Table of Contents

A. Data Documentation and Appraisal Reporting Standards

Introduction

B. Legal Basis for Appraisal Standards for Federal Land Acquisitions

C. Standards for the Review of Appraisals

D. Standards for Unique and Miscellaneous Appraisal Problems

D-1. Comparison of USPAP and the Uniform Appraisal Standards for Federal Land Acquisitions.

D-1a. Introduction. Section A of these Standards notes that the Standards conform to Uniform Standards of Professional Appraisal Practice (USPAP), ³³⁹ but that, in certain instances, it has been necessary to invoke USPAP's Jurisdictional Exception Rule to conform these Standards to federal law relating to the valuation of real estate for government acquisition purposes. The intent of Section D-1 is to identify the areas of these Standards that deviate from USPAP under the Jurisdictional Exception Rule.

     USPAP's Jurisdictional Exception Rule simply provides that "[i]f any part of [the USPAP] standards is contrary to the law or public policy of any jurisdiction, only that part shall be void and of no force or effect in that jurisdiction." By way of explanation, the comment section of USPAP's Jurisdictional Exception Rule further provides: "By logical extension, there can be no violation of USPAP by an appraiser disregarding, with proper disclosure, only the part or parts of USPAP that are void and of no force and effect in a particular assignment by operation of legal authority." The comment also states, however, that "[i]t is misleading for an appraiser to disregard a part or parts of USPAP as void and of no force and effect in a particular assignment without identifying in the appraiser's report the part or parts disregarded and the legal authority justifying this action."

     As made clear below, the conflicts between these Standards and USPAP that require invocation of USPAP's Jurisdictional Exception Rule are minimal. Invocation of the Jurisdictional Rule should never be invoked lightly, or without reference to the overriding federal policy, rule, or regulation which requires it. USPAP is not a particularly restrictive document, but it and these Standards require full and prominent disclosure to avoid misleading intended users (or even casual readers) of the appraisal report.

     While these Standards are not themselves law, they are based on federal case law, legislation, and administrative rules. Also, these Standards have been specifically incorporated by reference into a number of statutes and regulations. ³⁴⁰ In particular, the regulations ³⁴¹ that implement the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970. ³⁴² It is clear that the deviations between these Standards and USPAP noted below fall under USPAP's Jurisdictional Exception Rule; the legal authority justifying these exceptions consists of these Standards and the federal case law, legislation, and federal regulations upon which these Standards are based.

D-1b. Linking Estimate of Value to Specific Exposure Time. Section A-9 of these Standards provides that the appraiser shall not link an estimate of market value for federal land acquisition purposes to a specific exposure time. This is contrary to USPAP Standards Rule 1-2 and Standards Rule 2-2, and is considered a jurisdictional exception. The legal basis and reasoning for this jurisdictional exception may be found in Section B-2 of these Standards.

D-1c. Consideration of Land Use Regulations and Anticipated Public Projects. Section A-12 of these Standards provides that the appraiser disregard any changes in a property's neighborhood brought about by the government's project. Section A-13h further instructs appraisers that they must disregard recent rezoning (or the probability of rezoning) of the property under appraisal if such action was the result of the government's project. Section B-10 of these Standards, "Enhancement or Diminution in Value Due to the Project," explains the legal basis for these instructions. These instructions are contrary to USPAP Standards Rule 1-3(a), which requires appraisers to identify and analyze the effect on use and value of existing land use regulations and probable modifications
thereof, and to Standards Rule 1-4(f) which requires appraisers to analyze the effect on value of anticipated public improvements located on or off site. Therefore, the instructions to appraisers in these Standards in this regard are considered jurisdictional exceptions.

D-1d. Review Functions. Section C-5 of these Standards notes that 49 C.F.R. 24.104 requires the reviewer to determine whether the appraisal under review constitutes an adequate basis for the establishment of an offer of just compensation. To do that, it may be necessary for the reviewer to consider information that was not available to the appraiser at the time the appraisal report was prepared. Standards Rule 3-1(c) of USPAP prohibits the reviewer from using information not available to the appraiser in development of an opinion as to the quality of the appraisal report under review. Review appraisers are cautioned that some may construe their consideration of such information in conducting their review and developing recommendations to management as contrary to Standards
Rule 3-1(c). Therefore, review appraisers may wish to invoke USPAP's Jurisdictional Exception Rule in this regard, depending upon the specific circumstances of the review.

     As noted in Section C-1 of these Standards, administrative reviews are not subject to USPAP and do not meet the requirements of 49 C.F.R. 24.104. In addition, Draft Appraisal Reports ³⁴³ are not subject to USPAP, even though they may be reviewed for general conformance therewith, as well as conformance with these Standards. However, a technical review report covering a draft appraisal report does fall under the purview of USPAP and these Standards. However, the review appraiser typically does not approve, recommend for approval, disapprove, accept, or reject a draft appraisal report.

D-1e. Conduct of Preliminary Value Estimates and Appraisals for Federal Land Exchanges. As noted in Section D-7 of these Standards, a preliminary value estimate prepared under 43 C.F.R. 2201.1(b) is not considered an appraisal even though it is to be prepared by a qualified appraiser. Therefore, the preparation of such preliminary value estimates are a jurisdictional exception to USPAP. It is noted that 36 C.F.R. 254.4(b) is silent on whether such a preliminary value estimate is considered an "appraisal" by the USFS.

D-1f. Specific Legislation and Regulations. Each land acquisition agency has its own policies, rules, and regulations relating to its land acquisition activities. While all of these rules and regulations work from a base of 49 C.F.R. Pt.24, as do these Standards, specific agency program activities sometimes make it necessary to adopt rules and regulations which are, or may be construed to be, contrary to USPAP. ³⁴⁴

     Also, it is not uncommon for Congress to enact specific legislation relating to the acquisition of a specific property or properties to be acquired for a specific public project. In some instances, adherence to the provisions of that specific legislation may require the appraiser to invoke USPAP's Jurisdictional Exception Rule and/or prepare an appraisal under a hypothetical condition or extraordinary assumption. ³⁴⁵ In such instances, it is the agency's responsibility to advise the appraiser of the special conditions under which the appraisal is to be conducted, of the specific law requiring the invocation of USPAP's Jurisdictional Exception Rule, and, if necessary, of the hypothetical condition or extraordinary assumption.

D-1g. Conclusion. Any time appraisers confront a potential conflict between USPAP and these Standards, or the client agency's appraiser instructions, they should always analyze the apparent conflict and avoid invocation of USPAP's Jurisdictional Exception Rule whenever possible. Often, these Standards or the agency's special appraisal instructions do not require a jurisdictional exception, but rather merely that the appraiser conduct an appraisal under a hypothetical condition or by adopting an extraordinary assumption. ³⁴⁶

     However, in making such an analysis, appraisers must be cognizant of the fact that The Appraisal Foundation does not enforce USPAP: the 50 state appraiser licensing/certification agencies enforce USAP standards. Therefore, interpretation of USPAP often varies among the jurisdictions; and states are not obligated to follow the Advisory Opinions of the Standards Board of the Foundation, because the 19 Advisory Opinions that have been issued to date do not establish new standards or interpret existing standards. Therefore, appraisers must implement the USPAP standards in a manner consistent with the interpretations thereof by the licensing/certification agency with enforcement responsibility in the jurisdiction where the property under appraisal is located. Appraisers are advised to bear in
mind that full disclosure is the essential element in preparing an appraisal report in conformance
with USPAP.

D-2. Federal Rules of Civil Procedure. If an appraiser will testify as an expert witness in a federal trial, the appraiser's report must not only conform to these Standards, but must also conform to the content requirements of Rule 26(a)(2)(B) of the Federal Rules of Civil Procedure, which provides as follows:

Except as otherwise stipulated or directed by the court, . . . disclosure shall, with respect to a witness who is retained or specially employed to provide expert testimony in the case or whose duties as an employee of the party regularly involve giving expert testimony, be accompanied by a written report prepared and signed by the witness. The report shall contain a complete statement of all opinions to be expressed and the basis and reasons therefor; the data or other information considered by the witness in forming the opinions; any exhibits to be used as a summary of or support for the opinions; the qualifications of the witness, including a list of all publications authored by the witness within the preceding ten years; the compensation to be paid for the study and testimony; and a listing of any other cases in which the witness has testified as an expert at trial or by deposition within the preceding four years.

