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California Eminent Domain Report

"…nor shall private property be taken for public use, without just compensation."

Update on Two Recent California Eminent Domain Cases

Posted in Court Decisions, Inverse Condemnation & Regulatory Takings

I wanted to provide a quick update on two recent cases from the California Court of Appeal.

The first, Golden State Water Company v. Casitas Municipal Water District (April 14, 2015), involves what appears to be an issue of first impression in California:  can Mello-Roos financing be used to fund an eminent domain action to acquire a utility company’s assets?  In Golden State Water Company, the Casitas Municipal Water District wanted to acquire the assets of the Golden State Water Company for the purpose of taking over the provision of water to many residents in Ojai, California.  The idea is for Casitas to condemn Golden State’s assets — both its physical facilities and its intangible assets such as water rights and business goodwill — and thereby take over Golden State’s utility service to those Ojai residents.  To finance the plan, Casitas intended to use Mello-Roos financing.

Golden State sued, raising three arguments as to why Casitas should not be allowed to do this:

  1. Mello-Roos Financing Cannot be Used for Eminent Domain.  The Court rejected this argument, holding that “purchase” in the Mello-Roos Act includes involuntary purchases through eminent domain.
  2. Mello-Roos Financing Cannot be Used to Acquire Intangible Assets.  The Court rejected this argument, holding that intangible assets can be acquired with Mello-Roos financing so long as their acquisition qualifies as “incidental expenses” related to the acquisition of tangible assets.
  3. Mello-Roos Financing Cannot be Used to Replace One Service Provider with Another.  The Court avoided this argument, concluding that Golden waived the right to make the argument because it did not raise it at the trial court and could not, therefore, make the argument in the Court of Appeal.

Ultimately, the Court upheld Casitas’ plan, allowing it to proceed with its eminent domain action funded by Mello-Roos financing.  There is a lot more intrigue to this case, and you can read more about it in our E-Alert, Mello-Roos May Be Used to Fund Condemnation Action of Private Utility Provider.

The second case, Brost v. City of Santa Barbara (March 25, 2015) is an unpublished decision (meaning it cannot be cited in court) that involves many of the same issues as the Court of Appeal confronted in the 2008 Monks case.  The main issue involves a city’s liability for a regulatory takings claim where it seeks to limit what, if anything, can be built in areas with known slope stability issues.  In Monks, the Court of Appeal held that the City of Rancho Palos Verdes could not preclude certain lot owners from building homes within the city’s Landslide Moratorium Area.

In Brost, the issue involved plaintiffs’ attempt to re-build homes destroyed in a 2008 wildfire.  The homes were located in “an active landslide area known as Slide Mass C of the Conejo Slide,” and a city ordinance precluded construction on properties within the area.  The city refused to allow plaintiffs to build, and the trial court held that the refusal qualified as a taking.  Not surprisingly, the Court of Appeal focused considerable attention on the Monks decision and how it impacted the Brost plaintiffs’ claims.

One issue in Brost was whether plaintiffs’ taking claims were ripe, with the city arguing the claims were not ripe because plaintiffs did not submit formal development applications before filing their lawsuit and, therefore, the plaintiffs had not exhausted their administrative remedies.  The Court focused on the “futility exception,” holding that where, as in Brost, it was clear that the city would not approve any development plans, the plaintiffs were not required to spend the time and money on a “futile” effort to obtain permits before filing suit.   The Court explained:

We recognize that in most cases, the nature and extent of the land’s permissible uses will not be certain and that the processing of at least one development application will be necessary to define those uses. But, as the trial court aptly observed, this case “presents the extraordinary circumstance when no productive or economically beneficial use of land is permitted.”

Next, the Court focused on the city’s claim that allowing plaintiffs to develop would constitute a nuisance and, as a result, precluding development cannot qualify as a taking.  The Court agreed with the trial court’s conclusion that based on expert testimony, the most that could be said was that “uncertainty” existed regarding whether it would be unsafe to allow plaintiffs to rebuild.  And, as explained in Monks, “‘uncertainty’ regarding the geological stability of [an] area is not a sufficient basis for depriving plaintiffs of the right to rebuild their homes.”  The Court upheld the trial court’s rejection of the city’s nuisance theory:

This speculative harm is insufficient for the City to preclude plaintiffs, for their “own good,” from all economically beneficial uses of their properties.

