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

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Legal Research Digest 62 NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM October 2014 TRANSPORTATION RESEARCH BOARD OF THE NATIONAL ACADEMIES EMINENT DOMAIN AND FAIR MARKET VALUE IN A DEPRESSED REAL ESTATE MARKET This report was prepared under NCHRP Project 20-6, “Legal Problems Arising Out of Highway Programs,” for which the Transportation Research Board is the agency coordinating the research. The report was prepared by Larry W. Thomas, The Thomas Law Firm, Washington, DC. James B. McDaniel, TRB Counsel for Legal Research Projects, was the principal investigator and content editor. The Problem and Its Solution State highway departments and transportation agen- cies have a continuing need to keep abreast of operat- ing practices and legal elements of specific problems in highway law. This report continues NCHRP’s practice of keeping departments up-to-date on laws that will affect their operations. Applications Since 2005, a myriad of social and economic circum- stances, including, but not limited to, diminished property values, foreclosures, loan values exceeding actual fair market values, natural disasters, and other casualties have presented significant challenges in the acquisition of prop- erties for transportation projects. Outstanding liens encum- bering those properties often exceed the actual and current fair market values. Figures prepared by First American CoreLogic, a real estate information company in Califor- nia, showed that at the end of the third quarter of 2011, 10.7 million, or 22.1 percent of all residential properties with a mortgage, were in negative equity. The fair market value rule in these circumstances works an involuntary hardship on property owners and lienholders, leaving a forced loss on one or more parties (i.e., the property owner, condemnor, or lienholder). How do condemning agencies and the courts resolve the problem of just compensation in light of declining prop- erty values caused by financial calamities beyond the parties’ control? Do statutory remedies exist or have courts created judicial exceptions to the fair market rule for just compensation? This digest considers whether other approaches to valuation, such as the income approach or the replace- ment or reproduction cost method, are alternatives to the comparable sales approach that may result in a high- er valuation for the purpose of deciding just compensa- tion. The digest discusses whether the concept of just compensation allows for any judicial flexibility in deter- mining the value of real property when valuations are generally depressed. This digest also discusses whether there are Depression-era and later precedents that are relevant to the determination of just compensation, such as during the recent financial crisis. The material discussed in this digest should be useful to attorneys, real estate officials, planners, financial officials, developers, engineers, property owners, and community leaders.

CONTENTS I. Introduction, 3 II. Effect of the Financial Crisis on Property Values, Financial Institutions, Property Owners, and Transportation Departments, 4 A. The Emergence and Scope of the Financial Crisis, 4 B. The Effect on Real Property Values, 4 C. The Effect on Financial Institutions, 5 D. The Effect on Property Owners, 6 E. The Effect on Transportation Departments, 6 III. The Use of Fair Market Value to Determine Just Compensation, 7 IV. The Determination of Fair Market Value, 8 A. Introduction, 8 B. Comparable Sales, 9 C. Income Approach, 9 D. Reproduction or Replacement Approach, 10 V. Whether the Rule of Just Compensation Allows for Any Flexibility When Real Estate Values Are Depressed, 12 A. Avoiding “Manifest Injustice,” 12 B. Full Indemnification, 14 C. Fairness and Equity, 14 D. Judicial Discretion, 15 VI. Determining Just Compensation During Depressed Market Conditions, 15 A. Introduction, 15 B. Valuation During Temporary and Permanent Depressions in the Market, 16 C. Valuation Based on a “Normal” Market, 17 D. Relevancy of the Price Paid by an Owner for the Property, 19 E. Admissibility of a Property Owner’s Testimony as to Value, 20 F. Other Issues Affecting Valuation, 20 G. Exclusion of Project Influence, 23 H. Counterarguments to Valuing Property Any Differently Because of the Existence of a Depressed Real Estate Market, 25 VII. The Use of “Valuation Mechanisms” as Alternative or Supplementary Adjustments, 26 A. Introduction, 26 B. Value of the Condemnor’s Gain from the Taking, 26 C. Value of the Harm to the Property Owner, 27 D. Highest and Best Use, 27 E. The Time of the Taking, 28 F. Impact of Precondemnation Activity on Value, 29 VIII. The Roles of Distributive Justice and Environmental Justice in Eminent Domain and Just Compensation, 30 A. Distributive Justice, Environmental Justice, and Just Compensation, 30 B. Compensation for an Owner’s Subjective Property Rights, 32 C. Additional Losses or Values that May Be Compensable, 34 D. Proposals for Incorporating Distributive Justice Principles in Just Compensation, 34 IX. Constitutional and Statutory Amendments Authorizing the Payment of Additional Compensation, 36 A. Additional Compensation for the Taking of a Primary Residence or Homestead, for Heritage Value, or for Takings for Economic Development, 36 B. Compensation for Losses Related to a Business Conducted on the Property, 38 C. Compensation for the Purchase of Comparable Property, 39 D. Voluntarily Paying More than Fair Market Value, 39 X. Takings of Mortgaged Property with Negative Equity, 40 A. Introduction, 40 B. Calculation of Replacement Housing Payments and FHWA’s Waiver of 49 C.F.R. Section 24.401(b)(1), 40 C. The Use of Eminent Domain to Take Underwater Mortgages, 43 XI. Payment of Relocation Expenses, 45 A. Uniform Relocation Assistance and Real Property Acquisition Policies for Federal and Federally Assisted Programs Act, 45 B. State Laws Authorizing Payment of Relocation Expenses, 45 XII. Federal Reimbursement of Payments in Excess of Fair Market Value, 46 XIII. Conclusion, 46 APPENDIX A: Survey Questions, A-1 APPENDIX B: Summary of Transportation Departments’ Responses to the Survey, B-1 APPENDIX C: Transportation Departments Responding to the Survey, C-1

3 EMINENT DOMAIN AND FAIR MARKET VALUE IN A DEPRESSED REAL ESTATE MARKET By Larry W. Thomas, The Thomas Law Firm, Washington, DC I. INTRODUCTION The financial crisis that began in the United States in 2007 and 2008 is commonly considered to be the most severe economic downturn since the Great Depression.1 Although experts have identified a number of interrelated causes of the crisis,2 a speculative housing bubble began to implode in late 2006 and led quickly to a substantial decline in real property values and a record number of loan defaults and foreclosures.3 The principal issue for this digest is how courts value real property being taken in eminent domain during a severe financial crisis that has depressed the real estate market in general and thus affected the value of properties taken by eminent domain. The first section of the digest discusses the emergence and scope of the financial crisis and its effect on real property values, financial institutions, property owners, and transportation departments. The next four sections of the digest deal with how the courts traditionally have determined just compensation. The digest explains the courts’ use of the fair market value approach to determine just compensation (Section III). The digest considers whether other approaches to valuation such as the income approach or the replacement or reproduction cost method are alternatives to the comparable sales approach that may result in a higher valuation for the purpose of deciding just compensation (Section IV). The digest considers whether the concept of just compensation allows for any judicial flexibility in determining the value of real property when valuations are 1 See TONY CIRO, THE GLOBAL FINANCIAL CRISIS: TRIGGERS, RESPONSES AND AFTERMATH 1 (2012), herein- after referred to as “Ciro.” 2 Ciro, supra note 1, at 36. 3 See, HOMELAND SECURITY AND GOVERNMENT AFFAIRS COMMITTEE, U.S. SENATE, WALL STREET AND THE FINANCIAL CRISIS: ANATOMY OF A FINANCIAL COLLAPSE, at 45 (2011), hereinafter referred to as “Senate Report on the Financial Crisis,” available at: http://www.hsgac. senate.gov//imo/media/doc/Financial_Crisis/ FinancialCrisisReport.pdf?attempt=2. generally depressed (Section V). The digest also discusses whether there are depression-era and later precedents that are relevant to the determination of just compensation such as during the recent financial crisis (Section VI). The next two parts of the digest discuss proposals by scholars for the use of various means to supplement fair market value without violating traditional valuation rules (Section VII) and discuss whether distributive justice principles should be incorporated, particularly with respect to takings of residential property (Section VIII). The next four sections of the digest discuss constitutional and statutory provisions authorizing the payment of additional compensation to property owners when their property is taken (Section IX); whether transportation departments developed or revised any policies during the financial crisis concerning the valuation of property or takings of mortgaged property having negative equity (Section X); whether relocation payments under federal and/or state law may close the gap somewhat between constitutionally-mandated just compensation and other losses that are suffered by property owners that are not compensated (Section XI); and whether states that pay supercompensation when taking property for a highway project qualify for reimbursement as a result of a 2007 Federal Highway Administration (FHWA) policy (Section XII). A survey was used to obtain information from transportation departments for the digest, to which 23 state departments of transportation (DOTs) responded. The survey was not conducted for the purpose of an empirical study or analysis. Ten transportation departments responding to the survey 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 consider the effect of depressed property values because of the financial crisis.4 The departments’ 4 Arizona DOT; Arkansas State Highway and Trans- portation Department; California DOT; Connecticut DOT; Florida DOT; Idaho Transportation Department;

4 responses are discussed throughout the digest and summarized in Appendix B. II. EFFECT OF THE FINANCIAL CRISIS ON PROPERTY VALUES, FINANCIAL INSTITUTIONS, PROPERTY OWNERS, AND TRANSPORTATION DEPARTMENTS A. The Emergence and Scope of the Financial Crisis In late 2006 housing sales and property values began to decline significantly and the number of loan defaults and foreclosures began to increase.5 In the summer of 2007, a liquidity crisis developed when investors began to doubt the value of financial instruments securitized by real estate; when the Federal Deposit Insurance Corporation (FDIC) exposed unsound lending practices; and when some investment banks and houses closed or appeared to be on the verge of doing so.6 The disappearance of liquid capital caused banks that had been relying on short-term borrowing to incur excessive costs when attempting to roll over their liabilities.7 In June 2007 the financial markets in the United States spiraled downward rapidly with the collapse of Bear Sterns hedge funds followed by a 2-week period in September 2008 when six major financial institutions in the United States began to fail.8 When Lehman Brothers (Lehman) appeared to be on the brink of filing for bankruptcy, the Treasury Department and the Federal Reserve developed a plan to enable Lehman to transfer net assets to Barclays Bank in the United Kingdom.9 A stalemate developed when Lehman was unable and the Federal Reserve was unwilling to guarantee Lehman’s Michigan DOT; Oregon DOT; Utah DOT; and Wiscon- sin DOT. 5 Senate Report on the Financial Crisis, supra note 3, at 45. 6 MARTIN NEIL BAILY AND DOUGLAS J. ELLIOTT, INITIATIVE ON BUS. & PUB. POLICY AT BROOKINGS, THE US FINANCIAL AND ECONOMIC CRISIS: WHERE DOES IT STAND AND WHERE DO WE GO FROM HERE?, at 5 (2009), hereinafter referred to as “Baily and Elliott,” available at http://www.brookings.edu/research/papers/2009/06/15- economic-crisis-baily-elliott. 7 Id. at 5. See also Senate Report on the Financial Crisis, supra note 3, at 45, 46. 8 Senate Report on the Financial Crisis, supra note 3, at 45. 9 Ciro, supra note 1, at 40. obligations until the sales transaction was complete. The Financial Services Authority in the United Kingdom refused to approve the agreement between Barclays and Lehman.10 In September 2008, Lehman filed for the largest corporate bankruptcy in United States history.11 According to a report by the United States Senate’s Homeland Security and Government Affairs Committee, a primary cause of the crisis was the downgrading in July 2007 by two ratings agencies, Moody’s and Standard & Poor’s, of hundreds of collateralized debt obligations (CDO) and residential mortgage-backed securities.12 Because of the steady rise in home values in the United States, Americans had taken on an increasing amount of debt in the form of household mortgages that were repackaged and sold to investors as CDOs.13 The downgrading of these financial instruments was said to be a result of unsound and predatory lending practices followed by a record number of loan defaults and foreclosures on mortgaged properties.14 The effects of the financial crisis, decline in real property values, and increase in unemployment reverberated throughout the economy. The first quarter of 2009 saw gross domestic product decrease by 6.4 percent (after decreasing by 5.4 percent in the last quarter of 2008), which was the lowest level of economic growth in a 6-month period since 1958.15 In February 2009, one index of consumer confidence fell to an all-time low of 25.16 B. The Effect on Real Property Values With respect to property values, by the first quarter of 2009, housing prices in the United States had declined to 68 percent of their peak 10 Baily and Elliott, supra note 6, at 5; Ciro, supra note 1, at 40–41 (citing H.M. PAULSON, ON THE BRINK: INSIDE THE RACE TO STOP THE COLLAPSE OF THE GLOBAL FINANCIAL SYSTEM 335 n. 5 (2010)). 11 Ciro, supra note 1, at 40–41. 12 Senate Report on the Financial Crisis, supra note 3, at 6 and 45. 13 Ciro, supra note 1, at 33. 14 FEDERAL DEPOSIT INSURANCE CORPORATION, FINANCIAL INSTITUTION LETTER, PREDATORY LENDING, at 1 (2007), available at http://www.fdic.gov/news/news/ financial/2007/fil07006.pdf. 15 PHILLIP SWAGEL, PEW FINANCIAL REFORM PROJECT, THE COST OF THE FINANCIAL CRISIS: THE IMPACT OF THE SEPTEMBER 2008 ECONOMIC COLLAPSE, at 8 (2008), hereinafter referred to as “Swagel.” 16 Baily and Elliott, supra note 6, at 4.

5 values recorded in the second quarter of 2006.17 The decline in the value of residential property from mid-2007 to March 2009 was an estimated $5.9 trillion.18 Housing values that had peaked in the first quarter of 2006 finally reached bottom by the first quarter of 2012 at about 57 percent of their peak values. 19 By the fourth quarter of 2012, housing values had recovered only to around 62 percent of their 2006 highs.20 In the fourth quarter of 2009, at the apex of the financial crisis, approximately 24 percent or 11.3 million home mortgages were “underwater;”21 that is, the values of properties were less than the outstanding balances of the mortgages secured by the properties. By the first quarter of 2013, approximately 20 percent or 9.7 million of all residential homes with a mortgage were still underwater.22 Before the financial crisis, on average 21,000 foreclosures were completed each month between 2000 and 2006.23 By April 2013, approximately 52,000 properties were being foreclosed.24 However, April 2013 also was the 18th consecutive month in which there was a year-to-year decline in the inventory of foreclosures; for example, the number of 17 Location, Location, Location, THE ECONOMIST (May 16, 2013, updated Aug. 29, 2014) (unnumbered pages), hereinafter referred to as “Economist Article,” updated version available at: http://www.economist.com/ blogs/dailychart/2011/11/global-house-prices. 18 Swagel, supra note 15, at 13. 19 Economist Article, supra note 17 (unnumbered page). 20 Id. 21 Vi Ransel, Global Research, Social Inequality in America: Widening Income Disparities, Workhouse Na- tion: Part One (March 24, 2010), available at http://www.globalresearch.ca/social-inequality-in- america-widening-income-disparities/18281 (quoting First American CoreLogic). 22 Matt Egan, 850K Underwater Mortgages Finally Gasp for Air in 1Q, FOX BUSINESS (June 12, 2013), here- inafter referred to as “Egan,” (citing CoreLogic), avail- able at http://www.foxbusiness.com/markets/2013/06/ 12/underwater-mortgage-percentage-falls-below-20/. 23 Christine DiGangi, Credit.com, Seriously Delin- quent Mortgages Hit 5-Year Low (Jan. 13, 2014), available at http://blog.credit.com/2014/01/ seriously-delinquent-mortgages-hit-5-year-low-73632/. 24 Mark Huffman, Consumer Affairs, Foreclosure Rates and Mortgage Delinquencies (Sept. 12, 2014), available at http://www.consumeraffairs.com/ foreclosure-rates-and-mortgage-delinquencies. foreclosures between April 2012 and April 2013 declined by 24 percent.25 C. The Effect on Financial Institutions At the outset of the crisis, banks that previously were able to rely on short-term borrowing when needed to roll over their liabilities were no longer able to depend on this source of capital.26 As the crisis deepened, financial institutions had to write-off substantial amounts in losses based on non-performing loans and the reduced value of assets from subprime loans and other high-risk lines of credit.27 For example, the International Monetary Fund (IMF) estimated that the total value of write-downs on assets originating from the United States after the crisis was $2.7 trillion out of a total value of $27 trillion of all assets originating in the United States.28 Increases in loan defaults and foreclosures can have a seriously negative effect on financial institutions because of the costs of the foreclosure process and the difference between sales prices of properties and their mortgage balances.29 Financial institutions lose money on foreclosures when the sales price of a property is less than the balance of the mortgage on the property plus transaction costs and fees.30 During the financial crisis, losses on foreclosed properties were enhanced by the fact that financial institutions had originated almost 30 percent of all home loans in 2007 without a down payment.31 25 John Krainer, Federal Reserve Bank of San Fran- cisco, The Slowdown in Existing Home Sales (May 19, 2014), available at http://www.frbsf.org/economic- research/publications/economic-letter/2014/may/ existing-home-sales-slowdown/. 26 Baily and Elliott, supra note 6, at 5. See also Sen- ate Report on the Financial Crisis, supra note 3, at 5. 27 CONGRESSIONAL BUDGET OFFICE, BUDGET AND ECONOMIC OUTLOOK: AN UPDATE 27 (Sept. 2008), here- inafter referred to as “CBO Budget and Economic Out- look,” available at http://www.cbo.gov/publication/ 41729, at 27. 28 INTERNATIONAL MONETARY FUND, FURTHER ACTION NEEDED TO REINFORCE SIGNS OF MARKET RECOVERY (Apr. 2009), available at http://www.imf.org/external/ pubs/ft/survey/so/2009/RES042109C.htm. 29 U.S. GOV’T ACCOUNTABILITY OFFICE, FINANCIAL REGULATORY REFORM: FINANCIAL CRISIS LOSSES AND POTENTIAL IMPACTS OF THE DODD-FRANK ACT 24 (2013), hereinafter referred to as “GAO Report on Financial Regulatory Reform.” 30 Id. 31 Rachel D. Godsil and David V. Simunovich, Pro- tecting Status: The Mortgage Crisis, Eminent Domain,

