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By John T. Schmick, Vice President
Past articles in the publication have indicated that an appraisal starts with correctly identifying the appraisal problem or appraisal question to be answered. More often than not, the client articulates a value question and the appraiser frames that question into the appropriate appraisal format. The selection of appraisal methodologies used to answer the question is left up to the appraiser. However, it is important for the client to understand what methodologies will be employed and what alternative theories or methodologies are available and/or may be used in rebuttal, especially within the context of litigation. While it is true that there is a wide body of appraisal knowledge, it is also true that not all appraisers agree on the methodologies an theories to employ in any given appraisal assignment, The following discussion illustrates a classic difference of opinion: in this case, with regard to easements on railroad land.
The most common form of easement found on railroad land is utility easement on a portion of a railroad corridor. Depending on the nature of the assignment, appraisers may be asked to determine the answer to one or more of these questions:
Appraisers usually approach this problem for one of two viewpoints. Those who typically represent the railroads favor a method called Across-The-Fence (ATF) value with an Occupancy Factor. Those who typically represent the utility companies favor a market analysis method involving the analysis of larger parcels, highest and best use, and comparable land sales. While there is some overlap in the tow approaches, there are significant differences in the underlying assumptions of each method. It is crucial that users of the report are aware of these differences.
ATF VALUE
The concept of ATF value first appeared in the appraisal literature in 1978; a time when railroads in the eastern United States were going though bankruptcies and consolidation. ATF value is based on the idea that this long narrow strip of land which connects two points has special value characteristics. In its current practical application, it assumes that a railroad corridor has the same functional utility as the land adjacent to it (across-the-fence). Frequently, an appraiser will identify the entire width of the railroad corridor as some type of transportation/communication corridor.
Where possible, appraisers using the ATF method will look for corridor sales. However, depending on the general location in the United States, frequently there are few, or no sales available. Those which are available are seldom "clean" sales; they need significant analysis and/or adjustments. As a result, appraisers using the ATF method look for land sales in the area of the railroad corridor as a starting point for determining unit value prices for various segments of railroad corridor as it passes from one area to another. However, the assumption of equal functional utility allows the appraisers to make no adjustment for size, shape or access. All three are essential factors in determining value for the land adjacent to the railroad. As a result, it is a leap of faith for an appraiser to state that a long narrow ribbon of land has the same functional utility as a rectangular parcel of land available for development.
Having established a before taking market value using the ATF method, some appraisers will attempt to develop an occupancy factor for the new easement. In many instances, this involves going to the railroads and seeking out past easement agreements in order to review the terms. Often included in this analysis is the assumption that some future technology will need these corridors, but use will be precluded by the current easement. However, seldom can the appraiser, the railroad, or the easement holder articulate how they came to agree on an occupancy factor. We have seen appraisals in which the writer has opined a 60% occupancy factor for an overhead power line easement, 60% occupancy for an underground pipeline easement, and 50% occupancy for the railroad operation. This resulted in a 170% occupancy factor for all uses in the same section of railroad land! As a result, an unverifiable methodology is perpetuated with little regard for current market dynamics. With land prices increasing to record levels, it is becoming more common for utility companies to request proof of occupancy factor rather than continue to follow the same old patterns. With increasing frequency, these long-accepted occupancy factors cannot be supported in the face of adequate supply and demand analysis and highest and best use analysis.
The main advantage that the ATF method has over other methodologies is that it has been around for a long time and is widely recognized. Also, it is relatively simple to use and to communicate to the reader. However, older methods are sometimes inadequate in measuring and explaining values for current market conditions. The real estate industry is dynamic and appraisal profession continues to seek new and better methods to identify and explain market values in a wide range of real estate problem-solving situations.
MARKET ANALYSIS METHOD
A market analysis method was first presented to the appraisal community in 1989 in the form of a decision-tree model that allows appraisers to answer a series of question to properly identify the appraisal problem and how that problem should be approached. I its current practical application, the appraiser uses a two-step highest and best analysis, analyzes the larger parcels, uses comparable land sales with adjustments, and I this example, uses the well-recognized before taking and after taking analysis to determine loss in value cause by the new easement.
