4.4.2.4.2. Transactions with Potential Nonmarket Motivations.Not all property transactions can be used as potential comparable sales in valuations for federal acquisitions. While few types of transactions are categorically excluded from consideration under modern jurisprudence,473 as a matter of law several types of sales can be considered only under certain circumstances or for limited purposes. Accordingly, careful verification and analysis of each sale is required to ensure the appraiser’s opinion of value does not reflect any legally improper considerations.474 Transactions that involve potential nonmarket motivations include: (1) forced sales, (2) distress sales, (3) settlement negotiations, (4) sales between related parties or entities, (5) sales to government or other entities with condemnation authority, (6) sales to environmental or other public interest organizations, and (7) project-influenced sales. 

(1) Forced Sales.Forced sales are transactions that occur under a form of legal compulsion such as foreclosure or condemnation, are nonmarket transactions as a matter of law, and therefore cannot be considered as comparable sales.475 Forced sales include sales “at foreclosure, under deed of trust securing indebtedness, at execution of attachment, at auction, under the pressure of the exercise of the power of eminent domain, or other coercion sui generis—types of legal compulsion generally disclosed by public records.”476 Appraisers must carefully investigate the circumstances of a potential forced sale to ensure they do not consider a transaction in which “elements of compulsion so affected the seller that the sale could not be said to be fairly representative of market value at the time made.”477 

(2) Distress Sales.Similarly, distress sales and sales with atypical financing terms are questionable indicators of value and can be used only with great care.478 If limited market data necessitates reference to such a sale or sales, the appraiser must carefully analyze the circumstances of each transaction479 and make proper adjustments to account for any nonmarket motivations.480 

(3) Settlement Negotiations.It is generally recognized that offers of settlement are not reliable indicators of market value because such offers are often in the nature of compromise to avoid the expense and uncertainty of litigation.481 As a result, appraisers cannot rely on settlement negotiations or completed settlements as evidence of market value. As early as its October 1876 term, the Supreme Court noted that well-recognized principles made an offer of compromise inadmissible.482 The prohibition against the admissibility of offers to compromise and completed compromises is also codified in Rule 408 of the Federal Rules of Evidence.483 As with any sale, the appraiser should not simply assume that a transaction was a settlement to avoid or resolve litigation, but rather should contact the participants to ascertain their motives.484 

(4) Sales Between Related Parties or Entities.Sales between members of a family or closely related business entities are not arm’s-length transactions, and since they may involve other factors than market value considerations, such sales generally cannot be considered.485 

(5) Sales Involving the Government or Other Condemnation Authority.Sales to government entities are inherently problematic for federal appraisal purposes because they routinely involve nonmarket considerations, making them inaccurate indicators of market value and therefore improper to consider as comparable sales.486 For example, as recognized by the federal courts, such transactions tend to reflect payments “in the nature of compromise to avoid the expense and uncertainty of litigation and are not fair indications of market value.”487 Courts also exclude such evidence in litigation because it “complicates the record, confuses the issue, is misleading, and especially in condemnation cases, raises collateral issues as to the conditions under which such sales were made . . . .”488 

Sales to government entities must therefore be viewed as suspect from the outset, but they cannot, and should not, be rejected by appraisers as categorically invalid comparable sales.489 If the appraiser determines, after careful analysis and verification, that a sale to a government entity was a true open-market transaction, the sale may be appropriate to consider,490 particularly if there is a paucity of private sales available for use in the sales comparison approach to value.491 But such a determination requires extraordinary verification due to the nonmarket considerations inherent in most government acquisitions.492 Mere conclusory statements that a transaction was voluntary or did not involve the threat of condemnation are not sufficient.493 For example, the Tenth Circuit barred consideration of the government transactions at issue despite one witness’s testimony that the transactions were “voluntary,” pointing out that the same witness “also admitted that the government was eager to obtain the [properties] without using the condemnation process.”494 

While some cases allude to a split of legal authority on the admissibility of prices paid by entities with the power of eminent domain,495 the federal courts uniformly hold that such sales cannot 126 be considered if they are compelled by nonmarket considerations, but may be considered if they are true open-market transactions free of compulsion.496 Indeed, the federal courts have recognized a multitude of motivations that may compel a government entity (or other entity with the power of eminent domain497) to acquire lands at a price other than market value. For example, “the necessity of the purchaser, the disposition of the vendor, and peculiar circumstances and conditions may be such as to oblige a purchaser to submit to severe exactions in order to consummate a purchase without delay.”498 Or, “in an accumulation for a project such as a large airplane plant, the last parcels are undoubtedly more difficult to obtain, at their fair value, since the purpose of the acquisition is then usually known[,]” and due to “the exigencies which necessitated speed[, the] . . . parcels were urgently wanted and they were bought without regard to the real value . . . .”499 Moreover, “a condemning party might be willing to give more than the property is worth, and the owner might be willing to take less than it is worth rather than undergo a lawsuit.”500 Because of the likelihood of such nonmarket motivations, appraisers can consider sales to buyers with the power of eminent domain as “evidence of market value only when it is certain that those sales truly represent the market value of the land in question.”501 

To ensure compliance with federal case law, the appraiser must identify, analyze, and rule out or appropriately adjust for all potential nonmarket motivations before relying on a sale to a government entity as a comparable sale.502 Appraisers must carefully verify the circumstances surrounding a sale to a government entity to ensure that it meets the criteria of market value or can be accurately adjusted to reflect market value.503 See Section 1.5.2.4 and Appendix E. 

(6) Sales Involving Environmental or Other Public Interest Organizations.Sales to environmental or other public interest organizations may be similarly suspect. For example, acquisitions may be authorized for a government conservation or preservation project before adequate funds are appropriated to acquire the entire project area.504 Conservation or other environmental organizations may then voluntarily acquire lands within the project area for the sole purpose of transferring them to the government once funding becomes available.505 Sales made under such circumstances may well reflect project influence, which cannot be considered.506 And of course, where “a market for a particular use is created solely as a result of the project for which the land is condemned, value based on that use must be excluded.”507 Moreover, such sales, like direct sales to the government, typically involve nonmarket motivations and considerations beyond the property’s market value for its “highest and most profitable use….”508 But “[c]onsiderations that may not reasonably be held to affect market value are excluded.”509 Thus, as with sales to government entities, sales to public interest organizations cannot be used as comparable sales without careful analysis to identify and rule out or adjust for potential nonmarket motivations.510 

(7) Project-Influenced Sales. As discussed in depth in Section 4.5, valuations must disregard any value attributable to the government project prompting the acquisition.511 Consideration of project influence on market value is prohibited under the scope of the project rule. Whether the rule applies and how to apply it in a particular valuation assignment will require legal instructions.