Eminent Domain and Fair Market Value in a Depressed Real Estate Market (2014)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

30 action.”322 If so, “a landowner is entitled to ‘precondemnation damages’ caused by “government conduct that occurs prior to the filing of an eminent domain case.”323 In State ex rel. Dept. of Transp. v. Barsy,324 the landowner was entitled to “recover precondemnation damages by establishing that the government left the planning stage and entered into the ‘acquiring stage.’” In Buzz Stew, LLC v. City of N. Las Vegas325 the court concluded that a municipality’s announcement of intent to condemn a parcel of land may give rise to a cause of action by the landowner for damages based on allegations that, under the circumstances, the municipality acted improperly in making the announcement before instituting an eminent domain action. In this, we expand our ruling in State, Department of Transportation v. Barsy [113 Nev. 712, 941 P.2d 971 (1997), overruled on other grounds by GES, Inc. v. Corbitt, 117 Nev. 265, 268 n.6, 21 P.3d 11, 13 n.6 (2001)].326 In addition, there may be some judicial authority that “the government bears the risk in inverse condemnation cases of declining land values due to [an] economic downturn….”327 It should be noted that for a landowner to succeed on the basis of timing, the courts would have to exclude, disregard, or discount any evidence demonstrating that the value of the same property had benefited from the effects of the proposed project.328 Even if a court permits evidence of damages to a property taken in eminent domain that may be the result of precondemnation activities, a landowner may have difficulty proving “that the market value of the land declined because of unreasonable or oppressive governmental conduct. Often the cause of a decline in value is a general economic downtown.”329 However, as one article also states, the finding of a de facto taking may create “liability for the government for any loss in value prior to the formal condemnation, even if [the loss] resulted from some other source.”330 In situations when the fair market value of property has decreased due to the specter of 322 Id. 323 Storm and Hanley, supra note 320, at 15. 324 113 Nev. 712, 941 P.2d 971 (1997). 325 124 Nev. 224, 181 P.3d 670 (2008). 326 Id. at 226, 282 P.3d at 671. 327 Storm and Hanley, supra note 320, at 15. 328 Serkin, supra note 62, at 698. See discussion of the Project Influence Rule in Section IV.F. 329 Storm and Hanley, supra note 320, at 19. 330 Serkin, supra note 62, at 697 (footnotes omitted). imminent government condemnation, some courts have resorted to alternative methods for calculating just compensation.331 For example, some “courts have used the date of the condemnation as the benchmark for compensation but then disentangled the depreciation in market value due to the government’s action, and added that back into the total compensation.”332 The property owner may avoid the consequences to the valuation of the property if action by the government intentionally depressed the property’s value later in condemnation.333 Under the federal Uniform Act (URA),334 a public authority may not depreciate property values by a threat of the construction of a government project and then take advantage of the depression in price when the property is condemned.335 No transportation department responding to the survey reported that the courts or the departments during the recent financial crisis and period of depressed property values had resorted to using any of the foregoing described valuation mechanisms or alternative or supplementary approaches to compensation as suggested by commentators. VIII. THE ROLES OF DISTRIBUTIVE JUSTICE AND ENVIRONMENTAL JUSTICE IN EMINENT DOMAIN AND JUST COMPENSATION A. Distributive Justice, Environmental Justice, and Just Compensation The principal issue for the digest is whether real property should be valued any differently because of the effect of a financial crisis that has severely depressed the real estate market at the time of a taking by eminent domain. As discussed in Section V.A, there is some disagreement among scholars on who should bear the burden of such a crisis and resulting loss of valuation. Regardless of whether property values are generally depressed at the time of a taking, there is a body of scholarship that argues that eminent domain and just compensation should incorporate principles of distributive justice and must embrace environmental justice. 331 Id. at 696-97. 332 Id. at 697 (footnotes omitted). 333 United States v. 480.00 Acres of Land, 557 F.3d 1297, 1307 (11th Cir. 2009). 334 42 U.S.C. §§ 4651-4655. 335 United States v. Virginia Electric & Power Co., 365 U.S. 624, 636 (1961).

