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

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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;