Section 9.7 Appraisals and Just Compensation

Grant Administration: Section 9.7 Appraisals and Just Compensation

This section describes the requirements and procedures to establish the value of property for either voluntary or involuntary acquisitions under the URA. This section also addresses requirements for appraisals in that process.

Market Value for Voluntary Acquisitions
To estimate market value in a voluntary acquisition, grantees must follow specific procedures:

• A formal appraisal is not required by the URA in voluntary acquisitions. However, the purchase may involve a private lender requiring an appraisal.
• While an appraisal for voluntary transactions is not required, grantees may still decide that an appraisal is necessary to support their determination of market value. Grantees must have some reasonable basis for their determination of market value.
• If an appraisal is not obtained, someone with knowledge of the local real estate market must make this determination and document the file. That person should demonstrate knowledge through holding a real estate broker license recognized by the state of New Hampshire.

After a grantee has established a market value for the property and has notified the owner of this amount in writing, a grantee may negotiate freely with the owner in order to reach an agreement. Since these transactions are voluntary, negotiations may result in agreement for the amount of the original estimate, or for a lesser amount. CDFA must approve a waiver for use of CDBG funds in any acquisition for an amount greater than market value.

Waiver Valuation
An appraisal is not required under two circumstances: (1) when a property is being donated and owner has waived his/her rights; or (2) when a property has a value estimated at $10,000 or less. (See Easements below for rights-of-way and easements less than $10,000.) 49 CFR 24.102(c)(2)

If a grantee determines that a formal appraisal is not required, then the valuation process used is called a waiver valuation. Handbook 1378, Chapter 5, Paragraph 5-4 E

The determination that a property has a value less than $10,000 must be based on a review of available data by someone who has sufficient understanding of the local real estate market. That person should demonstrate knowledge through holding a real estate broker license recognized by the state of New Hampshire. This decision must be documented in the project file. 49 CFR 24.102(c)(2)(ii)(B)

A waiver valuation is not appropriate when the following situations arise:

• The use of eminent domain is anticipated;
• The anticipated value of the proposed acquisition is expected to exceed $10,000;
• Possible damages to the remainder property exist;
• Questions on highest and best use exist;
• The valuation problem is complex; or
• Hazardous material/waste may be present.

NOTE: If the entity acquiring a property offers the property owner the option of having the property appraised, and the owner chooses to have an appraisal, the agency shall obtain an appraisal and not use the waiver valuation method described above. 49 CFR 24.2(a)(33) and Handbook 1378, Chapter 5, Paragraph 5-4 E (1)

Easements
As outlined above, a grantee must obtain an appraisal for any property, including easements, estimated to be worth more than $10,000. For easements and rights-of-way worth less than $10,000, the grantee can use the Easement Valuation Form. This form, which is Attachment 9-11: Easement Valuation Form, summarizes the information that the grantee must have on file to document the estimated value of the property.

Appraisals
For acquisitions requiring the estimation of fair market value, the URA requires only one appraisal and a review of this appraisal by a qualified person. The following sections describe the contents of an appraisal and appraiser qualifications.

Appraiser Qualifications
For properties estimated to be worth more than $10,000, an appraisal must be conducted. There are several minimum requirements for appraisers, including:

• Procurement of appraisers and review appraisers shall be carried out in accordance with procurement or small procurement policies as described in Chapter 7: Procurement. (For additional guidance on preparing a scope of work see Contracting for Appraisal section below.)
• New Hampshire State Appraisal Board has established licensing and certification levels for appraisers doing business in the state. The level of appraiser required is based on either the kind of property or, if residential, the value of the property. Attachment 9-12 Appraisal Requirements displays the kind of appraiser classification required.
• A fee appraiser must be state licensed or certified in accordance with title XI of the Financial Institutions Reform Recover and Enforcement Act (FIRREA) of 1989.  49 CFR 24.103(d)(2)
• Appraisers, or persons performing the waiver valuation, must not have any interest—either direct or indirect—with the owner or property they are to review. This would be a conflict of interest.  49 CFR 24.102(n)(1)
• No person shall attempt to unduly influence or coerce an appraiser or waiver valuation preparer regarding any valuation or other aspect of an appraisal.
• Persons functioning as negotiators may not supervise nor formally evaluate the performance of any appraiser or waiver valuator.  49 CFR 24.102(n)(2)
• No appraiser may negotiate on the agency’s behalf if he or she performed the appraisal, review or waiver valuation, on the property. There is an exception for properties valued at $10,000 or less.  49 CFR 24.102 (n)(3)

Contracting for an Appraisal
In order to procure an appraiser, the grantee should request statements of qualifications from a number of local appraisers, review those qualifications, and employ only qualified appraisers. (See Chapter 7: Procurement for more information on procurement of professional services.)

The grantee must execute a professional services contract with an independent appraiser. The contract must include a detailed scope of services that the appraiser will perform. See Attachment 9-13: Guide for Preparing Appraisal Scope of Work. Payment for the appraiser’s services, or waiver valuation, must not be based on the amount of the resulting property value.

Appraisal Process & Criteria
Appraisals must meet nationally/state-recognized industry standards. The appraiser may not use race, color, religion, or the ethnic characteristics of a neighborhood in estimating the value of residential property. The contract must also specify the content requirements of the appraisal report.

The grantee or the appraiser must invite the property owner in writing to accompany the appraiser during inspection of the property. This notice should be given before the appraisal is undertaken. A copy of the notice should be placed in the property acquisition file along with evidence of receipt by the owner.

