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Premium pricing: the value of transit premium is key when assessing project benefits in eminent domain actions.

Demographic changes and a focus on quality of life have fueled interest among buyers and renters in communities with active transportation options. As public agencies expand rapid transit, properties in proximity to new bus or rail lines often increase in value--a phenomenon known as transit premium. Transit premium is especially important for appraisers to consider when developing opinions of value for land in eminent domain actions impacted by transit projects.

In many instances, when public agencies construct transit lines and develop new stations (as well as widen streets and build grade separations), they acquire portions of properties, which can result in severance damages for such factors as loss of view, increased cost of security, noise, vibration, temporary construction impacts and business disruption. Transit projects, however, can benefit the remainder property because the impacted property may thereafter fall within a transit overlay zone, allowing for higher-density opportunities and fewer parking requirements, or experiencing reduced vacancy and increased rental rates and sale prices.

Do the project benefits offset or otherwise affect the compensation to which a property owner is entitled? If so, how do appraisers quantify such potential benefits?

What is a project benefit?

A project benefit is any increase in the value of a property due to the construction and use of the project--including improvements located off the property, such as an adjacent transit station. Project benefits enhance the present market value of the remainder property, which can include the potential, actual or added use and enjoyment of the property. Just like damages, benefits cannot be remote or speculative, and must be capable of reasonable measurement.

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Project benefits can offset severance damages

In most jurisdictions, project benefits may offset severance damages, but they cannot offset against the value of the part taken. In other words, benefits from the project are considered, but they can only offset and not exceed severance damages. The rationale is that offsetting benefits against the part taken would unfairly result in an owner's loss of property without any compensation, whereas a neighbor whose land was not taken would receive the exact same benefit from the project. Conversely, federal rules allow an offset of benefits to damages as well as the value of the property taken. Under federal standards, an appraiser performs a "before" condition valuation and an "after" condition valuation; there is no value of the part taken, severance damages and offsetting benefits calculation.

There is disagreement among jurisdictions about whether general benefits or special benefits may be considered. General benefits are enjoyed by the public at large, whereas special benefits are unique to the property being acquired. Federal rules state that only special benefits may be considered, whereas some jurisdictions allow the consideration of general benefits. For example, the California Supreme Court, in Los Angeles County Metropolitan Transportation Authority v. Continental Development (1997) 16 Cal.4th 694, struggled with the concept of general benefits versus special benefits where one property near a proposed transit station was being partially acquired but more than 500 properties would benefit from being within a 1,700-square-foot radius of the new station. The court ultimately held that all benefits--even general benefits--could offset damages.

Measuring project benefits

Project benefits ordinarily are measured on the date of valuation, so if benefits will not be realized until some future time (say, once the transit project is complete and operational), the calculation must reflect this delay. Speculative benefits, which may not accrue until many years later, may not be appropriate.

Every market, property and project is different, so appraisers have to analyze how a project is zoned, whether the area is urban or suburban, whether the project is close enough to a transit project to enjoy accessibility premiums, and whether it meets a demand by improving mobility and traffic congestion.

After considering general factors, appraisers should focus on tangible benefits. For example, properties within close proximity to transit stations may become part of a transit overlay zone and be subject to parking reductions and increased density. New zoning ordinances may allow for larger buildings than would otherwise be permitted absent the project, which may allow additional residential units and more rental income or a greater number of unit sales and increased property values.

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Appraisers need to quantify this analysis, so they can review published articles and studies on transit-oriented developments (TODs); conduct interviews with property managers, brokers and market participants; and conduct a paired-data analysis if such data are available. If a transit agency paid for an investigation, the project-specific study could prove extremely valuable.

Studies on TODs suggest that proximity to rail has a positive impact on property values because of improved accessibility--but only within a certain distance. For example, "Impacts of Rail Transit on Property Values," from Booz Allen Hamilton, concludes:
   Most of the tests of the impact of rail on property
   values showed that the positive effects of rail transit
   on property values were most prominently felt
   within a very limited distance from transit stations.
   This distance is determined by the distance
   of a reasonable walk from the station, generally
   one-quarter mile to one-half mile. Beyond this
   zone, the effect of the proximity to rail on property
   values is negligible.


