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The Fundamentals of Easement Valuation

By February 2, 2024February 4th, 2024No Comments

* The following blog is an adaptation of the presentation Alan Ackerman and Matthew Ackerman gave on “The Fundamentals of Easement Valuation” at the American Law Institute’s Eminent Domain & Land Valuation Litigation Seminar in New Orleans on February 1, 2024.

I.  The Basics

One of the more complicated valuation issues in eminent domain cases is for easements in partial taking cases.  As government entities attempt to improve the electric grid to support the transportation of new renewable energies, they will necessarily have to condemn millions of miles of easements throughout the country.  See, e.g., Nadja Popovich & Brad Plumer, Why the U.S. Electric Grid Isn’t Ready for the Energy Transition, N.Y. Times (June 12, 2023), https://www.nytimes.com/interactive/2023/06/12/climate/us-electric-grid-energy-transition.html.  This blog sets out to explain the fundamentals of easement valuation and discuss some common issues our firm has encountered while advocating on behalf of property owners in recent utility easement cases.

A.  Definitions

Here are some definitions for key terms:

  • Whole property: The “whole property,” “parent tract,” or “larger parcel” generally refers to entire property before the partial taking.
  • Easement: An easement is a defined interest in property that is owned by someone other than the owner of the underlying fee simple interest.  The possessor of the easement holds the “dominant estate,” and the person who owns the underlying fee simple interest holds the “servient estate.”  The terms of the easement are usually specified in a written instrument.
  • Partial taking: The taking of a part of the whole property.  Partial takings can come in various forms: (1) an easement over part of the whole property, (2) an easement over the whole property, or (3) a fee taking of part of the whole property.  They can also be temporary or permanent.
  • Remainder: The remainder is the portion of the parent tract that the owner owns following a partial taking.
  • Severance damages: Severance damages refer to the compensation awarded to a property owner for the reduction in value to the remainder of their property following a partial taking.
  • Scope of the Project Rule: The Scope of the Project Rule—which is sometimes referred to as the “Project Influence Rule”—is the traditional rule that condemned property should be valued as if the broader project for which it is condemned had not been contemplated.
    • In Michigan, our courts have ruled that “where condemnation proceedings are protracted” causing “the whole character of an area” to “change to the detriment of the property owner, … the property owner should not be obliged to suffer the reduced value of his property.” In re Urban Renewal (City of Detroit v. Cassese), 376 Mich. 311, 318 (1965).  This rule also applies where the government project increases the value of the condemned property.  The corresponding model jury instruction (M Civ JI 90.15) states: “You should determine the value of the property as though this project had not been contemplated.”
  • Enhancement: In some cases, the government takes land in a partial taking that is used as part of a public project that increases the value of the remainder of the property.  Depending on the jurisdiction, the “enhancement” to the value of the remainder may be considered in determining the just compensation.
  • Cost to cure: In some cases, it is possible to mitigate severance damages by paying a “cost to cure.”  “When the cost of curing the injury to the remainder is less than the outright diminution in its value uncured, the government may pay the cost of cure.”  United States v. 2.33 Acres of Land, 704 F.2d 728, 730 (4th Cir. 1983).

B.  Valuing partial takings

1.  The “federal rule” vs. the “state rule”

There are two primary ways appraisers and courts assess damages for partial takings.  The preferred method typically varies by jurisdiction.

