The Missouri Eminent Domain Reforms of 2006 "good faith negotiation" requirement: cities can use illegitimate appraisals under Kansas City v. Ku.

• Author: Cranford, Jeremy T.

City of Kansas City v. Ku (1)

1. INTRODUCTION

   In 2006, following a wave of public outcry over the Kelo v. City of New London decision (2) and the "disaster" in Sunset Hills, Missouri, (3) the legislature enacted the 2006 Eminent Domain Reforms. (4) This act created new protections for landowners, including a requirement that the would-be condemnor must attempt to purchase the land from the would-be condemnee engaging in "good faith negotiation" before filing a condemnation action. (5) One requirement of "good faith negotiation" is that the condemnor must make an offer to purchase the land at a price no lower than the land's value, as established either by an appraisal or through "an explanation with supporting financial data." (6) Where the condemnor uses an appraisal to establish the value of the land, that appraisal must have been "made by a state-licensed or state-certified appraiser using generally accepted appraisal practices." (7)

   Missouri statutes require almost all real estate appraisals to be done by state-licensed or state-certified real estate appraisers. (8) Furthermore, Missouri requires all of those individuals to follow a set of standards promulgated by the federal government--the Uniform Standards of Professional Appraisal Practice (USPAP). (9)

   In the instant case, the condemnees (the Kus) received an offer from Kansas City based upon an appraisal created by a licensed real estate appraiser. (10) They refused that offer, and when the City attempted to take the land by eminent domain the Kus presented expert testimony that the appraisal failed to comply with the standards of USPAP. (11) They argued that, therefore, the appraisal was not made using "generally accepted appraisal practices" and, thereby, the City's actions did not constitute "good faith negotiation" under that term's statutory definition in Missouri Revised Statute Section 523.256 (Good Faith Negotiation statute). (12)

   The trial court found otherwise and permitted the condemnation to proceed. (13) In reviewing that decision, the Missouri Court of Appeals, Western District, interpreted the meaning of the two statutes (Good Faith Negotiation and USPAP-Compliance) as applied to this situation and held that "an appraiser in a condemnation proceeding must adhere to generally accepted appraisal practices--such an appraiser is not required to adhere to USPAP." (14)

   This Article argues that the holding of the Western District contravenes decades of Missouri statutory construction law, undermines significant public policy considerations, and indirectly implicates the Missouri constitutional guarantee of "just compensation" for takings by furthering a system of under-compensation. This Article speculates as to the potential policy reasons for such a holding and, finding only the considerations of judicial economy and condemnation proceeding efficiency (time and expense to the condemnor, the burden of which passes to taxpayers), this Article argues that such considerations must yield to the property interests clearly protected by the language of the Missouri legislature.

2. FACTS AND HOLDING

   1. The "Action" of the Case

      Appellants Chung Ho Ku and Myong Suk Ku own a property (the Ku Property) commonly known as 1219-21 Grand Avenue in Kansas City, Missouri. (15)

      The Ku Property is near the Power & Light Entertainment District, Sprint Center, and H&R Block World Headquarters in the downtown area. (16) In January of 2004, the Tax Increment Financing Commission of Kansas City (TIFC) adopted a resolution recommending that the City Council of Kansas City (the City Council) approve the 1200 Main/South Loop Tax Increment Financing Plan (the Redevelopment Plan). (17) The City Council, in March of 2004, passed an ordinance approving and adopting the TIFC's recommendation, designating a Redevelopment Area (18) and finding that the area was blighted. (19) To support this finding, the City Council cited defective or inadequate street layout, unsanitary or unsafe conditions, deterioration of site improvements, improper subdivision or obsolete platting, and the existence of conditions that endanger life or property by fire or other causes. (20)

      In October of 2004, the TIFC adopted a recommendation that the boundaries of the Redevelopment Area expand to an area that included the Ku Property. (21) The City Council approved this recommendation, thereby including the Ku Property in the Redevelopment Area and Plan. (22) However, the City Council failed to make the Ku Property a part of a specific redevelopment project. (23) TIFC then filed a condemnation petition to obtain the Ku Property, but the court dismissed it "without prejudice" on the grounds that the Ku Property was not a part of a redevelopment project as required by Missouri Revised Statute Section 99.820.1(3). (24)

