From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for February 2015

21st Century Valuation Problems

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Did everyone have a great holiday?  It’s been nearly 3 months since I’ve darkened the door of this blog.  Between the holiday season, a couple of very interesting conferences (more on those later) and heading for warmer climates for the winter (MUCH more on that later!), I’ve been terrifically distracted since November.

The trigger to get me off my duff and writing again was a complex Federal Court trial in Missouri last week.  Yes, I was the testifying expert, and yes, my clients prevailed, but that’s not exactly the point.  The point is WHY I was testifying and WHY my clients ultimately prevailed, at least in my humble observation.  The case was a class action concerning the value of a fiber optic telecommunications transmission easement. For a variety of reasons, this case only concerned 789 miles of the easement crossing about 3,250 properties, but the very important lessons learned from this case apply broadly to a variety of modern-day corridor easements.

Earlier in the litigation, the class action had been certified and the Court had held that the responsible party did not have the right to enjoy the easement without compensating the property owners.  The court had held that the defendants had unjustly enriched themselves, and so this trial was narrowly focused on compensation.  That compensation, it was held, would be the fair market value of the easement, and that’s where Greenfield came in.

The defendants proffered a valuation theory called “across the fence”, or “ATF” for short.  ATF models were developed many years ago for easements like railroads and power lines when data on such easements were difficult to come by, and when the change in highest-and-best-use of the property resulting from the easement was minimal, at best.  The ATF theory basically says that the value of the easement is equal to the value of the land taken (usually farmland or forests) plus an “enhancement factor” to equate the more valuable use of the railroad or power line easement.   This enhancement factor would range from 1X for an easement which was no more valuable than the surrounding land to 10X or more for a very valuable easement.  Note that the enhancement factor can be a matter of judgment on the part of the appraiser.  It is supposed to be determined by looking at sales or leases similar easements and similar surrounding properties, but with a dearth of data, the enhancement factor was often just a matter of conjecture.

In addition, ATF valuation required individualized “before-and-after” appraisals of every affected property.  In testimony in Missouri last week, the defendants’ appraiser acknowledged that each “before-and-after” appraisal would cost about $10,000, more or less.  Given that there are 3,250 properties affected by this one easement, that translates into $32.5 million in appraisal fees.  Ahem…..

In addition, the defendants’ appraiser applied a fractional enhancement factor, which he basically simply made up with no data or analysis to support it.  He said that the land devoted to a fiber optic cable telecommunications easement was worth 25% of the value of surrounding pasture and grazing land.  Again, ahem….

Greenfield was called in because modern valuation problems call for modern solutions.  In 2002, the U.S. Fish and Wildlife Service (“FWS”) was faced with the challenge of determining the fair market value of fiber optic cable easements in National Marine Sanctuaries.  Specifically, there were two such easements in the Olympic Marine Sanctuary in Washington State (one each headed to Japan and Alaska) and one in New England.  Faced with the likelihood that Federal land would be used for such easements in the future, and the mandate that private users of public property pay fair market value for such uses, the U.S. Government undertook an extensive review of payments for similar easements, and found that prices ranged from $40,000 per mile to $100,000 per mile.  (In the Missouri case, the defendants’ appraiser, applying pastureland values, a fractional enhancement factor, and a number of other adjustments, arrived at a value of $3.44 per mile.  Ahem, yet again…..)

Shortly after the FWS report, Greenfield undertook our own analysis of telecommunications corridor easement transactions across the U.S.  We gathered over 1,000 transactions dating back to the early 1970’s, with a particular focus on easements where both the grantor and grantee were operating on a level playing field (i.e. — telecom companies versus railroads).  Our findings were solidly supported.  Telecommunications easements are typically valued in America using corridor theory models.  The values of the easements are unrelated to the values of the surrounding land (thus relegating ATF models to the history books).  Corridor easements should (and indeed must) be valued with simple per-foot or per-mile data in a straightforward, easily understood, 21st century model.

The jury in Missouri deliberated about as long as it took to pick a fore-person to affirm the efficacy of corridor valuation models.  The evidence and testimony could not have been more starkly different from the two sides.

The downside?  I would love to have had a piece of that $32.5 million project they proposed.

Written by johnkilpatrick

February 10, 2015 at 7:19 am