Valuation Basics and Procedures

“Scope of Work” I. Valuation Procedures a. Analyze typical techniques b. Discuss easement scenarios c. Reporting d. Examples and application of techniques II. Questions/Feedback

Valuation  Identify the Problem/Assignment  Collect data Conservation Easement document (many times in draft form) or summary of restrictions and permitted uses Analyze the objectives/purposes of the easement – why is this tract a good candidate for a conservation easement? (assists when writing report and describing property) Comparable Data (Based on highest and best use)  Utilize the applicable approaches to value  Reconcile Values

Valuation Procedures Before and After Valuation  The value of a conservation easement equals the market value of the subject property prior to being encumbered by an easement, less the market value of the subject property with the easement in place.  The appraiser is basically required to provide two appraisals in one – a “before value” and an “after value”. Subject PropertyValue Pre-Easement$2,000,000 Post-Easement$1,000,000 Value of the Easement$1,000,000

Valuation: Cont. Highest & Best Use:  Both values must be based on the highest and best use of the subject property  The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The Appraisal of Real Estate, Eleventh Edition, The Appraisal Institute, 1996, Page 50.  Even though conservation is the desired use – it is typically not the highest and best use

Valuation: Cont.  There are several techniques utilized when estimating the value of conservation easements Within these techniques, the primary methodology is: Sales Comparison Approach Sales Comparison Approach: Value indication is determined by locating sales of similar properties within the marketplace and making adjustments based on various elements of comparison

Valuation: Cont.  Another commonly utilized method is: Subdivision Development Analysis (Discounted Cash Flow Technique) This analysis considers techniques used in both the Sales Comparison and Income Capitalization approaches. In this approach to value, the market value of each individual lot is estimated. The individual lot price is then utilized to estimate the total retail value of the subdivision. Once this is determined, the expected expenses of marketing the lots and the developer’s profit commensurate with the risk are deducted from the gross retail sales to arrive at the projected net income. After estimating the net income figures, they are discounted to reflect the time value of money during the expected marketing period.

Valuation: Cont.  There are several well recognized procedures: 1.) Compare subject property post-easement to land that is similarly zoned Example: The proposed conservation easement will only allow timber management and several single-family residences in the after situation Subject Tract Pre-Easement: Zoned for single-family residential subdivision in the before: Value Pre-easement: 100 acres x $15,000/acre = $1,500,000 Subject Tract Post-Easement: Compare to tracts zoned for timber management in the after Value Post-easement: 100 acres x $5,000/acre = $500,000 Value of Conservation Easement = $1,000,000

Valuation: Cont. 2.) Compare subject property post-easement to other tracts of land that were sold after being encumbered by a conservation easement Example: 200 acres with highest and best use of single-family development in the before. After easement, tract can only be used for trails, primitive campsites, etc. Subject Tract Pre-Easement: Single-Family land sales in the before show a value of $12,000/acre Value Pre-easement: 200 acres x $12,000/acre = $2,400,000 Subject Tract Post-Easement: Sales of tracts encumbered by similar easements show a value of $6,000/acre Value Post-easement: 200 acres x $6,000/acre = $1,200,000 Value of Conservation Easement = $1,200,000

Valuation: Cont. 3.) Subdivision Development Analysis (Discounted Cash Flow Technique) Example: 150-acre tract with a planned subdivision - Prior to easement 200 lots are allowed - Easement will incorporate entire tract and will allow 2 residences in the after situation Subject Tract Pre-Easement: Discounted Cash Flow based on 200 lots: 6 lot/quarter $50,000/lot (less costs) = $2,000,000 Subject Tract Post-Easement: Two single-family residences allowed: $7,000/acre (blended rate) x 150 acres = $1,050,000 Value of Conservation Easement = $950,000

Valuation: Cont. 3.) Similar Easement Sales  Sales of other easements to conservation agencies can be utilized  This data can be limited – but should become more prevalent  Make sure the easement sale is a market value transaction