     If an appraisal report is prepared in accordance with these Standards, it is anticipated that the report will be found to conform with Rule 26(a)(2)(B). However, most appraiser qualification resumes do not include the information required by Rule 26, specifically, a list of all publications authored within the preceding ten years, a listing of all trials or depositions in which the appraiser has testified within the preceding four years, and disclosure of the fee received by the appraiser for the appraisal assignment and the fee anticipated for testifying. Therefore, when the possibility exists that an appraisal report may be used for litigation purposes, appraisers must supplement their standard qualification resumes to insure that they meet these requirements. In addition, it is recommended that appraisers include such information in any report being prepared for federal land acquisition purposes.

D-3. Appraiser Instructions, Assumptions and Limiting Conditions. An appraiser cannot make an assumption or accept an instruction that is unreasonable or misleading, nor can an appraiser make an assumption that corrupts the validity of the value estimate ³⁴⁷ or alters the scope of work required by the appraiser's contract or assignment letter. For example, it is improper, unless specifically instructed otherwise, to estimate the market value of a property assuming it is free of contamination when there is evidence, by the past use of the property or by the appraiser's inspection thereof, that contamination may exist. ³⁴⁸

     "An extraordinary assumption ³⁴⁹ may be used in an assignment only if:

° it is required to properly develop credible opinions and conclusions;

° the appraiser has a reasonable basis for the extraordinary assumption;

° use of the extraordinary assumption results in a credible analysis; and

° the appraiser complies with the disclosure requirements set forth in USPAP for extraordinary assumptions." ³⁵⁰

"A hypothetical condition ³⁵¹ may be used in an assignment only if:

° use of the hypothetical condition is clearly required for legal purposes, for purposes of
reasonable analysis, or for purposes of comparison;

° use of the hypothetical condition results in a credible analysis; and

° the appraiser complies with the disclosure requirements set for in USPAP for hypothetical conditions." ³⁵²

     In light of the foregoing, it is also improper for an appraiser to classify conclusions reached after investigation and analysis as assumptions (e.g., an appraiser can, after proper investigation and analysis, conclude that a probability of rezoning for the property under appraisal exists, but it would be improper to assume such a probability).

     Circumstances arise when agencies or their legal counsel need to provide some instruction
to the appraiser. Agency instructions and/or legal instructions must have a sound foundation, must be in writing and must be included in the appraisal report. ³⁵³ "Instructions by an attorney to the appraiser on a matter of law are certainly a proper element to be expressed in the attorney-appraiser relationship, but instructions to the appraiser on valuation are another matter. The appraiser has the choice of accepting or rejecting the attorney's [valuation] premise. Once accepted without reservation, the premise becomes the appraiser's responsibility." ³⁵⁴ "Opinions expressed by an attorney that are not valid and are without foundation should be disregarded by an appraiser." ³⁵⁵

Once received by the appraiser, written legal instructions that have a proper foundation must be accepted by the appraiser. Any written legal instruction received by the appraiser must be included in the appraisal report.

D-4. Appraiser's Use of Consultant's Reports. Appraisers are increasingly forced to rely on consultants' reports on technical issues. ³⁵⁶ However, the appraiser cannot merely accept such consultant reports as accurate, ³⁵⁷ but rather must review such reports and adopt them only if reasonable and adequately documented and supported. The results of secondary valuation reports, such as mineral, fixture, or timber valuations, cannot simply be added to the value of the land to arrive at a value of the property as a whole without proper analysis by the appraiser. To do so is a violation of the unit rule ³⁵⁸ and professional standards. ³⁵⁹ The appraiser must consider these components of the property in light of how they contribute to the market value of the property as a whole.

     If a consultant's services are used to assist an appraiser in estimating a cost to cure damage amount in a partial acquisition, the appraiser must review and analyze the cost estimate with great care. It must be remembered that a cost to cure method of estimating a diminution in value is only valid when the cost to cure is less than the diminution in value if the cure is not undertaken. Even though a cost to cure method of estimating the diminution of value may be appropriate, it must be remembered that the remainder property is still to be valued in its uncured condition. Therefore, it is important that any cost to cure estimate of damage include not only the direct costs of the cure, but also the indirect cost, any effects of delay, and if appropriate, an entrepreneurial profit factor. "[T]o give no consideration whatsoever to entrepreneurial profit when estimating an appropriate cost to cure adjustment is ludicrous." ³⁶⁰

D-5. Legal Description of the Property. It is essential that the appraiser obtain an accurate legal description of the property to be appraised. The appraiser should receive an accurate legal description with the appraisal assignment. If the assignment involves a partial acquisition, the appraiser should receive both a legal description of the whole property and a legal description of the remainder property, or alternatively, a legal description of the area to be acquired and/or encumbered. If for any reason that is not done, the appraiser is responsible for obtaining an accurate legal description of the property to be appraised and the property remaining (or to be acquired) before endeavoring to conduct the appraisal. ³⁶¹

     The appraiser should verify the legal description both on the ground as the physical inspection of the property is made; with the owner of the property, if possible; and by comparing it with city or county maps, aerial maps, as available in county or other governmental offices; and with records available in the recorder's, auditor's, assessor's, tax collector's, or other appropriate city or county offices. If an error of significant importance is discovered, the appraiser should consult the agency from which the appraisal assignment was received before proceeding with the appraisal. If a minor error is discovered which is believed will not affect the completion of the assignment, the appraiser should make a note of explanation in the appraisal report, making reference to it in the legal description given in the assignment.

     It must be determined whether the property interest to be appraised constitutes the fee simple estate, an easement, leasehold or other property right. Easements, mineral rights, rights of way, or any exception to the estate being acquired which limits the use of the property or grants certain uses to others, should be carefully ascertained. In the case of a partial acquisition the agency should provide a written description of the estate to be acquired to the appraiser.

D-6. Zoning and Other Land Use Regulations. Zoning is a factor to be considered in evaluating property. Accordingly, if the property to be appraised is in a zoned area, recite the restrictions in the appraisal report and interpret the impact of such restrictions on the utility and value of the subject property. In selecting comparable sales for use in the appraisal, the appraiser should select those sales that have the same or similar zoning as the property being appraised.

     The appraiser must not only consider the use restrictions of the zoning ordinance, but also other provisions of the zoning ordinance that may affect value. These additional provisions might include lot area requirements, building setback requirements, floor/area ratios, lot coverage ratios, off-street parking, landscaping requirements, height limitations, treatment of preexisting, nonconforming uses, and treatment of nonconforming uses that became nonconforming after adoption of the zoning ordinance. If the appraisal involves a partial acquisition, the appraiser must consider the effect of the zoning provisions on both the whole property and the remainder property.

     Special care must be taken to determine the effect of a zoning ordinance on a remainder property that has been converted to a nonconforming use by the government's partial acquisition. Some ordinances contain no mechanism for converting a property that has become nonconforming after adoption of the zoning ordinance into a conforming property or classifying it as a preexisting nonconforming use. Under such circumstances, penalties for nonconformity can be severe. Other ordinances have specific provisions that deal with properties that have become nonconforming by reason of a partial acquisition by a governmental agency.

     The appraiser has an obligation to consider not only the effect of existing land use regulations, but also the effect of reasonably probable modifications of such land use regulations, ³⁶² such as what impact on value any probability of a rezoning of the property being appraised might have. Although an appraiser might conclude that a property could be put to a higher and better use if it were zoned differently, this does not in itself suggest that a probability of rezoning exists.

     If an appraiser concludes that a property has a highest and best use that is physically and economically contrary to existing zoning, an investigation of the probability of obtaining such a rezoning shall be undertaken. Areas of enquiry should include the following:

° interviews of zoning administrators;

° interviews of members of the legislative body that make final zoning determinations;

° a review of all rezoning activity of nearby property, both approvals and denials;

° a review of land use patterns in the neighborhood and recent changes, if any in such patterns;

° a review of the physical characteristics of the subject and nearby properties;

° a review of neighborhood growth patterns;

° investigation of neighborhood attitudes concerning rezones;

° a review of the provisions of land use planning documents;

° a determination of the age of the zoning ordinance;

° analysis of sales of similar property to determine whether the sale prices reflect anticipated rezoning.

     If an appraiser concludes a highest and best use that will require a rezoning of the property under appraisal, the appraisal report shall include a description of the investigation undertaken by the appraiser to determine that a probability of rezoning exists, the appraiser's analysis of the information gathered, and the factual support for the appraiser's conclusion.

     Under no circumstances can a property be valued as if it were already rezoned for a higher use. The property must be valued only in light of the probability of obtaining a rezoning. Risk of being denied a rezoning, or that an exaction or other condition may be placed on the rezoning, always exists. The time delay and costs associated with the rezoning process must also be considered.

