Fair Market Value Issues in Eminent Domain Where the Market Has no Willing Sellers
A fundamental premise underlying eminent domain laws is that the owner is treated fairly under principles of just compensation. This means that the owner receives fair market value for the property being condemned. And, where there is an active, relevant real estate market with ample comparable sales data, this premise can be upheld through traditional appraisal methodologies.
Unfortunately, not all markets include legitimate, open market transactions from which to gather comparable sales data. This is especially true where market conditions have deteriorated; in other words, the very conditions that exist today. I have spoken on this subject several times in the past couple of years, but I believe many still do not understand the full impact of how current market conditions impact eminent domain cases.
Alan Ackerman, a Michigan eminent domain lawyer and editor of the National Emient Domain Blog, wrote a recent article in RE Business Online entitled Determining Fair Market Value which addresses just this issue. It walks through the concept of fair market value and the problem current conditions create. He explains:
Because most jurisdictions identify a specific date for the transfer of title and property values are subsequently assessed based on that specific date, there is greater potential for an artificially low value assessment based on what may be an unfavorable “snapshot” in time.
In other words, condemnees are penalized because they are forced to sell at a time when no reasonable seller would do so. And, exacerbating the problem, the data one typically finds around those dates of value represent distressed sales, for which one could reasonably argue there never is a true, willing seller. But, where that tainted data is the only data that exists, appraisers will often use it to establish value. Mr. Ackerman concludes:
Fundamentally, the underlying premise of fair market value is that property is sold without compulsion. To conclude that the sale must be made on a particular date could, for many owners, severely endanger the opportunity to receive just compensation, simply because they are not willing sellers in the marketplace.
Yes, market conditions will change, and this problem will go away. In the meantime, however, we will continue to struggle with assessing fair market value where the date of value falls during a severely depressed market.
There is one potential bright side for those practicing eminent domain in California. We have a statute designed to deal with situations in which no "relevant, comparable market" exists. Code of Civil Procedure section 1263.320 allows compensation to be established by "any method of valuation that is just and equitable" in such situations. This should provide appraisers with the flexibility necessary to adopt creative valuation scenarios where market conditions do not provide adequate, untainted data. How far courts will go in allowing appraisal testimony that does not follow traditional methodologies under the auspices of section 1263.320 remains to be seen.
The situation regarding "just compensation" is actually worse than what is depicted here -- which is bad enough.
There is a lot of play in the [determination] of just compensation. Energy companies, for example, practice a [] two-tiered pricing and/or leasing program: One for government (e.g., forest lands, game lands) and one for private property owners, even if they are next door. Guess who gets better compensation?
As one energy company agent admitted, governments are big and scary, and landowners are not. So government gets preferential treatment?
This does not amount to equitable treatment under law. After filing a freedom-of-information request, I obtained a copy of a Pennsylvania Game Commission lease with [an energy company]. This is for a . . . underground natural gas storage reservoir.
Meanwhile, private property owners were subjected to a two-year eminent domain battle.
The difference in value between the Game Commission lease and what [the company] offered landowners is sobering. []
The shale gas boom across many states (whether it is the Marcellus or Huntingdon shale) will drive more eminent domain threats. That is because where there is gas drilling, there will be more pipelines and more underground gas storage reservoirs. Pennsylvania and New York are already seeing this.
Mike --
I'm not going to get into details of the specific situation to which you are referring, but I do want to point out that you appear to be blurring a couple of different issues.
That a company may offer a "better" deal to a governmental agency than to a private person is not surprising; it happens all the time, in many different contexts. Aside from everything else, government owners tend to be much larger; with respect to land, they will often own vast acreages. These size differences can account for different pricing systems. This is not the same thing as determining just compensation in an eminent domain action, and there is nothing, per se, wrong with offering different terms to different owners.
On the other hand, an energy company may well offer a better deal to some owners specifically because the company has no eminent domain authority as to those owners, meaning a voluntary deal is the only viable option. In other words, not having an eminent domain option may indeed cause a company to "sweeten" the deal being offered. As long as the company still offers fair market value to other owners, there is again nothing wrong with such a practice.
Such "preferential" treatment does not mean that other owners should be denied just compensation. Private owners who do not like the deal being offered can choose to force the energy company to condemn the interest being sought. And, they are entitled to litigate the issue of compensation fully. Here in California, if the entity seeking to condemn property acts unreasonably in terms of the compensation it offers, it can subject itself to an award of litigation expenses (attorneys' fees, expert fees, and court costs), which also helps.
In addition, if there really are other "better" deals in the market, those deals may be available as comparable sales in the eminent domain case, which should help increase the amount of compensation the owner receives.
This does not mean that every owner will be made whole; sometimes an owner capitulates to a "bad" deal through ignorance or the inability to hire a competent eminent domain lawyer. But in many cases, adequately represented owners do ultimately receive fair compensation; I spend much of my time seeking to ensure just that. -- Rick