Valuation of compensation for a high-pressure gas pipeline crossing through agricultural lands

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Valuation of compensation for a high-pressure gas pipeline crossing through agricultural lands

Property experts who conduct real estate valuations know the approaches, methods, and techniques that are universally recognized and applied. Problems are encountered when the appraisal subject is compensation for the construction on land or under its surface of power, telephone, water, sewage or gas transmission lines. Particularly significant are valuations concerning compensation for the construction, most often under ground, of high-pressure gas pipelines. The land owner, be it the state, a cooperative or private individual, is often not interested I having a transmission line built on their land, which makes future use of the real estate considerably difficult.

Valuation of compensation scope

The valuation of compensation for the construction of high-pressure gas pipelines on agricultural lands leads to determining the amount of compensation for the crossing of a high-pressure gas pipeline through undeveloped lands and use restrictions for real estate (agricultural land) situated on the route of a planned pipeline. Taken into account in a valuation is compensation for actual damages and lost use caused by the construction of the above mentioned gas pipeline. Losses are in the form of damages to an owner's property, resulting from the construction of the infrastructure.

Depending on the regulations in force in a given country, taken into account are various land surfaces, which within the range of the constructed gas pipeline are subject to restrictions, e.g. construction of buildings, or planting of trees. In Poland two strips are allotted: a controlled strip (zone) and assembly strip (zone). The width of these strips depends on the gas pipeline diameter.

The valuation of compensation concerns assessing damages in the gas pipeline's controlled and assembly strips, according to information provided from the design office on the route of the planned gas pipeline, its diameter and the surface areas of the controlled and assembly strips. This data forms the basis for valuation of compensation.

Specific types of damages include:

a) Assembly strip - construction strip used for transport and assembly, on which the infrastructure and soil from excavations will be placed. In this strip one should appraise real estate usufruct losses. The assembly strip also comprises the surface area of the controlled strip.

b) Controlled strip - a strip that permanently restricts use of the real estate after the gas pipeline is constructed, therefore the strip directly localizes the infrastructure together with a protective area, in which limitations for further use of the real estate occurs. Forbidden in the controlled strip is the erection of any kind of structures and planting of tall trees. Agricultural crops can be cultivated and fruit shrubs planted within this strip. One should appraise the decrease in the value of usable real estate on account of permanent restrictions on use of the real estate.

In some cases the need arises to additionally appraise compensation on account of deterioration in agricultural farming conditions on remaining areas of the farm, from the period of construction start to when the real estate is made available again for further use, due to the need of construction terrain bypasses, or periodic land access restrictions, etc. A separate valuation is also required to determine damages on forest land and compensation for the cutting of individual trees.

General rules for assessing compensation

The valuation of compensation on undeveloped agricultural lands, that do not contain forests or woods, is what information on agricultural designated land according to valuation class is based on. In information parts of the valuation found are lists of land owners, data from land records, land designations, agricultural land valuation class, surface-areas of the assembly and controlled strips, and number of posts marking routes on individual land plots. Essential elements of the valuation are «agricultural earnings calculations», which in Poland can be obtained from Voivodeship Agricultural Advisory Centres.

The valuation must contain dates essential for the appraisal study:

- date on which the compensation value was specified,

- date on which the state of the appraised subject was taken into account,

- date when inspection of the real estate took place,

- date the valuation was prepared.

The estimated compensation for property damages on real estate include:

a) compensation for actual damages (losses) that the property owner incurred, including a decrease in the value of the real estate caused by the construction of the infrastructure,

b) recompensation for lost opportunities, which the owner could have obtained if the infrastructure was not constructed (destruction, loss or preventing use).

Determining the amount of compensation for actual damages and lost opportunities resulting from the construction of the high-pressure gas pipeline on agricultural lands, comprises compensation for losses in crops, cultivation and harvests for the period the land is excluded from production (assembly strip), decreased yields in later years due to changes in the land structure, and lowered real estate value as a result of the gas pipeline being constructed.

