V. Valuation

The first step in the process of acquiring a particular property is valuing the proposed acquisition.

Just Compensation

The U.S. Constitution and most State constitutions require that a property owner be paid just compensation when the government acquires private property. The Uniform Act requires that an "approved appraisal" be used to develop an amount the agency believes to be just compensation. The amount offered to the property owner must be at least the amount of the approved appraisal.

The Appraisal Requirement

The appraisal, and its review and approval by the acquiring agency, are the cornerstones on which the entire effort to provide property owners just compensation is built. The Uniform Act requires that the property be appraised before an acquiring agency begins negotiations to acquire it and that the amount of the approved appraisal be the basis of the offer of just compensation. In addition, the Uniform Act regulations in 49 CFR, Part 24, Subpart B (see appendix for copy) require that appraisals be reviewed and approved. However, the Uniform Act also gives the Lead Agency (which is FHWA) the authority to develop procedures for waiving the appraisal requirement in cases of non-complex, low-value acquisitions.

Appraisal Waiver and Waiver Valuations

Appraisal waiver provisions are found in §24.102(c) of 49 CFR. These procedures provide all acquiring agencies the option to waive the appraisal requirement under two circumstances. First, if an owner has indicated he intends to donate his property and if the owner releases the agency from its obligation to appraise the property. See the next chapter for more information on donations. The second circumstance is if the agency determines the property valuation problem is uncomplicated and has an anticipated value of less than $10,000. In such a case the agency could waive the appraisal requirement and prepare a waiver valuation instead. The decision process following receipt of authorization to proceed for when an appraisal is necessary is indicated in Figure 2.

The final determination to waive an appraisal may include consideration of other factors, such as the availability of recent sales or negotiation history in the local area, besides the complexity of the valuation problem and the approved low value threshold that might apply. Your SDOT will give you detailed procedures for use of an appraisal waiver and preparation of a waiver valuation. Keep in mind that a waiver valuation is not an appraisal, so appraisal-related requirements, such as owner accompaniment and appraisal review which are discussed in the Appraisal section below, are not Federal requirements when appraisal waiver procedures are used.

Appraisal

What is an appraisal? The 1987 amendments to the Uniform Act provided, for the first time in Federal law, a definition of an appraisal.

The definition contains all of the elements an appraisal must include to support use of Federal funds. Any real property valuation documentation that does not address these elements is not considered an appraisal. Once an appraisal of fair market value is reviewed and approved, it becomes the basis upon which the agency will establish an amount it believes to be just compensation. Having a well-prepared, unbiased and thoroughly documented appraisal report is the most critical step toward the goal of providing the property owner with the required estimate of just compensation.

In addition, each State and (possibly) local agency has developed a unique set of rules, regulations, and policies applicable to its jurisdiction.

Appraisal Standards and Requirements

Appraisal practice is guided by The Appraisal Foundation, a non-profit educational organization established in 1987. In 1989 the U.S. Congress gave the Foundation and its two independent Boards specific authority relating to real property appraiser qualifications and appraisal standards. The Uniform Standards of Professional Appraisal Practice (USPAP) authored by the Appraisal Standards Board is generally recognized as setting the ethical and performance standards for the appraisal profession.

USPAP is consistent with the appraisal requirements of Federal and most State governmental organizations. The jurisdictional exception rule within USPAP provides flexibility to accommodate laws or regulations applicable to agency appraisal requirements. The requirements for appraisals and appraiser performance contained in the regulations implementing the Uniform Act (See copy of the January 2005 Uniform Act regulation in the Appendix) are consistent with the standards in USPAP.

Appraiser Qualifications and State Certification

To implement appraisal standards, each State has established a State appraiser regulatory agency responsible for certifying and licensing real estate appraisers and supervising their appraisal-related activities. If your appraisal work requires use of contract (fee) appraisers, they must be State licensed or certified, and qualified by experience or training to perform the work assignment competently.

Under the Uniform Act regulations, each SDOT must develop criteria for determining the minimum qualifications of appraisers, consistent with the complexity of the appraisal assignment. You should review the qualifications of your staff appraisers, and utilize only those qualified for each assignment under SDOT requirements.

Note: We recommend that you contact your SDOT concerning appraiser qualifications, any technical questions about the appraisal process or the documentation formats preferred for appraisal reports.