6 Financial institutions suffer losses when governments condemn properties having under- water-mortgages. When a government takes a mortgaged property by eminent domain, the mortgagee (i.e., the lender or financial institution) receives the money paid for the property up to the outstanding balance of the mortgage.32 Moreover, the mortgagee may lose any prepayment fees if they were required by the loan documents.33 Regardless of whether a condemnation award is sufficient to pay the mortgage on the property taken, a mortgagee forfeits its anticipated financial gain because of the prepayment of the loan and the loss of future revenue.34 D. The Effect on Property Owners During the financial crisis, financial institutions and homeowners had both interrelated interests and divergent interests. Property owners who were shareholders in financial institutions were affected by the declining value of the shares of the institutions, as well as by a reduction in dividends payable on the institutions’ shares or by the institutions’ suspension of their dividend payments. Furthermore, as a result of the crisis, banks were required to increase lending standards and restrictions on loans for residential property, thus affecting sellers whose purchasers needed a mortgage to be able to buy property that was for sale. New lending standards and restrictions also affected business owners needing capital.35 The decline in the availability of credit impaired if not precluded some homeowners’ and business owners’ ability to pay expenses.36 The financial crisis led to increased unemployment, thus making it more difficult or impossible for some property owners to make their mortgage payments.37 Many homeowners who were unable to sell their homes ultimately lost their homes to and the Ethic of Homeownership, 77 FORDHAM L. REV. 949 at 960 (2008), hereinafter referred to as “Godsil and Simunovich.” 32 Dale A. Whitman, Mortgage Prepayment Clauses: An Economic and Legal Analysis, 40 UCLA L. REV. 851, 913 (1992), hereinafter referred to as “Whitman.” 33 Id. at 914. 34 Id. at 915. 35 CBO Budget and Economic Outlook, supra note 27, at 29. 36 Id. 37 GAO Report on Financial Regulatory Reform, supra note 29, at 23. foreclosure, resulting in a loss of equity, if any, in their property and in lower credit scores that would affect their ability to qualify for a loan in the future.38 Foreclosures and vacant properties depressed even further the value of other properties in the area.39 During the financial crisis, by the time of a taking of a property, the value of some properties that were purchased at the onset of the financial crisis was less than the properties’ purchase price and frequently less than the balance of a mortgage on the properties. As discussed in the digest, when a homeowner’s property is taken in eminent domain the homeowner may be unable to find another home elsewhere that is affordable,40 particularly when the value of the property taken was less than the balance of the mortgage on the property. Although a financial institution backing a mortgage loses its security interest when the government takes property serving as collateral, typically any remaining amount due on the mortgage plus expenses and fees continue to be the obligation of the borrower, i.e., the mortgagor.41 E. The Effect on Transportation Departments The financial crisis significantly affected state governments and their transportation departments. Similar to financial institutions and property owners, declining property values and an increase in foreclosures created a financial burden on state and local governments because of decreased property tax revenue and the costs associated with vacant properties.42 For example, state tax revenues had decreased by 8.4 percent in 2009 from the previous year, and the aggregate budgetary deficit of all states was almost $200 billion in 2010.43 Therefore, state governments had to slash spending, including spending on transportation projects.44 38 Id. at 24. 39 Id. 40 Godsil and Simunovich, supra note 31, at 968. 41 Whitman, supra note 32, at 915. 42 GAO Report on Financial Regulatory Reform, su- pra note 29, at 24. 43 John Hood, The States in Crisis, NATIONAL AFFAIRS, Winter 2011, at 51, available at: http://www.nationalaffairs.com/publications/detail/the- states-in-crisis. 44 Cathy Proctor, FasTrack Costs Have Dropped, But So Have Funds for Project, RTD Says, DENVER BUSINESS JOURNAL, Jan. 5, 2010, hereinafter referred to as “Proctor,” available at http://www.bizjournals.com/

7 On the other hand, it is reported that because of the crisis some states benefited because of the decreased cost of materials.45 The lower cost for land acquisition is said to have assisted some states in reducing costs and in being able to resume some suspended projects.46 For example, although revenue decreased to $4.1 billion from $4.7 billion in 2008, the Colorado Department of Transportation reported that its costs of materials decreased, thus allowing the department to narrow the gap between revenue and expenses. For one transportation project in Colorado, estimated construction costs dropped almost half a billion dollars between 2008 and 2009.47 III. THE USE OF FAIR MARKET VALUE TO DETERMINE JUST COMPENSATION The Fifth Amendment to the U.S. Constitution provides that private property shall not be taken by the government for public use without just compensation.48 The language was designed to limit the power of the government and to serve the interests of both the public and private owners.49 In particular, the Fifth Amendment was intended to ensure that the government would “deal fairly with individuals” and to prevent individuals from “bearing burdens that should be borne by the public as a whole.”50 Both the federal and state governments may take property for a public use but only if they pay just compensation to the landowners for their property.51 To make a “present value determination” most states have established a date on which the value of condemned property is to be determined.52 In a denver/stories/2010/01/04/daily35.html?page=all. 45 Rick E. Rayl and Bradford B. Kuhn, Do You Feel (Federally) Stimulated: Stimulus Dollars Really Having an Impact on California’s Infrastructure?, Sept. 15, 2009, available at http://www.nossaman.com/ showealert.aspx?show=5865. 46 Id. 47 Proctor, supra note 44. 48 U.S. CONST. amend. V. 49 Marissa Fegan, Just Compensation Standards and Eminent Domain Injustices: An Underexamined Con- nection and Opportunity for Reform, 6 CONN. PUB. INT. L. J. 269, 274 (2007), hereinafter referred to as “Fegan.” 50 Id. at 275; Armstrong v. United States, 364 U.S. 40, 49 (1960). 51 Christopher A. Bauer, Government Takings and Constitutional Guarantees: When Date of Valuation Statutes Deny Just Compensation, 2003 B.Y.U.L. REV. 265, 265-266 (2003), hereinafter referred to as “Bauer.” 52 Id. at 266. majority of states, the valuation date is set by statute.53 Thus, just compensation traditionally is determined on the basis of the fair market value of a property as of the date of the taking.54 Condemnees are protected if their property’s value falls after a valuation on the prescribed date of taking, but not when the value of the property increases after its valuation as of the taking. Although just compensation may be affected by the date a state has established as the date of taking, the issue for the Report is whether property may be valued any differently when a taking occurs during a time of generally depressed real property values. In 1893, the Supreme Court articulated the current standard for just compensation in Mononghela Navigation Co. v. United States.55 The Court stated that “compensation must be a full and perfect equivalent for the property taken.”56 Exactly what constitutes a perfect equivalent, however, was not established until almost thirty years later when the Court decided Olsen v. United States.57 In Olsen, the Court held that the equivalent compensation that was sufficient to satisfy the Fifth Amendment’s just compensation requirement was the fair market value of the property condemned.58 In United States v. 563.54 Acres of Land,59 the Court clarified that the term fair market value meant “‘what a willing buyer would pay in cash to a willing seller’ at the time of the taking.” The Fifth Amendment does not require payment for all losses incurred by a property owner by reason of a taking of his or her property 53 Id. 54 Although beyond the scope of this digest, as of the date of the Bauer article in 2003, 21 states and the Dis- trict of Columbia had no valuation date statute. Some states, such as California, provide for three methods and dates of valuation. Bauer, supra note 51, at 277. Twenty-nine states had a variety of approaches to the date of valuation, such as “the date of summons, the date of trial on compensation, the date that the con- demnation action begins, the date that the condemnor deposits probable compensation, and the date that the condemnor takes the land.” Id. at 278. 55 148 U.S. 312, 13 S. Ct. 622, 37 L. Ed. 463 (1893). 56 Mononghela Navigation Co., 148 U.S. at 326, 13 S. Ct. 622, 626, 37 L. Ed. at 468. 57 292 U.S. 246, 54 S. Ct. 704, 78 L. Ed. 1236 (1934). 58 292 U.S. at 255, 54 S. Ct. at 708, 78 L. Ed. at 1244. 59 441 U.S. 506, 511, 99 S. Ct. 1854, 1857, 60 L. Ed. 2d 435, 441 (1979) (quoting United States v. Miller, 317 U.S. 369, 374 (1943)).

8 for a public use. In Kirby Forest Industries, Inc. v. United States,60 the Court agreed that the standard for determining just compensation does not always indemnify the owner for his loss. Particularly when property has some special value to its owner because of its adaptability to his particular use, the fair-market-value measure does not make the owner whole. …We are willing to tolerate such occasional inequity because of the difficulty of assessing the value an individual places upon a particular piece of property and because of the need for a clear, easily administrable rule governing the measure of “just compensation.”61 Thus, “current compensation rules exclude whole categories of damages caused by government takings of private property.”62 Under the Fifth Amendment as construed by the courts, the government is not constitutionally required to compensate a property owner for attorney’s fees, relocation costs, or the cost of replacement property that exceeds the fair market value of the property that was taken.63 Fair market value, moreover, excludes “consequential damages and compensation for any of the real but subjective harms suffered by the property owner.”64 An owner typically may not recover damages that are common to other property owners in the same community.65 Many other items are not compensable because the doctrine of fair market value also does not include a landowner’s more personal or subjective losses.66 Scholars have addressed whether the principle of just compensation is one that is fairly derived and applied, particularly in regard to takings of private homes or takings of property belonging to low income persons or to members of minority groups. Scholars emphasize that takings law 60 467 U.S. 1, 104 S. Ct. 2187, 81 L. Ed. 2d 1 (1984). 61 Id., 467 U.S. at 10, n.15, 104 S. Ct. 2194 n.15, 2194, 81 L. Ed. 2d at 10 n. 15 (1984) (citations omitted). 62 Christopher Serkin, The Meaning of Value: Assess- ing Just Compensation For Regulatory Takings, 99 NW. U. L. REV. 677, 678–79 (2005) (footnotes omitted), here- inafter referred to as “Serkin.” 63 Katrina Miriam Wyman, The Measure of Just Compensation, 41 U.C. DAVIS L. REV. 239, 254-255 (2007), hereinafter cited as “Wyman.” 64 Serkin, supra note 62, at 678-679 (footnote omit- ted). 65 Harris County Flood Control Dist. v. Glenbrook Patiohome Owners Ass’n, 933 S.W.2d 570, 578 (Tex. App. 1996). 66 Brock L. Toll, The Implications of Eminent Do- main in a Post-Kelo World, at 86 (2007) (citation omit- ted), hereinafter referred to as “Toll,” available at: http://business.uni.edu/economics/Themes/toll.pdf. generally “impose[s] significantly unequal burdens on citizens.”67 However, much of the recent debate has focused on the meaning of public use in the Fifth Amendment to the U.S. Constitution and in state constitutions, while the meaning of just compensation has “remain[ed] somewhat in the shadows of the takings debate.”68 As discussed in Section VI, some commentators argue that a property owner’s additional “economic losses can be easily compensated in eminent domain cases.”69 IV. THE DETERMINATION OF FAIR MARKET VALUE A. Introduction Fair market value is what a person who is willing but not required to buy a property would pay a seller who is willing but who is not required to sell it, taking into consideration the highest and best use to which the property may be put.70 Nevertheless, as the courts have stated, “[m]arket value is nothing but a hypothetical concept….”71 Indeed, the methods traditionally used to value property may produce quite different valuations of the same property.72 The fair market value approach itself has been attacked on the grounds that the approach renders an unjust outcome and is even inconsistent with property law.73 According to the Supreme Court, “when market value has been too difficult to find, or when its application would result in manifest injustice to [the] owner or public, courts have fashioned and applied other standards….”74 Although “[t]here is 67 John Fee, Eminent Domain and the Sanctity of Home, 81 NOTRE DAME L. REV. 783, 803 (2006), herein- after referred to as “Fee.” 68 Fegan, supra note 49, at 269. 69 Toll, supra note 66, at 86. 70 County of Ramsey v. Miller, 316 N.W.2d 917, 919 (Minn. 1982). 71 United States ex rel. Tenn. Valley Auth. v. Powelson, 138 F.2d 343, 345 (4th Cir. 1943). 72 4 Nichols on Eminent Domain § 13.01[10]. 73 Fegan, supra note 49, at 277. 74 United States v. Commodities Trading Corp., 339 U.S. 121, 123, 70 S. Ct. 547, 549, 94 L. Ed. 707, 712 (1950); see also Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 104 S. Ct. 2187, 81 L. Ed. 2d 1 (1984).

9 no precise and inflexible rule for the assessment of just compensation,”75 “the dominant consider- ation always remains the same: What compensation is ‘just’ both to an owner whose property is taken and to the public that must pay the bill?”76 Consequently, some courts have stated that “market value should not be the sole means of valuation in eminent domain cases.”77 There are four basic methods used to derive a valuation that satisfies the just compensation requirement: comparable sales, income capitalization, reproduction or replace- ment cost, and development cost.78 Although not discussed further in the digest, the development cost approach is based on the price a developer- purchaser would be warranted in paying for land given its cost of development and probable sales proceeds, but the land must be ripe for development.79 In a generally depressed real estate market, one issue is whether there are conditions that militate against using the comparable sales approach to value property and whether other methods of valuation or adjustments may be or should be utilized to determine value so as to avoid altering the traditional rules of valuation used in eminent domain cases yet produce a fair and equitable valuation. B. Comparable Sales The fair market value method based on comparable sales to determine property value, discussed throughout the digest, is the lodestar of valuation methods when a public agency takes 75 Township of Manchester Department of Utilities v. Even Ray Co., Inc., 315 N.J. Super. 122, 135, 716 A.2d 1188, 1195 (N.J. Super. Ct. App. Div. 1998). 76 United States v. Commodities Trading Corp., 339 U.S. 121, 123, 70 S. Ct. 547, 549, 94 L. Ed. 707, 712 (1950); see also Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 104 S. Ct. 2187, 81 L. Ed. 2d 1 (1984). 77 Township of Manchester Department of Utilities v. Even Ray Co., Inc., 315 N.J. Super. 122, 136, 716 A.2d 1188, 1195 (N.J. Super. Ct. App. Div. 1998). 78 County of Ramsey v. Miller, 316 N.W.2d 917, 919, 922 (Minn. 1982). 79 Deborah Dyson, Eminent Domain: Just Compensa- tion, MINNESOTA HOUSE RESEARCH (August 2006), here- inafter referred to as “Minnesota House Research,” available at http://www.house.leg.state.mn.us/hrd/pubs/ ss/clssedjust.pdf. The valuation methods are discussed in the Dictionary of Real Estate Appraisal, 4th ed. (2002). property in eminent domain.80 The comparable sales value is determined by “comparing the property to similar properties that have been sold recently and then applying appropriate units of comparison to adjust the sale prices.”81 The comparable sales approach is used to value improved properties, as well as vacant land.82 However, at a time of a severely depressed real estate market, some sales of comparable property may include sales that were involuntary and not at arm’s length because of government intervention or foreclosures and sales by institutional investors and speculators, sales that arguably must be excluded because they are not comparable sales.83 C. Income Approach Another accepted method of valuation is the income capitalization approach to determine the fair market value of income-producing property. The income method calculates just compensation by assessing “the present value of the future revenues for the useful life of the business based on past performance.”84 When property is taken that is a unique business property, a court may allow a jury to consider lost profits caused by the taking “because the income approach necessarily takes into account what future earnings would be were the property interest not extinguished….”85 Although typically used for commercial property, the income method may be used for any property that is capable of or actually producing an income.86 The approach may serve as an alternative when comparable sales are not available. Indeed, it has been noted that [t]he income approach is employed for any property, such as an apartment building, whose value is primarily dependent upon the amount of cash generated by its on- going operations. This method is generally regarded as a check on the accuracy of comparable sales, and is used instead of comparable sales where insufficient sales data 80 4 Nichols on Eminent Domain § 13.01[9] (stating that the courts have equated just compensation with a property’s fair market value at the time of the taking). 81 Minnesota House Research, supra note 79. 82 Id. 83 Joseph T. Waldo & Stephen J. Clarke, Preventing A Down Real Estate Market From Affecting Valuation in Condemnation Cases, at 58 (July 2010), hereinafter referred to as “Waldo & Clarke.” 84 Minnesota House Research, supra note 79. 85 Housing Authority of Atlanta v. Southern Ry. Co, 245 Ga., 170 at 231, 264 S.E.2d at 176. 86 4 Nichols on Eminent Domain § 13.01[12].