     If the probability of a rezoning is impacted, either positively or negatively, by the government project for which the property under appraisal is being acquired, such impact must be disregarded. ³⁶³ In the case of a partial acquisition, the probability of a rezoning must be reanalyzed in regard to the remainder property. If the probability of a rezoning for the remainder property is increased, a special benefit may exist; ³⁶⁴ if such probability has been diminished, a severance damage may have occurred. ³⁶⁵

     In addition to zoning, the appraiser must consider the impact of other land use regulations on the utility and value of the property being appraised. These land use regulations may be of local, state, regional or national origin. Land use regulations, in addition to zoning, which may have an impact on property value include, among others:

Building codes	Health codes regulations	Environmental impact statement
Shorelines management      requirements	Flood plain management      regulations	Subdivision regulations
Mining regulations	Comprehensive land use      planning documents	Timber harvesting regulations
Noise pollution controls	Air pollution controls	Water pollution controls
Hazardous/toxic waste controls	Open space requirements	Coastal zone management
Wetland regulations	Endangered species      protection	Development moratoria

     When an acquiring agency has identified special or unique land use regulations that may affect the value of a property, the agency should advise the appraiser of such potential at the time of the appraisal assignment.

D-7. Special Considerations in Appraisals for Federal Land Exchanges. Federal land exchanges contrast from other federal land acquisitions in that an exchange must always be voluntary and therefore, the parties must reach agreement on the value of the properties. In direct acquisitions, the government always has the authority to force an owner to transfer his or her land by the exercise of its power of eminent domain, as long as the government's use of the land will be for a public purpose and the government pays the owner just compensation for the land. However, the government does not have the authority to force individuals to convey their lands and accept federal lands as compensation therefor. Likewise, the government "is not required to exchange any Federal lands. Land exchanges are discretionary, voluntary real estate transactions between the Federal and non-Federal parties." ³⁶⁶ This does not mean, however, that such transactions are exempt from litigation relating to the valuation of the property involved and/or the adequacy of the appraisal report upon which the transaction was based. ³⁶⁷

     Most federal land exchanges are accomplished pursuant to the Federal Land Policy and Management Act of 1976 (FLPMA), as amended (43 U.S.C. 1701 et seq.). ³⁶⁸ The two agencies most actively involved in federal land exchanges are the U.S. Forest Service (USFS), with an average of 115 exchanges per year for fiscal years 1989-1999, and the Bureau of Land Management (BLM), with an average of 238 exchange transactions ³⁶⁹ per year over the same time period. Both the USFS and the BLM have adopted regulations that implement FLPMA and control their land exchange activities. ³⁷⁰ USFS and BLM regulations are similar and both require some modifications of these Standards. These regulations define appraisal, highest and best use, and market value, ³⁷¹ and appraisers must use these definitions when conducting appraisals for federal land exchanges.

     Exchanges can be proposed by the USFS, BLM, or by any person, state, or local government. "To assess the feasibility of an exchange proposal, the prospective parties may agree to obtain a preliminary estimate of the values of the lands involved in the proposal. The preliminary estimate is generally not an appraisal but shall be prepared by a qualified appraiser." ³⁷² Such a preliminary estimate does not fall under these Standards and is also a jurisdictional exception to USPAP. ³⁷³ The requirements for classification as a qualified appraiser under these exchange regulations are essentially the same as those for a contract appraiser under 49 C.F.R. 24.103(d)(2) and these Standards, as described in Section D-15. ³⁷⁴

     One of the initial steps in an exchange involving federal lands is the formulation of an agreement to initiate an exchange (ATI). ³⁷⁵ In that ATI, which does not legally bind any party to proceed with processing or to consummate the exchange, ³⁷⁶ the lands proposed to be exchanged are specifically delineated, the estates to be conveyed are identified, and an assignment of responsibility between the parties for performance of required functions and the costs associated with processing the exchange (including the costs of necessary appraisals) is made.

     An appraiser may be selected and retained by either party to the proposed exchange, as long as the appraiser is qualified. However, irrespective of which party retains the appraiser, the appraisal report must reference and be prepared according to the applicable regulations and, to the extent appropriate, these Standards. ³⁷⁷ All appraisal reports prepared for federal exchanges are subject to review by federal agency review appraisers. ³⁷⁸ Therefore, appraisers conducting appraisals for federal exchange purposes have a professional responsibility to recognize that both the federal agency and the private land owner are intended users of the appraisal report and to identify them as such in the appraisal report. ³⁷⁹

     If an appraiser is retained by a private party to prepare an appraisal for federal land exchange purposes and the client issues an instruction to the appraiser to make an extraordinary assumption or to adopt a hypothetical condition in the conduct of the appraisal which would conflict with the exchange regulations, or these Standards, the appraiser must advise the client of the conflict. If the client insists that the appraiser make the assumption or adopt the condition in conducting the appraisal, the appraiser may make the appraisal, but must clearly identify the assumption and/or condition in the appraisal report and also report that the value estimate has not been prepared in accordance with the exchange regulations and/or these Standards, so as to insure that the intended users of the report are not misled.

     The major technical difference between appraisals prepared for federal land exchange purposes and those typically prepared under these Standards relates to the appraisal of multiple tracts and the appraiser's determination of the larger parcel. ³⁸⁰ In the typical acquisition appraisal, the appraiser will apply the tests of unity of ownership, of unity of highest and best use, and of contiguity or proximity as it bears on unity of use in determining the larger parcel. However, for purposes of an exchange appraisal the tracts to be appraised are defined in the property description contained in the agreement to initiate an exchange. Even if the property described in the ATI is part of a larger contiguous ownership that clearly has a unitary use, the lands outside of the property described in the ATI should not be considered by the appraiser in either larger parcel determination or in reaching a conclusion of highest and best use.

     If an appraiser concludes that the property described in the ATI constitutes two or more separate larger parcels, the method of valuation is generally fact dependent and, in most cases, will be controlled by the provisions of the ATI. In some instances, the appraiser may be instructed to value the different larger parcels as separate entities, while under other circumstances the appraiser may be instructed to value the larger parcels only as they contribute to the whole, as if the property described in the ATI would be sold from one seller to one buyer in one transaction. ³⁸¹ If those instructions are contrary to the appraiser's highest and best use or larger parcel conclusion, it may be necessary for the appraiser to identify the instruction as an extraordinary assumption, or hypothetical condition, under USPAP. It is important, however, for the appraiser to recognize that the same method of valuation must be utilized for both the federal and non-federal lands. ³⁸²

     The regulations also provide for special treatment of the larger parcel issue in assembled land exchanges. ³⁸³ This term is defined differently in the USFS and BLM regulations ³⁸⁴ and, for that reason, assembled land exchanges may be administered differently by these agencies. Again, depending on the provisions of the ATI, the value of the various parcels may be estimated as independent parcels, or as a single tract to be sold in a single transaction.

     Because of the complexity of appraising multiple tracts of land for exchange purposes, and the fact that their treatment is often fact specific, it is essential that agencies provide clear written instructions to the appraiser in this regard, and that the appraiser insist upon such instructions, at the initiation of the appraisal assignment.

     The technical treatment of the larger parcel, as it relates to federal exchanges, is discussed under various scenarios on pages 2-37 - 2-45 and APPB-23 - APPB-32 of the Appraisal Institute's and American Society of Farm Managers and Rural Appraisers' Seminar Handbook for "Federal Land Exchanges and Acquisitions: Appraisal Issues and Applications."

D-8. Special Considerations in Appraisals for Inverse Condemnation Claims. The one major difference between a direct condemnation and an inverse condemnation claim is the question of government liability. In a direct condemnation the government purposely acquires a property or an interest in property, and by filing a direct condemnation case, acknowledges the actual or proposed acquisition of the property and the government's obligation to pay for it. In the inverse condemnation case, the government's legal position is that its actions do not constitute the taking of property or a property interest, requiring the payment of just compensation under the Constitution. If the government purposely exercises its power of eminent domain, it institutes formal condemnation proceedings because it is prohibited from "intentionally mak[ing] it necessary for the owner to institute legal proceedings to prove the fact of the taking of the real property." ³⁸⁵

     Therefore, in an inverse condemnation action, the first area of enquiry is whether the government's action constituted a taking of property that requires compensation. From a technical standpoint, the answer to that question is of no direct concern to the appraiser. ³⁸⁶ Nevertheless, the appraiser may be asked to provide valuation services which will be used by government's legal counsel in the liability phase of the litigation. If the government's action resulted in the government's permanent physical occupation of the land in question, the liability issue is a rather straightforward one. ³⁸⁷ However, in the context of a taking by regulation, the federal courts have developed various tests to determine whether a taking has occurred: the character of the government action; the extent to which the regulation interferes with distinct, investment-backed expectations; and the economic impact of the regulation. ³⁸⁸

     The economic impact test above involves the valuation of the property in question before and after the government's action. ³⁸⁹ When conducting such an analysis, the appraiser's application of the larger parcel tests may vary from those applied in the direct acquisition or condemnation ³⁹⁰ because of the investment-backed expectations test noted above. Investment-backed expectations are typically considered as of the date upon which the owner acquired the property and in the regulatory environment that existed at that time. But, on the date of the alleged taking, the owner may have sold portions of the property previously acquired. For the court to accurately assess the economic impact of the regulation, it must know how the regulation impacted the owner's reasonable investment-back expectations. ³⁹¹ For that reason, it may be necessary for the appraiser to disregard the unity of title test of the larger parcel and to value the entirety of the tract that was originally acquired. Because the tests applied by the courts to determine the question of liability (i.e.,
whether a compensable taking has occurred) are quite complex, it is essential for the appraiser to confirm with legal counsel the appropriateness of the larger parcel determination before proceeding with the appraisal assignment.

