First, there is the letter from the government.
Then, there is the bulldozer.
By Scott E. Jenny
This article was originally published in the magazine, Contra Costa Lawyer, in November of 2001.
Article I, Section 19 of the Constitution of the State of California States:
“Private property may be taken or damaged for public use only when just compensation, ascertained by a jury unless waived, has first been paid to, or in to court for, the owner.”
Eminent Domain is the right of the government to take private property for public use. It is sometimes referred to as condemnation. For example, when a street needs to be widened, or when BART needs to extend its tracks, the government uses the power of eminent domain to condemn, or acquire, the private property needed.
At some point a private property owner may find that he or she owns property directly in the path of a future public project such as a freeway or BART extension. Or, that their cattle ranch is actually a perfect location for a reservoir. Or that some public agency thinks that the vacant lot which they purchased some years ago as an investment would make a perfect access road to a new shopping center or subdivision.
By the time the property owner finds out that their property is being condemned, the government will have already had an appraiser place a value on the property rights being taken. However, an appraiser is only able to render his or her opinion of the value of the property. Usually, the property owners do not agree with the appraised value. In fact, often property owners do not even know the value of their property. They have the right to express their own opinion of value, and they have the right to hire their own appraiser.
If property owners find themselves in this position, the applicable government agency interested in their property will approach them and attempt to buy the property at an “agreed-upon” price. If the property owner does not agree with the agency’s “agreed-upon” price, the agency will sue the property owner in eminent domain and take the property through a legal proceeding.
The property owner may want to keep the property, and they have a legal right to challenge the right of the government to take the property. If the agency wants to investigate the existence of any hazardous materials on the property (under the Polanco Act), the property owner has rights which can protect the owner from unnecessary clean-up costs. Or, the property owner may believe that the price the agency is offering is simply too low.
When property owners find themselves in this position, they begin to think an awful lot about property values. When the public agency approaches them, it will tell them that it has already performed an appraisal of the property, and it will present the property owner with a summary of that appraisal. The property owner must then decide: appraise, or not appraise. The property owner first needs to decide if they want to appraise, and then they need to determine how to do it. With the soaring prices of real estate in California, the first instinct will be to have the property appraised by their own appraiser. They should follow that instinct. The question of how to appraise the property is a bit more complicated. An appraisal for eminent domain purposes is different from a typical appraisal, and the resulting property values can vary greatly.
Property owners sometimes know the value of their property. After all, they have usually owned it for quite some time. They either live on the property, or have purchased the property as an investment. Either way, property owners tend to follow the real estate market and often have a pretty good idea of the value of their property. At least they think they do.
While property owners may have a general idea of the value of their property if the property were to be sold on the open market, property owners usually have no idea of what the value of their property is if it is being taken through the process of eminent domain. There are significant differences between open market and eminent domain values. Eminent domain values can often times be substantially higher than the property owner believes. While the constitution allows public entities to take private property, the legislature has enacted numerous statutes which protect a private property owner from losing his or her property without being properly compensated.
As private property owners, they are entitled to “just compensation” for their property taken. Just compensation is defined as the fair market value of the property being taken, and severance damages, if any, to the remainder. The determination of a property’s fair market value must take into consideration two concepts unique to eminent domain: “highest price” and “highest and best use”. BAJI 11.73 (applicable only to eminent domain proceedings) defines fair market value as:
“The fair market value of the property is the highest price on the date of valuation that will be agreed to by a seller who is willing to sell but who is under no particular or urgent necessity for so doing and who is not obliged to sell, and a buyer who is ready, willing, and able to buy but who is under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.”
One of the key terms in this definition of fair market value is the term “highest price.” Usually, outside of eminent domain proceedings, when an appraiser appraises a piece of property, he or she appraises the property using the standard of “most probable price.” This means that the appraiser has evaluated the real estate market and has determined a price at which the property would most likely sell, after a reasonable period of marketing. The appraiser’s job is to inform the property owner of the “most likely” price that the property would bring.
By contrast, in an eminent domain proceeding, the appraiser must appraise the property according to the “highest price” that the appraiser believes the property would sell for. Any appraisal is merely an appraiser’s opinion of the value of the property, and requires the appraiser to create a fictitious sale in attempting to set that value. Under eminent domain valuation standards, the appraiser must use the higher standard of “highest price” rather than the typical appraisal standard of “most probable price.” This difference in analysis can greatly affect the value of the property being appraised.
For example, if an appraiser is valuing a piece of property and the comparable sales ranged from $10.00 per square foot to $16.00 per square foot, an appraiser using the standard of “most probable price” may come in with an appraisal conclusion of $13.00 per square foot. However, an eminent domain appraisal using the standard of “highest price” may come in above $13.00 per square foot, closer to the $16.00 per square foot figure.
The other unique concept in eminent domain appraisals is the concept of “highest and best use.” BAJI 11.74 defines “highest and best use” as follows:
“The fair market value of the property to be taken must be based upon factors affecting the market value, including the highest and best use for which the property is geographically and economically adaptable. The term “highest and best use” means the most profitable use.”
