were merely adjacent lands, the subsequent enlargement of the project to
include them (or their acquisition for some other public purpose) cannot
deprive [or reward] the owners of the value added [or lost] in the
meantime by the proximity of the project. 196
The
question of whether the lands were probably within the scope of the
project from the time the government was committed to it typically
arises in connection with projects that involve boundary adjustments or
that have spanned long periods between inception and the acquisition in
question. Application of the scope of the project test to any set of
facts "requires discriminating judgment." 197
The rule does not require a showing that the land ultimately taken was
actually specified in the original plans for the project. It need only
be shown that during the course of the planning or original construction
it became evident that land so situated would probably be needed for the
public use. 198
If
a property's marketability has been detrimentally impacted by the
creation of the government's project, thereby reducing the number of
potential buyers for the property under appraisal, this does not by
itself fall under the scope of the project rule, unless the reduced
marketability results in an impact on the price at which the property
could be sold. Even a substantial reduction of the attractiveness of the
property to potential purchasers does not fall under the scope of the
project rule because the definition of market value used for federal
land acquisition purposes includes the presumption of a reasonable
exposure time on the open market and, irrespective of that length of
time, it is assumed to have passed on the effective date of value.
Therefore, if the number of market sales within an announced project
boundary decreases substantially, this fact is not considered unless the
project has impacted the price at which the property could be sold. Worth
noting here is the rule that special benefits to the remainder property
resulting from the project for which the land is acquired (a kind of project
enhancement) are to be offset against the award of compensation in a
partial acquisition. This rule, which is not inconsistent with the
foregoing no-project-enhancement rule, is discussed in detail in Section
B-12. If
there is any real question about whether the government's activities
constitute a project, for purposes of the scope of the project
rule, or whether the property under appraisement falls within the scope
of the project, the appraiser should request legal instructions in this
regard from legal counsel for the agency or, if litigation has been
instituted, the responsible trial attorney. These questions are matters
of law and not within the purview of the appraiser's function, which is
limited to measuring the impact of the government's project, if any, on
the market value of the property under appraisal. B-11.
Partial Acquisitions.
When the United States acquires only part of a unitary holding, federal
law requires that compensation be made not only for the property
interest acquired, but also for the diminution, if any, in the value of
the remainder directly caused by the acquisition and/ or by the use to
which the part acquired will be put. 199
This diminution in the value of the remainder is often and
"somewhat loosely" referred to as severance damage. 200
When the remainder is specially benefited as a result of the
government's project, the value of the remainder will reflect that fact,
which will result in a lessening of the compensation paid to the
landowner. 201
It
is essential to a partial taking and to the application of the
rules on severance damages and special benefits that the land acquired
be part of a unitary holding (a "whole"), commonly
referred to as the larger parcel. 202
It is often difficult to determine what constitutes the whole property
comprising the part acquired and the remainder, in particular when there
are vast acreages or non-contiguous parcels involved. 203
Because of this difficulty, tests have been established to determine the
larger parcel. First, there must be a unity of ownership in all parts of
the whole. 204
Second, there must be a unity of highest and best use for all parts of
the whole. 205
Historically,
to satisfy the requirement of unity of ownership, title to all
parts of the whole had to be vested to the same extent in the same
persons. 206
It has been ruled that unity of ownership was lacking when the owner has
different interests in the two or more tracts, as, for example, when one
tract is owned in fee simple, a leasehold interest is held in a second
tract, and the owner holds all of the stock in a corporation that holds
title to a third tract. Likewise, unity of ownership has been ruled
lacking when one tract was owned by a husband and the second was owned
by his wife, or where one was owned by the father and the other was
owned by the son. 207
However,
in more recent cases some courts have found a single larger parcel even
though the quality of the title was not identical. For example, a single
larger parcel was found when the interest in one tract was an easement
and the interest in the second tract was a leasehold. 208
In another case, the court found that three tracts constituted a single
larger parcel even though each tract was owned by a different
corporation, because ownership of all three corporations was held by the
same individuals. 209
But even in these more recent cases, legal control over the ownership
and future of the lands in question was required to meet the unity of
title test. Whether
the quality of the interests held in different tracts is sufficient to
meet the unity of title test is, of course, a legal question, and the
law on this issue appears somewhat unsettled. Thus, appraisers must seek
advice of legal counsel 210
any time they conclude that a single larger parcel exists when the
ownership interests in all parts of the whole are not identical. While
it has been found that, to meet the unity of use test, all parts of the
whole must actually be devoted to a unitary use, 211
the weight of the law is that to meet this test the lands in question
merely have to have the same, or an integrated, highest and best use. 212
If the uses are dissimilar, no allowance can be made for severance
damages or special benefits. While holding that it is not essential that
parcels be contiguous, physical proximity has usually been considered to
the extent that it bears on the physical and economic practicalities of
a single unitary highest and best use. Appraisers must bear in mind the
distinction between a residue of a tract whose integrity is destroyed
[or impaired]and what are merely other parcels or holdings of the same
owner. 213
Practical application of the larger parcel tests and the appraiser's
responsibility in conjunction therewith are discussed in Section A-14. The
availability of replacement property for the parcel taken is an
important factor to bear in mind, particularly (but not only) when the
acquisition involves non-contiguous parcels devoted to a unitary use
(e.g., a mill site and one or more parcels providing raw material for
the mill); a reasonable buyer and seller would consider the availability
of a replacement. 214
Thus, for example, if a mill site's loss of a parcel of sugar cane land
can be remedied by the mill owner's purchase of a replacement parcel, severance
damages might be reduced or eliminated. This is essentially a cost
to cure measure of damages, as discussed later in this section and in
Section D-4. When
considering damages to remainder properties, appraisers must recognize
that in some states the compensation due a property owner may include
items that the federal rules exclude as being consequential, i.e.,
non-compensable, damages. 215
It is important that appraisers bear in mind these differences between
the various state and federal rules. Because
the fundamental basis of a claim of severance damages is a diminution in
the value of the remainder land, 216
the law is that "strict proof of the loss of market value to the
remaining parcel is obligatory." 217
And, as has been judicially noted, "the extent to which the utility
of a property has been destroyed and its market value diminished must
necessarily be established by factual data having a rational foundation
in support of such a claim." 218
Accordingly, severance damage should never be assumed merely because
there has been a partial acquisition, but must always be fully supported
by the facts of each situation. Unfortunately, however, appraisers too
often use severance damage as a catchall. When an appraisal report has
factual data supporting other conclusions, severance damages are simply
stated as the appraiser's opinion without specifying the basis for the
opinion. With reference to landowners who had failed to furnish factual
data to support claimed diminution in value to the remainder, one court
stated: "Not only were the opinions of their experts based largely
on speculation and conjecture, but these witnesses totally disregarded
available evidence of comparable sales before and after the taking of
the easement." 219
Clearly, the language here indicates that severance damages, like other
factors in estimating market value, must not be based upon speculation. 220
As the cited case shows, evidence in this respect must not be
"vague and speculative in character," nor may testimony
dealing with "possibilities more or less remote" be
considered. Allowable
severance damages include diminution in the value of the remainder
caused by the use to which the United States will put the part of the
land acquired; 221
however, diminution in value of the remainder caused by the use to which
the United States will put the land taken from others or from use of
land it owns cannot be considered. 222
In recognition of the practical difficulty in applying this rule in some
situations, the 9th Circuit has allowed severance damages when the
damages may be said to flow both from the acquisition and use of only a
portion of the owner's property and from the use to which the government
puts land acquired from a third party neighbor when the damages are
inseparable. 223
An example of such a situation might be the partial taking of a tract
for construction of a contaminated soils depository, a portion of which
would be constructed on the property acquired and a portion of which
would be constructed on property acquired from others—it might not be
practical to separate the diminution in value to the remainder caused by
the use of the property acquired from the larger parcel from the
diminution caused by the use of lands acquired from others. If
confronted with such a situation, it is recommended that appraisers seek
guidance from agency or Department of Justice legal counsel. Also,
a distinction must be drawn between diminution in value of the remainder
caused by the acquisition itself and the use to which the acquired
property will be put, which is compensable as severance damage, and
damage to the remainder caused by anticipated physical invasion of the
remainder that would result from the intended use of the land acquired,
which is not compensable. For instance, if the government acquired a
flowage easement for construction of a reservoir, an appraiser could not
consider damages to the remainder property above the line of the
acquisition from anticipated wave action during periods of high winds. 224
If
the United States proposes to put the part of a larger parcel acquired
to hazardous use and if fear of the hazard would affect the price, a
knowledgeable and prudent buyer would pay to a similarly well-informed
seller, diminution in value to the remainder caused by the fear is a
proper consideration in estimating the market value of the remainder,
even if such fear is not well founded. 225
As one court explained: [I]n
the final analysis, we are concerned only with market value. Although
these studies may show objectively the complete safety of these
structures, we are not convinced that certain segments of the buying
public may not remain apprehensive of these high voltage lines, and
therefore might be unwilling to pay as much for the property as they
otherwise would. On the record, allowance of incidental damages ...on
each side of the outer boundary of the remainder of the easements
appears to us reasonable and proper. 226
In
partial acquisitions, these Standards require with the exceptions noted
below and in Section B-14, application of the before and after
method of valuation 227
in which the appraiser estimates both the market value of the whole
property before the government's acquisition and the market value of the
remainder property after the government's acquisition. 228
Requiring this method of valuation allows acquiring agencies, the
Department of Justice, and the courts to calculate a reasonable measure
of compensation by deducting the appraiser's estimated remainder or
after value from the appraiser's estimate of the larger parcel's before
value. The result of this method is a figure that automatically includes
the value of the land actually acquired as well as any severance damages
and/or special benefits to the remainder property. Notwithstanding
the foregoing, to assist acquiring agencies in meeting their obligations
under the Uniform Relocation Assistance and Real Property Acquisition
Polices Act of 1970, 229
appraisals must contain an allocation of the difference between the
before and after value estimates between the contributory value of the
land acquired and damages to the remainder. (See A-30, "Allocation
and Explanation of Damages.") In
another approach, the appraiser estimates the contributory value of the
part of the whole property to be acquired and adds to or subtracts from
that figure an allowance for damages and/ or special benefits in value
to the remainder. 230
This method may or may not be more complicated, but it usually is more
subject to error and more apt to result in duplication, 231
sometimes referred to as double damages. When this taking
+ damages method is employed, the value of the part acquired is
its value as a part of the whole (i.e., larger parcel), not its value as
a separate parcel. Also, if this method of valuation is employed, the
appraiser must affirmatively address the issue of possible damages and/
or special benefits to the remainder of the larger parcel in the
appraisal report. This second taking + damages method should not be
utilized by appraisers without the express written authorization from
the acquiring agency, or the Department of Justice trial counsel, to
employ it. However,
acquiring agencies should bear in mind that there are situations in
which insistence upon strict adherence to the before and after rule
would impose costly and sometimes nearly impossible burdens upon
appraisers. Examples of such situations, in which this second taking +
damages method may be applicable, are minor fee or easement acquisitions
(for flowage, wetland or habitat protection, roads, pipelines,
transmission lines, etc.) from large ranches, industrial complexes,
etc., where the cost of valuing the whole unit before and after the
acquisition is simply unwarranted in view of the minor nature of the
acquisition. Use of this method, however, is generally limited to those
instances wherein there are no damages to the remainder property. In
short, where its application would be logical, practical, and capable of
understanding, the before and after method of valuation in partial
acquisitions is preferred. The taking + damages method shall not be
utilized without concurrence of the client agency. In
certain circumstances, damage to the remainder may be cured by
remedial action taken by the owner. The cost to cure, however, is
a proper measure of damage only when it is no greater in amount than the
decrease in the market value of the remainder if left as it stood. 232
When the cost to cure is less than the severance damages if the cure
were not undertaken, the cost to cure is the proper measure of damage,
and the government is not obligated to pay in excess of that amount. 233
See additional discussion of the cost to cure measure of damage in
Section D-4. B-12.
Offsetting of Benefits.
In a partial acquisition, when the market value of the remainder
property is being estimated, federal law requires that consideration be
given to special benefits that are capable of present estimate and
reasonable computation. 234
The law makes a distinction between general and special
benefits, and provides that only special benefits should be
considered in estimating the remainder's value. 235
The distinction between the two classes of benefits has been described
in a leading case on the subject as follows: 236
General
and special benefits have been thus distinguished: The
most satisfactory distinction between general and special benefits is
that general benefits are those which arise from the fulfillment of the
public object [that] justified the taking, and special benefits are
those, which arise from the peculiar relation of the land in question to
the public improvement. Ordinarily the foregoing test is a satisfactory
one, though sometimes difficult to apply. In other words, the general
benefits are those, which result from the enjoyment of the facilities
provided by the new public work and from the increased general
prosperity resulting from such enjoyment. The special benefits are
ordinarily merely incidental and must result from physical changes in
the land, from proximity to a desirable object, or in various other
ways. Nichols on Eminent Domain, 3rd ed., 45, §8.6203. In
other words, benefits to be special need not be particular to a single
parcel, but may accrue to multiple parcels. For instance, lands within
all four quadrants of a newly constructed freeway interchange may all be
specially benefited due to their special relationship to the public
improvement, whereas general benefits may accrue to all lands in the
vicinity due to the reductions in traffic congestion and commuting
times. Further illustration in this regard comes from a case involving a
river improvement project, in which the Supreme Court opined that an
increase in the value of the portion of any parcel of land caused by its
frontage on the widened river, carrying a right of immediate access to
and use of the improved stream, would constitute a special and direct
benefit, as distinguished from a benefit common to all the lands in the
vicinity, although the remaining portions of other riparian parcels
would be similarly benefited. 237
In so deciding, the Court approved and followed the law of benefits as
it had been applied in reference to lands abutting upon a new or widened
street, stating: The
benefit is not the less direct and special to the land of the
petitioner, because other estates upon the same street are benefited (sic)
in a similar manner. The kind of benefit, which is not allowed to be
estimated for the purpose of such deduction, is that which comes from
sharing in the common advantage and convenience of increased public
facilities, and the general advance in value of real estate in the
vicinity by reason thereof... The advantages of more convenient access
to a particular lot of land in question, and of having a front upon a
more desirable avenue, are direct benefits to that lot, giving it
increased value in itself. It may be the same, in greater or less
degree, with each and every lot of land upon the same street. But such
advantages are direct and special to each lot. They are in no proper
sense common because there are several estates, or many even, that are
similarly benefited (sic). To
take into account any special benefits from the project, the appraisers
apply the before and after rule of valuation, i.e., estimate the market
value of the entire tract at the time of acquisition excluding any
enhancement or diminution from the project, and the market value of the
remainder including any special benefit or diminution from the project. The
extent of the benefit to a tract caused by the project is a fact
question and the appraiser should be prepared in this respect. 238
However, whether a benefit is a general benefit or a special
benefit is a mixed fact-law question and, therefore, appraisers should
consult with legal counsel to resolve any questions about this
classification. 239
Appraisers
should give the same consideration to benefits as they do to damages in
estimating values of remainder properties. Benefits can take many forms,
such as when the project has caused the remainder to have lake frontage,
frontage on a better road, more convenient access, a beach firmed up and
made more useful, drainage improvement, irrigated land, and an improved
view. An upward shift in the highest and best use of the remainder
property is often an indication of special benefits, and special
benefits must be considered when appraisers estimate the value of
remainder properties, even though other lands may enjoy the same
benefits from the project. B-13.
The Unit Rule.
The market value concept adopted by the courts to be applied in federal
acquisitions generally requires application of the so-called unit
rule. This rule has two aspects; one relating to the interests, or
estates, into which ownership of real estate may be carved, and the
second relating to the various physical components of real estate. The
first aspect of the unit rule requires that property be valued as a
whole rather than by the sum of the values of the various interests into
which it may have been carved, such as lessor and lessee, life tenant
and remainderman, and mortgagor and mortgagee, etc. This is an
application of the principle that it is the property, not the various
interests, that is being acquired. 240
Many cases illustrate the unit rule, 241
thus, if there are several interests or estates in the property, the
property should be valued as a whole, embracing all of the rights,
estates, and interests of all who may claim, and as if in one ownership.
The market value of the whole property is later apportioned among those
who hold various interests in the property, but this apportionment
generally falls outside the scope of the government appraiser's
assignment. 242
The
whole property or unit valuation remains applicable even where the
ownership is divided between such inherently diverse interests as
surface rights and timber rights 243
or surface and mineral rights. 244
That does not necessarily mean, however, that the independent values of
the various interests are not admissible in a condemnation trial; but if
they are admitted it is for the sole purpose of aiding the trier of fact
in fixing the value of the property as a whole. 245
Likewise, it is not inappropriate for appraisers to consider the
independent values of the interests, but again, only for the purpose of
better estimating the market value of the whole property. Appurtenant
easements and similar use restrictions create an exception to this
aspect of the unit rule. 246
When lands are encumbered by such an appurtenant easement, they are
valued as encumbered. The easement estate is valued separately from the
balance of the tract it encumbers. The value of such an easement
interest is estimated in relationship to the dominant estate to which it
is attached. 247
Thus, when a tract of land encumbered with an appurtenant easement is
acquired, two larger parcels are created for valuation purposes. One
parcel is the property acquired, subject to the easement encumbrance,
and the second parcel is the appurtenant easement together with the
lands to which it is attached. 248
A
second aspect of the unit rule is that different elements or components
of a tract of land are not to be separately valued and added together.
For example, the value of timber, as an independent component, cannot be
added to the value of minerals in the same property as an independent
component, and this sum further added to the value of the land. Such a
procedure results in a summation or cumulative appraisal,
which is forbidden in appraisals for federal acquisitions, 249
as it is in general real estate appraisal practice. 250
The summation appraisal is an invalid procedure because the entire unit
is being hypothetically sold in its entirety, not as separate parts
individually. If the appraiser is not familiar with all of the types of
property involved, he or she should consult with experts in the
particular fields to become familiar with all aspects of the property.
In discussing the separate elements of the property in their analyses in
the appraisal reports, appraisers should always clearly state that these
elements were considered with respect to their enhancement of the value
of the whole. There
are some stated guidelines on admissibility of evidence with which
appraisers should be familiar; these relate to the valuation of
components of a real estate parcel: (1) that a landowner in dealing with
a parcel of land on which there is a mineral, timber or like substance
may not introduce expert testimony by which the expert multiplies the
gross material present by the market value per unit thereof and thereby
arrive at a figure [that] purports to be fair market value for the
parcel; (2) that the landowner may not by expert testimony capitalize
the present or future value of a business enterprise and thereby arrive
at fair market value; that rental value may, however, be capitalized;
(3) that the landowner is entitled to have an expert or lay witness
describe the commodity or substance on the land, the quantity thereof,
the going price thereof as factors only, upon which the expert
may in part base his value as to the fair market value of the
parcel in question; that a landowner is not entitled to present
testimony as to the fair market value of the mineral or timber or other
substance apart from the value of the land... In other words, a clear
distinction must be drawn between what is presented and considered as a factor
underlying the expert's opinion as contrasted with opinion as to the
fair market value of the substance, timber or mineral itself, apart from
the land; (4) that a landowner must make a showing of some sort of
market, poor or good, great or small, for the commodity in question
before the quantity and price of the commodity or substance may be
presented to the jury to be used as a factor in the expert's opinion
testimony; (5) that since the inquiry is essentially one as to what
would have been the negotiations between the willing buyer and the
willing seller, there may be taken into consideration by the expert only
those factors which would have been reasonably so considered; (6)
that except in cases where the matter is so clear that it becomes a
question of law it is generally a question for the jury to determine
whether the proposed factor underlying in part the opinion of the
expert as to the fair market value, is one which would have reasonably
been considered by the willing buyer and the willing seller; ...251 Normally,
each parcel should be appraised separately, but appraisers must
recognize that agency and/or local taxing authority mapping do not
control what constitutes a separate larger parcel. Since unity of use is
one of the elements for an integrated unit, it would not necessarily
follow that a contiguous body of land in the same ownership constitutes
a single unit if the highest and best use for various parts is
different. Failure to value the property as an integrated whole,
however, must always be explained and supported. In this regard,
appraisers must follow the guidelines set out for larger parcel
determination, as discussed in Sections A-14 and B-11 of these
Standards. B-14.
The Commerce, or "Navigational Servitude."
