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Easement-to-fee-simple value ratios for electric transmission line easements: a common sense approach.

Generalized legal positions pertaining to just compensation are synthesized with appraisal methodology to form a basis for the development of easement-to-fee-simple (EFS) value ratios. Because it is sometimes difficult to obtain the necessary data, a simplified approach to extraction of EFS ratios is presented as an alternative to statistical analysis. A sample residential pairing extracted from the Ocala, Florida, market is reviewed, transformed into an EFS ratio, and reconciled.

Factual data based on paired-sales analyses are essential for the development of a reliable just compensation estimate. Easement-to-fee-simple (EFS) value ratios are the foundation of easement valuation and just compensation estimation. This article outlines the reasons that such ratios may vary significantly and synthesizes the salient points of case law and appraisal methods as they pertain to EFS ratios. The use of EFS ratios in appraisal is limited to the application of the inverses of these ratios in before-and-after valuation to determine market value of the servient estate (i.e., underlying fee interest in the parent tract). A paired-sales approach to extraction of EFS ratios--rather than a more sophisticated statistical model--is presented as an alternative for appraisers who, like the author, are unable to generate sufficient data to accommodate statistical analysis (i.e., unable to generate an acceptable range of standard deviation).

This article first addresses the most important findings of case law and reviews the salient points of three articles regarding power line easement valuation. Methods for research and analysis of market-extracted EFS ratios are outlined, and a case study is presented of two residential property pairings extracted from the Ocala, Florida, market--a Standard Metropolitan Statistical Area (SMSA) with a population of about 190,000.

CASE LAW AND APPRAISAL CONCERNS

In his memorandum, Valuation of Electrical Power Transmission Line Easements,[1] William Phelan, the City Attorney for Ocala, Florida, develops the following four generalized legal opinions that pertain to just compensation considerations of electrical transmission lines. While his opinions are specific to Florida law, they are based on case law precedents in Colorado, Florida, Louisiana, Maryland, New Jersey, North Carolina, North Dakota, and Wyoming,[2] and are generally applicable in most states.

1. Damages are only to be considered for those sites that have some portion taken by eminent domain proceedings.

2. The generalized impact of an overall project cannot be considered with regard to diminution of a parcel taking.

3. Damages to the remainder may only be measured by evidence of diminution in market value.

4. Valuation of any particular easement must be based on situation-specific analysis of the facts involved in that particular case.

The second conclusion raises an interesting question as to an appraiser's obligation to consider negative externalities with each parcel valuation. Based on Phelan's findings, an appraiser should only be concerned with the portion of utility-line infrastructure that extends across the subject parcel. Any external improvements such as substations or transmission lines of greater magnitude should not be addressed by an appraiser. Normally, an appraiser would consider external influences before and after the taking that would affect highest and best use. The second of the four tests of highest and best use, however, is consideration of legal constraints. Phelan's position, founded on case law, thus does not conflict with appraisal methods.

The third conclusion clearly defines an appraiser's obligation to estimate value diminution based solely on evidence from market data (i.e., paired sales), while the fourth conclusion establishes the basis for advocating paired-sales analysis as opposed to precedent actions or right-of-way agents' rules of thumb.

APPRAISAL LITERATURE

Numerous articles address appraisal methods and valuation considerations for electrical transmission easements. In Impact of Electrical Power Transmission Line Easements on Real Estate Values,[3] Louis E. Clark and F. H. Treadway address the value relationship of easement versus fee simple interests. They emphasize that the relationship of such a ratio may not be applicable to all types of property uses. The two primary factors that should be considered are the location of an easement on the parent tract (i.e., placement) and the nature and characteristics of the property and parent tract on which an easement is taken. Their observations are 1) that generally a parallel relationship exists between density of use and an easement's degree of impact in relation to highest and best use, easement value, and damages to the remainder; 2) that transmission line easements that cross open, low-density lands of low unit value usually have minimal easement value and create modest damages to the remainder; and 3) that agricultural parcels and apartment complexes have no measurable loss in value, while improved residential property and small-scale commercial building sites reflect the opposite.