31 Distributive justice, also referred to as comparative justice or efficiency maximization, is based on principles of equity and fairness.336 The distributive justice approach to just compensation is founded on the belief that “resources should be divided to secure the greatest overall utility to society as a whole…. [D]istributive justice is to be assessed not from the perspective of the claims of actual individuals, but rather from an ‘impartial’ perspective that identifies justifiable moral claims independent of the identity of an existing claimant.”337 Distributive justice is essentially focused on the fair distribution of resources among members of society and questions basic assumptions underlying competing claims to finite resources.338 In Armstrong v. United States,339 Justice Black implied that distributive justice principles are applicable to just compensation when he stated that the “Fifth Amendment’s guarantee…[is] designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” Since then, several legal theories have developed that seek to incorporate the concept of distributive justice into eminent domain and takings law. There are three schools of thought on the meaning of distributive justice with respect to takings in eminent domain: the Libertarian, Progressive, and Utilitarian.340 The Libertarian approach is that compensation should be rendered each time an “impact on [a] landowner is disproportionate to the burden (if any) carried by other beneficiaries of that public use.”341 Essentially the rule is one of proportionality to assure that landowners do not have to shoulder an unfair, heavy burden in comparison to the burden sustained by others while taking into consideration the benefit received by all parties involved.342 Thus, the Libertarian approach is that 336 Jeffrey M. Gaba, Taking ‘Justice And Fairness’ Seriously: Distributive Justice and the Takings Clause, 40 CREIGHTON L. REV. 569, 575 (2007), hereinafter re- ferred to as “Gaba.” 337 Id. at 578-579. 338 See id. at 580. 339 364 U.S. 40, 49, 80 S. Ct. 1563, 1569, 4 L. Ed. 2d 1554, 1561 (1960). 340 Hanoch Dagan, Takings and Distributive Justice, 85 VA. L. REV. 741 (1999), hereinafter referred to as “Dagan.” 341 Id. at 757. 342 Id. at 757-58. no public actions may be taken that would place some owners in a comparatively worse position because of a transfer “of some of their economic value to the public or to other individuals.”343 Assuming that the public action is welfare-promoting, or at least not welfare-impoverishing, this rule safeguards against any government action that results in private landowners suffering a net loss of economic value. The proportionality rule thereby preserves the prevailing distribution of assets, legal rules, and wealth (although it may still translate people’s assets or other entitlements into different types of wealth without their consent).344 The Progressive approach maintains that the rights of landowners should not be expanded beyond those cases that involve a physical seizure of property, thereby excluding cases in which regulatory takings affect property owners.345 Under the Progressive theory “takings doctrine need not object to deviation from strict proportionality in the regulation of land use as long as the disproportionate impact can be justified by ‘general, public, and ethically permissible policies.’”346 The Progressive approach argues that most regulatory restrictions of land use should be treated as part of the risks and opportunities that are assumed by property owners.347 On the other hand, “[P]rogressive takings theory demands compensation that varies inversely with the wealth of the property owner.”348 The Utilitarian approach is that “a taking is a reallocation of resources and, as such, raises the question of whether its redistributive effects should be canceled by compensation that spreads the loss (or ‘socializes’ it) among the beneficiaries of this reallocation, or whether losses should ‘be left with the individuals on whom they happen first to fall.”349 In responding to this dilemma, Utilitarians consider many factors, such as the monetary value needed to offset “disutilities” that accrue to a losing landowner and the present value of lost future production caused by the demoralization of losing landowners, as well as the effect on outside observers disturbed by how losing landowners are treated under the law.350 343 Id. at 757. 344 Id. 345 Id. at 760. 346 Id. 347 Id. 348 Serkin, supra note 62, at 721 (footnote omitted). 349 Dagan, supra note 340, at 762–63 (footnote omitted). 350 Id.

