There has been a controversy recently about the value of environmentally sensitive land. This is understandable given the history of the subject. A generation ago the value of environmentally sensitive land, say for example wetland, was the value as if reclaimed less the cost of reclamation. So if you had farmland that was wet, you could get a government loan to drain or fill it, and next year plant it in row crops. Value equals row crop land, less costs to drain or fill and time. Simple. Slightly more interesting; say you owned a marshy island in San Francisco Bay. Maybe it used to be a salt evaporator. Incorporate it. Write municipal bonds for offiste public improvements and use the proceeds to fill the island to a comfortable elevation above sea level. Build roads and run in utilities. Then sell lots. No problem. Value could be estimated by backing out the necessary costs and time from the present worth of the proceeds of the prospective use: slightly more complex, but still relatively simple.
In the 1970's environmental awareness entered the picture. In California the Friends of Mammoth decision in 1973 stated that the assessment of environmental impact of a project was not limited only to governmentally sponsored projects. All of a sudden, a housing subdivision was required to comply with environmental assessment just like a hydropower dam. Revolutionary. In the course of the decade limitation on development in the name of environment was upheld in various guises. The Petaluma decision validated the concept of growth controls. That is to say, if your prospective neighbors think you are going to cause too much traffic, or overcrowd the schools, or use too much water, they can tell you to build 10 houses this year instead of 100. The suburban ambience aspects of the criteria embodied in many growth control ordinances have been characterized as, "I've got mine, Jack," or "Not In My Backyard (NIMBY)." Thus a word, NIMBYism, was coined.
Of course all things reach a point of absurdity. Like taxation, the power to regulate is the power to destroy. Given that there is a time value of money, delay translates into a reduction in value. Moratoria abounded in the decade of 1975 to 1985. The legal justification is that it is permissible for government to call a halt to development while new zoning is studied and implemented. Moratoria lasting for years pushed the envelope. Obviously, if permitted use is changed from commercial to seasonal grazing, value will go down. There are still cases pending relating to land use at Lake Tahoe, where large areas platted and improved for residential development were declared to be too sensitive to be built with anything. There is an intersection between the police power of the state, and the takings clause of the Constitution. There have been a series of cases upholding the property rights of landowners to a greater or lesser extent. In one case a landowner in the Atlantic barrier islands offered his property for free to a Supreme Court justice to demonstrate how worthless it had become. The city involved bought the lot for unimpaired market value and subsequently sold it for development.
In the course of things, the discovery of any environmentally sensitive factor affecting land became a blight. In many cases it rendered land completely unmarketable. Toxic waste contamination is a similar and related sort of thing. For example, imagine the marshy island in San Francisco Bay. Development involves fill, which is prohibited. Salt production is no longer economic given the small size of the island and high fixed operation costs compared to the low cost of salt. It could be flooded and planted and leased to duck hunters, except that it is within the city limits and discharge of firearms is prohibited. If value is related to use, and there is no use, what is the value? In this setting, understandably, there were no sales for over ten years, except some public acquisitions for parks, and the Audubon Society for nature preserves.
Now it is all very well and good for Audubon to establish a waterfowl refuge or the public to buy a park. But what should they pay for it? Audubon can, obviously, pay whatever they can afford, and use their own criteria for evaluating the purchase of any parcel. The public, however, is constitutionally bound to pay "just compensation". Just compensation is generally equated to market value. In other words, it is limited to comparable sales, or some other appraisal indicator. So as long as the government can find current comparable data, say the Audubon purchases, no problem. When that is not available, then what? Well, why not use a discounted cash flow model of future costs and payments. Great, except for two related factors. If, given the regulations that encumber the property, there was any reasonable prospect of profitable use, there would be a private market. In fact there is no forseeable use, and demonstrably no market. Thus any hypothetical cash flow is purely speculative, and lacking any firm factual basis, any two such predictions may bear no relation to one another. Typically the landowner will be high and the government low for obvious reasons. Because of the wide disparity of values produced by the approach in this sort of case, discounted cash flow valuation of land is no longer allowed for eminent domain purposes in California courts. Just compensation has been ruled to be the agricultural value of the land, whatever its development prospects.