10 exist in the relevant market. This method is also dependent upon the existence of reliable and relatively consistent income and expense data going back several years prior to the taking.87 In its response to the survey, Arizona noted that the income approach is “impossible to do with vacant land or agricultural land where rents are too low.”88 Connecticut advised that “[w]hen appraising a multi-use or multi-occupied property…the income approach may be utilized, or considered by the courts during the reassessment process.”89 The department agreed that the income approach “sometimes” is an alternative but commented that “[o]wner-occupied single family residential properties typically do not generate revenue.” Florida confirmed that that some property owners had used the income method. Nevertheless, the experience of the remaining transportation departments responding to the survey was that property owners had not attempted to rely on an income approach as an alternative to valuation in condemnation cases during the financial crisis.90 D. Reproduction or Replacement Approach The reproduction cost less depreciation method estimates the current cost to construct a reproduction of or replacement for the existing structure, deducts depreciation from the total cost, and adds the estimated land value.91 If during a depressed real estate market the use of the comparable sales method is not appropriate, an alternative is the depreciated replacement or reproduction cost method.92 87 Timothy S. Hollister and Allison M. McKeen, Cur- rent Issues in Just Compensation, GEORGETOWN LAW CENTER, at 11 (2005) (citing Correira v. New Bedford Dev. Auth., 375 Mass. 360, 377 N.E.2d 909, 911 (1978) (emphasis supplied)). 88 Response of Arizona DOT. 89 Response of Connecticut DOT. 90 Arizona DOT; Arkansas State Highway and Transportation Department; California DOT; Connecti- cut DOT; Idaho Transportation Department; Oregon DOT; Utah DOT; and Wisconsin DOT. 91 Minnesota House Research, supra note 79. 92 Del-Mar Redevelopment Corp. v. Associated Ga- rages, Inc., 726 S.W.2d 866, 869 (Mo. Ct. App. 1987) (stating that “[o]ur courts have also approved two other methods for arriving at fair market value: “cost of re- placement” and “capitalization of income”); City of Boulder v. Orchard Ct. Dev. Co., 527 P.2d 931, 933 (Colo. App. 1974) (stating that “evidence of elements of damages, such as cost of restoration and estimates of replacement value, are admissible if ‘they would have a Replacement value may be used when market value is not readily available, or where otherwise uncompensable consequential damages would be extremely high. More generally, courts can award replacement value when awarding fair market value would result in manifest injustice, making the denial of replacement value itself a valuation mechanism because of courts’ wide discretion.93 The replacement cost method may result in a market value that differs significantly from a comparable sales approach to fair market value94 and may exceed any other measure of the value of the property.95 A Missouri court has stated that the replacement value method may not be the “most accurate approach to valuation” but that the method is “an accepted method of determining [the] fair market value of condemned property.”96 However, the replacement value method also has been called the “non-fair market method of valuation.”97 In Louisiana [r]eplacement costs are those expenses arising from the cost of replacing structures due to the expropriation of property on which the original constructions were situated. Traditionally, this kind of incidental damage was denied because it did not pertain to the market value of the property itself. Thus, any additional costs to replace the building at current market prices were borne by the owner.98 However, Louisiana courts have “granted replacement costs when the court has determined that they are necessary in order to compensate an owner to the ‘full extent of his loss.’ By doing so, courts have shown a clear departure from the ‘res’ theory of awards and have shifted their focus more to the personal loss an owner experiences from the taking.”99 The Louisiana Supreme Court bearing on and influence opinion as to value’”) (citation omitted)). 93 Serkin, supra note 62, at 702-703 (footnotes omitted). 94 4 Nichols on Eminent Domain § 13.01[13]. 95 Serkin, supra note 62, at 702 (footnote omitted). 96 Del-Mar Redevelopment Corp. v. Associated Ga- rages, Inc., 726 S.W.2d 866, 869 (Mo. Ct. App. 1987) (citing State ex rel. State Highway Commission v. Jasper, 544 S.W.2d 554, 555 (Mo. en banc 1976); 5 Nichols on Eminent Domain § 20.1, at 20–21 (3d ed. 1985)). 97 Department of Transportation v. Bales, 197 Ga. App. 862, 400 S.E.2d 21, 24 (1990). 98 Tracy Lee Howard, Compensating an Owner to the Full Extent of His Loss: A Reevaluation of Compensable Damages in Louisiana Expropriation Cases, 51 LA. L. REV. 821, 830 (1991), hereinafter cited as “Howard.” 99 Id. (footnote omitted).

11 has held that when using the replacement value approach “it is not constitutionally significant that the award…will exceed the market value of the property used in their business operations.”100 In City of Renton v. Scott Pacific Terminal,101 the court held that the replacement cost of improvements may be introduced into evidence whether or not there is a market value upon which to base an opinion as to the value of the property.102 The court stated that the majority rule in the state of Washington is that evidence of cost of reproduction of structures less depreciation may be introduced whenever the structures are well adapted to the land upon which they stand. The proper measure of just compensation is the value of the land with the buildings upon it, and the owner therefore receives nothing for the buildings unless they increase the market value of the land.103 Furthermore, the court stated that [t]he reproduction cost of the structure on another comparable parcel of realty is not the sole measure of compensation but it is a factor to be considered in determining fair market value of the property as a whole. When the cost of reproduction (or the original cost) is considered as an element in determining market value, a proper deduction must be made for depreciation. Depreciation is not limited to physical wear and tear but it includes economic and functional obsolescence.104 The replacement cost approach is used to value unique or special use properties, such as properties for which no market exists (e.g., schools, churches, train stations).105 Unique properties are those that are not of a type generally bought or sold in the open market.106 A unique property “must be valued by something 100 State ex rel. Department of Highways v. Constant, 369 So. 2d 699, 702 (1979) (holding that landowners were entitled to recover replacement costs of construct- ing a new loading and parking area for their marina business operations). 101 9 Wash. App. 364, 512 P.2d 1137 (Wash. Ct. App. 1973). 102 Id., at 369-370, 512 P.2d at 1141-1142. 103 Id. 104 Id., 512 P.2d at 1141-1142. 105 Township Dept. of Util. v. Even Ray Co., 716 A.2d 1188, 1195 (N.J. Super Ct., App. Div. 1998); State ex rel. Mo. Highway and Transp. Comm’n v. Roberts, 926 S.W.2d 18, 21 (Mo. Ct. App. 1996); Housing Authority of City of Atlanta v. Southern Ry. Co., 264 S.E.2d 174, 175 (Ga. 1980)). 106 Housing Authority of Atlanta v. Southern R. Co., 245 Ga. 229, 230, 264 S.E.2d 174, 175 (1980) (ques- tioned by, followed by Buck’s Service Station, Inc. v. Department of Transportation, 191 Ga. App. 341, 381 S.E.2d 516 (1989)). other than the fair market value standard;” otherwise, a property owner will not secure just and adequate compensation.107 The damages sustained by the taking of a unique property may be “measured by a variety of non-fair market methods of valuation, including the cost and income methods.”108 Indeed, an expert may testify that under the circumstances a unique property has no market value.109 In a North Carolina case, the court held that “testimony [on the replacement cost for a replacement church building] was proper and directly relevant to the determination of the property’s fair market value immediately before and after the taking.”110 In a New York case, the court held that greenhouses on a property were unique and therefore the replacement cost method was the appropriate method to value the condemned property, including a residence located on the property because it was an “integral part” of the nursery complex.111 On occasion the courts also have permitted a “hybrid appraisal technique,” one that considers the characteristics inherent in a property that may produce a significantly higher valuation.112 For example, in situations in which property has particular value because of an easement or because the property is deemed to be unique for some other reason the property may warrant an alternative method of valuation to accommodate the distinction.113 Unique properties can best be described as “properties without compare.”114 One of the proposals for reforming the methods of determining just compensation is to “provide property owners with the replacement value of 107 Id. 108 Id. 109 Id. 110 Department of Transportation. v. Marston Baptist Church, Inc., 676 S.E.2d 313, 315 (N.C. Ct. App. 2009); see also State Department of Highways v. Baddock, 160 So. 2d 279, 280 (La. Ct. App. 1964). 111 In re County of Suffolk, 47 N.Y.2d 507, 512, 514 (1979). 112 London Bridge Resort, Inc. v. Mohave County, 200 Ariz. 462, 27 P.3d 819 (Ariz. App. 2001) (valuation of time-share interests with a hybrid method); 4 Nichols on Eminent Domain § 13.01[15]. 113 Housing Authority of City of Atlanta v. Southern Ry. Co., 264 S.E.2d 174, 175 (Ga. 1980). 114 Duvall, Richard O. & Black, David S., Methods of Valuing Properties Without Compare: Special Use Prop- erties in Condemnation Proceedings, THE APPRAISAL JOURNAL (Jan. 2000).

12 their property if it is higher than the property’s fair market value.”115 Commentators have argued that a valuation that is higher using the replacement value method should be used when a comparable sales valuation would be insufficient to permit an owner after the taking to buy comparable housing in the community.116 One writer argues that “replacement value could be paid either in-kind (i.e., by guaranteeing the expropriated owner similar property…), or in cash (i.e., by paying compensation sufficient to allow the property owner to buy similar housing).”117 Another occasion for the use of replacement cost is when an owner has incurred high consequential losses.118 Some state statutes allow for the use of the replacement cost method so that an owner will be able to purchase a comparable property in the community.119 Nevertheless, Connecticut’s response to the survey was that “[w]hen there is an abundance of comparable sales to consider, the replacement cost approach is rarely used when appraising improved residential property.”120 Only Florida and Idaho reported that the departments had had instances in which property owners had resorted 115 Wyman, supra note 63, at 257-258 (2007) (foot- notes omitted). 116 Id. at 257. 117 Id. at 258 (footnotes omitted). 118 Fegan, supra note 49, at 288. 119 Wyman, supra note 63, at 258 (citing MINN. STAT. § 117.187 (2006) (guaranteeing an owner who is forced to relocate damages “sufficient for an owner to purchase a comparable property in the community”); Assemb. B. 3075 2007 Leg., 230th Sess. (N.Y. 2007) (requiring that “just compensation...be measured by fair market replacement value [of the acquired property], which shall be at least equal to the actual cost of pur- chasing an equivalent property in a similarly situated location with a similar structure on the property”)). Wyman also cites to the New Jersey Department of the Public Advocate, In Need of Redevelopment: Repairing New Jersey’s Eminent Domain Laws: Abuses and Remedies, A Follow-up Report, at 25 (2007) (recommending families be paid at least replacement value for homes and higher compensation for tenants) and the New Jersey Department of the Public Advocate, Reforming the Use of Eminent Domain for Private Re- development in New Jersey, at 20 (2006) (recommending “that compensation for a taken home be based on the highest” of “the fair market value of the property” and “‘replacement value’ of the property, [defined as] the cost of a home of similar size and quality under compa- rable conditions, within a reasonable distance of the current property”)). Id. at n.63. 120 Response of Connecticut DOT. to the replacement cost method as an alternative to the comparable sales approach. Florida’s response to the survey was that [s]ince 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 adjustments is uniquely challenging during declining markets because there are limited numbers of transactions to analyze in the first place.121 Florida’s response also stated that [w]hen 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.122 Idaho reported that the replacement cost method had been used on a case-by-case basis but that the method had been “used rarely (1-2 cases) over the last few years.”123 Other departments responding to the survey reported that they had not encountered situations during the financial crisis in which property owners had sought to rely on the replacement cost method of valuation.124 V. WHETHER THE RULE OF JUST COMPENSATION ALLOWS FOR ANY FLEXIBILITY WHEN REAL ESTATE VALUES ARE DEPRESSED A. Avoiding “Manifest Injustice” One issue is whether the traditional approaches to determining just compensation are flexible enough to accommodate the effects of a nationwide financial crisis when real property values, especially for residential property, are deeply depressed. The fair market value approach has been attacked because it allegedly results in an unjust outcome when market value is too difficult to find or when the approach would result in a “manifest injustice” to the owner or the public. 121 Response of Florida DOT. 122 Response of Florida DOT. 123 Response of Idaho Transportation Department. 124 Arizona DOT; Arkansas State Highway and Transportation Department; California DOT; Connecti- cut DOT; Oregon DOT; Utah DOT; and Wisconsin DOT.

13 Even though the courts have been consistent in finding that the comparable sales approach is usually the best evidence of market value, some courts have stated that they are not “wedded” to any particular formula or method to determine just compensation. Other courts have held that “the determination of what would be fair compensation in each case is not a matter of formulas or artificial rules; it is a matter for discretion and sound judgment based on the facts peculiar to each case.”125 Related to the issue of avoiding manifest injustice in condemnation cases is the question of who should bear the economic burden that resulted from the financial crisis. An article by law professor C.M.A. McCauliff argues that financial institutions should have borne more of the burden; that financial regulation is the key to prevent corporations from becoming “too big to fail;”126 that competition must be enhanced and economic concentration decreased for the benefit of the public and the economy in general;127 and that greater transparency and accountability are necessary for financial stability.128 As for specific policy changes, McCauliff discusses the Treasury Department’s proposed plan to enhance the powers of the Federal Reserve Bank System and the Federal Deposit Insurance Corporation over financial institutions.129 McCauliff argues that “[p]rotecting institutions, consumers, and investors against fraudulent and unfair contracts, as the Treasury’s plan does…would prevent unjust transfers through risks which should not be taken.”130 There are commentators who do not consider financial consumers to be entirely innocent parties who should not bear any of the burden of 125 State Highway Comm’n v. Minckler, 62 Mich. App. 273, 276, 233 N.W.2d 527, 529 (1975) (partial tak- ing) (citations omitted). 126 C.M.A. McCauliff, Didn’t Your Mother Teach You to Share?: Wealth, Lobbying, and Distributive Justice in the Wake of the Economic Crisis, 62 RUTGERS L. REV. 383, 395 (2010), hereinafter referred to as “McCauliff.” 127 Id. 128 Id. at 406. 129 Id. at 417. See U.S. DEP’T OF TREASURY, FINANCIAL REGULATORY REFORM: A NEW FOUNDATION (2009), avail- able at http://www.treasury.gov/initiatives/Documents/ FinalReport_web.pdf. See also Robert Schmidt & Jesse Westbrook, Obama to Limit Fed Lending Power, Grant Systemic Role, BLOOMBERG NEWS, June 17, 2009, avail- able at http://www.bloomberg.com/app/news?pid=2060 1087&sid=aIA5KsKdW74s. 130 McCauliff, supra note 126, at 422. the crisis.131 In an article by law professor Richard Posner for the Wall Street Journal,132 Posner described individual borrowers as “consenting adults” who should have or must have known that lower interest rates come with greater risk.133 McCauliff, however, argues that although individual borrowers and financial institutions knowingly took risks, some financial institutions acted recklessly and still received government bailouts whereas individual borrowers did not.134 In a 2010 report on the financial crisis, the IMF also argued that financial institutions should be held responsible.135 The IMF proposed measures to limit the cost of future crises and encouraged all governments to require that financial institutions repay all money provided to them during the financial crisis.136 The IMF report stated: Measures to pay for and contain the fiscal costs of future financial failures should be guided by two key objectives. They should: • Ensure that the financial sector pays in full for any fiscal support it receives. Expecting taxpayers to support the sector during bad times while allowing owners, managers, and/or creditors of financial institutions to enjoy the full gains of good times misallocates resources and undermines long-term growth. The unfairness is not only objectionable, but may also jeopardize the political ability to provide needed government support to the financial sector in the future.... • Reduce the probability and the costliness of crises. Measures should reduce incentives for financial institutions to become too systemically important to be permitted to fail, and should discourage excessive risk- taking.137 To recover the costs of the financial crisis, the IMF proposed that a “backward-looking tax” be imposed on financial institutions that received financial support.138 The IMF defined the tax as “one assessed on some attribute—with balance sheet variables a logical choice—that was determined prior to the announcement of the 131 Id. at 408. 132 Richard A. Posner, Treating Financial Consumers as Consenting Adults, WALL ST. J., July 23, 2009. 133 McCauliff, supra note 126, at 408. 134 Id. at 409. 135 INTERNATIONAL MONETARY FUND, A Fair and Sub- stantial Contribution by the Financial Sector: Final Report for the G-20 (2010) at 9, available at: https://www.imf.org/external/np/g20/pdf/062710b.pdf. 136 Id. at 6 and 9. 137 Id. at 9. 138 Id. at 8.

14 tax.”139 The tax would be “a fixed monetary amount that each institution would owe, to be paid over some specified period and subject to rules limiting the impact on net earnings.”140 The foregoing articles do not resolve the issue of manifest injustice to institutions and property owners who had no role in the financial crisis and no control of the causes of their losses, including those incurred when properties were taken by eminent domain at a time of severely depressed property values. B. Full Indemnification According to Supreme Court and other precedents, the intent in takings jurisprudence is to provide “the full monetary equivalent of the property taken.”141 The Supreme Court has stated that its case law demands that just compensation make an owner whole and “restores the owner to ‘the same position monetarily’ that the owner would have occupied but for the taking.”142 The courts have stated that the right to just compensation is grounded in natural law and justice;143 that “[j]ust compensation rests on equitable principles;”144 that the constitutional mandate means full indemnification of the property owner whose property is taken;145 and that the valuation rules are not intended “to give the government a windfall.”146 Some judicial decisions suggest that there is flexibility in the courts’ approach to valuation, because the concept of just compensation is grounded on principles of 139 Id. 140 Id. 141 United States v. Reynolds, 397 U.S. 14, 16, 90 S. Ct. 803, 805, 25 L. Ed. 2d 12, 15 (1970). 142 Godsil and Simunovich, supra note 31, at 976 (quoting United States v. Reynolds, 397 U.S. 14, 16 (1970)). 143 Bailey v. State, 500 S.E.2d 54, 68 (N.C. 1998); Monongahela Navigation Co. v. United States, 148 U.S. 312, 327-328, 13 S. Ct. 622, 37 L. Ed. 463 (1893). 144 Seaboard Air Line Ry. Co. v. United States, 261 U.S. 299, 304, 43 S. Ct. 354, 67 L. Ed. 664 (1923); Olson v. United States, 292 U.S. 246, 54 S. Ct. 704, 78 L. Ed. 1236 (1934). 145 State v. Doyle, 735 P.2d 733, 736 (Alaska 1987); State ex rel. N.W. Elec. Power Co-op, Inc. v Waggoner, 319 S.W.2d 930, 934 (Mo. Ct. App. 1959). 146 San Diego Metro Transit Development Bd. v. RV Communities, 26 Cal. Rprt. 3d 593, 608 (Cal. Ct. App. 2005). natural law and equitable principles and requires full indemnification.147 C. Fairness and Equity In United States v. Commodities Trading Corp., the Supreme Court stated that it had “never attempted to prescribe a rigid rule for determining what is ‘just compensation’” but that “[t]he word ‘just’ in the Fifth Amendment evokes ideas of ‘fairness’ and ‘equity’….”148 In a later decision, the Court again emphasized that the courts must be fair and equitable when determining just compensation: “[t]he constitutional requirement of just compensation derives as much content from the basic equitable principles of fairness…as it does from technical concepts of property law.”149 The takings rules are meant to keep the 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.”150 In United States v. Cors,151 the Supreme Court stated that the Fifth Amendment does not contain any definite standards of fairness by which the measure of “just compensation” is to be determined. …The Court in an endeavor to find working rules that will do substantial justice has adopted practical standards, including that of market value. …But it has refused to make a fetish even of market value, since that may not be the best measure of value in some cases.152 The concepts of justice and fairness were emphasized by the Supreme Court in Armstrong v. United States153 and in Tahoe-Sierra Preservation Council v. Tahoe Regional Planning Agency.154 Likewise, in Palazzolo v. Rhode 147 State v. Doyle, 735 P.2d at 736; State ex rel. N.W. Elec. Power Co-op, Inc. v. Waggoner, 319 S.W.2d 930, 934 (Mo. Ct. App. 1959). 148 339 U.S. 121, 124, 70 S. Ct. 547, 549-550, 94 L. Ed. 707, 711–712 (1950). 149 United States v. Fuller, 409 U.S. 488, 490, 93 S. Ct. 801, 803, 35 L. Ed. 2d 16, 20 (1973) (citation omitted). 150 Armstrong v. United States, 364 U.S. 40, 49, 80 S. Ct. 1563, 4 L. Ed. 2d 1554 (1960). 151 337 U.S. 325, 332, 69 S. Ct. 1086, 93 L. Ed. 1392 (1949) (citations omitted). 152 Cors, 337 U.S. at 332, 69 S. Ct. at 1090, 93 L. Ed. at 1399 (citations omitted). 153 364 U.S. 40, 80 S. Ct. 1563, 4 L. Ed. 2d 1554 (1960) (citations omitted). 154 535 U.S. 302, 122 S. Ct. 1465, 152 L. Ed. 2d 517 (2002).