In Ocala, Florida, a 150-foot-wide, 230-kilovolt (kV) easement extends diagonally across a subsidized housing project. Recently dated pairings indicate that substantially encumbered parcels (by as much as 50% of the lot) did not suffer any measureable loss in value compared with unencumbered parcels of equal parent tract size. Similarly, apartment complexes are generally oriented toward families that cannot afford conventional housing units. Whether subsidized housing or apartments, occupants typically cannot afford the luxury of selectivity with regard to location.

Peter F. Colwell and Kenneth W. Foley, in "Electric Transmission Lines and the Selling Price of Residential Property"[4] as well as Colwell in "Power Lines and Land Value,"[5] introduce a multiple linear regression (MLR) model for estimating the diminution in value associated with proximity to an electrical transmission line easement. The major shortcoming of this process is that if a target area does generate an adequate volume of arm's-length sales, the equation's result will carry an unacceptable margin of error (i.e., excessive standard deviations). The model's foremost advantage is its element of application--processing mass data with multiple variances. The MLR model, however, is inappropriate for less densely populated SMSAs and rural communities where verified sale data are limited and often have unquantifiable variances that increase subjectivity. Further, the MLR model is only as reliable as the accuracy of its data. In light of the extended economic downturn, unmeasurable conditions of sale frequently skew the results of statistical models. Selective research, verification, and application of paired sales by conventional means should minimize the weaknesses of the MLR model.

OUTLINE PROCESS FOR RESEARCH

The mentioned articles do not address the logistics of extracting sales from a target market incapable of generating sufficient data for MLR application. Therefore, eight steps are established here for researching EFS ratios for easement valuation. The scope is limited to just compensation valuation as it pertains to establishment of EFS ratios. Compensation estimates for building and site improvements and landscape ornamentals and trees are not considered. Similarly, parcels that need constructive total takings[6] required additional consideration beyond the scope of this analysis.

Step 1: Identify taking area

The taking area must be identified with regard to its width, site placement on the parent tract, proximity to set-back lines, and proximity to available building area. A trade-off between the height of the power lines and the width of the required right-of-way must be made. Most electrical transmission line easments are at least 30 feet wide to address the needs of maintenance vehicles and wind-induced line sway. With regard to 230-kV easements, widths may vary noticeably depending on the trade-off between the cost of land area traversed and the additional costs of pole construction caused by increased line height.

Several decades ago, Florida Power Corporation (FPC) extended a 230-kV line through the soon to be developed Silver Springs Shores subdivision, located in north-central Florida. At the time of acquisition, the rural-influenced parent tracts had established relatively low property values--allowing relatively low property values--allowing FPC to minimize construction and maintenance costs by erecting steel frame tower supports on 285-foot-wide easement corridors. Conversely, in densely populated areas, priority is placed on minimizing land acquisition costs and perceived adverse effects. In these areas, FPC and other Florida utility companies have opted to install costlier concrete, single-pole supports that require less land area. Underground lines, which have the highest construction costs of all electrical transmission systems, are only considered when extreme circumstances are encountered (e.g., restrictive aerial rights such as those adjacent to airports, and cost ineffective aerial construction, such as across bridges).

The width of an easement affects its value in proportion to the width or depth of the parent tract. For example, the 285-foot width of the FPC easement has a diminished effect on the encumbered parcels because most of these commercial lots were platted with depths of 655 feet. Its easement-to-parent-tract width (EPTW) ratio is 1:2.3 (i.e., for every foot of easement width, the parent tract extends 2.3 feet in depth). The FPC easement extends across the frontage portion of the parent tracts. Because a portion of the easement is located within the required street set-back lines, its adverse influences are somewhat neutralized.

An easement that extends along perimeter boundaries would probably have less impact than an easement that crosses the middle of the parent tract. The angle at which the easement crosses the site may notably increase severance damages. For example, an easement that extends diagonally across its parent tract rather than parallel to front and rear property lines would likely cause increased severance damages because the remainder of the parent tract would be divided into irregular and less functional shapes (i.e., triangular rather than square or rectangular).

