Question: What is the valuation process for submerged lands, aquatic resources and ecosystem services?

Answer: Valuation of submerged lands, aquatic resources and ecosystem services may be determined through appraisals, socioeconomic analyses, policy guidelines, and negotiations.

Marine Conservation Agreements (MCAs) usually involve an exchange of interests or services that are valuable in some way. The articulation and quantification of these values can be difficult. The methods used to determine values of submerged lands, aquatic resources and ecosystem services vary widely and are largely situationally-dependent as several variables can be involved in any given MCA project. The type of acquisition or agreement, the type of land, resource, or service, the degree of exclusivity, the governing policy framework, and the sophistication of markets can all change how values are determined.

Due to the variability in project circumstances and valuation methodologies, the values themselves can also vary widely. For example, in the United States shellfish aquaculture leases can include up-front fees ranging from $0 to $1,000 and on-going annual rents of $2/acre to $150/acre (see Leasing and Restoration of Submerged Lands (pdf, 1,346k). In one U.S. project, a fee-simple purchase of 13,000 acres (5,260 hectares) of submerged lands, which included all rights and interests except for navigation, cost $63,000, or approximately $4.85/acre (see New York Field Project).

It is important to recognize that some acquisition costs are considered proprietary information and, as such, are not available to the public. While this is the prerogative of private project managers, it can also lead to difficulties for other project managers who are trying to find comparable sales information for their valuation exercises. In addition, in some areas and projects, the direct costs, such as lease fees, are considered more-or-less as tokens of good faith when compared to the values attributed to increased local employment opportunities, improved coastal and ocean environments, protection of cultural and social conditions, and establishment and maintenance of close personal relationships. As such, the direct payments derived from MCAs may not completely represent the value that the owners and users actually attribute to the land, resource, or service being acquired or provided.

Valuation techniques and issues to consider for MCA projects include:

• Appraisals
• Socioeconomic analyses
• Policy guidelines
• Negotiations
• Market Values
• Fishing Permits, Vessels and Equipment

Appraisals

When considering fee-simple purchases and less-than fee-simple purchases (i.e., easements, leases, licenses) of submerged lands in countries where land markets and policy frameworks are relatively sophisticated, formal property appraisals may be most appropriate to determine land values. Appraisal methods for submerged lands are often similar to those used for terrestrial lands. The obvious difference is that the submerged lands are permanently or temporarily covered with water and not all property appraisers understand how to account for this difference. As such, it is important to find certified property appraisers that are accustomed to valuing submerged lands to determine the site's or resource's Fair Market Value (FMV). In the U.S., the Internal Revenue Service requires as part of the charitable status of NGOs that they do not pay more than FMV except to other charitable organizations.

One of the key problems with obtaining reliable appraisal services for lands lying below the high tide line is the lack of directly-applicable market data (the primary source of data for determining FMV). Because of this, the need for a well thought-out and comprehensive scope of work and instructions to the appraiser becomes critical. Among the elements of this are:

• Determination of “Highest and Best Use”
• Restrictions on title and property rights (explicit in the deed or implicit to the land type)
• Hypothetical conditions
• Extraordinary assumptions
• Suitable valuation surrogates
• Stand-alone property value or assemblage value
• Type of Appraisal: Summary, self-contained, appraisal update
• Identification of authorized users and client/co-clients

Careful attention to the scope of work and instructions to the appraiser is critical to ensure the appraisal accurately captures the value of the land in question. In addition, one should be careful to ensure that the contracted appraiser can demonstrate that they have prior experience with appraising lands lying below the high tide line. Even then, you may need to educate the appraiser on various aspects of such lands, such as boundary principles, legally allowable uses, public trust doctrine considerations, and tribal rights. For more information, see Valuation of Submerged Lands (pdf, 36k).

U.S. Issues: Essentially, there are two standards for appraisal practice in the United States. The most common is the Uniform Standards of Professional Appraisal Practice (USPAP), under a quasi-governmental organization known as the “Appraisal Institute.” This widely accepted standard applies mostly to traditional real estate practice (residential, commercial, and agricultural). While the instructions under USPAP do very little to guide an appraiser in estimating the true value of lands lying below the high tide line, financial institutions and public agencies may insist on its application. Most any licensed appraiser should be familiar with these standards.