15 Island,155 Justice O’Connor stated in a concurring opinion that [t]he concepts of “fairness and justice” that underlie the Takings Clause, of course, are less than fully determinate. Accordingly, we have eschewed “any ‘set formula’ for determining when ‘justice and fairness’ require that economic injuries caused by public action be compensated by the government, rather than remain disproportionately concentrated on a few persons.” D. Judicial Discretion With respect to choice of methodology, the courts have wide discretion concerning which method to permit.156 Federal courts are not restricted “‘to any single basis for determining fair market value.’”157 Rather, trial courts are permitted “considerable discretion to select the method of valuation that is most appropriate in the light of the facts of the particular case.”158 State courts also are allowed substantial discretion in regard to the choice of method for valuing property; “‘[t]rial courts must be afforded substantial discretion in choosing the most appropriate method of determining the value of a taken property,’”159 one reason being that each each parcel of real estate is unique. The foregoing precedents hold that in determining just compensation the courts are to be guided by fairness and equity in an attempt to make an owner whole for a taking of an owner’s 155 533 U.S. 606, 633, 121 S. Ct. 2448, 2466, 150 L. Ed. 2d 592, 617 (2001). 156 State v. Bishop, 800 N.E.2d 918, 924 (Ind. 2003) (citation omitted), rehearing denied by State v. Bishop, 2004 Ind. LEXIS 375 (Ind., Apr. 23, 2004). 157 Barrett Refining Corp. v. United States, 242 F.3d 1055, 1061 (Fed. Cir. 2001) (quoting Seravalli v. United States, 845 F.2d 1571, 1575 (Fed. Cir. 1988)). 158 Cane Tennessee, Inc. v. U.S., 71 Fed. Cl. 432, 439 (Fed. Cl. 2005); Seravalli, 845 F.2d at 1575. 159 City of Bristol v. Tilcon Minerals, Inc., 284 Conn. 55, 931 A.2d 237, 250-51 (Conn. 2007) (citation omit- ted); Hous. Auth. of City of W. Haven v. CB Alexander Real Estate, LLC, 107 Conn. App. 167, 944 A.2d 1010, 1015 (Conn. App. Ct. 2008) (stating that “‘because each parcel of real property is in some ways unique, trial courts must be afforded substantial discretion in choos- ing the most appropriate method of determining the value of a taken property’” (citation omitted) and North- east Ct. Economic Alliance, Inc. v. ATA Partnership, 256 Conn. 813, 829, 776 A.2d 1068, 1078 (Conn. 2001) (also stating that “trial courts must be afforded sub- stantial discretion in choosing the most appropriate method of determining the value of a taken property”), on remand at 2003 Conn. Super. LEXIS 368 (Conn. Su- per. Ct., Feb. 14, 2003)). property and to avoid manifest injustice. Nevertheless, it has been argued that the Supreme Court “has never deviated from its conclusion that compensation is just so long as it reflects the fair market value of the property on the date the property is taken.”160 Furthermore, the courts have held that just compensation must be derived for a property whenever market value is ascertainable. For example, although not involving a taking at the time of a depressed real estate market, the Supreme Court in United States v. 50 Acres of Land held that a condemnee was not entitled to compensation measured by the cost of acquiring a substitute facility, even though the condemnee was a public entity that had a duty to replace the condemned facility, when the market value of the condemned property was ascertainable.161 As discussed in Section VI.C, however, some state court decisions have been located that hold that property must be valued based on a normal as opposed to a depressed or speculative market. VI. DETERMINING JUST COMPENSATION DURING DEPRESSED MARKET CONDITIONS A. Introduction Legal scholars have argued that there are other factors that the courts should consider in determining the value of property taken by eminent domain so as to indemnify a property owner more adequately for his or her losses caused by a taking. Arguably these same factors should be considered when property values are generally depressed as happened because of the financial crisis. As for the transportation departments’ experience with takings during the financial crisis, of 23 transportation departments responding to the survey, 10 departments reported that property owners had argued that a valuation of their property should take into consideration the effect of depressed property values because of the crisis. However, only four transportation departments reported that there were any judicial or other decisions that had accepted a landowner’s contention that the effect of a generally depressed real estate market 160 Godsil and Simunovich, supra note 31, at 976 (cit- ing Kirby Forest Indus. v. United States, 467 U.S. 1, 10, 104 S. Ct. 2187, 81 L. Ed. 2d 1 (1984)). 161 United States v. 50 Acres of Land, 469 U.S. 24, 26, 105 S. Ct. 451, 453, 83 L. Ed. 2d 376, 380 (1984).

16 should be considered in determining just compensation.162 The Oregon DOT reported that in one of its circuit court cases, the issue of “normalized value” was argued but that the court excluded the appraisal theory at trial. However, “[s]hort sales were used as comparables in both [the] Plaintiff’s and Defendant’s appraisals.”163 A short sale is one that is less than the balance due on the loan that is approved in advance by the lender.164 In Wisconsin, because state law requires the transportation department to pay fair market value, the only “market effect” that the department is “allowed to ignore is the effect of the public improvement project itself on property values.”165 As discussed below in Sections VI.C and VI.D, only on rare occasions does it appear that the courts have deviated from the requirement that just compensation must be determined as of the date the property is taken and without regard to a temporary or permanent depression affecting real estate values.166 B. Valuation During Temporary and Permanent Depressions in the Market The courts traditionally have not taken temporary depressions of property value into account.167 Nichols on Eminent Domain states that “the courts have drawn a distinction between a depression that is purely temporary in character and one that has attained some degree of permanency. For temporary depressions, the judicial inclination is to disregard the effects of the depression.”168 Nevertheless, there is some 162 Arizona DOT (stating that unpublished decisions are not shared with anyone other than the client); Con- necticut DOT; Oregon DOT; and Wisconsin DOT. 163 Response of Oregon DOT. 164 Robert Hockett and John Vlahoplus, A Federalist Blessing in Disguise: From National Inaction to Local Action on Underwater Mortgages, 7 HARV. L. & POL’Y REV. 253, 255 (2013), hereinafter referred to as “Hockett and Vlahoplus.” 165 Response of Wisconsin DOT. 166 Central States Life Ins. Co. v. Koplar Co., 85 F.2d 181, 184 (8th Cir. 1936) (holding that “[t]he fact that no present market exists for the Park Plaza Hotel property does not prevent a determination of fair market value”). 167 In re Clearview Expressway, 9 N.Y. 439, 214 N.Y.S.2d 438 (1961); 4 Nichols on Eminent Domain § 12B.06[1][a]. 168 4 Nichols on Eminent Domain § 12B.06 [2][a] (citing United States v. Inlots, 26 F. Cas. 490 (C.C.S.D. Ohio 1873)). authority for taking economic conditions into consideration when declining property values acquire the “characteristics of permanency.”169 When a fair market valuation is difficult or impossible to make, rather than determine property value by what a willing buyer would pay, the court may determine value based on what a “fictitious” buyer would be willing to pay under the circumstances or on what one would pay who is not “averse to paying the pre-depression price.”170 The approach has been used in some instances when a market for a property no longer exists sufficiently to permit an estimate of fair- market value.171 In Central States Life Ins. Co. v. Koplar Co.,172 the court stated that “[t]he fact that no present market exists for the … property does not prevent a determination of fair market value. The courts always have recourse to that hypothetical individual, ‘the willing purchaser,’ and can determine from competent evidence what he would pay as the result of fair negotiations.”173 The issue is whether property acquired by eminent domain in a depressed real estate market requires more compensation than just the value of the property based on prices prevalent in the current market.174 The reasons advanced for valuing property differently under conditions during or after a financial crisis that severely affect the overall real estate market are that “the current market is not a fair one;” that the market is “unnaturally depressed, volatile, or erratic;” and that the subject property “at some previous point in time is more representative of fair market value than the current market.”175 Furthermore, when there are much higher rates than usual of foreclosures and sales by large investors and speculators the sales are not voluntary or arm’s length transactions conducted under normal circumstances. In some instances, the courts have departed from a rigid application of the methods of determining just compensation when a property is subject to an “artificial market” without, 169 4 Nichols on Eminent Domain.§ 12B.06 [2][b]. 170 Central States Life Ins. Co. v. Koplar Co., 85 F.2d 181 (8th Cir. 1936), cert. denied, 298 U.S. 687, 56 S. Ct. 955, 80 L. Ed. 1406 (1936); 4 Nichols on Eminent Do- main § 12B.06[1][b]. 171 Central States Life Ins. Co., 85 F.2d at 184. 172 Id. 173 Id. 174 Waldo and Clarke, supra note 83, at 58. 175 Id. at 58.

17 however, abandoning the underlying and accepted rules of valuation.176 On the other hand, some legal commentators have argued that it is both inappropriate and unlawful to consider the value of the property in a depressed real estate market, for the simple fact that the property owner would not have voluntarily sold the property in such a market. In a down real estate market, a property owner who had no compulsion to sell would simply retain the property until real estate prices leveled out or increased, or the owner might borrow against the property if in need of liquid assets (i.e., cash).177 Nevertheless, it has been argued that in a market replete with depressed property values what should be “valued is the fair market value of the property, …not the current market value.”178 C. Valuation Based on a “Normal” Market In a Connecticut case decided in 1933 involving a taking of an owner’s property for a highway, the court rejected any suggestion that the property taken should be valued differently because of the Great Depression. The owner argued that because of the depression the land must be valued as of a date preceding the depression.179 The court held: Aside from the impracticability of applying the rule of valuation suggested, it would be manifestly unsound. The purpose of an appraisal of damages in condemnation is to give to the landowner an equivalent in value for the land taken measured in money. In a time of general depression the money so received will purchase much more than in normal times; if, for instance, the plaintiff desired to purchase other land in place of that taken he could buy a much more desirable property for the same money in a time of general depression than he could when values were at a higher level. The fair market value at the time of the taking is the true rule of valuation; [the fact] that prices are generally depressed at the time affords no sufficient reason for departing from that rule.180 In contrast, however, in a 1938 case, In re Board of Water Supply,181 a case decided by the New York Court of Appeals, the property in question had been taken in November 1936. However, the evidence was that the condemned property as well as property in the area had no fair market value as of 1936.182 The court noted that there are many elements that may be 176 4 Nichols on Eminent Doman § 12B.05. 177 Waldo and Clarke, supra note 83, at 59. 178 Id. at 58. 179 Alishausky v. Macdonald, 117 Conn. 138, 141, 167 A. 96, 97 (1933). 180 Id. at 141-142, 167 A. at 96 (citations omitted). 181 277 N.Y. 452, 14 N.E.2d 789 (1938). 182 Id. at 459, 14 N.E.2d at 792. considered when finding the fair market value of property, including the effect of a “financial depression.”183 In holding that it was proper to consider evidence of the property’s value as of a much earlier date, October 1930, the court rejected the city’s argument that doing so would “destroy time-tested standards of measurement.”184 One aspect of the case that makes it special, however, is that there was a statutory basis for the court’s holding. Section 1083-a of the New York Civil Practice Act stated that “in cases where there is no market at the date when value should be determined, value must be fixed at ‘such nearest earlier date as there shall have been any market value thereof….’”185 The court held that it was proper for the commissioners to consider the effect of the depression affecting real property values. Certainly, during the depression, ordinary conditions have not existed in the real property market. Conditions in that market have been extraordinary and unprecedented. This court laid down the rule in People ex rel. Amalgamated Properties, Inc., v. Sutton (274 N. Y. 309, at p. 311) that “the effect of the financial depression since 1929, which the referee considered, is also a proper element of present market value,” and in Matter of New York Title & Mortgage Co. (277 N. Y. 66) we indicated the proper method of fixing the value of mortgages during the period of the depression of which judicial notice must be taken.186 The court’s opinion suggests that the court did not view its approach as a departure from the customary rule of valuing property as of the date of the taking. Rather, the absence of any market value in 1936 and the existence of market value in 1930 were simply “elements that might be taken into consideration in fixing market value as of a definite date.”187 183 See 277 N.Y. at 457, 14 N.E.2d at 791. The court explained that “[i]ndications of the elements that may be considered by the authority fixing value, whether in condemnation cases or in other cases, do not abrogate or destroy the general rule that value must be fixed as of the time when the property was converted or taken. Rules are merely laid down as to the type or character of evidence admissible properly for the consideration of the value-fixing authority in determining the value of property on a particular date.” Id., 277 N.Y. at 457, 14 N.E.2d at 792. 184 Id. at 455, 14 N.E.2d at 791. 185 Id. at 456-457, 14 N.E.2d at 791. 186 Id. at 457, 14 N.E.2d at 791 (some internal quota- tion marks omitted). 187 Id.

18 Indeed, the court’s rules for determining valuations at a time of extraordinary economic circumstances when “there is no real market as of a particular date” required a finding of value that excluded conditions that could produce a value that is too low or too high.188 The Court of Appeals stated that “‘[f]air market value’ means neither panic value, auction value, speculative value, nor a value fixed by depressed or inflated prices. A fair market value is not established by sales where prices offered are so small that only sellers forced to sell will accept them.”189 Furthermore, the court held that [t]he mere absence of competitive buyers does not establish lack of a real market. But a market in fact may be established only where there are willing buyers and sellers in substantial numbers. When there is no real market as of a particular date, some indication of the intrinsic economic and commercial value of the property to the owner and of his loss from the appropriation as of that date may be shown by evidence of the “fair market value” of the property, if in substantially the same condition, at the nearest earlier date when there was a fair market.190 Finally, the court stated that “‘[f]air market value’ of property actually taken as of the date of appropriation resides in an estimate and a determination of what is the fair, economic, just and equitable value under normal conditions…. All elements of value that inhere in the property should be considered….”191 Thus, at a time of extreme or extraordinary circumstances, all elements of value are to be considered, including evidence of value at an earlier time, in an effort to find the “intrinsic economic and commercial value” of a property as of the time of a taking as though conditions were “normal.”192 Although the Court of Appeals’ opinion implies that there is some flexibility in determining fair market value when there are extraordinary circumstances, the case may be distinguishable, first, as noted, because of the New York statute that sanctioned the court’s approach. Second, the Board of Water Supply case may be distinguishable from cases involving properties affected by the recent financial crisis, because in Board of Water Supply the issue was not that the property was worth significantly or substantially 188 Id., at 459, 14 N.E.2d at 792. 189 277 N.Y. at 458-459, 14 N.E.2d at 792 (citations omitted). 190 Id. at 459. 191 Id. 192 Id. less than it had been on an earlier date but that there was no market value whatever that could be used to value the property at the time of the taking. Similar to what the New York Court of Appeals did in Board of Water Supply, an earlier South Carolina case also allowed for some adjustment in finding a property’s value, namely to permit a finding of fair market value at the time of the taking based on a valuation that would have been made in a “normal” market. In Howell v. State Highway Department,193 the trial court had given the following instruction: The actual value of the land means the fair market value of the land, upon a fair market, upon fair advertisement, and a fair sale at normal times. It does not mean any value in times of great inflation in currency nor does it mean the value in times of great depression. The actual value of the land means a fair market value, a fair market in normal times.194 The Supreme Court of South Carolina upheld the instruction. It would be manifestly unfair to the owner if the taking of the property be during a period of deep depression to fix the value as of that exact date. On the other hand, if the taking be during a period of inflated prices, it would be just as unfair to the condemnor to fix the value as of that exact period. We think the Circuit Judge exercised a wise judgment when he defined the market value as that which prevailed in “normal times.” We think he meant by that phrase not any special date, but used the words “normal times” as synonymous with “normal conditions.” No authority has been cited to us to the effect that the value must be fixed as of the very day of entry or taking. The common sense view seems to be that, if it be of the period immediately about the time of the taking, it would be a sufficient compliance with the rule. This excludes speculation as to future value, and excludes a valuation fixed upon former prices.195 In the post-Depression years, the courts in a few other states followed New York’s and South Carolina’s approach. In 1947 in Kornegay v. City of Richmond,196 the Supreme Court of Virginia stated that “[n]either an inflated nor a depressed market is the proper criterion of fair market value. The one is unfair to the condemnor and the other is unfair to the property owner.”197 The court held that it was not error and not inconsistent 193 167 S. C. 217, 166 S.E. 129 (1932). 194 Id. at 221, 166 S.E. at 130 (emphasis supplied) (internal quotation marks omitted). 195 Id. at 223-224, 166 S.E. at 131 (emphasis supplied). 196 185 Va. 1013, 41 S.E.2d 45 (1947). 197 Id. at 1025, 41 S.E.2d at 51.

