Volume 11, No. 1, Spring 2006

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Easements and Special Assessments

What Seems Simple on the Surface May Be Quite Complex

By Angela Hough, Valuation Analyst; & John T. Schmick, Vice President

Experienced appraisers know that the first (and most important) step in any appraisal assignment is to make sure that the appraisal problem is clearly identified. Following that, the appraiser will take the necessary steps to answer the appraisal question. Despite years of experience, we continue to receive assignments that seem simple on the surface but become complicated as we further research the appraisal problem. Assignments involving valuations for easement and special assessment matters are especially challenging. However, a reasonable estimate of damages or benefits can be determined if the appraiser has all of the relevant information.

In one assignment, which involved the construction of a new underground pipeline for natural gas, the subject properties consisted of vacant farmland. Initially, the case appeared to be based solely on the loss of value in the easement area. However, research indicated a far more complex situation. The emerging data reinforced our belief that what you see is not necessarily what you get! Soil experts identified some unexpected impacts of easements:

• Construction equipment caused a compaction of soils on either side of the pipeline. In one study, soil tests indicated compaction problems to a depth of 24 to 30 inches. Soil compaction affects the ability of crop roots to grow downward. Unable to grow down, the roots "pancake" out to the sides, stunting plant growth and diminishing crop yield. Equipment capable of ripping the soil to alleviate the compaction currently reaches to a depth of only 14 inches. Thus, the problem could not be cured. Crop experts predicted measurable diminished crop yield 15 years or more into the future.
• Failure to compact the soil over the pipeline trench caused settling.The resulting change in the flow of surface water contributed to soil erosion and stunted growth in the plants. More importantly, in the first year or two after construction, farm machinery frequently bogged down in the trench area. In one instance, a combine tipped over in the trench with its nose stuck in the ground on the other side. The cost to repair the equipment was in excess of $4,000. Several farmers reported nearly tipping over when their equipment sank into the trench area. While equipment repair cost is one problem, operator safety is another issue entirely.
• Owner compensation for taking of the easement area is a common factor in all easements A legal description and a survey of the easement location are required by law. In this particular case, owners who accepted the initial offers of compensation received blanket easements over the entire field and no surveys were made of the "as built" locations. Other owners, who rejected the initial offers of compensation, did receive surveys and legal descriptions of the specific pipeline locations, but only after two years of litigation.
• An intact drain tile system is essential to farming in that it carries away excess soil moisture that can damage crops in as little as 48 hours. In this case, no effort was made to protect the drain tile because pipeline construction was placed on the "fast track". As a result, contractors cut through all of the drain tiles, repairing them after the pipeline was in place. Unfortunately, the replacement tile pipe was "un-slotted", meaning it could not provide drainage in the area of the repairs. This resulted in various changes in drainage water flow patterns and some ponding of water in the fields which, in turn, negatively affected crop yields.
• Loss of value extended to the whole field. Initially, no one anticipated the magnitude of value loss. However, market evidence introduced by both sides of the condemnation clearly indicated that a pipeline in this area caused a loss of value in the entire field. Although some subsequent buyers indicated that they didn't think pipeline affected their purchase prices, market evidence showed otherwise.

This negative impact on value of pipeline easements is not exclusive to land currently used for farming. Pipelines closer to urban areas may not diminish crop yields or damage drain tiles. Nevertheless, they can significantly impact the properties they occupy. In another recent assignment, it appeared that the proposed natural gas pipeline easement would, again, encumber a property currently in agricultural production.Upon closer inspection, however, it became evident that the subject property was located in an area slated for annexation to the city and, thus, a prime candidate for urban residential subdivision in the near future. In reality, the appraisal assignment was to measure the impact of the easement on an urban residential development. Although this was also a gas pipeline easement case, the key valuation issues are relevant to other types of easements (overhead power line easements or road easements) as well. Careful consideration must be given to how the following changes affect the value of the subject property. Land that was prime for residential development is now encumbered with an easement:

