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Eminent Domain
Determining Just Compensation
INTRODUCTION
In condemnation actions and eminent domain takings, the determination of just compensation is usually the most important consideration for the property landowner. Typically, the landowner will be unable to stop the government taking his or her land. This leaves the issue of just compensation as the primary concern for the property owner. The following is a brief discussion of some of the more important concepts that make up the determination of just compensation. As with most issues that involve eminent domain, landowners should be sure to contact an experienced eminent domain attorney to insure that they receive just compensation.
WHAT DOES THE TERM JUST COMPENSATION MEAN?
Federal and state constitutions require just compensation be paid for any takings of private property for public purposes through eminent domain or condemnation. The right to just compensation is preserved by both the constitution and case law. In United States v. Miller, the Supreme Court stated: “The Fifth Amendment of the Constitution provides that private property shall not be taken for public use without just compensation. Such compensation means the full and perfect equivalent in money of the property taken. The owner is to be put in as good position pecuniarily as he would have occupied if his property has not been taken.” In other words landowners should be compensated for what they have lost not what has been taken. This concept of just compensation has led to landowners being compensated for the highest and best use of the property to be taken and severance damages to the residual of the property not taken. These concepts will be discussed in greater detail infra.
In typical eminent domain cases, just compensation is measured by examining the fair market value of the subject property. Fair market value has been defined in Federal Jury Instructions “as the amount a willing buyer would have paid a willing seller in an arms-length transaction with both parties being fully informed concerning all of the advantages and disadvantages of the property, and with neither acting under any compulsion to buy or sell.” See 3A Fed. Jury Prac. & Instr $ 154.31 (5th ed). Although fair market value is favored by Courts it is not the exclusive measure of valuation. In United States v. Commodities Trading Corp., 339 U.S. 121, 123 (1950), the Court noted that it “has never attempted to prescribe a rigid rule for determining what is “just compensation” under all circumstances and in all cases. Fair market value has normally been accepted as a just standard. But when market value has been too difficult to find, or when its application would result in manifest injustice to owner or public, courts have fashioned and applied other standards.”
VALUING THE PARCEL
Just compensation is typically thought of in terms of value or, in other words, how much the landowner’s value in his or her land has been affected by the taking. Appraisers will usually utilize three methods to determine how the landowner’s value has been affected: the sales comparison approach, the income approach and the cost approach. The decision on which method is appropriate for the effected property is a very important decision and should only be taken in consultation with a qualified attorney and/or appraiser.
The sales comparison approach to determining value uses a methodology based on comparing properties similar to the property that is to be taken that have recently been sold or are listed for sale. In contrast, the income comparison approach compares similar properties that are under lease. It then compares the income expense ratios associated with these properties and then applies capitalization theory to produce an estimated income expense ratio for the property to be taken. With this information in hand, the appraiser can then ascribe a value to the take based on the loss of incomes. Finally, in the cost approach the appraiser will determine the cost to replace or reproduce the parcel to be taken with value of other similar properties.
Determining the Parcel
When determining just compensation, a proper examination of the parcel affected by the taking is of paramount importance. The landowner and/or his attorney should first determine the exact size and shape of the parcel effected and then attempt to value that parcel.
Appraisers use the term “larger parcel” to define the relevant property being affected by a condemnation. The “larger parcel” could be the entirety of one legally described property, part of that property or several separate properties. It is extremely important to identify the “larger parcel” in order to insure that the landowner receives just compensation. Intuitively, it is self evident that just compensation can only be determined where you identify the parcel affected by the taking. In addition, determining the larger parcel may have a significant effect on determinations of highest and best use and residual or severance damages discussed infra.
In identifying the “larger parcel” most appraisers and courts focus on unity of ownership, unity of use and physical unity. Where a parcel meets all three tests, it will commonly be considered part of the “larger parcel” even if it is not directly affected by the taking. Some jurisdictions adhere to a very strict interpretation of these three tests. The more modern view focuses on how the marketplace would view the parcels.
Highest and Best Use
In all eminent domain cases, the landowner is entitled to compensation based on the highest and best use of the parcel affected by the taking. Highest and best use is defined as the most profitable use to which the property can most reasonably be adapted. It is important to note that in arguing highest and best use for a property, the use to which the landowner is arguing the property may be put must also be needed in the near future and not be speculative. Appraisers use four criteria when determining highest and best use: legal permissibility, physical possibility, financial feasibility, and maximum profitability. These four criteria are typically followed sequentially. In almost all areas where a highest and best use argument is being made, the landowner bears the burden of proof in court.
Before and After Rule/Severance
In situations where the taking affects only a part of the parcel, the remaining unaffected portions may have their values affected. Owners can typically receive compensation for the loss of value the rest of their property suffers as a result of the taking. There are two slightly different rules for calculating these damages: the before and after rule and the severance damage rule.
The before and after rule determines damages by comparing the fair market value of the larger parcel before the taking with its value following the taking.
In comparison, the severance damage rule provides that the fair market value of the larger parcel is determined. Then, the value of the taking is calculated. The remaining untaken property is then valued before and after the take and a damage applied. The aggregate of these calculations is then presented as the basis for just compensation.
Landowners should be well advised to utilize qualified attorneys and appraisers before having a before and after or severance calculation determined. Sometimes in utilizing these calculations, a benefit may accrue to the landowner. If this occurs, compensation attributed to the landowner from the actual taking can be reduced.
Project Influence Rule
Under this rule, the reduction in land values caused by the project itself will be disregarded when determining the fair market value of the take. In other words, if a large pipeline project depresses land values throughout a given area, the condemnor should not have the benefit of these reduced values. In federal projects, the project influence rule can be found under the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970. This act provides: “Any decrease or increase in the fair market value of real property prior to the date of valuation caused by the public improvement for which such property acquired, or by the likelihood that the property would be acquired for such improvement, other than due to physical deterioration within the reasonable control of the owner, will be disregarded in determining the compensation for the property.”
CONCLUSION
This article has provided a brief overview of some of the issues that surround the determination of just compensation in an eminent domain or condemnation case. It is by no means an exhaustive review of all of the issues that a landowner could face and should not be considered a substitute for consulting with a qualified eminent domain attorney. If you should have any questions regarding just compensation, the eminent domain process, or condemnation, please feel free to contact Phil Sever at 317-824-9000.