As previously noted, the portion of a parent tract that extends into street and building set-back areas would be least affected by a power line easement. In most municipalities all building improvements are prohibited within yard set-back lines; in some regions those site improvements required by zoning code must be placed outside of additional, street set-back lines. In light of development limitations within a street set-back zone, an easement confined to this area should have minimal impact on the highest and best use of a property. Easements that extend across available building area, however, should significantly affect highest and best use and result in increased severance damages.

Step 2: Identify placement and extent of the power line infrastructure

The placement of power poles, towers, and other supporting structures such as guy wires can significantly affect the value of both a servient estate and a dominant estate (i.e., easement interest). The appearance of infrastructure (e.g., size and height of support structure and number of power lines) affects property values more than the amount of transmission voltage.

The unpleasing aesthetic appearance of freestanding, single-pole systems is somewhat diffused against the landscape of an affected parcel if the span between the poles extends beyond the parcel's vista. The massive size of these poles, however, certainly has greater visual impact than the ubiquitous aerial distribution lines and poles that parallel our streets and highways. The worst visual offenders are the four-legged, steel frame towers that often overshadow nearby building improvements.

As is evident from these first two steps of the research process, most parameters of value are interrelated. Adverse effects of easement placement may be compounded depending on the size and extent of transmission line infrastructure.

Step 3: Identify easement's impact on the bundle of rights and highest and best use

Comparing a servient estate's bundle of rights before and after the easement taking--albeit a difficult task--provides a means of quantifying the impact of an easement. The bundle of rights is severable; its four major rights are possession, control, quiet enjoyment, and disposition. Depending on the wording of an easement and its intended use, one or all of the rights may be affected. Severance damages are a measurement of the loss in value resulting from restrictions in the bundle of rights. An easement may affect the right of quiet enjoyment by restricting or prohibiting improvements and certain activities within the taking area. Further, the right of control may be affected if the landowner is not allowed to exclude the dominant tenement (i.e., owner of the easement estate) from entering the taking area.

A servient estate's right of quiet enjoyment may be significantly disturbed depending on the wording of the easement. Often, electrical transmission line easements permit owners access to and over the easement taking area. An owner typically is allowed to use undersurface, surface, and aerial components of the real property, assuming such uses do not interfere with transmission line operations and maintenance. As mandated by federal regulations pertaining to electromagnetic fields (EMF), all dwelling units and any ancillary buildings above one meter in height are prohibited within the calculated EMF-buffer zone. This zone frequently coincides with the width of the easement area. Often, site improvements that are serviced by vehicles or equipment that would interfere with power line structures are prohibited (e.g., well, septic tank, swimming pool). To avoid additional just compensation, however, such existing site improvements may be permitted to remain--but without replacement. Fences are seldom excluded from a taking area as long as access is provided to the dominant tenement. In most cases, billboards, water retention areas, parking lots, signs, and landscaping can be spanned by the power lines without being disturbed.

The highest and best use of an easement area and parent tract build on the concept of the bundle of rights. The four tests of highest and best use are whether a use is physically possible, legally permissible, financially feasible, and maximally productive. The four tests should be applied to an easement area and parent tract before and after the taking. If the taking of an easement initiates a change in the type, rather than the extent, of use of the parent tract, the resulting severance damages probably will be substantial. If maximal productivity is the only factor diminished by the taking of an easement, severance damages may be minimal. If the highest and best use remains unaffected, just compensation, if any, will apply only to the easement taking area.

Step 4 Correlate all factors of influence outlined in steps 1 through 3

An easement taking area and the remainder of the parent tract should be evaluated as a whole. As previously mentioned, all of the parameters researched in steps 1 through 3 are interrelated and may increase or decrease in magnitude depending on their relationship.

