California Eminent Domain Report

In Freeport Reg’l Water Auth. v. M&H Realty Partners VI, L.P., 2019 Cal. App. Unpub. LEXIS 6126 (Sept. 16, 2019), the court walked through a complicated fact pattern involving – in its simplest form – a 40-foot easement for an underground water pipeline.  For our purposes, the key issues were valuing (1) the easement being acquired, (2) the severance damages caused to the remainder parcel, and (3) a temporary construction easement for the pipeline’s installation.  Though it was not technically a eminent domain case because the parties had reached an agreement concerning the acquisition, they agreed that the valuation issues would be resolved using eminent domain principles.

Because it is an unpublished decision and, as a result, it cannot be cited as precedent in any other cases, it’s probably not worth the effort of walking through the court’s analysis in detail.  That said, the valuation theories used in the case were clever and complicated, causing the court to examine a few frequently-litigated issues of eminent domain law.  In particular, in assessing severance damages, the court grappled with whether the property owner’s appraiser had applied the “developer’s approach” to valuation.  For those who don’t already know, once a valuation opinion is tagged with the “developer’s approach” label, it becomes inadmissible under California eminent domain law.  There are several reasons behind this principle, but the fundamental issue is that the developer’s approach – which essentially values property the way a developer would by comparing the cost of the property and the project to be constructed against the value the completed project will have on the market – involves far too much speculation for the court’s comfort.   In Freeport, the court concluded that the appraiser had done enough to avoid the dreaded “developer’s approach” label, but the real value in the case lies in the court’s analysis and how it got to its conclusion.

Turning to the fee valuation, the issue was another theme common to eminent domain cases:  whether the appraisers had used proper comparable sales.  On this front, the interesting part of the opinion discussed whether a particular transaction was more like an option (and therefore inadmissible) or a sale (and therefore admissible).   The court held that the buyer’s commitment of significant “hard money” (i.e., money that would not be refunded if the buyer did not complete the purchase) was enough to make the transaction admissible.

Finally, with respect to the TCE, another common theme emerged:  whether Freeport’s project caused a delay in the owner’s ability to construct its project.  This was important because it affected the highest and best use conclusion the appraisers used in valuing the TCE.  If Freeport was deemed to have delayed the owner’s project, then the highest and best use during the time of the TCE was developed property.  If, on the other hand, there was no delay, the highest and best use yielded only an agricultural value ($623,000 vs. $1,400).

In the end, it’s a bit of an odd opinion, arising from fairly odd factual circumstances.  Nonetheless, the court’s analysis provides some interesting insights into three issues we see regularly in eminent domain cases, making it worth a read.