California Eminent Domain Report : a blog following condemnation, inverse condemnation, and regulatory takings written by attorneys with Nossaman LLP.

A new published California court of appeal decision may be important for private utility companies with respect to the valuation of their possessory interests in public rights-of-way for property tax assessment purposes.  The case, Charter Communications Properties v. County of San Luis Obispo, provides that when assessing the fair market value of a utility's possessory interest, the County tax assessor will likely be able to disregard the utility's agreed-upon remaining term of possession and instead assume a much longer anticipated term of possession to match reality.  This, in turn, means private utility companies should expect to see higher property tax assessments.  

Some background:  Under article 13, section 1 of the California Constitution, property is generally assessed as a percentage of its fair market value.  Private possessory uses of public property may also be assessed for property tax purposes.  With respect to private utilities in public rights-of-way, such possessory rights are typically valued by capitalizing the annual rent.  The annual rent is based on the franchise fee paid in exchange for the utility's possessory interest for (1) the remaining term or (2) the anticipated term.

The term of possession therefore becomes very important for valuation purposes, as the longer the term of possession, the greater the present value.  In the past, the assessor typically relied on the franchise agreement between the public entity and the private utility company in determining the remaining term.  As terms came closer to expiration, private utility companies were taxed less and less.  

The Charter Decision:  In Charter, the private utility company had between four and eight years remaining on its franchise agreements with the County for the placement of its television cables in public rights-of-way.  Instead of using this remaining term for valuation purposes, the County assessor instead valued the private utility's possessory interest by assuming a much longer anticipated term of possession (15 years).  

Charter challenged the assessor's valuation methodology, as it resulted in over half-a-million dollars of increased assessment.  Charter claimed there was no basis to deviate from the agreed-upon remaining term and assume a longer anticipated term of possession.  The trial court held that the assessor appropriately relied on an extended anticipated term as opposed to the parties' stated remaining term, concluding that the evidence demonstrated that these types of franchise agreements are routinely renewed indefinitely, and in fact Charter expected its cables to remain in-place indefinitely.

The Court of Appeal affirmed, also concluding it was appropriate for the County assessor to assume a much longer anticipated term for valuation purposes.  Despite the stated length remaining for its franchise term, there was no question that the utility provider would have its franchise renewed and the utilities would remain in place well into the future.  

Private utility companies will now need to seriously analyze their property tax bills and determine the valuation methodology employed by the assessor.  If the assessor deviated from the stated remaining franchise term, the utility provider will need to decide whether the deviation is supported.

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The City of Laguna Woods had been leasing the building it used for City Hall on El Toro Road for a number of years.  In 2005, the City -- apparently tired of leasing the space -- decided to acquire the property by using its power of eminent domain.  After proceeding to trial, a jury determined this week that the fair market value the City is required to pay for the building was $6.43 million -- $2.78 million more than the City had initially offered.

According to an Orange County Register article, "Laguna Woods must pay $6.4 million to take City Hall," the issues that resulted in the valuation spread between the building's owner, Raintree Realty, and the City, included (1) whether the property decreased in value as a result of the City's taking over the site, and (2) the value of a parking lot easement the City was acquiring as part of the eminent domain action.

Ultimately, the City will be forced to pay nearly $3 million more than it thought for for the property, plus interest.  The City has stated that the proceeds will come from its reserve funds.

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Another recent interesting court decision was somewhat lost in all the excitement last week over (1) the County of Los Angeles v. Glendora Redevelopment Project case striking down Glendora's redevelopment plan for inadequate blight findings and (2) the US Supreme Court decision in the Stop the Beach Renourishment, Inc. v. Florida Department of Environmental Protection case rejecting a "judicial takings" claim. 

That recent decision was by the California Court of Appeal in City of San Jose v. Union Pacific Railroad, which came down a month ago, but received little attention as an unpublished decision on a narrow valuation issue.   But on June 11, the Court decided to publish its opinion, making it a whole lot more relevant to us eminent domain attorneys. 

In Union Pacific Railroad, the city sought to condemn an easement across a strip of land owned by the railroad company in order to widen an existing street.  The court held that the railroad was entitled to only nominal compensation for the portion of the property actually used for the rail line, explaining that a special rule applies in such circumstances pursuant to a 1925 California Supreme Court decision, City of Oakland v. Schenck (1925) 197 Cal. 456.

With some thoughtful analysis, it seems pretty clear that the Court got the decision right.  Under the facts as presented in the case, the easement did not diminish the value of the fee given its highest and best use as a rail line, meaning nominal value makes perfect sense -- and constitutes fair market value.  

But the Court apparently found the case to be more novel, concluding that it was bound to follow Schenck, but that the end result was a decision that did not afford the owner fair market value for the property taken.   In my opinion, the Court's analysis is wrong, even though its decision was right. 

For more details about the case, feel free to read my E-Alert, Court of Appeal Holds that a Condemnee is Not Always Entitled to Fair Market Value – But is That Really What the Court Means?
 

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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.

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