Using this approach, the appraisers starts by identifying the larger parcels; that is, those parcels which have unity of use, unity of title, and contiguity. Essentially, the appraiser is looking for physical breaks in the corridor. This includes streets, highways, significant bodies of water, etc. Even operating railroads tracks are a carrier to unity of use for excess land on either side of the tracks. At this point it becomes necessary to obtain detailed maps to be used as exhibits to effectively communicate the appraisal to the user.
Next, the appraiser follows a two-step highest and best use analysis. The first step is more of a macro analysis that focuses on the continued use of the railroad tracks. If the railroad track usage is to be discontinued, then the entire width of the railroad corridor is available for a new use. However, if the track usage is to continue, then the appraiser has to decide if there is any excess land on either side of the tracks that may not be needed for railroad operations. If there is no excess, the appraiser is focused o a rail corridor with little to no room for other use. If there is excess land, the appraiser had to decide if there is a demand for the excess land, either for a corridor use or for use by adjacent land owners. The outcome of this macro highest and best use analysis will determine how the appraiser reaches a conclusion as to the value of the land. In the case where there is excess land on either side of the operating tracks, the appraiser will conduct a second, or micro, highest and best use analysis to determine whether or not there is greater demand for and value from a corridor use or from adjacent land owners.
Having determined the larger parcels and the highest and best use of the total corridor and the individual parcels, the appraiser turns to the selection of comparable sales, including the sale of any small sections of the subject railroad corridor. This is an important distinction because while the ATF method assumes the same functional utility as other developable parcels, here the appraiser looks at the actions of both the owner and the market to determine functional utility. It is not unusual to find that small sections of excess railroad land have been sold to adjacent land owners for a multitude of uses, including buildings, parking, outdoor signs, and landscaping buffers.
When one considers that the continuous corridor is no wider than its narrowest point, any additional width is easily identified as potential excess land. Determining the highest and best use of the excess land will usually require a survey of both potential corridor uses and adjacent land owners, as well as review of other easements on the subject railroad land. It is not unusual to find multiple users in the same section of excess land, both for corridor uses and non-corridor uses. Where excess land has a highest and best use of sale to adjacent land owners, the appraiser cannot ignore adjustments for size, shape, and access; adjustments which are not allowed under the ATF methodology.
After identifying the larger parcels, analyzing the highest and best use, on both a macro and micro level, and valuing each component of the subject, the appraiser can conclude a total value for the subject before the taking of a new easement in our example. It is at this point that the two methods differ significantly. While the ATF method estimates an occupancy factor, the market analysis method asks a simple question, "What could the owner do with the property before the new easement that cannot be done after the easement is in place?" Rather than assume an occupancy factor. The appraiser must look for a way to measure the marginal impact on use and functional utility caused by the new easement. Under the recognized before and after rule, the appraiser now starts over again. He or she prepares a separate analysis to determine highest and best use with the easement in place and re-evaluates the larger parcel to determine value after the taking for the new easement. The difference between the before taking value and the after taking value is the measure of loss or diminution in value.
In some respects, the diminution in value measured by the before and after analysis is similar to an occupancy factor in that it measures that portion of the bundle of rights inherent in fee simple ownership/value which is captured by the new easement. The difference is that it is measured in the current market place and is not perpetuation of the historical relationship between two parties.
CONCLUSION
At the beginning of this article, we stated that it is important for clients to understand what methodologies are employed in their assignments and what alternative theories or methodologies are available. We recognized that all appraisers do not approach an appraisal problem in the same manner. While most users of appraisal series will not find their assignments involving the extreme differences in appraisal methodology exhibited in our railroad and utility easement example, it is still important to understand that differences in appraisal opinion are often the rule rather than the exception. Therefore, we recommend that users of appraisal services take the time to talk to their appraisers and to understand what procedure, methods, and theories have been used in their appraisal assignment.
Shenehon Company
88 South 10th Street, Suite 400
Minneapolis, Minnesota 55403
Phone: 612.333.6533 / Fax: 612.344.1635
ValuationSpecialist@shenehon.com
