UP Standards

1.8.1. Market Rent and Highest and Best Use. As discussed in the income capitalization approach section of these Standards, in developing an appraisal for a leasehold acquisition, the appraiser must use the definition of market rental value found in Section 1.5.4.1.  As part of the development of an appraisal for a leasehold acquisition, the appraiser must determine the highest and best use of the property (as improved) that is the subject of the leasehold. This requirement is critical to the selection of comparable rents used in the valuation process. Where necessary, the appraiser may need to perform a marketability study to aid in this analysis.

1.8. 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. This section of the Standards will address the requirements for developing an appraisal for this purpose. 

1.7.1.4. Takings Plus Damages Procedure (State Rule). There may be rare circumstances in federal acquisitions when strict adherence to the before and after rule will create costly and/or difficult burdens on the appraiser. Examples of such situations are minor fee or easement acquisitions (for flowage, wetland or habitat protection, roads, pipelines) from large parcels, where the cost of performing a full before and after appraisal is unwarranted in view of the minor nature of the acquisition and there are clearly minor or no damages to the remainder. In those rare situations, the client agency may alter the scope of work to allow a takings plus damages procedure, sometimes called the state rule. Under this procedure, the appraiser must still determine…

1.7.1.3. Offsetting of Benefits. Direct (special) benefits may offset the contributory value of the part taken and any damages to the remainder caused by the government’s project. To take into account any direct benefits from the project, appraisers must apply the before and after rule by forming an opinion of the market value of the larger parcel at the time of acquisition (excluding any enhancement or diminution resulting from the project) and deducting the market value of the remainder property (including any direct benefit or diminution from the project).  Appraisers should note that the federal rule in this regard may be different from state rules and they should consult client agency counsel if there is a question.

1.7.1.2. Benefits. As with damages, appraisers must be aware that the legal rules regarding what constitutes indirect (general) benefits and what constitutes direct (special) benefits may differ between state and federal rules. The extent of a benefit to a remainder parcel is a fact question that must be well supported by the appraiser. Whether the benefit is general or direct (special) is a mixed fact/law question and client agency counsel should be consulted to resolve any question about this classification. Appraisers should give the same consideration to benefits as they do to damages in developing an opinion of the market value of remainder properties. Benefits can take many forms, such as when the project has caused the remainder to have…

1.7.1.1. Damages. When considering damages to remainder properties, appraisers must understand that state and federal rules may differ on which items of damage may be compensable (severance) and which items may be non-compensable (consequential). It is recommended that appraisers seek guidance from agency legal counsel if there is any question about whether an element of damage is compensable.  The fundamental basis for a claim of compensable damages is a diminution in the market value of the remainder. The extent to which the utility of a property has been impacted by the acquisition must be established by factual information and analysis and must never be assumed or based on speculation. Evidence that the highest and best use of the remainder property…

1.7.1. Before and After Rule (Federal Rule). The federal rule—also known as the before and after rule—applies in all appraisals involving partial acquisitions. Under this procedure, the appraiser develops opinions of both the market value before the acquisition and the market value after the acquisition. Requiring this valuation procedure allows acquiring agencies, the Department of Justice, and the courts to calculate a reasonable measure of compensation by deducting the remainder or after value from the larger parcel’s before value. The result is a figure that includes the value of the property acquired as well as any compensable damages and/or direct (special) benefits to the remainder property. It should be noted that these are two separate appraisals within the same assignment…

1.7. Partial Acquisitions. There are many situations in which a client agency is only acquiring a part of a larger parcel. This can occur when the client agency is acquiring an interest less than the fee simple, such as an easement, water rights, subsurface rights, or air rights. This can also occur when the agency is acquiring the fee interest in only a portion of a larger parcel. This section of the Standards addresses the appraisal requirements under these circumstances.

1.6. The Reconciliation Process and Final Opinion of Value. A critical part of developing an appraisal under these Standards and forming a final opinion of market value is the reconciliation process. This process requires a careful examination of the factual data about the subject property and the market. The highest and best use and larger parcel analyses are considered in light of the factual data to ensure consistency and accuracy. All of the supporting data for each of the approaches to value is examined for consistency and accuracy with the subject property and market data as well as the highest and best use and larger parcel analyses. For example, if both the sales comparison and income capitalization approaches were developed,…

1.5.4.5. Yield Capitalization (Discounted Cash-Flow [DCF] Analysis). A second method of valuation used in the income capitalization approach is known as the yield capitalization method. This method is also often referred to as the discounted cash-flow (DCF) analysis and has been an accepted valuation method within the appraisal profession for several decades. This method is often used in the valuation of investment grade properties such as multi-tenant office buildings, retail centers, apartment complexes, and industrial warehouse facilities and reflects the way sophisticated buyers and sellers consider the potential income generated by a property to arrive at a purchase or sale price.  The yield capitalization method has limited use in an eminent domain setting because it requires the appraiser to forecast…