The Federal Government reserves very broad powers over navigation and
navigable waters under the Commerce Clause of the Constitution of the
United States, 252
which appraisers must bear in mind when valuing riparian land acquired
by the United States. The navigable waters are United States public
property and because of this, the great inland waterways have long been
deemed national assets rather than the private property of riparian
owners. In this connection, the Supreme Court has stated "...that
the running water in a great navigable stream is capable of private
ownership is inconceivable." 253
The Supreme Court has also observed that "...although the title to
the shore and submerged soil [of navigable rivers]is in the various
States and individual owners under them, it is always subject to the
servitude in respect of navigation created in favor of the Federal
government by the Constitution." 254
Since
the special values arising from access to navigable streams are
allocable to the public, and not to private interests, allowing recovery
of those values would permit private owners to receive windfalls to
which they are not entitled. 255
Accordingly, although land strategically located on navigable bodies of
water undeniably enjoys site-specific potentials that may make the
property more valuable in transactions between private individuals, the
federal government, when acquiring land pursuant to the commerce
servitude that is riparian to a navigable stream, is not required to pay
for the value of the land attributable to the flow of the stream. Under
this established principle of law, the following values have been held
to be noncompensable when the riparian upland is acquired by the federal
government in exercise of its power to control commerce: port site
value; 256
power site value; 257
and riparian rights of access to navigable waters. 258
More recently, the rule has been construed as applicable to other
factors relating to riparian location such as irrigation, boating,
fishing, and hunting. 259
It
should be noted that "[i]t is commerce, and not navigation, which
is the great object of constitutional care." 260
For this reason the constitutional power of the United States over its
waters is not limited to navigation: flood protection, watershed
development, recovery of cost of improvements through utilization of
power are likewise part of commerce control. 261
However, with the adoption by Congress of Section 111 of the Rivers and
Harbors Act of 1970 (84 Stat. 1818, 1821, codified at 33 U. S. C. §
595a), a special provision regarding government land acquisition was
enacted as follows: In
all cases where real property shall be taken by the United States for
the public use in connection with any improvement of rivers, harbors,
canals, or waterways of the United States, and in all condemnation
proceedings by the United States to acquire lands or easements for such
improvements, the compensation to be paid for real property taken by the
United States above the normal high water mark of navigable waters of
the United States shall be the fair market value of such real property
based upon all uses to which such real property may reasonably be put,
including its highest and best use, any of which uses may be dependent
upon access to or utilization of such navigable waters. In cases of
partial takings of real property, no depreciation in the value of any
remaining real property shall be recognized and no compensation shall be
paid for any damages to such remaining real property which result from
loss of or reduction of access from such remaining real property to such
navigable waters because of the taking of real property or the purposes
for which such real property is taken. The compensation defined herein
shall apply to all acquisitions of real property after December 31,
1970, and to the determination of just compensation in any condemnation
suit pending on December 31, 1970. The
provisions of Section 111 are fairly straightforward and unambiguous.
They should present no difficulty in implementation when the appraisal
involves acquisition of an entire larger parcel, leaving no remainder.
However, when the appraisal involves a partial taking, leaving a
remainder, their implementation is a problem. 262
The use of the usual before and after method of valuation entails too
many difficulties to be workable in a Section 111 partial acquisition
situation. Instead, it is recommended that when provisions of Section
111 of the Rivers and Harbors Act of 1970 apply, the appraiser employ
the taking + damages method of valuation, as described in Section B-11
of these Standards, using the steps set out below. 263
(a)
Estimate the market value of the land to be acquired, as a part of the
whole (larger parcel), based upon its highest and best use, including
uses that may be dependent upon access to or utilization of navigable
waters. (b)
Estimate the market value of the remainder land, as a part of the whole
(larger parcel), based upon its highest and best use, excluding
uses that would be dependent upon access to or utilization of the
navigable waters. (c)
Estimate the market value of the remainder land after the acquisition by
the government, based upon its highest and best use, excluding
uses that would be dependent upon access to or utilization of the
navigable waters. (d)
Compute compensable damages to the remainder property (b c). It
should be noted that this procedure takes into account the fact that the
law established by the Supreme Court prior to enactment of Section 111,
the Rivers and Harbors Act of 1970, remains applicable to remainder
properties, both before and after the government's acquisition. The case
law provides that the navigational servitude permits the government to
reduce the value of riparian lands by denying the riparian owner access
to the stream without compensation for the loss and also permits the
government to disregard the value arising from the same fact of riparian
location in the valuation of fast lands for government acquisition for
navigational purposes. It is for that reason that steps (b) and (c)
require analysis and valuation of the remainder property excluding
consideration of uses that would be dependent upon access to or
utilization of the navigable waters. B-15.
Noncompensability of Consequential Damages.
It is a firmly established principle of federal law that certain damages
which may occur by reason of a government acquisition of land are not
compensable and, therefore, must be disregarded by appraisers when
estimating market value for such acquisitions. Such damages are
classified as consequential or incidental damages.
"[T]he Fifth Amendment does not require any award for consequential
damages arising from a condemnation." 265
Loss
of business and relocation expenses have been determined to be
consequential, and therefore noncompensable. 266
Other damages classified as consequential include: damage to business,
loss of or damage to goodwill, future loss of profits, expenses of
moving removable fixtures and personal property, depreciation in value
of furniture and removable equipment, frustration of plans, frustration
of contractual expectations, loss of customers, and the expense of
having to readjust manufacturing operations. 267
The
basic federal law in this respect has been stated by the Supreme Court
as follows: The
sovereign ordinarily takes the fee. The rule in such a case is that
compensation for that interest does not include future loss of profits,
the expense of moving removable fixtures and personal property from the
premises, the loss of good-will, which inheres in the location of the
land, or other like consequential losses, which would ensue the sale of
the property to someone other than the sovereign. No doubt all these
elements would be considered by an owner in determining whether, and at
what price, to sell. No doubt, therefore, if the owner is to be made
hole for the loss consequent on the sovereign's seizure of his property,
these elements should properly be considered. But the courts have
generally held that they are not to be reckoned as part of the
compensation for the fee taken by the government. We are not to be taken
as departing from the rule they have laid down, which we think sound.
Even where state constitutions command that compensation be made for
property "taken or damaged" for public use, as many do, it has
generally been held that that which is taken or damaged is the group of
rights, which the so-called owner exercises in his dominion of the
physical thing, and that damage to those rights of ownership does not
include losses to his business or other consequential damage. [Footnotes
omitted.]268
The
Court went on to state, at page 382: Whatever
of property the citizen has the government may take. When it takes the
property, that is, the fee, the lease, whatever he may own, terminating
altogether his interest, under the established law it must pay him for
what is taken, not more; and he must stand whatever indirect or remote
injuries are properly comprehended within the meaning of
"consequential damage" as that conception has been defined in
such cases. Even so the consequences often are harsh. For these,
whatever remedy may exist lies with Congress. 269
The
Supreme Court later gave further guidance with respect to noncompensable
consequential damages by stating: Since
"market value" does not fluctuate with the needs of the
condemnor or condemnee but with general demand for the property,
evidence of loss of profits, damages to good will, the expense of
relocation and other consequential losses are refused in condemnation
proceedings. 270
In
the absence of a statutory mandate, the United States must pay only for
what it takes, not for opportunities that the owner may lose. 271
It is critically important that appraisers objectively estimate market
value, without attempting to include any consequential damages in those
estimates. To do so would not result in an accurate reflection of market
value and, in addition, could result in double recovery of damages
reimbursable under the Uniform Act. B-16.
Offers to Purchase or Sell.
It is well settled that a mere offer, unaccepted, to buy or sell real
estate is inadmissible to establish market value in eminent domain
valuation proceedings. 272
The Supreme Court has stated the reasons as follows:
It
is frequently very difficult to show precisely the situation under which
these offers were made. In our judgment they do not tend to show value,
and they are unsatisfactory, easy of fabrication and even dangerous in
their character as evidence upon this subject. 273
An
exception has been recognized in that an offer to sell by the landowner
from whom the property is being condemned may be proved against
the owner as an admission of value when introduced by the condemnor. 274
An option to purchase is a form of an offer; it is an offer that is
irrevocable for the period stipulated. Even though consideration has
been paid for it, an unexercised option is inadmissible. 275
Appraisers
should not confuse inadmissible information with that information they
must disregard in forming their opinions of market value. The analysis
of offers to buy and sell is clearly recognized in the appraisal
profession as a proper procedure. For instance, The Appraisal of Real
Estate, 11th ed. (Chicago: Appraisal Institute, 1996) contains the
following statements: Listings,
which represent the owner's perception of the value of the property,
usually reflect the upper limit of value; offers, which represent the
buyer's perception, commonly set the lower limit of value. Listings and
offers may be analyzed for comparability, but are not generally adjusted
(p. 171). In
addition to recorded sales and signed contracts, appraisers should
consider offers to sell and offers to purchase. Offers provide less
reliable data than signed contracts and recorded sales (p. 325). To
apply the sales comparison approach, an appraiser gathers data on sales,
contracts, offers, refusals, options, and listings of properties
considered competitive with, and comparable to, the subject property.
Data from completed transactions are considered the most reliable value
indicators (p. 400). In
addition, in relation to the property being appraised, Standards Rule
1-5 of The Appraisal Foundation's Uniform Standards of Professional
Appraisal Practice (USPAP), 2000 ed., requires an appraiser to
"analyze any current Agreement of Sale, option, or listing of the
property, if such information is available to the appraiser in the
normal course of business" and the reporting of offers to buy or
sell the property under appraisal is required by these Standards. See
Section A-13(e). Therefore,
while it is recognized that offers provide less reliable data than do
completed transactions and are generally inadmissible, they nonetheless
should be considered by appraisers. The degree of weight given to an
offer by an appraiser in arriving at a final estimate of market value
is, of course, a matter of judgment, but in making that judgment they
should remain mindful that, in the words of the Supreme Court, such
offers are "easy of fabrication and even dangerous." B-17.
Settlement Negotiations.
As early as its October 1876 term, the Supreme Court noted that
well-recognized principles made an offer of compromise inadmissible. 276
The prohibition against the admissibility of offers to compromise and
completed compromises is now embodied in Rule 408 of the Federal Rules
of Evidence. There
is one notable exception to the above rule. Section 4651 of the Uniform
Relocation Assistance and Real Property Acquisition Policies Act of
1970, P. L. 91-646, as amended, 42 U. S. C. §4601, et seq. provides
that: Before the initiation of negotiations for real property, the head
of the Federal agency concerned shall establish an amount, which he
believes to be just compensation therefore and shall make a prompt offer
to acquire the property for the full amount so established. In no event
shall such amount be less than the agency's approved appraisal of the
fair market value of such property.... The head of the Federal agency
concerned shall provide the owner of real property to be acquired with a
written statement of, and summary of the basis for, the amount he
established as just compensation. The
Fifth Circuit found that §4651 statements of just compensation sent to
land owners do not fall under Rule 408 of the Federal Rules of Evidence
because "[t]echnically, at the time the statements are provided,
there is no disputed claim, and hence no settlement negotiations of a
disputed claim, to serve as the predicate of Rule 408." 277
In light of that and other findings, the court ruled that §4651
statements of just compensation sent to land owners "are admissible
at a subsequent compensation trial as an admission . . ." 278
of the government's prior determination of just compensation. This could
be considered a corollary to the rule allowing offers to sell by
landowners admitted as admissions, as discussed in Section B-16. As
with offers to purchase or sell, the admissibility of a settlement offer
does not control whether an appraiser considers a settlement
offer in developing an opinion of value. It should be noted that the
Fifth Circuit's ruling does not admit §4651 statements as evidence of
market value, but rather as admissions against interest in those cases
in which the government's valuation testimony at trial is less than the
§4651 offer. An offer to purchase made under Section 4651 of the
Uniform Relocation Act generally represents only the opinion of market
value estimated by another appraiser and, as such, would generally not
be given serious consideration by appraisers. It
is generally recognized that offers of settlement are not reliable
indications of market value because such offers are often in the nature
of compromise to avoid the expense and uncertainty of litigation and,
therefore, should not be considered by appraisers in developing their
opinions of market value. B-18.
Price Paid by a Governmental Entity for Similar Property.
Based upon a variety of reasons, e.g., that such payments are in the
nature of compromise to avoid the expense and uncertainty of litigation
and so are not fair indications of market value, that such evidence
complicates the record, confuses the issue, is misleading, and,
especially in condemnation cases, raises collateral issues as to the
conditions under which such sales were made, the historical view of the
various federal courts has been that the sum paid for similar land by an
agency having condemnation authority, even if condemnation proceedings
have not begun, was inadmissible. 279
However, an exception to this rule is recognized in cases of voluntary
sales, or where the fact that the parties were condemnor and condemnee
either was not known or had no influence because the sale was not in
connection with or in anticipation of condemnation proceedings. 280
"[T]he
recent trend has been in favor of granting the trial court broad
discretion in determining the admissibility of sales . . .". 281
"The theory of admissibility is that although evidence of a
purchase by the condemnor of property similar to that involved in a
condemnation proceedings is less persuasive on the issue of market value
than evidence of a purchase by a stranger, there is no reason in
principle why such evidence should not be admitted provided the purchase
by the condemnor was made without compulsion; in short, it is held that
objection to this type of evidence goes to its weight, not to its
competency." 282
As explained by the Sixth Circuit: "The possibility that the
condemnation itself may have influenced the price the Government paid
for the [comparable]property may well disclose the presence of
artificially inflated values in the sale price of that property.
Nevertheless, this is merely a possibility, which cannot be determined
through use of a general exclusionary rule prior to trial." 283
While
sales to government entities should be viewed as suspect from the
outset, they cannot, and should not, be rejected by appraisers as
invalid comparable sales out of hand, especially in those situations
wherein a paucity of private sales are available for use in the sales
comparison approach to value. However, because "the person who
offers evidence of other transactions must establish preliminarily that
the purchase was made 'without compulsion, coercion, or compromise,
" 284
appraisers must use extreme care in their verifications of sales to
government entities if they are going to rely upon them as comparable
sales. Since there can be a multitude of motivations for a government
entity to acquire lands at a price other than market value, Section D-9
of these Standards sets out the verification procedures appraisers must
employ in verifying the circumstances surrounding a sale to a government
entity to ensure that it meets the criteria of market value, or can be
accurately be adjusted to reflect market value. B-19.
Leaseholds.
When the government acquires a leasehold estate, whether by voluntary
lease or condemnation, the proper measure of value is the market or
economic rent of the occupied premises for the term specified. 285
(See Section D-12, for detailed discussion of this point). The market
rental rate is to be determined as though the property were an
unencumbered whole and without regard to any subsidiary interests into
which it may have been divided. 286
Just
as the preferred way of appraising a fee estate is to use comparable
sales transactions, the preferred way of appraising a leasehold estate
is to use comparable lease transactions. Elements of comparability in
leasehold valuations include, in addition to the usual elements of size,
time, location, and so forth, the basic term of the lease, the number
and term of options to renew, if any, tenant build-out, and the extent
services are provided by the lessor and/ or lessee. Under this approach,
the appraiser will attempt to find leases of similar premises, near in
location and time, which reflect as near as possible the terms of the
lease and conditions of the premises being acquired. The rent paid per
square foot (or per acre, or other unit of measure) in these comparables
would be used as the basis for estimating the square foot (or other unit
of measure) market, or economic, rent of the space to be leased. In this
process, appropriate adjustments must be made for differences between
the leasehold being appraised and the comparable lease transactions.
Particular attention must be paid to adjustments for basic term and
services, as the government often acquires leasehold estates of shorter
terms than normally encountered in the market and, when the leasehold is
being acquired by condemnation, the estate will not call for the
furnishing of janitorial and similar type personal services often
included in market leases, as the furnishing of such services cannot be
compelled. When
the lease involves office space, it is imperative that the appraiser
determine the net rentable area in the space being appraised in the same
manner in which the net rentable space in the comparable leases is
determined. There are several methods of measurement currently used in
the private sector across the country, and the General Services
Administration (which leases millions of square feet of space throughout
the country and is often the government agency acquiring leasehold
estates) has its own method that differs from those found in the private
sector. Since square feet is usually the basis for comparison in an
office space leasehold appraisal, it is of paramount importance to use
the same common denominator and method of measurement in relating the
comparable leases to the property under appraisal. If the government's
standard of measurement varies from that of the local market (as it
usually does), appraisers usually find it easiest to convert the
government's measurements to that used in the local market for purposes
of comparison because the market rent is to be determined in regard to
what the owner/lessor could have received for the space on the open
market. 287
When
comparable lease transactions are available, it is not proper to
estimate market, or economic, rent of a leasehold estate by use of the percentage
of fee value method. 288
This method, which requires an appraisal of the fee value of the subject
property and the application of some percentage factor reflecting an appropriate
return on the owner's investment is fallacious in at least two
respects: (1) it does not reflect the way rental rates are established
in the market, and (2) neither the marketplace nor the law guarantees an
owner a return on his or her investment. The
acquisition of a leasehold estate can encompass only a portion of a
larger property. Under such circumstances, appraisers should not rule
out consideration of the possibility of a diminution in the market
rental of the area not leased by the government merely because the
government's acquisition is of a leasehold estate. Such diminution in
rental value can result in a compensable damage. 289
A hypothetical example of such a situation was given by the court in a
case, which involved a leasehold taking of a portion of a commercial
office building. The court stated that if the rental of the remainder is
diminished unless offered together with the space acquired by the
government, then the diminution in rental value of the remainder is a
valid compensable damage. 290
However, appraisers must take care in this regard to avoid consideration
of what are merely consequential, or noncompensable, damages. 291
As
noted above, in conducting appraisals for the government, market rent is
estimated without regard to any subsidiary interests into which the
property may have been divided. However, client agencies may, on
occasion, expand the scope of an appraiser's assignment to include
consideration of the values of such subsidiary interests, so as to
provide the agency with additional information that will facilitate its
acquisition/ negotiation activities. Compensation due to the owners of
such subsidiary interests will vary depending on the nature and extent
of the government's acquisition and the specific terms and conditions
under which the subsidiary interest is held. B-20.
Easements.
An easement can generally be described as an interest in land of another
entitling the owner of that interest to a limited use of the land in
which it exists, or a right to preclude specified uses in the easement
area by others. An easement is an interest less than the fee estate,
with the landowner retaining full dominion over the realty subject only
to the easement; the landowner may make any use of the realty that does
not interfere with the easement holder's reasonable use of the easement
and is not specifically excluded by the terms of the easement. Federal
acquisitions involve a wide variety of easement types ranging from the
traditional to the exotic; they include, for example, road, pipeline,
electric transmission line, levee, flowage, clearance, navigation,
scenic, conservation, tunnel, sewer line, and safety zone easements. In
making an appraisal in conjunction with an easement acquisition, 292
it is imperative that the appraiser have a clear understanding of the
specific terms of the easement involved, as the burden on the land upon
which the easement is imposed (the servient estate) and the concomitant
impact on the value of the affected land will vary according to the
character of the easement. 293
(For example, there is no such thing as a generic road easement or a
generic scenic easement. 294
) Also, full consideration should be given to and due allowance made for
the rights remaining in the owner. 295
Every
easement acquisition is a partial acquisition leaving a remainder estate
in the owner. This is true even where the entire ownership is impressed
with the easement: because an easement is less than the fee, there is a
remainder estate in the land within the easement. If the easement is
impressed upon less than the full area of the larger parcel, the portion
of the parcel outside the easement is also a remainder. Federal courts
have long held that the appropriate measure of compensation in a partial
acquisition is the difference between the value of the whole parcel
before the acquisition and the value of the remainder after the
acquisition. 296
The courts accordingly have held this to be the proper measure of
compensation in easement acquisitions. 297
If only the strip subject to the easement is valued, this violates the
rule that "comparing the fair market value of the entire
tract affected by the taking before and after the taking ...states the
correct measure of value in For
some types of easements, such as those acquired for electric, telephone,
fibre optics, cable lines and pipelines, there may be an established
going rate per pole, per line-mile, per rod, and the like. In appraising
a similar type of easement for government acquisition, the appraisal
must not be based upon such going rates but must be based upon the usual
before and after appraisal method. 299
Although
the before and after method of valuation is required by these Standards
when the government acquires easements (because it measures what the
owner has lost, not what the government has gained), use of the before
and after method of valuation is not required when the government sells
an easement interest. Agencies are, therefore, free to consider the
value of the easement to the acquirer as well as the diminution to the
government's property by reason of the encumbrance. Easements
may be permanent or temporary. An example of the latter is the temporary
construction easement. The appropriate measure of value for the
acquisition of a temporary easement is the rental value for the term of
the easement, adjusted as may be appropriate for the rights of use, if
any, reserved to the owner. See Section D-10 of these Standards for a
fuller discussion of this point. The
foregoing discussion pertains to appraisals made for easement
acquisitions. A quite different though related matter is the proper
measure of value for a third party appurtenant easement that is acquired
or extinguished as an incident of the government's acquisition of the
servient estate (e.g., fee acquisition of property through which an
easement of access connects a third party's parcel to the highway). The
third-party easement owner has a separate estate that must be separately
appraised. 300
In such cases, the easement owner is not limited to the value of the
easement acquired, but is entitled to the value diminution of the
property served by the easement. 301
Accordingly, two appraisal assignments are required; a before and after
appraisal of the easement interest and the property it serves (the
before appraisal including the easement interest and the land it serves
and the after appraisal excluding those interests acquired by the
government) and a second appraisal assignment covering the land being
acquired, as encumbered by the easement. 302
This second appraisal would also require a before and after appraisal if
only a portion of this larger parcel is to be acquired. 303
B-21.
Streets, Highways, Roads and Alleys.
Under established federal law, only nominal compensation is due for
streets, highways, roads and alleys acquired by the federal government
unless the streets must be replaced. 304
This is not to say that the government pays nothing for the land
constituting the streets: as has been judicially stated, "[i]t is
customary to say that the value of the land in the streets and alleys is
'reflected' in the value of the lots, and since this value must be paid
for upon condemnation, it cannot be said that the condemnor acquired
without cost the lands within the lines of the highway." 305
If
the governmental unit from which the street has been acquired needs to
replace the street, then the cost of replacing the street with a
functionally equivalent substitute becomes the measure of the owner's
loss, rather than market value, the usual standard. 306
If acquired streets do not need replacement, they require only nominal
compensation. Compensation for streets that require replacement is
generally measured by the cost to replace them, and appraisals are
seldom used for such acquisitions. B-22.
