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

We've covered in the past the impacts property and business owners suffer when government agencies plan for public projects.  We've also covered when agency planning crosses the line and results in precondemnation damages or a de facto taking.  A recent unpublished Court of Appeal decision, Joffe v. City of Huntington Park, highlights (1) the types of impacts owners suffer and (2) the difficulty owners face in trying to recover for such impacts.

In Joffe, a related property owner and furniture manufacturing business claimed that the city repeatedly expressed a desire to acquire their property and surrounding properties for a new redevelopment project.  The owner was told for six years that the redevelopment project was on track and that its property would be acquired as part of the project.  The city went as far as:

• appraising the property and the business;
• analyzing relocation of the business;
• requesting that the owner obtain an independent appraisal for negotiation purposes;
• placing large signs in the vicinity announcing the project; and
• stating in writing that the property would be acquired for the project either voluntarily or involuntarily.

After six years, the project never proceeded, and the city never acquired the property.

The business claimed it needed a long lead-time to manufacture its furniture orders, and its customers became concerned it could not fulfill its obligations given the uncertainty of its future tenancy.  The business could not enter into long-term furniture contracts with major retailers due to the uncertainty and the retailers' contract penalty clauses should the business be unable to perform.  The business eventually went under, and as a result, the business suffered a loss of goodwill.

The property owner claimed it repeatedly tried to obtain new tenants, but no one was interested given the uncertainty of the ability to remain at the site.  Thus, the owner claimed it could not obtain fair market rent for its property.  Both the owner and tenant sought to recover for precondemnation, or Klopping, damages as a result of the city's actions.

The city claimed that its actions were not unreasonable, and it never "announced an intent to condemn," and therefore Klopping damages were never triggered.  The trial court agreed with the city, and the complaint was dismissed.  The Court of Appeal also agreed with the city, finding no precondemnation liability.

No Unreasonable Delay Following an Announcement of Intent to Condemn

The Court explained that where no resolution of necessity is adopted, the property owner must demonstrate that the agency's action resulted in a special and direct interference with the owner's property.  Here, the city's actions could have similarly impacted over 200 parcels within the proposed project area.  While the property and business owner clearly suffered due to the city's actions, the Court announced that the correct test in analyzing liability is to judge the agency's actions, not the impacts suffered by the owner.  The Court also concluded that the city's undertaking the appraisal process was required under the law, and that such acts do not cross the line to establish liability.  Similarly, informal representations of an intent to use eminent domain if no agreement is reached do not trigger Klopping damages.  In short, the Court held that the actions all fell within the context of general planning and did not rise to the level of demonstrating a present intent to acquire.

No Unreasonable Precondemnation Conduct

The plaintiffs alleged that the city's actions were done to intimidate them and force them to sell.  The Court disagreed, concluding that the actions on their face were in line with typical public agency activities when planning for public projects.  There was no evidence of extortion, no evidence of an intent to depress the value of the property, no evidence of false allegations or misrepresentations, or anything else establishing the city acted unreasonably.

The Joffe case highlights the devastating impacts property owners and businesses can suffer as a result of the drawn-out public project planning process.  It also highlights, however, the uphill battle owners face in trying to recover for such impacts.  

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The use of eminent domain in a declining real estate market presents a number of unique issues.  I often receive calls from property owners who are frustrated with the government's timing of condemnation proceedings, and want to know how they can get market-peak-values for their property. 

This issue was the hot topic of a previous IRWA seminar I chaired, Property Acquisition, Appraisal, and Relocation in an Upside Down Market.  And a recent blog post by the Weiss Serota Helfman law firm, Eminent Domain Valuation in a Falling Market Poses Questions for Condemning Agencies, triggered some thoughts I felt worthwhile to pass along. 

If a government agency has been long-planning to acquire a property, but the proposed project does not go forward for several years, property owners are typically left in limbo with a "cloud" of condemnation hanging over their property.  Sometimes, the agency's actions go too far, and result in liability.  When liability attaches in a rapidly declining real estate market, who bears the burden of the market decline:  the agency, or the property owner?  The answer depends on whether the agency is liable for (i) a de facto taking or (ii) precondemnation damages (or "Klopping" damages). 

