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    FOREST SERVICE HANDBOOK

    NATIONAL HEADQUARTERS (WO)

    WASHINGTON, DC

    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

Amendment No.: 5409.12-2005-4

Effective Date: February 17, 2005

    Duration: This amendment is effective until superseded or removed.

Approved: GLORIA MANNING Date Approved: 01/31/2005

     Associate Deputy Chief

Posting Instructions: Amendments are numbered consecutively by Handbook number and

    calendar year. Post by document; remove the entire document and replace it with this

    amendment. Retain this transmittal as the first page(s) of this document. The last amendment to

    this Handbook was 5409.12-2005-3 to 5409.12_20.

    5409.12_30 13 Pages New Document

    !5409.12,3 Contents 1 Page Superseded Document(s)

    (Amendment 5409.12-92-1, 08/03/1992) by Issuance Number and

    5409.12,3 10 Pages Effective Date

    (Amendment 5409.12-92-1, 08/03/1992)

Digest:

This chapter has been recoded from a 1-digit chapter to a 2-digit chapter.

30.3 - Establishes policy for the appraisal of partial interests in real property.

30.5 - Revises the definitions of partial acquisition and partial taking for voluntary negotiations

    and threat of condemnation.

31 - Removes reference to acquisition in a Federal project area and the “before and after” method

    of valuation. Adds emphasis to estimate the effect of the acquisition on the value of the whole

    property rather than the value of the interest acquired.

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    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

Digest--Continued:

31.1 - Clarifies consideration for a Federal project area and establishes determination of a

    Federal project area in compliance with the Uniform Appraisal Standards for Federal Land

    Acquisitions. Revises paragraph 2 to reflect compliance with Sections A-14 and B-11 of the

    Uniform Appraisal Standards for Federal Land Acquisitions. Clarifies loss in market value

    rather than the return on investment to the owner of the property. Replaces “taking” with

    “acquisition.” Removes appraisal methods.

31.2 - Removes reference to Section A-20 of the Uniform Standards for Federal Land

    Acquisitions. Removes assumption of contributory value of an existing road if there is no loss of

    use to the owner after acquisition.

    32.1 - Replaces “economic rent” with “market rent.”

    32.2 - Changes “capitalized value” to “discounted present value.”

    33.21 - Replaces “interest rate” with “discount rate.”

33.4 - Adds consideration of State and local harvest regulations in valuing timber.

WO AMENDMENT 5409.12-2005-4 5409.12_30 EFFECTIVE DATE: 02/17/2005 Page 3 of 13 DURATION: This amendment is effective until superseded or removed.

    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

    Table of Contents

    30.3 - Policy ................................................................................................................................ 4 30.5 - Definitions ........................................................................................................................ 4 31 - THE APPRAISAL OF PARTIAL ACQUISITIONS ................................................... 4 31.1 - Rules and Principles for Partial Acquisition Appraisal .................................................... 4

    31.2 - Existing Roads .................................................................................................................. 8 31.3 - Scenic, Conservation, and Other Use-restricting Easements ........................................... 9

    32 - APPRAISAL OF LEASED PROPERTY .................................................................. 9 32.1 - Items to Consider .............................................................................................................. 9 32.2 - Valuation of the Leased Fee ........................................................................................... 10 32.3 - Valuation of the Leasehold ............................................................................................. 10 33 - POSSESSORY INTERESTS ................................................................................. 10 33.1 - Items to Consider ............................................................................................................ 10 33.2 - Valuation and Discount Procedures ............................................................................... 11

    33.21 - Reversion Method ..................................................................................................... 11

    33.22 - Income Approach Method ........................................................................................ 11

    33.23 - Reconciliation ........................................................................................................... 12 33.3 - Reservations for Pasture or Grazing Rights ................................................................... 12

    33.4 - Outstanding or Reserved Timber Rights ........................................................................ 12

    33.5 - Outstanding or Reserved Mineral Rights ....................................................................... 12

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    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

30.3 - Policy

The criteria used in the appraisal of partial interests in real property shall be consistent whether

    the property is acquired under threat of eminent domain or voluntary negotiations.

