Valuation of Partial Interests International Right of Way Association and Appraisal Institute

1. Valuation of Partial InterestsInternational Right of Way Association and Appraisal Institute Federal Agency Update January 13, 2009 Eric Paul Griffin, MAI Appraisal Services Directorate

2. Objectives: • We will address the appraisal process and what it is we are to value • We will discuss the bundle of rights and how this relates to valuation of partial interests • We will look at an overview and examples of some common partial interests • We will discuss methodology applicable to the valuation of partial interests • We will work a case study of the valuation of a conservation easement under two different user scenarios • We will provides examples of different valuation methodologies as they apply to specific types of partial interest assignments

3. What We Value: Rights vs. Tangible Items • As appraisers it is the real property (the rights) to the real estate (the land and appurtenances attached to the land) which we value. • Real property; All interests, benefits and rights inherent in the ownership of physical real estate; the bundle of rights with which the ownership of the real estate is endowed. Dictionary of Real Estate 4th Edition

4. The Bundle of Rights The Bundle of Rights With a divided interest the ownership or control of some of the sticks are in a multiple ownership interests

5. Some Common Types of Partial Interests: • Leased fee and or leasehold interests • Mortgage and or equity interests • Life estates • Transfer of development rights • Easements • Air rights • Mineral rights • Water rights • Riparian rights

6. Common Types of Easements • Aviation easement (the right, to the use of the air space above a specific height for the flight of aircraft) • Clearance easement • Conservation easement • Deciduous easement (a right of accommodation (for a specific purpose) requiring action by one of the parties, such as a right of way) • Drainage easement • Facade easement • Flowage easement • Highway easement • Line-of-sight easement (view or scenic easements) • Overhead easement

7. Useful Terms and Concepts: Easements: An easement is an interest in real property that conveys use, but not ownership, of a portion of an owner's property. Components of an Easement: • Servient estate: The property that is burdened by an easement • Dominant estate: The right to perform a specific action on a property owned by another; also called an affirmative easement. • Easements may be permanent or for a specific-term

8. Useful Terms and Concepts: • Easement appurtenant is an easement that is attached to: benefits, and passes with the conveyance of the dominant estate; runs with the land for the benefit of the dominant estate and continues to burden the servient estate, although such an estate may be conveyed to new owners. • Easement in gross is an easement that is not attached or appurtenant to any particular estate; does not run with the land nor is it transferred through the conveyance of title. • Easement by prescription is the right to use another's land, which is established by exercising this right over a period of time. Such an easement is not specifically granted; it is understood. The easement may be perfected by legal action. Also identified as a prescriptive easement.

9. The Significant Seven • Identify the client • Identify the intended users • Identify the intended use • Identify the type of value • Identify the effective date of value • Identify the relevant property characteristics • Identify the assignment conditions

10. The Client The client is the party or parties who engage an appraiser in a specific assignment. It is essential you work with client in developing a clear understanding of the intended use of the appraisal. The client is the one who controls the distribution of the appraisal.

11. The Intended User and Intended Use: The Intended users and the intended use will determine the scope of the appraisal and how we report the assignment results. The intended use may affect the determination of the subject property. The client typically determines what the subject property is. Appraisals prepared for the Federal Government and for the IRS may require the appraiser to determine the subject property (the larger parcel). Remember it is you as the appraiser who determines who you intended to be users, but this needs to be determined in the context of the intended use and who the client intends to be able to rely on the appraisal.

12. The Type of Value This may be driven by the intended use and intended user. Be sure you know what definition of value the assignment requires. Market value may be the most probable value or the highest price by law. The IRS has numerous definitions of market value. The courts and codes contain definitions of market value. Most definitions share the characteristics we as appraisers are familiar with. While it is probable that the use of the wrong definition will not affect the assignment results it may affect your credibility or the admissibility of the appraisal.

13. The Effective Date of Value This is something that needs to be determined in consultation with the client. There may be legal issues or requirements which will require that a certain date of value be used.

14. The Relevant Property Characteristics and the Assignment Conditions The property characteristics describe the property to be appraised and will determine your opinion of the highest and best use of the property in its present condition. They will also affect the determination of what the property to be appraised is. You probably will have two sets of relevant property characteristics. The second set of relevant property characteristics will involve the property as encumbered by the easement. These property characteristics may result in a different highest and best use.

15. The Relevant Property Characteristics and the Assignment Conditions Continued The assumptions and limiting conditions will include the easement information. The easement will affect the highest and best use of the property with the easement in place. The assignment conditions may affect the property in the unencumbered condition.