32 For Utilitarians, the amount and purpose of compensation for a taking, therefore, should equal the amount necessary to avoid these demoralization costs.351 Although the above approaches have been argued to be applicable principally to cases of regulatory takings, the approaches’ underlying principles also have implications when property is taken by condemnation. As discussed below, the URA352 addresses some of the concerns expressed in the three views on distributive justice by providing additional compensation and by seeking to preserve home ownership.353 A policy founded on equity and fairness also evokes principles of environmental justice. Under title VI of the Civil Rights Act of 1964, all federal agencies must ensure that there is no discrimination in their federally funded activities.354 An executive order in 1994 required every federal agency to make environmental justice a part of their policies, programs, and activities that might affect minority or low-income populations.355 The order not only requires taking steps to avoid or mitigate harmful and disproportionate health and environmental effects on the two groups but also requires federal agencies to include them in their decision making and to prevent them from being denied benefits owed to them.356 The Department of Transportation revised its order on environmental justice as of May 2, 2012.357 The order requires operations to be conducted in a way that avoids discrimination and disproportionate adverse effects of transportation projects on minorities and low- 351 Id. 352 Uniform Relocation Assistance and Real Property Acquisition Policies for Federal and Federally Assisted Programs Act of 1970, 42 U.S.C. §§ 4601-4655 (2000). 353 Godsil and Simunovich, supra note 31, at 983-84. 354 FEDERAL HIGHWAY ADMINISTRATION, An Overview of Transportation and Environmental Justice, hereinaf- ter referred to as “Overview of Transportation and En- vironmental Justice,” available at http://www.fhwa.dot. gov/environment/environmental_justice/overview/. 355 Exec. Order 12898 (1994), available at: http://www.archives.gov/federal-register/executive- orders/pdf/12898.pdf. 356 Overview of Transportation and Environmental Justice, supra note 340. 357 U.S. Department of Transportation Order 5610.2(a) (2012), available at http://www.fhwa.dot.gov/ Environment/environmental_justice/ej_at_dot/order_ 56102a/index.cfm. income populations.358 The DOT has examined its efforts to incorporate principles of environmental justice.359 One case study found that construction on transportation projects affected homes and surrounding areas with noise, light, traffic, and dust.360 The negative effects were especially harmful to low-income people in the area because, for example, they had to open windows for ventilation because of the lack of air conditioning.361 One writer notes that the taking of property for public projects tends to affect minorities and low-income groups disproportionately.362 B. Compensation for an Owner’s Subjective Property Rights As stated, the digest’s central question is whether because of a financial crisis and a depressed real estate market, a property owner should receive compensation in excess of the appraised fair market value of the property. Although not necessarily limited to takings when property values are depressed because of a crisis, one approach that has been suggested is to allow compensation for certain elements that are very personal to an owner but not compensable, such as an owner’s subjective interests in the property being taken. There is a threshold issue, however, of whether compensation paid by the government that exceeds market value is ever justifiable.363 Assuming there is justification for additional compensation, there are some alternative analyses regarding 1) whether fair market value is insufficient; 2) whether compensation should be paid that exceeds fair market value; 3) whether additional losses should be reimbursed; and 4) whether various formulas should be applied to achieve distributive justice. In Georgia, “[e]xcept in cases of extreme necessity and great urgency, the right of eminent 358 Id. 359 See, e.g., FEDERAL HIGHWAY ADMINISTRATION, En- vironmental Justice and NEPA in the Transportation Arena: Project Highlights, available at http://www.fhwa. dot.gov/environment/environmental_justice/ej_and_ nepa/highlights/ejandnepa.pdf. 360 Id. at A-23. 361 Id. 362 Catherine E. Beideman, Eminent Domain and Environmental Justice: A New Standard of Review in Discrimination Cases, 34 B.C. ENVTL. AFF. L. REV. 291, 292 (2007). 363 Id. at 975.

33 domain cannot be exercised without first providing for just compensation to the owner for the interference with his exclusive rights.”364 It is not clear that such a statute, however, would require the payment of compensation for a property owner’s subjective losses in connection with a taking. One source reports that several states now require payments for intangible losses, such as owner’s sentimental attachments to property.365 For example, one commentator notes that in Louisiana Resources Co. v. Noel,366 the court refused to grant compensation for subjective losses;367 however, in State, Department of Transportation and Development v. Dietrich,368 the question was “left open…whether subjective or intangible damages will be included as compensable damages in the future.”369 Although the alternatives to the current law on takings and just compensation appear to have scant, if any, support in the case law, there are some statutory provisions, as discussed in Section IX,370 that authorize additional compensation. 1. Whether Fair Market Value Rules Comport with Distributive Justice Scholars argue that there are circumstances in which the payment of fair market value does not constitute just compensation. The fair market value approach has been criticized for failing to compensate for interests that are not marketable or that are difficult to value but that constitute, nonetheless, very important loses sustained by homeowners and businesses when there is a taking.371 Although there is an issue of whether a property owner’s subjective or sentimental values or attachment to a business should be compensable,372 as some state legislatures apparently have decided the objectives of fairness and equity may require the payment of additional compensation. An approach emphasizing fairness and equity arguably may be even more necessary when there are takings during a period of severely 364 GEORGIA CODE § 22-1-5. 365 Wyman, supra note 63, at 255 (footnotes omitted). 366 499 So. 2d 1016 (La. App. 3d Cir. 1986). 367 Howard, supra note 98, at 835. 368 555 So. 2d 1355 (La. 1990). 369 Howard, supra note 98, at 836. 370 1 Nichols on Eminent Domain § 1A.03 (citing authorities). 