    30.5 - Definitions

    Partial acquisition. An acquisition in which a portion of a larger property or an interest or partial interest in a larger estate is acquired by condemnation, threat of condemnation, or through

    voluntary negotiations.

    Partial taking. The acquisition of only a part of a property for public use under the power of eminent domain and for which the Government must pay compensation, taking into

    consideration the damages or special benefits to the remainder property.

    31 - THE APPRAISAL OF PARTIAL ACQUISITIONS

The purposes of partial interest appraisals are (1) to estimate the change in value of a property as

    a result of acquisition of a part of it or acquisition of a portion of the bundle of rights and (2) to

    estimate the effect of the acquisition on the value of the whole property and not to estimate the

    value of the taking or the interest acquired. Valuation of the taking or rights to be acquired as a

    separate unit is an improper appraisal procedure.

    31.1 - Rules and Principles for Partial Acquisition Appraisal

Appraise partial acquisitions (all roads and trail right-of-way appraisals; scenic easement,

    conservation easement, other similar easement appraisals; and other partial interests) according

    to Federal condemnation appraisal practice, law, and rules whether or not condemnation actually

    is imminent or contemplated.

For partial acquisitions, appraisers shall know and understand Federal law pertaining to

    condemnation and the terms of the easement, the rights to be acquired by the Government, and

    how those rights relate to value. In addition, the appraiser shall ascertain the physical effects of a

    Federal project on the property and determine what improvements are to be included as a part of

    the project and what items are to be left for the landowner to replace or repair.

The appraiser should seek legal counsel if there is a question of whether the property is within a

    Federal project area, since it is not the appraiser’s responsibility to determine if a particular

    property is in a project area. Legal opinions should be provided to the appraiser in writing.

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    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

Consider the following when preparing a partial interest appraisal:

    1. Follow Federal Laws. Federal, not State law, controls.

    2. Use Tests of Contiguity, Unity of Title, and Unity of Use to Determine the Larger

    Parcel. Unity of title may not be absolute. Lands under beneficial control of a single individual

    or entity may constitute a larger parcel. If the appraiser determines that beneficial control is not

    the same as title, the facts should be presented to the Office of the General Counsel for written

    legal instructions. (See Uniform Appraisal Standards for Federal Land Acquisitions, Standards

    A-14 and B-11 for a more detailed discussion of larger parcel determination.)

Normally, do not assume an arbitrary unit or larger parcel that is less than the whole property

    unless specifically instructed to do so by the Department of Justice.

    3. Base Compensation on Loss in Market Value of the Property, Not What the United

    States Gains. Demonstrate and prove loss of market value in the remaining property. Do not

    assume that there is damage to the property simply because the Government acquires or restricts

    some rights. Compensation should measure loss of market value only. Market value is the value

    on the private market, the price a private buyer would pay (FSM 5410.5). It does not measure a

    return on an owner's investment.

    4. Make No Allowance for Involuntary Acquisition. Do not consider or make allowance for the involuntary nature of the acquisition or taking.

    5. Consider Multiple Acquisitions as a Unit. If there is to be more than one partial acquisition from one tract, the before and after evaluations should consider all of the acquisitions

    as a unit. Value the entire property before any takings and imposition of easements and, then,

    value the property after all acquisitions. Be careful not to duplicate damages and losses in value.

    6. Consider Existing Government Rights. Consider any existing rights the Government has in the land.

    7. Acquire Only Specified Rights. If the easement does not specify certain rights, the appraiser may not assume those rights such as the right to fence or the right to cut timber are not

    acquired. If timber is to be acquired, the deed must so specify.

    8. Consider Enhancement and Diminution. Market value does not include enhancement or diminution in value resulting from the use or purpose for which the Government acquires land.

    In condemnation proceedings, the United States cannot be charged for values that it creates by

    the very project for which the Government needs the property; nor may the landowner be

    permitted to suffer any diminution in value attributable to the project.

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    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

    9. Consider Damages. Under the doctrine of just compensation, when the Government

    acquires a part of a single tract, an owner is entitled to compensation for the loss in value to the

    remaining property if any loss occurs. Such compensation is often referred to as "severance

    damage." Sometimes it is incorrectly referred to as “consequential damage”. Consequential

    damages are not compensable under Federal rules. Damage, loss in value, and so forth mean a

    reduction in value to the remainder.

