City, South Dakota and I hold the ARA designation of the American Society as well as the MAI designation of the Appraisal Institute. I am here today with Richard C. Sorenson, 1995 President of the Appraisal Institute. Mr. Sorenson is a senior real estate appraiser and analyst with First Chicago Bank in Chicago, Illinois. President Sorenson also holds the MAI designation of the Appraisal Institute.

Originally founded in 1929, the American Society's membership has been expanded throughout the United States, Canada, and other countries. The American Society's primary objective is to create and maintain a professionally trained group of accredited farm managers and rural appraisers capable of providing expert guidance and assistance to farmland owners, farmers, and other groups which have caretaking responsibilities for farm lands and rural properties. These caretakers include banks, insurance companies, attorneys and accountants.

The Appraisal Institute is an involved and respected participant in real estate appraisal and real property issues throughout the United States. The Appraisal Institute's mission is to lead the real estate appraisal profession by conferring meaningful designations which reflect demonstrated competency and integrity. As the recognized authority in real estate appraisals, the Appraisal Institute strives to serve the public and its membership with education, publications, and research while promoting and enforcing high standards of appraisal practice for all types of valuation and real estate analysis assignments. The Appraisal Institute is the world's largest publisher of real estate literature and offers an extensive educational appraisal curriculum.

Mr. Chairman, we appreciate the opportunity to present this testimony on the proposed language contained in S. 605, "Omnibus Property Rights Act of 1995." Our combined organizations represent nearly 36,000 professionals, many of whom are experts in agricultural land valuation and who may serve as an excellent resource for the subcommittee as the debate on this issue moves forward.

As you know, the Fifth Amendment to the United States Constitution guarantees that property will not be taken unless required for the greater public good, and then only with just compensation for the owner. Both the American Society and the Appraisal Institute are committed to the protection of an individual's right to own real property and to receive compensation in the event of a lawful taking by the government.

Regarding the proposed legislation, I will outline three primary concerns with S. 605 as currently drafted. Additionally, I will offer several examples highlighting some practical considerations which should be given attention. First, S. 605 makes no provision that a determination of value be made by a qualified appraisal expert. Second, for the protection of the individual property owner and the general public, the bill should reference the industry standards for the development of and reporting of an appraisal. These standards are known in the industry as the Uniform Standards of Professional Appraisal Practices (USPAP) promulgated by The Appraisal Foundation since 1987. The Appraisal Foundation, as recognized by Congress, is the source of appraisal standards and qualifications in federally related transactions. Finally, S. 605 utilizes the outdated and undefined term "fair market value" as opposed to the more accepted term "market value".

DETERMINATION OF VALUE

It appears that compensation to property owners and the determination of value are issues at the core of this legislation. Because it is a central issue, determination of value should require the services of an experienced and educated real estate appraiser. For example, S. 239, introduced by Senator Richard Shelby, contains language which requires such a determination to be made "by a qualified appraisal expert". Knowledge of current real estate practices with additional emphasis on valuation of property for various purposes is essential. Issues of legal use, right-of-way, easement, and public utility are likely to play a part in the valuation of real estate property contemplated in S. 605. We believe that the issue of market value is a relevant benchmark for unique properties such as unspoiled wilderness, fish and wild game habitats and sites of archaeological or historic significance. Restrictions on land use due to the Endangered Species Act, wetlands and other environmental issues, and aesthetic set-aside concerns pose complex valuation scenarios. Designated real estate appraisers, such as members of American Society and the Appraisal Institute, are often uniquely qualified to consider these issues.

The Endangered Species Act is an area of significant concern for much of the farming community. From a farm manager's perspective, operation of that Act can destroy the economic viability of a farming operation, and from an appraiser's perspective, the uncertainty in the marketplace because of the imposition of this Act makes it more difficult to accurately value affected property. Determining the value

impact of a taking, either in whole or in part, under the Endangered Species Act is an issue that should be addressed. The American Society and the Appraisal Institute believe that the economic impact of a taking can be determined by a competent appraiser who is knowledgeable of market conditions in the area and who understands both the theory and application of the concept of highest and best use.

Often a loss may be perceived in terms of potential uses of the property, including future uses not presently legally permissible. Because this goes to the issue of value and cost, allow us to give you a couple of examples. In the case of powerline easement acquisitions, a property right is acquired through the power of eminent domain. In many cases, as evidenced by market data, no loss in value will occur as a result of locating a powerline along a property line or roadway. In fact, in remote rural areas, properties with powerlines from which electric service for the property can be obtained will bring a premium as compared to one without a powerline. Often, analysis of rural subdivisions has shown that tracts with powerline easements may be the last tracts to sell in a subdivision, but they will sell for the same price as tracts without powerlines. While some economic loss is measurable through a "time value of money analysis," typically such a loss is insignificant.

