by Daniel Peters, Real Estate Attorney
Before the government can take a citizen’s property through the power of eminent domain, or condemnation, it must first show the taking is for a public purpose. Once that is established, the government acquiring your property for a public use must compensate its owner by paying “just compensation.” Just compensation is typically measured in one of two ways, either 1) it is the “fair market value” of the property taken by the government if the government takes an entire property; or 2) it is the fair market value of the property taken plus the loss in value to the rest of your property if the government takes only a portion of your property.
“Fair market value” is defined as the sales price in cash that a willing and well-informed buyer would pay to a willing seller for the property. Typically in a condemnation case both the government agency (condemnor) and the property owner (condemnee) will hire an appraiser to calculate this value. In most circumstances, the appraisers will use one or more of three different methods, the sales comparable approach, or the income approach.
The sales comparison approach is the most commonly relied upon approach for determining fair market value. With this method, the appraiser looks at the price at which other similar properties in the area sold for, and then determines the Fair Market Value by adjusting the price of the subject property based on various factors like location/neighborhood, quality and size of the property and buildings and market conditions. The cost approach looks at what it would cost to purchase the bare land and then build the existing structures located upon it. This approach is generally more useful when there are not many similar properties in the area that can be used for comparison. The third method, the income approach, looks at how much revenue a property generates for the owner and determines a value based on how much money it brings to the owner. This method is usually only useful where the property is used for a business that generates revenue.
Where only a portion of the property is taken – for instance, if a narrow strip of your property is needed so a street can be widened – the government must pay you the Fair Market Value of the strip it takes, and then compensate you for damage to your remaining property. One example of this would be if a parking space on your remaining property can no longer be accommodated because your driveway is reconfigured. In that situation you would be entitled to the decreased value of your remaining property due to the lost parking.
There are some things that just compensation typically does not include, first and foremost are business losses. If the property is used as a retail store and it loses sales because of the government’s taking compensation is not normally available for lost profits those sales would have generated. Additionally, if the government changes the traffic pattern on the street in front of your property and this causes your location to be less desirable, you will not normally be compensated for what is called “circuity of travel.” There may, however, be compensation if the actual access to your property is impeded.
Once the government has determined it needs the property, the parties must either agree to a sales price or the government must start a condemnation lawsuit – the result of which is a judgment that transfers title to the government and determines what amount of just compensation is to be paid to the owner. The process begins with the government making an offer to pay its just compensation amount to the property owner. In most cases the condemnee will hire its own appraiser to calculate just compensation, and it is typical that the government’s determination of just compensation is lower than the property owners calculation. If this is not the case, the owner will most likely accept the condemnor’s initial offer. If the numbers are close enough, often times a compromise can be reached before litigation begins or early in the process. However, where the numbers are far apart and both sides cannot agree to a number, the case will proceed to trial, where a judge or jury will determine the just compensation amount. At trial, each side will attempt to show that its appraiser’s calculation was more accurate, and may bring forward experts to testify as to why certain circumstances should or should not impact the value of the property. The judge or jury is entitled to select either number or choose its own number somewhere in between. If the property owner obtains a judgment that is ten percent higher than the government’s offer made 30-days prior to trial, the property owner will be entitled to its reasonable attorney’s fees.
Beyond “just compensation,” you also may be entitled to be reimbursement for other costs. Often times money is available to the owner to pay an appraiser to evaluate the government’s offer, particularly when federal money is used to fund the project or the government agency has a policy requiring this. Under some circumstances, owners may be entitled to reasonable attorney’s fees for time spent evaluating the agency’s offer (but not typically for time spent advocating for a higher award for just compensation). If an owner is required to relocate to another property, they may also be entitled to moving expenses, depending upon agency policies and funding sources.