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

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36 there is some evidence that distributive justice principles have influenced legislatures to enact laws that authorize additional compensation to cover certain losses suffered because of a taking.419 No transportation department responding to the survey reported that during the real estate crisis its agency or the courts in its jurisdiction had permitted the use of distributive justice principles when determining just compensation such as by allowing compensation for an owner’s subjective or sentimental loss (e.g., the taking of an owner’s home or of a family homestead of long duration). IX. CONSTITUTIONAL AND STATUTORY AMENDMENTS AUTHORIZING THE PAYMENT OF ADDITIONAL COMPENSATION A. Additional Compensation for the Taking of a Primary Residence or Homestead, for Heritage Value, or for Takings for Economic Development As discussed in the preceding part, regardless of whether there are generally depressed property values because of a financial crisis, some states have enacted statutes that allow for an increase in compensation. Some statutes authorize additional compensation when property is taken for economic development. The statutes are a further indication that the legislatures in some states have concluded that in certain conditions, although not specifically in response to a financial crisis, the courts may add compensation in excess of a property’s appraised fair market value at the time of a taking. Since the United States Supreme Court’s decision in Kelo v. City of New London,420 there have been many proposals to increase the compensation for takings to compensate property owners more completely for their losses.421 Depending on who is taking the property and the purpose for which the property is taken, state constitutional and statutory provisions may require the payment of additional compensation and/or the payment of expenses such as for relocation, appraisal fees,422 attorney’s fees,423 and 419 Id. at 593. 420 545 U.S. 469, 125 S. Ct. 2655, 162 L. Ed. 2d 439 (2005). 421 Wyman, supra note 63, at 242. 422 In Minnesota, subject to some conditions an “owner is entitled to reimbursement for the reasonable costs of the appraisal from the acquiring authority up to other costs.424 For instance, it is said that Louisiana is one state that has “reconsidered its constitutional definition of just compensation”425 by requiring that an owner be compensated to the full extent of his loss.426 In some states a condemnor now must pay compensation in excess of fair market value, particularly when property is taken for economic development or even if blighted property is taken for redevelopment.427 As one article notes, some state legislatures have adjusted upward the amount of compensation that a property owner receives based on various factors, such as type of property or length of time the current owner has owned the property. For example, Indiana considered a proposal that would give owners of condemned property the higher of either 150 percent of the assessed value of the property, or the average of three independent property value appraisals. Other proposals also include items incidental to condemnation in just compensation. …An Idaho proposal provides for a relocation payment of between $2,500 and $10,000 to business owners.428 a maximum of $1,500 for single family and two-family residential property and minimum damage acquisitions and $5,000 for other types of property….” MINN. STAT. § 117.036(2)(b)(2013). 423 In Minnesota, “[i]f the final judgment or award for damages, as determined at any level in the eminent domain process, is more than 40 percent greater than the last written offer of compensation made by the con- demning authority prior to the filing of the petition, the court shall award the owner reasonable attorney fees, litigation expenses, appraisal fees, other experts fees, and other related costs…. No attorney fees shall be awarded…if the final judgment or award of damages does not exceed $25,000.” MINN. STAT. § 117.031(a). In Minnesota, a final judgment or award for damages as used in the statutory provision “does not include any amount for loss of a going concern unless that was in- cluded in the last written offer by the condemning au- thority.” MINN. STAT. § 117.031(a). In Minnesota, when “the court determines that a taking is not for a public use or is unlawful, the court shall award the owner rea- sonable attorney fees and other related expenses, fees, and costs…..” MINN. STAT. § 117.031(b). 424 Wyman, supra note 63, at 256–57 (footnotes omitted). 425 Fegan, supra note 49, at 294 (citation omitted). 426 Id. at 295. See also State ex rel. Dept. of Highways v. Constant, 369 So. 2d 699 (1979). 427 LARRY W. THOMAS, THE RAMIFICATIONS OF POST- KELO LEGISLATION ON STATE TRANSPORTATION PROJECTS 19 (NCHRP Legal Research Digest No. 56, 2011) (foot- notes omitted). 428 Alex Hornaday, Imminently Eminent: A Game Theoretic Analysis of Takings since Kelo v. City of New