Public Facilities.
Public property owners have sought to extend application of the
replacement cost measure of compensation to properties of a more
conventional nature than streets, highways, roads and alleys, such as
buildings and landfills. 307
However, the Supreme Court has ruled that, notwithstanding the need to
replace the acquired facility, market value is the proper measure of
compensation when the market value of the property is ascertainable.308
From
an appraisal perspective, the question that must be addressed is not
what measure of compensation should be employed, but rather what is
meant by replacement cost. For instance, when a street must be
replaced, the only means of obtaining a functionally equivalent street
is to construct one. Streets are not bought and sold in the open market,
and the functionality of a street is tied to its specific location.
However, when the property acquired is one that has an ascertainable
market, the replacement cost of the property is not the cost to
reconstruct it, but rather the price at which a functionally equivalent
property can be acquired in the open market, i.e., its market value. In
the case cited above, the Court found that there was an active market
for the type of property being acquired. 309
In
line with current case law, appraisers assigned to value a public
facility that has a demonstrable market must estimate its market value.
When the public facility being acquired is one without an ascertainable
market value, because the property type is not one bought and sold on
the open market, appraisers should seek guidance in the form of a
written legal instruction from the client agency's legal counsel, or if
a condemnation case has been filed, from Department of Justice legal
counsel regarding the appropriate valuation methodology to be employed. B-23.
Zoning and Permits.
Market value is to be estimated at the time of valuation considering the
property in its condition and situation at that time; 310
if at that time, the property was subject to zoning restrictions, that
factor must be considered in evaluating the property. 311
"Thus, if existing zoning restrictions preclude a more profitable
use, ordinarily such use should not be considered in the
evaluation." 312
Because property is to be valued in light of its highest and best use 313
zoning regulations are of critical importance because they restrict the
uses to which the property may lawfully be devoted. Of
course, zoning regulations may change and a prospective purchaser may
well consider the potential for a zoning change when determining the
price he or she would pay for the property. Thus, if there is a
reasonable probability that the property's zoning classification will be
changed, this probability should be considered in arriving at the value
estimate; but it should be considered only to the extent that the probability
would have affected the price a willing buyer would have offered for the
property at the time of the government's acquisition. 314
The appraiser's opinion as to whether there is a reasonable probability
of a zoning change must have a factual foundation; it is insufficient to
merely assert that there is a reasonable probability of a zoning change.
315
A discussion of the investigation and analysis required by an appraiser
in this regard may be found in Section D-6 of these Standards. The
foregoing principles apply with equal force when the property is subject
to regulations that preclude a particular use unless a permit for that
use has been issued by the regulating authority. 316
(Substitute "reasonable probability of obtaining a permit" for
"reasonable probability of a zoning change.") For instance,
this issue frequently arises in connection with a proposed use of
wetlands subject to the Corps of Engineers' regulatory authority under
the Clean Water Act of 1977, 33 U. S. C. 1251 et seq. In Section 301(a)
of this Act, Congress enacted an absolute prohibition against the
discharge of pollutants into the nation's water, excepting only
discharges made in compliance with other sections of the Act, including
Section 404. Pursuant to Section 404, the Corps of Engineers administers
a permit program for the discharge of dredged or fill material ("
pollutants" under the Act) into navigable waters, which
includes wetlands. 317
Other
frequently encountered permits are discussed in Section D-6 of these
Standards. 94.
United States v. 93.970 Acres of Land, 360 U. S. 328, 332-333
(1959); United States v. Miller, 317 U. S. 369, 380(1943). 96.
United States ex rel. T. V. A. v. Powelson, 319 U. S. 266, 279
(1943). 101.
United States v. Reynolds, 397 U. S. 14, 16 (1970). 105.
Kimball Laundry Co. v. United States, 338 U. S. 1, 5 (1949).
112.
United States v. Reynolds, 397 U. S. 14, 16-17 (1970). 114.
United States v. 50 Acres of Land, 469 U. S. 24, 29 (1984)
(citations omitted). 120.
United States v. 564.54 Acres of Land, 441 U. S. 506, 511 (1979). The
appraiser should receive from the acquiring agency advice as to the
requirements of such agency for the removal of buildings, structures and
the identification of these which the head of the agency determines will
be adversely affected by the proposed use of the property. However,
appraisers should also recognize that such instructions may not be
applicable if the case is referred to the Department of Justice for
condemnation, because Section 102 of the Act provides: (a) The
provisions of section 4651 of this title of the Act [relating to real
property acquisition policy and practices]create no rights or
liabilities and shall not affect the validity of any property
acquisitions by purchase or condemnation. (b) Nothing in this Act shall
be construed as creating in any condemnation proceedings brought under
the power of eminent domain, any element of value or of damage not in
existence immediately prior to January 2, 1971. 42 U. S. C. §4602. 124.
In researching this issue, legal counsel may want to start their
research by referring to the following cases: Old Dominion Co. v.
United States, 269 U. S. 55, 65 (1925); Searl v. School District,
Lake County, 133 U. S. 553, 562-565 (1890); Washington
Metropolitan Area Transit Authority v. One Parcel of Land, 780 F. 2d
467, 471 (4th Cir. 1986); United States v. Delaware, Lackawana &
Western Railroad Co., 264 F. 2d 112, 116-117 (3rd Cir. 1959);
Bibb County, Georgia v. United States, 249 F. 2d 228, 230 (5th Cir.
1957), but see United States v. Certain Space in Rand McNally
Building, 295 F. 2d 381, 383-384 (7th Cir. 1961). 125.
That will generally be the date of the appraiser's last property
inspection in voluntary acquisitions. In a declaration of taking case,
the proper time of valuation is the date of filing the declaration of
taking or the date of the government's entry into possession, whichever
occurs first. United States v. Dow, 357 U. S. 17, 21-22 (1958).
In a straight condemnation (without declaration of taking), the
date of commencement of trial is used as the date of valuation. See Kirby
Forest Industries, Inc., v. United States, 467 U. S. 1, 16-17
(1984), for a full discussion of the date of valuation question in a
straight condemnation case. 126.
Olson v. United States, 292 U. S. 246, 255 (1934). See also
Boom Company v. Patterson, 98 U. S. 403, 408 (1878). 130.
United States v. 62.50 Acres of Land, 953 F. 2d 886, 890 (5th
Cir. 1992); Tennessee Gas Pipeline Co. v. 104 Acres of Land, 780
F. Supp. 82, 86 (D. R. I. 1991). 131.
Olson v. United States, 292 U. S. 246, 255 (1934). 133.
Ibid., 256; United States v. 27.93 Acres of Land, 924 F. 2d 506,
512 (3rd Cir. 1991); United States v. 33.90 Acres of Land, 709 F.
2d 1012, 1014-1015 (5th Cir. 1983); United States v. 158.24 Acres of
Land, 696 F. 2d 559, 563 (8th Cir. 1982); United States v.
77,819.10 Acres of Land, 647 F. 2d 104, 110 (10th Cir. 1981). 134.
United States v. Meadow Brook Club, 259 F. 2d 41, 45 (2nd Cir.
1958), cert. denied, 358 U. S. 921. 135.
United States v. 179.26 Acres of Land, 644 F. 2d 367, 371 (10th
Cir. 1981); United States v. 320.0 Acres of Land, 605 F. 2d 762,
817 n. 124 (5th Cir. 1979); Eagle Lake Improvement Co. v. United
States, 160 F. 2d 182, 184 (5th Cir. 1947), cert. denied, 332 U. S.
762; United States v. Carrol, 304 F. 2d 300, 306 (4th Cir. 1962).
136.
United States v. 91.90 Acres of Land, 586 F. 2d 79, 87 (8th Cir.
1978); cert. denied, 441 U. S. 944 (1979); Morton Butler Timber Co.
v. United States, 91 F. 2d 884, 888 (6th Cir. 1937); United
States v. Jaramillo, 190 F. 2d 300, 302 (10th Cir. 1951); United
States v. Certain Parcels of Land in Rapides Parish, La., 149 F. 2d
81, 82 (5th Cir. 1945). 137.
United States v. Cors, 337 U. S. 325, 333 (1949); United
States v. 320.0 Acres of Land, 605 F. 2d 762, 811 n. 107 (5th Cir.
1979); United States v. 46,672.96 Acres of Land, 521 F. 2d 13,
15, 16 (10th Cir. 1975); J. A. Tobin Construction Co. v. United
States, 343 F. 2d 422, 423 (10th Cir. 1965), cert. denied, 382 U. S.
830; United States v. 158.76 Acres of Land, 298 F. 2d 559, 560
(2nd Cir. 1962). 138.
United States v. Chandler-Dunbar Co., 229 U. S. 53, 80-81 (1913);
United States v. 320.0 Acres of Land, 605 F. 2d 762, 783 n. 26,
811 n. 107 (5th Cir. 1979); United States v. 46,672.96 Acres of Land,
521 F. 2d 13, 15-16 (10th Cir. 1975). 139.
United States v. Weyerhaeuser Co., 538 F. 2d 1363, 1366, 1367
(9th Cir. 1976), cert. denied, 429 U. S. 929 (1976) (internal citations
omitted). 140.
The Appraisal of Real Estate, 11th ed. (Chicago: Appraisal
Institute, 1996), 298 n. 1. 141.
Interagency Land Acquisition Conference, "Position Paper: On the
issue whether a noneconomic highest and best use can be a proper basis
for the estimate of market value" (Washington D. C., 1995). 142.
William J. Kollins, "Presentation on Issues Raised by the 'Public
Interest Value' Concept: Views of the Department of Justice" (Paper
delivered at the Annual Meeting of the American Society of Farm Managers
and Rural Appraisers, Reno, NV, November 11, 1994), 4. See also,
William J. Kollins, "Public Interest Value," United States
Attorney's Bulletin (February 2000): 47-53. 143.
For example, in the before position the farm may have a balanced ratio
of supporting outbuildings to service the land area in the farm, whereas
in the after position, because of the reduced land area of the farm, the
outbuildings may constitute an over-improvement and thus contribute less
value, because of the lessened land area to be served. 144.
This would include a prior sale of the land under appraisement, which
could very well be the most comparable of all the comparable sales. See
Section B-5, "Prior sales of the identical property," for
fuller discussion of this point. 145.
E. g., El Paso Natural Gas Co. v. Federal Energy Regulatory
Commission, 96 F. 3d 1460, 1464 (D. C. Cir. 1996);United States
v. 819.98 Acres of Land, 78 F. 3d 1468, 1471 (10th Cir. 1996); United
States v. 24.48 Acres of Land, 812 F. 2d 216, 218 (5th Cir. 1987); Nemmers
v. City of Dubuque, 764 F. 2d 502, 505 (8th Cir. 1985); United
States v. 103.38 Acres of Land, 660 F. 2d 208, 211 (6th Cir. 1981); United
States v. 100 Acres of Land, Etc., Marin Cty., Cal., 468 F. 2d 1261,
1265 (9th Cir. 1972), cert. denied, 414 U. S. 822 (1973); United
States v. Upper Potomac Properties Corp., 448 F. 2d 913, 918 (4th
Cir. 1971); United States v. 344.85 Acres of Land, 384 F. 2d 789,
791-792 (7th Cir. 1967); United States v. 60.14 Acres of Land,
362 F. 2d 660, 665 (3rd Cir. 1966). 146.
El Paso Natural Gas Co. v. Federal Energy Regulatory Commission,
96 F. 3d 1460, 1464 (D. C. Cir. 1996); United States v. 819.98 Acres
of Land, 78 F. 3d 1468, 1471 (10th Cir. 1996); Servalli v. United
States, 845 F. 2d 1571, 1575 (Fed. Cir.1988); United States v. 421.89
Acres of Land, 465 F. 2d 336, 338-339 (8th Cir. 1972); United
States v. Upper Potomac Properties Corp., 448 F. 2d 913, 917 (4th
Cir. 1971); United States v. 344.85 Acres of Land, 384 F. 2d 789,
792 (7th Cir. 1967). 147.
For a general discussion of these elements of comparison see, The
Appraisal of Real Estate, 11th ed. (Chicago: Appraisal Institute,
1996), 403-414. 148.
United States v. New River Collieries, 262 U. S. 341, 344 (1923). 150.
United States v. Certain Land in Fort Worth, Texas, 414 F. 2d 1029,
1031-32 (5th Cir. 1969); District of Columbia Redevelopment Land Agency
v. 61 Parcels of Land, 235 F. 2d 865, 865-66 (D. C. Cir. 1956); Hickey
v. United States, 208 F. 2d 269, 275 (3rd Cir. 1953), cert. denied,
347 U. S. 919(1954); United States v. 5139.5 Acres of Land, 200
F. 2d 659, 661 (4th Cir. 1952); Baetjer v. United States, 143 F.
2d 391, 397 (1st Cir.), cert. denied, 323 U. S. 772. 151.
Hickey v. United States, 208 F. 2d 269, 275 (3rd Cir. 1953),
cert. denied, 347 U. S. 919 (1954). 153.
United States v. Certain Land in Fort Worth, Texas, 414 F. 2d 1029,
1031-1032 (5th Cir. 1969) ; District of Columbia Redevelopment Land
Agency v. 61 Parcels of Land, 235 F. 2d 865, 865-866 (D. C. Cir.
1956). 154.
United States v. 6, 162.78 Acres of Land, 680 F. 2d 396, 399 (5th
Cir. 1982); United States v. Certain Land in Fort Worth, Texas,
414 F. 2d 1029, 1032 (5th Cir. 1969); District of Columbia
Redevelopment Land Agency v. 61 Parcels of Land, 235 F. 2d 865, 866
(D. C. Cir. 1956); United States v. Katz, 213 F. 2d 799, 800 (1st
Cir. 1954); United States v. 5139.5 Acres of Land, 200 F. 2d 659,
661 (4th Cir. 1952). 155.
United States v. Leavell & Ponder, Inc., 286 F. 2d 398, 406
(5th Cir. 1961), cert. denied, 366 U. S. 944. 157.
Ibid. But in the case of a partial acquisition where offsetting of
benefits or damages are involved, post-acquisition sales could be
particularly relevant in valuing the remainder. For example, they may
also be particularly useful when the measure of damages is the
difference between the market value before and after imposition of an
easement. United States v. 1129.75 Acres of Land, 473 F. 2d 996,
999 (8th Cir. 1973). 158.
United States v. 312.50 Acres of Land, 812 F. 2d 156, 157 (4th
Cir. 1987); United States v. 428.02 Acres of Land, 687 159.
United States v. 0.59 Acres of Land, 109 F. 3rd 1493, 1495-1496
(9th Cir. 1997); United States v. 10,031.98 Acres of Land, 850 F.
2d 634, 637 (10th Cir. 1988); United States v. 158.24 Acres of Land,
696 F. 2d 559, 565 (8th Cir. 1982); United States v. Certain Land in
Fort Worth, Texas, 414 F. 2d 1029, 1032 (5th Cir. 1969). 160.
E. g., United States v. 819.98 Acres of Land, 78 F. 3d 1468, 1471
(10th Cir. 1996); United States v. 1,129.75 Acres of Land, 473 F.
2d 996, 998 (8th Cir. 1973); United States v. 100 Acres of Land,
468 F. 2d 1261, 1265 (9th Cir. 1972), cert. denied, 414 U. S. 822
(1973); United States v. Certain Land in Fort Worth, Texas, 414
F. 2d 1029, 1031, (5th Cir. 1969); United States v. 60.14 Acres of
Land, 362 F. 2d 660, 668-669 (3rd Cir. 1966); Bailey v. United
States, 325 F. 2d 571, 572 161.
United States v. 428.02 Acres of Land, 687 F. 2d 266, 271 (8th
Cir. 1982); Surfside of Brevard, Inc. v. United States, 414 F. 2d
915, 917 (5th Cir. 1969); A prior sale of the same property is not, as a
matter of law, entitled to greater weight than sales of comparable
property; the relative importance of the two being dependent upon the
facts in the particular case. Hickey v. United States, 208 F. 2d
269, 273 (3rd Cir. 1953), cert. denied, 347 U. S. 919 (1954). 162.
United States v. 428.02 Acres of Land, 687 F. 2d 266, 271 (8th
Cir. 1982); Carlstrom v. United States, 275 F. 2d 802, 809 (9th
Cir. 1960); Dickinson v. United States, 154 F. 2d 642,643 (4th
Cir. 1946) (sale six years prior to date of valuation held properly
admitted); United States v. Becktold Co., 129 F. 2d 473, 479 (8th
Cir. 1942) (sale fourteen years prior to date of value properly
admitted). In Becktold the court stated (p. 479): "The fact the
purchase was made some fourteen years before the date of taking the
property went to the weight of the evidence, rather than to its
admissibility." 163.
J. D. Eaton, Real Estate Valuation in Litigation, 2nd ed. (Chicago:
Appraisal Institute, 1995), 160.F. 2d 266, 270-271 (8th Cir. 1982); United
States v. 114.64 Acres of Land, 504 F. 2d 1098, 1100 (9th Cir.
1974); United States v. Smith, 355 F. 2d 807, 811-812 (5th Cir.
1966). 164.
United States v. 55.22 Acres of Land, 411 F. 2d 432, 435 (9th Cir. 1969)
United States v. Certain Interests in Property in Champaign County,
Ill., 271 F. 2d 379, 382 (7th Cir. 1959), cert. denied, 362 U. S.
974. 165.
Lewis Orgel, Valuation Under the Law of Eminent Domain, 2nd ed.
(Charlottesville, Va.: The Michie Co., 1953), Vol. 2, §199, p. 57. 166.
United States v. Toronto, Hamilton & Buffalo Navigation Co.,
338 U. S. 396, 403 (1949); See also United States v. Benning Housing
Corp., 276 F. 2d 248, 253 (5th Cir. 1960); Buena Vista Homes,
Inc. v. United States, 281 F. 2d 476, 478 (10th Cir. 1960). 167.
United States v. 55.22 Acres of Land, 411 F. 2d 432, 435-36 (9th
Cir. 1969); United States v. Certain Interests in Property, Etc.,
296 F. 2d 264, 269-70 (4th Cir. 1961). 168.
Also referred to as unique properties, or limited market properties. 170.
The Appraisal of Real Estate, 11th ed. (Chicago: Appraisal
Institute, 1996), explains this distinction as follows (p. 345):
"Reproduction cost is the estimated cost to construct, at current
prices as of the effective appraisal date, an exact duplicate or replica
of the building being appraised, using the same materials, construction
standards, design, layout, and quality of workmanship, and embodying all
the deficiencies, super adequacies, and obsolescence of the subject
building." "Replacement cost is the estimated cost to
construct, at current prices as of the effective appraisal date, a
building with utility equivalent to the building being appraised, using
modern materials and current standards, design, and layout." 171.
Ibid., 345. 173.
It must be noted, and emphasized, at the outset that the only income
properly considered under this approach to market value is the income
generated by the real estate— normally rental income, and not the
income generated from a business conducted on the property. 174.
Foster v. U. S., 2 Cl. Ct. 426, 448 (1983). 175.
Ibid. 179.
E. g., United States v. Petty Motor Co., 327 U. S. 372, 377-78
(1946); United States v. General Motors Corp. 323 U.S. 373,
379-380 (1945); United States ex rel. T. V. A. v. Powelson, 319
U. S. 266, 281 (1943); Mitchell v. United States, 267 U. S. 341,
344-345 (1925); Joslin Co. v. Providence, 262 U. S. 668, 675
(1923); Bothwell v. United States, 254 U. S. 231, 233 (1920); A.
G. Davis Ice Co. v. United States, 362 F. 2d 934, 936-937 (1st Cir.
1966). 180.
United States v. Brinker, 413 F. 2d 733, 735 (10th Cir. 1969); United
States v. 26.699 Acres of Land, 174 F. 2d 367, 368-369 (5th Cir.
1949); United States v. Meyer, 113 F. 2d 387, 397 (7th Cir.
1940), cert. denied, 311 U. S. 706; Welch v. Tennessee Valley
Authority, 108 F. 2d 95, 100 (6th Cir. 1939), cert. denied 309 U. S.
688. 181.
Lehigh Valley Coal Co. v. Chicago, 26 F. 415, 417 (C. C. N. D.
Ill. 1886). 183.
See United States v. 75.13 Acres of Land, 693 F. 2d 813, 816 (8th
Cir. 1982). Because there are few federal cases on this issue, see also
the following cases in which state courts, employing the same principles
with undergird the federal concept of market value, treat speculative
evidence: Fruit Growers Express v. City of Alexandria, 221 S. E.
2d 157, 161-162 (S. Ct. Va. 1976); Matter of City of New York
(Blackwell's Island Bridge), 103 N. Y. S. 441, 443-444 (N. Y. 1907);
Levitin v. State of New York, 207 N. Y. S. 2d 798, 799 (N. Y.
1960). 184.
