This article will focus on how lawyers and appraisers can work together to tackle difficult appraisal problems that don’t lend themselves easily to a simple comparable sales approach or where such an approach requires larger adjustments than are typical because of a dearth of similar properties.
We will first provide legal and appraisal resources supporting the use of alternative appraisal techniques and then, because these are the kinds of cases that often require litigation to determine value, we will discuss examples of how they have been applied.
GENERAL EMINENT DOMAIN CONCEPTS SUPPORT EXPANSIVE EVIDENTIARY RULES
When dealing with difficult valuation problems, referring to bedrock eminent domain concepts can help guide the process.
A valuation trial seeks to replicate the marketplace, and any competent evidence that would be considered by a prospective buyer or seller is generally admissible. As early as 1879, the United States Supreme Court established that “in determining the value of land appropriated for public purposes, the same considerations are to be regarded as in a sale of property between private parties. The inquiry … must be what is the property worth in the market.”1
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State courts have recognized these principles as well. In replicating the marketplace, “the fact finder is tasked with determining how much a willing buyer would pay for the property if the owner had voluntarily offered it for sale.”2 The factfinder should consider any competent evidence “which would be considered by a prospective vendor or purchaser or which tend to enhance or depreciate the value of the property taken is admissible.”3
Thus, recognition should be given to all relevant factors which tend to provide a means for arriving at a fair valuation in eminent domain proceedings.4
Difficulty in determining compensation doesn’t eliminate the obligation to do so. A condemnee must recover all damages upon the trial of the condemnation suit, no matter how difficult their ascertainment may be.5
Supreme Court holdings recognize that market value “is not an absolute standard nor an exclusive method of valuation,” and will depart from it when justice requires.6
In United States v. Commodities Trading Corp., the Court indicated that it “has never attempted to prescribe a rigid rule for determining what is ‘just compensation’ under all circumstances and in all cases.”7
In United States v. Fuller, the Supreme Court explained that fair market value “is not an absolute standard nor an exclusive method of valuation. The constitutional requirement of just compensation derives as much content from the basic equitable principles of fairness as it does from technical concepts of property law.”8 When fair market value is “too difficult to find, or when its application would result in manifest injustice to owner or public, courts have fashioned and applied other standards.”9 State courts have recognized similar indemnity principles.10
There are no set formulas for determining just compensation. Many state courts have recognized that just compensation is the central question to be decided and have rejected rigid adherence to specific methods or formulas, even when determining market value. “These formulas are all means to this end; there is no artificial formula by which alone such compensation may be determined.”11 Instead, courts have tried “to find working rules and practical standards that will accomplish substantial justice such as, but not limited to, market value.”12
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SPECIFIC APPRAISAL APPROACHES AND TECHNIQUES
Case law has also addressed the use of various appraisal techniques when valuing unique or scarce properties.
The Comparable Sales Approach
The comparable sales approach is the most used approach to determine value in condemnation proceedings, and some courts suggest it is the only method to be considered when adequate sales data is available. The following concepts should be remembered when applying this technique to unique or scarce properties.
Comparable sales are not necessarily identical properties.13 Property can be similar but “possesses various points of difference.”14
The admissibility of allegedly comparable sales is typically within the discretion of the court or commission.15 When a comparable sale is admitted only in support of the appraiser’s opinion, it generally does not have to possess the same degree of comparability as when submitted as direct evidence of value.16
An even greater degree of difference in comparable sales may be allowable when there is little else available.17
Other Techniques and Approaches to Value
Courts and appraisal literature also recognize the use of other traditional and non-traditional approaches to value and alternative valuation techniques when dealing with special and unique properties. Other techniques may also be applicable when there is a dearth of comparable sales.
In jurisdictions that generally allow only the comparable sales approach, or that favor it over other techniques, the lack of comparable sales may justify using the income or cost approach to value.18
Lack of market evidence may also support using less traditional valuation techniques. For example, when a property “is of a kind seldom exchanged, it has no ‘market price,’ and then recourse must be had to other means of ascertaining value, including even value to the owner.”19 In such cases, parties may have to “resort … to [using the] best available data which, even though speculative, under some circumstances may be sufficient to allow a jury to make an informed estimate of value.”20
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
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