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

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B-1 APPENDIX B—SUMMARY OF TRANSPORTATION DEPARTMENTS’ RESPONSES TO THE SURVEY 1. Of 23 state transportation departments responding to the survey, 10 departments stated that during the real estate crisis that they had had eminent domain cases in which property owners argued that the valuation of their property for a transportation project should take into consideration the effect of depressed property values because of the financial or real estate crisis.536 2. Four transportation departments reported that in their state that there were judicial, administrative, or other decisions (e.g., by the attorney general) that had accepted in whole or in part that the effect of the real estate crisis and depressed property values should be considered in determining just compensation.537 The Connecticut DOT stated: The Division of Rights of Way establishes its initial estimate of value based on a Fair Market Value Appraisal of the property being acquired. We’ve also defined Just Compensation to be either the value agreed upon between the par- ties, for all losses suffered, or the amount received in a condemnation reassessment appeal, as rendered in Judg- ment by the court. In situations where homeowners have negative equity in the property being acquired, through no fault of their own, we have used our Administrative Settlement process as a means to address the gap between the appraised value and the debt owed. We have also applied the Federal Highway Administration’s Temporary Waiver of 49 C.F.R. 24.204(b)(1) to the calculation of replacement housing payments (RHP) for 180-day homeowner occu- pants in negative equity situations. The Oregon DOT stated that “‘[n]ormalized value’ was argued in the Deschutes County Circuit Court” but that “the court “excluded that appraisal theory from the trial. Short sales were used as comparables in both [the] Plaintiff’s and Defendant’s appraisals.” The Wisconsin DOT reported that “Wisconsin Statutes require WisDOT to pay fair market value. The only market effect we are allowed to ignore is the effect of the public improvement project itself on property values.” 536 Arizona DOT; Arkansas State Highway and Transportation Department, California DOT; Connecticut DOT; Flor- ida DOT, Idaho Transportation Department, Michigan, Oregon DOT, Utah DOT, and Wisconsin DOT. 537 Arizona DOT (stating that unpublished decisions are not shared with anyone other than the client); Connecticut DOT; Oregon DOT; and Wisconsin DOT.

B-2 Four transportation departments stated that they were unaware of any opinions accepting that the effect of the real estate crisis and depressed property values should be considered.538 3. As for whether any transportation departments had developed or revised any eminent domain policies regarding the valuation of property because of the effect of depressed property values, three departments stated that they had done so, California Department of Transportation (Caltrans), the Connecticut DOT, and the Wisconsin DOT, whereas the remaining departments responding to the question stated that they had not developed or revised their policies.539 Caltrans stated: On a case by basis, it was the policy of the Division of Right of Way to address the Negative Equity scenario for residential properties by compensating the land owner for the property’s Fair Market Value (FMV) and the differ- ence between the FMV and the amount of the mortgage. This was not addressed on the valuation (appraisal) of the grantor’s property but on the final negotiated settlement of just compensation. In addition the Relocation Assistance program the replacement Housing Valuation was calculated from the FMV and not the final negotiated settlement amount. As the Connecticut DOT explained: In situations where homeowners have negative equity in the property being acquired, through no fault of their own, we have used our Administrative Settlement process as a means to address the gap between the appraised value and the debt owed. We have also applied the Federal Highway Administration’s Temporary Waiver of 49 C.F.R. 24.204(b)(1) to the calculation of replacement housing payments (RHP) for 180-day homeowner occupants in nega- tive equity situations. The Wisconsin DOT reported that it “has been using the Federal Guideline from a Memorandum dated 9/25/12, titled Temporary Waiver of Methodology for Calculating Replacement Housing Payment for Negative Equity.” 4. No transportation departments responding to the survey reported that during the real estate crisis the courts in their jurisdiction had developed valuation rules that take into consideration in some way the effect of the real estate crisis and depressed property values on the value of property taken by eminent domain.540 538 Arkansas State Highway and Transportation Department; California DOT; Florida DOT; and Idaho Transporta- tion Department. 539 Arizona DOT; Arkansas State Highway and Transportation Department (stating that “[n]o policies were devel- oped; however, it was determined that no time adjustment would be made in the comparable sales approach appraisals during that period of time, as applied to multiples sales”); Florida DOT; Idaho Transportation Department; and Oregon DOT.

B-3 5. Transportation departments were asked whether during the real estate crisis the ability to value real property in their jurisdiction had been affected by government intervention (e.g., efforts to reduce foreclosures) or by sell-offs of residential or business property by institutional investors, banks, or speculators. Five transportation departments reported that their ability to value properties had been affected by such interventions or actions. The Arizona DOT stated it had answered yes “to the extent government regulations force banks to sell REO property without market exposure.” The Arkansas State Highway and Transportation Department stated that “[t]he number of ‘arms length transactions’ decreased during this time period, and, therefore, were not available for use in the comparable sales method of appraisal.” The Idaho Transportation Department stated that “[f]requently, the only market data available for valuation purposes has been short sales and foreclosure properties.” The Oregon DOT said that “[i]t is more challenging to find suitable comparable properties.” The Utah DOT reported that its “policy is not to include foreclosures in any of our relocation studies to find …replacement housing” for displacees and that the number of foreclosures made this more expensive and caused delays. However, four transportation departments responding to the question reported that their ability to value real property had not been affected by such interventions or actions: Caltrans; Connecticut DOT (“short sales are not considered comparable properties as part of the valuation process); the Florida DOT; and the Wisconsin DOT. The Wisconsin DOT stated that its answer is no, because “[t]o date the appraisers are able to find a sufficient number of comparable sales that are not foreclosures, short sales or bank sell offs.” The Florida DOT’s response noted that although the answer to the survey question is no “[f]ederal regulations and state statute mandate a determination of value without consideration of these circumstances.” 540 Responses to the question were received from Arizona DOT; Arkansas State Highway and Transportation Depart- ment; California DOT (stating that by state and federal law real property is appraised on the basis of fair market value); Connecticut DOT; Florida DOT; Idaho Transportation Department; Oregon DOT; and Wisconsin DOT.

