Basic Principles of Compensation Valuation

The value of compensation is one of the most important aspects for the land owners that are affected by the land procurement for public interest. Law No. 2 of 2012 (“Law No. 2/2012”) stipulates that the compensation shall be proper and fair. There is no further explanation on the meaning of proper and fair compensation under the Law No. 2/2012, Presidential Regulation No. 7 of 2012 (“Perpres No. 7/2012”) and Head of National Land Agency Regulation No. 5 of 2015 (“Perka BPN No. 5/2015”). Based on the principle of justice as set out in Law No. 2/2012, the land owners are guaranteed to obtain proper compensation, so they have an opportunity to lead a better life.

In principle, the land procurement for public interest is a compulsory land acquisition, where the government can acquire the land from the land owners, even though the land owners do not wish to sell the land. However, under the principle of justice, even though the land procurement is compulsory, the compensation given to land owners shall not result a degradation of land owners’ standard of living before the land procurement is conducted.

Valuation of Compensation

Unlike the previous regulations, Law No. 2/2012, Perpres No. 7/2012, and Perka BPN No. 5/2015 do not regulate the basis for the calculation of compensation of land procurement object. The value compensation is derived from the result of valuation of the valuer that is designated by the chairman of land procurement. The valuer shall obtain valuation practice license from the Minister of Finance, and license from the land agency. In carrying out its duties, the valuer shall conduct the valuation independently and professionally. The valuation of compensation is conducted per plot of land, which covers:

  • land;
  • space above the ground and underground space;
  • buildings;
  • plants;
  • goods related to the land;
  • other losses that can be assessed.

For the material of valuation, the valuer shall request the map of plot of land, nominative list, and required data from the chairman of land procurement. The valuation shall be conducted at the latest 30 business days from the date of designation of the valuer by the chairman of land procurement. The value of compensation is a single value per plot of land at the time of announcement of land determination. It means that the announcement date of land determination is the cut-off date of the valuation. For example, if the location determination is announced on 29 October 2018, then the value of compensation is the value of land procurement object as of 29 October 2018.

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Indonesian Valuation Standards

The Minister of Finance Regulation No. 101/PMK.01/2014 stipulates that the valuation by the valuer must be conducted according to the Indonesian Valuation Standards (“SPI”). The procedures of valuation for land procurement of public interest are stipulated under SPI 306. Under SPI 306, the basis of valuation is fair replacement value. Fair replacement value is a value that is based on equality with the market value towards the property, by considering the extraordinary elements in the form of non-physical losses which arise from the acquisition of rights towards the property.

In practice, at the time of deliberation meeting is conducted, the land owners will be provided the result of valuation of compensation, in the form of fair replacement value, which contains:

  • indication value of physical loss, which is the value of compensation for the (i) land, (ii) space above the ground and underground, (iii) buildings, (iv) plants, (v) goods related to the land, and (vi) other losses that can be valued.

  • indication value of non-physical loss, which is the value of compensation in the form of (i) premium, i.e. the loss of job or business, or emotional loss, (ii) transaction costs, i.e. moving costs and taxes according to the applicable laws and regulations. (iii) compensation for the waiting period (interest), and (iv) loss of remaining land, i.e. decrease of land value due to acquisition towards the part of land.

The main approach for conducting land valuation is the market data approach, where the value of land should not be based on the price as desired by the seller, but the fair price that will be paid by the buyers who are eager to buy land from the sellers that are not very willing to sell. The land value therefore shall not be based on the assumption of compulsory sales, but shall be based on assumption of the result of voluntary negotiation.

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For determining the value of land, the valuer must examine the highest and best use (“HBU“) of the land. Based on SPI 360, there are 4 things that must be assessed in determining HBU of land, namely (i) legally permitted, (ii) physically possible, (iii) adequately supported and feasible from the financial aspect, and (iv) giving the highest value (maximum productivity). The regional and urban spatial planning (land designation) is the most important thing for determining the HBU of land by the valuer. Therefore, the market data that are taken for determining the value of compensation must be comparable and relevant to the HBU of land.

There are 3 approaches that can be used by the valuer when conducting the valuation of physical and non-physical loss, such as market approach, income approach and cost approach. The use of approach will depend on the type of object that will be valued. For example, in order to value the physical losses in the form of land and building, the valuer can use the market approach and income approach. Meanwhile, in order to value the non-physical losses in the form of transaction costs, the valuer can only use the cost approach.

The Use of Other Valuer as Comparator in the Objection of Compensation Value

The objection on the value of compensation can be submitted to the local District Court at the latest 14 business days after the date of deliberation meeting. Based on the explanation of Article 38 paragraph (2) of Law No. 2/2012, the land owner shall have the right to propose an expert witness in the field of valuation to be heard as the comparator of the valuation of compensation that is conducted by the valuer as designated by the chairman of land procurement.

Ivor Ignasio Pasaribu