Owner Accompaniment

The Uniform Act requires that the property owner (or the owner "s designated representative) be given the opportunity to accompany the appraiser during inspection of the property. The purpose of this requirement is to ensure that the owner has the opportunity to advise the appraiser of features of the property which might impact the valuation of the property, as well as allow the owner to indicate any features of the property that might not be obvious to the appraiser (such as the location of underground structures, i.e., wells, septic systems, storage tanks, utilities).

Either your agency or the appraiser must invite the property owner to accompany the appraiser during the inspection of the property. To assure that this requirement is not overlooked, you should advise your appraiser of this responsibility. Concurrently, you should contact the property owner to supply him or her with the name, address, and phone number of the appraiser. An invitation to accompany the appraiser should be in writing and allow sufficient lead time for the owner to arrange to be present or to request an alternate time. You should document these steps in your parcel file. If the owner declinesthe invitation, that fact should be documented in the parcel file.

If it later becomes necessary to update the appraisal, the owner does not have to be given an opportunity to accompany the appraiser on the re-inspection.

Appraisal Criteria

Section 24.103 of 49 CFR contains the requirements for real property appraisals for federally-assisted programs. It references USPAP and other supplemental requirements developed by State and local agencies involved in real property acquisition. The acquiring agency is expected to be involved in development of the scope of work and defining the appraisal problem for each property on which an appraisal will be prepared.

The Uniform Act requires the appraiser to disregard any decrease or increase in fair market value to the property caused by the project for which the property is to be acquired. The requirement reflects that owners should not be penalized because of a decrease in value caused by the proposed project nor rewarded by speculation created by knowledge of the proposed project.
Appraisals must be in writing and must be retained in your parcel file. The regulations found in 49 CFR Part 24 provide that the format and level of documentation for each appraisal are relevant to program needs and follow accepted appraisal practice. At a minimum an appraisal must comply with the above referenced definition of appraisal and include sufficient data and analysis to support the value conclusion.

Based on the scope of work and complexity of the appraisal problem the requirements as described in 49 CFR 24.103, must be used, whether the acquisition is of the whole property or only a part of it. The appraisal report should include an appropriate analysis of such factors as the highest and best use of the property (especially when that use is in transition or a change in the highest and best use will follow the acquisition), severance damages, special benefits, and special purpose properties.

Real and personal property items located on the property are to be clearly identified within the report. In certain instances, an appraisal may include the findings of a specialty report. A specialty report is a study of unique valuation aspects of the property, such as zoning and permit compliance, machinery or equipment on the property, mineral rights or forestation, or items that generally do not fall within the expertise of a real property appraiser.

An appraisal should reflect SDOT appraisal requirements and contain the following items:

• An adequate description of the physical and legal characteristics of the property being appraised (and in the case of a partial acquisition, an adequate description of the remaining property), including items identified as personal property, a statement of any known or observed encumbrances, title information, location, zoning, present use, an analysis of highest and best use, and at least a 5-year sales history of the property.
• All relevant and reliable approaches to value (Sales Comparison, Income, and Cost). When sufficient market sales data is available for the specific appraisal problem, the agency, at its discretion, may require only the sales comparison (market data) approach. If more than one approach is used, there must be an analysis and reconciliation of those approaches, including an explanation of the final conclusion of value.
• A description of comparable sales, including a description of relevant physical, legal, and economic factors such as parties to the transaction, source and method of financing, and verification by a party involved in the transaction.
• A statement of the value of the real property to be acquired. For a partial acquisition, a statement of the value of any damages and benefits to the remaining real property if any.
• The effective date of valuation, date of appraisal, signature, and the certification of the appraiser.

Appraisal Review

If you get an appraisal, you must have that appraisal reviewed. The Uniform Act requires that the estimate of just compensation be not less than the agency"s estimate of fair market value from the recommended appraisal. An appraisal becomes "recommended" through appraisal review.

Federal requirements for appraisal review are found in 49 CFR 24.104. The regulations require that acquiring agencies have an appraisal review process and that a qualified review appraiser:

• Examine all appraisals to assure they meet applicable appraisal requirements,
• Seek any necessary corrections or revisions to the appraisal, and
• Identify each report reviewed as recommended, accepted, or not accepted for use in establishing just compensation.

The complexity of the appraisal problem will have a bearing on the qualifications needed by the review appraiser and the degree of explanation required to support the review appraiser's recommended value. It is the review appraiser "s responsibility to determine if the appraisal report contains accurate data, adequate documentation, and appropriately supported conclusions.