B-4 6. In connection with the preceding question, four transportation departments stated property owners in their jurisdictions had argued that sales are not comparable sales because they were not sales conducted voluntarily or at arm’s length. For example, the Arizona DOT stated that “opposing appraisers argue REO sales don’t get appropriate market exposure or are a result of financial pressure so they sell below market.” The Florida DOT stated that “[w]hen performing an valuation of any property regardless of whether there is a pending foreclosure, short sale, etc., comparables used are valid voluntary arm’s length transactions.” The Idaho Transportation Department stated that “[i]n these situations, additional market comparables were researched. Administrative settlements were used more readily to fairly compensate owners.” The Oregon DOT reported that “[t]he argument is the [that] the non-voluntary (short sales or foreclosures) are [a] ‘fire sale’ process and do not reflect the market.” The Utah DOT said that its “policy prevented this as they are not arm’s length and were not included.” The Arkansas State Highway and Transportation Department transportation department stated that its department had not encountered the argument that sales were not comparable sales because there not voluntary sales or ones conducted at arm’s length. Three departments did not respond to the question. 7. Transportation departments reported on whether during the real estate crisis and in response to depressed property values whether as an alternative to the comparable sales approach property owners or the courts resorted more frequently in your agency’s experience either to the replacement cost method of valuation or the income approach to valuation. Only the Florida DOT and Idaho Transportation Department had instances in which property owners had resorted to the replacement cost method. The Florida DOT stated: Since fewer transactions are available, property owners often resort to use of the Cost Approach and the Income Approach. Often, the valuation opinion is skewed due to a lack of adjustment for external obsolescence in the Cost Approach. Additionally, the Income Approach valuation on the part of the property owners is based on prior years’ numbers with unrealistic vacancy and collection allowances and unsupported capitalization rates. Supporting ad- justments is uniquely challenging during declining markets because there are limited numbers of transactions to analyze in the first place. When the property owner resorts to use of the Cost Approach and the Income Approach without the Sales Comparison Approach, we often see a lack of analysis of supply and demand forces. Obviously, without a thorough analysis of supply and demand forces, it is impossible to develop a supported market analysis in order to form an opinion of market value.

B-5 The Idaho Transportation Department stated in regard to the replacement cost method that it “was used rarely, (1-2 cases) over the last few years;” that “no procedure or criteria were established; and that the method was used on a “case-by-case basis.” Other departments responding to the question had not encountered situations in which property owners had resorted to the replacement cost method of valuation.541 Caltrans advised that “[t]he weighted consideration of the 3 approaches to value did not change.” The Connecticut DOT stated in regard to the replacement cost method that “[w]hen there is an abundance of comparable sales to consider, the replacement cost approach is rarely used when appraising improved residential property.” As for the income approach, Florida DOT reported that some property owners had used the income method. However, eight transportation departments stated that they had not found that property owners were attempting to rely on an income approach to valuation.542 The Arizona DOT noted that such an approach is “impossible to do with vacant land or agricultural land where rents are too low.” The Connecticut DOT, however, responded “sometimes” to the question, stating that “[o]wner-occupied single family residential properties typically do not generate revenue. When appraising a multi-use or multi-occupied property…the income approach may be utilized, or considered by the courts during the reassessment process.” 8. Only the Arkansas State Highway and Transportation Department reported that during the real estate crisis the courts in its jurisdiction had admitted evidence of the price that an owner had paid for property taken by or on behalf of the agency. The department stated that “Arkansas courts are liberal in allowing landowner testimony, and depending on the date of the purchase, courts will allow [evidence of] purchase price paid.” 541 Arizona DOT; Arkansas State Highway and Transportation Department; California DOT; Connecticut DOT; Oregon DOT; Utah DOT; and Wisconsin DOT. 542 Arizona DOT; Arkansas State Highway and Transportation Department; California DOT; Connecticut DOT; Idaho Transportation Department; Oregon DOT; Utah DOT; and Wisconsin DOT.

B-6 Seven departments responding to the question stated that the courts in their jurisdiction had not admitted evidence of the price paid by an owner for the property. 9. 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).543 10. 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.544 Three departments responding the question stated that they had not voluntarily paid more.545 Caltrans 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 Acqui- sition 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 loss. They should not be left bankrupt and unable to purchase a comparable home. In addition, negotiated settlements considering the grantor’s negative equity situation were completed to re- duce court and litigation costs in the number of condemnations going to court. The Idaho Transportation Department stated that it had done so on a case by case basis but that no policy had been established. The Wisconsin DOT advised that it had done so pursuant to the federal waiver program for those property owners that qualified. 543 Arizona DOT; Arkansas State Highway and Transportation Department; California DOT; Connecticut DOT; Florida DOT; Idaho Transportation Department; Oregon DOT; and Wisconsin DOT. 544 California DOT; Connecticut DOT; Florida DOT; Idaho Transportation Department; and Wisconsin DOT. 545 Arizona DOT; Arkansas State Highway and Transportation Department; and Oregon DOT.