It is recognized that the methodology described herein is not
technically an approach to value, but rather a method or technique of
valuation, which incorporates aspects of all of the formal approaches to
value (i.e., sales comparison, income capitalization, and cost) into its
application. It has also been referred to as a land residual approach,
developer's residual approach, subdivision development method, and the
lot method. 185.
Cases setting out the courts' description of the development approach
include United States v. 99.66 Acres of Land, 970 F. 2d 651,
655-656 (9th Cir. 1992); United States v. 47.3096 Acres of Land,
583 F. 2d 270, 271-272 (6th Cir. 1978). 186.
United States v. 125.07 Acres of Land, 667 F. 2d 243, 246 (1st
Cir. 1981). 189.
United States v. 47.3096 Acres of Land, 583 F. 2d 270, 272 (6th
Cir. 1978). 191.
United State v. Reynolds, 397 U. S. 14, 16 (1970), citing e.g. Shoemaker
v. United States, 147 U. S. 282 (1893). 193.
See 42 U. S. C. §4651(3) of the Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970. 195.
The enhancement or diminution in value due to the project is often
referred to as "project influence." 197.
United States v. Reynolds, 397 U. S. 14, 21 (1970). 199.
Bauman v. Ross, 167 U. S. 548, 574 (1897); United States v.
Grizzard, 219 U. S. 180, 183 (1911); United States v. Miller,
317 U. S. 369, 376 (1943). 200.
United States v. Miller, 317 U. S. 369, 376 (1943). 204.
United States v. 87.30 Acres of Land, 430 F. 2d 1130, 1133-1134 (9th
Cir. 1970); United States v. Certain Parcel of Land in Jackson Co.
Mo., 322 F. Supp. 841, 848-849 (W. D. Mo. 1971). 205.
Washington Metropolitan Area v. One Parcel of Land, 691 F. 2d 702,
704-705 (4th Cir. 1982); United States v. 158.24 Acres of Land, 515 F.
2d 230, 232 (5th Cir. 1975); United States v. Wateree Power Co.,
220 F. 2d 226, 231 (4th Cir. 1955); United States v. Honolulu
Plantation Co., 182 F. 2d 172, 179 (9th Cir. 1950), cert. denied,
340 U. S. 820; Baetjer v. United States, 143 F. 2d 391 (1st Cir.
1944), cert. denied 323 U. S. 772. 206.
United States v. 87.30 Acres of Land, 430 F. 2d 1130, 1133 (9th
Cir. 1970); United States v. Stewart, 429 F. Supp. 658, 660-661
(E. D. Tenn. 1976); United States v. Certain Parcel of Land in
Jackson Co. Mo., 322 F. Supp. 841, 848-849 (W.D. Mo. (1971). 207.
Ibid. 212.
Washington Metropolitan Area v. One Parcel of Land, 691 F. 2d
702, 704-705 (4th Cir. 1982); United States v. 158.24 Acres of Land,
515 F. 2d 230, 232 (5th Cir. 1975); United States v. Wateree Power
Co., 220 F. 2d 226, 231-232 (4th Cir. 1955); Baetjer v. United
States, 143 F. 2d 391 (1st Cir. 1944), cert. denied 323 U. S. 772. 213.
There is a good discussion in this connection in Sharpe v. United
States, 112 F. 893, 896 (3rd Cir. 1902), aff'd 191 U. S. 341, 354
(1903). See also, United States v. 8.41 Acres of Land, 680 F. 2d
388, 393 (5th Cir. 1982). 214.
Georgia-Pacific Corp. v. United States, 640 F. 2d 328, 359-360
(Ct. Cl. 1980); International Paper Company v. United States, 227
F. 2d 201, 207 (5th Cir. 1955); Porrata v. United States, 158 F.
2d 788, 790 (1st Cir. 1947). In International Paper Company v. United
States, supra, the question of the availability of replacement land
was considered so important that the court affirmed the trial judge's
withdrawal of the severance damage claim from the jury because the
owner's witnesses had not taken that factor into consideration. 215.
Batten v. United States, 306 F. 2d 580, 583-584 (10th Cir. 1962).
For a discussion of consequential damages, see Section B-15. 216.
Bauman v. Ross, 167 U. S. 548, 574 (1897); United States v.
Grizzard, 219 U. S. 180, 183 (1911); United States v. Miller,
317 U. S. 369, 376 (1943); United States v. 33.5 Acres of Land,
789 F. 2d 1396, 1398 (9th Cir. 1986); United States v. 101.88 Acres
of Land, 616 F. 2d 762, 767 (5th Cir. 1980). 217.
United States v. Honolulu Plantation Co., 182 F. 2d 172, 179 (9th
Cir., 1950), cert. denied 340 U. S. 820; Miller v. United States,
620 F. 2d 812, 828 (Ct. Cl. 1980). 218.
United States v. 26.07 Acres of Land, 126 F. Supp. 374, 377 (E.
D. N. Y. 1954), citing Westchester County Park Commission v. United
States, 143 F. 2d 688, 692 (2nd Cir., 1954), cert. denied, 323 U. S.
776. 219.
United States v. 26.07 Acres of Land, 126 F. Supp. 374, 377 (E.
D. N. Y. 1954). As the court went on to state: "On the other hand
...the Government's expert made a detailed survey of sales of
residential and industrial parcels in the immediate vicinity of the
defendants' properties, before and after the appropriation of the
easement, which plainly indicated that there was no appreciable
depreciation in the market value of similar parcels as a result of the
imposition of the easement." 220.
Sharpe v. United States, 112 F. 893, 897 (3rd Cir. 1902), aff'd
191 U. S. 341 (1903). 222.
Campbell v. United States, 266 U. S. 368, 371-372 (1924); United
States v. 760.807 Acres of Land, 731 F. 2d 1443, 1447 (9th Cir.
1984); United States v. 101.88 Acres of Land, 616 F. 2d 762, 769
(5th Cir. 1980); United States v. Kooperman, 263 F. 2d 331, 332
(2nd Cir. 1959); Winn v. United States, 272 F. 2d 282, 286-287
(9th Cir. 1959); Boyd v. United States, 222 F. 2d 493, 494 (8th
Cir. 1955). 223.
United States v. Pope & Talbot, Inc., 293 F. 2d 822, 825 (9th
Cir. 1961); United States v. 15.65 Acres of Land, 689 F. 2d 1329,
1332 (9th Cir. 1982), cert. denied, 460 U. S. 1041 (1983). 224.
Such damage may be compensable in an inverse taking action by the
landowner but is not compensable as severance damages in a condemnation
action. United States v. 38.60 Acres of Land, 625 F. 2d 196,
199-200 (8th Cir. 1980); United States v. 101.88 Acres of Land,
616 F. 2d 762, 768 (5th Cir. 1980). 225.
United States v. 760.807 Acres of Land, 731 F. 2d 1443, 1447 (9th
Cir. 1984); United States v. 6.24 Acres of Land, 99 F. 3d 1140,
(6th Cir. 1996). 226.
United States ex rel. T. V. A. v. An Easement & Right of Way,
405 F. 2d 305, 309 (6th Cir. 1968). 229.
42 U. S. C. §§ 4601-4655; P. L. 91-646, . Section 4651(3) requires the
head of the acquiring agency to make a written offer to purchase to the
property owner, separately stating the estimated contributory value of
the property to be acquired and damages to the remaining property. 230.
Often referred to as the taking + damages rule, or the state rule. See United
States v. 97.19 Acres of Land, 582 F. 2d 878, 880-881 (4th Cir.
1978); Miller v. United States, 620 F. 2d 812, 829 (Ct. Cl.
1980). 231.
For an example of how this duplication occurs see, J. D. Eaton, Real
Estate Valuation in Litigation, 2nd ed. (Chicago: Appraisal Institute,
1995), 32-33. Some states use this second method because they require a
separate finding of severance damage since their law permits benefits
from the project to be offset against the severance damage, but not
against the value of the land acquired. As will be shown in Section
B-12, this reason is not applicable in federal acquisitions. 232.
United States v. 2.33 Acres of Land, 704 F. 2d 728, 730 (4th Cir.
1983); United States v. Dickinson, 152 F. 2d 865, 870 (4th Cir.
1946), aff'd, 331 U. S. 745 (1947). 233.
United States v. 2.33 Acres of Land, 704 F. 2d 728, 730 (4th Cor.
1983). 234.
E. g., Bauman v. Ross, 167 U. S. 548, 570 (1897); United
States v. River Rouge Co., 269 U. S. 411, 415-416 (1926); United
States v. Miller, 317 U. S. 369, 376 (1943); Washington
Metropolitan Area v. One Parcel of Land, 691 F. 2d 702, 704 (4th
Cir. 1982); United States v. 901.89 Acres of Land, 436 F. 2d 395,
397-399 (6th Cir. 1970), cert. denied, 402 U. S. 973 (1971); United
States v. 2,477.79 Acres of Land, 259 F. 2d 23, 28-29 (5th Cir.
1958). 235.
Bauman v. Ross, 167 U. S. 548, 574-575 (1897); United States
v. River Rouge Co., 269 U. S. 411 (1926); Washington Metropolitan
Area v. One Parcel of Land, 691 F. 2d 702, 704 (4th Cir. 1982); United
States v. 901.89 Acres of Land, 436 F. 2d 395, 397-399 (6th Cir.
1970), cert. denied, 402 U. S. 973 (1971); United States v. 6816.5
Acres of Land, 411 F. 2d 834, 837 (10th Cir. 1969); United States
v. 2,477.79 Acres of Land, 259 F. 2d 23, 28-29 (5th Cir. 1958). 236.
United States v. 2,477.79 Acres of Land, 259 F. 2d 23, 28 (5th
Cir. 1958) See also United States v. 901.89 Acres of Land, 436 F.
2d 395, 397-399 (6th Cir. 1970), cert denied, 402 U. S. 973 (1971). 237.
United States v. River Rouge Co., 269 U. S. 411, 415-416 (1926). 238.
United States v. 2,477.79 Acres of Land in Bell County, 259 F. 2d
23, 28 (5th Cir. 1958). 240.
The term in rem is used to designate proceedings or actions instituted
against the thing, in contradiction to personal actions, which are said
to be in personam. It is for this reason that the style of federal
condemnation cases generally takes the form of United States v. x
Acres of Land, rather than United States v. Landowner. 241.
E. g., United States v. Dunnington, 146 U. S. 338, 351 (1892); Bogart
v. United States, 169 F. 2d 210, 213 (10th Cir. 1948); Nebraska
v. United States, 164 F. 2d 866, 868 (8th Cir. 1947), cert. denied
334 U. S. 815; United States v. 25.936 Acres of Land, 153 F. 2d
277, 279 (3rd Cir. 1946); Meadows v. United States, 144 F. 2d
751, 753 (4th Cir. 1944), cert. denied, 358 U. S.921. 242.
However, the appraiser may be asked by a client agency to allocate the
total value of the property among the separate estates or interests for
agency negotiating purposes and/ or to meet its obligations under the
Uniform Relocation Assistance and Real Property Acquisition Policies
Act. In such an instance, it is recommended that the appraiser report
such an allocation in a supplemental report rather than include it in
the appraisal report in which the market value of the property as a
whole is 243.
Meadows v. United States, 144 F. 2d 751, 752-753 (4th Cir. 1944),
cert. denied, 358 U. S. 921. 247.
United States v. Welch, 217 U. S. 333, 339 (1910). 250.
The Appraisal Foundation, Uniform Standards of Professional Appraisal
Practice (USPAP), 2000 ed., Standards Rule 1-4(e). 255.
United States v. Rands, 389 U. S. 121, 126 (1967). 256.
United States v. Rands, 389 U. S. 121, 126 (1967). See also United
States v. 30.54 Acres of Land, 90 F. 3d 790, 796 (3rd Cir. 1996); United
States v. 87.30 Acres of Land, 430 F. 2d 1130, 1133 (9th Cir. 1970).
Indeed, in United States v. Virginia Electric Co., 365 U. S. 624,
631 (1961), the Supreme Court stated: "The [lower]court was clearly
right in excluding all value attributable to the riparian location of
the land." 257.
E. g., United States v. Virginia Electric Co., 365, U. S. 624,
629 (1961); United States v. Twin City Power Co., 350 U.S. 222,
228 (1956). 258.
In United States v. Commodore Park, 324 U. S. 386, 390-391
(1945), navigable waters were filled in with material dredged from other
navigable waters. In South Carolina v. Georgia, 93 U. S. 4, 10-11
(1876), the course of a stream was diverted. In Gibson v. United
States, 166 U. S. 269, 275-276 (1897) and Scranton v. Wheeler,
179 U. S. 141, 152-153 (1900), there was impairment or destruction of
access to the stream by the placement of a dike or jetty in front of the
riparian owner's property. In each of these situations it was held that
the riparian owner had no right of recovery as against the United States
in exercising its power to control commerce. 259.
United States v. Birnbach, 400 F. 2d 378, 382 (8th Cir. 1968).
Under the provisions of the 1944 Flood Control Act, 33 U. S. C. Sec.
701.1(b), with respect to waters lying wholly or partially west of the
ninety-eighth meridian, improvements for navigation or flood control are
limited to such use "as does not conflict with any beneficial
consumptive use, present or future, in States lying wholly or partly
west of the ninety-eighth meridian, of such waters for domestic,
municipal, stock water, irrigation, mining, or industrial
purposes." When there is doubt concerning the applicability of this
Act, the appraiser should consult with agency or Department of Justice,
legal counsel. 260.
Scranton v. Wheeler, 179 U. S. 141, 160 (1900). 262.
In the 1973 edition of these Standards the hope was expressed that the
provisions of Section 111 would be construed by the courts at an early
date. Unfortunately, no circuit or Supreme Court case has been decided
that sheds any light on the proper appraisal methodology for such a
partial acquisition. 263.
This methodology has been tested in court only once, and in an
unpublished case was successful. However, as developments subsequent to
publication of these Standards may require adoption of a different
methodology, it is recommended that the appraiser consult with the
client agency (or trial counsel, as appropriate) before undertaking an
appraisal of a partial acquisition covered by this Act. 264.
For a thorough discussion of the formula applied in the taking + damages
valuation methodology, see J. D. Eaton, Real Estate Valuation in
Litigation, 2nd ed. (Chicago: Appraisal Institute, 1995), 30-40. See
also United States v. 97.19 Acres of Land, 582 F. 2d 878, 880-881
(4th Cir. 1978); United States v. 344.85 Acres of Land, 384 F. 2d
789, 792 (7th Cir. 1967). 265.
United States v. 50 Acres of Land, 469 U. S. 24, 33 (1984). 267.
See Omnia Commercial Co. v. U. S., 261 U. S. 502, 509-510 (1923);
Mitchell v. United States, 267 U. S. 341, 345 (1925); United
States v. 38.60 Acres of Land, 625 F. 2d 196, 200 (8th Cir. 1980); Georgia-Pacific
Corp. v. United States, 640 F. 2d 328, 360-361 (Ct. Cl. 1980); United
States v. 677.50 Acres of Land, 420 F. 2d 1136, 1138-1139 (10th Cir.
1970), cert. denied, 398 U. S. 928; R. J. Widen Co. v. U. S., 357 F. 2d
988, 993-994 (Ct. Cl. 1966); Certain Land in City of Washington, D.
C. v. U. S., 355 F. 2d 825, 826 (D. C. Cir. 1965). 268.
United States v. General Motors Corp., 323 U. S. 373, 379-380
(1945). 270.
United States v. Petty Motor Co., 327 U. S. 372, 377-378 (1946). 272.
E. g., Sharp v. United States, 191 U. S. 341, 348-350 (1903); United
States v. 10,031.98 Acres of Land, 850 F. 2d 634, 637 (10th Cir.
1988); United States v. 158.24 Acres of Land, 696 F. 2d 559, 565
(8th Cir. 1982); United States v. Smith, 355 F. 2d 807, 811 (5th
Cir. 1966); Bank of Edenton v. United States, 152 F. 2d 251, 253
(4th Cir. 1945). 273.
Sharp v. United States, 191 U. S. 341, 349 (1903). 275.
United States v. Smith, 355 F. 2d 807, 811 (5th Cir. 1966). 277.
United States v. 320.0 Acres of Land, 605 F. 2d 762, 824-825 (5th
Cir. 1979). 280.
United States v. 10.48 Acres of Land, 621 F. 2d 338, 339-340 (9th
Cir. 1980). 286.
This is an aspect of the unit rule, discussed more fully in Section
B-13. See also Carlock v. United States, 53 F. 2d 926, 927 (D. C.
Cir. 1931); A. G. Davis Ice Co. v. United States, 362 F. 2d 934,
937 (1st Cir. 1966). Should the property in fact be encumbered by an
existing leasehold estate in a third party that will be interrupted or
extinguished as a consequence of the government's acquisition, the
lessee may or may not be entitled to compensation, but that is a
question of allocation of the value. Thus, there is no need for the
government's appraiser to value that third party leasehold estate,
unless requested to do so by the client agency. 287.
United States v. Bedford Associates, 548 F. Supp. 732, 743 (S. D. N. Y.
1982), modified in other respects, 713 F. 2d 895 (2nd Cir. 1983). 288.
United States v. 883.89 Acres of Land, 442 F. 2d 262, 264-265
(8th Cir. 1971); United States v. Michoud Industrial Facilities,
322 F. 2d 698, 707 (5th Cir. 1963); United States v. 117,763 Acres of
Land, 410 F. Supp. 628, 631 (S. D. Cal. 1976), aff'd sub nom. United
States v. Shewfelt Investment Co., 570 F. 2d 290, 291-292 (9th Cir.
1977). 289.
United States v. 1735 N. Lynn St., 676 F. Supp. 693, 698-699 (E.
D. Va. 1987). 290.
Ibid. 293.
"The valuation of an easement upon the basis of its destructive
impact upon other uses of the servient fee is a universally accepted
method of determining its worth." United States v. Virginia
Electric Co., 365 U. S. 624, 630 (1961). 294.
For this reason, it is essential that the client agency provide the
appraiser with a written description of the estate to be taken when an
easement is to be acquired. 295.
Where only an easement is acquired, the full fee value of the land
within the easement is not necessarily a proper measure of diminution in
value since the rights remaining in the owners may be very substantial.
See United States v. An Easement and Right-of-Way Over Two Strips of
Land, 284 F. Supp. 71, 73 (W. D. Ky. 1968). 296.
Sec Section B-11. Because easement acquisitions are partial
acquisitions, the rules on severance damages and offsetting of benefits
apply. 297.
United States v. Virginia Electric Co., 365 U. S. 624, 632
(1961); United States v. 8.41 Acres of Land, 680 F. 2d 388, 392
(5th Cir. 1982); United States v. 38.60 Acres of Land, 625 F. 2d
196, 198-199 (8th Cir. 1980); Transwestern Pipeline Co. v. O'Brien,
418 F. 2d 15, 21 (5th Cir. 1969). 298.
Transwestern Pipeline Co. v. O'Brien, 418 F. 2d 15, 21 (5th Cir.
1969) (emphasis added). 301.
United States v. Grizzard, 219 U. S. 180, 184-185 (1911); United
States v. 57.09 Acres of Land, 706 F. 2d 280, 281 (9th Cir. 1983). 302.
Boston Chamber of Commerce v. Boston, 217 U. S. 189, 195 (1910); United
States v. 79.20 Acres of Land, 710 F. 2d 1352, 1354-1355 (8th Cir.
1983). 303.
For a fuller discussion of this methodology, see J. D. Eaton, Real
Estate Valuation in Litigation, 2nd ed. (Chicago: Appraisal Institute,
1995), 365-368. 304.
United States v. Streets, Alleys & Public Ways, Etc., 531 F.
2d 882, 885-886 (8th Cir. 1976). "The overwhelming weight of modern
authority is to the effect that a municipality, a county, a state, or
other public entity is entitled to compensation for the taking of a
street, road or other public highway only to the extent that, as a
result of such taking, it is compelled to construct a substitute
highway." (Emphasis by court.) California v. United States,
169 F. 2d 914, 924 (9th Cir. 1948). See also Prince William County v.
United States, 27 Fed. Cl. 339, 342-343 (1992), rev'd on other
grounds 48 F. 3d 520 (Fed. Cir.1995); Franklin County, Georgia v.
United States, 341 F. 2d 106 (5th Cir. 1965); Mayor and City
Council of Baltimore v. United States, 147 F. 2d 786, 790 (4th Cir.
1945); United States v. Des Moines County, 148 F. 2d 448, 449
(8th Cir. 1945), cert. denied, 326 U.S. 743; Woodville v. United States,
152 F. 2d 735, 737 (10th Cir. 1946), cert. denied, 328 U. S. 842; United
States v. City of New York, 168 F. 2d 387, 389-390 (2nd Cir. 1948); United
States v. Certain Lands in Raritan and Woodbridge, 246 F. 2d 823,
824 (3rd Cir. 1957); Washington v. United States, 214 F. 2d 33,
39, 42-44 (9th Cir. 1954), cert denied, 348 U. S. 862. 307.
This has become known as the substitute facilities doctrine and excludes
any consideration of, or deduction for, depreciation in the acquired
facility. 308.
United States v. 50 Acres of Land, 469 U. S. 24, 26 (1984). It
should be noted that the Court did not address the question of the
appropriate measure of compensation for the taking of public facilities
for which there is no ascertainable market value. 309.