16. The risk of not understanding the needs of the intended users

17. Reporting Requirements and Methodology The intended use will drive how we develop (the valuation methodology) and report the assignment results. The intended use is a key driver in determining the scope of work. The intended use will relate to who the client intends to rely on the appraisal. The appraisals of partial interests may involve the valuation of one or more of the interests or estates. Some examples are: • The valuation of the fee simple interest unencumbered.

18. Reporting Requirements and Methodology continued • The valuation of the servient property as encumbered. • Valuation of the affect of the proposed partial interest on the encumbered (servient) estate. • Valuation of the proposed fractional interest. (Can the sum of the parts be equal to something other than the whole?) • Valuation of the dominate estate, before and after where the easements is located on one property but benefits another.

19. The Federal Rule If the appraisal is prepared for most Federal Agencies or if Federal moneys are involved the methodology will be based on: The unencumbered value of the property which is to be encumbered by the easement. The value of the property as encumbered by the easement (probably a hypothetical condition). The difference between these two values is the value of the easement.

20. Some Questions to Consider With the Federal Rule • What is the highest and best use as unencumbered ? • What rights are being giving up? • What is the highest and best use as encumbered? • If there is no change in the highest and best use as a result of the easement is there a change in value? • Can the same easement have a different affect on the value of different properties? • Is it possible for an easement which place fewer legal restrictions on the use of a property to have a greater affect on value?

21. IsThere a Change in Highest and Best Use? This is one of the most common problem areas in the valuation of partial interests. Just because something is possible it doesn’t follow that it is probable. Many appraisers seem to become very creative in developing an opinion of the highest and best use of the property. While it is appropriate to recognize that a change in use or zoning is possible it is also necessary recognize that this is not the same as already having the zoning.

22. Some Common Partial Interest Assignments Involve • Conservation Easements • Underground Easements • Overhead Easements • Flowage Easements • View Easements • Height Easements • Rights of Way • Temporary Easements

23. Conservation Easements Common purposes or types of conservation easements are: • Farm land preservation • Habitat preservation • Recreation • Open space Common intended use of conservation easements include • A non cash contributions (IRS & State taxes) • Purchase by the Federal Government (this may include the use of Federal funds and may apply to other government entities) • Purchase by NGO’s (Non governmental organizations) • Purchase by government agencies which do not require a before and after valuation.

24. Purchase by the Federal Government These assignments typically require the appraisal meet the requirements set out in the Uniform Appraisal Standards for Federal Land Acquisitions (UASFLA) commonly referred to as the Yellow Book. Like your American Express Card don’t leave home without it!www.usdoj.gov/enrd/land-ack

25. Possible solutions to developing an opinion of value as encumbered. • Sales of properties encumbered by easements with similar characteristics. • Sales of properties which are not encumbered by easements but because of their physical characteristics have similar limitations. • Sales of properties which are unencumbered and sales of properties which are encumbered by similar easements which are located in other areas from which you can develop a relationship of the affect of the easement on value. • Development of a matrix where all the rights associated with ownership are identified and given some sort of a weighting. You then consider how the easement affects each of the rights.

26. Valuation of a 9,820 acre cattle ranch for a conservation easement The easement will: • Preclude division of the ranch • Allow only one home site but will allow worker housing and construction of improvements associated with the operation of the property as a cattle ranch • Require good management practices • Allows the holder of the easement the right to inspect the property to insure the conditions of the easement are being met, but does not require public access. • The easement will be purchased by an NGO with funding by the USF&WS. The client is the Appraisal Serviced Directorate (US Department of the Interior). The intended users are the ASD and the USF&WS. The intended use is for the USF&WS to provide funding for the acquisition of a conservation easement

27. Highest and Best Use E. Griffin & Associates

28. Since the intended users are Federal Agencies and the intended use is the a purchase of the property using Federal funds what requirements must the appraisal meet? The Uniform Appraisal Standards for Federal Land Acquisitions (UASFLA)

29. Relevant information The relevant property characteristics are the 9,820 acre ranch unencumbered and the same ranch as if encumbered by a conservation easement. Assignment conditions are that the property is to be appraised according to the requirements of the UASFLA. What is the likely highest and best use based on the information you have? What is the likely methodology based on the information given?

