Note: This post was originally published in the Winter 2016 Terra Firma Magazine, the official publication of the REALTORS® Land Institute.
Almost all articles about easements deal with their appraisal. Valuation of easements is important and the real estate professional can benefit by understanding these valuation techniques. However, this particular article is designed to assist the non-appraiser real estate professional in their discussions with buyers and sellers regarding the impact of easements on land.
WHY ARE EASEMENTS IMPORTANT
Most properties have easements and in some instances these easements can impact the utilization and even value. Knowing if there are easements present, where they are situated and what they are used for, is an important part of listing, buying, selling, financing and appraising land. Any analysis or presentation of a property should include a discussion of easements. A few thoughts on the nature of easements and how they may influence value can help ascertain their significance to the transaction. When the subject property already has easements, if there is going to be an easement placed on the property or if the comparable sales and/or listings used to value the property have easements, then, their possible impact should be considered.
WHAT IS AN EASEMENT
According to the Land 101: Fundamentals of Land Brokerage LANDU course,
An easement is defined as a right in law held by one person or entity to make use of land or property of another for a limited purpose. Under the terms of an easement, the owner grants a portion of, or interest in, his property rights to an individual or organization. An easement grants a portion or interest in the property rights of a property to another individual or organization. When it is recorded, an easement becomes part of the property’s chain of title.
Easements result in a diminution of uses to the landowner and sometimes, but not always, a reduction in the value of the property. The landowner can no longer build within the easement area. Depending on the easement document, he may be restricted from traversing or crossing the easement area. There could also be restrictions on the use of the subservice or aerial portions of the land within the easement area.
NATURE OF EASEMENTS
Each easement is unique. Easements are created by a document including the specific agreements between the landowner and the holder. These agreements may have a time limit or extend into perpetuity. Very few easement agreements are exactly the same. There are almost an infinite number of uses for an easement, the most typical of which are roads, pipelines, and electrical transmission lines. Each easement reflects the highest and best use, and other characteristics of the land it crosses, further adding to its uniqueness. An easement is not a highest and best use but the existence of one could change the highest and best use of the subject property. Often, easements are described as surface, sub-surface or aerial but these classifications are primarily physical and the easement agreement may include additional rights. For purposes of discussion, easements can also be divided into right of way (land) and infrastructure (improvements). Either the right of way or the infrastructure within it can impact the value of the land. Again, the easement agreement spells out the specifics of both the right of way area and the improvements which are allowed in that area.
Another factor of uniqueness is that an easement physically divides the property which it encumbers. A property with an easement can be said to have three physical parts: the subject whole, the portion burdened (also called right of way or acquisition) and the remainder (that part of the subject whole not encumbered). These distinctions are important when analyzing the impact an easement has on value as discussed below.
Easements are quite specific and, as mentioned above, are spelled out in a legal document. A title search may uncover an easement document and this agreement should be read. Many easements are visible at inspection but some are not. The landowner should always be interviewed regarding the presence of easements. Assumptions regarding easements should be avoided.
WHEN DO EASEMENTS IMPACT VALUE
In most cases there is no impact on value due to easements, particularly if they are of the standard utility or access variety. In some cases, the easement area itself will include significant infrastructure such as highways, electrical transmission lines or pipelines. Value impact issues may include proximity to improvements; visual impairment; crossing restrictions; location issues such as traversing the land through the middle rather than along the boundaries; and destruction issues such as loss of trees or improvements. Loss of value should be based on market data rather than subjective or anecdotal reasons. Individual markets react in different ways to a particular type of easement. For example, a natural gas pipeline causes little comment at all on the Gulf Coast of Texas while a similar easement could create a great deal of consternation in rural Vermont.
HOW EASEMENTS ARE APPRAISED
Easements are not valued per se. There is no market for easements in and of themselves. The value (impact) of an easement is always the amount of loss in value of the burdened property, not the value of the easement to the taker (user). Another way of saying this is that the value of easements is based on the underlying value of the land. There are two components of possible value loss to the land: reduction in the value of the easement area and loss of value to the remainder of the tract. As discussed above, the loss to the remainder can be caused by either/or the right of way itself or the infrastructure within the easement area itself. The total loss in value caused by an easement cannot exceed the value of the entire subject property.
The generally accepted methodology used by appraisers, and the one almost always accepted (required) by the courts, is the “Before and After” method. In practice, this requires the appraiser to perform two separate appraisals: the value of the property before the imposition of the subject easement and the value of the property after the easement and infrastructure is in place. The difference in value between the two is the impact of the easement. Since any appraisal is market based, comparable land sales will be used. In the before scenario, comparables without easements will be used, and in the after analysis, comparables that are encumbered with easements similar to the one to be placed on the subject will be used. Generally, these two appraisals and the data are presented in one report.
RULES OF THUMB
There are a number of alternative methodologies (rules of thumb) which are often used to estimate the impact (value) of easements. None of these rules of thumb reflect market value and should not be relied upon. In any event, they are not recognized by appraisers or courts of law because they are not supported in the marketplace. In the final analysis, alternative methodologies are not based on the underlying land value. Three examples of these rules of thumb would be: (1) linear expressions of value such as per rod or per running foot, (2) prices paid for other easements and (3) expressing damages (diminution in value) in terms of percentages.
Basing the value on linear expressions, such as dollars per rod or foot, is a commonly used rule of thumb particularly in pipeline easements. Many companies used this metric as a budgeting tool. It is not a reliable indication of value, however, for several reasons. There is no market for sales of individual easements in the market place. Many easement acquisitions involve eminent domain and, as such, are not arm’s length transactions.
The price paid for the acquisition of individual easements is usually based on many factors in addition to the underlying value. Examples of these would be negotiations based on timing of the project and holdout situations. Additionally, because of the uniqueness of each easement, the easements being purchased probably are not similar to the subject easement.
The use of percentages not based on comparable sales data does not reflect the market. An example would be to say that a power line easement reduces property value by twenty-five percent. This is a generalization which does not take into consideration such factors as differences in size of the property being affected; different sizes of the transmission line size and voltage; different neighborhoods; different highest and best use of the property; etc.
ADVISING YOUR CLIENT REGARDING A PROPOSED EASEMENT
In the event of the possibility of an easement being imposed on the subject property your client may seek your advice. The real estate professional should exercise a great deal of caution at this point and should not ever offer legal or appraisal advice. The party seeking to obtain the easement may have the right of eminent domain, and this introduces a legal environment which will require, in most instances, the assistance of an attorney. Recommending an attorney is fine as long as they are qualified to handle a condemnation matter. In the event that an appraiser is needed, the attorney usually selects one they have worked with in the past. Acting as a negotiator or expert witness for either party in an eminent domain matter should be given a great deal of thought before accepting the assignment. Most states require an appraiser license or certification before an individual may act as a valuation witness. Any comments about easements and values, particularly in public meetings, should be based on comparable data and not alternative methods or rules of thumbs.
Easements are important and can impact both use and value of the property. Generalizations about easements are of little use primarily because each easement is unique and does not fit a preconceived pattern. Generally speaking, both appraisers and the courts apply an underlying land value based approach (before and after) to the valuation of easements. The reason for this is that this method reflects how the market reacts. Rules of thumb to estimate value (impact) of easements themselves should be avoided.
About the author: Albert Allen, ALC, represents buyers and sellers of farm and ranch properties, rural recreational acreage and close in transitional land. His background includes growing up in a South Texas ranching family, graduating with a degree in Agriculture Economics from Texas A&M University and serving as a real estate officer in the US Army Corps of Engineers.