Thus, as in Monks, the city in Brost could not preclude plaintiffs’ development of their own properties within the slide area.  Its efforts to do so constituted a regulatory taking.

Don’t Overlook the Potential Value Added By Green Buildings

Posted in Events, Valuation

Green futuristic city living concept. Life with green houses, soIt is increasingly important for buildings to be energy efficient.  So-called “green buildings” can not only lead to more efficient energy use, but can also result in significant cost savings over time.  Indeed, green buildings may be more valuable than comparable buildings that are not as energy efficient.  This is an important factor to consider in eminent domain proceedings.  This point was driven home in a recent presentation made by Michael Frost, LEED AP, First Vice President at CBRE in its Palo Alto, California office.  He made the presentation to a diverse group of right of way professionals at the International Right of Way Association (“IRWA”), Chapter 42, the Silicon Valley Chapter of the IRWA.  Michael has an extensive background in green building issues and was the first LEED accredited commercial broker in Silicon Valley.

Michael explained that there is a LEED green building rating system that is a voluntary, consensus based, market driven system based on existing proven technologies.  The system evaluates exterior building design and construction, interior design and construction, and building operation and maintenance.  There is a point system based on several factors including: location and transportation; sustainable site; water efficiency; energy and atmosphere; materials and resources; indoor environmental quality; and innovative and regional priority.  Buildings can achieve four levels: Certified, Silver, Gold, and Platinum, depending on how many points a building receives under the rating system.

Michael pointed out that green buildings provide many benefits to both landlords and tenants.  For landlords, having a green building and a high score on the rating system can improve the value of the building because it may result in lower operating costs and lower energy costs.  This will provide the landlord greater flexibility and competitiveness in a competitive leasing marketplace.  For instance, it may lead to shorter lease-up times and higher rental rates.  For tenants, green buildings may provide a public relations and marketing opportunity, showing that the tenant’s business values energy efficiency.  It also may help with recruitment among millennials who are very concerned about energy efficiency and the environment.  Some of the other employee friendly benefits of green buildings, such as using natural lighting, better indoor air quality, and more responsive and controllable smart building systems (e.g., digital HVAC controls and networked lighting), may lead to greater productivity from employees.  Michael noted that, while sustainability and energy efficiency may not be the chief criteria for a tenant making decisions on where to locate its business, the “smart-building” benefits of green buildings can be an important factor.

Finally, Michael noted that, with respect to new construction and remodels, landlords today have less choice because regulations may require energy conservation measures in new and rebuilt buildings.  Some cities and counties may also have building codes that require a building to meet certain energy efficient standards.  Michael expressed confidence that energy efficient and green buildings are the wave of the future.  He noted that some countries, such as Germany, have made a major concerted effort at all levels of government to promote energy efficient and environmentally sustainable growth.

For those valuing a green building in an eminent domain proceeding, serious consideration should be given to the benefits that a green building provides to owners and tenants as compared to a non-green building.  These benefits may result in a material increase in value of a green building as compared to a non-green building.  At the least, the energy efficiency of a building and whether it is a green building should be thoroughly investigated by anyone valuing a building, and consideration should be given to how its energy efficient status impacts its value.

Caltrans and Temecula Join Forces to Relieve I-15 Congestion

Posted in Projects

The City of Temecula is moving forward with the French Valley Parkway.  The project involves construction of a new arterial, as well as improvements to the I-15 Winchester Road interchange.  Phase I of the project included constructing southbound off-ramps for the future Parkway.  These ramps are complete, but as a post on The Transit Coalition Inland Empire blog asked a year ago – “What the heck is going on with French Valley Parkway?”   The answer is the same now as it was then — Caltrans and the City are working to establish the scope and phasing of the remaining improvements.  So when will it be actually be built?