Valuation: Cont. Rule of Thumb:  The overall value of the conservation easement can vary substantially, from case to case  There are some estimations for diminution in value for the typical easement (although, each case is unique): According to an article written by Janis A. Lassner, SRA, Valuing Agricultural Conservation Easements, The Appraisal Journal, April 1998, “Because land values differ from location to location, so does the dollar value of easements”. For her article, she interviewed 14 private land trusts and government agencies active in preserving agricultural land. “As a percentage of unencumbered fee value, the broad opinion is that a conservation easement can range from 25% - 85%. This is because the terms of a conservation easement can vary. The more restrictive the conditions on the easement, the higher the percentage in terms of acquisition cost. The more development rights the property owner retains, the less value the easement has, and therefore the cost is lower. While the broad opinion of value is 25% - 85%, the majority of easements are acquired at 40%- 60% of fee”. In the case studies mentioned in Ms. Lassner’s article, “the conservation easements were 75% of unencumbered fee value”.

Valuation: Cont. Be Wary of Valuation Pitfalls:  The highest and best use must adhere to all the requirements in the before and after analysis. For instance, an appraiser cannot assume a use that is not legally permissible!  If assuming subdivision – valuation must be based on approved subdivision plan and appraiser must not give credit to infrastructure that is not in existence.  Must provide good support for absorption, hard and soft costs, discount rates, entrepreneurial incentive, etc.

Valuation: Cont.  Overvaluing land that would be considered undevelopable in the before  Appraiser must determine if entire tract, or simply a portion of the subject is encumbered by the easement

Reporting  Similar reporting requirements as normal appraisal assignment  Intended use is typically for “income tax purposes”  “As Is” Value  Description of tract should include some detail about the conservation worthy attributes of the subject  Provide before value and after value sections  Conservation Easement section should discuss the restrictions and/or permissions of pending easement  Include copy of conservation easement

Examples Example #1 1.) 250-acre mountain tract:

Examples Example #1 (Cont.) EasementHighest & Best UseValue Prior to Easement Single Family Development $10,000/acre Based on similar high-end mountain type developments = $2,500,000 Post- Easement Easement restrictions will only allow five residences (with 2- acre lots), hunting, fishing, and limited timber management. $4,000/acre for 240 acres Based on recreational/timber tract sales – with limited ability to develop, plus; $25,000/acre for 10 acres Based on rural residential lots = $1,210,000 Value of Easement$1,290,000

Examples Specific Rights Estimated % of Value % Change (Easement in Place) Develop (Subdivide) 5045 Construction105 Recreation (Hunt/Fish) 1000 Occupy & Use1500 Timber Practices1000 Agriculture0500 TOTAL10050 Property Rights & Uses

Examples Example #1 (Cont.)  Rural residential sales & recreational/timber tracts provide after value  Recreational/timber tracts were approximately 40% of unencumbered value & rural residential lots used for 10 acres of allowable development  Property rights reduction chart was additional support  The highest and best use changed in the after situation (single-family development is no longer permissible); therefore your comparables and market data must change.

Examples Example #2 1.) 200-acre tract with proposed subdivision :

Examples Example #2 1.) 200-acre tract with proposed subdivision: EasementHighest & Best UseValue Prior to Easement 150–Lot Subdivision Average lot value = $40,000 Absorption = 5 lots per quarter (less $2,250,000 subdivision costs – within DCF) DCF = $ 1,500,000 (Costs can vary depending on the amount of work completed) Post- Easement 200-acre tract; allowing four home sites (maximum of 2 acres each) and no other development 192 acres x $3,500/acre Plus 8 acres x $10,000/acre = Value = $750,000 (Sometimes this is just a blended per acre value) Value of Easement$750,000

Examples Example #2 (Cont.)  The costs that have already been incurred would add to the before value of the subject property (i.e. developer would pay more if the subdivision was ready to develop). Before valuation is based on a DCF for the sellout of proposed lots – less costs.  The property has been reduced from the potential density of 150 lots, to a 200-acre tract with four potential home sites, and no other development. Valuation is based on sales of similar rural/recreational tracts as well as some small residential sites.

References  (IRS)  (SC Legislature )   (Appraisal Institute)

Questions