19 with the requirement that property must be valued as of the date of its taking for a commissioner to decide not to consider speculative value or a market that was not “normal” and not error for a commissioner to define a normal market as one that is neither “depressed” nor “inflationary.”198 The commissioner had considered the market at the time of the taking to be inflationary or speculative because of “federal activities in the Richmond area….”199 The Virginia court quoted an Oregon case, Public Market Co. v. Portland,200 for the proposition that “market value means value under ordinary conditions—not conditions either of depression or inflation.”201 In the foregoing cases involving valuations during a period of a depressed real estate market, one court held that there could be no variance from the rule that property must be valued on the date of the taking of the property (Alishausky v. Macdonald). Several courts held that evidence of value prior to a taking constituted substantial compliance with the rule that condemned property must be valued as of the date of the taking and/or that the property could be valued on the basis of what would be a normal market (In re Board of Water Supply; Howell v. State Highway Department; and Kornegay v. City of Richmond). Although the courts stated that a normal market is one that is neither depressed nor inflated, the courts did not explain how to construct a normal market for the purpose of valuing a property at the time of a depression in the real estate market. Only in Public Market Co., supra, in which the court agreed “that a piece of property may have a market value even though it is not immediately salable,” did the court indicate that “the future prospects of the property” could be considered in finding the fair market value of a property.202 No transportation departments reported being aware of any judicial decisions rendered during the financial crisis and its aftermath in which the courts allowed any evidence of value other than as of the date of a taking. Likewise, research for the Report did not disclose any other cases. 198 Id. 199 Id. 200 179 Ore. 367, 170 P.2d 586, 597 (1946). 201 Kornegay, 185 Va. at 1026, 41 S.E.2d at 51 (inter- nal quotation marks omitted). 202 Public Market Co., 179 Ore. at 393, 170 P.2d at 597. D. Relevancy of the Price Paid by an Owner for the Property Another issue is whether to allow valuations to consider the higher price (presumably) paid by an owner of real property that is taken later when prices are depressed by overall economic conditions. Nichols on Eminent Domain states that “[w]hen a parcel of land is taken by eminent domain, the price which the owner paid for it when he acquired it is one of the most important pieces of evidence in determining its present value.”203 However, the price paid for real property is relevant only when a purchase was both recent and voluntary and when there has been “no change in conditions or marked fluctuations in value” since the purchase.204 Under the Uniform Eminent Domain Code (enacted only in Alabama),205 Section 1107 provides that the purchase price of property may form the basis of an opinion of value even if it may not serve as independent evidence of value.206 However, the comment to Section 1107 states: The weight to be given to the data, of course, will depend upon whether the particular transaction was fully voluntary, not too remote in time, and was made at a price and under circumstances which make it a useful criterion of market value on the valuation date. For example, if the prior sales price reflected project-caused enhancement or blight, or if physical and economic conditions substantially changed since the date of the sale, the agreed price might not be reasonably indicative of value for purposes of the condemnation action.207 Only one transportation department respond- ing to the survey stated that the courts in its jurisdiction admit evidence of the price paid by an owner for a property taken in eminent domain. Arkansas reported that during the real estate crisis, its courts had admitted evidence of the price that an owner had paid for property that was later taken by the agency but noted also that the “Arkansas courts are liberal in allowing landowner testimony, and depending on the date 203 5 Nichols on Eminent Domain § 21.01[2] (provided certain conditions are met). 204 Id. § 21.02. 205 See United States–Uniform Laws and Model Acts, Uniform Eminent Domain Code, available at: http://www.lawsource.com/also/usa.cgi?usm#E. 206 5 Nichols on Eminent Domain § 21.02[c]. 207 Uniform Eminent Domain Code, § 1107, Cmt. (emphasis supplied), available at http://www.uniform laws.org/shared/docs/Eminent%20Domain/MEDC74. pdf.

20 of the purchase, courts will allow [evidence of] purchase price paid.”208 E. Admissibility of a Property Owner’s Testimony as to Value According to several sources, in many if not most states, a landowner may testify as to the fair market value of his or her property taken in eminent domain even though the owner “has no formal training or experience in land valuation other than ownership of the property in question.”209 As an appellate court in Texas explains, [a] property owner can be shown to be qualified to testify to the value of his property even if he is not an expert and would not be qualified to testify to the value of other property. … “[W]hen an entity’s agent testifies to the market value of the organization’s property, the legal effect is that the actual owner of the property is testifying.” … “[T]he Property Owner Rule is limited to those witnesses who are officers of the entity in managerial positions with duties related to the property, or employees of the entity with substantially equivalent positions and duties.” … The witness must be personally familiar with the property and its fair market value, but the Property Owner Rule creates a presumption as to both.210 208 Response of Arkansas State Highway and Trans- portation Department. 209 Landowners may testify regarding the value of their property for example in Kansas (John K. Rosenberg, Regional Focus: Fear of Electromagnetic Fields as an Element of Damages in Condemnation Cases in Kansas, 5 KAN. J.L. & PUB. POL’Y 115 (1995)); Maryland (Brannon v. State Roads Commission, 305 Md. 793, 506 A.2d 634 (1986) and Judith C. Ensor, Awilda R. Marquez and Kathryn A. Turner, Survey: Development in Maryland Law, 1985-86: Ix. Property, 46 MD. L. REV. 801, 806-807 (1987) (footnotes omitted)); Nebraska (Nelson v. Metro. Utilities Dist., 249 Neb. 956, 959, 547 N.W.2d 133, 136 (1996)); South Carolina (What’s New?: Summaries of Recent Developments in the Law, 20 S. CAROLINA LAWYER 43, 46 (2008)); and Texas (Clarissa Kay Bauer, Eminent Domain Basics for General Practitioners, 59 TEX. B. J. 742, 746 (1996) (stating that in Texas landowners may testify as to the value of their properties “without detailing the basis for their opinions”) (citing State v. Berger, 430 S.W.2d 557, 559 (Tex. Civ. App. 1968, writ ref’d n.r.e.)). 210 Mansions in the Forest v. Montgomery County, 2012 Tex. App. LEXIS 7576, at 4 (Tex. Ct. App. 2012) (citing Reid Rd. Mun. Util. Dist. No. 2 v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846, 852-53 (Tex. 2011)). See also, John Allen Chalk Sr. and Sadie Harrison- Fincher, Eminent Domain Power Granted to Private Pipeline Companies Meets with Greater Resistance from Property Owners in Urban rather than Rural Areas, 16 However, in the Mansions in the Forest case, supra, the property owner failed to “identify the market value of the property before the taking, the market value of the remainder after the taking, or explain the facts supporting his opinion.”211 F. Other Issues Affecting Valuation 1. Sales Not at Arm’s Length Several issues arose because of the financial crisis regarding the use of comparable sales, such as the effect of foreclosures and auctions and other sales (e.g., short sales) of property for amounts that were substantially less than what an owner had paid for the property prior to the taking. One issue is whether evidence of sales that are not voluntary or otherwise at arm’s length may be used as comparable sales in valuing property. As for the transportation departments’ experience or practice with such sales, four transportation departments reported that property owners had argued that sales were not comparable sales because they were not sales conducted voluntarily or at arm’s length.212 Arizona stated that “opposing appraisers argue [that Real Estate Owned or REO] sales don’t get appropriate market exposure or are a result of financial pressure so they sell below market.”213 Florida’s response was that when performing a “valuation of any property regardless of whether there is a pending foreclosure, short sale, etc., comparables used are valid voluntary arm’s length transactions.”214 In Idaho “[i]n these situations, additional market comparables were researched. Administrative settlements were used more readily to fairly compensate owners.”215 Oregon stated that the owners’ argument is that nonvoluntary (short sales or foreclosures) are a “‘fire sale’ process” that does not reflect the TEX. WESLEYAN L. REV. 17, 22 (2009) (stating that a landowner is “competent” to testify as to market value). 211 Mansions in the Forest, 2012 Tex. App. LEXIS 7576, at 6 (Tex. Ct. App. 2012). 212 Three departments did not respond to the ques- tion. The Arkansas State Highway and Transportation Department advised that it had not encountered any argument that sales were not comparable sales because they were not voluntary or conducted at arm’s length. 213 Response of Arizona DOT. 214 Response of Florida DOT. 215 Response of Idaho Transportation Department.

21 market.216 Utah also stated that its policy was not to include sales that were not conducted at arm’s length.217 Sales at auctions may not necessarily be evidence of market value. In Tremblay v. Highway Commissioner,218 Virginia’s highest court ruled in regard to evidence of market value that [i]n many sales at auction, there is present an element of legal compulsion which negates the idea of a free and voluntary transaction and which rebuts the probability that fair market value has been paid and received. This necessitates a rule, which we now adopt, excluding evidence of sales at auction under foreclosure proceedings or similar forced circumstances.219 However, the court did not completely preclude evidence of prices paid for property at auctions: Doubtless, however, there are other sales at auction where the element of compulsion is lacking. In a given case, it might be shown that the circumstances under which the property was sold were free and open and produced a sale price reflecting market value. If these elements of voluntariness and fairness can be shown to the satisfaction of the trial court by the party offering the sale, upon whom the burden rests, in a hearing conducted out of the presence of the commissioners, then evidence of such a sale should be admitted.220 Thus, the Supreme Court of Virginia held in Tremblay that sales at auctions may be used when “the element of compulsion is lacking”221 and that a sale to liquidate an estate would not necessarily be excluded as evidence of value.222 In Appalachian Power Co. v. Anderson,223 the same court in remanding a case held that the court was unable to determine from the record whether or not a sale at auction was a comparable sale because Appalachian had been precluded from “developing the facts. The mere fact that it was an auction sale does not necessarily exclude it under the forced circumstances rule provided the voluntariness and fairness of the sale is shown.”224 2. Write-Downs of Mortgages The issue has arisen whether the holder of a mortgage secured by real estate may be required to adjust and reduce the balance of a mortgage to reduce the balance of an owner’s indebtedness 216 Response of Oregon DOT. 217 Response of Utah DOT. 218 212 Va. 166, 183 S.E.2d 141 (1971). 219 Id. at 168, 183 S.E.2d at 144 (emphasis added). 220 Id. 221 Id. 222 Id. 223 212 Va. 705, 187 S.E.2d 148 (1972). 224 Id. at 713, 187 S.E.2d at 155. because of the depressed value of the property. No cases were located involving a condemnation of property during the recent financial crisis in which a mortgagee was required to reduce the balance of the indebtedness secured by the property. The courts generally have refused to sustain laws requiring a mortgagee to reduce the balance of its loan because of the secured property’s depressed fair market value.225 One writer notes that Wright v. Union Central Life Ins. Co.226 “established that the Constitution guarantees a secured creditor the value of the collateral in which he owns an interest” and that “this guarantee to the creditor of the value of the property means that the payment is to be made by the debtor in cash.”227 A case that appears to be a possible exception to the rule that a creditor is entitled to the full amount of an indebtedness secured by property is Central States Life Ins. Co. v. Koplar Co.,228 decided in 1936. The case was an appeal from an order, inter alia, denying permission to the appellant to foreclose on the trust deed securing the first mortgage bonds on the Park Plaza Hotel in St. Louis, Missouri. The properties were unsalable; the bonds had been “long in default.”229 As part of a reorganization the holders of the mortgage bonds were to receive new bonds equal to their present holdings and with the same security.230 The bond holders argued that because the security was essentially worthless the reorganization if approved would deny them the ability to sue for a deficiency judgment after a foreclosure and a sale of the property. The court rejected the bond holders’ arguments even though “there was no present market for the property and…the income from it during the depression years would not yield a reasonable 225 Nobelman v. America Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) (bank- ruptcy law provision prohibited modifications and could not be circumvented), superseded by statute as stated in In re Young, 199 B.R. 643 (Bankr. E.D. Tenn. 1996). See Peter L. Cockrell, Subprime Solutions to the Housing Crisis: Constitutional Problems with the Helping Fami- lies Save their Homes Act of 2009, 17 GEO. MASON L. REV. 1149, 1181–82 (2010), hereinafter referred to as “Cockrell.” 226 311 U.S. 273, 61 S. Ct. 196, 85 L. Ed. 184 (1940). 227 Cockrell, supra note 225, at 1179 (footnotes omitted). 228 85 F.2d 181 (8th Cir. 1936). 229 Id. at 183. 230 Id.

22 rate of return….”231 The court agreed that “[c]ost, reproduction cost, and use value constitute evidence which may be considered in determining fair market value.”232 However, the court held that “[t]he fact that no present market exists for the Park Plaza Hotel property does not prevent a determination of fair market value. The courts always have recourse to that hypothetical individual, ‘the willing purchaser,’ and can determine from competent evidence what he would pay as the result of fair negotiations.”233 Although the property may have had no present value, the court approved the reorganization plan because the plan “merely proposes the capitalization of a hope for the future for the possible benefit of unsecured creditors and stockholders of the debtor.”234 3. Prices Affected by Government Intervention A related issue is whether at the time of a depressed real estate market some sales of comparable property may include sales that were affected by government intervention, such as when implementing programs to stimulate sales and reduce the inventory of foreclosed and REO properties.235 Although not an eminent domain case, there is Supreme Court precedent holding that an owner is not entitled to recover what the owner might have been paid for property when prices were higher, such as when they are no longer subject to government imposed war-time price controls.236 In United States v. Commodities Trading Corporation,237 Commodities Trading sued to recover just compensation for a large quantity of black pepper requisitioned by the 231 Id. 232 Id. (citing Hard & Rand v. Biston Coffee Co., 41 F.2d 625, 627 (8th Cir. 1930); Union Electric Light & Power Co. v. Snyder Estate Co., 65 F.2d 297, 305 (8th Cir. 1933)). 233 Central States Life Ins. Co., 85 F.2d at 184. 234 Id. 235 See, e.g., U.S. Housing and Urban Development Web site offering homes at $1, available at: http://portal.hud.gov/hudportal/HUD?src=/program_offi ces/housing/sfh/reo/goodn/dhmabout; Fannie Mae web- site advertising thousands of foreclosed homes, avail- able at: http://www.homepath.com/; and Federal Hous- ing Finance Agency’s Government-sponsored REO-to- Rental Program, available at http://realestate.aol.com/ blog/2012/06/29/reo-to-rental-program-takes-next-step- fhfa/. 236 United States v. Commodities Trading Corp., 339 U.S. 121, 70 S. Ct. 547, 94 L. Ed. 707 (1950). 237 Id. government in 1944. During the war, black pepper was subject to a ceiling price. The company argued that “Congress did not and could not constitutionally fix the ceiling price as a measure for determining what is just compensation under the Constitution” and that the “application of the ceiling price in this instance would be particularly unjust.”238 The Court agreed that “[s]ince the market value standard was developed in the context of a market largely free from government controls, prices rigidly fixed by law raise questions concerning whether a ‘market value’ so fixed can be a measure of ‘just compensation.’”239 However, the Court held that the “ceiling prices of commodities held for sale represented not only market value but in fact the only value that could be realized by most owners. Under these circumstances they cannot properly be ignored in deciding what is just compensation.”240 Even though sellers have the right to buy and hold property until they receive a price higher than they paid for the property, the Court stated that such a value “has never been treated as a separate and essential factor.”241 Regardless of any loss that the owner had suffered because of not being able to hold the property until a higher price could be achieved, the Court stated that the government is not “required to make good any losses caused by the fact that the owner purchased goods at a price higher than market value on the date of taking.”242 As for the impact of government intervention during the financial crisis on the transportation departments’ ability to appraise the fair market value of property, four transportation departments said that their ability to value real property had not been affected;243 however, five 238 Id. at 122, 70 S. Ct. at 549, 94 L. Ed. at 711. 239 Id. at 123, 70 S. Ct. at 549, 94 L. Ed. at 712 (cita- tion omitted). 240 Id. at 124, 70 S. Ct. at 550, 94 L. Ed. at 712 (foot- notes omitted) (citation omitted). 241 Id. at 126, 70 S. Ct. at 551, 94 L. Ed. at 713. 242 Id. at 130, 70 at 553, 94 L. Ed. at 715. 243 Responses of California DOT; Connecticut DOT (“short sales are not considered comparable properties as part of the valuation process); Florida DOT; and Wisconsin DOT. The Wisconsin DOT reported that “[t]o date the appraisers are able to find a sufficient number of comparable sales that are not foreclosure, short sales or bank sell offs.” The Florida DOT’s response also noted that”[f]ederal regulations and [its statutes] man- date a determination of value without consideration of these circumstances.”

23 departments reported that their ability to value properties had been affected by such interventions or actions. For example, Arizona stated that its ability had been affected “to the extent government regulations force banks to sell REO property without market exposure.”244 4. Payment of Compensation Exceeding Fair Market Value as an Illegal Gift of Public Funds There is precedent for the position that the government’s payment of more than fair market value as just compensation for a condemned property would be an illegal gift of public funds. In Colaluca v. Ives,245 the attorney general decided that the commissioner should have proceeded to enforce an option rather than institute condemnation proceedings. Because of the decision, there was an application to withdraw a condemnation certificate. The plaintiff argued that the taking was complete at the moment of the filing of the certificate and that she was entitled to the full amount pursuant to the condemnation procedure. In ruling against the plaintiff, the court observed that “even if the property was ‘taken’ by the commissioner, her damages would be, and could be, only $35,000, since that was the full value of her interest in the property at the time of the claimed taking.…Any greater sum would be, not just compensation, but an unwarranted gift of public funds to a private individual.”246 G. Exclusion of Project Influence The general rule appears to be that the valuation of an owner’s property must exclude the value attributable to any increase in value from a proposed project, i.e., the “project influence rule” 244 Response of Arizona DOT. As for other responses, the Arkansas State Highway and Transportation De- partment reported stated that “[t]he number of ‘arms length transactions’ decreased during this time period, and therefore, were not available for use in the compa- rable sales method of appraisal.” The Idaho Transporta- tion Department stated that “[f]requently, the only market data available for valuation purposes has been short sales and foreclosure properties.” The Oregon DOT reported also that “[i]t is more challenging to find suitable comparable properties.” However, the Utah DOT stated that it was the department’s “policy…not to include foreclosures in any of our relocation studies to find…replacement housing” for displacees and that for this reason the number of foreclosures made its policy more expensive and caused delays. 245 150 Conn. 521, 191 A.2d 340 (1963). 246 Id. at 531, 191 A.2d at 344 (emphasis supplied). or “scope of the project rule.” If the rule were to be altered for property taken at a time of generally depressed property values, a property owner could benefit from an increase in the value of property resulting from a prospective project. As discussed below, however, in some if not most states a statutory provision or amendment may be necessary to alter or reverse the rule that typically excludes project influence that would result in a higher valuation of property taken by eminent domain. The project influence rule thus provides that “[a]ny 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 is acquired…will be disregarded in determining the compensation for the property.”247 The rule is an exception to the usual requirement that the value of a property must be measured as of the date of the taking.248 In United States v. Miller,249 the Supreme Court held that if the government’s taking of a property increased its value, only subsequent takings of adjacent lands would benefit from any increase in market value because of the taking of the first property. Later, the Court elaborated: It is not fair that the government be required to pay the enhanced price which its demand alone has created. That enhancement reflects elements of the value that was created by the urgency of its need for the article. It does not reflect what “a willing buyer would pay in cash to a willing seller” …in a fair market.250 The Court reaffirmed the rule in United States v. Reynolds when it stated: The [Miller] Court early recognized that the “market value” of property condemned can be affected, adversely or favorably, by the imminence of the very public project that makes the condemnation necessary. And it was perceived that to permit compensation to be either reduced or increased because of an alteration in market value attributable to the project itself would not lead to the ‘just compensation’ that the Constitution requires.251 247 42 U.S.C. 4651(3) (2013). 248 3 Nichols on Eminent Domain, § 8A.01[3][a]. United States v. 480 Acres of Land, 557 F.3d 1297, 1311 (11th Cir. 2009) (stating that “the ‘scope of the project’ rule is a narrow exception from the general rule that regulations are to be considered in determining a pro- ject’s ‘highest and best use’”). 249 United States v. Miller, 317 U.S. 369, 376-77, 63 S. Ct. 276, 281, 87 L. Ed. 336 (1943). 250 United States v. Cors, 337 U.S. 325, 333-34, 69 S. Ct. 1086, 1091, 93 L. Ed. 1400 (1949). 251 United States v. Reynolds, 397 U.S. 14, 15-16, 90 S. Ct. 803, 805, 25 L. Ed. 2d 12 (1970).

