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

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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).