The property acquired was a landfill site with a remaining holding
capacity of 650,000 cubic yards, with an estimated remaining life of
12.8 years. The condemnee had replaced the taken site with a site, which
had a holding capacity of 2.1 million cubic yards and a life span of
41.6 years. The cost of the new site, which was claimed as compensation
by the condemnee, was $1,276,000, whereas testimony was introduced that
the market value of the taken site, based on comparable sales, was from
$160,000 to $370,000. 310.
United States v. Chandler-Dunbar Co., 229 U. S. 53, 76 (1913); United
States v. Miller, 317 U. S. 369, 374 (1943); United States v.
Reynolds, 397 U. S. 14, 16 (1970). 311.
United States v. 27.93 Acres of Land, 924 F. 2d 506, 512 (3rd
Cir. 1991); United States v. 174.12 Acres of Land, 671 F. 2d 313,
315-316 (9th Cir. 1982); United States v. 320.0 Acres of Land,
605 F. 2d 762, 818 (5th Cir. 1979); United States v. Eden Memorial
Park Association, 350 F. 2d 933, 936 (9th Cir. 1965); H & R
Corporation v. District of Columbia, 351 F. 2d 740, 742-743 (D. C. Cir.
1954); Rapid Transit Co. v. United States, 295 F. 2d 465, 466-467 (10th
Cir. 1961), cert. denied, 369 U. S. 819 (1962); United States v.
Meadow Brook Club, 259 F. 2d 41, 45 (2nd Cir. 1958), cert. denied,
358 U. S. 921. 312.
United States v. Meadow Brook Club, 259 F. 2d 41, 45 (2nd Cir.
1958), cert. denied, 358 U. S. 921. 315.
H & R Corporation v. District of Columbia, 351 F. 2d 740,
742-743 (D. C. Cir. 1954); United States v. 320.0 Acres of Land,
605 F. 2d 762, 819, n. 130 (5th Cir. 1979). 316.
United States v. 62.50 Acres of Land, 953 F. 2d 886, 890-893 (5th
Cir. 1992); United States v. 8,968.06 Acres of Land, 326 F. Supp.
546, 548 (S. D. Tx. 1971). 317.
33 C. F. R. 323.2. 318.
United States v. Fuller, 409 U. S. 488, 492-493 (1973). See also,
Federal Lands Legal Consortium v. United States, 195 F. 3d 1190,
1196-1197 (10th Cir. 1999). 319.
United States v. Fuller, 409 U. S. 488, 493 (1973). Sections B-23
through B-24 77 http://www.usdoj.gov/enrd/land-ack/legal.htm
B-1.
Federal Law Controls C.
Standards
for the Review of Appraisals Introduction.
The
review and documentation of the appraisal process should be in
conformity with these Standards, which are compatible with standards and
practices of the appraisal industry and with the current edition of the Uniform
Standards of Professional Appraisal Practice (USPAP). 320
It has been necessary, however, to invoke USPAP's Jurisdictional
Exception Rule in certain instances, so as to conform these Standards to
overriding federal laws and regulations on the review of appraisal
reports prepared for use in government land acquisitions. 321
Government
review appraisers are often assigned administrative duties in addition
to the technical review of individual appraisal reports. Those
administrative duties vary from agency to agency and may range from
contract administration or counseling management for general valuation
issues to assisting the agency to meet both its non-appraisal and
appraisal obligations under P.L. 91-646. 322
Some of these duties may fall outside the scope of USPAP. These
administrative duties are also considered to fall outside the scope of
these Standards and are therefore not covered in the following
discussion. The
review of appraisal reports by a qualified reviewing appraiser is
required. The minimum review process is prescribed in 49 C.F.R. 24.104,
as follows: The
agency shall have an appraisal review process and, at a minimum: (a) A
qualified reviewing appraiser shall examine all appraisals to assure
that they meet applicable appraisal requirements and shall, prior to
acceptance, seek necessary corrections or revisions. (b) If the
reviewing appraiser is unable to approve or recommend approval of an
appraisal as an adequate basis for the establishment of the offer of
just compensation, and it is determined that it is not practical to
obtain an additional appraisal, the reviewing appraiser may develop
appraisal documentation in accordance with §24.103 to support an
approved or recommended value. (c)
The reviewing appraiser's certification or the recommended or approved
value of the property shall be set forth in a signed statement, which
identifies the appraisal reports reviewed and explains the basis for
such recommendation or approval. Any damages or benefits to any
remaining property shall also be identified in the statement. These
requirements have been implemented by government land acquisition
agencies by the adoption of various policies, rules, and regulations. 323
Therefore, review appraisers should refer to the specific review
standards established for the individual agencies for a detailed
discussion of appraisal review requirements. Appraisal review standards,
which have been adopted by the federal land acquisition agencies
generally set, as a minimum, Standard 3 of the Uniform Standards of
Professional Appraisal Practice (USPAP), 2000 ed., although some
agencies have found it necessary to invoke USPAP's Jurisdictional
Exception Rule in some instances. In
accordance with these requirements, prior to the approval of an
appraisal of property having more than token value, the appraisal
reviewer for each agency should attach to the appraisal a written review
report or review memorandum indicating the scope of the review and the
reviewer's analysis and support for the action recommended. It is the
review appraiser's responsibility to determine whether the appraisal is
adequately supported, complies with recognized appraisal principles and
practices, complies with the appraiser's contract (or assignment letter)
and these Standards, and conforms to any governing legal premises that
may have been prescribed by the agency or its legal counsel in the way
of a written legal instruction. Appraisals
provided by an agency to the U. S. Department of Justice in support of a
request to initiate condemnation proceedings shall be reviewed by the
Appraisal Unit of the Department. It is the responsibility of the
Appraisal Unit to insure that sound, proper, and suitable appraisals are
available for settlement negotiation and trial purposes. In this regard,
the Appraisal Unit shall confirm both technical conformance with these
Standards and the reasonableness of the appraiser's value estimate(s).
In addition, the Appraisal Unit shall determine the suitability of the
appraisal report for trial purposes: it will identify weaknesses and
strengths of the report under review and recommend actions that the
government's appraiser and/or trial counsel can take prior to trial to
strengthen the government's case. It should be recognized that appraisal
reports may be found to be in technical conformance with these Standards
and the appraiser's value estimate(s) reasonable, yet they may still be
unsuitable for trial purposes. 324
Due
to the intended use, and intended user, of these appraisal reviews, the
review appraiser within the Appraisal Unit shall not develop his or her
own independent estimate of value. C-1.
Types of Appraisal Reviews. There
are generally recognized two types of reviews that can be performed; a
technical review and an administrative review. 325 An
administrative review may be performed by an appraiser 326
or a non-appraiser and is sometimes referred to as a compliance review.
An administrative review is not subject to USPAP and is typically
performed as part of making a business decision such as whether or not
to pursue the purchase or sale of a property or whether or not to pursue
litigation. The content and scope of an administrative review will vary
with the intended use and intended user of the review. Some federal
agencies or departments have adopted specific policies regarding the use
of administrative reviews. 327
An administrative review may include confirmation that the appraisal
report conforms to contract/ assignment letter requirements, to these
Standards, and to applicable federal law for federal land acquisition
appraisals. The administrative reviewer may also verify the accuracy of
factual data and the mathematics presented in the appraisal report. The
administrative reviewer shall not, however, form an opinion regarding
the analysis, judgment or opinion(s) of value contained within the
appraisal report under review. 328
As such, administrative reviews do not meet the requirements of 49
C.F.R. 24.104. Administrative reviewers will often use a checklist similar
to that shown is Appendix A of these Standards. 329
C-2.
Scope of Work. Technical
reviews may be conducted as either desk reviews or field reviews. A desk
review involves, in addition to confirmation that the report was
prepared in accordance with these Standards, a thorough review and
analysis of the information and analysis contained in the appraisal
report under review and a careful examination of the internal logic and
consistency. In a desk review, the appraisal reviewer limits the
examination to the information and analysis presented within the
appraisal report. The data contained within the appraisal report may or
may not be confirmed and the reviewer may or may not identify additional
comparative market data. The
most significant difference between a desk review and a field review is
the level of evaluation accorded the factual data presented in the
appraisal report. A field review always requires at least an exterior
field inspection of the subject property and often of the properties
used as comparable data in the appraisal report. In addition, the data
contained within the appraisal report is usually independently confirmed
during the review process. A field review may be used to obtain
additional market data beyond that provided by the appraiser or to
resolve factual differences between two appraisals with divergent market
value estimates. The field review represents the highest level of due
diligence within the appraisal review practice. It
is critical that the review appraiser clearly identify the precise
extent of the review process used in each review. The use of terms such
as administrative or technical review, as well as desk review and field
review, are terms of art, which may not be understood by all users or
readers of the review. Therefore, if these terms are used in the review
report, they require precise definition.
If
a review results in a request for corrective action by the appraiser,
the review appraiser should maintain a complete file memorandum of the
results of the preliminary review and the requested corrective action.
The practice of maintaining only the final corrected appraisal report
and the final review thereof should be avoided. C-3.
Responsibilities of the Review Appraiser. Like
the appraiser, review appraisers must remain objective in their
appraisal review activities. They cannot let agency goals or adversarial
pressure influence their opinions of an appraisal report's
appropriateness or of the value estimate(s) it reports, nor can they let
their personal opinions regarding the advisability of the agency's
proposed acquisition enter into the review process. Also,
appraisal reviewers should not attempt to substitute their judgment for
that of the appraiser unless they are willing and able to develop their
own opinions of value, and become the agency's appraiser of record.
Appraisal reviewers must recognize that technical deficiencies can be
found in nearly every appraisal report. However, minor technical
non-conformance with these Standards or USPAP standards should not be
the cause of disapproval of an appraisal report, unless the deficiency
affects the reliability of the value estimate, or the value estimate
itself. Minor technical non-conformance with these Standards should
never be used as an excuse to reject a report when the underlying reason
for rejection is the reviewer's differing opinion of the market value of
the property appraised. In
conducting an appraisal review the reviewer must:
Identify
the agency client and intended users of the reviewer's opinions and
conclusions, and the purpose of the assignment.
Identify
the appraisal report under review, the date of the review, the property
and ownership interest appraised 330
in the report under review, the date of the report under review and the
effective date of the value estimate(s) reported, and the names of the
appraisers that completed the report under review.
Identify
the scope of work performed in the review.
Develop
an opinion as to the completeness of the appraisal report under review
within the scope of work applicable to the appraisal assignment, which
shall include these Standards. Develop
an opinion as to the apparent adequacy and relevance of the data and
propriety of any adjustments to the data. Develop an opinion as to the
appropriateness of the appraisal methods and techniques used and develop
the reasons for any disagreements.
Develop
an opinion as to whether the analyses, opinions and conclusions in the
appraisal report under review are appropriate and reasonable, and
develop the reasons for any disagreement.
Prepare
an appraisal review report in compliance with agency policies, rules,
and regulations, and in accordance with Section C-6 of these Standards. 331
C-4.
An Opinion of Value Expressed by a Review Appraiser. If
a review appraiser cannot approve or recommend approval of an appraisal
report reviewed, and it is determined that it is not practical to obtain
an additional appraisal, 49 C.F.R. 24.104 permits the review appraiser
to develop an independent opinion of value subject to that value opinion
being documented in accordance with 49 C.F.R. 24.103. Various federal
agencies have adopted policies, rules, and procedures that regulate the
circumstances by which a reviewing appraiser may develop his or her
independent value estimate and become the agency's appraiser of record. 332
The
review appraiser may accept, approve, recommend approval, or disapprove
an appraisal report based upon compliance with these Standards and the
appropriateness of the methods and analyses employed in the appraisal
report. Such acceptance, approval, recommendation, or disapproval does
not constitute an opinion of value on the part of the review appraiser,
nor does it infer that the reviewing appraiser has taken ownership of,
or is responsible for, the value opinion expressed in the appraisal
report under review. When
it is appropriate for a reviewing appraiser to develop his or her own
value estimate and become the appraiser of record, that value estimate
must be supported and documented in accordance with Section A of these
Standards. However, that does not mean that the reviewer must replicate
the steps completed by the original appraiser. The data and analysis
that the reviewer determined to be credible and in compliance with these
Standards can be incorporated by reference into the review appraiser's
review report using an extraordinary assumption. 333 C-5.
Reviewer's Use of Information Not Available to the Appraiser. The
typical appraisal review assignment involving a federal land acquisition
has a scope of work exceeding that of the usual appraisal review because
49 C.F.R. 24.104 requires the reviewer to determine whether the
appraisal report under review constitutes an adequate basis for the
establishment of an offer of just compensation. In making that
determination, circumstances may require the review appraiser to
consider information that was not available to the appraiser who
prepared the appraisal report under review. This information may have
become available following the completion of the appraisal report. 335
In light of the intended use (i.e., basis for offer of just
compensation) and intended user (i.e., agency management), the reviewer
is required to consider all available information in making a
recommendation to management. A recommendation to management based on
outdated or incomplete information would fail to meet management's need
to determine a current offer of just compensation and would not
conform to the intent of 49 C.F.R. 24.104. USPAP
provides as follows: The appraisal review must be conducted in the
context of market conditions as of the effective date of the opinion in
the work being reviewed. Information available to the reviewer that
could not have been available to the appraiser as of or subsequent to
the date of the work being reviewed must not be used by a reviewer in
the development of an opinion as to the quality of the work under
review. 336
The
appraisal reviewer's use of subsequent information that is required
under the government's scope of work may be construed as being contrary
to the above USPAP provision. If the reviewer appraiser's consideration
of the subsequent information is so construed, such consideration is an
exception to USPAP, under its Jurisdictional Exception Rule. However, it
must remembered that an appraisal reviewer may find that an appraisal
report under review was prepared in accordance with these Standards and
that the estimate of value reported was reasonable and reliable as of
the effective date of the appraisal, and yet still find that the value
estimate is unreliable as the basis for an offer to purchase by the
government because of changed circumstances or new information that has
become available. In such an instance, the appraisal reviewer must
clearly explain all pertinent findings in the review report to avoid any
impression that the appraisal report under review was disapproved
because of its quality or the reasonableness of the value estimate as of
the effective date of the appraisal. In these circumstances, some agency
reviewers accept the appraisal report, but do not approve it. C-6.
Review Reporting Requirements. These
Standards do not require a specific review report format or structure. A
number of the federal land acquisition agencies have adopted required or
recommended formats for review reports to provide consistency and
efficiency in the review reporting process. Appraisal reviewers for
these agencies should, of course, be familiar with and follow these
agency-required or recommended formats. Irrespective of the review
report format, all appraisal review reports shall be in writing and
contain, at a minimum, the following: Identification of the agency
client and intended users of the review report, the intended use of the
review, and the purpose of the review assignment; Identification
of the appraisal report under review, the date of the review report, the
property and ownership interest appraised in the report under review,
the date of the report under review and the effective date of the value
estimate(s) reported, and the names of the appraisers that completed the
report under review; Description of the scope of work performed in the
review; Statement
of opinions, reasons and conclusions reached concerning the appraisal
report under review; Review appraiser's signed certification, in
accordance with Section C-8 of these Standards. 337
The scope of work undertaken in the review assignment must be adequately
described so that the intended user of the review report will understand
the type and level of review completed. 320.
The Appraisal Foundation, Uniform Standards of Professional Appraisal
Practice (USPAP), 2000 ed. 323.
e.g., U. S. Forest Service Manual FSM 5410 and U. S. Forest Service
Handbook FSH 5409.12; U. S. Army Corps of Engineers Real Estate Engineer
Regulations, ER 405-1-12, Chap. 4, §§ X-XI; Bureau of Land Management
Manual 9310; U. S. Fish & Wildlife Service Appraisal Handbook 342 FW
1 and Appraisal Review Handbook 342 FW 2. 326.
See The Appraisal Foundation, USPAP Frequently Asked Questions, 2000
ed., 56, Q98; The Appraisal of Real Estate, 11th ed. (Chicago: Appraisal
Institute, 1996), 687, n. 2. 327.
e.g., U. S. Department of Justice, Land Acquisition Section,
"Establishment of policy regarding administrative appraisal
reviews," 6/ 18/ 97. 336.
The Appraisal Foundation, Uniform Standards of Professional Appraisal
Practice (USPAP), 2000 ed., Standards Rule 3-1(c). 337.
See generally, USPAP Standards Rule 3-2.338. Appraisal reviewers should
recognize that USPAP changes frequently and, with future changes, there
may be additional jurisdictional exceptions necessary, which are not
noted in Section D-1 of these Standards. In such an instance, review
appraisers will have to identify and report those additional
jurisdictional exceptions, as well as any jurisdictional exceptions,
which were necessary as a result of any policies, rules, or regulations
unique to the client agency regarding appraisal reviews. http://www.usdoj.gov/enrd/land-ack/standardsreview.htm
Introduction
D.
Standards
for Unique and Miscellaneous Appraisal Problems D-1.
Comparison of USPAP and the Uniform Appraisal Standards for Federal
Land Acquisitions. USPAP's
Jurisdictional Exception Rule simply provides that "[i]f any part
of [the USPAP] standards is contrary to the law or public policy of any
jurisdiction, only that part shall be void and of no force or effect in
that jurisdiction." By way of explanation, the comment section of
USPAP's Jurisdictional Exception Rule further provides: "By logical
extension, there can be no violation of USPAP by an appraiser
disregarding, with proper disclosure, only the part or parts of USPAP
that are void and of no force and effect in a particular assignment by
operation of legal authority." The comment also states, however,
that "[i]t is misleading for an appraiser to disregard a part or
parts of USPAP as void and of no force and effect in a particular
assignment without identifying in the appraiser's report the part or
parts disregarded and the legal authority justifying this action." As made
clear below, the conflicts between these Standards and USPAP that
require invocation of USPAP's Jurisdictional Exception Rule are minimal.
Invocation of the Jurisdictional Rule should never be invoked lightly,
or without reference to the overriding federal policy, rule, or
regulation, which requires it. USPAP is not a particularly restrictive
document, but it and these Standards require full and prominent
disclosure to avoid misleading intended users (or even casual readers)
of the appraisal report. While
these Standards are not themselves law, they are based on federal
case law, legislation, and administrative rules. Also, these Standards
have been specifically incorporated by reference into a number of
statutes and regulations. 340
In particular, the regulations 341
that implement the Uniform Relocation Assistance and Real Property
Acquisition Policies Act of 1970. 342
It is clear that the deviations between these Standards and USPAP noted
below fall under USPAP's Jurisdictional Exception Rule; the legal
authority justifying these exceptions consists of these Standards and
the federal case law, legislation, and federal regulations upon which
these Standards are based. D-1b.
Linking Estimate of Value to Specific Exposure Time. Section
A-9 of these Standards provides that the appraiser shall not link an
estimate of market value for federal land acquisition purposes to a
specific exposure time. This is contrary to USPAP Standards Rule 1-2 and
Standards Rule 2-2, and is considered a jurisdictional exception. The
legal basis and reasoning for this jurisdictional exception may be found
in Section B-2 of these Standards. D-1c.
Consideration of Land Use Regulations and Anticipated Public Projects. Section
A-12 of these Standards provides that the appraiser disregard any
changes in a property's neighborhood brought about by the government's
project. Section A-13h further instructs appraisers that they must
disregard recent rezoning (or the probability of rezoning) of the
property under appraisal if such action was the result of the
government's project. Section B-10 of these Standards, "Enhancement
or Diminution in Value Due to the Project," explains the legal
basis for these instructions. These instructions are contrary to USPAP
Standards Rule 1-3(a), which requires appraisers to identify and analyze
the effect on use and value of existing land use regulations and
probable modifications thereof, and to Standards Rule 1-4(f), which
requires appraisers to analyze the effect on value of anticipated public
improvements located on or off site. Therefore, the instructions to
appraisers in these Standards in this regard are considered
jurisdictional exceptions. D-1d.
Review Functions. Section
C-5 of these Standards notes that 49 C.F.R. 24.104 requires the reviewer
to determine whether the appraisal under review constitutes an adequate
basis for the establishment of an offer of just compensation. To do
that, it may be necessary for the reviewer to consider information that
was not available to the appraiser at the time the appraisal report was
prepared. Standards Rule 3-1(c) of USPAP prohibits the reviewer from
using information not available to the appraiser in development of an
opinion as to the quality of the appraisal report under review. Review
appraisers are cautioned that some may construe their consideration of
such information in conducting their review and developing
recommendations to management as contrary to Standards As
noted in Section C-1 of these Standards, administrative reviews are not
subject to USPAP and do not meet the requirements of 49 C.F.R. 24.104.
In addition, Draft Appraisal Reports 343
are not subject to USPAP, even though they may be reviewed for general
conformance therewith, as well as conformance with these Standards.
However, a technical review report covering a draft appraisal report
does fall under the purview of USPAP and these Standards. However, the
review appraiser typically does not approve, recommend for approval,
disapprove, accept, or reject a draft appraisal report. D-1f.
