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

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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.