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  A recent unpublished Court of Appeal decision, Joffe v. City of Huntington Park, highlights (1) the types of impacts owners suffer and (2) the difficulty owners face in trying to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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Yesterday, I chaired the International Right of Way Association Chapter 67 (Orange County) spring seminar, focused on the interrelationship between renewable energy, right-of-way acquisitions, and eminent domain.  It was a great success.  For those of you who were in attendance -- or for those of you that missed the seminar but would like a recap -- all of the speakers were generous enough to allow us to make their presentations available.

• Dave Kilpatrick's presentation, titled "Energy Independence -- the Impossible Dream?" [PDF], focused on our nation's overall energy policy, dependence on foreign oil, and how reliance on renewable energy can solve -- at least partially -- our energy issues.  Mr. Kilpatrick painted the picture that while our decreasing supply of traditional energy sources is problematic, our bigger concern is the increasing demand not just from the US, but from other countries like India and China.  Mr. Kilpatrick also pointed out that while there are renewable energy options that could play a large part in helping solve our energy crisis, most of these options are plagued with economic limitations.
• Rick Rayl's presentation, titled "Renewable Energy Meets Eminent Domain -- When Grandma's House Gets in the Way of Windmills" [PDF], focused on some of the unique laws that allow privately held utility companies to condemn property for energy projects, and some of the legal issues that arise in valuing impacted properties.  A hot discussion point was whether private utility companies should offer to pay impacted property owners up to $5,000 to obtain an independent appraisal.  Mr. Rayl concluded that while utility companies may not technically be required to make such an offer (an issue that remains unclear under current law), it makes good sense to do so.  Mr. Rayl pointed out that such an offer allows the property owner to feel secure in the utility company's offer, and it may result in the utility company's avoiding having to pay thousands -- and potentially hundreds of thousands -- of dollars in legal fees in an eminent domain battle.
• Elizabeth Kiley's presentation, titled "Kicking the Dirt -- How Energy is Changing Land Use and Values" [PDF], focused on various appraisal issues involved in renewable energy projects and right of way acquisitions for such projects.  Ms. Kiley presented a somewhat rosy picture for those properties out in the "middle of nowhere" that previously had no real value, as they may now have a highest and best use as a solar or wind farm site, especially where the properies lie near major transmission corridors.  Although there have not been many "closed' transactions yet, many deals are in the works pending entitlement approval, and desert property values are experiencing an uptick.
• Cliff Clement's presentation, titled "A Walk in the Wind" [PDF], walked us through a wind farm project from concept to entitlement to construction and, finally, to completion.  Going through the Power Point is definitely a must, as you'll be amazed at what goes in to selecting an appropriate site and constructing these massive wind turbines.

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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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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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In his September 16 article entitled “DWP outmaneuvered on Kern County land purchase,” Los Angeles Times reporter David Zahniser described a story full of political intrigue. It seems someone with ties to Mayor Villaraigosa acquired a property out from under the Department of Water and Power (“DWP”), only to immediately offer to sell the property to DWP at a hugely inflated price. While the article focuses mainly on the political aspect of the situation (e.g., did the buyer know about DWPs plans for the property when it purchased it, etc.), the eminent domain angle is also interesting.

The property, known as Onyx Ranch, encompasses about 68,000 acres east of Bakersfield. It has long been viewed as a potential site for a wind farm, and the DWP sought to acquire it for that purpose. As DWP was working on obtaining control over part of the property through a partnership with Padoma Wind Power, J. Ari Swiller stepped in an bought the property for $42 million. Even before closing escrow on the purchase, Swiller offered to sell part of the property to DWP for $65 million. When DWP balked, Swiller sold the property to the City of Vernon (which has its own electric utility company). Now, DWP must contemplate condemning the property from Vernon if it wants to proceed with the wind farm.

Stripping away the politics, this situation highlights a precondemnation strategy that landowners can sometimes use. By knowing an agency’s planned condemnations in advance, sophisticated landowners look for opportunities to purchase properties ahead of the condemnation. Where they can negotiate a great deal or, more typically, where they can assemble multiple parcels to create a more valuable highest and best use for the combined parcels, they can reap huge rewards. With a known government buyer waiting in the wings, such property “flips” can be quite profitable. Of course, as with all high reward strategies, this gambit comes with considerable risk:

1. The government’s plans or funding may change, and the intended condemnation may never materialize, leaving the owner with a property he or she probably never wanted in the first place, facing the prospects of looking for a buyer that may not exist.
2. Such purchasers must buy knowing they are walking into a lawsuit against the government, a though many may find unappetizing.
3. The government holds a significant ace up its sleeve any time an owner tries to hold it hostage by charging far more than a property is really worth because it knows the seller badly needs it. In the “real world,” sellers in such situations can command huge premiums, because a seller who must have a particular property will pay far more than its “fair market value.” When the purchaser is the government, it can largely ignore such demands for premiums, knowing it can condemn the property at its fair market value.

In the end, while this landowner strategy can (and has) been used quite successfully in some circumstances, it requires a sophisticated landowner and an initial seller willing to sell for far less than what the buyer thinks will be its fair market value when the government comes calling.

Photo credit: LA Times

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