Specific Legislation and Regulations. Each
land acquisition agency has its own policies, rules, and regulations
relating to its land acquisition activities. While all of these rules
and regulations work from a base of 49 C.F.R. Pt.24, as do these
Standards, specific agency program activities sometimes make it
necessary to adopt rules and regulations, which are, or may be construed
to be, contrary to USPAP. 344 Also,
it is not uncommon for Congress to enact specific legislation relating
to the acquisition of a specific property or properties to be acquired
for a specific public project. In some instances, adherence to the
provisions of that specific legislation may require the appraiser to
invoke USPAP's Jurisdictional Exception Rule and/or prepare an appraisal
under a hypothetical condition or extraordinary assumption. 345
In such instances, it is the agency's responsibility to advise the
appraiser of the special conditions under which the appraisal is to be
conducted, of the specific law requiring the invocation of USPAP's
Jurisdictional Exception Rule, and, if necessary, of the hypothetical
condition or extraordinary assumption. D-1g.
Conclusion. Any
time appraisers confront a potential conflict between USPAP and these
Standards, or the client agency's appraiser instructions, they should
always analyze the apparent conflict and avoid invocation of USPAP's
Jurisdictional Exception Rule whenever possible. Often, these Standards
or the agency's special appraisal instructions do not require a
jurisdictional exception, but rather merely that the appraiser conduct
an appraisal under a hypothetical condition or by adopting an
extraordinary assumption. 346 However,
in making such an analysis, appraisers must be cognizant of the fact
that The Appraisal Foundation does not enforce USPAP: the 50 state
appraiser licensing/certification agencies enforce USAP standards.
Therefore, interpretation of USPAP often varies among the jurisdictions;
and states are not obligated to follow the Advisory Opinions of the
Standards Board of the Foundation, because the 19 Advisory Opinions that
have been issued to date do not establish new standards or interpret
existing standards. Therefore, appraisers must implement the USPAP
standards in a manner consistent with the interpretations thereof by the
licensing/certification agency with enforcement responsibility in the
jurisdiction where the property under appraisal is located. Appraisers
are advised to bear in D-2.
Federal Rules of Civil Procedure. If
an appraiser will testify as an expert witness in a federal trial, the
appraiser's report must not only conform to these Standards, but must
also conform to the content requirements of Rule 26(a)(2)(B) of the
Federal Rules of Civil Procedure, which provides as follows: Except
as otherwise stipulated or directed by the court, ...disclosure shall,
with respect to a witness who is retained or specially employed to
provide expert testimony in the case or whose duties as an employee of
the party regularly involve giving expert testimony, be accompanied by a
written report prepared and signed by the witness. The report shall
contain a complete statement of all opinions to be expressed and the
basis and reasons therefore; the data or other information considered by
the witness in forming the opinions; any exhibits to be used as a
summary of or support for the opinions; the qualifications of the
witness, including a list of all publications authored by the witness
within the preceding ten years; the compensation to be paid for the
study and testimony; and a listing of any other cases in which the
witness has testified as an expert at trial or by deposition within the
preceding four years. If
an appraisal report is prepared in accordance with these Standards, it
is anticipated that the report will be found to conform with Rule
26(a)(2)(B). However, most appraiser qualification resumes do not
include the information required by Rule 26, specifically, a list of all
publications authored within the preceding ten years, a listing of all
trials or depositions in which the appraiser has testified within the
preceding four years, and disclosure of the fee received by the
appraiser for the appraisal assignment and the fee anticipated for
testifying. Therefore, when the possibility exists that an appraisal
report may be used for litigation purposes, appraisers must supplement
their standard qualification resumes to insure that they meet these
requirements. In addition, it is recommended that appraisers include
such information in any report being prepared for federal land
acquisition purposes. D-3.
Appraiser Instructions, Assumptions and Limiting Conditions. An
appraiser cannot make an assumption or accept an instruction that is
unreasonable or misleading, nor can an appraiser make an assumption that
corrupts the validity of the value estimate 347
or alters the scope of work required by the appraiser's contract or
assignment letter. For example, it is improper, unless specifically
instructed otherwise, to estimate the market value of a property
assuming it is free of contamination when there is evidence, by the past
use of the property or by the appraiser's inspection thereof, that
contamination may exist. 348 "An
extraordinary assumption 349
may be used in an assignment only if:
it
is required to properly develop credible opinions and conclusions; the
appraiser has a reasonable basis for the extraordinary assumption; use
of the extraordinary assumption results in a credible analysis; and the
appraiser complies with the disclosure requirements set forth in USPAP
for extraordinary assumptions." 350 “A
hypothetical condition 351
may be used in an assignment only if:
use
of the hypothetical condition is clearly required for legal purposes,
for purposes of reasonable analysis, or for purposes of comparison; use
of the hypothetical condition results in a credible analysis; and the
appraiser complies with the disclosure requirements set for in USPAP for
hypothetical conditions.” 352
In
light of the foregoing, it is also improper for an appraiser to classify
conclusions reached after investigation and analysis as assumptions
(e.g., an appraiser can, after proper investigation and analysis,
conclude that a probability of rezoning for the property under appraisal
exists, but it would be improper to assume such a probability). Circumstances
arise when agencies or their legal counsel need to provide some
instruction Once
received by the appraiser, written legal instructions that have a proper
foundation must be accepted by the appraiser. Any written legal
instruction received by the appraiser must be included in the
appraisal report. D-4.
Appraiser's Use of Consultant's Reports. Appraisers
are increasingly forced to rely on consultants' reports on technical
issues. 356
However, the appraiser cannot merely accept such consultant reports as
accurate, 357
but rather must review such reports and adopt them only if reasonable
and adequately documented and supported. The results of secondary
valuation reports, such as mineral, fixture, or timber valuations,
cannot simply be added to the value of the land to arrive at a value of
the property as a whole without proper analysis by the appraiser. To do
so is a violation of the unit rule 358
and professional standards. 359
The appraiser must consider these components of the property in light of
how they contribute to the market value of the property as a whole. If
a consultant's services are used to assist an appraiser in estimating a
cost to cure damage amount in a partial acquisition, the appraiser must
review and analyze the cost estimate with great care. It must be
remembered that a cost to cure method of estimating a diminution in
value is only valid when the cost to cure is less than the diminution in
value if the cure is not undertaken. Even though a cost to cure method
of estimating the diminution of value may be appropriate, it must be
remembered that the remainder property is still to be valued in its
uncured condition. Therefore, it is important that any cost to cure
estimate of damage include not only the direct costs of the cure, but
also the indirect cost, any effects of delay, and if appropriate, an
entrepreneurial profit factor. "[T]o give no consideration
whatsoever to entrepreneurial profit when estimating an appropriate cost
to cure adjustment is ludicrous." 360
D-5.
Legal Description of the Property. It
is essential that the appraiser obtain an accurate legal description of
the property to be appraised. The appraiser should receive an accurate
legal description with the appraisal assignment. If the assignment
involves a partial acquisition, the appraiser should receive both a
legal description of the whole property and a legal description of the
remainder property, or alternatively, a legal description of the area to
be acquired and/or encumbered. If for any reason that is not done, the
appraiser is responsible for obtaining an accurate legal description of
the property to be appraised and the property remaining (or to be
acquired) before endeavoring to conduct the appraisal. 361
The
appraiser should verify the legal description both on the ground as
the physical inspection of the property is made; with the owner of the
property, if possible; and by comparing it with city or county maps,
aerial maps, as available in county or other governmental offices; and
with records available in the recorder's, auditor's, assessor's, tax
collector's, or other appropriate city or county offices. If an error of
significant importance is discovered, the appraiser should consult the
agency from which the appraisal assignment was received before
proceeding with the appraisal. If a minor error is discovered, which is
believed will not affect the completion of the assignment, the appraiser
should make a note of explanation in the appraisal report, making
reference to it in the legal description given in the assignment. It must be determined whether the property interest to be appraised constitutes the fee simple estate, an easement, leasehold or other property right. Easements, mineral rights, rights of way, or any exception to the estate being acquired, which limits the use of the property or grants certain uses to others, should be carefully ascertained. In the case of a partial acquisition the agency should provide a written description of the estate to be acquired to the appraiser. D-6.
Zoning and Other Land Use Regulations. Zoning
is a factor to be considered in evaluating property. Accordingly, if the
property to be appraised is in a zoned area, recite the restrictions in
the appraisal report and interpret the impact of such restrictions on
the utility and value of the subject property. In selecting comparable
sales for use in the appraisal, the appraiser should select those sales
that have the same or similar zoning as the property being appraised. The
appraiser must not only consider the use restrictions of the zoning
ordinance, but also other provisions of the zoning ordinance that may
affect value. These additional provisions might include lot area
requirements, building setback requirements, floor/area ratios, lot
coverage ratios, off-street parking, landscaping requirements, height
limitations, treatment of preexisting, nonconforming uses, and treatment
of nonconforming uses that became nonconforming after adoption of the
zoning ordinance. If the appraisal involves a partial acquisition, the
appraiser must consider the effect of the zoning provisions on both the
whole property and the remainder property.
The
appraiser has an obligation to consider not only the effect of existing
land use regulations, but also the effect of reasonably probable
modifications of such land use regulations, 362
such as what impact on value any probability of a rezoning of the
property being appraised might have. Although an appraiser might
conclude that a property could be put to a higher and better use if it
were zoned differently, this does not in itself suggest that a
probability of rezoning exists. If
an appraiser concludes that a property has a highest and best use that
is physically and economically contrary to existing zoning, an
investigation of the probability of obtaining such a rezoning shall be
undertaken. Areas of enquiry should include the following: interviews of
zoning administrators; interviews of members of the legislative body
that make final zoning determinations; a review of all rezoning activity
of nearby property, both approvals and denials; a review of land use
patterns in the neighborhood and recent changes, if any in such
patterns; a review of the physical characteristics of the subject and
nearby properties; a review of neighborhood growth patterns;
investigation of neighborhood attitudes concerning rezones; a review of
the provisions of land use planning documents; a determination of the
age of the zoning ordinance; analysis of sales of similar property to
determine whether the sale prices reflect anticipated rezoning. If
an appraiser concludes a highest and best use that will require a
rezoning of the property under appraisal, the appraisal report shall
include a description of the investigation undertaken by the appraiser
to determine that a probability of rezoning exists, the appraiser's
analysis of the information gathered, and the factual support for the
appraiser's conclusion. Under
no circumstances can a property be valued as if it were already rezoned
for a higher use. The property must be valued only in light of the
probability of obtaining a rezoning. Risk of being denied a rezoning, or
that an exaction or other condition may be placed on the rezoning,
always exists. The time delay and costs associated with the rezoning
process must also be considered. If
the probability of a rezoning is impacted, either positively or
negatively, by the government project for which the property under
appraisal is being acquired, such impact must be disregarded. 363
In the case of a partial acquisition, the probability of a rezoning must
be reanalyzed in regard to the remainder property. If the probability of
a rezoning for the remainder property is increased, a special benefit
may exist; 364
if such probability has been diminished, a severance damage may have
occurred. 365
In
addition to zoning, the appraiser must consider the impact of other land
use regulations on the utility and value of the property being
appraised. These land use regulations may be of local, state, regional
or national origin. Land use regulations, in addition to zoning, which
may have an impact on property value include, among others:
When
an acquiring agency has identified special or unique land use
regulations that may affect the value of a property, the agency should
advise the appraiser of such potential at the time of the appraisal
assignment. D-7.
Special Considerations in Appraisals for Federal Land Exchanges. Federal
land exchanges contrast from other federal land acquisitions in that an
exchange must always be voluntary and therefore, the parties must reach
agreement on the value of the properties. In direct acquisitions, the
government always has the authority to force an owner to transfer his or
her land by the exercise of its power of eminent domain, as long as the
government's use of the land will be for a public purpose and the
government pays the owner just compensation for the land. However, the
government does not have the authority to force individuals to convey
their lands and accept federal lands as compensation therefore.
Likewise, the government "is not required to exchange any Federal
lands. Land exchanges are discretionary, voluntary real estate
transactions between the Federal and non-Federal parties." 366
This does not mean, however, that such transactions are exempt from
litigation relating to the valuation of the property involved and/or the
adequacy of the appraisal report upon which the transaction was based. 367
Most
federal land exchanges are accomplished pursuant to the Federal Land
Policy and Management Act of 1976 (FLPMA), as amended (43 U.S.C. 1701 et
seq.). 368
The two agencies most actively involved in federal land exchanges are
the U.S. Forest Service (USFS), with an average of 115 exchanges per
year for fiscal years 1989-1999, and the Bureau of Land Management
(BLM), with an average of 238 exchange transactions 369
per year over the same time period. Both the USFS and the BLM have
adopted regulations that implement FLPMA and control their land exchange
activities. 370
USFS and BLM regulations are similar and both require some modifications
of these Standards. These regulations define appraisal, highest and best
use, and market value, 371
and appraisers must use these definitions when conducting appraisals for
federal land exchanges. Exchanges
can be proposed by the USFS, BLM, or by any person, state, or local
government. "To assess the feasibility of an exchange proposal, the
prospective parties may agree to obtain a preliminary estimate of the
values of the lands involved in the proposal. The preliminary estimate
is generally not an appraisal but shall be prepared by a qualified
appraiser." 372
Such a preliminary estimate does not fall under these Standards and is
also a jurisdictional exception to USPAP. 373
The requirements for classification as a qualified appraiser under
these exchange regulations are essentially the same as those for a
contract appraiser under 49 C.F.R. 24.103(d)(2) and these Standards, as
described in Section D-15. 374 One
of the initial steps in an exchange involving federal lands is the
formulation of an agreement to initiate an exchange (ATI). 375
In that ATI, which does not legally bind any party to proceed with
processing or to consummate the exchange, 376
the lands proposed to be exchanged are specifically delineated, the
estates to be conveyed are identified, and an assignment of
responsibility between the parties for performance of required functions
and the costs associated with processing the exchange (including the
costs of necessary appraisals) is made. An
appraiser may be selected and retained by either party to the proposed
exchange, as long as the appraiser is qualified. However,
irrespective of which party retains the appraiser, the appraisal report
must reference and be prepared according to the applicable regulations
and, to the extent appropriate, these Standards. 377
All appraisal reports prepared for federal exchanges are subject to
review by federal agency review appraisers. 378
Therefore, appraisers conducting appraisals for federal exchange
purposes have a professional responsibility to recognize that both the
federal agency and the private land owner are intended users of
the appraisal report and to identify them as such in the appraisal
report. 379
If
an appraiser is retained by a private party to prepare an appraisal for
federal land exchange purposes and the client issues an instruction to
the appraiser to make an extraordinary assumption or to adopt a
hypothetical condition in the conduct of the appraisal, which would
conflict with the exchange regulations, or these Standards, the
appraiser must advise the client of the conflict. If the client insists
that the appraiser make the assumption or adopt the condition in
conducting the appraisal, the appraiser may make the appraisal, but must
clearly identify the assumption and/or condition in the appraisal report
and also report that the value estimate has not been prepared in
accordance with the exchange regulations and/or these Standards, so as
to insure that the intended users of the report are not misled. The
major technical difference between appraisals prepared for federal land
exchange purposes and those typically prepared under these Standards
relates to the appraisal of multiple tracts and the appraiser's
determination of the larger parcel. 380
In the typical acquisition appraisal, the appraiser will apply the tests
of unity of ownership, of unity of highest and best use, and of
contiguity or proximity as it bears on unity of use in determining the
larger parcel. However, for purposes of an exchange appraisal the tracts
to be appraised are defined in the property description contained in the
agreement to initiate an exchange. Even if the property described
in the ATI is part of a larger contiguous ownership that clearly has a
unitary use, the lands outside of the property described in the ATI
should not be considered by the appraiser in either larger parcel
determination or in reaching a conclusion of highest and best use. If
an appraiser concludes that the property described in the ATI
constitutes two or more separate larger parcels, the method of valuation
is generally fact dependent and, in most cases, will be controlled by
the provisions of the ATI. In some instances, the appraiser may be
instructed to value the different larger parcels as separate entities,
while under other circumstances the appraiser may be instructed to value
the larger parcels only as they contribute to the whole, as if the
property described in the ATI would be sold from one seller to one buyer
in one transaction. 381
If those instructions are contrary to the appraiser's highest and best
use or larger parcel conclusion, it may be necessary for the appraiser
to identify the instruction as an extraordinary assumption, or
hypothetical condition, under USPAP. It is important, however, for the
appraiser to recognize that the same method of valuation must be
utilized for both the federal and non-federal lands. 382
The
regulations also provide for special treatment of the larger parcel
issue in assembled land exchanges. 383
This term is defined differently in the USFS and BLM regulations 384
and, for that reason, assembled land exchanges may be administered
differently by these agencies. Again, depending on the provisions of the
ATI, the value of the various parcels may be estimated as independent
parcels, or as a single tract to be sold in a single transaction. Because
of the complexity of appraising multiple tracts of land for exchange
purposes, and the fact that their treatment is often fact specific, it
is essential that agencies provide clear written instructions to the
appraiser in this regard, and that the appraiser insist upon such
instructions, at the initiation of the appraisal assignment. The
technical treatment of the larger parcel, as it relates to federal
exchanges, is discussed under various scenarios on pages 2-37 - 2-45 and
APPB-23 - APPB-32 of the Appraisal Institute's and American Society of
Farm Managers and Rural Appraisers' Seminar Handbook for "Federal
Land Exchanges and Acquisitions: Appraisal Issues and
Applications." D-8.
Special Considerations in Appraisals for Inverse Condemnation Claims. The
one major difference between a direct condemnation and an inverse
condemnation claim is the question of government liability. In a direct
condemnation the government purposely acquires a property or an interest
in property, and by filing a direct condemnation case, acknowledges the
actual or proposed acquisition of the property and the government's
obligation to pay for it. In the inverse condemnation case, the
government's legal position is that its actions do not constitute the
taking of property or a property interest, requiring the payment of just
compensation under the Constitution. If the government purposely
exercises its power of eminent domain, it institutes formal condemnation
proceedings because it is prohibited from "intentionally mak[ing]
it necessary for the owner to institute legal proceedings to prove the
fact of the taking of the real property." 385
Therefore,
in an inverse condemnation action, the first area of enquiry is whether
the government's action constituted a taking of property that requires
compensation. From a technical standpoint, the answer to that question
is of no direct concern to the appraiser. 386
Nevertheless, the appraiser may be asked to provide valuation services,
which will be used by government's legal counsel in the liability phase
of the litigation. If the government's action resulted in the
government's permanent physical occupation of the land in question, the
liability issue is a rather straightforward one. 387
However, in the context of a taking by regulation, the federal courts
have developed various tests to determine whether a taking has
occurred: the character of the government action; the extent to which
the regulation interferes with distinct, investment-backed expectations;
and the economic impact of the regulation. 388
The
economic impact test above involves the valuation of the property in
question before and after the government's action. 389
When conducting such an analysis, the appraiser's application of the
larger parcel tests may vary from those applied in the direct
acquisition or condemnation 390
because of the investment-backed expectations test noted above.
Investment-backed expectations are typically considered as of the date
upon which the owner acquired the property and in the regulatory
environment that existed at that time. But, on the date of the alleged
taking, the owner may have sold portions of the property previously
acquired. For the court to accurately assess the economic impact of
the regulation, it must know how the regulation impacted the owner's
reasonable investment-back expectations. 391
For that reason, it may be necessary for the appraiser to disregard the unity
of title test of the larger parcel and to value the entirety of the
tract that was originally acquired. Because the tests applied by the
courts to determine the question of liability (i.e., whether a
compensable taking has occurred) are quite complex, it is essential for
the appraiser to confirm with legal counsel the appropriateness of the
larger parcel determination before proceeding with the appraisal
assignment. In
providing appraisal services to the government in connection with the
liability phase of an inverse condemnation action, it is imperative for
both the appraiser and the trial attorney to completely understand what
it is the appraiser's valuations are intended to measure. For that
reason, continual contact and conferencing between the appraiser and
trial counsel throughout the development of the appraisal is essential.
Government's trial counsel must determine what is to be measured,
while the appraiser determines how to measure it. If
the court finds that a compensable taking has occurred, the appraiser's
function generally is to estimate the market value of the affected
property before and after the taking, as of the date of the taking,
which should be provided to the appraiser by legal counsel. In this valuation
phase of the inverse condemnation litigation, the appraiser will
generally utilize the same larger parcel tests that are applied in
direct acquisitions or condemnations. In other words, the larger parcel
used in the liability phase of the trial may be different than the
larger parcel used in the valuation phase of the trial. Inverse
condemnation actions relating to temporary takings are discussed in
Section D-10 of these Standards. D-9.