• The land available for development is smaller after the taking of land for an easement. In one pipeline easement study, Before and After single-family residential development plans were drawn to determine whether or not any lots would be lost due to the pipeline. Final drawings indicated a loss of 5% of the buildable lots with the pipeline easement in place. Not only were there fewer lots, those within the easement area itself had to be larger than normal to accommodate unique setback requirements. Larger lots like these do not necessarily warrant higher prices because of the building limitations created by the pipeline easement. In one example, a lot adjacent to the pipeline and twice the size of its neighboring lot sold for the same overall price. On a per square foot basis, the larger lot sold for approximately price the developer expected to achieve if two separate lots could have been developed. Additionally, there may be fewer developable lots in the subdivision as a whole once an easement is in place.
• Easements affect the overall design of the development. If the easement is approved prior to the design stages, the development is efficiently laid out to accommodate the easement. If there is no easement, the owner has a variety of development options allowing him or her to maximize density within the development. When working around an easement, the property owner loses flexibility; the encumbered land imposes significant design limitations. In effect, the overall character of the development may be altered as a result of the easement. Consider, for example, a housing development plan consisting of high-end homes on executive lots. If an easement were imposed on this property, it is likely that the character of the entire development would change: heavily wooded areas may lose their mature trees, cul-de-sac lots may be eliminated and roads realigned in an attempt to accommodate the project design once the easement is in place. W was an ideal site for single-family homes may now be a site better suited to townhomes or other types of higher density residential development. Initially, it appeared that the easement affected only the land it encumbered. However, as Obviwe noted, the entire parcel of land is affected, in one way or another, by the easement.
• Increased development costs and prolonged planning often occur for subdivisions with an easement. If the development plan is complete and ready for platting, the developer will now be required to spend additional time and money to re-design the site. Subsequent delays in the start of the development typically increase construction costs. If the overall character of the development half the has changed, it may result in lower lot prices and increase the time for lot sell-off, thus driving u the cost of holding the vacant land. Because of the easement, there are now fewer developable lots in the development, which reduces the available revenue to cover development expenses for the individual lots (grading costs, constructing the streets and configuring utilities to serve the subdivision). In the final analysis, a decrease in development revenue, an increase in the sell-off time, and the possible increase in the development expenses lead to an overall lower profitability of the land-all as a result of the easement.

Easements are by no means the only assignments which appear simple but may be quite complex. It is equally essential that the appraiser keep the big picture in mind when determining values for special assessment cases. One might assume that most of the appraisal concern will be related to land values and how much they might increase as a result of th introduction of public water and sewer services the area. Often overlooked, however, is the question of benefits from those same water and sewer services as they pertain to the value of an improved property.

When municipal water and sewer services are brought into an area, the appraisal question is straightforward: How has the land value changed (if at all), as a result of these new services? Appraisers look for sales of land with these services and compare them to sales of land without these services. Obviously, there will always be additional issues (such as zoning) to consider in the valuation, but the market offers many examples of the impact these changes have on land values. However, for improved properties such as those with a warehouse or industrial building occupying the site, the appraisal question isn't just about land values. The appraiser must focus on total property value. If the land value goes up, what happens to total property value? What happens to the value of the improvements?

One recently proposed theory regarding improvement value in a special assessment case suggests that total property value is increased by the amount of increase in land value. In effect, the building value "floats" on the land value. However, this is in direct conflict with other valuation theories related to the estimated economic life of a building, interim uses, highest and best use and ripeness for redevelopment. Our research did not find any appraisal literature to support the "floating building" value theory.

The complexity of the issue becomes clear when the appraiser researches market sales data of similar building types both with and without municipal utility services. In researching market sales data, one is confronted with the difficulty of isolating the change in value from the total improved property when utility services are extended to that property. Assume, for example, that the property is improved with a metal skin industrial building. The subject is located in a fringe urban area using an on-site well and septic system. City utilities are extended to the site and the well and septic systems are abandoned. What we find in the market is that the extension of utility services often brings with it an upgrading in building standards such that metal skin buildings are no longer commonplace. In general, we find concrete buildings that are more costly to build but have a longer life expectancy. As a result, the difference in value between a higher cost concrete building with utility services compared to a lower cost metal skin building without utility services often masquerades as a "benefit caused by the extension of utility services". In reality, the higher value is partially based on a difference in building types and is not due solely to the extension of utility services.

After deducting the cost to hook up to the new services, we discovered that there is nearly an equal exchange of increase in land value to loss in building value such that overall total property value remains unchanged. The composition of total value (building v. land) changes but total property value may not change at all. Intuitively, this makes sense because adding public water and sewer services to the land does not change the function and use of existing warehouse space unless that space is remodeled to a more intense use that needs the new utility services. What initially appeared to be a simple analysis of how municipal water and sewer benefit land value is, in fact, a complicated analysis of the benefit (if any) to an existing improvement.

CONCLUSION
No matter what type of appraisal question or litigation problem you bring to the appraiser, it is wise to be aware that what appears on the surface to be a simple and straight forward appraisal assignment may be much more complicated. The shrewd property owner understands that some issues will require the input of additional experts and that it will take more time to thoroughly complete the assignment. No matter how complex the situation, all those who use valuation services should require that their valuation experts have the experience and skill to bring the assignment to a successful conclusion.