CHAPTER 2 EVALUATING MINERALS IN CONDEMNATION CASES
| Jurisdiction | United States |
(Jan 1996)
EVALUATING MINERALS IN CONDEMNATION CASES
Opperman & Associates, P.C.
Denver, Colorado
"[N]or shall private property be taken for public use, without just compensation." Amendment V, United States Constitution. Did our forefathers envision that just compensation would have to be determined for the taking of increased density locations, behind pipe reserves, lignite seams or deposits of sand and gravel when the United States Constitution was drafted? Probably not. If they had understood that oil, gas and mineral interests such as these would be the subject of eminent domain or condemnation proceedings, they may have omitted this provision from the Constitution! The determination of just compensation for the taking of oil, gas and mineral interests is certainly a problematic area from both industry and legal perspectives. The focus of this paper is to provide a basic overview of the substantive and procedural setting pertaining to valuation of a generic eminent domain or condemnation proceeding and to detail the methods for evaluating oil, gas and mineral interests in condemnation actions which have been both acceptable and effective in state and federal courts.
I. Situations Where Oil, Gas and Mineral Interests may be Subject to Condemnation
As the population increases, so does the demand for land and natural resources, fueling the confrontation for many of the condemnation cases which now involve oil, gas and mineral interests. Where exploitation of natural resources historically involved remote lands far removed from population centers, exploration and development of these resources is now taking place adjacent to and in populated areas. Therefore, oil, gas and mineral interests are now being acquired as a part of condemnation actions for public projects that once affected only basic real estate interests. Even where areas of the United States remain unpopulated, environmental and conservation programs have forced the condemnation of these interests.
Common situations involving the acquisition of oil, gas and mineral interests include:
• State and federal highway projects
• Environmental acquisitions, such as for parks or open space, wildlife, or conservation purposes
• Land intensive governmental projects such as airports and dams
• Natural gas storage facilities
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• "Inverse" condemnation situations resulting from the taking of property without instituting condemnation proceedings or where regulation of property interests effects a taking
The concept of market value is also a common issue in many other areas where the valuation of oil, gas and minerals is involved, such as:
• Securities
• Bankruptcy
• Partnership Dissolution, Roll-ups
• Estates
• Taxation
• Acquisitions and Mergers
While condemnation actions do involve unique procedural and substantive rules, much of the oil, gas and mineral valuation methodology which is acceptable in condemnation actions will also apply to these other areas.
II. The Goal: Market Value
The phrase "just compensation" as included in Amendment V of the United States Constitution and in the constitutions of the states has evolved into a concept generally known as "market value" or "fair market value" as defined below. Market value is the value that is to be determined in condemnation actions. In the volatile market for natural resources, is there such a thing as market value and if there is, how should market value be determined? These are the basic issues confronting industry professionals and attorneys faced with the mandate to prove market value when oil, gas or mineral interests become subject to acquisition in eminent domain or condemnation actions.
III. Market Value Defined
The United States Supreme Court set forth an enduring definition of market value in the landmark condemnation case United States v. Miller.1 The Court stated:
The Fifth Amendment of the Constitution provides that private property shall not be taken for public use without just compensation. Such compensation means the full and perfect equivalent in money of the property taken. The owner is to be put in as good position pecuniarily as he would have occupied if his property had not been taken.
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It is conceivable that an owner's indemnity should be measured in various ways depending upon the circumstances of each case and that no general formula should be used for the purpose. In an effort, however, to find some practical standard, the courts early adopted, and have retained, the concept of market value. The owner has been said to be entitled to the "value", the "market value", and the "fair market value" of what is taken. The term "fair" hardly adds anything to the phrase "market value", which denotes what "it fairly may be believed that a purchaser in fair market conditions would have given", or, more concisely, "market value fairly determined".
A definition of market value, referred to as "reasonable market value", which is similar to that used in many jurisdictions is represented by Colorado Jury Instructions, 3d Edition, Vol. 2, 36:3 which reads:
"Reasonable market value" means the fair, actual, cash market value of the property. It is the price the property could have been sold for on the open market under the usual and ordinary circumstances where the owner was willing to sell and the purchaser was willing to buy, but neither was under an obligation to do so.
As indicated by the last sentence of the quoted portion of United States v. Miller, the process or the methodology employed to reach market value is important in the search for a "fair" valuation. It is accepted that there is no exact formula or methodology to be used to determine market value.2 As the court in United States v. Sowards3 stated:
But, whatever method is employed, the evidence offered must have a bearing upon what a willing buyer would pay a willing seller for the property on the date of taking. Considerations that may not reasonably be held to affect market value are excluded.
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Market value or just compensation in condemnation cases should put the property owner in a position as good as he was in prior to the taking. Overcompensation should be as great a concern as under compensation for a taking. Market value must be fair not only to the condemnee, but also fair to the public or those paying for the acquisition.4
IV. Procedure to Determine Market Value in Condemnation Actions
Although no exact formula or methodology is mandated by the courts to determine the substantive manner in which market value will be determined, ie. comparable sales, income approach, etc., there are basic procedural steps that are commonly followed in condemnation actions in many jurisdictions which essentially provide a mathematical framework for the determination of market value or just compensation. Where a taking involves the acquisition of an entire property or ownership, the simple computation involves the determination of the value of the property as of the date of the taking. Where a taking involves only a portion of a property or an ownership, a common procedural formula used in several states which provides for damages and benefits includes six steps which can be summarized as follows:
1. The value of the whole property is determined prior to the taking. There is a considerable amount of judicial interpretation of what constitutes the "whole" property which is beyond the scope of this paper. However, the whole is commonly referred to as property belonging to the owner of property taken which constitutes an "economic unit."5
2. The value of the property taken is determined (as of the date of the taking).
3. The value of the remainder property without consideration of the impacts of the taking is determined.
4. The value of the remainder considering the impacts of the taking is determined.
5. Total damages and/or benefits are determined based upon the value determinations in #3 and #4 above.
6. The value determined in #2 is added to value(s) found in #5 to determine just compensation. It should be noted that jurisdictions vary on the treatment of damages and benefits in condemnation actions. Some jurisdictions offset damages with benefits, some offset compensation for the taking with benefits.
This procedural model is simplified under the federal rule involving partial takings which is also used in several states where the value of the remainder is valued simply on a "before taking" and "after taking" basis.
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V. Guidelines for Determining Market Value in Condemnation Actions
1. Speculation is Limited.
Testimony as to market value must be supported by evidence and cannot be based on mere conjecture, unsupported assumptions or other speculation.6 However, in the valuation of minerals, it is generally recognized that uncertainties will exist and that some speculation is inherent in the attempt to ascertain market value.7
2. The Project or Purpose for the Condemnation Should not be Considered.
Where property is taken for a project, such as an airport, the property owner cannot claim a higher value based upon the increase in market value attributable to that project.8 Likewise, an owner should not be forced to bear the burden of diminished values where the project has adversely affected the market. An example of how this rule applies in a mineral setting is where a sand and gravel rich property is taken for highway purposes. The owner of the sand and gravel could not base the value of his deposits on the increased need for sand and gravel created by the highway project. Rather, the owner would have to establish value without consideration of the project, based upon the market for sand and gravel without the highway's impact on the market.
3. The Value of the Property to the Taker Should not be Considered.
A corollary to the rule that the project for which the property is taken...
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