  • Federal Rule, also known as the “before and after” method: Under the “federal” rule—which, despite its name, is used by several states—just compensation for a partial taking is calculated as the value of the entire property before the taking less the value of the remainder.
    • “Where the property interest permanently taken is an easement, the ‘conventional’ method of valuation is the ‘before-and-after’ method, i.e., ‘the difference between the value of the property before and after the Government’s easement was imposed.’” Otay Mesa Prop., L.P. v. United States, 670 F.3d 1358, 1364 (Fed. Cir. 2012) (quoting United States v. Va. Elec. & Power Co., 365 U.S. 624, 632 (1961)).
    • “This commonly used approach to determine the compensation of a partial taking is known as the before-and-after rule. . . . The measure of damages is generally the fair market value of the land immediately before the taking minus its fair market value immediately after the taking.”  Portland Nat. Gas Transmission Sys. v. 19.2 Acres of Land, 195 F. Supp. 2d 314, 320 (D. Mass. 2002).
    • “The measure of compensation is the difference between (1) the market value of the entire parcel before the taking and (2) the market value of what is left of the parcel after the taking.” M Civ JI 90.12 (Partial Taking).
  • State Rule, also known as “value of take plus damages”: By contrast, applying the “state” rule, just compensation is calculated as the value of the taken property plus the damages to the remainder.
    • “In a partial taking, a property owner is entitled to compensation for the property taken and ‘damages’ for injury to the property which remains after the taking, i.e., the residue.” Hilliard v. First Indus., L.P., 158 Ohio App. 3d 792, 794 (2004) (quotation marks omitted).
    • “There are only two elements of damages to be considered in a condemnation proceeding: first, the market value of the property actually taken; second, the consequential damage that will naturally and proximately arise to the remainder of the owner’s property from the taking of the part that is taken and the devoting of it to the purposes for which it is condemned.” White v. Dep’t of Transp., 227 Ga. App. 488, 489 (1997) (cleaned up).

In theory, both methods should achieve the same result.  In practice, that is not always the case.  According to several right-of-way agents, the state rule results in excess compensation.  See, e.g., Wayne C. Lusvardi, The Appraisal of Easements Under the State Rule: Separating Fact from Fiction, Right of Way, July/August 1995, at 15, 18 (criticizing the “value of take plus damages” approach based on the author’s opinion that the “value of take” part of the approach is based on a “subjective” and often overvalued “percentage of diminution applied to unencumbered land sales”).

2.  Enhancement

In applying the state rule (property taken plus damages), most jurisdictions allow condemnors to use the enhancement to offset damages to the remainder but not the value of the taken property.  As a result of different offsets, the state and federal rules can achieve two different results.

Here is a simple illustration.  A ten-acre parcel is worth $1 per acre before the condemnation of an easement across five of the acres.  The taking is part of a grand public project that dramatically increases the remainder’s value.  Following the taking, the five acres that are not encumbered by the easement are worth $2 per acre.  The easement diminishes the value of the affected acreage by $0.50 per acre.

If, in applying the federal (before-and-after) rule, the jurisdiction offsets the enhancement, then the owner is not entitled to just compensation, because the property is worth more after the taking ($15) than it was before ($10).

By contrast, in applying the state rule, the enhancement offsets only against the damages to the remainder.  Even though the property is worth more after the taking, the property owner is still entitled to damages based on the value of the taken property.  More specifically, the property taken would be calculated as 50% ($0.50 / $1) of the encumbered five acres, which were worth $1 per acre, for a total of $2.50 in compensation.

3.  Partial takings can impact property value in many ways

In appraising the value of the remainder following a partial taking under either approach, you should consider many ways the taking impacts the value of the property.  Michigan’s jury instructions (M Civ JI 90.12 (Partial Taking)) list several non-exclusive considerations, including:

  • The reduced size of the residue
  • The altered shape of the residue
  • Reduced access to the residue
  • Any change in utility or desirability of the residue
  • The effect of the applicable zoning ordinances on the residue
  • The assumption that the condemnor will use its newly acquired property rights to the fullest extent allowed by the law.

Please note that these are just a few of many possible ways the taking affects the property’s value.

In the context of many utility takings, for example, property owners are concerned about health risks or hazardous conditions associated with living in close proximity to high-voltage transmission lines.  In most states, property owners are entitled to introduce evidence that the fear of health concerns or hazardous conditions will affect the market value even if there is no scientific basis for that fear.  See, e.g., Florida Power & Light Co. v. Jennings, 518 So. 2d 895, 894, 898-99 (Fla. 1987) (“We join the majority of jurisdictions who have considered this issue and hold that the impact of public fear on the market value of the property is admissible without independent proof of the reasonableness of the fear. . . .  [A]ny factor, including public fear, which impacts on the market value of land taken for a public purpose may be considered to explain the basis for an expert’s valuation opinion.  Whether this fear is objectively reasonable is irrelevant to the issue of full compensation in an eminent domain proceeding.”).

