California Eminent Domain Report

More than 50 years ago, Caltrans purchased roughly 500 homes under threat of eminent domain within the planned right-of-way for the anticipated construction of the I-710 freeway (linking Monterey Park to Pasadena).  As we reported a number of years ago, Caltrans finally decided to sell those homes once it became clear the alignment would not be utilized.  We haven't heard much on how that sales process was going, but the Pasadena Star reported recently that it has been the subject of litigation, which has now reached an outcome.

In Steve Scauzillo's April San Gabriel Valley Tribune article, Renters of Caltrans-owned homes in South Pasadena get to buy them $970,000 below market, several current tenants will be able to purchase their properties back from Caltrans for the same price Caltrans paid in 1963 -- which range from the mid-$20,000's to mid-$30,000's.  Caltrans had attempted to sell the homes back at the same price, but adjusted for inflation, which brought the prices up to several hundred thousand dollars (which was still dramatically below their fair market value of over $1 million).  The court disagreed with Caltrans' inflation adjustment, concluding that the homes should be offered back at the original acquisition price - no more, no less:

The Caltrans policy of adjusting the original acquisition price adjusted for inflation to determine the affordable sales price for the petitioners’ homes is an underground regulation and is therefore nullified.

Beckloff ruled that Caltrans came up with the idea of upping the sales price — sometimes six or seven times the acquisition price — on its own. In other words, officials made it up. Caltrans cannot use its pricing methodology, Beckloff wrote, saying the bureaucracy was acting in a type of ‘quasi-legislating’ power …

Caltrans tried to argue that selling any state-owned properties for less than fair market value would be cheating the taxpayers.  In its court briefs, Caltrans said it was obligated and authorized, and in fact mandated by law to adjust the original acquisition prices for inflation.  The court explained that Caltrans has no authority to vary from what is known as the Roberti Law, a complex set of regulations that requires Caltrans to offer the homes to tenants living there for a certain period of time and at an affordable price who are low- and moderate-income. Of the 460 surplus properties, about tenants at 120 of them qualified for the affordable price program.

Caltrans didn’t walk away empty-handed.  The court kept in tact covenants that will remain as liens on the property during a transfer of ownership.  The tenant does not realize the full equity, only the appreciation from the sales price from the purchase to the next sale. In other words, upon a later sale, about $900,000 in equity would go to a state agency charged with building affordable housing, called the California Housing Finance Agency.

The 710 freeway example -- with Caltrans' ownership dating now over 50 years -- is quite the story.  After the backlash from the famous eminent domain Kelo decision and the enactment of Proposition 90 in California, the results today would likely have played out differently.  Under California Code of Civil Procedure section 1245.245, if a public entity does not put condemned property to public use within 10 years of the adoption of the resolution of necessity (and does not adopt a new resolution), the public entity is required to offer the property back to the original owner at the present market value, unless it is a single family residence, in which case it is to be offered back at the price paid by the agency, adjusted for inflation, if the original owner meets low or moderate income requirements.  If the original owner cannot be found, the agency is required to sell the property as surplus.