• De Facto Takings:  Under a de facto taking claim, the landowner must demonstrate that a government agency’s particularly oppressive acts result in a taking of the property either through a physical invasion or through a direct legal restraint.   In assessing damages, the property is to be valued on the date that the “taking” occurs, and all decline in value after that date is to be borne by the condemning agency.  Since the taking is said to have occurred at this earlier date, damages would include those losses wholly unrelated to the precondemnation activity, such as losses due to a general decline in market value in the area.
• Precondemnation Damges:  Under a precondemnation damages claim, the landowner must demonstrate that the agency has acted unreasonably in issuing precondemnation statements, either by excessively delaying in bringing the eminent domain action, or by other oppressive conduct.  In assessing damages, the landowner is entitled only to those losses caused by the agency’s announcements, and not any decline in market value that is caused by general conditions unrelated to the activities of the condemning agency (i.e., the agency is not liable for any general market declines).

Both claims can be difficult to prove, a de facto takings claim more so.  But in a rapidly declining real estate market, understanding the nuances between the two claims is important, as it can make a significant difference on the amount of just compensation. 

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We reported several months ago about the property owner impacted by the expansion of the Everglades National Park petitioning the US Supreme Court to determine how to treat the government's enactment of tougher zoning standards that decrease the value of property which the government may want to acquire in the future.  The issue presented was whether the government's actions must be the primary cause of the precondemnation depression of the property's market value, or whether there must only be a nexus between the government's actions and the depressed market value.

This is an interesting debate, and according to a recent blog post by the Cato Institute's Ilya Shapiro, the US Supreme Court declined to hear the case.  Shapiro was clearly disappointed, explaining:

[t]he case involved the federal government maneuvering to unjustly drive down property values before taking land for (legitimate) public use — in this case expanding the Everglades — thus greatly diminishing the compensation it was obligated to pay the owners."

I think most people will agree that if the government is taking steps to drive down the acquisition price of property it eventually seeks to acquire, and those government activities result in the property's losing value, such actions should be disregarded when valuing the property.  California's eminent domain law addresses exactly this issue, and courts routinely hold that in such circumstances, the property is to be valued without considering such "project-related impacts."  

The issue becomes tricky, however, when a property owner is trying to prove why the government undertook certain actions that resulted in the property's losing value.  Were the government's actions really in an effort to reduce the property's eventual acquisition price, part of the project for which the property is being taken, or for some other legitimate, but unrelated, purpose?  

I have seen government agencies attempt to avoid paying compensation at all by simply enacting tougher zoning standards on a property, or designating a property for potential conservation (see, for example, the Western Riverside County Regional Conservation Authority's conservation efforts), which actions essentially make it impossible for the owner to make a viable use of the property.  A nexus standard, as argued by the property owner in the Everglades case, would make proving compensable government impacts much easier.  As it now stands, however, there is no bright-line rule, at least in California, as to whether the "primary cause" or "nexus" test should apply in determining whether the government's actions should be disregarded in determining a property's fair market value. 

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Over the years, the approval process for development projects in California has become more burdensome, more difficult, and more time consuming.  The project proponent -- whether a private developer or a public agency -- spends months, and usually years, addressing environmental issues, processing entitlements and, for bigger projects, often facing court challenges.  But what does this have to do with eminent domain?

Well, property owners and business owners typically become aware of potential government projects very early in the planning process.  And while the government is still waiting for project approvals (approval of an Environmental Impact Report, for example), the owners whose property may be acquired for the project are left facing extreme uncertainty which creates a "cloud of condemnation" over their property -- and which makes it nearly impossible to sell, process entitlements, find tenants, etc.  Unfortunately, the longer the government's approval process takes, the longer the owners face this uncertainty.

A good example of this is taking place right now in the City of Exeter.  According to a Visalia-Times Delta article, "City of Exeter bows out in dispute between residents, school district," the Exeter public school district is looking to expand one of its elementary school campuses, and the proposed expansion site requires the acquisition of eleven properties.  Owners obviously fear their property may be acquired by eminent domain, but the school district feels it cannot begin the negotiation/eminent domain process yet because the site has not gone through the full approval process (meaning there is no guarantee the project will ultimately be built on this particular site).

