Fair Market Value Issues in Eminent Domain Where the Market Has no Willing Sellers
Posted in Valuation

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.

  • Rick E. Rayl

    Rick Rayl is an experienced litigator on a broad range of complex civil litigation issues.  His practice is concentrated primarily on eminent domain, inverse condemnation, and other real-estate-valuation disputes.  His public ...

California Eminent Domain Report is a one-stop resource for everything new and noteworthy in eminent domain. We cover all aspects of eminent domain, including condemnation, inverse condemnation and regulatory takings. We also keep track of current cases, project announcements, budget issues, legislative reform efforts and report on all major eminent domain conferences and seminars in the Western United States.

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