371 Id. § 1A.04[2]. 372 Serkin, supra note 62, at 700. depressed real property values. The courts to some extent already consider subjective value to an owner, for example, when the courts define property rights to include an owner’s special use of a property.373 2. Rationales for Applying Distributive Justice to Just Compensation Several rationales or justifications have been offered in support of a distributive justice approach to just compensation. Distributive justice is based on the differing level of persons’ needs.374 There is concern among some scholars that the burdens of eminent domain are imposed more often on minorities and that just compensation for these groups in particular is not equitable.375 It is argued “that governments are more likely to burden the relatively less well off when choosing where, and on whom, to impose burdens created by governmental action.”376 Consequently, some scholars argue that just compensation should incorporate a “context- dependent” factor to “provide more protection for property belonging to members of a disfavored group than to property belonging to the privileged.”377 Some commentators argue that “if homeowners are compensated at fair market value, they are unlikely to be able to afford to purchase a home elsewhere….”378 Thus, one commentator suggests providing for a range of benefits for a court to consider that “varies proportionately with the property owner’s wealth.”379 Distributive justice theory emphasizes that “[t]he people who most often become net losers to eminent domain are renters, the poor, the elderly, business owners, and those negatively affected by precondemnation activity.”380 For instance, takings are more likely to harm low income owners who often do not have “the credit standing needed to obtain a normal mortgage loan” and who are “forced to purchase [a] home ‘on contract’ 373 Id. at 701. 374 Gaba, supra note 336, at 582. 375 James Geoffrey Durham, Efficient Just Compen- sation as a Limit on Eminent Domain, 69 MINN. L. REV. 1277, 1279 (1985), hereinafter referred to as “Durham.” 376 Serkin, supra note 62, at 718 (footnote omitted). 377 Id. 378 Godsil and Simunovich, supra note 31, 968. 379 Serkin, supra note 62, at 737 (citing Hendler v. United States, 38 Ct. Cl. 611 (1997); Laughlin v. United States, 22 Ct. Cl. 85 (1990)). 380 Fegan, supra note 49, at 287 (footnote omitted).

34 at a price far above its fair market value.”381 When a homeowner receives only fair market value, the owner may lose any “contract purchase equity” existing at the time of the taking, leaving the homeowner “with nothing but the possibility of a deficiency judgment after applying his or her award to the debt still owed to the seller.”382 To some extent, however, the issue has been addressed by FHWA’s waiver, necessitated by the financial crisis and underwater mortgages, of the usual method for calculating Replacement Housing Payments under the URA.383 C. Additional Losses or Values that May Be Compensable As noted in Section VIII.B., even though the courts refer to just compensation as full indemnification, there are losses peculiar to homeowners as well as businesses that are not compensable in eminent domain. Typically, fair market value and just compensation exclude any “subjective or emotional damages.”384 Commentators argue that takings and just compensation as presently defined substantially affect “homeowner status” with low income persons and minority groups being harmed the most.385 Among the reasons to protect homeowner status are the positive impact that homeownership has on the community and “every age, race, and economic category.”386 For most people their home is their most valuable asset; however, a home is more than a house.387 Homeownership creates status and is important in creating or maintaining one’s “personhood,” a value that ostensibly should be considered and compensated appropriately when deciding on the amount of just compensation for the taking of a home. In the absence of adequate compensation, a homeowner may be unable to acquire another home, resulting in the loss of homeowner status and the commensurate value to society of persons who as homeowners tend to be more involved in their communities and in society in general.388 381 3 Nichols on Eminent Domain § 8.22 [4] (New compensation practices). 382 Id. 383 See discussion in Section X.B. 384 Fegan, supra note 49, at 286. 385 Godsil and Simunovich, supra note 31, at 977. 386 Id. at 975. 387 Id. at 954. 388 Id. at 951 and 952. Although the recent case law does not indicate that these personal or subjective factors are being compensated as concomitant elements of the value of real property, one writer observes that federal and state law already recognize the “unique status” of a home and home ownership389 that are “an extension of personhood.”390 For example, the value of a home to one who has lived there for many years often includes benefits that take time to develop and that are personal. These might include a home’s connection to memories, its proximity to a particular community of friends and family, its ability to provide an atmosphere of stability and comfort….391 One problem, of course, is the difficulty in converting such subjective or personal values into a monetary value;392 for example, there may be “demoralization costs” suffered by an owner when a family homestead is taken but such costs are difficult to monetize.393 D. Proposals for Incorporating Distributive Justice Principles in Just Compensation Some scholars suggest a distributive justice approach to compensate for the loss of individual rights resulting from current takings law so as to compensate a homeowner for his or her “personhood interest” that is at risk when there is a taking.394 Commentators have urged a variety of methods to assure that a property owner is made whole for his or her property taken by eminent domain. Even reformers concede, however, that property owners’ subjective losses or values associated with their property present potential problems in effectuating an approach because of the difficulty in placing a value on the losses.395 As for which additional losses should be compensated, commentators have offered several approaches or formulas that would avoid injustice, including a statutory formula.396 One method is to authorize the payment of more compensation when there is a taking of an owner’s principal residence397 because “fair market value seems like a particularly inadequate measure of compensation for this class of deeply 389 Fee, supra note 67, at 786. 390 Id. at 787. 391 Id. at 791 (footnotes omitted). 392 Durham, supra note 375, at 1301. 393 Id. at 1305. 394 Fegan, supra note 49, at 278. 395 Fee, supra note 67, at 812-813, 814. 396 Id. at 814. 397 Toll, supra note 66, at 88.