     In providing appraisal services to the government in connection with the liability phase of an inverse condemnation action, it is imperative for both the appraiser and the trial attorney to completely understand what it is the appraiser's valuations are intended to measure. For that reason, continual contact and conferencing between the appraiser and trial counsel throughout the development of the appraisal is essential. Government's trial counsel must determine what is to be measured, while the appraiser determines how to measure it.

     If the court finds that a compensable taking has occurred, the appraiser's function generally is to estimate the market value of the affected property before and after the taking, as of the date of the taking, which should be provided to the appraiser by legal counsel. In this valuation phase of the inverse condemnation litigation, the appraiser will generally utilize the same larger parcel tests that are applied in direct acquisitions or condemnations. In other words, the larger parcel used in the liability phase of the trial may be different than the larger parcel used in the valuation phase of the trial. Inverse condemnation actions relating to temporary takings are discussed in Section D-10 of these Standards.

D-9. Comparable Sales Requiring Extraordinary Verification and Treatment. As has been previously noted in these Standards, ³⁹² the federal courts have traditionally held that, in general, sales to a governmental entity were inadmissible, but the recent trend has been to admit them with the view that such evidence goes to its weight, not its admissibility. The following discussion, however, relates not to the admissibility of such evidence, but to the question of whether sales to the government should be used by appraisers in conducting appraisals for federal land acquisition purposes and, if so, the degree of weight placed on those sales by appraisers.

     As has been noted, "government is a different type of player, not constrained to follow market economic rules;" ³⁹³ thus, sales to the government should be immediately viewed by appraisers as suspect. When appraisals for federal land acquisitions are conducted, sales to the government should not be used as comparable sales unless there is such a paucity of private market data as to make a reliable estimate of market value impossible without the use of government purchases. However, the types of transactions conducted and lands acquired by governments are often unique. For instance, in the acquisition of lands for conservation or preservation, the acquired lands are often located in remote areas, are of extraordinary size, have little economic utility or value, and are located in areas of little market activity. To develop a reliable and supportable estimate of market value in these situations, appraisers may be forced to consider sales to the government in the sales comparison approach to value.

     However, in situations when an appraiser is forced to consider sales to the government as comparables, there are certain steps that the appraiser must take before a sale to the government can be qualified as a valid comparable sale. Comprehensive and documented verification of government transactions is essential, and "[a] ppraisers have a special responsibility to scrutinize the comparability of all data used in a valuation assignment. They must fully understand the concept of comparability and should avoid comparing properties with different highest and best uses, limiting their search for comparables, or selecting inappropriate factors for comparison." ³⁹⁴ "When nonmarket conditions of sale are detected in a transaction, the sale can be used as a comparable but only with great care. The circumstances of the sale must be thoroughly researched before an adjustment is made, and the conditions must be adequately disclosed in the appraisal." ³⁹⁵

     The type and amount of information available to an appraiser about a sale to the government will vary, depending on the acquiring agency's land acquisition documentation requirements. Small governmental entities, such as local service districts, may make some of their land acquisitions without written appraisals, appraisal reviews, or written records of negotiations. State and federal agencies, on the other hand, usually make their acquisitions in accordance with the Uniform Relocation Assistance and Real Property Acquisition Policies Act (or comparable state statutes), which requires extensive documentation of land acquisitions, including formal documented appraisals, written appraisal reviews, and written records of the negotiating process.

     The availability of sales documentation for appraiser inspection and analysis will also vary from agency to agency, depending on the agency's public disclosure policy and the applicable laws on access to government documents. The following is written under the presumption that the sales to be verified by the appraiser have been fully documented and that all documentation is available for the appraiser's inspection. It is recognized that in many instances, this will not be the case. However, when documentation is not available for the appraiser's inspection, the appraiser should report such fact and the impact of such unavailability on the reliablity of the transaction as a valid comparable sale.

     First, the appraiser should review the legislation which authorized and/or mandated the government's acquisition. By this review, the appraiser should verify that the legislation provided that the property would be acquired at market value. Legislation that mandates acquisition at a price other than market value, or provides for acquisition at a price unaffected by particular market forces (e.g., disregard of the influence of the Endangered Species Act), may not result in a valid comparable sale representative of market value. Likewise, legislation that allows the acquiring agency to deviate from the market value measure if it finds it in the public interest to do so will often not result in a price representative of market value. The appraiser should next contact the acquiring agency and ask to
inspect the appraisal upon which the acquisition was based, the agency review of that appraisal, the negotiator's report (or file) in conjunction with the acquisition, and the agency's acquisition file.

Examination of the agency's appraisal, should include:

° Determination that the government's acquisition was a total acquisition of the landowner's property, as opposed to a partial acquisition wherein the acquisition cost may be a measure of the difference between the value of the whole property before and after the government's acquisition, or a measure of the value of the parcel acquired plus damages to the remainder parcel, rather than an indication of the value of the property acquired.

° Determination that the sale was for the fee simple interest in the property, or an interest similar to the interest being appraised. Sales that are for something less than that the fee simple interest in an entire property (e.g., partial acquisitions, easement acquisitions) may not be valid comparable sales.

° A review of the appraiser's estimate of highest and best use. The highest and best use upon which the value estimate was estimated must be an economic highest and best use. That highest and best use must be the same as, or highly similar to, the highest and best use of the property under appraisal before the government acquisition can be considered a reliable comparable sale. A value estimate based on a highest and best use of sale to the government, conservation, or any use that contemplates taking the property out of economic productivity in perpetuity is not a valid highest and best use upon which to estimate market value.

° A review of the appraiser's final estimate of value. Determine whether the price paid for the property was equivalent to its appraised value. If not, determine whether the price paid was within the range of values indicated by the appraiser's comparable sales in the sales comparison approach and/or whether the price paid was within the range of the indicated value of the property by the different approaches to value developed by the appraiser.

° A review of the sales used by the government's appraiser in estimating value. If the sales relied on by the appraiser were substantially influenced by non-market factors (e.g., political pressure), they would be invalid indicators of market value, thus any value conclusion reached based on such sales may, likewise, be invalid.

° A review of any breakdown of value that the appraiser may have included in the appraisal report, such as different unit values for different land types included in the sale property, or the contributory value of improvements.

     A review of the agency's appraisal review should next be undertaken, with particular note being made of any technical or factual errors reported by the review appraiser. A review of the negotiator's report and the agency's acquisition file regarding the process of negotiation between the agency and the property owner should also be conducted. Any suggestion that the property would be condemned if agreement cannot be reached should be noted. Likewise, any indication that the property owner has accepted the price paid with the understanding that the agency will support (or, at least not oppose) the property owner's attempt to take a tax write-off for a donation for some amount in excess of the actual price paid should be noted. Either of these circumstances may suggest a price below market value. Any suggestion that a property owner may have threatened to damage the property for the government's intended use (e.g., cutting the timber from land slated for acquisition as a park) if the owner's asking price was not paid can result in a price in excess of market value. Sales involving the exchange of property are generally unreliable for use as comparable sales. ³⁹⁶

     A determination should be made whether the property owner or the owner's representative submitted an appraisal or any meaningful market data to the agency that may have supported a value higher than the government's appraisal and the agency's subsequent determination to pay more than its appraisal. If so, the submitted material should be reviewed and analyzed.

