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Importance of Right of Way Assignments

By Stephen S. Wagner, MAI, SRA, AI-GRS

Appraisers looking to expand their practices might want to consider Right of Way work. This can be an interesting area of valuation and it can provide career enhancement opportunities.

Right of Way Assignments
It’s important first to understand the definition of Right of Way appraisals. According to the Appraisal Institute’s The Dictionary of Real Estate Appraisal, 6th Edition, “Right of Way” is defined as a right to pass over land in some particular path. It also is defined as a strip of land used as a transportation corridor, such as streets and roads, railroads, and utility and fiber optic lines, and for other private or public transportation uses. Right of Way assignments can be any type of real estate affected by eminent domain. Project types could include:

• Roads and highways;
• Recreational parks;
• Protected areas;
• Air rights;
• Flood ways;
• Electrical lines, gas pipelines, other utility companies;
• Inverse condemnation; and
• Expanded sidewalks by the local government.

In general, Right of Way assignments involve two appraisals. The first is based on the value of the property before acquisition, and the second on the value of the property after the acquisition and completion of the project. The Uniform Standards of Federal Land Acquisitions is a great resource. It provides a detailed explanation of the appraisal development and reporting requirements necessary for completing appraisals for federal acquisitions. Most state highway departments have their own published resources with similar detailed requirements.

Value Concepts and Principles
The appraisal principles of anticipation, change, supply and demand, substitution and balance all influence land value. Anticipation means that value is created by the expectation of benefits to be derived in the future. For example, if buyers anticipate that raw land in a certain location will be in demand for office use within the next five years, they may be motivated to acquire land for future development even though the development of office space is not presently feasible. The competition among the buyers in the market for raw land creates a price level for the land that may have little to do with the current use.

The principle of substitution, which holds that a buyer will not pay more for one property than for an equivalent property, applies to raw land and developable sites just as it does to improved property. The principle of substitution indicates that the greatest demand will be generated for the lowest-priced site with similar utility. The principle of balance is also applicable to the value of land and sites. When the various elements of a particular economic mix or a specific environment are in a state of equilibrium, land value is sustained. When the balance is upset, values change.

For example, if an industrial district has too much industrially zoned land and a declining number of industrial users, then the value of industrial land will probably fall or remain the same over a period of time. On the other hand, if the industrial district is in transition to other uses and there is a reasonable probability of a zoning change, the value of a particular site could be higher than sales of comparable industrial sites would indicate.

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Property Rights and Public Controls
An appraiser’s analysis of the value of a parcel of land focuses on the physical parcel and the accompanying property rights. These rights may include the right to:

• Develop the land to its highest and best use;
• Lease the land to others;
• Farm the land;
• Mine the land;
• Alter the land’s topography;
• Subdivide the land;
• Assemble the parcel of land with other parcels;
• Hold the land for future use; and
• Construct or alter building improvements.

Government Regulation
In an effort to encourage planned growth and compatibility among different land uses, governments regulate how land can be used. Most municipalities and counties have some form of zoning regulations that specify how a parcel of land can be developed. In addition to zoning, many jurisdictions have master plans or comprehensive land use plans that specify long-term development goals.

Frequently, real estate developers must have amenities such as open space, streets, and off-site public improvements in place or dedicated before a proposed development receives approval from the appropriate public agency. Usually, developers will proceed with development only after they have submitted detailed development plans and obtained building department approval.

In many areas, citizen groups will protest a development they do not like, and their objections can influence the type of development that is finally approved. Typically, after site plan approval has been achieved and permitting has been obtained for a development, the value of the land can increase substantially. At that point, the site has full entitlements for immediate development.

In some jurisdictions, land value is based on development rights, which may be transferable. In urban areas, development rights are often very valuable, and discrete markets have formed in which these rights trade. In some rural areas, governmental agencies compensate farmers for retaining land in agricultural use, and the agencies then shift or sell the benefit of those development rights to other locations. Lower ad valorem taxes on agricultural land also affect rural land use. This form of tax subsidy tends to extend the duration of agricultural uses.

A relatively recent trend in the United States has been the acquisition of land through open space or conservation easements that are held in perpetuity by qualified agencies. These permanent encumbrances limit or prohibit the development potential of land. The potential uses of land subject to perpetual open space or conservation easements are usually restricted, as specified in the deed of easement, and thus the value of the land is affected. Open space is also preserved through the donation of specified easement rights to a qualified recipient such as a land trust.

