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

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46 to the maximum extent possible.529 The statute provides that relocation benefits are to be paid by an acquiring authority according to 49 C.F.R., Part 24 “with respect to reimbursement of reestablishment expenses for nonresidential moves…, except that the acquiring authority shall reimburse the displaced business for eligible expenses up to a maximum of $50,000.”530 Kansas, Iowa, and Oregon also have provisions requiring the payment of relocation expenses.531 XII. FEDERAL REIMBURSEMENT OF PAYMENTS IN EXCESS OF FAIR MARKET VALUE Assuming that supercompensation is permitted by a state statute or by judicial decision for one of the reasons discussed in the digest, transportation departments will be interested in whether there would be federal reimbursement. FHWA policy has addressed the issue of supercompensation payments that are defined by state law to be a component of acquisition. FHWA’s Policy and Guidance on Supercompen- sation Payments Incurred for Acquisition of Real Property on Projects Eligible for Federal Funding532 responds to “questions…concerning eligibility for reimbursement of that portion of [a state’s] payment in excess of fair market value” and confirms that that there is federal-aid participation for “supercompensation” payments.533 Supercompensation “refers to legislatively mandated eminent domain damage payments that are based on [the] payment of 100 percent of fair market value plus some additional percentage for inconvenience, sentimental value, or some other type of personal imposition.” FHWA points out that in Missouri, for example, “recent 529 MINN. STAT. §§ 117.51, subdiv. 1. See Minnesota House Research, supra note 79. 530 MINN. STAT. §§ 117.51, subdiv. 2. 531 Fegan, supra note 49, at 293 (citing Tomasic v. Unified Gov’t. of Wyandotte County, 962 P.2d 543, 559- 60 (Kan. 1998) (noting allowance for the legislature to award compensation beyond “just compensation”); IOWA CODE ANN. § 6B.42 (West 2001); IOWA CODE ANN. § 6B.54 (West 2001); OR. REV. STAT. § 35.510 (2005)). 532 FHWA, Policy and Guidance Supercompensation Payments Incurred for Acquisition of Real Property on Projects Eligible for Federal Funding (Jan. 27, 2007), available at http://www.fhwa.dot.gov/real_estate/ practitioners/uniform_act/policy_and_guidance/ supercompguid.cfm. 533 Id. legislation addressing compensation associated with acquisition of property by [the] exercise of eminent domain defines ‘Just Compensation’ to be [Fair Market Value or FMV] multiplied by 125 percent (homestead taking) or FMV multiplied by 150 percent (heritage taking).”534 FHWA’s Guidance advises that a payment in excess of fair market value is reimbursable as part of a property’s acquisition cost. It is because of some states’ post-Kelo reforms mandating just compensation payments in excess of excess of fair market value that FHWA chose to issue its Guidance. XIII. CONCLUSION The constitutional requirement of just compensation does not include all of the losses that may be borne by a property owner when an owner’s property is taken for a public use. One issue is whether because of the financial crisis and its effect on the values particularly of residential property, alternative but accepted methods of valuation such as the income approach or the replacement or reproduction cost method could be used to arrive at a higher valuation in determining just compensation. Although there are some reported cases of the income or replacement methods being used, the transportation departments responding to the survey reported that there were few instances when an approach other than the comparable sales approach was used during the financial crisis for the purpose of determining just compensation. Another issue is whether the rule of just compensation allows for any judicial flexibility in determining compensation when real estate values are generally depressed. Although the Supreme Court and other courts state that they seek to indemnify an owner fully based on principles of fairness and equity and seek to avoid a manifest injustice, there were few instances located for the digest when the courts had departed from the customary view that compensation is just as long as it reflects the fair market value of the property on the date the property was taken. Some cases were located dealing specifically with determining just compensation during a period of depressed market conditions for real property. A few courts have held that real property should not reflect a value based on market conditions that are artificially high or low 534 Id.

47 and that valuation should be based on what constitutes a normal market. However, the cases did not specify any methodology for proving what a normal market is or would be under the circumstances. As for other possible approaches to valuation during a financial crisis and resulting depressed real estate values, it does not appear that the price that an owner paid for a property is relevant and/or admissible when market or other conditions have changed significantly since the purchase. It does appear that many states permit an owner to testify as to the value of his or her property. Nevertheless, no cases were located when either the price paid by an owner or the owner’s opinion of value had been used to adjust the fair market value of property taken during the financial crisis. As confirmed by the transportation depart- ments’ responses to the survey, there have been problems finding comparable sales during the recent financial crisis as so many sales were not voluntary or were not conducted at arm’s length because they resulted from foreclosures and auctions, short sales, or government intervention. Some scholars have made proposals to supplement the fair market value of a property taken by condemnation through so-called valuation mechanisms as described in the digest. In addition, some scholars argue that principles of distributive justice should be incorporated into just compensation analysis in part because of the relatively greater burden that is imposed by takings of property belonging to low-income persons or members of minority groups. No cases, however, were located in which the courts appear to have adopted any of the suggested approaches or principles. As discussed in the digest, there are various constitutional and statutory provisions permitting the payment of additional compensation to property owners, including the payment of more than 100 percent of the property’s value. As discussed in the digest, states that pay supercompensation may qualify for reimburse- ment under an FHWA policy announced in 2007. On the other hand, the courts generally reject any claim that an owner’s property value should reflect any additional value attributable to the property because of the effect of the project on the property. Several transportation agencies identified takings of mortgaged property with negative equity during the financial crisis as a particular problem. Some states took advantage of a waiver by the FHWA of a federal regulation on the calculation of a qualifying owner’s Replacement Housing Payment. Although the city of Richmond, California, developed a plan to acquire mortgages by eminent domain and place them with new investors to reduce owners’ indebtedness, the city’s plan has been opposed in the courts, by industry groups, and by members of Congress. During the financial crisis there was a precipitous fall in real estate values; however, except to the limited extent discussed in the digest, the collapse in property values does not appear to have effected any significant change in how real property is to be valued in the United States at the time of a taking for a public use such as a transportation project. If change is desired with respect to valuation, it appears that change would have to be made through result of state constitutional or legislative enactments.