Damages caused by construction of the gas pipeline include:

a) loss of real estate usufruct during the period from construction commencement to returning the real estate to the owner for further use, including:

- usufruct losses for 1 year,

- losses due to the impossibility of full use of the real estate for a period longer than one growing season;

b) deterioration of real estate use conditions for the investment period;

c) transitory decrease in the value of usable real estate for the period up to restoring the original production level;

d) losses real estate use caused by inserting infrastructure elements underground (marking posts, and other elements);

e) decrease in the value of real estate do to permanent restriction to free (legally possible) methods for using the real estate.

The amount of compensation will be determined according to the state of the appraised subject from the date the real estate was examined according to land valuation class and cultivation. The linear character of the infrastructure running through the real estate of various purposes, various uses and various intensities of uses, causes the necessity to apply to them separate assessment procedures with regard to individual farming conditions.

Valuation of compensation due to the decreased production capacity in the seasonal cultivation period is accepted as 150% of the value of the lost one-year usage in the first year of the gas pipeline construction period.

Estimating compensation for permanent restrictions in real estate use is accepted as a loss in land market value in the controlled strip, caused by restricting future free (but legally possible) use of the real estate and easement appurtenant limitations.

Compensation for permanent markings of the gas pipeline route is accepted as perpetual recompensation for the necessity of additional work of agro-technical equipment and the difficulties caused during field work.

Procedures for estimating compensation

1. Determining compensation for devastated crops and cultivation of plants as lost usufruct for the first year, resulting from the lack of possibility of using the real estate in the period the terrain is occupied for investment realization in the assembly (construction) strip, no longer than to obtaining one crop. Compensation is appraised according to the forecasted crop and agricultural product price in the market. The agricultural product price level is accepted according to the average market price in the appraisal region. As the basis for calculating the average compensation the «agricultural earnings calculations» is used, which takes into account the following assumptions:

- production expenditures are accepted according to the required technological minimum for obtaining the planned yield,

- yield of individual plant production is accepted as forecasted by a given level of expenditures and land valuation class,

- agricultural product prices are accepted as the average prices obtained, or forecasted by sales for the given appraisal period,

- individual work prices for equipment is accepted according to operating costs on an average farm, and average agricultural services hiring prices for the given appraisal period,

- labour prices are accepted according to the average agricultural work prices for a given appraisal period.

At the same time the gas pipeline contractor is obligated to restore land in the construction strips to a state comparable to before the investment was realized.

2. Determining the value of usufruct loss due to a decrease in land production capacity in the assembly strip for the period up until full production capacity is returned after construction, taking into account the period the soil returns to full production capacity and depends on:

- degree of soil disturbance,

- soil devastation,

- quality of recultivation performed.

Estimation of the amount of crop reduction (damages) is conducted through a «single flat-rate damages» empirical assessment, comprising a accumulative, several year crop reduction for the assembly strip occupied during the gas pipeline construction. Established with this is a yearly, gradual improvement in the crop soil. With experienced observation it is accepted that a return to full productivity in the assembly strip takes places in the fifth year and that crop reduction amounts to:

- year 1 - 60% of forecasted crop for a given land,

- year 2 - 40% of forecasted crop for a given land,

- year 3 - 30% of forecasted crop for a given land,

- year 4 - 20% of forecasted crop for a given land.

Combined crop loss in the assembly strip due to construction of the gas pipeline amounts to a 150% loss of usufruct in the first year.

3. Determining the value of compensation due to easement of infrastructure and permanent restrictions on land use, as the investor realizing the construction and use of the gas pipeline «disturbs» and limits exercising ownership rights. Constructing a gas pipeline that is a foreign property on land often causes a decrease in the market value of real estate. This results from the fact that:

- foreign elements exist (gas pipeline) in the real estate, on the real estate or over the real estate,

- possibility of the gas pipeline owner entering the real estate with the aim of conserving the equipment or fixing problems.