Well, there are some indications that it could be soon.  The City recently issued an RFP for property acquisition services, though the French Valley project is not specifically mentioned.  But we do know he project will involve acquisitions from at least 9 privately-owned properties and may require relocation of two businesses.  Those owners can expect to receive “Notices of Intent to Appraise” soon, if they haven’t already.  For more on the eminent domain process, check out our brochure “A Property Owner’s Survival Guide to Eminent Domain.”

Can Comments By a Federal Employee Result in a Taking Requiring Compensation Under the Fifth Amendment?

Posted in Court Decisions, Inverse Condemnation & Regulatory Takings, Uncategorized

It depends.  A recent decision out of the Federal Circuit tackled this very issue, and the court’s decision strongly suggests that a taking could arise under the right circumstances.  (Filler v. U.S. (Fed. Cir. Mar. 10, 2015) Case No. 2014-5117.)  As you probably already guessed by my use of the phrase “strongly suggests,” both the lower court and the Federal Circuit in this case found that the plaintiff’s challenge did not present the “right circumstances.”

After sustaining a work-related injury, an employee of the U.S. National Marine Fisheries Service visited the plaintiff to receive treatment.  Sometime after receiving treatment, this federal employee posted a number of comments to a public message board using a private account.  The federal employee, however, posted these comments from a government computer during normal working hours.  Learning of these comments, the plaintiff filed an action for common law defamation and interference with prospective business advantage, as well as a claim for inverse condemnation.

The lower court and the Federal Circuit rejected plaintiff’s claim for inverse condemnation, finding that despite the fact that the federal employee made the comments on a governmental computer during normal working hours, the federal employee was acting “for her independent purpose of conveying her personal views on the efficacy and advisability of the treatment,” and not in an official governmental capacity.  Accordingly, because there must be an authorized government action in order for there to be a compensable taking under the Fifth Amendment, the courts found that plaintiff failed to state a cognizable claim for inverse condemnation.

Notably, the lower court also found that plaintiff’s medical license did not, as a matter of law, constitute a compensable property interest for purposes of the Takings Clause.  The Federal Circuit, however, expressly declined to address this issue.

Lake Elsinore to use Eminent Domain to Expand Serenity Park

Posted in Projects

On Tuesday, the Lake Elsinore City Council adopted a Resolution of Necessity to acquire a 2+ acre property in order to expand Serenity Park.  As Michael Williams describes in his article “City hopes to take over boat launch,”  the expansion is part of the City’s plan to develop a skateboarding arena .  The City’s staff report says the City has been negotiating with the property owners for about a year, but that they have not agreed on a price for the property.  The staff recommended the city move forward with an eminent domain lawsuit.

Elsinore_Serenity_Park

It isn’t clear why the owners rejected the City’s offers, but a good bet is that they weren’t happy with the appraised value.  Although the property is currently vacant, Mr. Williams’ reports that at one time the owners sought to develop the property with a self-storage facility.   My guess is that the owner sees it as a valuable, income producing property, while the City looks at it as a piece of vacant land not suitable for much.  In other words, this may come down to a fight about the property’s “highest and best use.”

Long-Awaited Montebello Grade Crossings Moving Forward

Posted in Articles, Projects

As this article by OCTA explains, the Southern California region is growing both in terms of population and in the volume of goods moving through the region via both road and rail.  I am sure many of us are familiar with the impacts this has on our daily lives — like being stuck for what feels like hours at a train crossing.  But several local agencies are doing what they can to ease our pain.  In Orange County, OCTA is in the midst of its OC Bridges program building grade separations.  And in Los Angeles, the Alameda Corridor-East Construction Authority (ACE) has completed several new crossings, with many more in construction and design.   (Go to theaceproject.org to see the project map.)  The latest ACE projects to hit the news are the grade crossings in Montebello.

Nancy Martinez reports in her EGP news article “Montebello Council Approves Plan to Build Rail Crossings” that many in the Montebello community are glad the 15-year wait is (more or less) over.  After much debate, the City recently approved plans for underpasses at Maple Avenue and Montebello Blvd.  But not everyone is happy.  It looks like the projects will require several properties including several homes and at least two businesses along Maple Avenue.   (You can see the presentation to the City Council here.)   The City’s approved plans now go on to ACE, who must approve them and will actually undertake the work — the last of ACE’s projects before the agency shuts down.