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Highest and Best Use
The valuation of land draws directly from the conclusions of highest and best use analysis. Even if a site is already improved, the site is valued as though vacant and available for development to its highest and best use. Consideration of the site as though vacant facilitates the orderly analysis and solution of appraisal problems that require land to be valued separately. The highest and best use of a competitive site on the date of sale is the basis of the comparability of that site to the property being appraised.

Regardless of how physically similar a potentially comparable site is to the subject site, the sale property is not truly comparable if it does not have a similar highest and best use as the subject property, and in that case the potentially comparable site should be dismissed from further consideration in the analysis of the subject property.

Assignments for Appraisers
Right of way appraisals are an area of practice where the client particularly values the appraiser’s opinion. The work can be complex, and the development process can be time consuming. However, this is an area that many appraisers do not pursue because it can be uncomfortable and stressful. The work is a very important aspect of protecting the public trust and the property owner deserves to be treated fairly no matter who the appraiser works for. The government also needs to be protected so that the money is not spent frivolously.

Many opportunities exist for appraisers in Right of Way. State Departments of Transportation (DOTs) around the country bid out large projects in areas that require appraisals. These DOTs are looking for consultants to put together teams, which include appraisers. It’s important for appraisers to understand that DOTs need to see analysis in reports, including supporting documentation and exhibits. Right of Way work can provide professional opportunities for appraisers who want to branch out from traditional bank appraisals. Appraisers in this field generally find the abstract dimension to be a stimulating challenge.

Appraisers might not realize that unique challenges exist with Right of Way appraisals. Government agencies are buying properties that aren’t easily measured, and which can be abstract. Yet, some value must be assigned to the subject property. Eminent domain can pose challenges in this area—and it’s critical for appraisers to understand the rules of individual jurisdictions. That’s a big difference compared to standard bank appraisals. Appraisers should know that this type of work is much more involved than a typical bank appraisal. With Right of Way appraisals, appraisers are not helping in a lending or investment decision—these valuations involve taxpayer money, and the appraiser must get it right the first time. It’s also important to be fair to the condemnee.

If appraisers want to get into this line of work, they should contact the agency acquiring land in their market area, be aware of any new infrastructure project taking place, and contact the local real estate attorneys.  When a new project begins, the property owners are typically contacted by attorneys. Therefore, they should also attend the local meetings about government projects and meet the people who are involved on the condemnation side and the property owners who will be affected.

Appraisers also should establish professional relationships with condemnors – entities who acquire property for public use. Appraisers can create these relationships initially by educating themselves and working with the condemnors or other appraisers experienced in this field. Appraisers also can market themselves by contacting the government agencies and attorneys directly and ask fellow appraisers for introductions and names of contacts that can be helpful. Also, use LinkedIn and web searches to find contact sources.

Appraisers generally do not need to be certified to handle right of way work. Some of the assignments that will be completed are single-family residential properties. They range from complete acquisitions to small strip acquisitions for utilities. Although certification is not required, the offerings in the Appraisal Institute’s Litigation Professional Development Program are valuable in preparing to enter this area of practice and the publication, Real Property Valuation in Condemnation also is an excellent source for preparing these assignments.

Ultimately, the valuation profession needs younger appraisers to get involved in Right of Way. There is a market for this discipline, and it requires hard work and the ability to face challenges—especially when working with attorneys and engineers. Recent college graduates can find work in Right of Way—often with DOTs that have training programs—or utility companies.

The new book, Corridor Valuation: An Overview and New Alternatives, is a resource for appraisers to use when referring to Right of Way appraisals. The Appraisal Institute partnered with the International Right of Way Association and the Appraisal Institute of Canada to publish the book, which explores the controversial issues surrounding railroad corridors, with definitive information on the evolution of corridor valuation theory, related property rights and legal issues, and methodologies for valuing railroad, telecommunications, pipeline, power transmission and conservation corridors.

About the Author

Stephen S. Wagner, MAI, SRA, AI-GRS, is the 2019 president of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. Based in Chicago, the Appraisal Institute has nearly 18,000 professionals in almost 50 countries.

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