UP Standards

4.5.6. Further Guidance.As often observed, the scope of the project rule may “be stated easily enough” but “is not so easily understood or applied.”707 For further guidance, the two major Supreme Court decisions on the scope of the project rule are United States v. Miller and United States v. Reynolds.708 The Fifth Circuit’s influential opinion in United States v. 320 Acres analyzes applications of the rule as well as its historical and legal origins.709 Two more recent cases on the applicability of the scope of the project rule are also instructive: United States v. 480.00 Acres (Fornatora), from the Eleventh Circuit, and United States v. 1.604 Acres (Granby I), from the Eastern District of Virginia.710 

4.5.5. Limits of the Scope of the Project Rule.The scope of the project rule “is designed to ensure that the landowner is neither hurt nor helped in a takings valuation by any action done by the Government within the scope of the project leading to the taking.” 701 The scope of the project rule applies only to changes in value attributable to the government’s project: the rule does not allow an appraiser to disregard changes in value attributable to other factors.702 For this reason, changes in value prior to the date of valuation due to physical deterioration within the landowner’s reasonable control must be considered.703 Similarly, the scope of the project rule does not permit the appraiser to ignore market…

4.5.4. Impact on Market Value.The scope of the project rule only arises if there is evidence the government’s project affected the market value of the property being appraised. If there is no evidence the government project influenced the property’s market value, no determination of the scope of the project is required because there is no project influence to disregard.698 And while possible project influence on market value can prompt an analysis of the scope of the project, project influence on a property’s marketability cannot: Even a substantial decrease in marketability, decreasing the number of potential buyers, must be disregarded if the price at which the property would be sold is not affected.699 This is because the federal definition of market…

4.5.3. Legal Instructions.Because the scope of the project rule involves interrelated factual and legal questions, the appraiser must request appropriate legal instruction if there is evidence the government’s project affected the market value of the property being appraised.694 The appraiser may be asked to gather and/or analyze data to inform the legal analysis. Counsel (or the Court) will instruct the appraiser as to (1) whether the scope of the project rule applies, and, if so, (2) how the rule must be applied to the specific property under appraisal, and, if applicable (3) when the scope of the project rule applies, (i.e., the date as of which the rule is triggered).695 These legal instructions are “the criteria [the appraiser] must follow…

4.5.2. Application of the Scope of the Project Rule.Application of the scope of the project test to any set of facts “requires discriminating judgment.”690 Thus, even if a property is unquestionably within the scope of the government project, a “mechanical application of the . . . rule” is insufficient.691 Rather, “the rule is not to be divorced from its objective— compensation awards that are just to both the public and the dispossessed landowner.”692 A nuanced factual and legal inquiry is necessary to determine what must be considered and what must be disregarded to ensure the appraiser’s opinion of market value does not unfairly reflect project influence. Depending on the specific facts of each acquisition, it may be appropriate or necessary…

4.5.1. The Scope of the Project Test.To fairly apply the principle excluding project influence, the Supreme Court created the scope of the project test in United States v. Miller: “[I]f the ‘lands were probably within the scope of the project from the time the Government was committed to it,’ no [change] in value attributable to the project is to be considered in awarding compensation.”670 Accordingly, if the scope of the project rule applies, project influence on market value must be disregarded.671 Conversely, if properties not originally within the scope of the project are later acquired by the government, the United States “must pay their market value as enhanced [or diminished] by this factor of proximity” to the project—so any project…

4.5. Project Influence. At times, the market value of the property being acquired may be affected, positively or negatively, by the very project prompting the government’s acquisition. This project influence on value is potentially problematic in federal acquisitions because “to permit compensation to be either reduced or increased because of an alteration in market value attributable to the project itself would not lead to the ‘just compensation’ that the Constitution requires.”658 The Supreme Court has ruled that in fairness, the United States cannot be charged for value it created in constructing the government project for which the property is being acquired. Similarly, an owner cannot be penalized for any diminution in value due to that very government project.659 Accordingly, in…

4.4.5.4. Availability of Comparable Sales.When a property’s market value can be reliably estimated using comparable sales, the development approach should not be relied upon as a primary indicator of value, as its underlying assumptions are “largely speculative” and “subjective elements…enhance the risk of error[.]”653 However, the development method can be utilized in such situations to test a highest and best use conclusion654 or to support a value indicated by the sales comparison approach.655 It also bears noting that “[w]hile a lack of sales and/or development activity may indicate an insufficient supply of land suitable for such use, it can also indicate a lack of demand.”656 And without “credible evidence that there is an actual demand for [subdivision development] or that…

4.4.5.3. Credible Cost Estimate.Even if subdivision was a demonstrably reasonable certainty, federal law requires credible evidence of projected subdivision costs: “In the absence of credible cost evidence, [one should] exclude[ ] the [development] method valuation altogether.”650 Mere unsupported assertions are insufficient.651 Costs that must be reliably estimated and considered include direct costs of development (such as surveying, design, engineering, permitting, grading, clearing, sewers, street paving, curbs and gutters, water lines, and other utilities); indirect costs (including financing, insurance, real property taxes, sales, advertising, accounting, legal and closing costs, project overhead, and supervision); and the developer’s expected profit.652 

4.4.5.2. Application to Undeveloped Land.It is rarely appropriate to apply the development method to undeveloped land.644 As a district court recently explained, the development method  effectively values a parcel of land, even if undivided and unimproved, virtually as if it has already been subdivided and sold. Such a valuation calculation…requires more than just that a hypothetical purchaser at the time of the taking would consider development potential; it generally requires that landowner demonstrate that subdivision of the unimproved land was reasonably certain in the near future at the time of the taking.645  Use of the development method cannot be justified based on a landowner’s “inchoate plans, intention, or profit expectations” for a property as assumptions underlying the development method are…