Fundamental of Special Assessments in Appraisals
By: John G. Flaherty, Stephen T. Hosch, and Darrell V. Koehlinger
Special assessments can be simply thought of as an invoice charged to a property owner by a municipality for local improvement projects under the government's power of taxation. Special assessments are often levied on properties directly affected by the physical improvement or indirect enhancement sponsored by the municipality, such as the construction or reconstruction of streets, extension of public utilities, the addition of a regional storm water pond, and several other infrastructure improvements. The amount a property is assessed can never exceed the benefit accrued to the property as a result of the improvement. Dollars spent on condemnation awards are often included in the total project cost figures if the condemned property was required to complete the project as in the case of street right-of-way acquisitions.
Properties particularly susceptible to proposed projects and future special assessments are vacant land parcels, and improved properties that are either under-improvements on large sites or those nearing the end of their economic lives. It is not uncommon to find in growing urban areas older commercial, industrial or residential properties on large tracts of land still served by private well and septic systems. In many cases, the value of the land as vacant has approached or even surpassed the value of the properties as improved. In areas like these where redevelopment is ripe, land speculators and developers often begin acquiring older properties with the anticipation of municipal utilities eventually becoming available. As more developers begin to control an area, the likelihood for them petitioning the local municipality for the extension of public utilities and street improvements increases. Eventually, the municipality may implement a project that will provide the infrastructure needed for the petitioning developers to redevelop their properties into more intense uses.
Appraising the value of project improvements that will ultimately be included in an assessment roll is a unique area in real estate appraisal. Typically, the valuation methodology is similar to appraising properties for condemnation; both are done on a before and after basis. In some instances, the property owner may wish to consult a land planner and civil engineer to review special assessment costs, zoning, impacts of the project on the development of the property, or any other issues that may be in question. The difference between the value of the property before the project and the value of the property after the project is measured to determine the economic "benefit" that the project had on the market value of the property.
Special assessments are adopted after the project has been completed and actual costs are quantified. In the case of raw land being developed simultaneously with project improvements, we believe the date of valuation "before the project" must fall prior to when the project commenced, because a different product type may exist (finished housing, a new building, internal streets, etc.) once specials are adopted years later. The date of valuation "after the project" should be the same as the "before" date, but then assume the project improvements are complete. Using the same date of valuation both before and after a project is a consistent method to use, so as not to confuse the indicated "benefit" with value appreciation over time or a change in the property's physical condition unrelated to the project. Only when a property sits idle during the project improvements does it appear reasonable to use the date the assessments were adopted as the date of valuation, because the test is being conducted on the same property in both the before and after valuations to determine whether or not a benefit exists..
It is understandable that municipalities would like to pass through entire project costs to property owners, although it may not always be possible. It can also be difficult to quantify who should pay what portion of the project cost, especially when multiple properties of various types and life cycles are impacted by the project. Sometimes the allocation of project costs to be adopted in a special assessment roll are determined on an arbitrary basis, such as front footage or gross acreage with the intention that larger developments should be responsible for a higher percentage of the total costs because they will receive the most benefit. This arbitrary allocation can be a mistake in some cases where a particular property is now burdened with significant costs as a percentage of overall value that did not exist before the project.
Municipalities are only allowed to assess the property in an amount that is equal to or less than the indicated "benefit". Municipalities know that special assessments can only be charged if individual property values increase and only by an amount not to exceed the benefit received. It has been our experience as appraisers that sometimes specials are charged to a property without any prior investigation by the city as to the benefit to the particular property. This lack of preparation has resulted in the property owner either not paying the assessment or paying only a reduced amount, leaving the balance for the city to cover. What causes this problem is that sometimes the improvement is too premature, and the local market is not able or ready to absorb any more development at this time. The municipality put in the improvement without understanding the dynamics of the marketplace and the property was not currently able to derive any benefit. A viable alternative to the city would be to escrow the specials and charge them back to the property owner at some future date when development occurs. Both the city and the property owner can incur substantial legal bills when special assessments are contested.
Prudent municipalities engage in an appraisal process before special assessments are allocated, not after. One of the ways municipalities can protect themselves in determining special assessments is to engage the services of a real estate appraiser first to determine if a proposed improvement will provide sufficient benefit to the property's owners to warrant a special assessment charge. If no benefit exists, the city officials can determine if they should go ahead with the improvement and pay for it under the general fund. In this scenario they have at least made an informed decision and determine in advance if they have the funds for the project.
While the economic benefit may be proven through numerous appraisals to justify special assessments, it is rare when all of the property owners impacted by the project actually plan to redevelop or fully utilize the project improvements immediately. In some cases, a homeowner may enjoy the secluded nature of an oversized lot with no intention to sell the property for redevelopment; however, if special assessments amounting to thousands of dollars are levied on the property with an annual interest rate of say 8%, this homeowner may be forced to sell due to the financial burden resulting from the annual special assessment charges. To help existing homeowners who do not plan to subdivide and utilize the improvements in the foreseeable future, some municipalities would require that the homeowner hook up to the new water and sewer lines, assess them for the benefit provided to the existing home, but defer the balance of the special assessments interest free until the time that redevelopment/ subdivision occurs. The immediate financial burden on the homeowner is then significantly reduced, often allowing them to co-exist with surrounding redevelopment. The majority of the project cost is usually recovered in a short period of time through the assessments levied on the developers' properties, assuming the developers held a majority of the impacted land area prior to the adoption of the special assessments.
The relationship between special assessments and condemnation is often confused in the marketplace. They are two chronologically distinct valuation methodologies that are not interdependent. If special assessments are levied as a result of a condemnation, the "after" condition in condemnation is exactly the same as the "before" condition when valuing the property to determine special assessments. To measure any potential severance in a condemnation case, the "after" condition should take into account the financial impact of the proposed project from special assessments to be levied on the property. By incorporating the proposed special assessments into the "after" condition, any value diminution resulting from the proposed special assessments is recognized within the condemnation appraisal.
The law is unclear on whether a special assessments case can pick up severance not measured or awarded in a condemnation case. An attorney should be consulted on a case by case basis for direction in the appraisal process. For example, if a new right of way has been extended through the middle of a property owner's land from condemnation and severance was not fully recovered, the special assessments case may or may not recover some lost severance by reducing or eliminating the assessment. The appraiser in the special assessment case may find that the improvement of the right of way is only partially beneficial to the owner and, as a result, the owner may be responsible for only a portion of the assessment. In this situation, even though the owner was not awarded full severance damages in a prior condemnation proceeding, it should not have a bearing on the calculation of the special benefit.
Before allocating special assessments, prudent planning and a clear economic benefit to the impacted property are required. To ensure limited exposure in future special assessment appeals by property owners, before and after appraisals should be completed prior to adopting special assessments to provide a framework within which the municipality can clearly determine project cost recoveries. Property owners, especially those who choose to buy underdeveloped properties in a growing market or within the path of development, must be prepared for public improvement projects on the horizon that could result in significant special assessments. 
Back To Top
