Evaluation of interests in land in Germany

by | 15. July 2006 | German Business Law

In the practice of property valuation a variety of occasions require a valuation. The appropriate type and nature of the property valuation depends on the purpose for which the values are needed. For example, if land is to be bought or sold, the buyer or seller in Germany usually wishes to know the ”Zeitwert” – literally ”time value” – i.e. the market or current value. German legislation (§ 194 BauGB) speaks –in so far- of the ”Verkehrswert” (current value). But various other occasions for a valuation, i.e. seizures, inheritances, settlements, etc. exist. Since valuation must always be seen with reference to the specific occasion for which it has to be carried out there is no such thing as the property valuation. The expert is required to apply the appropriate (i.e. the right) method according to the purpose of the valuation.

German valuation practice is strongly influenced by the German legislation on expropriation mainly contained in The Federal Building Code (Baugesetzbuch 1997, BauGB). The extensive nature of the Code identifies the scope of the planning and development process from planning principles to completion of a development. The document is specific in each section and addresses both the national and federal systems of the country. Chapter One, Part five of the Code defines the legal requirements, compensation and the procedure for expropriation. § 95 BauGB defines that compensation for the loss of a right is based on current (standard) market value (as defined in § 194 BauGB). The section then continues with the items that are not to be considered, including changes in value linked to change of use, anticipation of the expropriation, increases in value since an open market transaction was possible. § 96 BauGB considers compensation for other property loss. Definitions of values and the recording of price data is also addressed. Chapter Three Other Provisions, Part One establishes valuation duty and expertise including specific reference to valuation for expropriation. The basis for the payment of compensation is current market value(Verkehrswert) at the time that the expropriation authority adjudicates on an application for expropriation which is decisive. The concept of other property loss, disturbance is then addressed?. The current market value(or sometimes translated as standardised market value) is defined as the price which would be achieved in an ordinary transaction at the time when the assessment is made, taking into account the existing legal circumstances and the actual characteristics, general condition and location of the property or other object of assessment, without consideration being given to any extraordinary or personal circumstances (§ 194 BauGB). The Federal Building Code further provides that the valuation should be performed by an independent group of experts whose principal task is not the administration of the land owned by the regional public authority for which the valuation exercise is being carried out (see § 192 BauGB). If necessary, the regional public authorities can request one or more higher-ranking groups of experts to provide a second valuation (§ 198 BauGB).

According to § 199 BauGB the German Government is authorized to issue regulations in which standards for valuation of real estate may be given. Pursuant to this authorisation the German Government has issued such regulations in December 1988 (Verordnung über Grundsätze für die Ermittlung der Verkehrswerte von Grundstücken/Regulation about principles for the valuation of the market value of real estate). In addition to that Guidelines on valuation of market value concerning real estate have been issued, recently renewed by the Guidelines 2002 (BAnz Nr. 238 v. 20.12.2002). It was held by the Bundesgerichtshof that the scope of the Regulations 1988 is not limited to expropriation cases but that they contain generally recognized evaluation principles for nearly every field of evaluation  (BGH, 12.01.2001, V ZR 420/99, ZfIR 2001, 459). The Court led it open whether the Regulations are compulsory for each expert and held that the Regulations are in any case not limited to the application by the local expert groups established under § 192 BauGB. Thus a widely recognized standard for valuation has been established in Germany. The Regulations 1988 provide three valuation methods. According to the comparing price method all prices concerning land comparable with the characteristics of the estate in question have to be considered (§ 13 Regulations 1988). By the profits method the expert has to ascertain the real profit per year which has to be multiplied by a factor given by the regulations with respect of the attended remaining time of use (§§ 15 to 20 Regulations 1988). Finally the Regulations provide the Sachwertverfahren (§§ 21 to 25 Regulations 1988). Subsequent to § 7 Regulations 1988 all these methods have to be taken into account for fixing the market value. The market value has to be fixed through the results of the applied method with respect to the situation of the market. The valuation price must stand the market test. The Bundesgerichtshof has held that the market value which has been fixed by an expert will not be binding when it has been fixed notwithstanding the fact that efforts customary in commerce to sale the land for this price have been without any success (BGH, 12.01.2001, V ZR 420/99). German experts therefore generally use the Market Value(Verkehrswert) to estimate the value of real estate which is not really comparable with the open market concept in England, particulary because the DCF-method is not really recognized in practice.