35 personal property.”398 One writer argues that more compensation should be paid precisely because the property is a home,399 for example, by paying “an additional…percent of market value for every year the owner has lived in the home.”400 One writer argues that just compensation must be “the amount of compensation required to make the owner indifferent to the land acquisition at issue (not indifferent to the government’s choice to use eminent domain as the means of acquisition), accounting for the owner’s reasonable subjective value.”401 Another approach is to “require a higher measure of direct compensation when government takes land for private redevelopment than when it retains the land for direct public use.”402 For example, it has been suggested that a legislatively approved schedule is a way to increase the amount of compensation in excess of what would be awarded based on a property’s fair market value to compensate in an objective way for the loss of subjective home ownership values.403 Some propose something on the order of a surtax whereby a condemnee may receive, for instance, 150 percent of fair market value as compensation.404 Reformers also have proposed that a premium be added to compensate for emotional damages, perhaps adjusted for the number of years a property owner has lived in the home.405 One proposal that would result in additional compensation involves the use of a percentage premium plan (PPP).406 Two types of PPPs have been proposed: a flat percentage plan and an individual percentage plan. The flat percentage plan is based on a single percentage (usually 10 percent) that is added to the value of the home being condemned.407 In the individual percentage plan, consideration is given to various factors such as “length of residency, relative wealth of the condemnee, or relative value of the community in which the condemnee lives.”408 It has been said 398 Serkin, supra note 62, at 722. 399 Fee, supra note 67, at 785. 400 Id. at 815. 401 Id. at 807 (footnote omitted). 402 Id. at 811 (footnote omitted). 403 Wyman, supra note 63, at 278. 404 Merrill, supra note 286, at 90. 405 Fegan, supra note 49, at 291. 406 Godsil and Simunovich, supra note 31, at 978–82. 407 Id. at 978. 408 Id. that PPPs are “a balm for the infringement upon autonomy brought about by any forced exchange and…to correct the systematic underestimation of value.”409 Both forms of PPPs have potential drawbacks because they are “are just as likely to overcompensate a homeowner as they are to undercompensate.”410 There is no guarantee that homeowners will be able to maintain their homeowner status even when a PPP provides more compensation.411 Attempts to value the subjective aspects of a homeowner’s loss may lead to overcompensation or arbitrariness in the calculation of compensation.412 Another concern is that there would be overcompensation in the sense that most homeowners may be satisfied simply with the receipt of just compensation based on the fair market value of their property.413 Because of the financial crisis there were many homeowners who owed their lenders more than their home was worth.414 Thus far, it does not appear that the literature on distributive justice or the courts have considered the possible, additional impact on homeowner status if a homeowner sustains an even greater loss after a taking because of a deficiency judgment in those states where loans to purchase residential property are made with recourse.415 However, some of the distributive justice concerns possibly could be addressed by awarding just compensation based on replacement value rather than on fair market value based on comparable sales.416 Although judicial opinions stress the importance of equity and fairness, the courts have not reevaluated the meaning of just compensation, for example, by “balancing factors in terms of distributive justice….”417 Although the courts may not have been affected that much by academic research and writings on the subject of distributive justice and just compensation,418 409 Id. 410 Id. (footnote omitted). 411 Id. 412 Id. 413 Id. 414 Id. at 960. 415 See Hockett and Viahoplus, supra note 164, at 268–69 (stating that “California law makes first- mortgage loans legally or practically nonrecourse”). 416 Serkin, supra note 62, at 724. 417 Gaba, supra note 336, at 585. 418 Id. at 590.