     A reading should be conducted of any correspondence from the property owner's political representatives, and the agency's response thereto, to determine whether there may have been undue non-market pressure to consummate a sale at something other than market value. A reading should also be conducted of any newspaper clippings that may be in the file, to determine whether there was an undue amount of public pressure on the agency or the property owner to consummate a quick sale. Such public pressure can result in a price that is above or below the market value of the property.

     A reading of the conveyance and closing documents will reveal the exact estate conveyed to the government. It should be confirmed that the estate conveyed is the same estate that was appraised by the government's appraiser. Care should be taken here because, during negotiations, some agencies have a practice of allowing the property owner to retain some rights in the property after acquisition not contemplated by the government's appraiser (e.g., a life estate in the property, or an estate for years, at zero or nominal rent, the right to continue to grow crops on the land, or use it for grazing, or, in some instances a physical reduction in the land area acquired).

     If the estate acquired was only an easement, the sale is not a valid comparable either as an indication of fee simple value, or of the value of an easement. If only an easement is being acquired from the property under appraisal, the measure of value should not be based on the price paid for similar easements, but rather upon the usual before and after appraisal method. ³⁹⁷

     A reading and analysis should be undertaken of any documents produced by the agency or others, in an attempt to justify payment in excess of the approved appraisal. Legitimate reasons that a price in excess of an agency's approved appraisal may still represent a valid indication of market value might include:

° The appraisal is outdated in a rapidly appreciating market.

° The proposed price remains within the range of values indicated by the comparables developed by the appraiser.

° The proposed price remains within the range of values indicated by the different approaches to value developed by the appraiser.

° Factual information about the property, the appraisal, or the comparables used by the appraiser, came to light after the appraisal and review that revealed errors in the appraisal that could be mechanically corrected.

     Legitimate reasons that a government entity could justify a price in excess of its approved appraisal, but would eliminate the transaction as a valid comparable sale, at least without adjustment, might include:

° The price in excess of market value is warranted due to costs and risks inherent in a condemnation trial.

° The threat of imminent destruction of the property for the government's intended use existed.

° The cost of project delay caused by the failure to acquire the property offsets the price paid in excess of its market value.

° The administrator of the public agency found it to be in the public interest to pay in excess of market value.

° The price in excess of market value is justified because the tract being acquired is a key tract, or the last tract to be acquired, for the government's project.

° The economy of land management of a consolidated ownership by the government
outweighs the price in excess of market value paid for the tract.

     Once the forgoing investigation and analysis have been completed, the appraiser should personally verify the sale with the purchaser and the seller, or their representatives. In conducting this verification, the appraiser should clear up any questions that may have arisen as a result of earlier research. It is recognized that an agency's appraisal does not represent the only reasonable estimate of market value, but if the government paid more for the property than its approved appraisal, the appraiser should determine the justification used by the government to do so and whether such justification was based on valid market considerations or whether the justification was non-market related and, therefore, invalidates the price paid as an indication of market value.

     In this same context, there is another category of sales that needs careful verification if the sales are going to be used as comparables. Occasionally, a government project will be created and acquisition will be authorized, but adequate funds for the entire acquisition project will not be appropriated. When the government project involves conservation/preservation lands, environmental organizations will sometimes acquire lands within the project area for the sole purpose of transferring those lands, often at the organization's cost, to the government when funding becomes available. Sales to environmental organizations under such circumstances, like direct sales to the government, are suspect as reliable comparable sales, because the purchaser's motivation was not economically driven by typical market forces.

Sales made under such circumstances may well be project-influenced. ³⁹⁸ At times these environmental organizations are working so closely with the government agency administering the project ³⁹⁹ that, from a practical standpoint (although not from a legal one), they essentially become an agent for the government. Also, the sellers of such land have been known to take (or attempt to take) a tax write-off for a contribution to the environmental organization and claim a value of the property sold in excess of the actual selling price. Because of these complications, appraisers should avoid using such sales as comparables. If a paucity of market data in the private market makes their use necessary, extreme care must be taken in the verification of such sales. The appraiser should determine whether the sale was based on a competent appraisal that estimated the market value of the property for its economic highest and best use, whether there were any tax-write offs taken, and whether the purchase was impacted by the pendency of the government's project. If the purchase price was not based on the market value of the property for its economic highest and best use, the sale will normally have to be discarded as a comparable. The same is true if tax write-offs were involved or if project influence was present, although it is sometimes possible to make adjustments to the sale for these factors. If, subsequent to the sale, the property has been transferred by the environmental group to the government, the fact and circumstances of the transfer must be reported.

     A third category of sales that must be verified and treated with great care consists of those sales used in the appraisal of a property that has a highest and best use for some form of development that will require the procurement of rezoning or a land use permit. Sales of such property in the private market will generally take the form of initial options or contingency sales, the contingency being the purchaser's ability to procure the necessary rezoning or permitting to develop the property to its highest and best use. If the rezoning or permitting is denied, the contingency is not met and the sale does not close. Or, if an option is used and rezoning and/or permitting is not available, the option is not exercised. Therefore, when consummated, such sales do not represent the price at which a property would have sold if a purchaser had to procure a rezoning or permits after the date of closing. Instead, such sales represent the price of a property with zoning or permitting for development to its highest and best use in place. All of the risks, time delays, and costs associated with a rezoning or permitting have been removed from the transaction.

     Therefore, such sales are typically not comparable to the property being appraised for federal acquisition purposes. Generally, properties under appraisal for government acquisition purposes that have a highest and best use requiring a rezone and/or permits to be developed to their highest and best use do not have the zoning or permitting in place. Thus, on the theoretical date of the sale's closing (i.e., the effective date of valuation), the purchaser must assume the risks, time delay, and costs of procuring the rezone and/or permitting. Properties seldom sell in such a condition in the private market; thus, there are few truly comparable sales available for the appraiser's use in developing a value for the property under appraisal by the sales comparison approach.

     Given this fact, appraisers must often resort to using sales which already have, on the date of consummation, their needed zoning/permitting in place. Under these circumstances, it is essential that the appraiser adjust the sales to reflect the differences in the regulatory environments of both the sales at the time of closing and the property under appraisal as of the effective date of the appraisal. Such adjustments must account for the risks inherent in the procurement of a rezoning or permitting, including the possibility that the regulatory agency may deny such a request, or place conditions on it. ⁴⁰⁰ The time delays encountered in procurement of the rezoning and/or permitting and the costs associated with their procurement must also be considered. In certain circumstances, a purchaser may require an entrepreneurial profit in addition to an adjustment for risk.

     Appraisers cannot merely assume that such a rezoning/permit is in place for the property under appraisal, or assume that such a rezone/permit will be granted. They must appraise the property only in light of the probability of the obtaining the rezone/permit. If appraisers use sales of properties with zoning/permitting in place at the time of sale, they must explain in the sales comparison approach to value how they accounted for the regulatory environmental differences between these sales and the subject property and how they quantified the adjustment(s) for this factor, based as much as possible on market evidence.

D-10. Temporary Acquisitions. There are generally three situations in which the government's acquisition may be temporary: temporary construction easements (TCEs), temporary acquisitions by inverse condemnations, and leasehold acquisitions. This last category of acquisitions will be discussed in a separate section of these Standards. ⁴⁰¹ Temporary construction easements and temporary inverse condemnation acquisitions will be discussed separately below because of their uniquely different characteristics.

     A temporary construction easement is generally acquired in conjunction with a permanent acquisition and often abuts the boundaries of the permanent acquisition. The permanent acquisition area is used for permanent placement of the public improvement, whereas the TCE is used in addition to the permanent acquisition area for initial construction of the public improvement. After initial construction of the public improvement is completed, the construction easement expires and the unencumbered fee interest in the land reverts back to the owner. Another form of temporary easement sometimes acquired is an easement for a right of entry onto the land for purposes of surveying, inspection, and/or testing for contamination. These rights of entry are generally very short term in nature and are treated in the same manner as TCEs. ⁴⁰²

     Damages that result from TCEs are usually based on the economic or market rent of the affected area for the term of the temporary easement. Usually, the land area affected is so small and the term of the easement so short that compensation for the TCE is nominal. As a result, many agencies and appraisers have adopted a shortcut for its estimation. A reasonable return rate, rather than the economic or market rent based on comparable rentals, is estimated and applied to the encumbered land's fee value for the term of the easement. The rent loss or appropriate return is often not converted to a present value through the application of a discount rate because of the short term of the easement and the nominal nature of the indicated rent loss.

     Even though technically incorrect, as discussed below, this short cut is generally acceptable to agencies because of the nominal nature of the TCE acquisition and the cost/time savings associated with the short cut. However, appraisers must recognize that the short cut methodology will be found unacceptable under these Standards if the indicated compensation is more than nominal. When the indicated compensation for the acquisition of a TCE is more than nominal, the appraiser must use proper appraisal methodology to develop the present value of the rent loss. This will entail the use and presentation of properly documented comparable rentals, and the discounting of the lost rental income stream into a present value.