24 There are four occasions when the project influence rule may be asserted. The first occasion is when “the improvement’s exact location is known from the outset, the property that will serve as the site of the improvement will not be subject to any rise or fall in values.”252 The second occasion is when the location of a project is unknown. When the announcement of a project depresses the market value, the project influence is to be disregarded.253 However, if a project enhances the value of the land and the location of the project is unknown, the courts are more reluctant not to allow a property owner to benefit from the enhancement once a location is selected.254 The third occasion is when there is a supplemental taking of land. If a definite area has already been condemned, the market value of the neighboring property is naturally affected thereby. If an enhancement in value results, such property is entitled to the benefit thereof. It follows that if the original project is subsequently enlarged so as to embrace additional property, a parcel involved in the supplemental taking is entitled to the benefit of any enhancement in value which resulted from the original taking. If, however, the public project initially included the taking of certain tracts, but only one of them is taken in the first instance, the owner of the other tracts should not be allowed an increased value for property that is ultimately taken. On the other hand, the owner whose property is not taken pursuant to the first step of a single plan should not be deprived of compensation for a loss in value and severance damages brought about by the second step of the taking.255 The fourth occasion is when the project influence rule is authorized or precluded by constitutional or statutory provisions.256 For 252 4 Nichols on Eminent Domain § 12B.17(2). 253 Id. § 12B.17(3). 254 Id.; see, e.g., United States v. 2353.28 Acres of Land, 414 F.2d 965 (5th Cir. 1969) (stating that the property owner’s land adjacent to a rocket launching site was never intended to be taken in the original con- demnation proceedings and once new condemnation proceedings were instituted the property owners should be able to benefit from the enhanced value of their property). 255 4 Nichols on Eminent Domain § 12B.17(4). 256 Id. § 12B.17(5). Compare FLA. STAT. § 73.071(5) (2013) (“Any increase or decrease in the value of any property to be acquired which occurs after the scope of the project for which the property is being acquired is known in the market, and which is solely a result of the knowledge of the project location, shall not be consid- ered in arriving at the value of the property acquired.”) and WIS. STAT. § 32.09(5)(b) (2013) (“Any increase or decrease in the fair market value of real property prior to the date of evaluation caused by the public improve- example, an Alabama statute provides that when land is condemned for a highway right-of-way [a]ny decrease or increase in the fair market value of real property prior to the date of valuation caused by the public improvement for which the property is acquired, or by the likelihood that the property would be acquired for improvement, other than that due to physical deterioration within the reasonable control of the owner, will be disregarded in determining the compensation for the property.257 A California statute provides in part that [t]he fair market value of the property taken shall not include any increase or decrease in the value of the property that is attributable to any of the following: (a) The project for which the property is taken. (b) The eminent domain proceeding in which the property is taken. (c) Any preliminary actions of the plaintiff relating to the taking of the property.258 In City of Boulder v. Fowler Irrevocable Trust 1992-1,259 the city of Boulder instituted condemnation proceedings for approximately three acres of land owned by the Fowler Irrevocable Trust 1992-1 (Trust). The trial court held that under the project influence rule, the reduction in value of the property caused by the project could not be taken into account when determining the value of the 3.01 acres of land.260 ment for which such property is acquired, or by the like- lihood that the property would be acquired for such im- provement, other than that due to physical deteriora- tion within the reasonable control of the owner, may not be taken into account in determining the just compen- sation for the property.”) with S.D. CODIFIED LAWS § 21- 35-17 (2013) (“In all cases of taking or damaging private property by a municipal corporation, the jury shall take into consideration the benefits which may accrue to the owner thereof as the result of the proposed improve- ment.”) and MD. CODE ANN. Real Prop. § 12-105(b) (Lex- isNexis 2013) (“[F]air market value includes any amount by which the price reflects a diminution in value occurring between the effective date of legislative authority for the acquisition of the property and the date of actual taking if the trier of facts finds that the diminution in value was proximately caused by the pub- lic project for which the property condemned is needed, or by announcements or acts of the plaintiff or its offi- cials concerning the public project, and was beyond the reasonable control of the property owner.”). 257 ALA. CODE § 18-4-14 (3). See also ALA. CODE § 18- 1A-171. 258 CAL. CIV. PROC. CODE § 1263.330. 259 City of Boulder v. Fowler Irrevocable Trust 1992-1, 53 P.3d 725, 726 (Colo. App. 2002). 260 Id. at 727.

25 The Colorado Court of Appeals affirmed the trial court’s application of the rule.261 The Fowler court explained that the rule promotes fairness in valuing property by preventing a windfall to the property owner based on speculative potential enhancements in value while, at the same time, protecting the property owner from the injustice of assessing against it a diminution in the property’s value caused by the same project for which it is being taken.262 The Fowler court observed that regulatory actions that affect the value of a property as a result of the project, “such as rezoning or the imposition of use limitations” may not be taken into account when determining the value of the property.263 In Missouri Highways and Transportation Commission v. 1811 North Broadway, LLC,264 the court held that “[i]n a partial taking…an owner is entitled to just compensation not only for the value of the land taken, but also for any damage to the remainder.”265 Fair market value can be determined using the comparable sales method, which looks at “voluntary sales of other similar property made in the same general vicinity and not too remote in time to the date of the taking.”266 The “comparable sales method of determining value…may be subject to the project influence doctrine;”267 that is, “Missouri courts may exclude evidence of sales that are influenced by the project for which a property is being acquired.”268 However, in Missouri Highways and Transportation Commission v. 1811 North Broadway, LLC, supra, “the Missouri Supreme Court noted that there was a possibility when a trial court may in its discretion admit evidence of comparable sales that have alleged project- influence, leaving it to the jury to determine the extent of influence, if any.”269 When “a trial court 261 Id. at 726. 262 Id. at 728. 263 Id. 264 Missouri Highways and Transportation Commis- sion v. 1811 North Broadway, LLC, 405 S.W.3d 539, (Mo. Ct. App. 2013). 265 Id. at 545 (citing City of Maryland Heights v. Heitz, 358 S.W.3d 98, 105 (Mo. Ct. App. 2011)). 266 Id. 267 Id. 268 St. Louis County v. River Bend Estates Home- owners’ Ass’n, 408 S.W.3d 116, 130 (Mo. 2013) (en banc). 269 Missouri Highways and Transportation Commis- sion, 405 S.W.3d at 546 (stating that “[i]n determining whether to admit comparable sales evidence, the factors a trial court considers relating to relevance, or compa- decides to admit evidence that may contain project influence, the effect of the project influence should be explained and the opinion of value adjusted if possible to account for the influence,” and the jury instructions should explain that the project influence should not be taken into account when calculating damages.270 Finally, it may be noted that the project influence rule is applicable in all federal takings of property271 and is applicable in a majority of the states.272 Thus, in many states except when the project influence rule was adopted by judicial decision, statutory amendments likely would be needed to authorize the courts to allow property value to include any increase in value attributable to the intended project, either in all condemnations or when the court determines that special circumstances exist, such as when there is a generally depressed real estate market. It does not appear, however, that the project influence rule was relaxed or amended in response to the financial crisis. H. Counterarguments to Valuing Property Any Differently Because of the Existence of a Depressed Real Estate Market There are various counterarguments to any government policy or judicial approach that authorizes or requires the payment of more than fair market value as just compensation for property taken in eminent domain even if property values are depressed because of a financial crisis. First, a condemnor may argue that real estate prices in the period preceding the financial crisis were artificially and unfairly inflated; thus, “the current market value of a property is actually its fair market value.”273 Second, the market at a time of depressed values is not a reason for altering or supplementing rules of valuation in condemnation cases because what has occurred is simply a market correction, albeit a difficult one, after a period of unusually high inflation and speculation. Third, even if property owners receive less than what they have paid they are able to buy a comparably priced home that is rability, include the ‘time of transaction, size, shape and character of the comparable land, and whether there has been any enhancement or depression in value’”). Id. at 546-47. 270 Id. at 546. 271 42 U.S.C. § 4651(3) (2013). 272 3 Nichols on Eminent Domain § 8A.01(3). 273 Waldo and Clarke, supra note 83, at 58.

26 also selling at a depressed price.274 As a Connecticut court stated when refusing to permit a valuation as of any date other than as of the date of taking, if a property owner desires “to purchase other land in place of that taken he could buy a much more desirable property for the same money in a time of general depression than he could when values were at a higher level.”275 There are other counterarguments or issues that condemnors may raise; for example: whether public funds may be used to place a property owner in a better economic situation by providing resources to purchase a comparable replacement property less the debt owed on a property that is worth less than the balance of the mortgage; and whether adjusting the principles of just compensation amounts to rewarding property owners, banks, and speculators for engaging in what was essentially irresponsible behavior, such as the issuance of loans exceeding the value of a property or the use of no-document or sub-prime loans. VII. THE USE OF “VALUATION MECHANISMS” AS ALTERNATIVE OR SUPPLEMENTARY ADJUSTMENTS A. Introduction Because there may be some situations in which the standard of fair market value is “inappropriate,”276 the question is whether when an owner is not being made whole under the circumstances, there are means by which valuation may be increased “without revising existing law.”277 One source argues that the fair market value approach “hides a number of substantive decisions” that may be corrected or supplemented by the use of various “valuation mechanisms [that] are more or less well suited to advancing the goals of particular private property regimes.”278 Commentators argue that there are situations when a court could depart from one method of valuation in favor of another method, because “property rights consist of a bundle of rights or 274 Id. at 60. 275 Alishausky v. Macdonald, 117 Conn. 138 at 141, 167 A. at 97. 276 United States v. 564.54 Acres of Land, 441 U.S. 506, 512, 99 S. Ct. 1854, 1858, 60 L. Ed. 2d 435, 442 (1979). 277 Serkin, supra note 62, at 725. 278 Id. at 678. entitlements to occupy and use property, to exclude others from it, and to transfer the property to others.”279 Some writers argue that “current valuation methods are flexible enough to advance the goals of a variety of … theories [of just compensation] and are therefore not inadequate at all;”280 that the intent of the drafters of the Fifth Amendment was “to compensate for more than [the] fair market value of property taken;”281 and that some losses typically excluded could be allowed to increase the level of compensation closer to fair market value to prevent property owners from being “net losers.”282 Finally, commentators argue that a condemnee is entitled to a share of the added value resulting from the project for which the property owner’s property was taken. No cases were located for the Report, however, that awarded compensation for an owner’s purported share in the enhanced value of the property after the taking283 or based on any of the approaches suggested by scholars regarding alternative or supplemental compensation so as to increase a condemnee’s compensation to an amount that more closely approximates all of an owner’s property rights or values.284 B. Value of the Condemnor’s Gain from the Taking The cases appear to have rejected already a suggested valuation mechanism that would value property based on the value of the benefit acquired or gained by the government as a result of the taking,285 i.e., “that a condemnee is entitled 279 Godsil and Simunovich, supra note 31, at 965. 280 Serkin, supra note 62, at 681. 281 Fegan, supra note 49, at 272 (citing Gideon Kanner, Condemnation Blight: Just How Just is Just Compensation?, 48 NOTRE DAME L. REV. 765, 772-73 (1973)). 282 Fegan, supra note 49, at 287. 283 Id. at 288. See discussion of Project Influence Rule in Section VI.F. 284 For a discussion of such rights and values, see Godsil and Simunovich, supra note 31, at 977. 285 See Kimball Laundry Co. v. United States, 338 U.S. 1, 5 (1949) (“Because gain to the taker, on the other hand, may be wholly unrelated to the deprivation imposed upon the owner, it must also be rejected as a measure of public obligation to requite for that depriva- tion.”) (citations omitted); United States v. John J. Felin & Co., 334 U.S. 624, 629 (1948) (stating that “[i]n en- forcing [the Fifth Amendment] the question is ‘what has the owner lost, not what has the taker gained”‘) (quot- ing Boston Chamber of Commerce v. City of

27 to an award equal to the opportunity cost of his contribution to the condemnor’s project….”286 Although the value of the gain to the condemnor and the loss to a property may be equivalent in some or even most cases, particularly at the time of a severely depressed real estate market the difference in value between the two measures may be substantial.287 A property owner’s compensation presumably would be higher if a decision on the value of the property and the compensation due to a property owner is based on the value of the government’s gain because of the use for which the property was taken, for example, for commercial development.288 It appears that most courts have not allowed evidence of the value of the gain to the government so as to permit a property owner to recoup losses relating to a particular use of the property that are reflected in a strict interpretation of fair market value.289 Indeed, as discussed in Section VI.F, depending on the circumstances, the law also disfavors allowing property that is taken to include value attributable to the project’s influence on the property. C. Value of the Harm to the Property Owner At the time of a taking, property owners may suffer a variety of losses. Unless authorized by statute, however, homeowners cannot claim “government enhanced value, removal or relocation costs, business interests, or any ‘undue enrichment’ to the property owner.”290 They cannot claim “any decrease in value attributable to pre-condemnation activity, unless the property owner can show that the Boston, 217 U.S. 189, 195 (1910))); and A.A. Profiles, Inc. v. City of Fort Lauderdale, 253 F.3d 576, 583 (11th Cir. 2001) (“The starting point for any inquiry into damages in a takings cases [sic] is to query what has the owner lost?”) (internal quotation marks omitted)). 286 Thomas W. Merrill, The Economics of Public Use, 72 CORNELL L. REV. 61, 83-84 (1986), hereinafter referred to as “Merrill.” 287 D.C. Redevelopment Land Agency v. Thirteen Parcels of Land in Squares 859, 912, 934 & 4068, 534 F.2d 337, 338 (D.C. Cir. 1976). 288 Serkin, supra note 62, at 688. 289 Id. at 687-88 (citing David Abelson, Water Rights and Grazing Permits: Transforming Public Lands into Private Lands, 65 U. COLO. L. REV. 407, 415-16 (1994); United States v. 57.09 Acres of Land, 757 F.2d 1025, 1029 (9th Cir. 1985); Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470 (1973)). 290 Fegan, supra note 49, at 280 (citations omitted). [condemnor] intentionally drove down the property value.”291 Business owners “cannot recover for relocation, loss of profits, and loss of goodwill or going concern” value.292 Some commentators argue that both takings by condemnation and regulatory takings should consider the harm to the property owner in determining just compensation.293 D. Highest and Best Use It has been suggested that greater use should be made of valuations based on a property’s highest and best use. As proposed by one source, the highest and best use rule or principle “does not define a single, objective measure of value but, at best, a broad range of values that courts can still call ‘fair market value,’ wherever they fall along this spectrum.”294 A more general use of valuation of property based on its highest and best use presumably would enhance a property owner’s recovery, thereby offsetting some of the loss resulting from a low valuation during the period of a depressed real estate market. The application of the highest and best use principle in valuing property is illustrated by Crimi v. Commissioner.295 Although not a condemnation case, one expert estimated that a property’s fair market value was $4.5 million with its highest and best use for residential development, whereas another expert presented two alternative valuation hypotheses—a “conservation premise” and a “development premise” with market values, respectively, of $660,000 and $1,510,000. In holding that the highest and best use of the property was as a residential subdivision, the court stated: To decide how to best determine the fair market value of the subject property, we must first determine the subject property’s highest and best use in addition to its then- current use. …The highest and best use of the subject property is the highest and most profitable use for which it is adaptable and needed or likely to be needed in the reasonably near future. …Subsequent events are generally not considered in determining fair market value, …though they may be considered to the extent reasonably foreseeable on the valuation date….296 291 Id. at 281. 292 Id. at 281 (citation omitted). 293 Serkin, supra note 62, at 686-87. 294 Id. at 692. 295 T.C. Memo 2013-51 at *P52, P56, 2013 Tax Ct. Memo LEXIS 52, at *59, 64 (2013). 296 Id., T.C. Memo 2013-51 at *P65-66, 2013 Tax Ct. Memo LEXIS 52, at *75-76.

