CHICAGO (Feb. 28, 2011) – Changes to Federal Emergency Management Agency flood zone maps may cause economic damages to property owners, and governments may need to pay them substantial compensation, according to an article published this week in The Appraisal Journal’s Winter issue.
The Appraisal Journal is the quarterly technical and academic publication of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. The materials presented in the publication represent the opinions and views of the authors and not necessarily those of the Appraisal Institute.
"Flood Zone Revisions and Economic Loss: An Example from Florida" – by William Cole; Bruce Stephan, MAI; Nathan Chouinard; J. Howard Finch, Ph.D.; and H. Shelton Weeks, Ph.D. – examines how revisions to existing flood zones can negatively affect land value and cause economic loss to a property owner. Under Florida’s Harris Act, as well as under case law, property owners may ask the courts to deem a change in regulation as a "regulatory taking" and may ask the government for compensation.
The authors address how to compute the amount of loss, and consequently the amount of compensation, that a property owner would receive for the economic loss from a regulatory taking. The value of the compensation due to a new property regulation is determined by appraisal analysis of the value of the property before and after the government’s action.
The article presents a case study of a light industrial manufacturing operation within a newly designated flood zone in southwest Florida. The change in the flood zone restrictions affected the property value because the owners now are not allowed to substantially upgrade, expand or replacement of the building on their property. The authors use the sales comparison approach and the income capitalization approach to determine the value of the case study property before and after the regulation change. In this case, the estimated decline in value was $760,000, or 29 percent of the original property value.
The authors conclude by advising appraisers, property owners and regulatory officials to consider the implications of regulatory takings and the economic consequences associated with revising existing flood zone maps.
Read "Flood Zone Revisions and Economic Loss: An Example from Florida," in the Winter 2011 issue of The Appraisal Journal at http://www.lumlibrary.org/webpac/pdf/TAJ2010/TAJWinter2011pg44-56-1.pdf.
Among other articles in The Appraisal Journal’s Winter 2011 issue:
"Wind Farms — A Valuation Primer," by P. Barton DeLacy, MAI, looks at the factors that affect the value of property slated for development as large, utility-scale wind energy projects. According to the author, an appraiser valuing a wind farm is valuing an enterprise where the land is incidental to the power purchase agreement between the wind farm owner and the utility. The appraiser must take into account the income under the power purchase agreement as well as the value of the land after the agreement has expired.
"The Impact of Section 1031 Tax-Deferred Exchanges on Agricultural Land Sale Values," by Steven Shultz, Ph.D., and Roger P. Sindt, Ph.D., examines the effect of tax-deferred exchanges on the sale price of agricultural land. Some have suggested that tax-deferred exchanges — especially those involving out-of-state buyers — raise farmland prices and are a threat to the viability of agricultural operations by young farmers. The authors studied tax-deferred exchanges of farmland in Nebraska for 2006, 2007 and 2009, and they report that average prices per acre were more than 10 percent higher in tax-deferred exchange sales.
"Direct Capitalization: It Might Be Simple, But It Isn’t That Easy," by David C. Lennhoff, MAI, SRA, compares two basic income capitalization models: the direct capitalization approach and the yield capitalization approach. The courts generally prefer the direct capitalization approach and have at times rejected the yield capitalization as being "to speculative." In this article, the author demonstrates how both approaches take into account the same fundamental elements and result in the same value.