     The appraiser must also consider whether the existence of a temporary construction easement will restrict the property owner from using the unencumbered portion of the land for its highest and best use during the easement's term. Often an appropriate method to estimate the proper adjustment to reflect the diminution in the land's value by reason of the temporary easement is to apply the rent loss to all lands so affected. (If the property can be rented for a lesser use during the term of the TCE, the measure of damage is usually measured by the rent differential between the before and after situations.)

     Appraisers must remember that the loss in value caused by a TCE acquisition is not an independent acquisition, and the compensation for it cannot be added to the indicated diminution in value by reason of the associated permanent acquisition. The rent loss associated with a TCE should be used as the basis for an adjustment to the remainder property's after value, not as something to be added to the difference between the before and after value of the property.

     What generally makes temporary acquisitions by inverse condemnation uniquely different from the acquisition of a TCE is the amount of indicated compensation. An inverse condemnation acquisition usually involves whole ownerships, rather than a small geographical portion of the ownership, and the term of the alleged inverse taking is generally of a substantially longer period of time than the duration of a TCE. For that reason, greater care must be employed by the appraiser in estimating the value of such properties. Legal counsel will generally provide the appraiser with the effective date of the appraisal and the duration and extent of the alleged taking.

     Temporary acquisitions by inverse condemnation may be by either physical invasion of the property by the government (or an agent of the government) ⁴⁰³ or by regulation. ⁴⁰⁴. The measure of value in a temporary inverse case is the same as in the acquisition of a TCE, that is, the rental value of the land taken for the term of the taking. The substitution of a return on the fee value of the land for an estimate of the rental value of the land is not generally an accepted alternative. ⁴⁰⁵

     In a regulatory taking situation, it is possible that the regulation temporarily precludes the use of the land for its highest and best use, but that secondary uses of the property remain available to the property owner. In such a case, a before and after estimate of the economic or market rent is estimated to determine the difference in the rent which could have been commanded by the property during the inverse taking period. The before rent is the market or economic rent of the property for its highest and best use for the duration of the taking, and the after rent is the market, or economic rent of the property for its secondary, but allowable, use during the taking period. In estimating the potential use of the property during the taking period, appraisers must take into account the limited duration of the period of use. ⁴⁰⁶

     Because inverse condemnation cases, either permanent or temporary, are very fact specific, it is essential that the appraiser work very closely with the DOJ attorney assigned to the case. Both appraiser and attorney must understand the precise question that must be addressed by the appraiser and the acceptable methodology to be used to answer it. This will often involve substantial legal research by the attorney, concluding with written legal instructions to the appraiser. ⁴⁰⁷

D-11. Valuation of Mineral Properties. The appraisal of properties containing valuable minerals is a complex, specialized subject. As a result, appraisers must have specialized training and experience to properly understand and apply the proper methodologies established for estimating the market value of these properties.

     In the development of an appraisal concerning mineral properties, it is particularly important to understand the unit rule. ⁴⁰⁸ The courts have recognized that property must be valued as a whole for federal acquisition purposes, with due consideration of all of the components that make up its value. Its constituent parts are considered only in light of how they enhance or diminish the value of the whole, with care being exercised to avoid so-called cumulative or summation appraisals. ⁴⁰⁹ "In the case of land that is underlaid with marketable minerals, . . . the existence of those minerals is a factor of value to be considered in determining the market value of the property, but the landowner is not entitled to have the surface value of the land and the value of underlying minerals aggregated to determine market value." ⁴¹⁰

     Accordingly, it is improper for an appraiser to estimate the value of the surface of the property, add to it a valuation of the minerals, as estimated by a separate minerals expert, and thereby conclude a total market value for the property. Not only does this procedure result in a forbidden summation appraisal, it also results in no one individual being able to testify as to the market value of the property as a whole, if the case goes to trial. For these reasons, when consultants' reports are used in the valuation of mineral property, appraisers must strictly adhere to the requirements of Section D-4 of these Standards relating to the use of consultants' reports.

     Highest and best use analysis is another critical element in the development of a reliable mineral property appraisal. Such a report must contain a well supported and documented market analysis that clearly establishes whether or not there is adequate market demand for the minerals located on the property. The market analysis should provide the underpinning for the appraiser's conclusions regarding the marketability, price, and competition for the mineral commodity found on the property. It is critical that the appraiser adequately address the question of the market for the minerals found on the property because it has been ruled that an expert must "make a showing of some sort of market, poor or good, great or small, for the commodity in question before the quantity and price of the commodity or substance may be presented to the jury to be used as a factor in the expert's opinion testimony." ⁴¹¹

     Clearly, if no market exists for the commodity, then the expensive and time-consuming determination of the quantity and quality of the minerals on the property is unnecessary. If a market exists for a mineral, then a supportable determination must be made concerning both the legal permissibility of extracting the mineral and the physical characteristics of the minerals located on the property. Interpretation of permitting and other environmental requirements may necessitate the assistance of a consultant with specialized knowledge and experience in the area. Also, studies regarding the physical characteristics of the minerals are usually conducted by specialists (usually geologists and/or mining engineers) who make determinations concerning such important factors as the location, quantity, and quality of the mineral deposit, and any variations in the quality that might be found on the property. Additional determinations may be required regarding such factors as the accessibility of the mineral and problems and costs of extraction. This information then provides the basis for estimating the value of the property using the sales comparison and income approaches to value. However, before the adoption of these studies, it is the professional responsibility ⁴¹² of the appraiser to thoroughly review and understand the reports prepared by other experts and adopt them only if the analysis and conclusions were prepared according to appropriate standards, are sound, and are adequately supported.

     Another aspect of highest and best use analysis of mineral property that must be borne in mind is the consistent use theory. Under this concept, the "land cannot be valued on the basis of one use while the improvements [or minerals] are valued on the basis of another." ⁴¹³ For example, it is improper "to value a property for agricultural purposes and then add a substantial value increment for gravel deposits under the surface of the land. If the gravel is mined, the land, in all probability, will have no value for agricultural purposes during or after the mining operation." ⁴¹⁴ However, if the mineral deposit were oil, a concurrent use of the surface for grazing purposes would not, in most instances, be a violation of the consistent use theory.

     As in the valuation of other property for federal acquisition purposes, if adequate sales data is available, the sales comparison approach is usually considered the best evidence of value. ⁴¹⁵ While it is recognized that each property containing valuable mineral deposits is unique, the same may be said, to some degree, of all real estate. However, "[e]lements of sales of quite distant properties, even those with different mineral content, may be comparable in an economic or market sense when due allowance is made for variables." ⁴¹⁶ Therefore, it is unacceptable for an appraiser preparing an appraisal under these Standards to simply state that there are no comparable sales transactions without providing adequate support for the conclusion.

     

     In order to properly develop a sales comparison approach to value for a mineral bearing property, the appraiser needs to understand the level of information available concerning the mineralization found on the subject property. It is then important to identify comparable sales that had similar levels of information concerning mineralization available at the time of sale. The variables which must be given close attention include rights conveyed, conditions of sale, the presence of multiple ores on the same property, access for extraction purposes, topography and cover (stripping ratios), transportation availability and cost, and distance to smelters or refineries. All of these factors may require adjustment. ⁴¹⁷ The verification of data concerning the comparable sales is a critical component of this analysis, and the assistance of experts in identifying all necessary areas of enquiry during the verification process may be required.

     Also important in the sales comparison approach is the selection of the appropriate unit of comparison. Such selection should generally mirror that unit of comparison used by participants in the market and, as such, will generally result is the tightest bracket of value for the subject property. "However, arriving at a valuation by multiplying an assumed quantity of mineral reserves by a unit price is almost universally disapproved by the courts." ⁴¹⁸

     The income capitalization approach to value is also a valid means for estimating the market value of mineral properties, but should never be used exclusively if comparable sales are available for use in the sales comparison approach. The income capitalization approach can be especially applicable when the property under appraisal is already being mined, and thus the historical income stream from the property is available for analysis. In applying the income capitalization approach, appraisers must take care to consider only the income that the property itself will produce - not income produced from the business enterprise conducted on the property (i.e., the business of mining). ⁴¹⁹ An appraiser who is not thoroughly experienced in the appraisal of mineral properties should not attempt to employ the income capitalization approach. Even when used by an appraiser experienced in this field, this appraisal approach can be highly speculative, and great care must be exercised in its use. As one court cautioned:

Great care must be taken, or such valuations can reach wonderland proportions. It is necessary to take into consideration manifold and varied factors, like future supply and demand, economic conditions, estimates of mineral recoverability, the value of currency, changes in the marketplace,and technological advances. Many of these factors are impossible to predict with reasonable accuracy. ⁴²⁰

     In developing an estimate of value by the income capitalization approach for a mineral property, it is generally recognized that the most appropriate method of capitalization is yield capitalization, most notably discounted cash flow (DCF) analysis. The income that may be capitalized is the royalty income, and not the income or profit generated by the business of mining and selling the mineral. For this reason, the income capitalization approach, when applied to mineral properties, is sometimes referred to as the royalty income approach.

