Table of Contents

A. Data Documentation and Appraisal Reporting Standards

Introduction

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
term market value does not alter its meaning for federal acquisition purposes.

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 acquisi-tion 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 tosubstitute 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 ameasure 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
extent that the prospect of demand for such use affects the market value while the property
is privately held." ¹²⁷

          "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
land is both physically adaptable for such use and that there is a need or demand for such use in the reasonably near future; physical adaptability alone is insufficient. ¹³³ "[O]bviously the more profitable operation must be allowed by law to be carried out on the premises." ¹³⁴(See Sections B-23, "Zoning and Permits" and D-6, "Zoning and Other Land Use Regulations.")

     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
by others than the government: ¹³⁸

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
are recognized as:

° Property rights conveyed
° Financing terms
° Conditions of sale
° Market conditions (historically referred to as a time or date of sale adjustment)
° Location
° Physical characteristics
° Economic characteristics
° Use and zoning
° Non-realty components of value included in the sale property ¹⁴⁷

     Accepting the truism that all three of the usual approaches to value are based on market data
interpretation, the federal courts recognize that the sales comparison approach is normally the
best evidence. Adjustments made to comparable sales are often developed by the use of techniques
from the income capitalization and cost approaches to value and, conversely, factors used in the income capitalization and cost approaches are often derived from comparative 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 Ð 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 throughly 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 extremelyprobative 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, tobe 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, that 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 (2 nd 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.
. . . . .

After reviewing the entire record, we are left with the definite and firm conviction that a mistake has been made. . . . [A]ppellees' experts made key assumptions in using the income capitalization which were unsupported by the record evidence and the commission appeared to rely on these assumptions. When a factfinder bases its findings on the opinion of an expert whose reasons are without support in the record, the reviewing court should reject as clearly erroneous the findings based on such testimony. ¹⁷⁷

     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 producetilde;— 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 conjuction 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 which justified the taking, and special benefits are those which arisefrom 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.
. . .
We think that special benefits are those which are direct and peculiar to the particular property distinguished from the incidental benefits enjoyed to a greater or lesser extent by the lands in the area of the improvement. A special benefit is nonetheless such because other lands in like situations are similarly benefitted.

          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 benefitted 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 benefitted. 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 andconvenience 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 which 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 navigationand 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 uponall 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 whichsuch 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).

(e) Add value of taking (a) + damages (d). ²⁶⁴

     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 istaken, 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 therefor and shall make a prompt offer to acquire theproperty 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 suchpayments 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, avigation, 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 ea