37 Legislation proposed in Connecticut would increase the level of compensation for property acquired through eminent domain by a development agency to 125 percent of its average appraised value.429 In Indiana when property is condemned that is a person’s primary residence, state law requires the payment of compensation at a rate equal to 150 percent of the fair market value of the property.430 One commentator notes that Kansas law authorizes the use of eminent domain for private economic development purposes but states that “the legislature shall consider requiring compensation of at least 200% of fair market value [for] property owners….”431 In Kansas, when taking property for an “auto race track facility” a city must pay an additional amount equal to 25 percent of the compensation or damage “finally awarded…with respect to any property” taken.432 London, 64 WASH & LEE L. REV. 1619 (2007), hereinaf- ter referred to as “Hornaday.” See also Wyman, supra note 63, at 287 n. 61 (citing IND. CODE § 32-24-4.5-8 (2006) (requiring 125 percent or 150 percent of fair market value for some lands)). 429 Connecticut SB 167 (2007), record available at: https://votesmart.org/bill/4383/13725/restricting- eminent-domain#19980. But see Marc Mihaly and Turner Smith, Kelo's Trail: A Survey of State and Fed- eral Legislative and Judicial Activity Five Years Later, 38 ECOLOGY L. Q. 703, 722 (2011) (stating that although “Connecticut has not dramatically altered its takings law… [i]n June 2007, the Connecticut General Assem- bly passed Senate Bill 167, which bans condemnation of private property when ‘the primary purpose [is] increas- ing local tax revenue,’ and requires a super-majority vote in municipalities to acquire property through emi- nent domain,” citing CONN. GEN. STAT. §§ 8-193(b)(1), § 8-127(b)(6)(D) (2010)(S.B. 167, 2007 Leg., Reg. Sess. (Conn. 2007)). 430 IND. CODE § 32-24-4.5-8(2) (providing that “[f]or a parcel of real property occupied by the owner as a resi- dence (A) payment to the owner equal to one hundred fifty percent (150%) of the fair market value of the par- cel as determined under IC 32-24-1; (B) payment of any other damages determined under IC 32-24-1 and any loss incurred in a trade or business that is attributable to the exercise of eminent domain; and (C) payment of the owner's relocation costs, if any.” See IND. CODE § 32-24-4.5-8(1) (including a 125 percent rule for agricul- tural land). See also Hornaday, supra note 428, at 1638. 431 Hornaday, supra note 428, at 1638 n.126 (citing S. 323, 2006 Reg. Sess. (Kan. 2006) (enacted) (obligating the legislature to consider compensation of at least 200 percent of the fair market value of property condemned for economic development)). 432 Wyman, supra note 63, at 259 n.67 (citing 192 Kan. Sess. Laws requiring legislature to consider com- Michigan’s law requires that if a person’s principal residence is taken for public use, the amount of just compensation shall not be less than 125 percent of the property’s fair market value.433 In Missouri, the presiding circuit judge must determine whether a taking of a homestead has occurred and whether heritage value is payable. When there is an affirmative finding, the judge “shall” increase the amount of the commissioners’ award or the jury verdict in accordance with Section 523.039 of the Missouri Revised Statutes. First, a homestead taking is defined as “any taking of a dwelling owned by the property owner and functioning as the owner's primary place of residence or any taking of the owner's property within three hundred feet of the owner's primary place of residence that prevents the owner from utilizing the property in substantially the same manner as it is currently being utilized.”434 When there is a condemnation that that results in a homestead taking, “an amount equivalent to the fair market value of such property [is to be] multiplied by one hundred twenty-five percent….”435 Second, when a condemnation “result[s] in any taking that prevents the owner from utilizing property in substantially the same manner as it was currently being utilized on the day of the taking and involving property owned within the same family for fifty or more years,” the compensation is an amount “equivalent to the sum of the fair market value and heritage value.”436 Heritage value is 50 percent of fair market value.437 Heritage value is “assigned to any real property, including but not limited to real property owned by a business enterprise with fewer than one hundred employees[] that has been owned within the same family for fifty or pensating property owners at 200 percent of fair market value if the legislature authorizes a taking for private economic development with a 25 percent bonus for a taking of an “auto race track facility or a special bond project”). 433 Id. at 287 n.61 (citing MICH. CONST. art. X, § 2 (amended 2006) (requiring payment of “not less than 125%” of fair market value “in addition to any other reimbursement allowed by law” for taking “an individ- ual's principal residence”)). 434 MO. REV. STAT. § 523.001(3) (2013). 435 Id. § 523.039(2). 436 Id. § 523.039(3). 437 Id. § 523.001(2).