This is not very helpful for two reasons. The first is the absence of comparable sales to demonstrate an agricultural value. The second is more fundamental: if there is no forseeable profitable use, as zoned and restricted, isn't that a taking rather than a regulation? So, shouldn't value be based on a hypothetical reasonable use of the land? Down this path have wandered a number of appraisers, and the vagaries of their wanderings have become distressing to their friends.
The alternative isn't very much more attractive. Market value is predicated on highest and best use. Highest and best use is defined in terms of feasibility and maximum economic return. This is generally defined as the highest monetary return. Well, if the private market isn't willing to pay anything, and the government is willing to pay one dollar, even absent property tax considerations, governmental use is obviously the highest and best. But should the government pay anything for the land at all? Strictly speaking, no. Introducing the property tax cost of land ownership, the landowner should pay the government to take it off his hands. Eastern European industries and contaminated parcels, as well as some parcels constrained by rent control and a requirement for seismic (earthquake) retrofit fall in this category: real estate black holes. Some black holes can be dissolved. Government subsidy did for many ex-communist factories. The seller did, in fact, pay the buyer to take it off their hands. In another case, fire did the job, simultaneously erasing the rent control restrictions as well as the costs mandated to structurally strengthen the building. Neither of these examples are exactly apposite.
Let's try another approach. Is highest and best use strictly assessable in dollar terms? What about a house? People talk about its amenity value, which is not monetary. The right to live in the house is only partly captured by an estimated rent. The ultimate prospect of capital gains is only a bet on future inflation. Certainly it is arguable that home ownership is purely a monetary activity, but that argument is rather strained. It has some value as a simplifying hypothesis, but would be hard to validate by interview of homeowners. Now, what if you are a Salt Marsh Harvest Mouse, and you live on marshy islands. Your marshy island has a very large value to you. It is the value of life itself. The difficulty is that mice have proverbially always been a bit short of money. Now, what if Mr. Mouse has a wealthy uncle, Uncle Sam, willing to underwrite the Mouse family's housing costs? That cost becomes a consideration to Uncle's family: that is to say, if it is Uncle Sam, it is political.
The problem is translated from, what should be paid, to what is government willing to pay.
Historically this has been the problem that the Founding Fathers tried to avoid. King George was willing to pay nothing to billet his troops on colonists. A bond issue to buy out environmentally restricted landowners at Tahoe failed in California. But there has been research into what the public generally is willing to pay for public property. The question was framed first as, "What would you pay to have a National Park System?" The answer was fairly low. It was restated as, "What would you pay to keep from losing the National Park System?" The answer was a couple of orders of magnitude higher. Similar questions were asked about endangered species. The cute and cuddly ones get the high bids. There is no lobby for endangered bacterial pathogens. Because these were hypothetical questions, the spread is not too distressing. There are similar questions asked and answered every day: "What would you pay for this house?" Answer: "What I can afford." In San Francisco the median priced house is affordable to 15% of the population, so no deal. Or, "What will you take to sell your house?" The answer, usually, is: "More than you are willing to pay. I don't want to move."
So how do we narrow the spread? Well, that is what politics is supposed to be about, the allocation of public resources. At least the debate has advanced to the point where government is giving up diktat and is willing to talk about price. Aristotle defines the decadence of a republic as a state where the minority is oppressed by the majority. Maybe we are not quite there yet. Nor should we be intellectually distressed if one class of environmentally sensitive land is more attractive to the government than another. That, simply, is a political question. The only distressing thing is if the price that is being paid is misrepresented as being equivalent to that on offer from the private sector. It usually isn't. And appraisers should be careful not to be involved in this obfuscation. The cardinal rule of the Uniform Standard of Professional Appraisal Practice is that an appraisal should not mislead.
In an appraisal, the appraisers' job is to identify, quantify, analyze and conclude. That public highest and best uses are emerging is a fact. And the public is willing to pay a price for those uses. If that price ceases to bear much relation to private values, perhaps it is because the public is willing to pay more for Mr. Mouse's habitat than for another Big Box shopping center. Or perhaps the difference is just a measure of how unjustly property has been regulated in the last couple of decades.