Grade separations are complicated, time consuming and expensive.  They can also be very disruptive to the surrounding community.  But the upside is a much safer and more efficient way to move goods and people through the region.

 

A Victory (at Least for Now) for Opponents of the Keystone Pipeline

Posted in New Legislation, Projects

We’ve been following the saga of the Keystone XL pipeline for a while now, and the battle rages on in Washington.  Yesterday, the Republican-led Senate attempted to override President Obama’s veto of a bill to approve the pipeline.  For those a bit lost in all the political and legal wrangling, the recent story began with a bill in Congress designed to grant approval to the controversial pipeline project.  The bill passed the Senate on January 29 and the House in mid-February and was sent to the White House for President Obama’s signature.

keystone-oil-pipelineBut just as promised, President Obama vetoed the bill, which would ordinarily be the end of things.  (A veto override is exceedingly rare; it’s apparently only happened 110 times out of more than 2,500 vetoes dating all the way back to George Washington.  And, yes, I’m citing to Wikipedia for these stats.)  But with the Republicans in control in both the House and the Senate, and with a least a handful of Democrats having voted in favor of the bill, the Senate sought to override the veto.  If successful, a veto override would have done just that, override the veto, allowing the bill to become a law.  (Is anyone else hearing the “I’m just a bill . . . ” song in the background about now?  But I digress.)

On Wednesday, the Senate voted 62-37 to override the veto.  That sounds pretty good, right?  But a veto override vote requires 67 votes, meaning the override effort fell short.

So what happens now?  It depends on who you ask, and several plans remain in the works.  Senator John Hoeven of North Dakota, a strong supporter of the pipeline, vows to fight on.  He is quoted in a March 4 New York Times article as saying:

Another option is to attach this legislation to other energy, infrastructure or appropriations legislation that the president won’t want to veto. The will of the American people and Congress is clear.

And that other bill is rumored to be a highway infrastructure bill (which, presumably, President Obama wants).  Others, not surprisingly, have different views of the subject.  California Senator Barbara Boxer was quoted as saying last week that the very idea of a veto override attempt was a “ludicrous idea,” while at the same time rejecting the idea that the bill could be revived by attaching it to the highway legislation.  According to a March 4 Fox News story, Senator Boxer did not mince words as she summed up her view:

“First, they hold the homeland security funding bill hostage to immigration,” Boxer said. “Now they want to hold the highway bill hostage to big polluting Canadian special interests.”

Suffice it to say that we likely have not heard the end of this battle.

How Does Contamination Impact “Fair Market Value”?

Posted in Articles, Valuation

46-box-stationAs California continues to expand and improve its infrastructure, public agencies are more frequently running into contaminated property.  A frequent question for eminent domain attorneys is:  “how does contamination impact ‘fair market value’ in a condemnation action?”  My general advice is that the contamination should be treated just as it would in an open market transaction.  But how is contamination handled in a typical transaction — and how does it impact value?  Aside from potential clean-up costs, are there lending issues, and is there a general stigma with contaminated property?

Luckily, my colleagues will be covering some of these issues in great detail tomorrow at Nossaman’s 2015 Eminent Domain Seminar.  Nossaman eminent domain attorneys Rick Rayl and Michael Thornton, along with appraiser Orell Anderson and environmental/contamination expert Opjit Ghuman will be presenting on “Valuation, Cleanup Costs, & Other Scary Things:  Acquiring Contaminated Property,” so we’ll learn quite a bit more from them (hopefully!).

But as a preview, and if you’re not attending tomorrow’s seminar, I came across a great study prepared by Retail Petroleum Consultants (RPC), “‘Clean’ Versus Contaminated Gas Stations:  How Do Market Buyers and Lenders Address Contamination?”  RPC has been involved in appraising thousands of gas stations, so they know what they’re talking about.    According to RPC, many gas station properties involve an indemnity from the major gas station company that previously owned or operated the site.  RPC concluded that where these indemnities exist, purchase prices usually are not discounted:

Surveyed buyers of gas stations for continued gas station use do not support a discount for contamination or stigma, unless the responsible party is not a Major Oil Company or the ongoing remediation somehow increases their cost of capital or impairs the utility of the site. In summary it seems as long as there is an indemnity agreement as is the case with most contaminated gas stations and the Major Oil Company is the responsible party, the market does not support a material discount for contaminated gas stations.