II.  A Couple of Common Issues

A.  Property owners are entitled to compensation based on the maximum possible use of the easement

Although a condemnor may intend to perform a specific project, it is later constrained not by its initial intentions but by the easement language.  Owner advocates should carefully review and seek compensation based on the specific rights an easement grants to the condemnor.

1.  The holder of the dominant estate is constrained by the terms of the easement, not the condemnor’s initial intended use

In many cases, utility companies have, after decades of consistent use or even non-use of easements, expanded their use to the detriment of property owners.  When that happens, the utility companies are constrained not by their initial intended use of the easement but by the terms of the easement itself.

As an example, consider Rolland v. Int’l Transmission Co., No. 274411, 2008 WL 2038025 (Mich. Ct. App. May 13, 2008).  Rolland centered around easements originating from the 1940s and 1950s, when the Detroit Edison Company “acquired easement rights to ‘construct, operate and maintain’ electrical power lines, ‘including the necessary H-frames, towers, fixtures, wires and equipment’” over the owners’ properties.  Id. at *1.  Detroit Edison installed many wooden H-frame poles, which remained in place for many years.

**All images in this blog are AI generations.  This is not a wooden H-frame.**

In 2000, Detroit Edison assigned its easement rights to ITC, which sought to replace the wooden H-frame poles with steel “monopoles” and install new monopoles where they did not previously exist as part of a major project.

When ITC notified the landowners that it intended to enter their properties to install the monopoles, the owners objected and sought a declaratory judgment and injunction prohibiting any power line or pole upgrade work on their land.

The court ruled against the property owners, holding that ITC could install the colossal monopoles under the terms of the existing easements—specifically, the easement language granting the predecessor-in-title Detroit Edison Company “the right to construct, operate and maintain its lines for the transmission and distribution of electricity”—even though steel monopoles did not even exist when Detroit Edison obtained the easements.

Unfortunately, this is not a unique example.  See, e.g., Consumers Energy Co. v. Acey, No. 277039, 2008 WL 2779896 (Mich. Ct. App. July 17, 2008) (holding that a utility company could construct a second pipeline on an owner’s property based on a 1951 easement), rev’d in part on other grounds, 483 Mich. 985 (2009).

The lesson from these cases is straightforward: Utility companies are constrained by the terms of the easement, not their initial intended use.

2.  Property owners have only one opportunity to obtain compensation

In Rolland, the property owners were not entitled to additional compensation when the utility company replaced the H-frames with monopoles.  The reasoning is straightforward:  The utility company already owned the right to install the monopoles under the existing easement.

That shows how important it is for property owners to seek compensation based on the maximum use of the easement.  See, e.g., Highway Comm’n v. Great Lakes Express Co., 50 Mich. App. 170, 175 (1973) (explaining that because the landowner “is forever barred from claiming additional compensation,” the condemnor must compensate the landowner as if it will “make use of every one of the quantum of rights it had arguably taken”); State  Dep’t v. Kaylor, 137 S.E.2d 664, 666 (Ga. Ct. App. 1964) (explaining that “the assessment of compensation for land taken covers all damages whether foreseen or not which results from a proper construction [and operation of the project]”).

3.  Unconstitutional contemplation of the anticipated use of the easement

In determining just compensation awards for partial takings, some courts permit consideration of the expected use of the easement.  See, e.g., 2,953.15 Acres of Land v. United States, 350 F.2d 356, 360 (5th Cir. 1965) (“Damages reasonably to be anticipated from the use of the property for the purpose for which the condemnation is made are relevant in determining the compensation to be awarded for the taking.”).  Michigan’s model jury instructions, for example, state that “[i]n valuing the property that is left after the taking, you should take into account various factors, which may include . . . the use which the [name of condemning authority] intends to make of the property it is acquiring and the effect of that use upon the owner’s remaining property.”  M Civ JI 90.12 (Partial Taking).

