August 17, 2018
Author: Matthew Lubawy, MAI
Organization: Lubawy & Associates, Inc.
Effective Date of Value – The effective date of value is the date on which the value conclusion is effective. This can be a current date, a retrospective date, or a prospective date. Normally the effective date of value is a current date of value (usually the date of inspection). However, some assignments may require a retrospective date of value (a date in the past), or possibly a prospective date of value (a date in the future).
Date of Report – This is the date that the report was written and the results of the appraisals report were submitted to the client.
Intended Use. The intended use is the reason for which the client needs the appraisal. Reasons for ordering an appraisal of an easement:
_ Acquisition of an easement for access across another property
_ Acquisition for utilities (e.g. power, sewer, water, etc.)
_ Litigation between parties impacted by an easement
_ Tax deduction (e.g. conservation easement)
_ Termination of an easement
An extraordinary assumption is defined as: “An assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Extraordinary assumptions presume 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 about the integrity of data used in an analysis. Source: The Dictionary of Real Estate Appraisal, Fifth Edition (Chicago; Appraisal Institute, 2010) Page 73.
An example of an extraordinary assumption that goes into an appraisal of an easement: It is emphasized that any increase or decrease in the market value of the property prior to the date of value caused by the public improvement for which the right-of-way and permanent easements are being acquired has been disregarded in estimating the market value of the property, to the greatest extent practicable. (Source: 42 U.S.C. 4651 (3) of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970).
A hypothetical condition is defined as: “That which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.” Source: The Dictionary of Real Estate Appraisal, Fifth Edition, (Chicago: Appraisal Institute, 2010) Page 97.
An example of a hypothetical condition in an appraisal report with an easement is as follows: The after condition value of the subject property is based on the hypothetical condition that the easements are in place as of the effective date of value, even though they do not yet exist. The use of this hypothetical condition, if the improvements are altered from what is planned, might impact the assignment results.
Usually, the appraisal of an easement that does not yet exist is appraised without the easement, then with a hypothetical condition that the easements exists on the same day, so that the market value before the easement and the market value after the easement can be compared to each other without needing to worry about market conditions changing.
Definition of Market Value
Nevada State Assembly Bill 102, adopted May 23, 2007, defines market value as follows: “Value” means the highest price, on the date of valuation, that would be agreed to by a seller, who is willing to sell on the open market and has reasonable time to find a purchaser, and a buyer, who is ready, willing and able to buy, if both the seller and the buyer had full knowledge of all the uses and purposes for which the property is reasonably adaptable and available. In determining value, except as otherwise provided in this subsection, the property sought to be condemned must be valued at its highest and best use without considering any future dedication requirements imposed by the entity that is taking the property. If the property is condemned primarily for a profit making purpose, the property sought to be condemned must be valued at the use to which the entity that is condemning the property intends to put the property, if such use results in a higher value for the property. Source: Nevada Revised Statutes 37.009
NRS 37.110. Ascertainment and Assessment of Damages
The court, jury, commissioners or master must hear such legal testimony as may be offered by any of the parties to the proceedings, and thereupon must ascertain and assess:
- The value of the property sought to be condemned and all improvements thereon pertaining to the realty, and of each and every separate estate or interest therein; if it consists of different parcels, the value of each parcel and of each estate or interest therein shall be separately assessed.
- If the property sought to be condemned constitutes only a part of a large parcel, the damages which will accrue to the portion not sought to be condemned, by reason of its severance from the portion sought to be condemned, and the construction of the improvement in the manner proposed by the plaintiff.
- If the property, though no part thereof is taken, will be damaged by the construction of the proposed improvement, the amount of such damages.
- Separately, how much the portion not sought to be condemned, and each estate or interest therein, will be benefited, if at all, by the construction of the improvement proposed by the plaintiff; and if the benefit shall be equal to the damages assessed, under subsection 2 of this section, the owner of the parcel shall be allowed no compensation except the value of the portion taken; but if the benefit shall be less than the damages so assessed, the former shall be deducted from the latter, and the remainder shall be the only damages allowed in addition to the value of the portion taken.
- If the property sought to be condemned be for a railroad, the cost of good and sufficient fences along the line of such railroad between such railroad and other adjoining lands of the defendant; and the costs of cattle guards where fences may cross the line of such railroads. As far as practicable, compensation must be assessed for each source of damages separately. [1911 CPA § 674; RL § 5616; NCL § 9163]
NRS 37.112. Valuation of Property Subject to Condemnation as Result of Public Work or Project
- Except as otherwise provided in subsection 2, if the property is subject to condemnation as a result of a public work or public improvement, any decrease or increase in the fair market value of the property before the date of valuation which is caused by:
(a) The public work or public improvement for which the property is acquired; or
(b) The likelihood that the property would be acquired for such a purpose, must be disregarded when assessing the value of the property pursuant to NRS 37.110.