28 The court agreed that the values of the property were adjustable because the highest and best use of the property was for a residential subdivision. However, usually it is necessary to discount a property’s highest and best use valuation because of costs that would be attendant to the property’s development.297 Although development costs may be deducted, in contrast to what a real-world buyer would consider, the courts usually do not deduct the cost of any risks or delays associated with development that would decrease the value of the property being taken.298 Thus, there is the possibility with this approach to valuation that a property owner’s recovery could be greater than a private seller’s sale proceeds for the same property.299 There is some authority holding that temporary difficulties in the market may warrant valuing a property based not on its current use but on its highest and best use. In a New York case, the “[c]laimants were entitled to the value of the property based on the best use that could be made of it.”300 The court held that the fact that the claimants had “not put the property to the best use for which it was available because of a temporary stringency in the money market, or their own financial inability, should not deprive them of the fair potential value of the property….”301 E. The Time of the Taking Usually, just compensation is based on “the fair market value of the property on the date it is appropriated.”302 What has been established as the date of a taking for valuation purposes may significantly affect the value of a property and the compensation ultimately paid to a property owner. Some writers have suggested that flexibility regarding the date of valuation may be a way to increase a property owner’s 297 Serkin, supra note 62, at 690, 692 (citing Del Monte Dunes at Monterey, Ltd. v. City of Monterey, 95 F.3d 1422 (9th Cir. 1996)). 298 Id. at 692 (citing Del Monte Dunes at Monterey, Ltd. v. City of Monterey, 95 F.3d 1422 (9th Cir. 1996)). 299 Id. 300 In the Matter of the City of New York, 9 N.Y.2d 439 at 445, 174 N.E.2d at 525 (citing 4 Nichols on Emi- nent Domain [3d ed.], § 12.3112, subd. [1], par. A, pp. 64-65)). 301 Id. at 445, 174 N.E.2d at 525. 302 Kirby Forest Indus., 467 U.S. at 10, 104 S. Ct. at 2194, 81 L. Ed. 2d at 11. compensation that is especially warranted when an owner’s property is taken during a period of generally depressed property values. The possibilities include valuing the property on a date when values were higher to avoid a manifest injustice; the date that the property was acquired; or the date that it was appraised for a refinancing. Another possibility is to choose a later date when prices are projected to recover. None of the approaches seems to be particularly reliable measures of valuation. Property owners’ objections to time-of-taking provisions do not appear to have been successful. For example, in California the state’s eminent domain provisions allow for three dates when valuation may be determined. The first date is when the condemnor deposits probable compensation with the court.303 The second date, if there is to be a trial on the matter of compensation and the trial begins within one year of the commencement of the condemnation proceedings, is the date of the commencement of the proceeding.304 The third date, if the trial on compensation begins one year from the commencement of the proceeding, is the date of the trial’s commencement.305 In Mt. San Jacinto Community College District v. The Superior Court of Riverside County and Azusa Pacific University, Real Party in Interest,306 the Supreme Court of California noted that a condemnor may “take early possession of the property before litigation is concluded ‘upon deposit in court and prompt release to the owner of money determined by the court to be the probable amount of just compensation.’”307 The court addressed two constitutional issues. The first issue was whether the statute that establishes a valuation date at the time the condemnor deposits the probable compensation in court denies a property owner just compensation because litigation in the eminent domain action may not terminate for several years after the deposit is made. The second issue was whether it is constitutional to require a property owner to 303 CAL. CIV. PROC. CODE § 1263.110 (2013). 304 CAL. CIV. PROC. CODE § 1263.120 (2013). 305 CAL. CIV. PROC. CODE § 1263.130 (2013). 306 40 Cal. 4th 648, 151 P.3d 1166, 54 Cal. Rptr. 3d 752 (2007). 307 Id. at 653, 151 P.3d at 1168, 54 Cal. Rptr. 3d at 755 (citing CAL. CONST., art. I, § 19; see CAL. CIV. PROC. CODE § 1255.410).

29 waive its rights if the owner withdraws the funds as allowed by the statute.308 As for the first question, the argument of Azusa Pacific University (University) was that the date of valuation should be the date the trial on just compensation commenced. The University argued that it was denied its constitutional right to just compensation, because the condemnor is able to “set an early valuation date by depositing funds[] ‘and then reap the benefit of a large rise in property values when the valuation trial does not occur for several years (while retaining the option to abandon the action if values fall).’”309 However, the court held that “[n]o credible reason exists to invalidate the statutory date of valuation here[] when a deposit was made before trial and the owner had access to the money at that time.”310 As for the second question, the court held that “[t]he existence of conditions on withdrawal on the owner’s solely statutory right to further litigate the legality of the taking does not deny the owner just compensation.”311 However, in some cases there may be evidence of a de facto taking by the government before the declared or official date of a taking that will permit an adjustment in the valuation of a property.312 One source complains that “[c]ondemnors may delay for months or even years the tender or posting of the deposit required to take title—this may be because the condemnor is speculating on the outcome of the case.”313 Some argue also that many states permit a condemning authority to abandon a condemnation within a short period after the condemnor’s liability for the taking has been established.314 Depending on the circumstances, it may be possible on rare occasions to convince a court that fair market 308 Id. at 653-654, 151 P.3d at 1168, 54 Cal. Rptr. 3d at 755–756. 309 Id. at 661, 151 P.3d at 1173, 54 Cal. Rptr. 3d at 761. 310 Id. at 662, 151 P.3d at 1174, 54 Cal. Rptr. 3d at 762. 311 Id. at 665, 151 P.3d at 1175, 54 Cal. Rptr. 3d at 764. 312 Serkin, supra note 62, at 697 (citing Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 14-15 (1984); United States v. 3.95 Acres of Land, 470 F. Supp. 572, 574 (N.D. Cal. 1972); City of Buffalo v. J.W. Clement Co., 269 N.E.2d 895 (N.Y. 1971); Foster v. City of Detroit, 254 F. Supp. 655 (E.D. Mich. 1966)). 313 Waldo and Clarke, supra note 83, at 57. 314 Id. value should be established as of an earlier or different date.315 F. Impact of Precondemnation Activity on Value Another valuation mechanism has to do with timing and whether a property’s value has been affected by the government’s planning and/or notice of the condemnation of properties for an eventual project. Traditionally, the value of the property is determined on the date that the property is considered to have been taken.316 In reconciling the impact of precondemnation activity on just compensation, the courts sometimes have found that there was a de facto taking that occurred prior to an actual taking.317 The consequence is that a property’s value is determined without deducting for the value of harm to the property caused by precondemnation activity, such as the announcement of a project requiring the use of eminent domain or the taking of other properties in the vicinity of the property affected by the takings.318 The negative impact on property values is a phenomenon that it is often referred to as “condemnation blight.”319 Generally, however, because “the government is not liable for a taking for the implications of its planning activities,”320 the courts have denied compensation for any loss in the value of property caused by condemnation blight, thereby “applying the rigid rule that compensation is valued at the date of the actual expropriation of property.”321 Depending on the jurisdiction, the courts may have discretion concerning whether and to what extent to permit evidence of the effect of condemnation blight on the value of property taken for a project. As Serkin writes, some courts “have rolled back the valuation date by finding a de facto taking prior to the actual taking,” the effect of which is to value “the property prior to the detrimental impact of a proposed government 315 Id. 316 Serkin, supra note 62, at 697. 317 Id. at 697; City of Buffalo v. J.W. Clement Co., 269 N.E.2d 895 (N.Y. 1971). 318 Id. 319 Id. 320 Storm and Hanley, Eminent Domain in a Down Economy, NEVADA LAWYER (March 2012), hereinafter referred to as “Storm and Hanley,” available at: http://nvbar.org/articles/content/eminent-domain-down- economy. 321 Serkin, supra note 62, at 697 (footnotes omitted).

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.

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.

40 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 reduce court and litigation costs in the number of condemnations going to court. The Idaho Transportation Department stated that it had voluntarily paid more on a case by case basis but that no policy had been established. The Wisconsin Department of Transportation advised that it had done so pursuant to the federal waiver program, discussed in Section X.B, for those property owners who qualify. X. TAKINGS OF MORTGAGED PROPERTY WITH NEGATIVE EQUITY A. Introduction In condemnation proceedings all tangible and intangible property interests must be satisfied, including the balance due under a mortgage secured by the property.460 Depending on how a state statute defines an owner a mortgagee may be considered to be an owner and have an interest in the collateral for purposes of eminent domain.461 If the statute requires encumbrances to be joined, the mortgagee is a necessary party. Statutory definitions of “land” and “real estate” often provide that these terms must include lands, tenements, hereditaments, and “all rights therein, equitable as well as legal.” Under such a definition, the word “owner” has been construed to include a mortgagee.462 If state law conveys a defeasible title to property subject to a mortgage, the holder of the mortgage has to collect directly from the condemnor.463 However, if state law requires a mortgagee to take possession of the property before the mortgagee receives title to the property, the mortgagee must collect from the owner or mortgagor rather than the condemnor.464 When mortgaged property is taken by eminent domain, the mortgagee’s rights against the land follow the award in equity, and he or she may, in suitable proceedings, have the mortgage debt satisfied out of that fund in advance of other creditors of the mortgagor or of an assignee of the award.465 Although the existence of a mortgage does not affect the valuation of a property, a mortgage occasionally is an indicator of a condemned 460 See 2 Nichols on Eminent Domain § 5.03[1]. 461 See id. § 5.03[6][c]. 462 Id. 463 See id. 464 See id. 465 See id. property’s value.466 When property is taken in its entirety and the condemnation award is for more than the amount due under the mortgage, a mortgagee is entitled to the full amount due under the mortgage.467 If the condemnation award is for less than the amount due under the mortgage, a mortgagee is entitled to the amount of the condemnation award less taxes.468 For partial takings of property subject to a mortgage there are two approaches. One is that if the mortgagee forecloses on the remainder of the property the mortgagee has a claim to the condemnation award up to the amount of the mortgagee’s deficiency judgment.469 The second approach is that a “mortgagee is entitled to as much of the compensation awarded as the amount due on the mortgage bears to the value of the entire mortgaged premises before the taking.”470 B. Calculation of Replacement Housing Payments and FHWA’s Waiver of 49 C.F.R. Section 24.401(b)(1) Under the URA,471 a homeowner who qualifies as a 180-day homeowner-occupant may receive a Replacement Housing Payment (RHP). Under Section 24.401(a), a displaced person is eligible for a RHP when the homeowner-occupant “[h]as actually owned and occupied” the dwelling from which he or she is being displaced “for not less than 180 days immediately prior to the initiation of negotiations” and the displacee “[p]urchases and occupies a decent, safe, and sanitary replacement dwelling within one year after the later” of two dates specified in 49 C.F.R. Section 24.401(a)(2) (that may be extended for a one year period for good cause).472 The purpose of the RHP 466 See id. § 12D.02[4] but see In re John Jay College of Criminal Justice of the City University of New York, 74 A.D.3d 460, 461 (2010) (holding that “[t]he amount of the mortgage loan, with interest at 18½%, did not nec- essarily reflect the value of the property” and therefore excluding the evidence of the loan). 467 See 4 Nichols on Eminent Domain § 12D.02[4]. 468 See id. 469 See id. § 5.03[6][c][i]. 470 See id. “[T]he mortgagee has a claim upon the award to the extent necessary to satisfy the entire amount of the mortgage.” Id. § 12D.02(4). 471 Uniform Relocation Assistance and Real Property Acquisition Policies for Federal and Federally Assisted Programs Act of 1970, 42 U.S.C. §§ 4601-4655 (2000). 472 The dates specified are the later of the date the displaced person receives final payment for the dis- placement dwelling or, in the case of condemnation, the date the full amount of the estimate of just compensa-

41 under the URA is to assist homeowner-occupants bridge the “gap between the just compensation they are constitutionally entitled to receive for the acquisition of their property and the additional costs they may incur to obtain a comparable replacement property.”473 The amount of the payment may not exceed $22,500 and is calculated as provided in Sections 24.401(b) and (c). With some adjustment for interest and other costs, Section 24.401(b)(1) provides that the payment is the sum of “[t]he amount by which the cost of a replacement dwelling exceeds the acquisition cost of the displacement dwelling, as determined in accordance with paragraph (c) of this section….” On November 10, 2010, FHWA issued a temporary waiver of Section 24.401(b)(1) and the “methodology for calculating [RHP] for displaced homeowner-occupants” that has been extended through December 31, 2014.474 The waiver was issued in response to state agencies being confronted with the “prospect of displacing homeowner-occupants who hold negative equity in what is commonly referred to as ‘upside-down’ mortgages….”475 FHWA’s memorandum regarding the waiver notes that an administrative settlement negotiated to acquire a property for a federally assisted project may eliminate a homeowner-occupant’s RHP benefit. As the Michigan Department of Transportation’s memorandum of 2009 notes, “an Administrative Settlement can be used to increase the acquisition amount to pay off the negative equity balance.”476 The FHWA waiver is intended to “ensure that homeowner-occupants receive the assistance needed to relocate to a comparable replacement dwelling.”477 Usually the RHP calculation is based on the amount finally determined and paid as just compensation for the property. Because of the waiver, however, the RHP calculation is based on tion is deposited in the court or the date the displacing Agency’s obligation under § 24.204 is met. 49 C.F.R. § 24.401(a)(2)(i) and (ii). 473 FHWA Memorandum, dated Sept. 25, 2012, Tem- porary Waiver of Methodology for Calculating Replace- ment Housing Payment for Negative Equity, at 1, here- inafter referred to as “FHWA Waiver Memorandum.” 474 Id. 475 Id. 476 Michigan DOT, Memorandum, dated June 30, 2009, Request for Approval of Policy Implementation. 477 FHWA Waiver Memorandum, supra note 473, at 1. the “appraisal-based just compensation in the amount in the original offer, even though the final just compensation amount may have been increased through an administrative settlement that takes into account the amount by which the mortgage/lien balance exceeds the fair market value of the property acquired.”478 The FHWA waiver only applies to those homeowner-occupants who have a negative equity position in the property taken. For a state to make use of the waiver a state DOT must make certain findings, one of which is “that the homeowner-occupants bought their homes during the times of rapidly increasing home values” and that while in a negative equity situation they are not in default of their payment-obligations under the mortgage. Furthermore, a state DOT must “[e]nsure that a homeowner-occupant with negative equity has not received and has not applied to receive mortgage debt relief or [a] mortgage reduction” so that the homeowner- occupant does not receive a “windfall.”479 A state DOT is not obligated to use the waiver.480 However, if a state DOT does voluntarily choose to use the waiver, its use is subject to approval by FHWA.481 “[The] FHWA does not give carte blanche authority to increase the Just Compensation offer because a mortgage is upside down. [The] local agency must document and justify the settlement.”482 If a state DOT chooses to implement the waiver it must “[e]nsure [that] use of the waiver will not reduce any assistance or protection to the homeowner;” “[m]ake a public interest finding that clearly demonstrates that the proposed process for use of the waiver is fair and equitable;” “[e]nsure [that] the State DOT’s procedures…justify administrative settlements and obtain adequate title, in accordance with its FHWA approved 478 Id. at 2. 479 Id. 480 Memorandum from Nelson Castellanos, Dir. of Real Estate Serv., to Division Administrators on the Temporary Waiver of Methodology for Calculating Re- placement Housing Payment for Negative Equity (Oct. 9, 2012), hereinafter referred to as “Castellanos Memo- randum,” available at http://www.fhwa.dot.gov/real_ estate/practitioners/uniform_act/relocation/tempwaiv 12.cfm). 481 Id. 482 Von Klug, The Downturn in the Real Estate Mar- ket: Positive and Negative Impacts (undated), at 9, here- inafter referred to as “Von Klug,” available at: http://www.irwa67.org/newsletter/pdfs/VonKlugPresent ation.pdf.

42 Right-of-Way Manual, will apply to the use of the waiver;” and “[e]nsure that a homeowner- occupant with negative equity has not received and has not applied to receive mortgage debt relief or mortgage reduction to ensure that a windfall is not realized as a result of a negative equity waiver negotiated settlement.”483 The waiver has positive and negative aspects. The positive aspects of the waiver are that the waiver provides a “clear direction on how to use administrative settlement and Last Resort Housing” and provides “clear authority to use Administrative Settlement and [Last Resort Housing] to solve upside down mortgages.”484 The negatives are that a “person [who] does not have negative equity but did lose equity” may not receive the same treatment or waiver benefits and after the real estate market returns to a normal one “[state] agencies must be able to get back to the old way of doing business.”485 Several states have implemented the waiver including California,486 Nevada,487 Ohio,488 Washington,489 and Wisconsin.490 Some state DOTs have provided training on how to 483 Castellanos Memorandum, supra note 480; see Letter from Daniel M. Mathis, Division Administrator, to Ms. Paula J. Hammond, Sec’y of Transp., Washing- ton State Dep’t of Transp. (Nov. 23, 2009), hereinafter referred to as “Mathis Letter,” available at: http://www.wsdot.wa.gov/NR/rdonlyres/31A37942-237F- 47CD-86AE-77CB1D522122/0/ProgWaiver.pdf) (discussing the implementation of the 2009 version of the Waiver before it was extended until Dec. 31, 2014). 484 Von Klug, supra note 482. 485 Id. at 17. 486 Memorandum from the California DOT, Div. of Right of Way & Land Surveys on Extension and Im- plementation of Temporary and Programmatic Waiver (Apr. 8, 2011), available at http://www.dot.ca.gov/hq/ row/rap/RARF2011-01.pdf). 487 Paul A. Saucedo, Chief Right of Way Agent, Ne- vada DOT, Negative Equity, Hardship Acquisitions & PISTOL, hereinafter referred to as “Saucedo,” available at http://rightoffway.transportation.org/Documents/ Session%2023%20-%20Saucedo%20AASHTO% 20Conference.pdf (last visited Nov. 18, 2013). 488 Letter from James J. Viau, Administrator on Negative Equity, Temporary Programmatic Waiver of Section 5501:2-5-04(A)(2(a) of the Ohio Administrative Code (July 30, 2009), available at http://www.dot.state. oh.us/Divisions/Engineering/RealEstate/Administrator %20Corner/07%2029%202009%20Relocation%20Consul tant%20Letter%20RE%20Negative%20Equity.pdf). 489 Mathis Letter, supra note 483. 490 Response of Wisconsin DOT. adequately implement or apply for the waiver.491 Michigan has initiated additional procedures because of Michigan law requiring that when an individual’s principal residence is acquired the amount of just compensation must be 125 percent of the property’s fair market value.492 Three transportation departments responding to the survey reported that they specifically had developed or revised eminent domain policies on the valuation of property because of the effect of the depressed real estate market.493 The states’ policies concern takings of residential property with negative equity. The California Department of Transportation reported that [o]n 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 difference 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 to the Relocation Assistance program the replacement Housing Valuation was calculated from the FMV and not the final negotiated settlement amount. As the Connecticut Department of Transpor- tation 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 negative equity situations. The other departments responding to the survey stated that they had not developed new policies or revised existing policies because of the financial crisis affecting real property values.494 491 See, e.g., Saucedo, supra note 487. 492 Michigan DOT, Memorandum, dated June 30, 2009, Request for Approval of Policy Implementation. 493 Responses of California DOT, Connecticut DOT, and Wisconsin DOT. 494 Arizona DOT; Arkansas State Highway and Transportation Department (stating that “[n]o policies were developed; however, it was determined that no time adjustment would be made in the comparable sales approach appraisals during that period of time, as ap- plied to multiples sales”); Florida DOT; Idaho Transpor- tation Department; and Oregon DOT.