38 more years.”438 The Supreme Court of Missouri recently held that adding heritage value to the fair market value of a condemned property does not violate the Missouri Constitution.439 As for the legislature’s intent in enacting provisions to increase just compensation in certain circumstances, the process of revising Missouri’s eminent domain laws began in 2002 when some groups complained that the government unfairly took private land for a trail project.440 The legislature was unsuccessful in making any changes to the state’s eminent domain laws until after the United States Supreme Court’s decision in Kelo in 2005. The heritage value and homestead taking provisions were added to protect property owners by increasing the compensation that must be paid when property is taken in certain situations. In Ohio, legislation was proposed to compensate property owners for more than the fair market value of their property. For property owners, and commercial or residential tenants, a bevy of additional compensation is now required … for actual, reasonable moving expenses incurred in moving a person and their family (in the case of residential property), or moving a business. It also includes compensation for actual expenses incurred in searching for a replacement property and actual expenses to reestablish a business in a new location. In addition, business owners will be compensated for loss of goodwill, and any actual economic loss, up to a year’s net profit, that resulted from being forced to relocate the business.441 In addition, the Ohio legislation proposed that when agencies “offer property owners substan- tially less” than what a property is worth or attempts to appropriate property that is not necessary for a public use the agencies must award property owners their attorney’s fees and costs. If a property owner is awarded more than 125% of an agency’s good faith offer, the court is to award all costs and expenses actually incurred. Similarly, if a court decides an agency’s appropriation was not necessary, or 438 Id. 439 St. Louis County v. River Bend Estates Home- owners’ Ass’n, 408 S.W.3d 116 (Mo. 2013). See also State ex rel Tomasic v. United Gov’t of Wyandatte Cnty. 265 Kan. 779, 962 P2d 543 (1998). 440 A Win for All: Missouri's New Eminent Domain Law Strikes a Balance between Property Rights and Growth, RURAL MISSOURI (Aug. 2006), available at: http://www.ruralmissouri.org/06pages/06AugEmntdoma in.html. 441 Alisa Hardy, More Than Just a Plot of Land: Ohio’s Rejection of Economic Development Takings, 38 CAP. U.L. REV. 79, 102-103 (2009) (footnotes omitted). not within the scope of public use, a property owner is entitled to all reasonable fees and expenses incurred.442 In Rhode Island when property is taken for economic development a property owner must be compensated for a minimum of 150 percent of the fair market value of the real property, as well as for incidental expenses, such as the charge for prepaying a mortgage entered into in good faith and for “actual, reasonable, and necessary” relocation expenses.443 B. Compensation for Losses Related to a Business Conducted on the Property The financial crisis also affected business revenues and in many instances resulted in business failures, both of which are relevant to state statutes allowing for the recovery of certain business losses at the time of a taking. A California statute provides in part that an “owner of a business conducted on the property taken or on the remainder if such property is part of a larger parcel” shall recover compensation “for loss of goodwill if the owner proves” certain elements, including, inter alia, that “[t]he loss is caused by the taking of the property or the injury to the remainder” and that “[t]he loss cannot reasonably be prevented by a relocation of the business or by taking steps and adopting procedures that a reasonably prudent person would take and adopt in preserving the goodwill.”444 The California provision defines goodwill to “consist[] of the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage.”445 Florida law provides that the payment of compensation requires that compensation shall include when less than the entire parcel is being taken any damages to the remainder caused by the taking, including, when the action is by the Department of Transportation, county, municipality, board, district or other public body for the condemnation of a right-of-way, and the effect of the taking of the property involved may damage or destroy an established business of more than 4 years’ standing before January 1, 2005, or the effect of the taking of the property involved may damage or destroy an established business of more than 5 years’ standing on or after January 1, 2005, owned by the party whose lands 442 Id. at 102-103 (footnotes omitted). 443 R.I. GEN. LAWS §§ 42-64.12-8(a)-(c) and 42-64.12- 8.1 (the latter section applicable to tenants). 444 CAL. CIV. PRO. CODE § 1263.510(a). 445 Id. § 1263.510(b).