We want to caution that it would be unconstitutional for a condemnor to use this type of instruction to avoid paying just compensation based on the maximum possible use of the easement.  The condemnor’s promise or expectation that it will not use its rights under the easement in a specific manner is non-binding.  And, as explained above, the property owner will not be able to recover more compensation if the condemnor alters or expands its use under the existing easement.

The Constitution mandates that condemnors pay property owners “the full and perfect equivalent in money of the property taken,” United States v. Miller, 317 U.S. 369, 373 (1943), not the property the condemnor expects to use.

4.  Policy considerations also favor compensation based on the maximum use of the easement

Policy considerations also favor compensating property owners based on the maximum possible use of the easement.  In direct takings cases, the condemnor typically specifies the property it seeks to condemn in the complaint.  Although property owners may challenge whether the taking is necessary for a public use, they are typically bound by the condemnor’s chosen easement language.  Compensation based on the maximum use of the easement incentivizes utility companies not to condemn more rights than necessary for their anticipated project.

5.  Property owners are entitled to compensation based on the maximum possible use of the easement

In sum, in cases involving partial takings of easements, just compensation must be based on the condemnor’s maximum possible use of the easement, even if that use appears theoretical or unlikely.  Here are related rule statements and holdings from several jurisdictions:

  • Kenai Landing, Inc. v. Cook Inlet Nat. Gas Storage Alaska, LLC, 441 P.3d 954, 963 n.28 (Alaska 2019) (“The landowner is entitled to assume . . . that the taking authority will make the full use ‘physically possible of any easement or land described in the taking certificate.’” (quoting 4 Julius L. Sackman, Nichols on Eminent Domain12A.07[2] (3d ed. 2018))).
  • Baucum v. Ark. Power & Light Co., 15 S.W.2d 399, 402 (Ark. 1929) (holding in a partial takings case that “the fact that the owner was given the permissive use of the right of way could not be considered in reduction of the sum to be allowed as compensation” because the condemnor “acquired by the condemnation proceedings the power to make such use of the right of way as its future needs required” and the property owner would not be entitled to “future damages” if the condemnor subsequently prohibited the permissive use).
  • Water Dist. v. Campus Crusade for Christ, Inc., 37 Cal. Rptr. 3d 598, 622 (Ct. App. 2005) (“In determining severance damage, the jury must assume ‘the most serious damage’ which will be caused to the remainder by the taking of the easement and construction of the property. Because the property owner has only one opportunity to seek compensation for all foreseeable damages to his property, severance damages may include not only specific direct damages but also indirect factors that affect the property’s market value.” (citations omitted)).
  • Loveridge v. United States, No. 16-912, 2023 WL 4926217 (Fed. Cl. Aug. 2, 2023) (“[M]ere informal privileges to use property in a certain manner cannot be used to reduce damages unless the owner is given a legally binding right to use the property in the manner contemplated.” (quotation marks omitted)); (“A condemnor’s non-binding promises to restrict its uses of the rights it takes will not reduce the damages to the property and should not be considered.” (quoting Joseph T. Waldo & Jeremy P. Hopkins, Eminent Domain and Land Valuation Litigation: The Claim of Severance Damages in Easement Takings (2004)).
  • City of Mission Hills v. Sexton, 160 P.3d 812, 825 (Kan. 2007) (“[L]andowners are entitled to full compensation for the actual rights acquired by the condemnor, not the rights actually used.”).
  • “The landowner is entitled to assume, in the condemnation suit, that the taking authority will make the full use physically possible of any easement or land described in the taking certificate. When the condemnor limits the use of its easement after the taking has occurred, this limitation can limit the damages recoverable, but only if the limitation is lawfully enforceable by the condemnee.”  Portland Nat. Gas Transmission Sys. v. 19.2 Acres of Land, 195 F. Supp. 2d 314, 322 (D. Mass. 2002) (quotation marks omitted).
  • “It is presumed that the appropriator will exercise his rights to the full extent. Mere promises of intention not to use a right or a privilege specified or reasonably implied are not sufficient to exclude the consideration thereof in the assessment of damages.”  Union Elec. Co. v. Levin, 304 S.W.2d 478, 481 (Mo. Ct. App. 1957) (citation omitted).
  • “If the State wishes to limit its rights under the easement to the continuance of the presently existing use or to the prospective use envisaged by its expert, it should do so by formal action, by deed, release or otherwise. In the absence of such modification, the damage must be evaluated on the basis of what the State has the right to do under the terms of the easement as appropriated.”  Spinner v. State, 167 N.Y.S.2d 731, 733 (1957).
  • “[I]t is not what the condemning authority may subjectively intend to do but what such authority has seized within the four corners of the documents of condemnation which controls the measure of damages as of the time of the taking.” Kentucky Fried Chicken of Warren, Inc. v. Flanders, 461 A.2d 927, 928–29 (R.I. 1983)
  • “[I]t is presumed that the condemnor will exercise its right and use the property taken to the fullest extent of the right acquired.” State v. Ware, 86 S.W.3d 817, 826 (Tex. App. 2002).
  • “The Government concedes, as it must, that the landowners are entitled to assume in the condemnation suit that the Government will make the full use physically possible of any easement.” 2,953.5 Acres of Land v. United States, 350 F.2d 356, 360 (5th Cir. 1965).

