Use of the Income Approach in Valuing a Sand and Gravel Property in a Condemnation Proceeding

Article excerpt

INTRODUCTION

The legal concept of "Market Value" is applied by courts to determine the amount of just compensation for takings. "Market Value" has been defined as "what a willing buyer would pay in cash to a willing seller," but "Just Compensation" has no clear definition or valuation methodology. This article finds that valuing sand and gravel properly using the income approach is the most appropriate method of valuation, and that valuation experts should use the same valuation process that is used by owner/operators when buying or leasing land.

VALUING SPECIAL USE PROPERTIES

The essential problem in the valuation of special use properties is the lack of availability of adequate data from the sales of comparable properties. In some cases, there may be a lack of sales within a reasonably defined market area or a lack of specific information about the existing sales to make essential adjustments and draw a reasonable value conclusion.

In recent years, the Supreme Court has stated, "... when market value has been too difficult to find, or when its application would result in manifest injustice to an owner or the public, courts have fashioned and applied other standards." (1) This situation is usually considered to exist when the property involved in the taking is a special use property. Sand and gravel properties, by their nature, are special use properties.

Comparable sand and gravel sales are relatively few and infrequent compared to other types of properties, such as office buildings or retail commercial buildings. In instances where some local sales of sand and gravel properties have occurred, it is often difficult, if not impossible, to analyze these sales because the price paid depends on the remaining reserves (or degree of depletion) as of the date of sale, and this information is usually unavailable. According to the Uniform Appraisal Standards for Federal Land Acquisitions:

  In order to properly develop a sales comparison approach to value for
  a mineral bearing property, the appraiser needs to understand the
  level of information available concerning the mineralization found on
  the subject property. It is then important to identify comparable
  sales that had similar levels of information concerning
  mineralization available at the time of sale. The verification of
  data concerning the comparable sales is a critical component of this
  analysis, and the assistance of experts in identifying all necessary
  areas of inquiry during the verification process may be required. (2)

Sand and gravel operators mine minerals (aggregate) for use in almost all types of construction. Demand for the materials is based upon the need for new construction materials for both private and public projects. Owners of sand and gravel businesses either purchase or lease land for their operations. When leasing land, they negotiate a rate per ton, or a percentage of gross sales for all extracted materials. This rate is referred to as a royalty rate. When all of the materials are mined, the landowner or operator can then use the property for an inert landfill. Materials deposited for use in reclaiming the land are charged at a rate per ton, and property owners are paid a royalty rate on a per-ton basis.

The income approach is generally reliable for sand and gravel properties because it is based upon estimating the net rental income derived from royalty rates or the sale of material over a period of time. The value is then estimated using a discounted cash flow analysis.

UNDERSTANDING MARKET VALUE AND CONDEMNATION PROCEEDINGS

In a condemnation proceeding, the legal concept of "market value" is applied by the courts to determine the amount of just compensation for takings. Market value has been defined as "what a willing buyer would pay in cash to a willing seller," (3) and "just compensation" (4) has never been reduced to a single formula. …