Damages are based on the concept that the acquisition either will change the use to a less

    profitable use or create a burden with respect to the cost of operation.

Acquiring a part of the property, acquiring an easement on a property or a part of it, or

    constructing the proposed project may limit the highest and best use of the remainder or may

    otherwise reduce the value of the remainder.

The general rules pertaining to damages are:

    a. There must be a taking for damages to result.

    b. Damage must be directly caused by the project.

    c. Loss in market value is the measure of damage to the remainder.

    d. There is no damage if there is no loss in present market value. Therefore, do not

    consider damages that are speculative and too remote to affect the present market

    value. Consider damages only if they reduce the market value of the property.

    10. Consider Compensable and Noncompensable Damages. Consider in the estimate

    only those damages that are compensable under Federal law. Generally, damages are

    compensable or noncompensable as follows:

    a. Compensable. To be compensable, damages must affect the value of the

    remainder. Strict proof of loss in the effect must be definite, of practical importance,

    and measurable in the market at the time of the appraisal. Examples of compensable

    damages are:

    (1) Change of highest and best use to a lower use.

    (2) New construction costs such as for a fence, cattle guard, ditch, and so forth.

    (3) Disruption of drainage and irrigation facilities, such as by changing the utility of

    improvements by moving fences, changing ditches, and so forth.

    (4) Limiting of access (if, and only if, the limitation causes loss of value).

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(5) Reduction of economic size.

    (6) Irregularity of shape (odd-shaped remainders).

    (7) Change of grade that increases cost of access.

    (8) Proximity to the project if it causes loss of value, but not if the loss in value is based on fear of hazards.

    (9) Disruption of the right to see and be seen to a reasonable degree.

    (10) Physical interference with use of the remainder--that is, blocking normal grazing access and so forth.

    b. Noncompensable. Federal courts generally have held that compensation need not

    include payment for consequential or speculative damages or cost incurred by the property owner as a result of the taking. Damages that are not measurable in the market are noncompensable. Examples of noncompensable damages are:

    (1) Speculative or uncertain elements.

    (2) Nuisance or personal inconvenience to the landowner.

    (3) Loss of business profits.

    (4) Frustration of owner's plans (such as thwarting a subdivision development). (5) Inability to find a substitute location (covered by relocation costs). (6) Moving expense.

    (7) Loss of profits during construction.

    (8) Noise, dust, fumes, and odors, including their potential damage to future crops. (9) Annoyance or inconvenience to the public, generally.

    (10) Circuity of travel.

    (11) Rerouting or diversion of traffic.

    (12) Increase or decrease in the amount of travel.

    (13) Fear of improper construction.

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    (14) Fear of damage to the person's livestock from the project or from the

    Government's use of the land or property.

    (15) Reimbursement of the owner's cost or investment in the property as replacement

    costs for an existing road. (Owner's costs or investment do not constitute market

    value.)

    (16) Good will, business, or ongoing concern value.

    (17) Special value to the owner.

    (18) Value to the Government.

    (19) Damages based on fears of trespass or other hazards resulting from the

    Government's use of the property taken.

    (20) Loss of rental value except as it affects market value.

    (21) Values inherent in navigable waters.

    (22) Loss of police power.

    (23) Fencing of the right-of-way because of fears of trespass or fears that cattle might

    get on the road.

    (24) Compensation for cattle that might be injured or killed in the future.

    11. Consider Benefits. To qualify as a benefit, the change in value must be measurable

    in the market. Under Federal law, benefits are offset against the entire award--both the damages

    and the value of the part taken. If the remainder is worth as much after the acquisition and

    project completion as the whole was worth before, no compensation is justified.

    31.2 - Existing Roads

In acquisitions of all or parts of an existing road:

    1. Determine the status of the road.

    2. Consider general rules from Federal Court decisions.

    3. Do not value the road as an improvement. Appraise the amount of the difference between the market value of the land before and the market value immediately after imposition

    of the easement.