Conversely, large metal tower electric transmission lines or such lines crossing a property diagonally, can result in significant value losses to the owner as a result of a change in highest and best use. Also, health concerns regarding the effects of continual exposure to electromagnetic fields associated with these lines has resulted in a lower value for properties with these lines as compared to those without.

In the case of regulatory takings pursued under police power, loss in value and economic use of a property may be subtle and only occur over time. For example, in the well documented case of the endangered Golden Cheeked Warbler, the declaration of an area as "critical habitat" required that the landowner halt all removal of cedar trees (actually ashe juniper trees) from a property. Some of the area contains property which will naturally not become overgrown with cedar, but most of the area is susceptible to rapid, heavy infestation. If cedar is not removed, as a part of an ongoing management plan, in 20 years it will become a cedar forest and no other plant growth will occur. When this happens, the economic benefit in owning the property for other uses is minimized and it becomes solely a habitat for the Golden Cheeked Warbler. If there is no market demand for Golden Cheeked Warbler habitat a catastrophic loss in value may result even though the initial effects were minimal.

More often than not, any form of acquisition of a property right requires a technically competent professional to assess the value impact of the acquisition. Some acquisitions result in little or no loss in value, but the rest result in the loss of some or all economic use and value of the property.

In either case (the powerline or the warbler), technical expertise and a firm grasp of the appraisal process is required in the valuation analysis. We recommend that the legislation allow the determination of value to be based upon appraisals completed by competent appraisers with knowledge specific to the area and the property type.

USPAP

Regarding the second issue, the appraisal profession has adopted a set of uniform standards for the development of and reporting of an appraisal. Promulgated by the independent Appraisal Standards Board of the Appraisal Foundation, these standards help guide practitioners through a methodology which results in a supportable and defensible estimate of value. The Appraisal Foundation is authorized by Congress as the source of appraisal standards and qualifications in federally related transactions. Further, USPAP recognizes that the valuation of real estate considers the appraisal of property rights and, specifically, the impact on value of government regulations on the use, utility, and value of any property. Language requiring utilization of USPAP should be included in the bill.

MARKET VALUE

Third, S. 605 includes language requiring payments to property owners representing the "fair market value" of property. The generally accepted terminology in the industry today however is "market value". Market value is widely understood and has been soundly developed and supported by appraisal literature, statutes, and court precedents. Market value is based on the concept of an open and competitive market in which typical transactions are free of the aspects of duress or forced liquidation. As a practical matter, a change in the current language to reflect the more generally accepted term market value will help clarify the process.

We note that the bill contains no definition of market value. The Dictionary of Real Estate Appraisal, second edition, incorporates the concepts that are most widely accepted, such as willing, able, and knowledgeable buyers and sellers who act prudently, and gives the appraiser a choice among three bases: all cash, terms equivalent to cash, or other precisely revealed terms. Accordingly, market value has been defined as:

The most probably price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self interest, and assuming that neither is under undue duress.

Both the American Society and the Appraisal Institute support and encourage real estate appraisal legislation and regulation designed to benefit the general public. We support the principle that individuals involved in real estate transactions deserve the fundamental protection provided by a skilled professional appraiser who is accountable, impartial, and required to observe industry standards.

We appreciate your willingness to hear our suggestions. We stand ready to provide additional information you may require as your process continues. We look forward to working with you on this and other matters of mutual concern.

Thank you.

PREPARED STATEMENT OF THE HERITAGE FOUNDATION

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE: Thank you for inviting me to submit written testimony of my views on S. 605 and the issue of de facto taking of property through federal regulation, known popularly as "regulatory takings." submit this testimony in my own capacity and not as an employee or spokesperson for The Heritage Foundation.