- Any decrease or increase in the fair market value of the property before the date of valuation resulting from physical deterioration within the reasonable control of the owner is not required to be disregarded pursuant to subsection 1. (Added to NRS by 1993, 525)
NRS 37.120. Assessment of Compensation and Damages: Date of Valuation; Exceptions
- To assess compensation and damages as provided in NRS 37.120, the date of the first service of the summons is the date of valuation, except that, if the action is not tried within 2 years after the date of the first service of the summons, and the court makes a written finding that the delay is caused primarily by the plaintiff or is caused by congestion or backlog in the calendar of the court, the date of valuation is the date of the actual commencement of the trial. If a new trial is ordered by a court, the date of valuation used in the new trial must be the date of valuation used in the original trial.
- No improvements put upon the property after the date of the service of the summons may be included in the assessment of compensation or damages, regardless of the date of valuation.
- In all actions in eminent domain, the court shall award just compensation to the owner of the property that is being taken. Just compensation is that sum of money necessary to place the property owner in the same position monetarily as if the property had never been taken, excluding any governmental offsets except special benefits. Special benefits may only offset severance damages and may not offset the value of the property. Just compensation for the property taken by the exercise of eminent domain must include, without limitation, interest computed pursuant to NRS 37.175 and reasonable costs and expenses, except attorney’s fees, incurred by the owner of the property that is the subject of the action.
- As used in this section, “primarily” means the greater amount, quantity or quality of acts of the plaintiff or the defendant or, if there is more than one defendant, the total delay caused by all the defendants, that would cause the date of the trial to be continued past 2 years after the date of the first service of the summons. [1911 CPA § 675; RL § 5617; NCL § 9164] --- (NRS A 1965, 686; 1991, 1641; 1993, 526; 1999, 3533; 2007, 336)
Just compensation is defined as: “That sum of money necessary to place the property owner in the same position monetarily as if the property had never been taken, excluding any governmental offsets except special benefits. Special benefits may only offset severance damages and may not offset the value for the property. Just compensation for the property taken by the exercise of eminent domain must include, without limitation, interest computed pursuant to NRS 37.175 and reasonable costs and expenses, except attorney’s fees, incurred by the owner of the property that is the subject of the action” Source: NRS 37.120
Types of Easements – There are three types of easements: overhead, surface, and subsurface easements.
Examples of Easements:
Overhead easements – Overhead transmission lines, avigation easements, transportation easements (e.g. freeway flyover, train overpass, etc.)
Surface Easements – Railroad ROW, access roads, drainage easements, etc.
Sub-surface easements – utility lines for water, sewer, electricity, fiber optics; transportation easements (e.g. trains, tunnels for vehicles, etc.); communication lines, etc. The following is an example of the amounts paid for easements as indicated in an article published in the May/June 2006 IRWA Right of Way magazine. This is just an example; actual percentages may be outside of these ranges due to location, use, and other factors.
- USPAP – Uniform Standards of Professional Appraisal Practice
- N.R.S. – Nevada Revised Statutes
- Yellow Book – UASFLA (Uniform Appraisal Standards for Federal Land Acquisitions)
- State Rule
- Federal Rule
Definition: In governmental land acquisitions (also easement valuation), that tract or tracts of land which are under the beneficial control of a single individual or entity and have the same, or an integrated, highest and best use. Elements for consideration by the appraiser in making the determination in this regard are contiguity, or proximity, as it bears on the highest and best use of the property, unity of ownership, and unity of highest and best use. In most states, unity of ownership, contiguity, and unity of use are the three conditions that establish the larger parcel for the consideration of severance damages. In federal and some state cases, however, contiguity is sometimes subordinated to unitary use. Source: (The Dictionary of Real Estate Appraisal, Fifth Edition, page 110.)
Three tests for determining the larger parcel:
- Unity of Ownership
- Unity of Use
Value in the Before Condition
The property is appraised in the “before condition” prior to the easement acquisition
Value of the Part Acquired as Part of the Whole
The part acquired for the easement is valued as part of the whole (times the percentage of ownership rights taken). To determine the value of an easement, the following factors should be reviewed:
- A Factor to Recognize the Degree of Alienation caused by the easement essentially refers to loss of utility of the affected land due to the easement.
One hundred percent land use includes surface, subsurface, and aerial rights.
- A Use Factor addresses such issues as:
- The Sharing Factor – If a number of users can share an easement alignment, the rental rate can be modified for each utility. This encourages sharing of utility alignments.
- The Essential Service Factor – An essential service such as a water line that is required by the municipality will pay a lower rate than a for-profit competitive business that has chosen to occupy the easement.
- The Exclusive Rights Factor – An occupant that is an exclusive for-profit franchise holder within the city will pay an increased rate.
- The Depth and Disruption Factor – For underground utilities, shallow utilities (i.e. less than 1.5 meter in depth) create more conflicts, and are exposed and relocated more often than deeper utilities. The deeper utilities therefore pay a reduced rate.
- The Hazard Factor – Occupants that in themselves can present a loss of life risk, such as power and gas, will pay a higher rate.
