4.4.4.4. Unit Rule Implications.The unit rule, discussed in Section 4.2.2, applies in valuations using the income capitalization approach as in all other approaches to value.621 “The subsidiary interests in a fee cannot add to its market value and compensation for these interests must be paid out of the amount awarded for the whole.”622 Accordingly, in federal acquisitions, if using the income capitalization approach to value, appraisers must value the property being acquired as if in single ownership—not by “computing separately the value of the various constituent legal interests” (such as lessor/lessee or operator/owner) in the property.623 

For example, in United States v. 6.45 Acres of Land (Gettysburg Tower), the United States acquired two adjacent tracts in fee simple: Tract 4-203, owned in fee by landowner Enggren and under a 99-year lease to landowner Overview, and Tract 4-204, owned in fee by landowner Overview.624 On the date of value, Overview had built an observation tower on Tract 4-203 overlooking the Gettysburg Battlefield and was operating the tower as a tourist attraction and making payments to Enggren under the lease; Overview also owned and operated a gift shop, restaurant, and parking lot on Tract 4-204. The Third Circuit determined the following appraisal methodology correctly followed the unit rule for this property: 

[The appraiser] explained that because he was valuing the fee as a whole, lease payments were not considered an expense but merely a transfer of funds between interest holders that would cancel out under a unit valuation. Because [the appraiser’s] task was neither to appraise Overview’s interest nor the Enggrens’ interest, but rather the composite value of all interests, he did not count as an expense what was simply a transfer of value between interest holders that had no bearing on the land’s inherent capacity to generate income.625

The Third Circuit therefore reversed the district court’s ruling, which had improperly added to the valuation just described above a separate valuation of the Enggrens’ interest in the lease payments—thereby “double-count[ing] the substantial value of the lease.”626 

As discussed in Section 4.8.1, the unit rule is frequently misapplied in valuations of properties containing minerals or other natural resources. 142