Exploring Condemnation: Commentary on Real Property Valuation in Condemnation.

Author:Swango, Dan L.
Position:Resource Center

Property condemnation arises from the government exercise of eminent domain. Preparing appraisals for use in the condemnation process is a specialty for many appraisers; they usually have an extensive library (hardcopy and digital) of publications relative to condemnation and valuation matters. Appraisers not involved in such appraisals are well-advised to have some knowledge about condemnation appraising--at least a reasonable acquaintanceship.

The most recent Appraisal Institute publication in this field is a 300-page text and reference book, Real Property Valuation in Condemnation.

Real Property Valuation in Condemnation

(Chicago: Appraisal Institute, 2018). 300 pages, illus. Price: $95.00. AI Price: $75.00. Available in softcover and PDF formats. Item No. 0814M at https://bit.ly/2A2ubPY. ISBN 9781935328742

This is a fresh volume on the topic, and like the internationally recognized text The Appraisal of Real Estate, the book Real Property Valuation in Condemnation is an extensive combination text and reference work written by over two dozen collaborating experts with extensive peer review. For some basic content insight, here are the chapter and appendix topics:

  1. The Litigation Environment

  2. Origin of Eminent Domain and Just Compensation

  3. Legal Measurements of Just Compensation

    4* Limitations on Property Rights

  4. The Larger Parcel

  5. Highest and Best Use

  6. Land Use Regulations

  7. Cost Approach to Value

  8. Income Capitalization Approach to Value

  9. Sales Comparison Approach to Value

  10. Subdivision Development Analysis

  11. Construction of the Public Improvement

  12. Damages in Partial Taking Cases

  13. Benefits--General and Special

  14. Easements

  15. Inverse Condemnation and Regulatory Takings

  16. Writing the Report

  17. Preparation for Trial

  18. The Expert Witness

  19. Liability Risks for Appraisers in Condemnation

    * Appendix A: Sample Easement Form

    * Appendix B: Appraisal Report Documentation Checklist

    The following are comments on the discussions in these sections.

    Chapter 1, "The Litigation Environment," addresses the unique appraiser-client relationship in valuations for condemnation. It includes coverage of the importance of appraiser objectivity in the face of pressure or conflict, and the importance of having a clear scope of work. The text notes that normally the client of the appraiser is the attorney for the condemnor or condemnee. (1) In appraisal for condemnation, delivery of a completed appraisal is seldom the end of the appraiser's role. The appraiser-client relationship usually continues throughout the condemnation process, with consultations and possibly further research or trial preparation and testimony. (2)

    The chapter contains information about multipremise appraisals, (3) appraiser-attorney relations (which may be strained in view of the attorney's advocate role compared to the appraiser's objective analyst role), and the pros and cons of sharing draft appraisal reports. Further, the discussion provides practical suggestions for appraisers on such things as clearly written legal instructions for the appraiser and on fee arrangements. For example it advises,

    When appraisers are employed by private litigants, they should seriously consider requiring that their appraisal fee be paid up front, before the assignment is begun, or suggest that the fee be placed in escrow ... [so the] appraiser is assured of receiving the fee earned, even if the client is not satisfied with the appraiser's ultimate opinion of value. If appraisers are not paid in advance ... it could be made to look like their fee is contingent on the outcome. (Page 6) It also cautions that appraisers should be sure the fee arrangement is sufficient to cover hiring third-party experts or obtaining reports necessary for a well-supported, credible appraisal.

    Chapter 2, "Origin of Eminent Domain and Just Compensation," has good material about the basis for eminent domain, which is the right of the government to take private property for public use upon payment of just compensation. This right to compensation arises in the United States from the Fifth Amendment to the US Constitution. Condemnation is the act or process by which this right is implemented. This chapter explores the significance of related terms as well as some interesting historical background. (4)

    The Fifth Amendment covers several matters, but its last two clauses are key for eminent domain and condemnation; it states as follows:

    No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation. [Emphasis added.] The chapter reviews the changing interpretations of the Fifth Amendment term public use. For example, pages 10-12 include a discussion of case law trends (the Kelo vs. City of New London case and others) and the blurring of what is meant by "public use" and whether it applies to general public good and taking private property for economic development. Similarly, the discussion examines the meaning of another key term, just compensation, although this critical term may not always be clear-cut or uniform. The text points out that some state constitutions use other terms, such as "adequate," "reasonable," or "due" compensation, but the concept is the same. Regarding the concept of just compensation, the text explains,

    The basic premise is that the owner must be compensated for the taking of the land (i.e., the value of the land and any damages accrued as a result of the taking), as opposed to being compensated just for the land taken. It is also generally recognized that property encompasses the entire bundle of rights ... and that the taking or infringement on those rights may affect the highest and best use of the property and ultimately the market value of the property, thereby constituting a taking, even if no part of the physical real estate is taken. (Page 13) It also notes,

    about half the state constitutions provide for compensation to be paid for the taking of, or damage to, private property by the sovereign.... [I]t has been universally held that damages to a remainder parcel in a partial taking case are part and parcel of just compensation in a constitutional sense. (Page 13) In this way, owners are made whole, i.e., they are no worse off after the taking.

    Chapter 3, "Legal Measurements of Just Compensation," tackles the ways just compensation may be measured. Case law and differing constitutional provisions vary by jurisdiction, resulting in several methods of computing just compensation. The local approach is important because "although appraisers do not estimate just compensation, they must report their findings of market value, and the difference in property value before and after a partial taking, in a manner usable to those charged with the responsibility of computing just compensation." (Page 15)

    The text offers an overview of the two general rules involved in computing just compensation: (1) the federal rule (also called the before and after rule), and (2) the state rule (also called the taking plus damages rule). Each is discussed thoroughly with helpful, clear illustrations and examples. The chapter addresses general and specific damages as well as related subjects, such as an example of the backland theory. Table 3.3 in this chapter shows a state-by-state comparison of four benefit-offset rules important in matters of partial takings with a remainder parcel. Benefits may sometimes offset compensable items. Matters of benefits, general and special, are discussed in chapter 14.

    "Limitations on Property Rights" is the focus of chapter 4. First the discussion explains the distinctions between real estate, real property, and property rights; then, the concept of bundle of rights is taken up, with discussion getting into various access rights and police power. Rights related to changes in highways and traffic, and circuity of travel are covered as well.

    Circumstances that may affect the property rights and compensation are also addressed. These include the unit rule, (5) presence of multiple estates or interests in the property (e.g., a life estate), and natural assets or resources (e.g., mineral deposits and timber). The text includes examples and illustrations. The chapter continues with a discussion of the distinction between personal property, fixtures, and trade fixtures. This distinction is important in the condemnation process, as personal property cannot be considered in the determination of just compensation, but a fixture, which is part of the real property taken, must be part of the compensation paid. The special treatment of condominiums, and common areas involved, makes for unique appraisal, and possible legal, challenges; these are discussed with helpful insight and information for valuers. Other challenging valuation issues discussed in this chapter include the value of reversionary interests and the effect on value of restrictive covenants. The reader will find this chapter is especially well documented, with 60 footnote citations.

    "The Larger Parcel" is the focus of chapter 5, with considerable attention paid to definitions and the importance of knowing and understanding just what the larger parcel is and its significance.

    The larger parcel is critical in valuation, of course; it is also important that there be common understanding between the appraiser and client attorney regarding the larger parcel. The chapter offers several instructive examples and illustrations involving larger parcel issues. The key concepts essential...

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