Other important factors are property type and location. The same study finds:
   Properties holding employment uses such as
   offices and industrial sites experience higher property
   values because such properties have increased
   access to a larger labor market. In fact, office properties
   demonstrate a larger property value increase
   compared to industrial sites because office buildings
   tend to cluster in denser concentrations,
   allowing for the benefit of rail to be more acutely
   felt. Finally, retail properties often benefit from the
   fact that rail transit contributes to the concentration
   of activity and increases in pedestrian traffic in
   transit-accessible, pedestrian-oriented districts.


As more TODs are built, the impact of transit proximity on property values becomes less speculative. As the Transit Cooperative Research Program stated, "If transit investments create benefits, real estate markets tell us."

Disregard project enhancements in the 'before' condition

Appraisers need to consider whether awareness of a proposed transit project has increased the value of the subject property. If such an increase occurred, should it be ignored when providing an opinion of the property's value in the "before" condition?

Such a scenario occurred in Santa Monica, California, where the recently completed Expo Light Rail Transit project connects downtown Los Angeles to Santa Monica. Property values in Santa Monica already were increasing as a result of an improving real estate market, but how much of the increase--if any--resulted from the announcement of the transit line? Market data suggested such a correlation, as sales prices went up dramatically for residential properties in close proximity to the proposed route, especially once the city changed its zoning ordinances to allow for TODs along the route. Properties about one mile from the route were selling for around $250 per square foot, while similar properties about a half mile from the route were selling for around $450 per square foot. Properties even closer were going for upwards of $600 per square foot. Other factors may have played a role, but the proposed project seemed to be the biggest influence on property values.

The rule followed by the majority of jurisdictions is to exclude enhancements in value created by a proposed public project when giving a value opinion on the land taken. (See, e.g., United States v. Reynolds (1970) 397 U.S. 14, 90.) Several states have enacted statutes that prohibit the consideration of enhancement when appraising a condemned property. (See, e.g., Fla. Stat. [section] 73.071(5).) How does an appraiser exclude project influence? In Santa Monica, should appraisers have simply ignored or disregarded all the comparable sales within a half-mile radius of the proposed transit route and used comparable sales from farther away? Would appraisers open themselves up to greater scrutiny if they ignore nearby comparable sales data?

Courts have yet to adopt an iron-clad rule of exclusion for all project-enhanced sales, so perhaps a better approach is for appraisers to rely on nearby comparable data and make adjustments to account for project enhancement as long as the adjustments have some objective basis--such as discussions with the market participants, brokers or other studies or data. (See, e.g., City of Los Angeles v. Retlaw Enterprises, Inc. (1976) 16 Cal.3d 473, 482-483.)

Are project benefits more speculative than damages?

The timing of condemnation actions, and how they relate to severance damages and benefits, is another thing that appraisers, property owners and public agencies must consider. Damages usually are felt first, as construction impacts can result in the loss of tenants and views and an increase in security concerns. Benefits usually aren't realized until the entire transit project is completed, which could be years. Does this timing mean that benefits are more speculative? Not necessarily, because quantifying potential rent increases or vacancy reductions isn't more difficult than quantifying an impact to a view or the loss of parking spaces. However, since benefits are not as tangible, they are subject to more scrutiny.

Numerous factors can influence the amount of the increase in value, making benefits difficult to quantify, but there is more data than ever before that can help appraisers develop opinions of value on transit proximity project benefits.

Bradford B. Kuhn is a partner at the Irvine, California-based law firm Nossaman LLP, where he is chair of the Eminent Domain and Valuation Practice Group. He can be reached at bkuhn@nossaman.com.
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Title Annotation:Property Analysis
Author:Kuhn, Bradford B.
Publication:Valuation Magazine
Geographic Code:1U9CA
Date:Jun 22, 2016
Words:1579
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