     DCF analysis has been recognized by the courts as an appropriate method of valuation to be employed in the valuation of mineral properties. ⁴²¹ In conducting DCF analysis, the appraiser must avoid estimating a property-specific investment value to a particular owner instead of estimating the market value of the property if it were placed for sale on the open market. Like application of the development approach to value, DCF analysis in the valuation of mineral properties can be highly complex. ⁴²² As it relates to mineral properties, it often involves the creation of a detailed mining plan for the property. The essential ingredients in this approach are (a) the royalty rate, (b) the unit sale price of the mineral to which the royalty rate is applied (e.g., $20 per ton), (c) the projected annual amount of mineral production (e.g., 100,000 tons per year) (with the product of these three ingredients yielding the annual income), (d) the projected number of years of production and the year when the production will begin, and (e) the proper capitalization, or discount, rate.

     In developing an estimated income stream, the proper royalty rate can be derived from comparable mineral lease transactions, and the mineral unit price to which the royalty rate is applied may be derived from appropriate market transactions. The annual amount of production and the number of years of production are more difficult (and speculative) to estimate, and require as a minimum not only physical tests of the property to determine the quantity and quality of the mineral present, but also market studies to determine the volume and duration of the demand for the mineral in the subject property. Production levels estimates should be supported by documentation regarding production levels achieved in similar operations. Production levels should also be consistent with the mining plan's labor and equipment estimates. Numerous other factors may have to be considered, as for example, the amount of overburden, the method of mining (e.g., surface or deep mining), the requirements of permitting and applicable reclamation laws, the hauling distance to market, competition from other sites, the size and timing of the investment needed to construct any necessary access or processing plant, and so on.

     The size and timing of the investment needed, or capital costs, will include expenditures for services, construction and equipment related to mine development, pre-production, and production. Among the factors to be considered in this portion of the analysis are preliminary studies, such as exploration, environmental and engineering studies required to define the location and nature of the resource sufficiently to support the mining plan and ensure compliance with all applicable governmental permitting and land use regulations. The engineering costs related to the mining operation design must include contractors' fees and management. Other elements to be considered include site preparation costs, costs of facilities and improvements (including off-site improvements, such as rail or road facilities), and mining equipment and pre-production costs (including all of the costs required to bring the extraction process to full production, including the costs of time-lag and permitting). ⁴²³

     Operating costs are the expenditures incurred during the ongoing extraction process. These cost elements include labor, materials, supplies, utility costs, payroll overhead, management, indirect costs, and contingencies. Also, appropriate deductions for all relevant taxes associated with the operation must be made. As in the development approach, the estimation of an appropriate level of entrepreneurial profit is a critical element in the DCF analysis of any mineral property, and is a factor that should be supported by direct market data whenever possible.      

     One of the most critical factors in the application of DCF analysis is the selection of the discount rate. Attempts have been made to apply various statistical techniques to mineral valuations ⁴²⁴ to account for the extraordinary high risks associated with such operations. However, the application of various statistical techniques is not a substitute for discount rate selection derived from and supported by direct market data, ⁴²⁵ which is the preferred and most widely accepted approach. ⁴²⁶

D-12. Leasehold Acquisitions. The government will sometimes acquire only a leasehold estate in all or a portion of a property, thus acquiring the right of use and occupancy of the property for an identified period of time. Typically, compensation is equal to the present value of the market or economic rent of the premises to be occupied by the government for the term of the occupancy. ⁴²⁷

     It is important for the appraiser to recognize the characteristics of the rental, or income, streams being evaluated. Most often rent is paid periodically (e.g., monthly) in advance. However, when the government acquires a leasehold interest, or right of use and occupancy, in a property, it will usually pay rent in a manner that is inconsistent with the market. If the leasehold interest is acquired by condemnation, all of the rent due for the entire term of its occupancy is usually paid in a lump sum at the beginning of the occupancy (or on the date of acquisition). Therefore, an appraiser must convert any estimate of periodic market rent into a single lump sum present value or payment to be paid in advance. If the leasehold is acquired by negotiation, the rent may be paid in arrears, or at different frequencies than is typical in the market, and the appraiser must account for this differential.

     If rent is paid by the government in a single lump sum, adjustment for this factor is typically accomplished by applying an ordinary annuity factor (present worth of 1 per period factor) to the periodic market rent, if the estimated rent is projected to remain constant over the government's occupancy. If the appraiser concludes that the market rent will not be constant throughout the government's occupancy, the periodic rent is typically converted into a lump sum present worth by the use of present worth of 1 factors, or by discounted cash flow analysis.

     The discount rate to be applied to the periodic rent should reflect the rates of return typical for the type of property involved. The selected discount rate should be justified by the appraiser and supported by market data whenever possible.

     Appraisers must bear in mind that the leasehold estate acquired by the government may vary substantially from the terms of a typical lease in the private market. For instance, the term of the lease may be longer or shorter than typical for the type of space under appraisal. Expenses paid by the government may differ from those paid by the typical lessee, and there may be no provisions for expense stops and rental escalations during the lease term. The parking ratio for the space occupied by the government may vary from the market standard and there will by no provisions for rent concessions or lessor buildout of the occupied space. The appraiser must consider all of these factors when estimating the market or economic rent for the acquired space, and comparable rentals must be adjusted to account for these differences.

     As previously noted, ⁴²⁸ there are occasions when the government acquires the leasehold interest in only a portion of a larger property. In those instances, the appraiser must consider the possibility of damages to the remainder property (i.e., that portion not to be occupied by the government). In those instances where severance damages may be significant, appraisers should consult with their client agency and/or its legal counsel before proceeding with the appraisal assignment to ensure that the appraisal will be prepared in accordance with current applicable law.

D-13. Updating Appraisal Reports. When an appraisal has been made any substantial period in advance of acquisition, the appraisal must be carefully reviewed and brought up to date to reflect current market conditions. Any change in the value estimate attributable to trending or updating should be fully supported by acceptable market evidence, rather than by reference to a market index based on unidentified information.

     There can be no hard rule as to how often an appraisal report requires updating. While various government agencies recognize some rules of thumb in this regard (e.g., ever 6 months; every 12 months), the frequency of updating will depend on the type of property involved, its location, and the market conditions in the property's market area. For this reason, the U. S. Forest Service policy provides that, when approving an appraisal report, the review appraiser assigns a life to the approval, at the end of which the appraisal must be reviewed for updating. That approval life is based upon the variables noted above and can be quite short, especially when the property in question involves timber values in a very volatile market. Other agencies have also adopted formalized regulations. All agencies should develop procedures for automatic reviews of reports on a scheduled periodic basis.

     For trial purposes, in order to accord maximum weight to the testimony of the appraiser, it is important that the appraisal report reflects (1) the value as of the date of taking, ⁴²⁹ (2) the precise estate described in the complaint or any amendment thereof, and (3) the best market evidence of the value of the property available at the time of the trial.

     If an appraisal report is being updated in preparation for trial, the appraiser should consider this an opportunity to critically review his or her initial findings, to address report weaknesses which may have come to light as a part of the appraisal review process, and to include all of the important market data and reasoning which led to the conclusion of value. In most instances, the updating of an appraisal report for trial purposes will require an entirely new appraisal report. This will give the appraiser the opportunity to include the most recent reliable market data in support of the estimate of value, even if the newly found market data does not alter the appraiser's original estimate of value, ⁴³⁰ as well as an opportunity to purge the report of outdated data, analyses, and opinions. It further provides the appraiser with an opportunity to make sure that the report meets all requirements of Federal Rule of Civil Procedure 26(a)(2)(B), as discussed in Section D-2 of these Standards.

