A Closer Look at Right of Way Appraisal Issues: Part III Appraisal of Negative Interests for Right of Way Acquisitions Conservation Easements Restrictive Covenants Home Owner Associations

Issues Negative Interests in the sense that they limit the economic utility of the property Similarities and differing characteristics of Conservation Easements, Restrictive Covenants and Home Owner Association (HMO) property Are the permanent conditions to be treated as restrictive – similar to the impacts of zoning? What defines value – and to whom?

Conservation Easements Traditional Approach – Appraise the acquisition subject to the limitations of the easement Virginia statute requires that we compensate the holder of the conservation easement as well. How is this accomplished What are the impacts on the appraisal process?

Conservation Easement Right of Way Appraisal Issues Easement in perpetuity is not extinguished by conveyance Easement has a negative value i.e. it is an obligation to monitor the property Was any money ever paid for the easement? Tax Benefit – who is due the loss of the conservation easement ? Who received the benefit and should be compensated – public? Landowner already received tax benefit and should not be compensated again for the removal of ease.

“Modern” and “Majority” Views Nancy McLaughlin published an article in the U.C. Davis Law Review in June of 2008 entitled Condemning Conservation Easements: Protecting the Public Interest and Investment in Conservation Articulated the concept of Majority interpretation based on modern thought.

“Majority” Explanation “Courts at the federal level and in a majority of states that have addressed the issue have held that negative restrictions ….. constitute compensable property for eminent domain purposes.” Condemning Conservation Easements, by Nancy A. McLaughlin, University of California, Davis Vol. 41:1897, p.1910

“Modern” Legal Thought “As a result of this expansive modern view, a variety of intangible rights or interests in real property have been treated as compensable property for eminent domain purposes, including appurtenant and in gross easements, restrictive covenants ….. Ibid p.1910

The Question of Market Value Difficulty of finding market value of a negative interest McLaughlin quotes a Supreme Court Case (Va. Elec. & Power Co., 365 U.S. at 633) which “approved a before and after method to value existing in gross flowage easement upon its taking, and noting that there was no evidence of a market in flowage easements …”* *Ibid footnote 159

Question of Market Value (cont.) The actual quote from the Supreme Court in this case was as follows: “This Court has never attempted to prescribe a rigid rule for… “just compensation”.. Fair Market value has normally been …the standard. But when market value has been too difficult to find or.. Its application would result in manifest injustice to owner or public, courts have fashioned and applied other standards..” Ibid p.1935

“Minority” Opinion Arguments The more traditional opinions (referred to as “minority” in the McLaughlin article) offer several points of justification* 1) Restricting the Exercise of Eminent Domain 2) Intolerable financial and Procedural Burdens 3) Bad Faith and Fraud * Ibid pp

“Majority” Responses 1) The “majority” commentators point out that these interests do not prevent the exercise of eminent domain, just require that they be adequately compensated. 2) The intolerable burden issue pertains to the potential for having to address and compensate a large number of property owners where restrictive covenants are acquired (cont)

“Majority” Responses (Cont.) 2) (cont.) The “majority” commentators counter that there may be no impact in many cases and when there is, the impact may often be confined to nearby properties. 3) The bad faith argument is wary of owners who may place restrictions on property at the last minute hoping for windfall compensation. The “majority” opinion is that potential abuse is not justification for denying compensation when it is due. Ibid pp

Restrictive Covenants Property restrictions similar to conservation easement in that: Can’t be sold – must be extinguished Negative interest implying benefit In this case, benefits specifically intended for other properties Values to beneficiaries supported by Virginia case law

Meagher v. Appalachian Power Co., 195 Va. 138, 77 S.E.2d 461 (1953) Supreme Court of Virginia Power company bought lots in a subdivision with restrictive covenants limiting development to housing. Court ruled for property owners who were the holders of the beneficial interest Owner purchasing with knowledge of impending purchase was compensated Owner who moved prior to purchase not compensated Owners of lots in adjoining subdivision not compensated

Minner vs. City of Lynchburg 204 Va. 180 (1963)Supreme Court of Appeals of Virginia Subdivision had restriction against additional streets City purchased lot to build street Lot owners sued city and heirs of original developers and on appeal prevailed

Home Owner Assoc. (HOA) Issues Differs from preceding in that property may be voluntarily conveyed Is land committed by jurisdiction to subdivision use? Is it required “open space” or part of an approved planned use? If so, is this a regulatory restriction (like zoning) that is not directly tied by ownership interests to the subdivision lots?

HOA Issues (Cont.) What is ownership structure? Is it owned by HOA as a separate entity? Are there specifically described ownership interests held by the owners of the subdivision lots?

HOA Issues (Cont.) Does land have an alternate use? Is it essentially excess land? – or surplus? Unusable surplus land sales are good uneconomic comparables Usable excess land is addressed as any other property through an analysis of Highest and Best Use

Summary As noted, the acquisition of property with negative restrictions is not always a straight forward proposition and the appraisal issues are often complex. A review of local, state and federal case law is a mandatory first step. That said with the caveat that interpretations vary and understanding does often evolve over time. Whatever conclusion the appraiser reaches must be well informed and not based solely on traditional assumptions

Contact Information Michael C. McCall, MAI Chief Appraiser, Virginia Department of Transportation (804)

A Closer Look at Right of Way Appraisal Issues: Part III Appraisal of Negative Interests for Right of Way Acquisitions Conservation Easements Restrictive Covenants Home Owner Associations