Step 5: Identify target research areas

Researchers should locate and color-code existing transmission line easements (by transmission voltage level) on ownership or tax parcel maps. They should then identify easement widths, zoning, and key points pertaining to adjoining and adjacent properties (i.e., whether such properties are vacant or improved, low quality or upscale). A researcher should also note any special restrictions of servient-estate uses. All of this information is usually documented in public records. An appraiser can then prioritize the routes by comparing their physical and economic features with the subject transmission line data.

Step 6: Sale search for like properties

The previous step should have identified the research area for sales. Once the target areas have been designated, it is advisable to identify parcels that appear to lend themselves most easily to sale comparison. Adjustments for multiple variances should be avoided to minimize the margin of error in the pairing process. An appraiser should further review each parcel in conjunction with the primary corridor to determine the extent of improvements associated with the various types of uses. This may be accomplished through a combination search of the appraiser's files, sale transaction services, county property appraisers' tax parcel records, and physical inspections.

The basic method for pairing sales is to locate like properties, one unencumbered by an easement, and the other encumbered by an easement similar to the subject easement. Ideally, the improvements associated with these parcels should be similar in extent, quality, and condition, both as compared to each other and as compared to affected properties of the subject easement. If sale data are insufficient and there are multiple variations with regard to land and improvements, vacant parcels of like highest and best use should minimize the margin of error of multiple variances.

Do EFS ratios extracted from vacant-parcel pairings fairly represent market reaction to like-use improved properties? In the author's market, EFS ratios extracted from residential-use vacant and improved sales did not reveal any distinguishable variance in findings (comparisons for commercial, industrial, and agricultural property types were not available). However, vacant parcel pairings should not diminish the reliability or applicability of EFS ratios if the buyer is a prudent investor who has conisdered all aspects of how an easement will affect future development.

Regardless of whether the sales are vacant or improved, certain adjustments are unavoidable. The basic types of adjustments are ownership interest, financing considerations (cash equivalency process), conditions of sale, market conditions (time), locational variances, and physical/use variances, The first four adjustments (i.e., transactional adjustments) are required to be applied in sequence.

The greatest degree of subjectivity is not derived from the first four adjustments, however, but rather is derived from multiple considerations of the latter two. The process of establishing EFS ratios is inherently subjective because imperfect market data are extracted from transactions that are rarely consumated by fully informed buyers and sellers acting in a prudent manner. The application of preliminary adjustments to reflect multiple variances will compound the margin of error inherent in paired-sales analysis. The degree of subjectivity applied to the adjustment process of vacant parcels is lessened as a result of the elimination of improvement considerations.

Step 7: Selection of paired sales

The best candidates for paired-sales analysis can be reviewed based on 1) their similarities to each other in market conditions, location, physical characteristics, and uses; and 2) the comparability of an encumbered sale's easement in relation to the subject easement. The same prioritization process applied to selection of the target research area should be incorporated into the selection of paired sales.

Step 8: Verification process

All transactional information should be verified with at least one party to each sale. Questions should extend beyond verification of standard transactional data to encompass the buyer's and seller's perceptions of the restrictions created by an easement and whether the easement was quantified in the negotiated sale price.

The only accurate way to allocate a value diminution resulting from the taking area and severance damages is to verify parent tract sales encumbered with comparable easements that are placed within zoning set-back lines (e.g., street or yard set-backs). If the zoning ordinance prohibits building improvements and mandatory site improvements within an area defined by set-back lines, and if the highest and best use of the easement area is not greatly affected by the proposed placement of the transmission line infrastructure, then the price variance should accrue solely to the remainder of the tract as a result of severance damages.

The second means of sale selection involves indentification of parent tracts unaffected by the appearance and placement of the transmission line infrastructure. In this type of pairing, the price variance accrues solely to the easement taking area. If the data lend themselves to extraction of EFS ratios that reflect either severance or easement taking value diminutions, but not both, then these compartmentalized EFS ratios may be effectively applied directly to like-subject parcels or to EFS ratios of similar pairings. If insufficient data exist to permit allocation of the loss in value, the appraiser has at least accounted for all factors that result in value diminution of the land component.

