2 Compensation
| Library | Eminent Domain: A Handbook on Condemnation Law (ABA) (2011 Ed.) |
Terry C. Frank
The government's inherent power to take private property for public use is limited by the Fifth Amendment to the U.S. Constitution, applied to the states through the Fourteenth Amendment:1 "private property [shall not] be taken for public use without just compensation."2 The overriding idea of "just compensation" is that the owner of the property is entitled to a fair and adequate amount of reimbursement for losing the use of his or her property if the same is taken for use by the public.3 Each condemnation case is decided on its individual merits and is highly fact specific; there is no rigid formula for determining the amount of compensation due the owner.4 The goal is to place a value on the owner's loss, putting the owner in the same place he or she would have been had the taking not occurred: "[t]he owner must be made whole but is not entitled to more."5
To state a valid claim that a taking has occurred, a landowner must establish both ownership of the property interest6 and possession at the time of the taking.7 For calculating the amount of just compensation, the value is fixed as of the date of the taking itself, which in most cases will be the date of the filing of declaration or when the condemnor physically possesses the property, whichever occurs first.8
Absent unusual circumstances that require an alternate method, just compensation for the taking of private property is determined by assessing the fair market value of the property,9 or what a willing buyer would pay a willing seller.10 The transaction is assumed to be at arm's length with a bargained-for price agreed to by the parties' frank negotiations after full disclosure of all relevant factors.11 Fair market value is not the particular value to the seller, or even what the seller paid for the property, but rather what a reasonable person would pay for the property in an open market during the course of a voluntary transaction.12 Valuation is affected by a variety of factors, including legitimate zoning restrictions and other regulatory limitations.13 Any evidence that a willing buyer and seller would consider in negotiating a price is considered relevant in calculating fair market value for a determination of just compensation.14 Landowners are entitled to compensation for both the land itself and any improvements on the property, assuming such improvements are legal uses of the property at the time of the taking.15
The value of private property in the context of a condemnation action is determined by its "highest and best use," the use for which the property is best suited and "needed or likely to be needed in the reasonably near future[,] . . . not necessarily as the [sole] measure of value, but to the full extent that the prospect of demand for such use affects the market value while the property is privately held."16 While highest and best use is not the only consideration, fair market value is most certainly affected by the possibility of such use. Several relevant factors go to a property's highest and best use: the geographic region's economic development, current use of the property, market demand and availability of land for potential uses, specific feasible business plans of the owner (including action already taken to develop the property for such use), proximity to existing areas compatible with or necessary for the intended use, potential buyers, and substantive negotiations with those buyers.17 A landowner may show that the highest and best use is temporary in nature if the interim use would enhance the fair market value of the property.18
The highest and best use of the condemned parcel may require use with other parcels. "The fact that the most profitable use of a parcel can be made only in combination with other lands does not necessarily exclude that use from consideration if the possibility of combination is reasonably sufficient to affect market value."19 The test for whether a condemned parcel should be considered part of a larger, unified tract is the "unity theory,"20 based on the premise that the separate tracts operate together as a single economic unit. Thus, to condemn an individual tract of the whole requires compensation to the owner for its severance. To establish that the highest and best use of the taken property is in combination with other parcels, the owner must prove unity of ownership, physical unity, and that the parcel taken and the remaining parcel(s) have a unity of use.21
In this analysis, the greatest emphasis is placed on the unity of use. Relevant factors indicating unity of use include "(1) the intent of the owner, (2) the adaptability of the property, (3) the dependence between the parcels, (4) the highest and best use of the property, (5) zoning, (6) the appearance of the land, (7) the actual use of the land, (8) the possibility of tracts being combined in use in the reasonably near future,"22 and whether the parcels are separate platted plots. As long as they are being put to a single integrated use, separate parcels may be acquired at different times and need not be contiguous.23
A second prong of the unity test requires some unity of ownership between the condemned parcel and the remaining tracts.24 The fact that the various tracts are not titled in exactly the same manner does not necessarily defeat severance damages under this theory. Identically titled property is ideal, but joint control over the property and equitable ownership each may satisfy this requirement.25 For example, property titled in an individual's name was held to be part of a larger tract when the other parcels were titled in his family-owned business (of which he was president and chief officer).26
An owner of land partially condemned must also satisfy the third element of the unity test: physical unity between the condemned parcel and remaining tracts.27 Contiguity between the tracts is the primary but not sole means to meet the test.28 There is no requirement per se that the parcels be adjacent in order to establish physical unity,29and courts may consider non-neighboring parcels as part of the same "economic unit" if they were dedicated to the same use.30
Three widely accepted theories determine fair market value in eminent domain litigation: the market data approach, the income capitalization approach, and the reproduction/replacement cost approach.31 The fair market value in most cases looks at the market in general, and comparable sales, when available, are typically the strongest evidence of just compensation.32 The rationale behind the admissibility of this type of evidence is that the voluntary exchange of similar property between a willing buyer and willing seller implies that the fair market value of the comparable property will be generally equivalent, and this market price is a reliable standard of reference in determining the value of the condemned property.33 Comparable sales evidence typically encompasses such factors as the property itself and its physical characteristics, the property's relationship to the neighborhood, the purchase price paid by the owner as its relates to the property's current value, the price of similarly situated land recently sold, expert opinion, the consideration of all available uses, and the value of legal improvements.34
A second approach to valuation, available in limited circumstances, is the income approach (also called the income capitalization approach), in which the value of the property's earning power will support valuation based on the capitalization of income.35 It attributes value to the land based on the income generated from its use. The income capitalization approach consists of arriving at an
independent value of the land involved and adding to it the value of improvements arrived at by process of capitalization, i.e., converting reasonable or actual income at a reasonable rate of return (capitalization rate) into an indication of value. Land and improvements may be capitalized together in a single process.36
This method is applied when the income is derived from the intrinsic nature of the property itself and not from the business conducted on the property.37 The income approach requires proper evidence of all necessary factors, since the absence of such evidence renders the approach meaningless in determining market value for condemnation purposes.38 The complexity of the approach requires that all relevant evidence be presented because of the speculative nature of future business results.39
The income approach would apply, for example, to the condemnation of land used as a quarry but not to a commercially available property currently used as a restaurant. This is because a quarrying business would derive its income from the material available on the property and thus is not easily relocated to another commercially viable location. The income approach generally requires that the property is being operated as a going concern in good condition and is capable of producing the income to be capitalized.40
In rare circumstances, the best evidence of fair market value is the replacement or reproduction cost. The cost approach is admissible only when the property is of a unique type and when there are no available sales to compare in a market analysis approach.41 It requires that the interest condemned be one of complete ownership,42 that its use be based on the uniqueness of the property, and, where there is evidence, that it is reasonable to expect that the property could be replaced by a similar one.43 A reproduction analysis requires the landowner to prove that replacement of the interest taken would be a reasonable business venture,44 with proper consideration of its depreciation.45
In partial takings, courts usually employ one of two methods. The condemnor must compensate the landowner for the value of the land taken and any damages to the remainder, also known as severance...
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