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12 their property if it is higher than the propertyâs fair market value.â115 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 âreplacement value could be paid either in-kind (i.e., by guaranteeing the expropriated owner similar propertyâ¦), or in cash (i.e., by paying compensation sufficient to allow the property owner to buy similar housing).â117 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, Connecticutâs response to the survey was that â[w]hen there is an abundance of comparable sales to consider, the replacement cost approach is rarely used when appraising improved residential property.â120 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 âsufficient for an owner to purchase a comparable property in the communityâ); Assemb. B. 3075 2007 Leg., 230th Sess. (N.Y. 2007) (requiring that âjust 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 propertyâ)). Wyman also cites to the New Jersey Department of the Public Advocate, In Need of Redevelopment: Repairing New Jerseyâs 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 âthat compensation for a taken home be based on the highestâ of âthe fair market value of the propertyâ and ââreplacement valueâ 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 propertyâ)). Id. at n.63. 120 Response of Connecticut DOT. to the replacement cost method as an alternative to the comparable sales approach. Floridaâs 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 yearsâ 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 Floridaâs 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 âused rarely (1-2 cases) over the last few years.â123 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 âManifest Injusticeâ 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 âmanifest injusticeâ 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 âweddedâ to any particular formula or method to determine just compensation. Other courts have held that âthe 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.â125 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 âtoo big to fail;â126 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 Departmentâs 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 â[p]rotecting institutions, consumers, and investors against fraudulent and unfair contracts, as the Treasuryâs plan doesâ¦would prevent unjust transfers through risks which should not be taken.â130 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 Commân v. Minckler, 62 Mich. App. 273, 276, 233 N.W.2d 527, 529 (1975) (partial tak- ing) (citations omitted). 126 C.M.A. McCauliff, Didnât 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 âMcCauliff.â 127 Id. 128 Id. at 406. 129 Id. at 417. See U.S. DEPâT 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 âconsenting adultsâ 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 âbackward-looking taxâ be imposed on financial institutions that received financial support.138 The IMF defined the tax as âone assessed on some attributeâwith balance sheet variables a logical choiceâthat 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.â139 The tax would be âa 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.â140 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 âthe full monetary equivalent of the property taken.â141 The Supreme Court has stated that its case law demands that just compensation make an owner whole and ârestores the owner to âthe same position monetarilyâ that the owner would have occupied but for the taking.â142 The courts have stated that the right to just compensation is grounded in natural law and justice;143 that â[j]ust compensation rests on equitable principles;â144 that the constitutional mandate means full indemnification of the property owner whose property is taken;145 and that the valuation rules are not intended âto give the government a windfall.â146 Some judicial decisions suggest that there is flexibility in the courtsâ 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 ânever attempted to prescribe a rigid rule for determining what is âjust compensationââ but that â[t]he word âjustâ in the Fifth Amendment evokes ideas of âfairnessâ and âequityââ¦.â148 In a later decision, the Court again emphasized that the courts must be fair and equitable when determining just compensation: â[t]he constitutional requirement of just compensation derives as much content from the basic equitable principles of fairnessâ¦as it does from technical concepts of property law.â149 The takings rules are meant to keep the government âfrom forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.â150 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 âjust compensationâ is to be determined. â¦The Court in an endeavor to find working rules that will do substantial justice has adopted practical standards, including that of market value. â¦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, 711â712 (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).