OUTLINE FOR ANALYSIS

Step 1: Calculate taking area and parent tract sizes

A relatively reliable means, such as a hand-held calculator or a computer-aided program, should be used to determine the taking area and parent tract sizes of the subject parcels and all paired sales.

Step 2: Apply adjustments to paired sales

Regardless of whether a pairing represents a resale of a property before and after its easement taking--which is the ideal scenario--or whether the pairing uses like properties, adjustments for transactional data should be considered. It does not matter whether the encumbered sale or the basis for comparison as long as all paired sales are treated in the same manner. An appraiser should apply all necessary adjustments for market conditions, location, and physical variances as extracted from the market.

Step 3: Derive land-value diminution ratio of encumbered parent tract

This process involves subtracting the adjusted price of the encumbered sale from the adjusted price of the unencumbered sale. The difference is then divided by the adjusted price of the unencumbered sale to yield the land-value diminution (LVD) ratio of the unencumbered parent tract. The unencumbered price--the value indicator before the taking--is the basis of comparison (i.e., numerator of equation).

LVD ratio = Unencumbered adjusted sale price - Encumbered adjusted sale price Unencumbered adjusted sale price

Obviously, if the LVD ratio is equal to or less than zero, the market indicates that no diminution occurs as a result of the easement. This is not an impossible scenario given that 1) the easement is located within the entire street setback area; 2) there are no easement improvements within the easement area; and 3) the type of use associated with the property is unaffected by the external appearance of the transmission line.

Some types of property uses are resilient to value diminution of easement encumbrances. For example, an industrial parcel could likely absorb an easement that does not greatly restrict its highest and best use or its income-producing capability without suffering a decline in value.

Step 4: Estimate easement-to-parent-tract-size ratio

In the easement-to-parent-tract-size (EPTS) ratio, the number of units of the easement area (e.g., square feet or acres) is divided by the number of like units of the parent tract.

EPTS ratio = Easement size (square feet or acre) Parent tract size

The easement-to-parent-tract-width (EPTW) ratio is an invaluable basis of comparison for pairings that vary in the ratio of easement width to parent tract width (or depth). If an easement extends along the side yard lines, the easement width should be compared to the parent tract width; however, if an easement extends along the frontyard or backyard boundaries the easement width should be compared to the parent tract depth. The EPTS ratio proves to be a useful indicator for the reconciliation of EFS ratios. This ratio may be expressed in one-foot increments of easement width to corresponding parent tract distance (e.g., 1:2.5 [unkeyable] for every foot of easement width the parent tract extends 2.5 feet in depth).

EPTW ratio = Easement width/Parent tract width (depth)

Step 5: Calculate the EFS ratio

The EFS ratio can be determined by dividing the LVD ratio development in step 3 by the EPTW ratio derived in step 4. The EFS ratio reflects the percentage of value diminution attributable to the easement taking and severance damages to the land. EFS ratio = LVD ratio/EPTS ratio

Step 6: Prorate diminution

As previously discussed, if the data are available an appraiser derives a proration of total diminution attributable to the easement taking area compensation and severance damages. At this point in the analysis, the appraiser applies the allocated percentages to the LVD ratio. Consider the following example.

A commercial parcel has a transmission line easement extending along the perimeter of its back-yard. When compared with a parcel that is unencumbered, a 20% price variance (LVD ratio) is extracted. Within immediate proximity, the same easement extends across the frontyard of a similar commercial parcel, all within its street set-back line. Further, all transmission line improvements span the width of this lot and avoid obstruction of access at any perimeter point. When this second sale is compared to the same unencumbered sale, a 10% price variance (LVD ratio) results. The 10% price variance is solely attributable to severance damages because there are no apparent restrictions in highest and best use before and after the taking. The first pairing is experiencing a diminution in value, however, as a result of the easement taking and severance damages to the remainder. Verification of the two pairings support this conclusion; it thus stands to reason that 50% of the first pairings diminution should be allocated to severance damages with the balance accruing to the value of the taking area. This proration multiplier is derived by dividing the 20% LVD ratio into the 10% LVD ratio (i.e., .10 * .20 = .50, or 50%).