The less commonly known standard is the Uniform Appraisal Standards for Federal Land Acquisitions (USFLA, also known as Yellow Book). Far fewer licensed appraisers are proficient with this standard, as it encompasses only a fraction of the work of the appraisal industry. However, this standard goes into much more applicable detail for determining the value of lands lying below the high tide line. Moreover, it is not uncommon that it may be required for land acquisitions involving federal funding sources.

Socioeconomic Analyses

Fundamentally, the private agreement approach to marine conservation acknowledges that projects may impose two kinds of costs on owners, managers and users of marine areas: an opportunity cost related to foregone income from resource use and the cost of conservation management. For an agreement to be attractive to owners, managers and users, the incentives offered usually will have to be at least as great as the sum of these two costs. To understand these costs, a formal socioeconomic evaluation may have to be undertaken. Technical evaluations such as these should be completed by economists who are well-versed in ocean and coastal issues as well as private agreements. For more information, see Critical Issues: Socioeonomic Factors (pdf, 56k).

Formal economic evaluations should also be considered when the MCA project's goal is to provide ecosystem services to the local community or to the public at-large. Articulating, quantifying, and monetizing ecosystem services is a highly technical exercise that should be undertaken by a competent economist. Negotiations between the parties will have to determine how ecosystem services are then used to help off-set costs of the MCA. For more on ecosystem services, see Ecosystem Valuation site.

Policy Guidelines

In some areas, laws, regulations, and agency policies clearly establish the values, or the process to determine the values, of the lands, resources, or services that may be subject to MCAs. In these areas, agency representatives may have different lease rental rate determination procedures based on laws, rules, policies, and historical practices. Common procedures include standardized fee structures, percent of market/project value, upland extension, across-the-fence, comparable sales/leases, and negotiation. The agencies may calculate the values themselves and propose them to MCA project proponents. These values may or may not be subject to further negotiation. Policy guidelines for submerged land rental values can be based on a model-ratio technique associated with upland values. On occasion, lease rent discounts may be given for leases that provide public access or to non-profit organizations that benefit public resources at-large (the box to the right gives examples of discounts in the U.S. states).

Negotiations

Ultimately, determining the value of lands, resources and services subject to an MCA project may come down to negotiations. In many cases, even when appraisals, socioeconomic analyses, and policy guidelines are used to derive initial values, these values are only used as starting points for negotiations. Under some circumstances, however, such as when markets and policy frameworks are not well developed, negotiations may be the starting and ending points of the value determination process (appraisals, socioeconomic analyses, and policy guidelines may never be undertaken).

Asymmetries in bargaining power between international conservation organizations and communities in developing countries lead some critics to worry that negotiated deals may unfairly disadvantage local owners, managers and users of marine areas. Other critics worry that providing direct compensation for conservation services will burden conservation organizations with onerous fundraising obligations. In other words, MCAs may be too cheap, and they may be too expensive. When negotiating, both concerns must be kept in mind, since inequitable compensation will undermine the longevity of the agreement while exceedingly expensive agreements will be difficult to finance. Moreover, the incentive package must also be designed so as not to overwhelm the capacity of local economies to absorb the investment. An additional complication is that opportunity cost may increase over time, so the MCA and associated financing mechanism must be designed to mitigate this risk or accommodate changes. The key is that MCAs hinge on mutually agreed levels of compensation, arrived at through negotiations based on transparent, participatory stakeholder engagement. In addition, implementers have to recognize that in some cases the approach may simply be too expensive at a given site under prevailing legal, political, social, or economic conditions.1

Market Values

Under ideal circumstances, negotiations lead to the determination of fair market value (FMV), which is the price that an interested but not desperate buyer would be willing to pay and an interested but not desperate seller would be willing to accept on the open market assuming a reasonable period of time for an agreement to arise. While subject to negotiation, in most cases FMV for providing a public service such as marine conservation or an ecosystem service such as storm attenuation under MCAs may be (and likely should be) much less than FMV for a commercial marina site. See The Market Valuation of Submerged Lands (pdf, 384k) for more information.

Fishing Permits, Vessels and Equipment

A relatively recent occurrence is the acquisition of fishing permits, vessels, and equipment for conservation purposes. Interpreting the market value of these assets is complex and may involve appraisals, socioeconomic analyses, policy guidelines, and negotiations. In many cases, fishing vessels may not be of great value without the fishing licenses and quotas assigned to them. Also, while some licenses and quota have considerable value, others have very little. Resources such as The Permit Master Commercial Fish Resource site may be helpful to get an initial understanding of market conditions.

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