B. The unbound pipeline: Dealing with excessively broad easements

We have recently had several utility-taking cases in which utility companies have sought easements that are broader than necessary for their anticipated project.  We thought it would be worth explaining one recent experience with this phenomenon and two potential ways to combat it.

1.  The case

About a year ago, we represented the owners of an office building dealing with a utility company’s partial taking of a permanent easement for a pipeline.  The utility company caused minor damage and disrupted the use of the office building when it installed a pipeline on a grassy area between the building and a busy road. However, once the project was completed, the pipeline was underground and invisible to the naked eye.  On the surface, the damages appeared relatively minimal.

There were a few complications though.

In addition to reducing the property’s building area, the permanent easement granted the utility company the right to do far more than install the pipeline it had put in place.  Instead, the easement granted the utility company the right to modify and upgrade the line, including by replacing the mostly innocuous existing pipeline with one far greater in size and above ground.  The easement also granted the utility company the right to use the rest of the owner’s property whenever it found it useful for working on the pipeline.

2.  The necessity challenge

Necessity challenges are an important topic, but they are outside the scope of this blog (on easement valuation).  For what it is worth, our firm challenged the necessity of the pipeline taking for the office building and lost.  (One day someone will explain to me why a utility company installing an underground pipeline needs the right to install it above ground.)

3.  Force the condemnor to pay for it

After unsuccessfully challenging necessity, we decided the best course of action was to make the utility company pay for it.  So we sought compensation based on the maximum possible use of the easement.

At the mandatory mediation, we explained that the utility company acquired the right to replace the mostly innocuous existing pipeline with an above-ground one that is far more monstrous in size.  We also explained that the utility company had the right to disrupt the office building’s standard use repeatedly.  The mediation panel made a large award to our clients.

That damages award made the utility company reconsider whether it really needed the broad easement.  In the end, we settled for slightly less in damages but dramatically reduced the scope of the easement.

C.  Appraising easement damages in the absence of matched pairs

One common complication in easement valuation is identifying matched pairs for a specific—and often unique—type of damage.  In many cases, there are no possible matched pairs because it is the first time a particular type of project is constructed in the subject marketplace or because the subject property is unique.  We observe the former every time a new technology requires condemnation.

The absence of paired sales does not mean that the easement does not damage the value of the remainder or that the owner is not entitled to compensation.  Despite the lack of matched pairs, the appraiser must use common sense, experience, and expertise and make a reasoned adjustment based on the relevant information, such as the changed conditions, the location of the easement, and the rights taken.  See, e.g., J.D. Eaton, Real Estate Valuation in Litigation 309 (2d ed. 1995) (“The appraiser must also use common sense. . . . [If] after the taking, the dwelling is located three feet from the fenced right-of-way and its roof overhangs the taking line[,] the appraiser cannot conclude that the dwelling suffers no proximity damage simply because no comparable sales of dwellings three feet from an interstate highway right-of-way can be found in the market.  The appraiser must exercise sound judgment in such matters, whether or not strong market evidence exists.”).