43 C. The Use of Eminent Domain to Take Underwater Mortgages 1. The Use of Eminent Domain to Acquire Underwater Mortgages at Fair Market Value In 2008 several law professors separately argued that the federal government should use its power to purchase underwater mortgages.495 Since 2008, two scholars have argued that state and municipal governments should use the power of eminent domain to acquire underwater mortgages, particularly those held either in bank portfolios or by securitization trusts.496 Robert Hockett notes that banks already have the power to curtail the principal balance of loans secured by mortgages but argues that state and municipalities should use their power of eminent domain to take underwater mortgages that are held in private label securitized (PLS) trusts.497 Hockett and John Vlahoplus state that [m]any of the pooling and servicing agreements (PSAs) pursuant to which most [PLS] loans are securitized prohibit or otherwise prevent the trustee or loan servicer from modifying or selling underwater loans in sufficient number. The same agreements typically require unanimity or supermajority voting among holders of mortgage-backed securities (MBSs) in order to change these rules, which in any event would be severely limited by income-tax-law limitations on trust activities.498 Hockett argues that the use of the power of eminent domain would avoid the burdensome contractual terms of the PLS trusts that prevent their modification.499 He argues that, using their traditional eminent domain powers, “states and/or their municipalities can purchase underwater mortgage loans from private label securitization trusts at fair value.”500 495 Hockett and Vlahoplus, supra note 164, at 266. 496 See id. See also Robert Hockett, It Takes a Village: Municipal Condemnation Proceeding and Pub- lic/Private Partnerships for Mortgage Loan Modifica- tion, Value Preservation, and Local Economic Recovery, 18 STAN. J. L. BUS & FIN. 121, 124-5 (Fall 2012); Robert Hockett, Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt, CURRENT ISSUES IN ECONOMICS AND FINANCES, at 4 (June 19, 2013), hereinafter referred to as “Hockett, Paying Paul,” available at http://www.newyorkfed.org/ research/current_issues/ci19-5.pdf. 497 Hockett, Paying Paul, supra note 496, at 3, 4. 498 Hockett and Vlahoplus, supra note 164, at 260. 499 Hockett, Paying Paul, supra note 496, at 4. 500 Id. The writers note that “the power of eminent domain applies to all manner of intangible assets” including…mortgage loans and liens….”501 Some industry groups have threatened to take action against municipalities that use eminent domain to acquire underwater mortgages.502 The Securities Industry and Financial Markets Association (SIFMA) and eleven associations wrote to Congress to oppose any such eminent domain programs503 and to support proposed legislation entitled the Defending American Taxpayers from Abusive Government Takings Act of 2013 that would punish communities using eminent domain to acquire underwater mortgages.504 2. Federal Court Cases Against the City of Richmond, California On August 7, 2013, in Wells Fargo Bank, National Association v. City of Richmond, the plaintiffs Wells Fargo Bank and Deutsche Bank filed a complaint on behalf of their investors for declaratory and injunctive relief against the city of Richmond, California, and Mortgage Resolution Partners LLC (MRP).505 The plaintiffs claim that the city of Richmond and MRP have a plan to take mortgages through Richmond’s power of eminent domain, hereinafter referred to as the “Richmond Plan.” The plaintiffs allege that if the plan were allowed to go forward their investors would be 501 Hockett and Vlahoplus supra note 164, at 270 (cit- ing Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 602 (1935) (“If the public interest re- quires…the taking of property of individual mortgagees in order to relieve the necessities of individual mortga- gors, resort must be had to proceedings by eminent do- main.”); W. Fertilizer & Cordage Co. v. City of Alliance, 504 N.W.2d 808, 816 (Neb. 1993) (holding that a mort- gagee’s lien on real estate is an interest that may be subjected to a taking for a public purpose and, therefore, may be the subject of an eminent-domain proceeding)). 502 Id. at 271–74. 503 SIFMA, SIFMA and Other Associations Submit Comments to Congress Opposing the Use of Eminent Domain to Acquire and Refinance Underwater Mort- gage Loans, July 22, 2013, available at http://www.sifma.org/issues/item.aspx?id=8589944483. 504 Id. 505 Complaint for Declaratory and Injunctive Relief at 1-9, Wells Fargo Bank, National Association v. City of Richmond, (N.D. Cal. 2013) (No. C 13-03663 CRB), hereinafter cited as the “Complaint,” available at: http://www.cand.uscourts.gov/pages/1020.

44 irreparably harmed financially; thus, they sought declaratory and injunctive relief. The plaintiffs’ complaint alleges that the Richmond Plan violates the United States and California Constitutions because the takings would not be for a public use, would violate the prohibition against extraterritorial seizures, and would not provide the plaintiffs with just compensation.506 It is alleged that the Richmond Plan has no public purpose, because it would seize property from private entities, the plaintiffs, and transfer it to MRP and its private investors, thereby conferring “private benefits on a select set of individuals.”507 The plaintiffs claim that the seizures of the mortgages would be extra- territorial, because the mortgages and the underlying notes are held in trusts outside the city of Richmond and because “the situs of a debt for eminent domain is deemed to be the location of the creditor.”508 The plaintiffs argue that the Richmond Plan would violate the Commerce Clause of the United States Constitution, because the plan would have the effect of regulating the national residential mortgage-backed securities market and cause substantial losses to trusts holding the loans around the nation.509 The plaintiffs contend that the city’s plan violates the Contracts Clause of the federal Constitution, because the program would nullify the trusts’ rights to obtain the payments they bargained for and the trusts would have to accept significantly lower payments instead. Finally, the plaintiffs also argue that the program violates the Equal Protection Clause of the United States and California Constitutions.510 The U.S. District Court for the Northern District of California dismissed the plaintiffs’ motion for a preliminary injunction in a relatively brief order, because the plaintiffs’ claims were not ripe in that they were based upon “future events that may never occur”511 and denied the plaintiffs’ request for leave to amend their complaint.512 506 Id. at 10-1. 507 Id. at 33, para 100. 508 Id. at 35, para 110. 509 Id. at 37, para 120, 121. 510 Id. at 42, para 143. 511 Wells Fargo Bank, National Association v. City of Richmond (N.D. Cal. 2013) (No. C 13-03663 CRB), Or- der Granting Defendants’ Motion to Dismiss and Deny- ing Plaintiffs’ Motion for a Preliminary Injunction, at 1, available at: http://www.cand.uscourts.gov/pages/1020. 512 Id. at 2, n.3. Nearly 2 months after the Wells Fargo case was dismissed, the U.S. District Court for the Northern District of California dismissed a similar case brought by the Bank of New York Mellon against the city of Richmond and MRP.513 Again, the court held that the plaintiffs’ case was not ripe, because it was based upon events that may not occur.514 In their complaint in Wells Fargo Bank, the plaintiffs refer to statements by the Federal Housing Finance Administration (FHFA) and the United States House of Representatives Financial Services Committee, both of which commented on the consequences of local governments using eminent domain to seize mortgages.515 FHFA expressed concern that the programs “could negatively affect the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market,” as well as harm taxpayers.516 FHFA acts as a conservator of Fannie Mae and Freddie Mac and therefore must act to preserve and protect their assets and to minimize costs to taxpayers.517 If eminent domain programs were to be used nationwide, Fannie Mae and Freddie Mac allegedly could lose up to 30 percent “in their private-label residential mortgage-backed securities held in their portfolio” that would put tax revenues at risk.518 It is claimed that eminent domain programs such as the Richmond Plan would decrease homeowners’ ability to borrow in the future, because lenders may be wary that a loan contract would be broken by the government.519 If the Defending American Taxpayers from Abuses Government Takings Act were to be enacted it would prohibit Fannie Mae and Freddie Mac from purchasing mortgage loans in counties 513 Bank of N.Y. Mellon v. City of Richmond, 2013 U.S. Dist. LEXIS 159183 at *2-3 (N.D. Cal. Nov. 6, 2013). 514 Id. at *5. 515 Complaint, supra note 505, at 30. 516 Use of Eminent Domain to Restructure Perform- ing Loans, 77 Fed. Reg. 47652 (Aug. 9. 2012). 517 Id. 518 John Campbell, Release: Campbell Reintroduces Bill to Protect Taxpayers from Eminent Domain Schemes and Taxpayers from Abusive Government Tak- ing Act, available at http://www.campbell.house.gov/ press1/release-campbell-reintroduces-bill-to-protect- taxpayers-from-eminent-domain-schemesan-taxpayers- from-abusive-government-takings-act/. 519 Id.

45 where an eminent domain program was used within the past 10 years; the Federal Housing Administration from guaranteeing mortgages within counties where an eminent domain program has been used in the past 10 years; and the United States Department of Agriculture “from making, insuring, or guaranteeing mortgage loans.”520 FHFA suggests that the use of eminent domain to seize underwater mortgages could lead to redlining and violations of fair housing laws if only certain areas of a community are targeted.521 However, supporters of the eminent domain program suggest that it is FHFA that would be redlining. That is, FHFA would prohibit Fannie Mae and Freddie Mac from lending in communities that use eminent domain to acquire mortgages, communities that tend to have large numbers of underwater mortgages and large low- income and minority populations.522 XI. PAYMENT OF RELOCATION EXPENSES A. Uniform Relocation Assistance and Real Property Acquisition Policies for Federal and Federally Assisted Programs Act Some commentators argue that the best compensatory scheme to preserve homeowner status is the URA.523 First, the URA requires federal agencies to attempt to acquire properties by negotiation rather than by condemnation.524 Second, the URA is an example of a congressionally approved “form of super- compensation for takings of one class of personal 520 Defending American Taxpayers from Abusive Government Takings Act of 2012, H.R. 6397, 112th Cong. 521 FEDERAL HOUSING FINANCE AGENCY, General Counsel Memorandum, Summary of Comments and Additional Analysis Regarding Input on Use of Eminent Domain to Restructure Mortgages, at 4, available at http://www.fhfa.gov/webfiles/25418/GCMemorandum EminentDomain.pdf?n=22097. 522 Pamela Lee, Eminent Domain: The Debate Dis- tracts from Pressing Problems, The Urban Institute, Housing Finance Policy Center, at 12, available at: http://www.urban.org/UploadedPDF/412937-Eminent- Domain-The-Debate-Distracts-from-Pressing- Problems.pdf. 523 Uniform Relocation Assistance and Real Property Acquisition Policies for Federal and Federally Assisted Programs Act of 1970, 42 U.S.C. §§ 4601-4655 (2000). 524 42 U.S.C. § 4651 (1), (4), (8). property.”525 “[T]he URA expressly permits the condemning authority to provide compensation beyond the statutory limits.”526 The Act provides assistance to property owners for a variety of costs, such as moving expenses, mortgage costs, and a replacement payment designed to ensure that homeowners are provided with comparable post-taking housing. Such post-taking housing is required to be “decent, safe, and sanitary, adequate in size to accommodate the occupants, functionally equivalent to the acquired property, and located in an area not subject to unreasonable adverse environmental conditions.”527 B. State Laws Authorizing Payment of Relocation Expenses Some states also may authorize the payment of relocation expenses. In Georgia, a displaced condemnee may recover, inter alia, “actual reasonable” relocation expenses for an owner’s home or business to move a reasonable distance from the condemned property, as well as other expenses authorized by statute: In addition to the types of relocation damages permissible under law, any condemnee that is displaced as a result of the condemnation shall be entitled to: (1) Actual reasonable expenses in moving himself or herself, his or her family, business, farm operation, or other personal property within a reasonable distance from the property condemned; (2) Actual direct losses of tangible personal property as a result of moving or discontinuing a business or farm operation; (3) Such other relocation expenses as authorized by law; and (4) With the consent of the condemnee, the condemnor may provide alternative site property as full or partial compensation. In Illinois, except when federal funds are available, a condemning authority must reimburse displaced persons’ reasonable relocation costs as determined under the URA.528 In Minnesota, the acquiring authority is expected to secure federal financial participation 525 Serkin, supra note 62, at 741. 526 Godsil and Simunovich, supra note 31, 984 (citing 42 U.S.C. § 4626(a)). 527 Id. at 983-84; see also Fegan, supra note 49, at 281 (footnotes omitted). 528 735 ILCS 30/10-5-62.

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.

A-1 APPENDIX A SURVEY QUESTIONS NCHRP 20-6, STUDY TOPIC 19-01 EMINENT DOMAIN AND FAIR MARKET VALUE IN A DEPRESSED REAL ESTATE MARKET Agency Name: ________________________________________________________________________ Name of Employee: ________________________________________________________________________ Job Title: ________________________________________________________________________ Contact telephone/cell phone number: ___________________/ _____________________ Email address: _________________________________ How many years have you been with the agency? _____ NOTE: The following questions relate primarily to the nationwide financial and real estate crisis, hereinafter referred to as the “financial crisis” or the “real estate crisis,” that began approximately in 2006 or 2007 when property values began a significant decline. The decline in real estate values resulted in some property owners having “under-water” mortgages, i.e., mortgages with a balance that exceeded the value of the underlying property. Please attach additional pages as needed to respond to the survey questions. QUESTIONS 1. During the real estate crisis in any cases involving your agency or another agency on your behalf and the taking of real property for a transportation project have any property owners argued that the valuation of the property should take into consideration the effect of depressed property values because of the financial or real estate crisis? YES __ NO __ If your answer is “No,” please indicate and return the survey according to the instructions on page 5. If your answer is “Yes,” please respond to the following additional questions. 2. If your answer to question 1 is “Yes,” are there judicial, administrative, or other decisions (e.g., by the attorney general) that either accepted or rejected in whole or in part a landowner’s contention that the real estate crisis and depressed property values should be considered in determining just compensation? YES __ NO __ If your answer is “Yes,” please provide citations or, if unpublished, a copy of the decision(s) or opinion(s). __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ 3. Has your state or your agency developed or revised any eminent domain policies regarding the valuation of property because of the effect of depressed property values? YES __ NO __

A-2 If your answer is “Yes,” please provide a copy of any policies with your response. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ 4. During the real estate crisis have the courts in your jurisdiction 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? YES __ NO __ If your answer is “Yes,” please explain what exceptions have been created and/or applied. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ 5. During the real estate crisis has the ability to value real property in your jurisdiction 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? YES __ NO __ If your answer is “Yes,” please explain. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ 6. If your answer to question 5 is “Yes,” have property owners in your jurisdiction also argued that such sales are not comparable sales because they are not sales conducted voluntarily or at arm’s length? YES __ NO __ If your answer is “Yes,” please explain. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ 7. During the real estate crisis and in response to depressed property values, as an alternative to the comparable sales approach, have property owners or the courts resorted more frequently in your agency’s experience to either of the following: (a) the replacement cost method of valuation? YES __ NO __ (b) the income approach? YES __ NO __ If your answer is “Yes” to question 7 (a) and/or (b), please explain. If there is a memorandum or other document that is relevant to your answer, please provide, if possible, a copy. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ 8. In your agency’s experience, during the real estate crisis have the courts in your jurisdiction admitted evidence of the price an owner paid for property taken by or on behalf of your agency? YES __ NO __ If your answer is “Yes,” please provide details. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________

A-3 9. During the real estate crisis has your agency or the courts in your jurisdiction permitted the use of distributive justice535 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)? YES __ NO __ If your answer is “Yes,” please provide details. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ 10. During the real estate crisis and because of depressed real property values in your area has your agency voluntarily paid compensation in excess of fair market value to property owners whose property was purchased or taken for a project? YES __ NO __ If your answer is “Yes,” please identify and explain the reasons for doing so and, if possible, state whether this was an agency-wide or state-wide policy. __________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________ Thank you for your cooperation and for copies of any documents provided with your reply to the survey. Please scan and provide the copies by e-mail or send on a disk. ****************************************************************************** Please return your completed survey and any documents preferably via e-mail to: The Thomas Law Firm ATTN: Larry W. Thomas 1701 Pennsylvania Avenue, N.W. Suite 300 Washington, D.C. 20006 Tel. (202) 465-5050 lwthomas@cox.net 535 Distributive justice, also referred to as compensatory justice, comparative justice, or efficiency maximization, is based on principles of equity and fairness. The distributive justice approach to just compensation is founded on the belief that resources should be shared to secure the greatest overall utility to society as a whole.

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.

C-1 APPENDIX C—TRANSPORTATION DEPARTMENTS RESPONDING TO THE SURVEY Arizona Department of Transportation Arkansas State Highway and Transportation Department California Department of Transportation Colorado Department of Transportation Connecticut Department of Transportation Delaware Department of Transportation Florida Department of Transportation Kansas Department of Transportation Idaho Transportation Department Indiana Department of Transportation Iowa Department of Transportation Maine Department of Transportation Massachusetts Department of Transportation Michigan Department of Transportation Missouri Department of Transportation Nebraska Department of Roads Ohio Department of Transportation Pennsylvania Department of Transportation Tennessee Department of Transportation Texas Department of Transportation. Utah Department of Transportation Wisconsin Department of Transportation Wyoming Department of Transportation

ACKNOWLEDGMENTS This study was performed under the overall guidance of the NCHRP Project Committee SP 20-6. The Committee is chaired by MICHAEL E. TARDIF, Friemund, Jackson and Tardif, LLC. Members are RICHARD A. CHRISTOPHER, HDR Engineering; TONI H. CLITHERO, Vermont Agency of Transportation; JOANN GEORGALLIS, California Department of Transportation; JAMES H. ISONHOOD, Mississippi Office of the Attorney General; THOMAS G. REEVES, Consultant, Maine; MARCELLE SATTIEWHITE JONES, Jacob, Carter and Burgess, Inc.; ROBERT J. SHEA, Pennsylvania Department of Transportation; JAY L. SMITH, Missouri Department of Transportation; JOHN W. STRAHAN, Consultant, Kansas; and THOMAS VIALL, Attorney, Vermont. JANET MYERS provided liaison with the Federal Highway Administration, and GWEN CHISHOLM SMITH represents the NCHRP staff.

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