Another plausible scenario is the development of a pairing that involves the sale of an encumbered parent tract with an easement located entirely within the available building area, in which, because of the resilient use of the property (e.g., industrial or agricultural), the market does not perceive severance damages. In this case, the value diminution accrues solely to the value of the easement taking area.

The sum of value diminutions attributable to an easement taking area and severance damages may not necessarily reflect total land value diminution to the parent tract. More specifically, the parties to a sale transaction would probably acknowledge some overlap of these components when negotiating the price of an encumbered sale. When only one factor causes a loss in value, the full extent of this measure of loss would likely be reflected in the sale price. Ideally, enough pairings should be verified to extract EFS ratios that reflect combined components (e.g., easement contribution and severance damages) and mutually exclusive factors of value diminution.

Step 7: Apply EFS ratio to land value

An appraiser should estimate the unit land value of the parent tract before the taking and apply it to the taking area. The inverse multiplier of the EFS ratio (1 - EFS ratio) is then applied to the land value estimate of the taking area to determine the land value of the parent tract's fee and servient estate interests after the taking. This step may seem confusing at first glance; however, while it is true that these sequences are procedurally converse, the EFS ratios are extracted from, and applied to, market data in consistent mathematical sequences.

CASE STUDY OF RESIDENTIAL PROPERTY TYPE

The case study corridor is a 230-kV transmission line easement (200 feet wide) that extends through urban Ocala, Florida. This area was selected primarily because all other subdivisions that adjoin this easement do not have vacant lot sales located within the easement area.

The majority of subdivisions within the target research area contain residential lots legally described as adjoining but not including any of the easement area. The owners of these parcels (i.e., abutting but having no legally described servient's estate), however, are effectively using their respective half of the easement area by extending site improvements. When platted subsequent to the easement taking, subdivision lots encroached by transmission line easements are often larger compared with adjacent unencumbered lots. Often, the unencumbered portion of a lot severed by a transmission line easement is equal in size to unencumbered, adjacent parcels. In contrast, when subdivisions are platted prior to the easement taking, the transmission line easement may encroach on as much as 50% of the normal-sized lot's land area without creating a constructive total taking (a market does exist for significantly encumbered lots).

The subdivision that provides the best comparison of value diminution associated with encumbered versus unencumbered parcels is Walnut Creek (platted after the easement taking). Lots 7 through 10 of this subdivision include half (100 feet) of the right-of-way width. Only one of these lots sold as a vacant parcel--Lot 9. Lot 9 sold in May 1988 for $28,500; Lot 9 is 115 feet by 235 feet, of which the rear 100 feet is encumbered by the easement. The parent tract size is .62 acres and the easement area encompasses .26 acres. The cash equivalent unit price of the parent tract is $45,970 per acre, rounded to $46,000 per acre.

Lot 15, .51 acres, was purchased in April 1990 for $31,000 ($60,784 per acre). Lot 16, also .51 acres, was purchased in May 1990 for $30,500 ($59,804 per acre). The average of these two sale prices, $60,000 per acre, is the basis of comparison for the unencumbered lot value for Walnut Creek. The sale-date variance is not a factor of influence as lot values have not significantly changed during this time.

The EFS ratio developed from the pairing is 54.83%, rounded to 55%. The ratio of easement width to parent tract depth for Lot 9 is 1:2.4.

PROOF OF EXTRACTION PROCESS VALIDITY

A method for calculating EFS ratios that involves pairing like properties so that electrical transmission line easements are the only notable variance is outlined in this article. The second step requires development of an EPTS ratio, while the third and final step appropriates the overall loss to the easement taking without the necessity to establish component values of the front and back of the parent tract. This is an important element in the extraction of an EFS ratio because most properties accrue a diminishing return to their surplus land area, based on the principle of economies of scale. Often, the value contribution of the frontyard portion of a parcel exceeds the backyard portion. The process of dividing the overall value diminution of the encumbered parcel--expressed as a percentage ratio--by the EPTS ratio inherently accounts for the effect of economies of scale as well as for any component value of the frontyard versus the backyard. Consider the prior case study in Walnut Creek subdivision.