Comparable Sales Requiring Extraordinary Verification and Treatment. As
has been previously noted in these Standards, 392
the federal courts have traditionally held that, in general, sales to a
governmental entity were inadmissible, but the recent trend has been to
admit them with the view that such evidence goes to its weight, not its
admissibility. The following discussion, however, relates not to the
admissibility of such evidence, but to the question of whether sales to
the government should be used by appraisers in conducting appraisals for
federal land acquisition purposes and, if so, the degree of weight
placed on those sales by appraisers. As
has been noted, "government is a different type of player, not
constrained to follow market economic rules;" 393
thus, sales to the government should be immediately viewed by appraisers
as suspect. When appraisals for federal land acquisitions are
conducted, sales to the government should not be used as comparable
sales unless there is such a paucity of private market data as to make a
reliable estimate of market value impossible without the use of
government purchases. However, the types of transactions conducted and
lands acquired by governments are often unique. For instance, in the
acquisition of lands for conservation or preservation, the acquired
lands are often located in remote areas, are of extraordinary size, have
little economic utility or value, and are located in areas of little
market activity. To develop a reliable and supportable estimate of
market value in these situations, appraisers may be forced to consider
sales to the government in the sales comparison approach to value. However,
in situations when an appraiser is forced to consider sales to the
government as comparables, there are certain steps that the appraiser
must take before a sale to the government can be qualified as a valid
comparable sale. Comprehensive and documented verification of government
transactions is essential, and "[a] ppraisers have a special
responsibility to scrutinize the comparability of all data used in a
valuation assignment. They must fully understand the concept of
comparability and should avoid comparing properties with different
highest and best uses, limiting their search for comparables, or
selecting inappropriate factors for comparison." 394
"When nonmarket conditions of sale are detected in a transaction,
the sale can be used as a comparable but only with great care. The
circumstances of the sale must be thoroughly researched before an
adjustment is made, and the conditions must be adequately disclosed in
the appraisal." 395 The
availability of sales documentation for appraiser inspection and
analysis will also vary from agency to agency, depending on the agency's
public disclosure policy and the applicable laws on access to government
documents. The following is written under the presumption that the sales
to be verified by the appraiser have been fully documented and that all
documentation is available for the appraiser's inspection. It is
recognized that in many instances, this will not be the case. However,
when documentation is not available for the appraiser's inspection, the
appraiser should report such fact and the impact of such unavailability
on the reliability of the transaction as a valid comparable sale. First,
the appraiser should review the legislation [that] authorized and/or
mandated the government's acquisition. By this review, the appraiser
should verify that the legislation provided that the property would be
acquired at market value. Legislation that mandates acquisition at a
price other than market value, or provides for acquisition at a price
unaffected by particular market forces (e.g., disregard of the influence
of the Endangered Species Act), may not result in a valid comparable
sale representative of market value. Likewise, legislation that allows
the acquiring agency to deviate from the market value measure if it
finds it in the public interest to do so will often not result in a
price representative of market value. The appraiser should next contact
the acquiring agency and ask to inspect the appraisal upon which the
acquisition was based, the agency review of that appraisal, the
negotiator's report (or file) in conjunction with the acquisition, and
the agency's acquisition file. Examination
of the agency's appraisal, should include:
Determination
that the government's acquisition was a total acquisition of the
landowner's property, as opposed to a partial acquisition wherein the
acquisition cost may be a measure of the difference between the value of
the whole property before and after the government's acquisition, or a
measure of the value of the parcel acquired plus damages to the
remainder parcel, rather than an indication of the value of the property
acquired. Determination that the sale was for the fee simple interest in
the property, or an interest similar to the interest being appraised.
Sales that are for something less than that the fee simple interest in
an entire property (e.g., partial acquisitions, easement acquisitions)
may not be valid comparable sales. A review of the appraiser's estimate
of highest and best use. The highest and best use, upon which the value
estimate was estimated, must be an economic highest and best use.
That highest and best use must be the same as, or highly similar to, the
highest and best use of the property under appraisal before the
government acquisition can be considered a reliable comparable sale. A
value estimate based on a highest and best use of sale to the
government, conservation, or any use that contemplates taking the
property out of economic productivity in perpetuity is not a valid
highest and best use upon which to estimate market value. A review of
the appraiser's final estimate of value. Determine whether the price
paid for the property was equivalent to its appraised value. If not,
determine whether the price paid was within the range of values
indicated by the appraiser's comparable sales in the sales comparison
approach and/or whether the price paid was within the range of the
indicated value of the property by the different approaches to value
developed by the appraiser. A review of the sales used by the
government's appraiser in estimating value. If the sales relied on by
the appraiser were substantially influenced by non-market factors (e.g.,
political pressure), they would be invalid indicators of market value,
thus any value conclusion reached based on such sales may, likewise, be
invalid. A
review of any breakdown of value that the appraiser may have included in
the appraisal report, such as different unit values for different land
types included in the sale property, or the contributory value of
improvements. A
review of the agency's appraisal review should next be undertaken, with
particular note being made of any technical or factual errors reported
by the review appraiser. A review of the negotiator's report and the
agency's acquisition file regarding the process of negotiation between
the agency and the property owner should also be conducted. Any
suggestion that the property would be condemned if agreement cannot be
reached should be noted. Likewise, any indication that the property
owner has accepted the price paid with the understanding that the agency
will support (or, at least not oppose) the property owner's attempt to
take a tax write-off for a donation for some amount in excess of the
actual price paid should be noted. Either of these circumstances may
suggest a price below market value. Any suggestion that a property owner
may have threatened to damage the property for the government's intended
use (e.g., cutting the timber from land slated for acquisition as a
park) if the owner's asking price was not paid can result in a price in
excess of market value. Sales involving the exchange of property are
generally unreliable for use as comparable sales. 396
A
determination should be made whether the property owner or the owner's
representative submitted an appraisal or any meaningful market data to
the agency that may have supported a value higher than the government's
appraisal and the agency's subsequent determination to pay more than its
appraisal. If so, the submitted material should be reviewed and
analyzed. A
reading should be conducted of any correspondence from the property
owner's political representatives, and the agency's response thereto, to
determine whether there may have been undue non-market pressure to
consummate a sale at something other than market value. A reading should
also be conducted of any newspaper clippings that may be in the file, to
determine whether there was an undue amount of public pressure on the
agency or the property owner to consummate a quick sale. Such public
pressure can result in a price that is above or below the market value
of the property. If
the estate acquired was only an easement, the sale is not a valid
comparable either as an indication of fee simple value, or of the value
of an easement. If only an easement is being acquired from the property
under appraisal, the measure of value should not be based on the price
paid for similar easements, but rather upon the usual before and after
appraisal method. 397 A
reading and analysis should be undertaken of any documents produced by
the agency or others, in an attempt to justify payment in excess of the
approved appraisal. Legitimate reasons that a price in excess of an
agency's approved appraisal may still represent a valid indication of
market value might include: The
appraisal is outdated in a rapidly appreciating market. The proposed
price remains within the range of values indicated by the comparables
developed by the appraiser. The proposed price remains within the range
of values indicated by the different approaches to value developed by
the appraiser. Factual information about the property, the appraisal, or
the comparables used by the appraiser, came to light after the appraisal
and review that revealed errors in the appraisal that could be
mechanically corrected. Legitimate
reasons that a government entity could justify a price in excess of its
approved appraisal, but would eliminate the transaction as a valid
comparable sale, at least without adjustment, might include: The price
in excess of market value is warranted due to costs and risks inherent
in a condemnation trial. The threat of imminent destruction of the
property for the government's intended use existed. The cost of project
delay caused by the failure to acquire the property offsets the price
paid in excess of its market value. The administrator of the public
agency found it to be in the public interest to pay in excess of
market value. The price in excess of market value is justified because
the tract being acquired is a key tract, or the last tract to be
acquired, for the government's project. The economy of land management
of a consolidated ownership by the government outweighs the price in
excess of market value paid for the tract. Once
the forgoing investigation and analysis have been completed, the
appraiser should personally verify the sale with the purchaser and
the seller, or their representatives. In conducting this verification,
the appraiser should clear up any questions that may have arisen as a
result of earlier research. It is recognized that an agency's appraisal
does not represent the only reasonable estimate of market value, but if
the government paid more for the property than its approved appraisal,
the appraiser should determine the justification used by the government
to do so and whether such justification was based on valid market
considerations or whether the justification was non-market related and,
therefore, invalidates the price paid as an indication of market value. In
this same context, there is another category of sales that needs careful
verification if the sales are going to be used as comparables.
Occasionally, a government project will be created and acquisition will
be authorized, but adequate funds for the entire acquisition project
will not be appropriated. When the government project involves
conservation/preservation lands, environmental organizations will
sometimes acquire lands within the project area for the sole purpose of
transferring those lands, often at the organization's cost, to the
government when funding becomes available. Sales to environmental
organizations under such circumstances, like direct sales to the
government, are suspect as reliable comparable sales, because the
purchaser's motivation was not economically driven by typical market
forces. Sales
made under such circumstances may well be project-influenced. 398
At times these environmental organizations are working so closely with
the government agency administering the project 399
that, from a practical standpoint (although not from a legal one), they
essentially become an agent for the government. Also, the sellers of
such land have been known to take (or attempt to take) a tax write-off
for a contribution to the environmental organization and claim a value
of the property sold in excess of the actual selling price. Because of
these complications, appraisers should avoid using such sales as
comparables. If a paucity of market data in the private market makes
their use necessary, extreme care must be taken in the verification of
such sales. The appraiser should determine whether the sale was based on
a competent appraisal that estimated the market value of the property
for its economic highest and best use, whether there were any tax-write
offs taken, and whether the purchase was impacted by the pendency of the
government's project. If the purchase price was not based on the market
value of the property for its economic highest and best use, the sale
will normally have to be discarded as a comparable. The same is true if
tax write-offs were involved or if project influence was present,
although it is sometimes possible to make adjustments to the sale for
these factors. If, subsequent to the sale, the property has been
transferred by the environmental group to the government, the fact and
circumstances of the transfer must be reported. A
third category of sales that must be verified and treated with great
care consists of those sales used in the appraisal of a property that
has a highest and best use for some form of development that will
require the procurement of rezoning or a land use permit. Sales of such
property in the private market will generally take the form of initial
options or contingency sales, the contingency being the
purchaser's ability to procure the necessary rezoning or permitting to
develop the property to its highest and best use. If the rezoning or
permitting is denied, the contingency is not met and the sale does not
close. Or, if an option is used and rezoning and/or permitting is not
available, the option is not exercised. Therefore, when consummated,
such sales do not represent the price at which a property would have
sold if a purchaser had to procure a rezoning or permits after the date
of closing. Instead, such sales represent the price of a property with
zoning or permitting for development to its highest and best use in
place. All of the risks, time delays, and costs associated with a
rezoning or permitting have been removed from the transaction. Given
this fact, appraisers must often resort to using sales, which already
have, on the date of consummation, their needed zoning/permitting in
place. Under these circumstances, it is essential that the appraiser
adjust the sales to reflect the differences in the regulatory
environments of both the sales at the time of closing and the property
under appraisal as of the effective date of the appraisal. Such
adjustments must account for the risks inherent in the procurement of a
rezoning or permitting, including the possibility that the regulatory
agency may deny such a request, or place conditions on it. 400
The time delays encountered in procurement of the rezoning and/or
permitting and the costs associated with their procurement must also be
considered. In certain circumstances, a purchaser may require an
entrepreneurial profit in addition to an adjustment for risk. Appraisers
cannot merely assume that such a rezoning/permit is in place for the
property under appraisal, or assume that such a rezone/permit will be
granted. They must appraise the property only in light of the
probability of the obtaining the rezone/permit. If appraisers use sales
of properties with zoning/permitting in place at the time of sale, they
must explain in the sales comparison approach to value how they
accounted for the regulatory environmental differences between these
sales and the subject property and how they quantified the adjustment(s)
for this factor, based as much as possible on market evidence. D-10.
Temporary Acquisitions. There
are generally three situations in which the government's acquisition may
be temporary: temporary construction easements (TCEs), temporary
acquisitions by inverse condemnations, and leasehold acquisitions. This
last category of acquisitions will be discussed in a separate section of
these Standards. 401
Temporary construction easements and temporary inverse condemnation
acquisitions will be discussed separately below because of their
uniquely different characteristics. A
temporary construction easement is generally acquired in conjunction
with a permanent acquisition and often abuts the boundaries of the
permanent acquisition. The permanent acquisition area is used for
permanent placement of the public improvement, whereas the TCE is used
in addition to the permanent acquisition area for initial construction
of the public improvement. After initial construction of the public
improvement is completed, the construction easement expires and the
unencumbered fee interest in the land reverts back to the owner. Another
form of temporary easement sometimes acquired is an easement for a right
of entry onto the land for purposes of surveying, inspection, and/or
testing for contamination. These rights of entry are generally very
short term in nature and are treated in the same manner as TCEs. 402
Damages
that result from TCEs are usually based on the economic or market rent
of the affected area for the term of the temporary easement. Usually,
the land area affected is so small and the term of the easement so short
that compensation for the TCE is nominal. As a result, many agencies and
appraisers have adopted a shortcut for its estimation. A
reasonable return rate, rather than the economic or market rent based on
comparable rentals, is estimated and applied to the encumbered land's
fee value for the term of the easement. The rent loss or appropriate
return is often not converted to a present value through the application
of a discount rate because of the short term of the easement and the
nominal nature of the indicated rent loss. Even
though technically incorrect, as discussed below, this short cut is
generally acceptable to agencies because of the nominal nature of the
TCE acquisition and the cost/time savings associated with the short cut.
However, appraisers must recognize that the short cut methodology will
be found unacceptable under these Standards if the indicated
compensation is more than nominal. When the indicated compensation for
the acquisition of a TCE is more than nominal, the appraiser must use
proper appraisal methodology to develop the present value of the rent
loss. This will entail the use and presentation of properly documented
comparable rentals, and the discounting of the lost rental income stream
into a present value. The
appraiser must also consider whether the existence of a temporary
construction easement will restrict the property owner from using the
unencumbered portion of the land for its highest and best use during the
easement's term. Often an appropriate method to estimate the proper
adjustment to reflect the diminution in the land's value by reason of
the temporary easement is to apply the rent loss to all lands so
affected. (If the property can be rented for a lesser use during the
term of the TCE, the measure of damage is usually measured by the rent
differential between the before and after situations.) Appraisers
must remember that the loss in value caused by a TCE acquisition is not
an independent acquisition, and the compensation for it cannot be added
to the indicated diminution in value by reason of the associated
permanent acquisition. The rent loss associated with a TCE should be
used as the basis for an adjustment to the remainder property's after
value, not as something to be added to the difference between the before
and after value of the property. What
generally makes temporary acquisitions by inverse condemnation uniquely
different from the acquisition of a TCE is the amount of indicated
compensation. An inverse condemnation acquisition usually involves whole
ownerships, rather than a small geographical portion of the ownership,
and the term of the alleged inverse taking is generally of a
substantially longer period of time than the duration of a TCE. For that
reason, greater care must be employed by the appraiser in estimating the
value of such properties. Legal counsel will generally provide the
appraiser with the effective date of the appraisal and the duration and
extent of the alleged taking. Temporary
acquisitions by inverse condemnation may be by either physical invasion
of the property by the government (or an agent of the government) 403
or by regulation. 404.
The measure of value in a temporary inverse case is the same as in the
acquisition of a TCE, that is, the rental value of the land taken for
the term of the taking. The substitution of a return on the fee value of
the land for an estimate of the rental value of the land is not
generally an accepted alternative. 405
Because
inverse condemnation cases, either permanent or temporary, are very fact
specific, it is essential that the appraiser work very closely with the
DOJ attorney assigned to the case. Both appraiser and attorney must
understand the precise question that must be addressed by the appraiser
and the acceptable methodology to be used to answer it. This will often
involve substantial legal research by the attorney, concluding with
written legal instructions to the appraiser. 407
In
the development of an appraisal concerning mineral properties, it is
particularly important to understand the unit rule. 408
The
courts have recognized that property must be valued as a whole for
federal acquisition purposes, with due consideration of all of the
components that make up its value. Its constituent parts are considered
only in light of how they enhance or diminish the value of the whole,
with care being exercised to avoid so-called cumulative or
summation appraisals.
409
"In
the case of land that is underlaid with marketable minerals, ... the
existence of those minerals is a factor of value to be considered in
determining the market value of the property, but the landowner is not
entitled to have the surface value of the land and the value of
underlying minerals aggregated to determine market value."
410
Accordingly,
it is improper for an appraiser to estimate the value of the surface of
the property, add to it a valuation of the minerals, as estimated by a
separate minerals expert, and thereby conclude a total market value for
the property. Not only does this procedure result in a forbidden
summation appraisal, it also results in no one individual being able to
testify as to the market value of the property as a whole, if the case
goes to trial. For these reasons, when consultants' reports are used in
the valuation of mineral property, appraisers must strictly adhere to
the requirements of Section D-4 of these Standards relating to the use
of consultants' reports. Highest
and best use analysis is another critical element in the development of
a reliable mineral property appraisal. Such a report must contain a
well-supported and documented market analysis that clearly establishes
whether or not there is adequate market demand for the minerals located
on the property. The market analysis should provide the underpinning for
the appraiser's conclusions regarding the marketability, price, and
competition for the mineral commodity found on the property. It is
critical that the appraiser adequately address the question of the
market for the minerals found on the property because it has been ruled
that an expert must "make a showing of some sort of market, poor or
good, great or small, for the commodity in question before the quantity
and price of the commodity or substance may be presented to the jury to
be used as a factor in the expert's opinion testimony." 411
Clearly,
if no market exists for the commodity, then the expensive and
time-consuming determination of the quantity and quality of the minerals
on the property is unnecessary. If a market exists for a mineral, then a
supportable determination must be made concerning both the legal
permissibility of extracting the mineral and the physical
characteristics of the minerals located on the property. Interpretation
of permitting and other environmental requirements may necessitate the
assistance of a consultant with specialized knowledge and experience in
the area. Also, studies regarding the physical characteristics of the
minerals are usually conducted by specialists (usually geologists and/or
mining engineers) who make determinations concerning such important
factors as the location, quantity, and quality of the mineral deposit,
and any variations in the quality that might be found on the property.
Additional determinations may be required regarding such factors as the
accessibility of the mineral and problems and costs of extraction. This
information then provides the basis for estimating the value of the
property using the sales comparison and income approaches to value.
However, before the adoption of these studies, it is the professional
responsibility 412
of the appraiser to thoroughly review and understand the reports
prepared by other experts and adopt them only if the analysis and
conclusions were prepared according to appropriate standards, are sound,
and are adequately supported. Another
aspect of highest and best use analysis of mineral property that must be
borne in mind is the consistent use theory. Under this concept,
the "land cannot be valued on the basis of one use while the
improvements [or minerals] are valued on the basis of another." 413
For example, it is improper "to value a property for agricultural
purposes and then add a substantial value increment for gravel deposits
under the surface of the land. If the gravel is mined, the land, in all
probability, will have no value for agricultural purposes during or
after the mining operation." 414
However, if the mineral deposit were oil, a concurrent use of the
surface for grazing purposes would not, in most instances, be a
violation of the consistent use theory. As
in the valuation of other property for federal acquisition purposes, if
adequate sales data is available, the sales comparison approach is
usually considered the best evidence of value. 415
While it is recognized that each property containing valuable mineral
deposits is unique, the same may be said, to some degree, of all real
estate. However, "[e]lements of sales of quite distant properties,
even those with different mineral content, may be comparable in an
economic or market sense when due allowance is made for variables."
416
Therefore, it is unacceptable for an appraiser preparing an appraisal
under these Standards to simply state that there are no comparable sales
transactions without providing adequate support for the conclusion. In
order to properly develop a sales comparison approach to value for a
mineral bearing property, the appraiser needs to understand the level of
information available concerning the mineralization found on the subject
property. It is then important to identify comparable sales that had
similar levels of information concerning mineralization available at the
time of sale. The variables, which must be given close attention include
rights conveyed, conditions of sale, the presence of multiple ores on
the same property, access for extraction purposes, topography and cover
(stripping ratios), transportation availability and cost, and distance
to smelters or refineries. All of these factors may require adjustment. 417
The verification of data concerning the comparable sales is a critical
component of this analysis, and the assistance of experts in identifying
all necessary areas of enquiry during the verification process may be
required. Also
important in the sales comparison approach is the selection of the
appropriate unit of comparison. Such selection should generally mirror
that unit of comparison used by participants in the market and, as such,
will generally result is the tightest bracket of value for the subject
property. "However, arriving at a valuation by multiplying an
assumed quantity of mineral reserves by a unit price is almost
universally disapproved by the courts." 418
The
income capitalization approach to value is also a valid means for
estimating the market value of mineral properties, but should never be
used exclusively if comparable sales are available for use in the sales
comparison approach. The income capitalization approach can be
especially applicable when the property under appraisal is already being
mined, and thus the historical income stream from the property is
available for analysis. In applying the income capitalization approach,
appraisers must take care to consider only the income that the property
itself will produce - not income produced from the business enterprise
conducted on the property (i.e., the business of mining). 419
An appraiser who is not thoroughly experienced in the appraisal of
mineral properties should not attempt to employ the income
capitalization approach. Even when used by an appraiser experienced in
this field, this appraisal approach can be highly speculative, and great
care must be exercised in its use. As one court cautioned: Great
care must be taken, or such valuations can reach wonderland proportions.