      In November of 2005, the City Council made the Ku Property part of a mixed use redevelopment project. (25) Then, in May of 2006, the City Council declared the expanded Redevelopment Area blighted as a whole. (26) Having done so, the City then gave the Kus written notice of its intent to acquire the land. (27)

      In September of 2007, after waiting for two years, the City delivered an offer to the Kus to purchase their property for $390,500. (28) Included with this offer was a copy of an appraisal by Ed Severeid, a licensed real estate appraiser, (29) which valued the property at $390,500. (30) The offer was signed by Patrick Ferguson, the City's Right of Way Agent. (31) The Kus rejected this offer and made a counter offer of $2,000,000. (32) Finally, on November 6, 2007, the City filed a new petition for condemnation, and trial was set for March 17, 2008. (33)

   2. The Appraisal

      "In determining the Property's fair market value, [the City's Appraiser, Ed Severeid,] first determined that the Property's highest and best use to be vacant and unimproved land for some form of planned business and commercial use [combined] with other tracts or parcels in the area." (34) As a result, he found that the improvements on the Ku Property had no significant contributory value to the property. (35) Flowing from that determination, he concluded that the capitalization of income (36) and the cost approaches (37) to valuation were inferior to the comparative market approach. Finally, after applying the

      comparative market approach (39) and making adjustments for certain factors (such as location, physical characteristics, and time of sales), he estimated the value of the Ku Property to be $390,500. (40)

      Severeid's appraisal stated, "It is difficult to put a specific USPAP Standard 2 identity on an Appraisal Report prepared for the City. However, for any inconsistencies with USPAP, Appraisers are protected by the USPAP Jurisdictional Exception provision." (41) Finally, Severeid's appraisal also included a certification that the appraisal was made in conformity with "appropriate state laws, regulations, policies and procedures." (42)

   3. At Trial

      At trial, the Kus presented expert testimony that the City's appraisal was not performed in accordance with USPAP. (43) They argued that, because all appraisers are required to conform with USPAP, it is a part of "generally accepted appraisal practices" and that noncompliance would, therefore, lead to a conclusion that the City had not engaged in "good faith negotiations" as defined by Missouri Revised Statute Section 523.256. (44)

      The Kus' expert witness, Maurice Kancel, a state-certified appraiser, testified that he reviewed Severeid's appraisal to check compliance with USPAP. (45) Kancel found that Severeid's appraisal had failed to meet six of the twenty standard USPAP requirements and that he did not agree with Severeid's analysis. (46) Kancel testified that Severeid should have used the capitalization of income method, instead of the comparable sales method, to value the Ku Property. (47) Kancel believed that, even in using the comparable sales approach, Severeid had used inappropriate sales data, as those sales were too remote in time. (48) Furthermore, while Kancel testified that the techniques and methodology that Severeid used were valid, he believed that the data and analysis upon which Severeid relied were inaccurate and insufficient. (49) Finally, Kancel presented his own opinion of the Ku Property's value, $1,200,000. (50)

      Notably, the instant court made no mention of testimony by Severeid, leading to an inference that neither the condemnor nor condemnee elicited his testimony. (51) Instead, the City responded to Kancel's testimony by producing Patrick Ferguson, the City's Right of Way Agent. (52) Ferguson had signed the original offer of $390,500. (53) Ferguson testified that Severeid's appraisal was done in accordance with "generally accepted appraisal practices." (54) He also testified that Severeid's appraisal "discussed" the three standard approaches to appraising before selecting the comparative market approach as the most appropriate. (55) Unsurprisingly, Ferguson, like Severeid, also believed that the property's highest and best use was for redevelopment purposes and, therefore, believed the comparable sales approach to be the most applicable. (56)

      Ferguson further testified that he approved of Severeid's methodology. (57) He admitted that he had not reviewed Severeid's appraisal for USPAP compliance because "he felt that such a review was not necessary." (58) Instead, he testified that, when he had read the appraisal, he "did not notice anything that would make him believe that the appraisal did not comply with USPAP." (59)

      The trial court found that the City had complied with all conditions precedent to this condemnation action. (60) Accordingly, the trial court found in favor of the City and ordered the Ku Property condemned. The Kus appealed. (61)

   4. The Appellate Court's Holding

      The Missouri Court of Appeals, Western District, examined the legislative relationship between the Good Faith Negotiation statute's (62) requirement that an offer...