Background

This pairing resulted in an EFS ratio of 54.83%. Lots 15 and 16 of Block A were the control lots (unencumbered) because they are most similar in size (e.g., surplus land), topography, and tree covering. Lot 9 of Block A, the encumbered test lot, sold for $28,500 two years prior to the sale of the control lots; the control lots sold for $30,500 and $31,000 ($30,750 was the average price) in May 1990 in unrelated transactions. Prices in this test market have remained constant since about May 1987 when interest rates started to rise. The housing industry in Ocala anticipated the current economic recession.

Adjoining and adjacent to the .51-acre control lots are three typical-sized lots (Lots 12, 13, and 14 of Block A), which are .36 acres each. These lots are most comparable to the test and control lots but do not include surplus land area. All three lots sold in November 1977. Once again, date of sale is not an influence on price. Lots 12 and 14 sold for $25,000 and Lot 13 sold for $27,000. The difference in price is simply a reflection of negotiation skills--a factor that often skews results in paired-sales analysis. To overcome this element of subjectivity, the prices of the three sales are averaged at $25,650.

The unit prices of these lots are $46,000 per acre for the test lot; $60,000 per acre (average) for the control lots; and $71,250 per acre for the typical-sized lots. The marginal contribution of the surplus land area is developed by extracting the price differential of the latter two lots ($5,100), and dividing its result by the amount of surplus land area (.15 acres); the value contribution of surplus land is $34,000 per acre. Based on this price comparison, it is evident that economies of scale affected prices in Walnut Creek.

Alternative

If the average unit price of the unencumbered, typical-sized lots is applied to the encumbered land area of the test lot and then subtracted from the test lot's sale price, will the remainder represent the contribution of the servient estate? Consider the following analysis.

* The fact that the contribution of the unencumbered portion of the test lot is $25,650 (i.e., .36 acres at $71,250 per acre) imparts that the price residual of its surplus land is $2,850 (i.e., $28,500 less $25,650). As previously stated, the price differential of the control lots' unencumbered surplus land area is $5,100 ($34,000 per acre).

* The test lot is .11 acres larger than the control lots; therefore, the marginal value contribution of its surplus land area above and beyond the value of the control lot' surplus land area must be accounted for. The control lots are 42% larger than the typical-sized lots. Their coinciding marginal unit price is 48% of the typical-sized lots (i.e., $34,000 per acre divided by $71,250 per acre). Because the test lot is .11 acres larger than the control lots, its size differential represents a 22% incremental increase over the control lots. Based on curvilinear regression, the marginal unit price of the surplus .11 acres should be about 25% of the test lot unit price, which equates to $15,000 per acre (25% of $60,000 per acre). [TABULAR DATA OMITTED]

* The test lot, if unencumbered, should sell for $25,650 + (.15 acres at $34,000 per acre) + (.11 acres at $15,000 per acre) = $32,400. The price differential of the test lot as if unencumbered ($32,400) versus its actual, encumbered sale price ($28,500) is $3,900. This represents the most accurate means of estimating the diminution in value.

* The price differential of the test lot as if unecumbered ($32,400) versus the average-sized lots is $6,750 (i.e., $32,400 - $25,650). The EFS ratio is derived by dividing the value diminution ($3,900) by the total value contribution of the unencumbered surplus land area ($6,750), which equals 57.78%.

The shortcut procedure yielded an EFS ratio of 54.83%. The two EFS ratios would have aligned if a small size adjustment had been applied to the control lots. While this analysis facilitates the most accurate means of extracting the EFS ratio, it is questionable whether the slight increase in accuracy warrants its painstaking procedures. Considering that negotiation skills and other transactional factors diminish reliability of sales data, the small margin of error of the shortcut procedure may be readily compensated by extracting and correlating three or four best like pairings.

Wrong alternative

Has the obvious been overlooked? Consider the following simplified approach.

* Apply the average unit price of the typical-sized lots ($71,250 per acre) to the unencumbered portion of the subject lot (.36 acres): .36 acres at $71,250 per acre = $25,650.

