Right of Way - March/April 2016

Standing Up to Scrutiny

It is not unusual for one appraiser to use paired sales and published studies that indicate no damages, while another appraiser might use paired sales and published studies that suggest damages of 10 percent or more. This variance could potentially be avoided if the question of proximity damages were not addressed merely as part of another appraisal assignment, but were instead its own assignment.

The scope of such an assignment should be to analyze proximity impacts using data and methodologies that stand up to scrutiny not only by appraisers, but also by experts in associated fields such as statistics and economics, something that paired sales and most published studies on proximity impacts do not. While the costs of such a study would obviously be much greater than a typical appraisal, it would yield better project results when faced with balancing the need to treat property owners fairly with the need to prudently allocate agency or company funds.

Recognizing the unreliability and
often wild inconsistencies of the status
quo, some right of way agencies have
commissioned larger studies. And
while some of these studies have been
published, most of them only address
proximity impacts from electrical
transmission corridors. These studies
have generally reflected value impacts
that are only loosely connected to
corridor characteristics such as width,
voltage, location on property and
associated property rights. While
the variance appears modest, an
understatement or overstatement of
damages by only a few percentage
points could easily translate into
millions of dollars annually—either
allocated to or withheld from property
owners.

With significant financial impacts to right of way agencies and property owners alike, questions regarding the credibility of a given study in estimating proximity impacts become very practical for the right of way community. Exacerbating the saliency of these questions for the right of way community is the fact that certain federal agencies, such as the Federal Energy Regulatory Commission, have become increasingly concerned with the impact that right of way projects have on the value of abutting or proximate properties. Unfortunately, even cursory review of the scope and methodology of currently available studies indicates that proximity impacts are not being adequately analyzed, even when larger studies have been commissioned.

Addressing the Inadequacies

The most serious shortcomings of the published studies are lack of analytical rigor, limited scope of data and time, failure to use the latest advances in geocoding and computing, and failure to consider differences in the type or scope of corridors. Resolving these shortcomings requires that practitioners and their clients alike reconsider the assignment scope.

To ensure that a proximity impact analysis will yield credible results requires significantly more data than is reflected in currently available studies.

Additionally, the modeling must

Getting a Fair Share

When an appraiser is hired to value a partial acquisition, the primary assignment is determining the before and after valuation and any resulting damages. The proximity impact determination is usually relegated to a secondary consideration. As such, if the appraisal fee is only a few thousand dollars for the entire assignment, it’s likely that a relatively small portion will be allocated to the question of damages.

Consequently, the scope of work that is practical in analyzing proximity impacts is limited, even if appraisers are unwilling to admit it. As a result, the appraiser’s primary research on proximity impacts is likely to be some form of paired sales analysis that attempts to quantify proximity impacts by considering as few as two sales transactions. Unfortunately, much of the wide variances seen in proximity damage estimates can be attributed to the reality that paired sales analysis is, at best, a minefield for well-intended appraisers, while at the same time serving as a goldmine for the unscrupulous.

Given that disparate proximity impact estimates often result from typical appraisal assignments, the right of way industry should consider whether there is a more reliable means of analyzing proximity damages. We also question whether this should be part of a typical appraisal assignment or whether it requires a specific skillset and should be contracted as a separate assignment.

In a typical appraisal assignment, the appraiser is asked to estimate the proximity impact for a specific property.

To do so, appraisers rely on proxy data such as paired sales or published studies.

For example, to estimate proximity damages, if any, for a property next to a proposed transmission line, an appraiser would use paired sales and/or published data to derive a damage factor, generally expressed as a percentage of value.

However, neither the paired sales nor the published study is specific to the property being appraised. Instead, the proxy data reflects how proximity to power corridors impacted the prices of other properties.

This information is then extrapolated to the subject property. The credibility of the damages estimate rests entirely on the how reliable this proxy data is.