These factors cause that established on the real estate is a so-called infrastructure easement (easement appurtenant). This easement occurs in the controlled strip (exploitational) of the technical territorial development.

The amount of compensation is calculated using the formula:

gas pipeline crop compensation

Zw = S x W x P,

where Zw - amount of damages due to infrastructure easement, appropriate decrease in the value of real estate due to permanent restriction in the way the land is used; S - coefficient for the decrease in the value of real estate, in the range 0,15-0,20; W - market value for 1 m² of land (plot) real estate; P - surface-area of the controlled strip.

The amount of coefficient «S» used in the above formula depends on the type of technical infrastructure and restrictions related to it.

The market value for 1 m² of land real estate is determined by applying a comparative approach. Property experts should take into account in the valuation agricultural plots utilized in a similar way, and at the same time having at their disposal real estate transactions of similar value for valuation, should determine the value of a 1 m² plot as an average price from analyzed transactions, with taking into account market tendencies and real estate land prospects.

4. Determining the costs of additional agricultural equipment costs due to permanent markings of the gas pipeline route, and the necessity of increasing mechanical equipment work costs during agro-technical operations. Difficulties caused by permanent posts marking the gas pipeline route are to make a perpetual annuity. Discounting of additional mechanical equipment work costs amounts to:

Ks = D/r,

where Ks - perpetual compensation for permanent marking of the infrastructure route; D - annual agricultural equipment additional work costs; r - discounting rate.

A state, cooperative or private land owner is not often interested in having an utility transmission line constructed on their land, which considerably hampers future use of the real estate. For this reason, particular significance is given to valuations concerning compensation for the construction of high-pressure gas pipelines. Valuation of compensation for the construction of a high-pressure gas pipeline on agricultural land leads to determining the amount of compensation for the passing of a high-pressure gas pipeline through undeveloped land and for restricting legal use of the land (agricultural land) on the route of the planned gas pipeline. The valuation takes into account compensation for actual damages and use losses caused by the construction of the above mentioned gas pipeline.

Important elements of each valuation are clauses that protect the appraiser, e.g.:

- Тhe appraisal study was prepared in accordance with professional property expert standards.

- The appraisal study can not be published in its entirety or part in any documentation without the consent of the author and without agreeing with them on the forms and content of such a publication.

- The study cannot be used for any other aim except what is specified in the study.

- The basis for determining the legal state of real estate is made available by investor documents and materials.

- The valuation is based on real estate inspections carried out during local visits, and on information and documentation made available by the Design Office.

- Separate studies are agricultural calculations and determining the usefulness of agricultural arable land in the valuation of compensation region.

- Possible printing errors do not have an effect on the value of compensation estimates.

- Reserve the right to study confidentiality.

Literature

1. Cymerman, R. System and procedures for appraising real estate / R. Cymerman, A. Hopfer. Olsztyn-Zielona Gуra. 2001.

2. Cymerman, R. Rules for appraising damages causes by the realization of linear investments / R. Cymerman, D. Konieczny // APPRAISAL - VALUE - TURNOVER - REAL ESTATE MANAGEMENT no 2/49, 3/50, 4/51, Olsztyn 2000.

3. Professional Standards of the Professional Appraisal Practice - published by the Polish Federation of Valuers' Associations, Warsaw, 2004.

4. Јaguna, T.M. Valuation of real estate and agricultural farms / T.M. Јaguna. Olsztyn Western Organizations Center - Zielona Gуra. 1998.

5. Prystupa, M. Appraising real estate using the price-comparative method, Polish Federation of Valuers' Associations, Warsaw 1997.

6. The Appraisal of Real Estate, Polish Federation of Valuers' Associations. Warsaw, 2000.

7. European Appraisal Standards 2000, Polish Federation of Valuers' Associations, published by Estates Gazette, Warsaw 2001.

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