* Determine the residual value of the test lot: $28,500 - $25,650 = $2,850.

* Divide the residual value ($2,850) by the size of the easement area (.26 acres) to determine the unit price contribution of the servient estate, which equals $10,950 per acre.

* Divide the unit price contribution of the servient estate ($10,950 per acre) by the unit price of the control lots ($60,000 per acre) to determine the value ratio of the servient estate to the fee simple estate, which equals 18.25%.

* Develop the EFS ratio by simply inverting the value ratio of the servient estate to the fee simple estate = 81.75% (100% less 18.25%).

The EFS ratio is severely skewed because this process implies that the unit value of the easement land area, if unencumbered, would equal the average unit value of the entire lot. Diminishing marginal returns of the backyard versus frontyard and of the surplus land area are ignored. Dividing the unit price contribution of the servient estate ($10,950 per acre) by the unit price of the encumbered parent tract ($46,000) slightly diminishes the skewed results: 23.80% servient-to-fee-simple estate vis-a-vis the 76.20% EFS ratio. This simplified, alternative process is an incongruous abstraction, and more critically, it results in an erroneous conclusion.

The procedure outlined in this article for estimating the EFS ratio inherently accounts for the effect of economies of scale as well as for any component value of the frontyard versus the backyard. The result of this procedure is only as accurate as the data on which the result is founded. In light of the fact that negotiation skills and other transactional factors diminish reliability of sale data, small margins of error should be tolerated but compensated for by extracting and correlating three or four best like pairings.

CONCLUSION

As indicated, appraisers have often depended on conversations with right-of-way acquisition agents of various government and utility organizations to support their EFS ratio conclusions. Such interviews result in a ubiquitous understatement of the market-based value of the servient estate, resulting in an overstatement of just compensation. The weakness of relying on right-of-way acquisitions agents' transactional precedents is the fact that their negotiation incentives contradict the court's perspective.

More specifically, many right-of-way acquisition agents are concerned equally with political ramifications and acquisition costs. In interviewing several right-of-way acquisition agents, one agent unabashedly admitted that the local county property appraiser's assessments are often starting points for offering prices. This agent applies a 50% EFS ratio to the county property appraiser's assessment of the land component, and then proceeds to negotiate with the property owner. Agents often forego the best purchase price when the chance of bad press or any other detrimental image factors arise--and rightfully so. Further, parcel owners last in line for negotiation for a right-of-way taking are clearly at an advantage from a negotiation standpoint. One right-of-way acquisition agent noted that if one or two parcels are the only remaining pieces to the puzzle, he is much more willing to pay a premium to settle the whole issue.

In light of a typical right-of-way acquisition agent's method of negotiation, EFS ratios founded on generalized opinions, or on easement purchase prices, will lead to value conclusions unreflective of fair market value. Clearly, the best way to estimate the market value of an easement is the pairing of arm's-length sales of parties unaffected by political pressures. That is, the means of paired-sales analysis outlined in this article should provide the most reliable indication of market reaction to the value of the easement interest.

[1.] William Dude Phelan, "Valuation of Electrical Power Transmission Line Easements." Memorandum, March 1991.

[2.] See case law bibliography in Appendix.

[3.] Louis E. Clark, Jr., and F.H. Treadway, Jr., Impact of Electrical Power Transmission Line Easements on Real Estate Values (Chicago: Appraisal Institute, 1972), ii-57.

[4.] Peter F. Colwell and Kenneth W. Foley, "Electric Transmission Lines and Selling Price of Residential Property," The Appraisal Journal (October 1979): 490-499.

[5.] Colwell, "Power Lines and Land Value," The Journal of Real Estate Research (Spring 1990): 117-127.

[6.] Constructive total taking is a legal term used to describe the situation in which severance damages effectively create a 100% diminution in value of the parent tract.
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Title Annotation:includes appendix
Author:Green, Gordon G.
Publication:Appraisal Journal
Date:Jul 1, 1992
Words:6391
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