     The appraiser should remember that copies of entire appraisal reports are often exchanged by legal counsel or are provided to opposing counsel through the discovery process ⁴³¹ and that "[t]he thoroughness with which the appraisal is made and reported is the appraiser's greatest protection against professional embarrassment." ⁴³²

D-14. Contacting Landowners. During the course of inspecting the property being appraised, the appraiser is expected to see and talk personally to the property owner or, in the owner's absence, the owner's agent or representative. If the appraiser is advised that the property owner is represented by legal counsel, all owner contact and property inspections must be arranged through the owner's attorney, unless the attorney specifically authorizes the appraiser to make direct contact with the owner. Owners are generally a prime source of detailed information concerning the history, management, and operation of the property. In compliance with the provisions of Public Law 91-646, ⁴³³ the owner or the owner's designated representative must be given an opportunity to accompany the appraiser during his or her inspection of the property.

D-15. Contracting for Appraisal and Other Expert Services. Careful selection of and coordination with contract appraisers is of paramount importance in the successful negotiation or condemnation of an interest in real estate. It is important to obtain the contract services of the best qualified appraisers available within the agencies' rules governing the contracting process. While price is certainly a consideration, more important factors are general appraisal experience, education, professional reputation, experience in conducting appraisals for federal land acquisitions under these Standards, court experience, and demonstrated competency.

     Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, amended, (FIRREA) ⁴³⁴ required the establishment of state programs for the licensing and certification of appraisers. 49 C.F.R. 24.103(d)(2) provides that "[i] f the appraisal assignment requires the preparation of a detailed appraisal . . . and the Agency uses a contract (fee) appraiser to perform the appraisal, such appraiser shall be certified in accordance with title XI of [FIRREA]."

     When an agency anticipates that a tract of land will have to be acquired by condemnation, the agency should work closely with the Land Acquisition Section of the Department of Justice and/or the U. S. Attorney's office in the area in which the property is located in selecting a suitable appraiser to present expert testimony. Employment of inadequate appraisers wastes money, since it will often be necessary to expend more money for additional appraisals of the same property, and settlement opportunities may be impaired if the government is required to change estimates of value in midstream.

     Real estate appraisal is becoming increasingly sophisticated. Appraisers now find that preparation of an adequately supported estimate of market value often requires the assistance of specialized consultants. Before issuing an appraisal assignment, agencies should attempt to identify the need for such special consultants, and make arrangements for such services, either by contracting with the consultant directly or by providing for the appraiser's retention of the consultant in the appraisal contract. If an agency retains the consultant directly, it should select the consultant in cooperation with the appraiser, who will ultimately have to rely on the consultant's analysis and conclusion. The agency and the appraiser should jointly determine the scope of work and establish qualification criteria for any consultant retained. Irrespective of whether the consultant is retained by the agency or the appraiser, selection of the consultant must be by concurrence of both the appraiser and the agency.

     If the appraiser finds that an appraisal cannot be completed without a consultant's assistance, the appraiser should notify the agency involved immediately. The appraiser may not adopt unauthorized, unreasonable, or unsupported assumptions in making an appraisal in lieu of obtaining specialized consultant assistance.

     The types of special consultant most often needed include:

°    Fixture appraisers

°    Environmental engineers and auditors

°    Civil engineers

°    Cost estimators and contractors

°    Market experts

°    Feasibility and planning experts

°    Statisticians

°    Geologists/mining engineers/mineral specialists

°    Hydrologists

°    Timber cruisers/foresters/forestry engineers

°    Communications experts

     When contracting for appraisals, it is important to require the individual appraiser with whom the contract is made to actually prepare or be principally responsible for the appraisal and the appraisal report, and to be prepared to testify in court if it becomes necessary.

D-16. Confidential Nature of Appraisals. Appraisers' valuations and supporting appraisal reports are confidential information and the appraiser shall strictly abide by the Confidentiality provisions of the Ethics Rule of USPAP, which provides as follows:

° An appraiser must protect the confidential nature of the appraiser-client relationship.

° An appraiser must act in good faith with regard to the legitimate interests of the client in the use of confidential information and in the communication of assignment results.

° An appraiser must not disclose confidential information or assignment results prepared for a client to anyone other than: 1) the client and persons specifically authorized by the client; 2) state enforcement agencies and such third parties as may be authorized by due process of law; and 3) a duly authorized professional peer review committee.

     Under exception #1 in the preceding paragraph, appraisers must obtain written authorization from the client agency (or the Department of Justice if a case has been filed) before disclosure. The passage of time in and of itself does not extinguish either the appraiser's responsibility for confidentiality or the appraiser/client relationship. The appraiser/client relationship is extinguished only upon written release from the client agency or upon the consummation of the government's acquisition of the property appraised. Even though the appraiser/client relationship may terminate, the appraiser remains subject to the confidentiality provisions of USPAP.

     Appraisers have an extraordinary duty to maintain confidentiality when the acquisition of the property appraised may have to be accomplished by condemnation, and any appraisal report prepared for the purposes of government acquisition should be considered the subject of potential litigation until such time as the government has consummated its acquisition.

     If an appraiser receives a request or order, under exceptions #2 or #3 above, to provide confidential information relating to an appraisal conducted for the government to a state enforcement agency or professional peer review committee, the appraiser must provide the government with written notice of the request or order prior to providing the confidential information to the state enforcement agency or professional peer review committee. If litigation is pending, the Department of Justice may elect to intercede if it determines such intercession would be in the best interest of the government.

     49 C.F.R.24.102 requires an agency to provide a property owner with an initial written offer of purchase together with a written statement explaining the basis of the offer. The Department of Justice strongly recommends that, during the negotiation process, agencies not disclose the contents of appraisal reports beyond what is required by 49 C.F.R.24.102, because early disclosure of an appraisal report tends to weaken its viability and the viability of the appraiser in litigation. Agencies must recognize that early disclosure of appraisal reports may result in a Justice Department determination that it is in the best interest of the government for neither the appraisal report or the appraiser to be used for trial purposes. Such a determination will necessitate the procurement of a new appraiser and appraisal report for trial purposes.

     Once a case has been referred to the Department of Justice for the filing of an action, agencies shall not divulge the contents of an appraisal report to anyone, without authorization from the Department.

     Appraisers must use extreme caution in choosing what information to cite in developing their opinions of value. While it is common practice for appraisers in non-litigation appraisals to report that they have relied upon confidential information ⁴³⁵ in addition to the supporting data reported, in developing their opinion of value, such a reference in a litigation report may subject the information to discovery. Appraisers should not reference such information in litigation reports unless they are prepared to reveal the information, often by order of the court.

D-17. Project Appraisal Reports. Some government projects require the acquisition of a large number of parcels of real property, and individual appraisers are assigned to appraise a number of these parcels at the same time. On occasion, it is logical to include the appraisal of more than one parcel in a single report. Thus, under certain circumstances, such project or multiple parcel appraisal reports may be appropriate. Project appraisal reports are not appraisal shortcuts; they are clerical shortcuts. Assuming that the criteria set forth herein is met, project appraisal reports may be acceptable for the purposes of negotiated purchase, and for initial review purposes by the Department of Justice, and even for trial purposes.

     In preparation for trial, appraisal reports are generally exchanged between the parties or become subject to discovery. They are sometimes also used as exhibits during trial. Project appraisal reports may not be conducive to these purposes, and their use by trial attorneys is cumbersome. To introduce a project report as a court exhibit is to introduce a myriad of collateral issues. Also, the disclosure of an entire project report often discloses the estimated values of properties owned by persons not parties to the lawsuit, a disclosure which the government may not be prepared to make. For these reasons, agencies and appraisers should recognize that project appraisal reports for trial purposes may be unacceptable to the Department of Justice. However, given the high percentage of parcels within a project which are acquired short of trial, they can save valuable time and money for agencies engaged in larger projects.

     When appraisal reports are updated for trial purposes, appraisers should be prepared to develop a totally self-contained narrative appraisal report for the individual parcel being updated, in accordance with Section A of these Standards.

     Project appraisal reports are appropriate when 1) all of the parcels appraised are total acquisitions, or partial acquisitions of a nominal and/or consistent nature; 2) all parcels are vacant or have similar improvements; 3) all parcels are located within a relatively homogeneous geographical area; 4) all parcels have the same, or a similar, highest and best use; 5)the most relevant method of valuation is the same for all parcels, and; 6) the same array of market data will be relied on in the valuation of each parcel.

     The project appraisal report should consist of three major parts: 1) introduction, factual data, and analysis relating to all properties included in the report; 2) individual parcel reports; and 3) addenda and exhibits relating to all properties included in the report.

Part I—Introduction, General Factual Data and Analysis

1. Title Page. This should include the government project title, the number of individual parcels included in the report, the name and address of the individual(s) making the report, and