Normally, when property owners sell their property, they do so according to the current use of the property. That is, residential property is sold as residential property, commercial property is sold as commercial property, and industrial property is sold as industrial property. Under eminent domain, however, the appraiser must appraise the property according to “the highest and most profitable use to which the property might be put in the reasonably near future, to the extent that the probability of such a prospective use affects the market value.”
One of the most common ways that the concept of “highest and best use” comes into play is when the appraiser evaluates the zoning of the subject property. If the appraiser is appraising the property for an actual sale, the appraiser values the property as it is currently zoned. However, in an eminent domain proceeding, the concept of “highest and best use” may actually “change” the zoning of the property for purposes of the appraisal.
For instance, if property is currently vacant and zoned as residential, but the recent developments in the area of the property indicate that, in the reasonably near future, the property may be rezoned as commercial property, the eminent domain appraiser may appraise the property as commercial property. This does not simply mean that the appraiser would appraise the property assuming that the buyer had “some knowledge” that the property may be used as commercial property in the future. It means that rather than using residential comparable sales, the appraiser would actually use comparable commercial sales to determine the value of the property. This can have a significant impact on the value of property when the eminent domain appraiser “changes” the zoning of the subject property from residential to commercial, from agricultural to light industrial, etc. Of course, a change in zoning is merely the appraiser’s opinion, so you may actually have a situation where two eminent domain appraisers are testifying before a jury, with one appraiser having appraised the property as agricultural, and the other having appraised the property as light industrial.
Another important, and unique, feature is the concept of severance damages. If a property owner owns 100 acres of property and is only selling 20 acres, the owner can, of course, only receive compensation for the 20 acres he or she is actually selling. However, if property being condemned is part of a larger parcel of property, in addition to compensation for the property being taken, the property owner is entitled to recover “severance damages.” Severance damages are defined as the damage to the remainder caused by either the severance of the remainder from the part taken, or from the construction and use of the project for which the property is taken.
For instance, if the 20 acres is being taken by the county for use as a dump or nuclear power plant, the value of the remaining 80 acres (which the property owner will continue to own after the condemnation) will be severely decreased. The property owner is entitled to be compensated for this decrease in value.
Severance damages are determined by the appraiser valuing the remaining property in the “before” condition and comparing it with the value of the remaining property in the “after” condition. In the above example, if the property was worth $20,000.00 per acre in the “before” condition, that is, prior to the announcement and construction of the dump or nuclear power plant, and after the announcement and construction the property then decreases in value to $10,000.00 per acre, the property owner is entitled to receive the $10,000.00 per acre decrease in value caused by the project. This is, of course, in addition to the $20,000.00 per acre for the 20 acres actually taken.
Another way that severance damages can come into play is when the remaining property decreases in value by the “severing” of the part being taken. If the 100-acre parcel was big enough for a shopping center, but the remaining 80 acres is not, then the value of the remaining 80 acres may be worth less on a per-acre basis. This would result in a compensable claim of severance damages.
This firm has handled cases where the appraisal of the condemning agency differs greatly from the appraisals of our clients. When this happens, if the case does not settle informally, a jury trial is held on the issue of value, and the property owner is entitled to have a jury decide the value of the property taken. The jury hears all the evidence, primarily consisting of the appraisers’ opinions, and then the jury reaches a verdict as to the value of the property being taken. The following cases illustrate this point, involved very diverse opinions of values, and this firm is proud of the jury verdicts reached after trial:
Alameda County Flood Control and Water Conservation District, Zone 7 v. Ferreri, et al., (June 2008)
Alameda County Flood Control and Water Conservation District, Zone 7 v. Land Factors, Inc., et al., (April 2008)
State Route 4 Bypass Authority v. Pomeroy (February 2007)
Redevelopment Agency of the City of Sacramento v. Rashid (October 2006)
Sacramento County Flood Control District v. Cross (January 2005)
CalTrans v. Peckham (May 1997)
Contra Costa County v. James Ditmer (September 2000)
City of Pleasanton v. Oetman, et al. (October 1998)
City of Pleasanton v. Oetman, et al.
City of Walnut Creek v. Hartwig (February 1995)
The above is just an overview of the appraisal process for an action in eminent domain, and the above cases only examples of cases we have tried to juries (of course, this is not a guarantee as to the results of any future cases). This article and these cases only address the value of real property and do not discuss equally compensable categories of business goodwill, a bonus value on a lease, or improvements to the property. But the above should be enough to convince property owners that they need to have their property appraised by a qualified eminent domain appraiser who will use the proper standards, before the property owner simply accepts the appraisal presented by the condemning agency.
An attorney knowledgeable about eminent domain litigation is also a necessity. The property owner should locate an attorney they feel comfortable with, and who can recommend a qualified eminent domain appraiser (if the property owner selects their own appraiser before consulting a qualified eminent domain attorney, they run the risk of finding themselves using an appraiser who performs most of his or her work for condemning agencies, not private property owners). Timing is important also, because the agency already has a head-start. It has known it was going to take the property for a long time, and the owner is just finding out. An attorney is best able to protect the property owner's constitutional rights if the attorney is consulted as soon as the property owner discovers that the government wants the property.
Jenny & Jenny, LLP