The proper measure of compensation for the easement is based on reduction of utility and market value of the overall site caused by the easement. The factors to consider when analyzing a possible decrease in value are as follows:
- Purpose of the easement
- Length of time of use (i.e. temporary or permanent easement)
- Construction proposed (i.e. Is the easement required for surface, subsurface, air rights, etc. improvements?)
- Extent of rights of re-entry by the government agency acquiring the easement for maintenance and other purposes
- Location and physical limits of the easement area (i.e. Does the easement affect the potential utilization of the land?)
- Terms and conditions of the easement agreement (i.e. Do the conditions of the easement create loss or impose hardship?) Source: Encyclopedia of Real Estate Appraising, 3rd Edition, 1978, Chapter 33, pg. 752.
Value of the Remainder as Part of the Whole
This is the remaining value of the property as part of the whole. This value is calculated by subtracting the value of the part acquired from the value in the before condition.
Value of the Remainder After the Acquisition, Disregarding Special Benefits
In order to value the subject in the after condition disregarding special benefits, the following categories are considered:
Change to a Less Profitable Use: The highest and best use of the larger parcel, after the acquisition of the right-of-way and easements needs to be analyzed to determine if the easement will change the property to a less profitable use.
Loss or Limitation of Access: The right-of-way and easement acquisitions need to consider if there will be any loss or limitation of access.
Reconstruction of Improvements: The land needed for the right-of-way and easements needs to consider whether or not any reconstruction of improvements will be required.
Change of Grade: It needs to be assessed if the larger parcel will be adversely affected by a change in grade as a result of easement acquisitions.
Reduction in Size: Any reduction in size as a result of the easement needs to be analyzed to determine any impact on the value of the property. Usually this applies to a full taking as opposed to an easement.
Irregularity of Shape: Any irregularity in shape due to the easement should be considered. Usually this applies to a full taking as opposed to an easement.
Proximity Damage: Proximity damage is a decrease in market value to the remainder owing to some aspect of the project for which a part is taken.
Impaired Drainage, Loss of Utilities, or Other Facilities: The remainder land is not expected to suffer from increased drainage complications nor any reduction or loss of utilities or other facilities. Therefore, there is no loss in value related to this category.
Light, Air, and View: Light, air, and view are often recognized as compensable severance damages. The remainder will retain space for light, air and views. Therefore, no severance damages are applicable.
Severance Damages are defined as follows: “In condemnation, the loss in value to the remainder in a partial taking of property. Generally, the difference between the value of the whole property before the taking and the value of the remainder after the taking is the measure of the value of the part taken and the damages to the remainder. Note that different regions of the country and different courts may use terms such as consequential damages and severance damages differently.” Total severance damages are calculated by subtracting the “value of the remainder after the acquisition disregarding special benefits” from the “value of the remainder as part of the whole”.
A general benefit is enjoyed by the neighborhood or the community which is served by the public project. General benefits may result from new highways, which reduce travel time and traffic congestion, generally for those in the neighborhood. They may also result from extension of utility lines, stimulating the real estate market in the area.
A special benefit is generally considered to occur… “when an increase in value of a particular property or group of properties results directly from the taking and the improvement.” Source: Eminent Domain Valuation, Considerations for Real Estate Appraisers, American Institute of Real Estate Appraisers, 1978, page 7.
In essence, special benefits are those which are direct and peculiar to a property. The special benefit must flow from the construction of the public improvements. General benefits are those which result from sharing in the common advantage and convenience of increased public facilities and the general advance in value of real estate in the vicinity. According to the Federal Rule, special benefits accrue to the remainder property value and can offset both the value of the part acquired and any damages. However, according to the “State Rule” for the State of Nevada, special benefits may only offset damages to the remainder. Since the State of Nevada District Court is where any disputes relating to the acquisition would be settled, we are using the State Rule in this appraisal analysis.
For a property to receive a special benefit, one or more of the following typically will have occurred:
- Change to a more profitable use;
- Better access from such things as widening or opening of streets;
- Change to a more profitable zoning;
- Change from an inside lot to a corner lot;
- New street improvements installed gratis as part of the project;
- Improved drainage (site specific, not general); and
- Improvement of light, air, and view.
As mentioned above, under the State rule, special benefits may only be used to offset severance damages to the remainder. Under the Federal Rule, compensation for the portion of the property to be acquired or taken can be offset by the amount of special benefits of the proposed project attributed to the remainder property.
Conclusion to Compensation for the Easement
The following is an example of the format used to estimate the amount of compensation afforded to the acquisition of an easement. This example also includes a taking of land in addition to easements.
Temporary Construction Easements
The appropriate measure of compensation for the acquisition of a temporary easement is the fair rental value for the term of the easement adjusted as may be appropriate for the rights of use, if any, reserved to the owner. Further, damages that result from temporary construction easements are usually based on the economic rent or market rent of the affected area for the term of the temporary easement. Given the absence of rental data for vacant land parcels, a reasonable rate of return on the land can be applied to the unencumbered land’s fee value for the term of the easement. If the easement will have a term of 12 months (or less), discounting is usually not required.