Matched pairs—if truly “matched” pairs exist—are not the end-all-be-all.  Nor are they necessary for appraisers to make adjustments to comparable sales.

Appraisers frequently make adjustments to sales without matched pairs.  For example, appraisers almost always make adjustments without paired sales for time, market conditions, and other factors.  The appraisers, who are qualified experts, use their expertise and experience to make these adjustments.  It is standard and approved appraisal methodology to do so.  See, e.g., Guardian Pipeline, L.L.C. v. 950.80 Acres of Land, 486 F. Supp. 2d 741, 757 (N.D. Ill. 2007), aff’d, 525 F.3d 554 (7th Cir. 2008) (“[E]xact comparables [a]re not required by even the strictest appraisal standards because such exactness is impossible and because appraisers can make adjustments to account for differences.”).

The result should be no different when appraisers make adjustments related to factors impacted by the taking or the changed conditions caused by the taking.  Appraisers must make adjustments—before and after the taking—whether matched pairs exist or not.  Such adjustments go to the weight of the evidence, not the admissibility.  See Rover Pipeline, LLC v. 1.23 Acres of Land, No. 17-CV-10365, 2018 WL 3322995, at *5 (E.D. Mich. July 6, 2018) (affirming the admission of an appraisal report that did not include comparable sales for damages based on the appraiser’s conclusion that “while there are some properties with six to twelve inch pipelines, the Rover pipeline’s forty-two inch diameter makes it distinguishable,” noting, in part, that it is well-settled that ‘[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.’” (quoting Clay v. Ford Motor Co., 215 F.3d 663, 669 (6th Cir. 2000))).

To the extent an opposing party disagrees with an appraiser’s adjustment, the answer lies in stringent cross-examination.  Such cross-examination easily exposes any errant adjustments or flawed analysis.  See, e.g., Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 580 (1993) (“Cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof, rather than wholesale exclusion under an uncompromising ‘general acceptance’ standard, is the appropriate means by which evidence based on valid principles may be challenged.”).

Several courts have confronted challenges to the admission of appraisal reports based on the lack of matched pairs for damages.  The majority have ruled that the reports were admissible.  See, e.g., Wash. Metro. Area Transit Auth. v. One Parcel of Land, 549 F. Supp. 584, 588 (D. Md. 1982), aff’d, 720 F.2d 673 (4th Cir. 1983) (holding that the appraiser’s testimony of severance damages, without comparable damage sales, was not insufficient or inadmissible); Vector Pipeline, L.P. v. 68.55 Acres of Land, 157 F. Supp. 2d 949, 956 (N.D. Ill. 2001) (“Vector objects that the Commissioners’ results are flawed because the defendants failed to offer paired sales analyses or sales of parcels with comparable numbers of pre-existing easements in all cases. . . .   As explained, no particular methodology is required.  Comparable sales are only one method of estimating property values.  Other methods may be used ‘where no comparable sales exist.’ . . .  When Vector asked its own appraiser, Batis, to conduct such an analysis, he was unable to find one example of a transaction that the Commissioners believed persuasively lent itself to such an analysis.  However, because, as the Commissioners respond, ‘land is unique,’ this is neither surprising nor fatal to an appraisal.” (quoting United States v. 99.66 Acres of Land, 970 F.2d 651, 655 (9th Cir.1992))); Rover Pipeline, LLC, 2018 WL 3322995, at *5; Guardian Pipeline, L.L.C., 486 F. Supp. 2d at 757.

It is commonly noted that an appraisal is merely an “educated guess;” every appraisal is subjective.  That is precisely why courts have recognized that appraisals are an art, not a science.  To treat them as a science would be to exclude them entirely.