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    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

31.3 - Scenic, Conservation, and Other Use-restricting Easements

In appraising scenic easements, conservation easements, and other use-restricting easements,

    only the before and after rule and method apply. Consider the following:

    1. All Allowable Uses. Do not appraise to the most restrictive use allowed. Rather, consider all uses allowed in the after condition and in demand in the private market.

    2. Evidence of After Value. Analyze and consider sales of similarly encumbered tracts (if available) and tracts with similar easements. However, one is not restricted to using

    easement-encumbered sales in the after appraisal. Valid evidence of value of the encumbered

    property may be evident in sales with the primary value element similar to that allowed by the

    easement.

    3. Effect on Whole Property. If the easement does not encumber the whole property, evaluate the effect of the easement on the unrestricted portion.

    4. Beneficial Aspects. Consider any beneficial aspects of the easement such as assured privacy; any provisions for the Government to enhance scenic and environmental features of the

    property and surrounding properties; the assurance that the Government does not intend to

    develop other nearby properties which are subject to similar easements; and the freedom from

    concerns that adjacent properties could be rezoned to allow incompatible or detracting influences.

    5. Loss in Value. Consider what the owner has lost in market value, not what the Government has gained by acquisition of the easement.

    32 - APPRAISAL OF LEASED PROPERTY

The owner of a property who leases real estate owns the leased-fee estate; the lessee owns the

    leasehold interest.

    32.1 - Items to Consider

Value the estates created by a lease according to (1) financial stability of the tenant, (2) the

    forecast for market rent, and (3) the lease terms controlling rights and obligations of the lessor

    and the lessee.

Consider income stream, its duration, certainty, amount, and risk. Also important are the period

    of payments, taxes, special assessments, licenses, and fees. Additionally, consider clauses

    covering insurance, improvements, buildings, and covenants protecting the lessor's interest.

    Without such clauses, risk is higher and warrants a higher rate of capitalization. Use appropriate

    capitalization rates.

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    FSH 5409.12 - APPRAISAL HANDBOOK

    CHAPTER 30 - PARTIAL INTEREST APPRAISALS

32.2 - Valuation of the Leased Fee

Consider leasehold value to be the value accrued to a lessee based on the present worth of the

    difference between contract rent and market rent reflected by current market conditions.

The existence of an indicated leasehold value in the sale price of a lease reflects the degree of

    difference between rent charged by the lessor and the recognized market value of that use.

    Value the leased fee as the discounted present value of the net contract rent plus the reversion of the property--land and buildings, if any--at the end of the lease, provided the lessee does not have

    the right to remove the buildings.

    Ordinarily, a slightly lower discount rate applies to the leased-fee than applies to the leasehold interest.

    32.3 - Valuation of the Leasehold

The most common and most acceptable approach--and that recognized by Federal courts--is that

    the value of the leasehold is equal to the value of the property free and clear less the value of the

    leased fee.

A second method to value the leasehold is to capitalize the difference between the contract rent

    and the market rent at an appropriate capitalization rate. In selecting the rate, consider the

    duration, certainty, and amount of the net income stream.

These two methods should and usually do produce the same results. However, substantially

    different answers can occur: (1) when the contract rent is more than market rent (a negative

    leasehold interest results); (2) when there are lease restrictions that preclude the property from

    being sublet at its market rent; or (3) when the remaining period of the lease is so short that there

    is no market for subletting the subject property.

    33 - POSSESSORY INTERESTS

Reservations, outstanding rights, and life estates all are possessory interests and, for purposes of

    appraising, are similar to a leasehold estate or an estate for years. When valuing the possessor's

    right to the interest and the use of the property, remember that the balance of the value should

    not exceed the fee ownership of the property. This includes the right of the reversion or the right

    to recover complete possession of the property at the end of the possessory interest period.

    33.1 - Items to Consider

Recognize that while each approach may be used to value such possessory interests, sales

    comparison has limited application, so consider alternate methods. Because the estates are

    similar, the appraisal methods and premises for valuing leased fees and leasehold apply to

    appraisal of the value of estates created by reservations. Therefore, the value of a property

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