At a minimum, all appraisals must contain the following:

• The purpose and function of the appraisal.
• A statement of the assumptions and limiting conditions affecting the appraisal.
• An adequate legal description of the property, any remnants not being acquired, and its physical characteristics.  Handbook 1378, Chapter 5, Paragraph 5-4 J(11)
  – This should also include key information such as title information, location, zoning, present use, highest and best use, and at least a five-year sales history of the property.
• An explanation of all relevant approaches to value.
  – If sales data are sufficient, the appraiser should rely solely on the market approach.
  – If more than one method is used, the text should reconcile the various approaches to value and support the conclusions.
• A description of comparable sales.
• A final statement of the value of the real property.
  – For partial acquisitions, the appraisal should also give a statement of the value of damages and benefits to the remaining property.
• The effective date of the valuation appraisal.
• A signature and certification of the appraiser.
• The report will be consistent with the Uniform Standards of Professional Appraisal Practice (USPAP).

Conduct Review Appraisal
After the initial appraisal is conducted, a review must be made by a New Hampshire licensed appraiser under written contract. The appraiser must fulfill the requirements described in the Appraiser Qualifications section above. The review must be written, signed and dated. (See Attachment 9-14: Sample Review Appraisal for a sample Review of Appraisal document.)

The review appraiser must examine all appraisals to check that the appraisal meets all applicable requirements, and to evaluate the initial appraiser’s documentation, analysis, and soundness of opinion. 49 CFR 24.104

If the review appraiser does not approve or accept an appraisal, it may be necessary to seek a second full appraisal. If the review appraiser does not agree with the original appraisal and it is not practical to do a second appraisal, the review appraiser may re-evaluate the original appraisal amount.

Establishing Just Compensation
After a review of the appraisal, the grantee must establish just compensation and present this in a written offer to the owner.

Just compensation cannot be less than the appraised market value. In determining this amount, the grantee (not the appraiser) may take into account the benefit or detriment that the upcoming project will have on any remaining property at the site. 49 CFR 24.102(d)

If the owner retains or removes any property improvements, (for example, permanent fencing) the salvage value of the improvement should be deducted from the offer of just compensation.

If an entire parcel is not being acquired, and the agency determines that the owner would be left with an uneconomic remnant, the agency must offer to purchase this remnant. An uneconomic remnant is defined as a parcel of real property with little or no value to the owner. An example of this might be a remnant not large enough for future use or without access to a street. 49 CFR 24.102(k)

The grantee must prepare a written Statement of the Basis for the Determination of Just Compensation to be provided to the property owner (see Attachment 9-6: Sample Statement of the Basis Just Compensation). In addition to the initial written purchase offer, this Statement must also include:

• A legal description and location identification of the property;
• Interest to be acquired (e.g., fee simple, easement, etc.);
• An inventory of the buildings, structures, fixtures, etc., that are considered to be a part of the real property;
• A statement of the amount offered as just compensation;
• If there are tenant-owned improvements, the amount determined to be just compensation for the improvements and the basis for the amount;
• If the owner keeps some of the property improvements, the amount determined to be just compensation for these improvements and the basis for the amount;
• Any purchase option agreement should be attached; and
• If only a part of the parcel is to be acquired, a statement apportioning just compensation between the actual piece to be acquired and an amount representing damages and benefits to the remaining portion.

A copy of this Statement should be placed in the property acquisition file.

Negotiating the Purchase
As soon as feasible after establishing just compensation, the grantee must send the owner a Written Offer to Purchase which includes the Statement of the Basis for the Determination of Just Compensation (see the sample provided as Attachment 9-15: Sample Written Offer to Purchase). As with all notices, receipt must be documented. If the property is occupied by a tenant, owner or business, the grantee must issue a written Notice of Eligibility for Relocation Benefits as soon as possible after the written offer to purchase (also called the “Initiation of Negotiations”) is made.

The most recent URA regulations emphasize that the agency should make reasonable efforts to conduct face-to-face negotiations with the owner or the owner’s representative. The owner may present relevant information that bears on the determination of value and may suggest modifications to the proposed terms and conditions of the purchase. The agency must give these suggestions full consideration. 48 CRF 24.102(f)

If the owner’s information or suggestions would warrant it, the agency may ask the appraiser to update the current appraisal or order another appraisal. If this results in a change in just compensation, the agency must adjust the offer. Handbook 1378, Chapter 5, Paragraph 5-4 M and 49 CFR 24.106

The owner must be paid for costs to transfer title to the agency. These costs may be advanced instead of reimbursed and they include recording fees, legal fees, prepayment penalties, and incidental costs.
Documentation of negotiation proceedings should be placed in the project acquisition file. Grantees should be sure to thoroughly document the justification for payment if it is more than the original offer of fair market value.

CDFA will only allow CDBG funds to pay up to the fair market value established by a formal appraisal and review appraisal. Any cost above that amount must be derived from local funds or another source of funding included in the project. However, CDFA may allow CDBG funds to be expended that exceed fair market value if a court orders a higher amount through eminent domain procedures or other extenuating circumstances. The grantee will need to use an administrative settlement for any acquisition that exceeds fair market value. Attachment 9-16: Sample Administrative Settlement contains a sample of a settlement agreement. Consult with CDFA in such circumstances.

If payment exceeds the fair market value and CDFA accepts the acquisition, the acquisition file must include documentation of the funding sources other than CDBG that covered the amount paid which exceeds fair market value. The grantee should also retain a copy of the administrative settlement.