It is necessary to take into consideration manifold and varied factors,
like future supply and demand, economic conditions, estimates of mineral
recoverability, the value of currency, changes in the marketplace, and
technological advances. Many of these factors are impossible to predict
with reasonable accuracy. 420
In
developing an estimate of value by the income capitalization approach
for a mineral property, it is generally recognized that the most
appropriate method of capitalization is yield capitalization, most
notably discounted cash flow (DCF) analysis. The income that may be
capitalized is the royalty income, and not the income or profit
generated by the business of mining and selling the mineral. For this
reason, the income capitalization approach, when applied to mineral
properties, is sometimes referred to as the royalty income approach. DCF
analysis has been recognized by the courts as an appropriate method of
valuation to be employed in the valuation of mineral properties. 421
In conducting DCF analysis, the appraiser must avoid estimating a
property-specific investment value to a particular owner instead of
estimating the market value of the property if it were placed for sale
on the open market. Like application of the development approach to
value, DCF analysis in the valuation of mineral properties can be highly
complex. 422
As it relates to mineral properties, it often involves the creation of a
detailed mining plan for the property. The essential ingredients in this
approach are (a) the royalty rate, (b) the unit sale price of the
mineral to which the royalty rate is applied (e.g., $20 per ton), (c)
the projected annual amount of mineral production (e.g., 100,000 tons
per year) (with the product of these three ingredients yielding the
annual income), (d) the projected number of years of production and the
year when the production will begin, and (e) the proper capitalization,
or discount, rate. In
developing an estimated income stream, the proper royalty rate can be
derived from comparable mineral lease transactions, and the mineral unit
price to which the royalty rate is applied may be derived from
appropriate market transactions. The annual amount of production and the
number of years of production are more difficult (and speculative) to
estimate, and require as a minimum not only physical tests of the
property to determine the quantity and quality of the mineral present,
but also market studies to determine the volume and duration of the
demand for the mineral in the subject property. Production levels
estimates should be supported by documentation regarding production
levels achieved in similar operations. Production
levels should also be consistent with the mining plan's labor and
equipment estimates. Numerous other factors may have to be considered,
as for example, the amount of overburden, the method of mining (e.g.,
surface or deep mining), the requirements of permitting and applicable
reclamation laws, the hauling distance to market, competition from other
sites, the size and timing of the investment needed to construct any
necessary access or processing plant, and so on. The
size and timing of the investment needed, or capital costs, will include
expenditures for services, construction and equipment related to mine
development, pre-production, and production. Among the factors to be
considered in this portion of the analysis are preliminary studies, such
as exploration, environmental and engineering studies required to define
the location and nature of the resource sufficiently to support the
mining plan and ensure compliance with all applicable governmental
permitting and land use regulations. The engineering costs related to
the mining operation design must include contractors' fees and
management. Other elements to be considered include site preparation
costs, costs of facilities and improvements (including off-site
improvements, such as rail or road facilities), and mining equipment and
pre-production costs (including all of the costs required to bring the
extraction process to full production, including the costs of time-lag
and permitting). 423
Operating
costs are the expenditures incurred during the ongoing extraction
process. These cost elements include labor, materials, supplies, utility
costs, payroll overhead, management, indirect costs, and contingencies.
Also, appropriate deductions for all relevant taxes associated with the
operation must be made. As in the development approach, the estimation
of an appropriate level of entrepreneurial profit is a critical element
in the DCF analysis of any mineral property, and is a factor that should
be supported by direct market data whenever possible.
One
of the most critical factors in the application of DCF analysis is the
selection of the discount rate. Attempts have been made to apply various
statistical techniques to mineral valuations 424
to account for the extraordinary high risks associated with such
operations. However, the application of various statistical techniques
is not a substitute for discount rate selection derived from and
supported by direct market data, 425
which is the preferred and most widely accepted approach. 426
D-12.
Leasehold Acquisitions. The
government will sometimes acquire only a leasehold estate in all or a
portion of a property, thus acquiring the right of use and occupancy of
the property for an identified period of time. Typically, compensation
is equal to the present value of the market or economic rent of the
premises to be occupied by the government for the term of the occupancy.
427
It
is important for the appraiser to recognize the characteristics of the
rental, or income, streams being evaluated. Most often rent is paid
periodically (e.g., monthly) in advance. However, when the government
acquires a leasehold interest, or right of use and occupancy, in a
property, it will usually pay rent in a manner that is inconsistent with
the market. If the leasehold interest is acquired by condemnation, all
of the rent due for the entire term of its occupancy is usually paid in
a lump sum at the beginning of the occupancy (or on the date of
acquisition). Therefore, an appraiser must convert any estimate of
periodic market rent into a single lump sum present value or payment to
be paid in advance. If the leasehold is acquired by negotiation, the
rent may be paid in arrears, or at different frequencies than is typical
in the market, and the appraiser must account for this differential. If
rent is paid by the government in a single lump sum, adjustment for this
factor is typically accomplished by applying an ordinary annuity factor
(present worth of 1 per period factor) to the periodic market rent, if
the estimated rent is projected to remain constant over the government's
occupancy. If the appraiser concludes that the market rent will not be
constant throughout the government's occupancy, the periodic rent is
typically converted into a lump sum present worth by the use of present
worth of 1 factors, or by discounted cash flow analysis. The
discount rate to be applied to the periodic rent should reflect the
rates of return typical for the type of property involved. The selected
discount rate should be justified by the appraiser and supported by
market data whenever possible. Appraisers
must bear in mind that the leasehold estate acquired by the government
may vary substantially from the terms of a typical lease in the private
market. For instance, the term of the lease may be longer or shorter
than typical for the type of space under appraisal. Expenses paid by the
government may differ from those paid by the typical lessee, and there
may be no provisions for expense stops and rental escalations during the
lease term. The parking ratio for the space occupied by the government
may vary from the market standard and there will by no provisions for
rent concessions or lessor buildout of the occupied space. The appraiser
must consider all of these factors when estimating the market or
economic rent for the acquired space, and comparable rentals must be
adjusted to account for these differences. As
previously noted, 428
there are occasions when the government acquires the leasehold interest
in only a portion of a larger property. In those instances, the
appraiser must consider the possibility of damages to the remainder
property (i.e., that portion not to be occupied by the government). In
those instances where severance damages may be significant, appraisers
should consult with their client agency and/or its legal counsel before
proceeding with the appraisal assignment to ensure that the appraisal
will be prepared in accordance with current applicable law. D-13.
Updating Appraisal Reports. When
an appraisal has been made any substantial period in advance of
acquisition, the appraisal must be carefully reviewed and brought up to
date to reflect current market conditions. Any change in the value
estimate attributable to trending or updating should be fully supported
by acceptable market evidence, rather than by reference to a market
index based on unidentified information. There
can be no hard rule as to how often an appraisal report requires
updating. While various government agencies recognize some rules of
thumb in this regard (e.g., ever 6 months; every 12 months), the
frequency of updating will depend on the type of property involved, its
location, and the market conditions in the property's market area. For
this reason, the U.S. Forest Service policy provides that, when
approving an appraisal report, the review appraiser assigns a life to
the approval, at the end of which the appraisal must be reviewed for
updating. That approval life is based upon the variables noted above and
can be quite short, especially when the property in question involves
timber values in a very volatile market. Other agencies have also
adopted formalized regulations. All agencies should develop procedures
for automatic reviews of reports on a scheduled periodic basis. For
trial purposes, in order to accord maximum weight to the testimony of
the appraiser, it is important that the appraisal report reflects (1)
the value as of the date of taking, 429
(2) the precise estate described in the complaint or any amendment
thereof, and (3) the best market evidence of the value of the property
available at the time of the trial. If
an appraisal report is being updated in preparation for trial, the
appraiser should consider this an opportunity to critically review his
or her initial findings, to address report weaknesses, which may have
come to light as a part of the appraisal review process, and to include
all of the important market data and reasoning, which led to the
conclusion of value. In most instances, the updating of an appraisal
report for trial purposes will require an entirely new appraisal report.
This
will give the appraiser the opportunity to include the most recent
reliable market data in support of the estimate of value, even if the
newly found market data does not alter the appraiser's original estimate
of value, 430
as well as an opportunity to purge the report of outdated data,
analyses, and opinions. It further provides the appraiser with an
opportunity to make sure that the report meets all requirements of
Federal Rule of Civil Procedure 26(a)(2)(B), as discussed in Section D-2
of these Standards. The
appraiser should remember that copies of entire appraisal reports are
often exchanged by legal counsel or are provided to opposing counsel
through the discovery process 431
and that "[t]he thoroughness with which the appraisal is made and
reported is the appraiser's greatest protection against professional
embarrassment." 432 D-14.
Contacting Landowners. During
the course of inspecting the property being appraised, the appraiser is
expected to see and talk personally to the property owner or, in the
owner's absence, the owner's agent or representative. If the appraiser
is advised that the property owner is represented by legal counsel, all
owner contact and property inspections must be arranged through the
owner's attorney, unless the attorney specifically authorizes the
appraiser to make direct contact with the owner. Owners are generally a
prime source of detailed information concerning the history, management,
and operation of the property. In compliance with the provisions of
Public Law 91-646, 433
the owner or the owner's designated representative must be given an
opportunity to accompany the appraiser during his or her inspection of
the property. D-15.
Contracting for Appraisal and Other Expert Services. Careful
selection of and coordination with contract appraisers is of paramount
importance in the successful negotiation or condemnation of an interest
in real estate. It is important to obtain the contract services of the
best-qualified appraisers available within the agencies' rules governing
the contracting process. While price is certainly a consideration, more
important factors are general appraisal experience, education,
professional reputation, experience in conducting appraisals for federal
land acquisitions under these Standards, court experience, and
demonstrated competency. Title
XI of the Financial Institutions Reform, Recovery and Enforcement Act of
1989, amended, (FIRREA) 434
required the establishment of state programs for the licensing and
certification of appraisers. 49 C.F.R. 24.103(d)(2) provides that
"[i] f the appraisal assignment requires the preparation of a
detailed appraisal ...and the Agency uses a contract (fee) appraiser to
perform the appraisal, such appraiser shall be certified in accordance
with title XI of [FIRREA]." When
an agency anticipates that a tract of land will have to be acquired by
condemnation, the agency should work closely with the Land Acquisition
Section of the Department of Justice and/or the U. S. Attorney's office
in the area in which the property is located in selecting a suitable
appraiser to present expert testimony. Employment of inadequate
appraisers wastes money, since it will often be necessary to expend more
money for additional appraisals of the same property, and settlement
opportunities may be impaired if the government is required to change
estimates of value in midstream. Real
estate appraisal is becoming increasingly sophisticated. Appraisers now
find that preparation of an adequately supported estimate of market
value often requires the assistance of specialized consultants. Before
issuing an appraisal assignment, agencies should attempt to identify the
need for such special consultants, and make arrangements for such
services, either by contracting with the consultant directly or by
providing for the appraiser's retention of the consultant in the
appraisal contract. If an agency retains the consultant directly, it
should select the consultant in cooperation with the appraiser, who will
ultimately have to rely on the consultant's analysis and conclusion. The
agency and the appraiser should jointly determine the scope of work and
establish qualification criteria for any consultant retained.
Irrespective of whether the consultant is retained by the agency or the
appraiser, selection of the consultant must be by concurrence of both
the appraiser and the agency. If
the appraiser finds that an appraisal cannot be completed without a
consultant's assistance, the appraiser should notify the agency involved
immediately. The appraiser may not adopt unauthorized, unreasonable, or
unsupported assumptions in making an appraisal in lieu of obtaining
specialized consultant assistance.
The
types of special consultant most often needed include: °
Fixture appraisers When
contracting for appraisals, it is important to require the individual
appraiser with whom the contract is made to actually prepare or be
principally responsible for the appraisal and the appraisal report, and
to be prepared to testify in court if it becomes necessary. D-16.
Confidential Nature of Appraisals. Appraisers'
valuations and supporting appraisal reports are confidential information
and the appraiser shall strictly abide by the Confidentiality provisions
of the Ethics Rule of USPAP, which provides as follows: An appraiser
must protect the confidential nature of the appraiser-client
relationship. An appraiser must act in good faith with regard to the
legitimate interests of the client in the use of confidential
information and in the communication of assignment results. An appraiser
must not disclose confidential information or assignment results
prepared for a client to anyone other than: 1) the client and persons
specifically authorized by the client; 2) state enforcement agencies and
such third parties as may be authorized by due process of law; and 3) a
duly authorized professional peer review committee. Under
exception #1 in the preceding paragraph, appraisers must obtain written
authorization from the client agency (or the Department of Justice if a
case has been filed) before disclosure. The passage of time in and of
itself does not extinguish either the appraiser's responsibility for
confidentiality or the appraiser/client relationship. The
appraiser/client relationship is extinguished only upon written release
from the client agency or upon the consummation of the government's
acquisition of the property appraised. Even though the appraiser/client
relationship may terminate, the appraiser remains subject to the
confidentiality provisions of USPAP. Appraisers
have an extraordinary duty to maintain confidentiality when the
acquisition of the property appraised may have to be accomplished by
condemnation, and any appraisal report prepared for the purposes of
government acquisition should be considered the subject of potential
litigation until such time as the government has consummated its
acquisition. If
an appraiser receives a request or order, under exceptions #2 or #3
above, to provide confidential information relating to an appraisal
conducted for the government to a state enforcement agency or
professional peer review committee, the appraiser must provide the
government with written notice of the request or order prior to
providing the confidential information to the state enforcement agency
or professional peer review committee. If litigation is pending, the
Department of Justice may elect to intercede if it determines such
intercession would be in the best interest of the government. 49
C.F.R.24.102 requires an agency to provide a property owner with an
initial written offer of purchase together with a written statement
explaining the basis of the offer. The Department of Justice strongly
recommends that, during the negotiation process, agencies not disclose
the contents of appraisal reports beyond what is required by 49
C.F.R.24.102, because early disclosure of an appraisal report tends to
weaken its viability and the viability of the appraiser in litigation.
Agencies must recognize that early disclosure of appraisal reports may
result in a Justice Department determination that it is in the best
interest of the government for neither the appraisal report nor the
appraiser to be used for trial purposes. Such a determination will
necessitate the procurement of a new appraiser and appraisal report for
trial purposes. Once
a case has been referred to the Department of Justice for the filing of
an action, agencies shall not divulge the contents of an appraisal
report to anyone, without authorization from the Department. Appraisers
must use extreme caution in choosing what information to cite in
developing their opinions of value. While it is common practice for
appraisers in non-litigation appraisals to report that they have relied
upon confidential information 435
in addition to the supporting data reported, in developing their opinion
of value, such a reference in a litigation report may subject the
information to discovery. Appraisers should not reference such
information in litigation reports unless they are prepared to reveal the
information, often by order of the court. D-17.
Project Appraisal Reports. Some
government projects require the acquisition of a large number of parcels
of real property, and individual appraisers are assigned to appraise a
number of these parcels at the same time. On occasion, it is logical to
include the appraisal of more than one parcel in a single report. Thus,
under certain circumstances, such project or multiple parcel appraisal
reports may be appropriate. Project appraisal reports are not appraisal
shortcuts; they are clerical shortcuts. Assuming that the criteria set
forth herein is met, project appraisal reports may be acceptable for the
purposes of negotiated purchase, and for initial review purposes by the
Department of Justice, and even for trial purposes. In
preparation for trial, appraisal reports are generally exchanged between
the parties or become subject to discovery. They are sometimes also used
as exhibits during trial. Project appraisal reports may not be conducive
to these purposes, and their use by trial attorneys is cumbersome. To
introduce a project report as a court exhibit is to introduce a myriad
of collateral issues. Also, the disclosure of an entire project report
often discloses the estimated values of properties owned by persons not
parties to the lawsuit, a disclosure, which the government may not be
prepared to make. For these reasons, agencies and appraisers should
recognize that project appraisal reports for trial purposes may be
unacceptable to the Department of Justice. However, given the high
percentage of parcels within a project, which are acquired short of
trial, they can save valuable time and money for agencies engaged in
larger projects. When
appraisal reports are updated for trial purposes, appraisers should be
prepared to develop a totally self-contained narrative appraisal report
for the individual parcel being updated, in accordance with Section A of
these Standards. Project
appraisal reports are appropriate when 1) all of the parcels appraised
are total acquisitions, or partial acquisitions of a nominal and/or
consistent nature; 2) all parcels are vacant or have similar
improvements; 3) all parcels are located within a relatively homogeneous
geographical area; 4) all parcels have the same, or a similar, highest
and best use; 5) the most relevant method of valuation is the same for
all parcels, and; 6) the same array of market data will be relied on in
the valuation of each parcel. The
project appraisal report should consist of three major parts: 1)
introduction, factual data, and analysis relating to all properties
included in the report; 2) individual parcel reports; and 3) addenda and
exhibits relating to all properties included in the report. Part
I—Introduction, General Factual Data and Analysis
3.
Table of Contents. The
major parts of the appraisal report and their subheadings shall be
listed. The location of each individual parcel report shall be
specifically identified and items in the addenda of the report shall be
individually listed in the table of contents. If
the project appraisal encompasses a larger number of parcels, it is
desirable to include a second summary listed alphabetically, by owners'
names. 5.
Statement of Assumptions and Limiting Conditions. 436
All assumptions and limiting conditions that universally apply to the
appraisal of all parcels in the project appraisal report shall be
listed. Assumptions and limiting conditions that are not applicable to
all parcels included in the project appraisal report should not be
included in this section, but rather should be noted in the individual
parcel reports. 6.
Scope of the Appraisal. 437 9.
Area, City and Neighborhood Data. 440
In the case of partial acquisitions, this discussion should be clearly
broken down into two subsections: before the acquisitions and after the
acquisitions. 11.
Analysis of Highest and Best Use. 441
Inasmuch as all parcels in the report will have the same or similar
highest and best use, the appraiser should discuss and develop the
highest and best use of the parcels in this section. If, after in-depth
analysis, an appraiser determines that the highest and best use of a
parcel is not the same as or similar to that of the other parcels to be
included in the report, the unique parcel should be excluded from the
project report and a separate narrative appraisal report should be
prepared for this unique parcel in accordance with Section A of these
Standards. In
the case of partial acquisitions, this discussion should be clearly
divided into two subsections: before the acquisitions and after the
acquisitions. 12.
Discussion of Approaches to Value. The
appraiser should discuss the standard approaches to value and their
applicability or non-applicability to the parcels under appraisal in the
project report. If any modification to the typical application of the
approaches to value is required, such modification should be discussed. In
the case of partial acquisitions, this discussion should be clearly
broken down into two subsections: before the acquisitions and after the
acquisitions. 13.
Land Valuation. The
appraiser should identify, describe, and discuss all comparable land
sales that will be used in the individual parcel reports. A discussion
of how the comparable sales will be used in the individual reports can
be included in this section of the report. Reference should be made to
comparable sales data sheets, photos and a comparable sales map, which
shall be included in the addenda of the report. Universal
adjustments to the comparables should be discussed and developed in this
section of the report. Adjustments classified as universal would include
such adjustments as time, or market condition, adjustments and cash
equivalency adjustments; those adjustments that are not subject property
dependent. Also, the general results of any study relating to land value
(e.g., a size adjustment study) developed under item 17 (special
studies) should be discussed. If
a parcel requires land valuation by means other than comparable sales,
as a general rule, that parcel is not appropriate for inclusion in a
project report. In the case of partial acquisitions, this discussion
should clearly be divided into two subsections: before the acquisitions
and after the acquisitions. 14.
Cost Approach. The
appraiser should describe the methodology used to develop reproduction
or replacement cost and depreciation estimates. If a national cost
service has been used in estimating reproduction or replacement costs,
that publication should be specifically identified. If entrepreneur's
profit has been included in reproduction or replacement cost, its
derivation should be explained. If
depreciation studies using the market extraction or sales comparison
method 442
have been developed, their content and development should be discussed
and the general conclusions reached should be reported. Discussion of
partial acquisitions should clearly be divided into two subsections:
before the acquisitions and after the acquisitions. 15.
Sales Comparison Approach. The
appraiser should identify, describe and discuss all comparable improved
property sales that will be used in the individual parcel reports. A
discussion of how the comparable sales will be used in the individual
reports can be included in this section of the report. Reference should
be made to comparable sales data sheets, photos, and a comparable sales
map, which shall be included in the addenda of the report. Universal
adjustments to the comparables should be discussed and developed in this
section of the report. Adjustments classified as universal would include
such adjustments as time, or market conditions, adjustments and cash
equivalency adjustments; i.e., those adjustments that are not subject
property dependent. The discussion of partial acquisitions should
clearly be divided into two subsections: before the acquisitions and
after the acquisitions. 16.
Income Capitalization Approach. The
appraiser should identify, describe, and discuss all comparable rental
properties to be used in the individual parcel reports. A discussion of
how the comparable rentals will be used in the individual reports can be
included in this section of the report. Reference should be made to
comparable rental data sheets, photos, and a comparable rentals map,
which shall be included in the addenda of the report. Because
a high degree of similarity exists between all individual parcels
included in the project report, capitalization rates applicable to each
should be the same, or fit into a relatively narrow bracket. Therefore,
the development of applicable capitalization rates should be presented
in this section of the report. Discussion of partial acquisitions should
clearly be broken down into two subsections: before the acquisitions and
after the acquisitions. 17. Special Studies. This section of the report should be used to present any special studies that are appropriate and apply to all, or most, of the individual parcels included in the project appraisal report. Such studies might include (in addition to the capitalization rate, time, or market conditions, entrepreneurial profit, depreciation, and cash equivalency studies previously mentioned) easement studies, 443 size adjustment studies, proximity studies, 444 land-lock studies, special benefit studies, and project influence studies. These studies may relate to the before situation, the after situation, or both. |