What about securing loans from lending institutions?  RPC interviewed a number of lenders, and here was the conclusion:

The responses varied amongst the lenders surveyed, though it was apparent that none could identify a particular increase in the interest rate due to contamination (or stigma). More so, the contamination issue was dealt with on case by case basis with nominal effect on lending rates as long as the site has been remediated or is being remediated by credit rated responsible party such as a Major Oil Companies.

Gas station properties may be unique or different than other contaminated properties, especially because the indemnities tend to exist with the major oil companies.  However, gas stations are the properties condemning agencies run into most frequently with contamination issues, so this is useful input.  To get some more insight, take a look at RPC’s article, attend our seminar tomorrow, or feel free to give us a call.

How Hard Does it Have to Rain Before the Government is Liable for a “Condemnation Cloud?”

Posted in Articles

stormcloud

Public projects take years of planning and environmental review usually involving outreach to neighboring property owners and other stakeholders. During this process, potential right of way impacts are identified and property owners (and their potential buyers or tenants) become aware of the planned project. As we have described in the past, this can result in a “cloud of condemnation” over the property, affecting the value of that property. Property owners often feel they should be compensated for this uncertainty. But it is difficult for owners to succeed on these claims. (Check out a 2011 post from my colleague Brad Kuhn, “Property and Business Owners’ Precondemnation Damages Claims Dismissed.”)

There are good public policy reasons why precondemnation claims should be difficult to prove. If the government were liable every time it announced it might need a property for a public project, the costs of acquiring right of way would sky rocket, or an agency might be less forthright about its plans, neither of which are in the public interest. Most people would agree that public participation and transparency in government are vital to the democratic process. Government should be encouraged to give more, not less, information about its plans.

So how heavy must the cloud get before it rains compensation for a property owner? 

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California courts have generally made the distinction between the “planning stage” of a project, and the “acquisition phase.” (See Contra Costa Water Dist. v. Vaquero Farms, Inc. (1997) 58 Cal.App.4th 883, 900.) When I think of the “acquisition phase” I think of a notice of intent to appraise, followed by an appraisal and offer and negotiations. But several California courts have found these activities to be protected. And perhaps this makes sense – I have known agencies to redesign a project or even abandon an acquisition when negotiations break down or the impacts are too great. There is an argument that agencies should be free to do so without their own cloud of liability over their heads.

On the other hand, these rules may frustrate some property owners (and their attorneys) by blurring the line between “planning” and “acquisition” that allegedly determines liability. The courts have also found other ways of to define the line. In general, an owner must show there has been some special, direct interference targeted at his or her property, beyond the general pre-acquisition activities in the general area.

Test Yourself: Impermissible Targeting or Permissible General Planning?

To see how well you’re paying attention I’m offering this little quiz (or as we former teachers call it – “check for understanding.”) Answers are in the box below.

Case No. 1: Agency has property and business appraised, signs erected in area announcing development and Agency representatives informally told owner property would be acquired.

Case No. 2: Agency enacts zoning regulations designed to depress the market value of a property to be condemned.

Case No. 3: Agency adopted a resolution of necessity and filed an action, then adopted a second resolution to dismiss the proceedings. The second resolution also declared that the Agency had a firm intention of acquiring the property at a later time.

Case No. 4: Agency adopted an environmental report showing owner’s property as part of project. For the next 7 years, agency acquired neighboring property, obtained additional necessary permits, and refined the project’s design before it filing an action to acquire the owner’s property.

Did you get them right? Congratulations! You are a precondemnation damages expert. But don’t worry if you didn’t get them right, or if you just couldn’t be bothered to figure out the answers. You can always give me or one of my colleagues a call and we can let you know whether you’re going to need an umbrella.