39 are being so taken, located upon adjoining lands owned or held by such party, the probable damages to such business which the denial of the use of the property so taken may reasonably cause….446 In Idaho, an unsuccessful bill that was offered in the Senate would have added Section 7-727 to the state’s Eminent Domain Code to require that “[a]ny displaced person who moves or discontinues a business…shall receive a fixed location payment…not less than [$2,500] nor more than [$10,000].”447 In Louisiana, “[p]roperty owners…are entitled to compensation for loss of property, and business or consequential losses resulting from a taking.”448 Louisiana courts have held that property owners may recover “for loss of future rental income” and that lessees may recover “for loss of business interests.”449 The courts in Louisiana also “have awarded compensation for business related losses.”450 In State, Department of Transportation and Development v. Dietrich,451 the Supreme Court of Louisiana “extended the award of business losses to include not only present losses but also estimated future business losses.”452 In Minnesota, a business “must be compensated for loss of a going concern related to the taking of real property unless the condemning authority shows that the loss is not due to the taking, reasonable measures could have avoided the loss, or that it will duplicate other compensation awarded.453 Wyoming law also permits compensation for business losses for loss of goodwill such as the benefits of location and customers.454 446 FLA. STAT. § 73.071(3)(b) (2013). 447 S. 1152, 58th Leg., 1st Reg. Sess. (Idaho 2005). See Idaho Legislature Web site for status of 2005 legis- lation by bill number and subject, available at: http://legislature.idaho.gov/legislation/2005/legIndex. htm and http://legislature.idaho.gov/legislation/2005/ S1152.html#daily. 448 Fegan, supra note 49, at 295, LA CONST. of 1974, Art. 1, Sec. 4. 449 Id. (no citation provided). 450 Howard, supra note 98, at 832. 451 555 So. 2d 1355 (La. 1990); see Howard, supra note 98, at 834. 452 Howard, supra note 98, at 834. 453 Minnesota House Research, supra note 79. See MINN. STAT. § 117.186. 454 Fegan, supra note 49, at 293 (citing 1933 Fla. Laws. Ch. 15927 (No. 70), amending § 5089 of the Com- piled General Laws of Florida, previously § 3281 of the Revised General Statutes of Florida); Act of June 21, 1957, 1957 Vt. Laws 242 (currently codified, as The courts in several other states allow for the recovery of compensation for business losses, including Alaska, Georgia, Michigan, and Wisconsin.455 C. Compensation for the Purchase of Comparable Property Since 2006 a Minnesota statute provides that: When an owner must relocate, the amount of damages payable, at a minimum, must be sufficient for an owner to purchase a comparable property in the community and not less than the condemning authority’s payment or deposit under Section 117.042, to the extent that the damages will not be duplicated in the compensation otherwise awarded to the owner of the property. For the purposes of this section, “owner” is defined as the person or entity that holds fee title to the property.456 Furthermore, in Minnesota a “condemning authority must not require the owner to accept as part of the compensation due any substitute or replacement property….”457 D. Voluntarily Paying More than Fair Market Value When responding to the survey, five transportation departments stated that during the real estate crisis and because of depressed real property values in their area their agencies voluntarily had paid compensation in excess of fair market value to property owners whose property was purchased or taken for a project.458 Three departments responding the question stated that they had not voluntarily paid more.459 The California Department of Transportation stated: Compensating the land owner for the property’s Fair Market Value (FMV) and the difference between the FMV and the amount of the mortgage comes back to the spirit of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970. A displaced homeowner should not be left in a worse economic situation than they were in the before condition. If the land owner was current in the mortgage payments, the belief was were it not for the State’s project they would be able to see through the down turn to such a time they could have paid off the note or sold the property without incurring a amended, at VT. STAT. ANN. tit. 19, § 501 (1987); Cali- fornia and Wyoming adopted § 1016 of the Uniform Eminent Domain Code which provides for recovery of loss of goodwill). 455 Id. at 294 (citations omitted). 456 MINN. STAT. § 117.187 (2013). 457 MINN. STAT. § 117.188. 458 California DOT; Connecticut DOT; Florida DOT; Idaho Transportation Department; and Wisconsin DOT. 459 Arizona DOT; Arkansas State Highway and Transportation Department; and Oregon DOT.