30. Suggested Solution Unencumbered sales $950 to $1,050 per acre subject is probably in the middle of the range 9,820 acres at $1,000 results in a value of $9,820,000 Sales of ranches which were encumbered by easements similar to the subject sold for $650 to $710 per acre. Likely value of the subject as encumbered would be more than $650 per acre some where between $675 and $710 per acres. At $700 per acre the value is $6,874,000 Value of the easement $2,946,000

31. Continued Is there any additional support ? Sales from another area indicate a loss in value of 32% to 38% for properties encumbered by similar easements. Applying the reduction of 32% to 38% to the value of the subject suggests a value for the easement of $3,142,400 to $3,731,600. Does this information provide any support to our value opinion? Is the fact the Open Space District is paying 45% to 50% of the unencumbered price for easements relevant to this assignment?

32. Non Cash Contribution • The same facts except: • The intended use is to establish the basis for a non cash contribution • The easement will be donated to an NGO. The client is the property owner • The intended users are the property owner and the IRS • The type of value is market value as defined by the IRS • The date of value is the date the property will be contributed.

33. Non Cash Contribution Continued • The relevant property characteristics are the same 9,820 acre cattle ranch which will be encumbered by the same conservation easement. Neither the owner nor any of his family members have any ownership interest in any other land in the area. • Assignment conditions are that the property is to be appraised according to IRS requirements. What is the likely methodology?

34. Internal Revenue Service Instructions for Form 8283 The FMV of a conservation easement cannot be determined by applying a standard percentage to the FMV of the underlying property. The best evidence of the FMV of an easement is the sales price of a comparable easement. If there are no comparable sales, the before and after method may be used.

35. Non Cash Contribution Continued Do we have sales similar easements? We have sales at 45% to 50% of the unencumbered price. Do you think these may qualify under 8283 and if so what is the value of the easement? The value at 45% is $4,419,000 and the value at 50% is $4,910,000. The value based on a before and after analysis is $2,946,000.

36. Underground Utility EasementsBefore and After Proposed utility easement partially within proposed road widening and partially within set back from the road. The easement is for water and sewer lines, no other uses are permitted. The easement holder will be the City. The easement allows the construction and use of the encumbered area for underground utilities. The easement also allows entry to maintain and or replace the utility lines. The area of the easement is 6,957 Square feet.

38. Approximate location of easement

39. Underground Utility EasementsBefore and After The proposed easement is within the minimum set back for the road and no structure are allowed in this area. The area can be used for landscaping and counts toward the minimum parcel size to meet any allowed uses. There is the possibility that the landscaping could be damaged or destroyed if the easement holders need to work on the utility lines. Is this a pretty common easement and is it likely to have a significant affect on value?

40. Underground Utility EasementsBefore and After Do you think sales will indicate a loss in value? What about marketing time? As an appraiser are you willing to state that the easement has no value or affect on the value of the property? Do you have any suggestions as to the how to value this easement?

41. Approximate property line Approximate location of easement Underground Utility Easements bisecting the property Before and After

42. Underground Utility EasementsBefore and After different location In the before condition the property can be divided into two buildable parcels. The proposed easement will pass through the building site for the second parcel. No structure are allowed in the area of the easement. The area can be used for landscaping or farming and counts toward the minimum parcel size to meet any allowed uses. There is the possibility that the easement holder could damage or destroy anything within the easement area if the easement holders need to work on the utility lines.

43. Underground Utility Easementsbisecting the property Do you think there is a loss in value? What methodology would you use? Do you have any suggestions as to the how to value this easement?

44. Abovegroundutilityeasements Before and after The assignment involves an easement for a high voltage transmission line passing though a transitional area. The easement will precluded any structure but allow other uses such as parking and landscaping. In the before condition the property has the potential for retail development. There are sales of other properties in the area with similar potential. How would you develop an opinion of the value of the easement?

45. Approximate location of transmission line Existing transmission line in developing area Can we use this area to develop an indication of the after value?

46. Approximate location of transmission line The same area in 1993 Can we use this area to develop an indication of the after value?

47. Easements which include the use of the surface of the encumbered area With these assignments we would look to sales of properties with similar limitations rare. We would want to consider: • What limitations are placed on the area encumbered by the easement? • Does the owner benefit in some way from the use of the encumbered area? • How does the easement affect the utility of the unencumbered portion of the property?

48. This is an actual proposed easement for a road extension and bridge

49. Approximate location of easement for a bridge The area to be acquired is nearly an acre and will cross an existing canal.

50. Easements which include the use of the surface of the encumbered area The easement is for a bridge which will cross a canal owned by the United States of America. • What is the large parcel? • What is the value of the property which will be encumbered by the easement? • Does this easement affect the value of the property which will be encumbered by the easement?