Your efforts and consideration of the need to relieve property owners from increasingly intrusive and confiscatory federal governmental actions is welcome. Legislation is desperately needed to rectify the situation. While opponents of this legislation raise numerous concerns, an examination of their objections shows them to be without merit. In addition to stating why I believe this legislation is necessary, from both a modem and historical perspective, I will explain the flaws in the four main arguments of opponents of this bill. Specifically, their flawed arguments are that: (1) the Constitution requires "courts to balance important public needs against the legitimate rights of property owners;"

(2) the federal government cannot afford to pay property owners compensation for the rights taken from them;

(3) the law would constitute an entitlement and would be subject to the pay-asyou-go (PAYGO) budget rules; and

(4) compensation to property owners amounts to "paying people not to pollute." The federal government owns or controls about one out of every three acres in the nation, yet federal agencies in recent years have increased their use of regulation as a tool to obtain further control over private land because it imposes no cost on the government. But these regulations are not without substantial cost to others. The most unfair and burdensome hardship inflicted by regulatory takings typically is that property owners are not reimbursed for their loss. For instance, if an elderly couple spends a large portion of their retirement savings to buy property to build their dream home and that property is subsequently designated a wetland, the value of their property-and their savings is virtually gone. Unfortunately, tales of financial hardship caused by government designation of land as wetlands or endangered species habitat have become commonplace. To understand the enormity and the depth of the problem, I recommend you read The Heritage Foundation's recently released book, Red Tape in America: Stories From the Front Line. The instances of regulatory excess are so voluminous, the Foundation published a special abridged edition, Strangled by Red Tape.

Former Office of Management and Budget Director Leon Panetta, speaking on May 26, 1994 before the House Subcommittee on Water Resources and Environment, said paying compensation for regulating wetlands would be "an unnecessary and unwise use of taxpayer dollars" and a drain on the federal budget. Property owners, however, counter that regulatory takings are a drain on their family budget. If these regulations are so cost-ineffective so that it would not be in the governmental interest to regulate even if it were required to pay, then surely the same

action cannot be considered in the public interest when one citizen is saddled with the entire burden of providing for the "public good."

The Administration's objection to paying compensation for infringing of property rights, at its roots, seems based on a fundamental misconception of the relationship of the individual to the state. This misconception manifests itself in the widely held, but mistaken, belief that the Bill of Rights' fifth Amendment requires a balancing of interests. As current Office of Management and Budget Director Alice Rivlin stated in a June 7th letter to Senator Hatch, the Constitution,

has served us well for over 200 years by permitting courts to balance important public needs against the legitimate rights of property owners. S. 605, however, would go far beyond a reasonable balancing of interests, as required by the Constitution. It purports to entitle property owners to compensation * * * without regard for the public interests being served by agency actions.

This statement demonstrates a profound misunderstanding of the Constitution. The Constitution's just compensation protection does not require courts to balance the respective interests of the government and property owners. Rather, the right to compensation for any action that qualifies as a taking is absolute. Perhaps there is some measure of balancing built into the common measures of what constitutes a taking of a right to property, but the "legitimate rights of property owners" are not and should not be balanced by important needs. Rather, compensation for a taking is the balance built into the Constitution. Implicitly, the government is given the right to seize property, but is constrained in this otherwise almost unconstrained power by the necessity to pay for what it takes. Compensation not only protects property owners from financial ruin, it protects them from excessive governmental appetite. It is unlikely that many governmental entities would not assert control of other's property if that use were free of cost. Relying on the beneficent character of each regulator is an unstable foundation for securing the protection of the people.

To understand why legislative protection for landowners is both important and appropriate, it is necessary to understand the broader issue of governmental taking of property. The fifth Amendment to the U.S. Constitution implicitly recognizes that the federal government may take private property for public use. This power was recognized by the Supreme Court as early as 1795 in Vanhorne's Lessee v. Dorrance when the court found that "the despotic power, as it has been aptly called by some writers, of taking private property, when state necessity requires it, exists in every government government could not subsist without it."

* **

The Fifth Amendment explicitly mandates, however, that government must pay the property owner for the property confiscated. This concept, embodied in the clause "nor shall private property be taken for public use, without just compensation," ensures that property taken for public use is paid by those who benefit-the public and not by the citizen unfortunate enough to own land the government wants. In its most basic sense, this is a fairness issue: Why should one American bear the entire burden of the government's pursuit of a national good?

The Founders well understood the positive economic consequences of protecting owners' investments in their property. If property is to be put to its best and most highly valued use, ownership must reside in the hands of those who value it for as much or more than the fair market value. If government had a free hand to take property without payment, its incentive to confiscate property that conferred only a small benefit on the public would be large; after all, even small benefits outweigh a zero cost. The problem is that costs are nonexistent only to the government. The actual costs, borne by someone else, often are substantial.