The appraisal review process and your review appraiser also should ensure that there is consistency among the property valuations on a project wide basis. For example, two residences, which are similar in most respects and from which your agency is making similar acquisitions, should be appraised and valued consistently.

Deficient Appraisals

If an appraisal is deficient or contains errors, the review appraiser should return the appraisal report to the appraiser for correction, with the deficiencies noted.

There may be instances when the review appraiser discovers minor errors (i.e., insignificant math errors, misspellings, and typographical errors) in an appraisal report. In those cases where only minor changes and corrections are warranted, they can be made by the review appraiser without returning the report to the appraiser. All such changes should be initialed and dated by the review appraiser. It is sound policy to transmit a copy of the changes to the appraiser in the event an update is needed at a later date.

A review appraiser does not have to base his/her recommendation on a particular appraisal, although that is the preferred option. The following situation could occur and still produce acceptable results.

If acceptable corrections or revisions to an appraisal report cannot be obtained from the appraiser,

and the reviewing appraiser is unable to recommend the appraisal,

and your agency determines it is impractical to obtain an additional appraisal,

then the reviewing appraiser may develop appraisal documentation, either independently or by reference to acceptable relevant information developed by others, to support a recommended value.

Review Considerations

The review appraiser should inspect the appraised property and the comparable sales included in the appraisal report. If a field inspection cannot be made, the review appraiser should document the reason(s) in the review report. The review appraiser should examine the appraisal report to determine that it:

• Follows accepted appraisal principles and techniques in the valuation of real property in accordance with State and Federal requirements.
• Has been completed in accordance with the agency's appraisal specifications.
• Contains or makes reference to the information necessary to explain, substantiate, and thereby document the conclusions and estimate of fair market value.
• Contains an identification or listing of the buildings, structures, and improvements on the land as well as the fixtures considered part of the real property and items identified as personal property.
• Includes consideration of compensable items, damages and benefits, if any, and does not include compensation for items non-compensable under State law.

Contains an estimate of fair market value for the acquisition and, for partial acquisitions, an allocation of the estimate of fair market value for the real property and for damages, if any, to the remaining property

Appraisal Review and Just Compensation

The reviewing appraiser is also required to sign a certification that:

• Sets forth the recommended or approved value of the property,
• Identifies the appraisal report(s) reviewed, and
• States that the reviewer has no interest, present or future, in the property being reviewed.

Upon completion of the appraisal review, the review appraiser should place in the agency's parcel file a signed and dated report setting forth:

• The amount of fair market value in the recommended appraisal and the recommended estimate of just compensation, including an allocation of compensation for the real property acquired and, if applicable, of damages to remaining real property; identification of buildings, structures, and other improvements on the land; and identification of fixtures considered part of the real property being acquired.
• Whether, as part of the appraisal review, there was a field inspection of the parcel to be acquired and of related comparable sales. If no field inspection was made, the reason(s) should be stated.
• That the review appraiser has no direct or indirect present or contemplated future personal interest in the property or in any monetary benefit from its acquisition.
• That the recommended estimate of just compensation has been reached independently, without collaboration or direction, and is based on appraisals and other factual data.

The degree of detail provided in the review appraiser's written review report should reflect the complexity of the appraisal problem and report under review.

Note: The required certification forms for the appraiser and review appraiser should be available in your SDOT FHWA approved Right-of-Way or Appraisal Manual.

Appraisal Review Contracting

Following review the recommended appraisal provides the fair market value of the property needed for the project. This is the minimum amount that must be offered to the owner provided it is approved by an agency official. This may not necessarily constitute just compensation as there are situations where property is so unique in nature; or the appraisal, although properly prepared, does not estimate fair market value with any certainty; or the market value does not adequately measure just compensation. In these instances an amount above the recommended appraisal amount could be approved using other valuation evidence in order that the initial offer to the owner more accurately reflects just compensation.

Note: An acquiring agency may not delegate the function of determining the estimate of just compensation to be offered to the property owner to someone outside the agency including a contract review appraiser. This is a critical point that must not be overlooked.

Typically, it is the review appraiser who initiates the consideration that just compensation be based on considerations other than the approved appraisal. Depending on who is performing the appraisal review and agency policy, the appraisal review may include an estimate of just compensation; and that estimate may be based on more than the approved appraisal. In any case, agency files must contain documentation and justification for any amount of just compensation that is established.