UP Standards

4.4.3.4. Depreciation.All appropriate forms of depreciation, including physical deterioration, functional obsolescence, and economic obsolescence, must be derived from market data and deducted from the estimated reproduction or replacement cost.568 Depreciation may vary depending on the locality, purpose, and type of improvements, among other factors.569 “The sales comparison or abstraction method of estimating depreciation is particularly reliable.”570 

4.4.3.3. Reproduction Cost and Replacement Cost.The appraiser must distinguish between reproduction cost and replacement cost, despite the fact that many courts have used the terms interchangeably.564 Reproduction cost is the present cost of reproducing the improvement with an exact replica using the same physical materials; replacement cost is the present cost of replacing the improvement with one of equal utility.565 The appraiser may typically use either measure, but must demonstrate the relevance of the selected measure to the market value of the specific property being appraised and account for all forms of depreciation appropriate to the selected method.566  The estimate of the reproduction or replacement cost of the improvements must be based on current local market cost of labor and…

4.4.3.2. Value of the Land (Site) as if Vacant.The value of the site as if vacant and available for its highest and best use is generally estimated by analysis of comparable sales (i.e., by application of the sales comparison approach).562 Of course, this does not allow an appraiser to disregard actual physical conditions that a reasonably prudent buyer would consider: “A proper appraisal methodology has to account for those physical conditions.”563 

4.4.3.1. Foundations of the Cost Approach.Like the sales comparison and income capitalization approaches to value, the cost approach is based on the principle of substitution: a prudent buyer will pay no more for one property than for a similarly desirable property.546 Likewise, when several similar properties are available, the one with the lowest price will attract the greatest demand.547 The cost approach specifically “reflects the notion that one will not pay more for an existing property than it would cost to construct one’s own replacement for the property.”548 But as the Supreme Court recognized, “the value of property may be greater or less than its cost . . . . It is the property and not the cost of it…

4.4.3. Cost Approach.Where appropriate, appraisers can employ the cost approach in valuing property with existing physical improvements.535 In this approach, the reproduction or replacement cost of the improvements, less appropriate depreciation, is added to the estimated market value of the land as if vacant to derive an indication of the market value of the property as a whole.536 It bears noting that the cost approach can yield an indication of market value, but “cost is not synonymous with market value. A fortiori, cost of land and cost of improvements taken separately and added are not to be equalized with fair market value.”537 Rather, the elements are considered under the cost approach in developing an opinion of the market value of…

4.4.2.4.7. Sales After the Date of Valuation.Sales that occurred after the date of valuation may be considered if they are not otherwise incompetent as evidence of value.529 In the words of the Eleventh Circuit: “While post-taking sales are not automatically appropriate evidence of comparable value, neither are they automatically inappropriate.”530 But post-acquisition sales may be tainted by government project influence and reflect elements of value that cannot be considered under the scope of the project rule.531 As a result, before considering such sales, the appraiser must analyze “whether the sales are tainted and how much the taint distorts true market value . . . .”532  In partial acquisitions, post-acquisition sales that reflect the influence of the government project can be…

4.4.2.4.6. Offers, Listings, Contracts, and Options. Unconsummated transactions are generally not reliable indicators of value and therefore cannot be used as comparable sales. Appraisers should still carefully analyze such data, which may be appropriate to consider for certain limited purposes.519 “An opinion, however, largely based on owners’ asking prices ought to be rejected, for the courts have decided that even offers by buyers are too unreliable to be considered.”520  A binding and unconditional contract of sale can generally be considered as evidence of value, even if title has yet to be conveyed.521 By contrast, mere nonbinding offers or unexercised options are not permissible evidence of value, and therefore the appraiser should give little or no weight to such options except…

4.4.2.4.5. Contingency Sales.Sales of property with a highest and best use for some form of development that requires rezoning or land use permits generally take the form of contingency sales or initial options.516 Such sales are contingent on the would-be purchaser’s ability to procure the rezoning or permitting necessary 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 the option is not exercised). Therefore, when such sales are actually consummated, they reflect the price of property already rezoned or permitted for development to its highest and best use. If, on the date of value, the property being appraised would require…

4.4.2.4.4. Sales that Include Personal Property.Sales that include personal property cannot be considered unless they can be adjusted to reliably reflect only the real property transaction.513 For example, in considering the sale of a farm in which the price included personal property, the Second Circuit held it was legal error to exclude reliable evidence of “the actual consideration received for [the] realty.”514 In the sale of a farm, the purchase price often includes equipment, livestock, and other items of consideration.515 

4.4.2.4.3. Exchanges of Property.Sales involving an exchange of property generally introduce too many collateral issues to be reliable indicators of market value. As the Fifth Circuit explained, if evidence of an exchange “is to be considered as proof of present valuation, the values of such exchanged lands obviously must be proved by the same standards as attends proof of value of the property being condemned.”512