Another positive result of requiring just compensation is increased security. The founders well understood that protection of property restrained usurpation of other rights recognized by the Constitution. It is this relationship to which Supreme Court Justice Potter Stewart referred in Lynch v. Household Finance Co. Inc. in 1972 when he stated that there is a "fundamental interdependence * * * between the personal right to liberty and the personal right to property.

Practically speaking, governments can control a wide spectrum of individuals' activities if they can control whether individuals remain financially secure or must surrender their property. The majority truly can tyrannize a disfavored minority if property rights are uncertain. As James Madison characterized the problem of individual rights in Federalist Paper No. 10, "it is that [pure] democracies [without constraints] have ever been spectacles of turbulence and contention; have ever been incompatible with personal security or the rights of property." It was to restrict just such tyranny over individuals that the Framers put severe limits, such as the requirement of just compensation, on the unchecked will of the majority.

Although the framers were clear that a taking requires just compensation, the Supreme Court has been unclear in its interpretation of what constitutes a taking. That is why this legislation is necessary. Although it couldn't alter the Supreme Law of the land, legislation that defines a taking and a less cumbersome recovery process would serve to protect the people against the problems and abuses of property envisioned by our founders.

The primary argument espoused against property rights legislation is that the government cannot afford it, but individual property owners can. This argument is specious. First, the argument is, again, based on the belief that a balancing of interests is appropriate. This belief is incompatible with the concept of property protection. The issue of legislative compensation should revolve around whether a property right has been infringed, not whether it serves an important public purpose. After all, one would assume the government always had an important public purpose whenever it deliberately infringed its citizens' rights to use their own property. A second problem with the argument is that it is simply unfair. In every specific instance, the question comes down to whether the government will finance the pursuit of a "national good," or whether it will be borne by a single property owner. How can the federal government, with its vast resources and access to additional revenues, not afford a single parcel that serves an important public purpose, yet some hapless property owner have resources to spare? Even if an owner did, why should he or she finance the "national good." If the public as a whole benefits, the public as a whole should bear the costs-period.

The third flaw in the opponents' argument that the federal government cannot afford to compensate for what it takes is that the argument assumes agency behavior would not change. Yet one of the primary purposes of the legislation, as Title I states, is "to restrain the Federal Government in its overzealous regulation of the private sector" and "the minimization, to the greatest extent possible, of the taking of private property by the Federal Government." This purpose, moreover, very likely would be achieved.

We know from environmental legislation, as well as many other areas of the law, that if we tax a behavior, we get less of it. If we subsidize the behavior, we get more of it. Currently, for instance, we force property owners to subsidize the federal government's preservation of wetlands and endangered species habitat, and regulatory intrusions have increased. By the same token, however, if we "taxed" government agencies' behavior by making them internalize the consequences of that behavior, we could confidently expect to see less of it. But that doesn't mean we would necessarily get less protection. It means merely that agencies would be required to prioritize what regulations would get the "biggest bang for the buck."

Crafted to encourage a change in agency behavior, the Administration nevertheless protests that regulation will continue at its current speed. Thus, this legislation will cost, according to Director Rivlin's June 7th letter to Senator Hatch, $84 billion or more over the next seven years, or $12 billion or more per year.

From a budgetary perspective, this claimed inability to change behavior rests largely on the assertion by the Administration that S. 605 would fall under the payas-you-go or PAYGO provisions of the Budget Enforcement Act, and thus possibly would cause a sequester of other mandatory programs." The Administration wrongly assumes that this particular bill falls under the pay as you go rule, which means it is a mandatory program and not an discretionary one. While increases in mandatory spending require either reductions in other mandatory programs or increases in taxes to offset these new permanent costs, the rule does not apply here. To fall under the PAYGO provisions, the rights to compensation must be considered an entitlement, and thus, awards would not be subject to discretionary appropriations. Yet S. 605 specifically states in section 204(f) that awards:

shall be promptly paid by the agency out of currently available appropriations supporting the activities giving rise to the claims for compensation. If insufficient funds are available to the agency in the fiscal year in which the award becomes final, the agency shall either pay the award from appropriations available in the next fiscal year or promptly seek additional appropriations for such purpose.

Another argument that opponents of property rights legislation assert is that a law requiring compensation would in effect force government agencies to pay polluters not to pollute. This argument is based on a fundamental misunderstanding of the nature of property rights legislation in general and S. 605 in particular. Requiring compensation for "regulatory" takings of property no more constitutes paying polluters not to pollute than requiring compensation for "physical" takings does. In both cases, the government infringes property owners' rights to use their property in a way that enriches their own lives in order to satisfy the public's desire to use