(This particular example also has an interesting twist in that the City got involved and attempted to negotiate a memorandum of understanding by which the school district would not use eminent domain for the properties.  The school district declined to enter into the agreement, further fueling the belief that eminent domain may be used in the future.)

Proposed public school sites, for example, require soil samples, land surveys, and many other inspections and approvals before the proposed site is ultimately approved.  On the one hand, this drawn out approval process for a proposed school site makes sense.  We do not want our children to go to school on a daily basis on a site that could be potentially contaminated with hazardous materials, or that has other issues (such as traffic concerns, inadequate recreational space, etc.).  On the other hand, however, during the long approval process, the potentially impacted property and business owners may face uncertainty, decreased property values, lost tenants, and the inability to sell.  Are these losses compensable as a type of precondemnation damages? 

Generally, such impacts suffered by the property and business owners are non-compensable where the project has not been formally approved and the government has not engaged in other types of unreasonable conduct.  While this may seem unfair to the impacted property and business owners, if this were not the case, government agencies could face liability on each and every proposed site even if that site is not ultimately selected.  I unfortunately do not have a good answer for how to deal with this dilema other than to urge public agencies to be forthright and keep the public informed during the process.  From a property owner perspective, there may be recourse available if the agency makes announcements of intent to condemn or engages in other unreasonable conduct.  It probably makes sense for a property or business owner to consult with an eminent domain attorney early in the process to understand the owner's rights, even if the condemnation seems far in the future and may not ultimately take place.

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The Alameda Corridor-East Construction Authority ("ACE") is working on a $75 million project to improve rail service in the San Gabriel Valley.  The project involves constructing a rail underpass on Baldwin Avenue in El Monte, and it is part of a larger, $1.1 billion project that includes 20 grade separations.   

ACE has acquired nearly all of the right of way for the Baldwin Avenue underpass, but one owner, Fred Jast, has not moved.  According to a recent San Gabriel Valley Tribune article by Rebecca Kimitch, "El Monte man fights eminent domain claim," Mr. Jast has been fighting with ACE for several years:

"They have the right to take my property, but they don't have the right to steal my property," Jast, 69, said.

While the article describes gaining possession of Mr. Jast's property as "one of the last hurdles ACE faces before construction can begin," the Baldwin Avenue underpass is only part of the larger project.  ACE plans another, similar underpass in 2010 on Nogales Street South between Gale and San Jose in the City of Industry.  The Nogales Street (South) underpass will cost $84.1 million.  ACE will need to acquire a number of parcels for that part of the project.  

Other phases of the project are planned for 2011, including the $499-million San Gabriel Trench, and the Ramona Street, Mission Road, Del Mar Avenue, and San Gabriel Boulevard grade separations in San Gabriel. 

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When LifeChoices sought to expand its rehabilitation center in 2002, the City of San Jose rejected the proposal, citing its plans for a future Berryessa Bay Area Rapid Transit ("BART") station, which would require freeway interchange improvements on the property.  According to John Woolfolk's October 23 Mercury News article, "San Jose to pay $2 million to acquire parcel and settle lawsuit," five years later LifeChoices' owner, John Licking, filed suit, challenging the City of San Jose's denial as constituting discrimination against the disabled.

Now, San Jose has agreed to pay LifeChoices $2 million for the property to settle the lawsuit and avoid eventual eminent domain proceedings.  LifeChoices will be able to rent the property for $1 a year until it is needed for the freeway improvements.  LifeChoices will also be compensated for the value of the business.  Sound like a great deal for the owner?  According to City Councilman Sam Liccardo, just the opposite might be true.  "[I]t's a bargain" for San Jose: 

"I would characterize this in technical legal terms as a twofer . . . . We're resolving the suit with the added benefit of getting land that we wanted to buy anyway."

While LifeChoices focused on a discrimination claim based on the City's denial of its plans to expand, the case could have been crafted as a claim for precondemnation damages or unreasonable precondemnation delay.  Fortunately, this particular story has a happy ending, as the City purchased property it badly wanted, and the owner received fair compensation.  If the City had changed its mind about its need for the property after delaying the owners' plans for years, the outcome might have been much different.   

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