Case No. 1: Permissible general planning (Joffe v. City of Huntington Park (2011) 201 Cal.App.4th 592.) Case No. 2: Impermissible targeting (City of San Diego v. Rancho Penasquitos Partnership (2003) 105 Cal.App.4th 1013. Case No. 3: Impermissible targeting (delay) (Klopping v. City of Whittier (1972) 8 Cal.3d 39.) Case No. 4: Permissible planning (Contra Costa Water Dist. v. Vaquero Farms, Inc. (1997) 58 Cal.App.4th 883, 900.)

Image courtesy of Flickr by Benjamin Stäudinger

Image courtesy of Flickr by Rob Deutscher

Water District Not Liable In Inverse Condemnation When Water Pipe Breaks and Damages Property

Posted in Court Decisions, Inverse Condemnation & Regulatory Takings

California’s infrastructure is aging. There have been numerous reports of water line breaks and gas line leaks, and public agencies have been moving quickly to upgrade their utilities to minimize these risks and satisfy increasing demands. When incidents do occur, when do agencies face potential liability in inverse condemnation? A recent California Court of Appeal decision, Kelly v. Contra Costa Water District (Feb. 10, 2015) 2015 Cal.App.Unpub.LEXIS 924, while unpublished, provides some guidance.

In Kelly, the owners of a self-storage facility in Pittsburg, California, discovered water accumulating on their property. After a number of tests, it was determined that the water was coming from a cement water main running under the property. The local water district made numerous unsuccessful attempts to find the location and cause of the leak. Several years later, the water district’s engineer conducted a video inspection of the pipe’s interior and found an indentation in the pipe. The water district determined that the leak was small and intermittent and the repair did not need to be performed on an emergency basis. The repair was not completed until 2008.

Eventually, the water main leak caused cracks in the concrete slab running under some of the owner’s storage buildings. The property owner filed a lawsuit against the water district, which included causes of action for inverse condemnation, maintaining a dangerous condition of property, nuisance and trespass.

The Trial Court

The tort claims were tried to a jury and the inverse condemnation was tried to the court. The court sided in favor of the water district on the inverse condemnation claim, but the jury found the water district liable for trespass and awarded damages based on the repair costs. (The jury also found that the property owner was negligent at the time the property was constructed and assessed the owner’s percentage of fault at 20 percent, thereby lowering the award).

The Court of Appeal

The property owner appealed the trial court’s ruling regarding the inverse condemnation claim, but the Court of Appeal upheld the trial court’s ruling finding no liability. Since the water district unquestionably damaged the owner’s property, the question is why was there no liability?

The Court explained that a property owner may recover just compensation from a public entity under the theory of inverse condemnation for:

any actual physical injury to real property proximately caused by [a public] improvement as deliberately designed and constructed . . . whether foreseeable or not. This requirement is satisfied by a public improvement that as designed and constructed presents inherent risks of damage to private property, and the inherent risks materialize and cause damage.

The Court further explained that a claim for inverse condemnation requires a taking or damaging for public use that is based upon a policy decision by the public agency, and not simply the negligent act of a public employee. For example, in a case of alleged careless maintenance, as in this case, the plan of maintenance must be unreasonable to establish a taking – poor execution of a maintenance plan does not result in a taking.

Because the damage to the owner’s property was caused by negligent maintenance of the water main by the water district’s employees who failed to promptly locate and repair the leak (rather than by the design or construction of the pipe or the overall water delivery system), there was no liability in inverse condemnation.

Conclusion

Kelly supports the conclusion that as long as a public agency is undertaking reasonable efforts to maintain its infrastructure, there will be no inverse condemnation liability for damages caused by leaking or faulty pipes. However, where an agency understands that its pipes need to be replaced, but simply waits until the pipe breaks before fixing it, such a maintenance program will be viewed as inadequate, and lead to potential exposure in inverse condemnation.

Limiting exposure to inverse condemnation claims is important, as attorneys’ fees attach to the finding of liability. Nevertheless, agencies can still be found liable for other tort claims, such as trespass or negligence, when infrastructure is not properly maintained.