Eminent Domain Appraisal

Eminent Domain Appraisal Report

Eminent Domain graphic

An eminent domain appraisal report is often used either for or against a governmental action to take property from a property owner.  

Eminent domain is the right the government has to take private property for public use, with the payment of compensation. This right is used by governments, or by an entity with governmental authority, such as a school district, state highway system, parks district, utility, or others. State and local laws governing eminent domain spring from the Fifth Amendment to the US Constitution, which reads, in part, "nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation". The 14th Amendment is relevant as well, as it says, in part, "nor shall any State deprive any person of life, liberty, or property, without due process of law, or deny to any person within its jurisdiction, the equal protection of the laws".

Due Process of Law means that the taking can either be hostile or not.  Hostile means that the condemning authority and the property owner have not agreed on  a dollar amount for the value of the property rights taken, or damages to the property when only part of the property or rights is taken.  The term "just compensation" implies that  the property owner will get a dollar amount equal to the value of the land, (or rights acquired).  For the property owner to get more than just compensation would mean unjust enrichment, an equally thorny issue for a condemning authority that uses public funds to acquire private property. 

 Condemnation is the act or process of enforcing the right of eminent domain. 

Bundle of Rights and Just Compensation

Bundle of rights graphic

Just Compensation, although mentioned in the 5th Amendment, is not defined by the Constitution.  As such its calculation varies, primarily depending on who is condemning the property.    The two mathematical processes for determining compensation follow either the Federal rule, or the State Rule, (to complicate matters, some states follow the Federal rule even if they are a state).   To determine compensation, with either method, there must be an understanding of what rights are being taken, and what some of those rights are. 

A Property Right is enforceable, legal claim to title or interest in real property.  Collectively the rights compose "Fee Simple" ownership.  

 Some components of property rights include: 

Ownership rights are almost always subject to four limitations, which are taxation, eminent domain, escheat, and police powers.

Right of Taxation: This means that the jurisdiction in which the property resides will usually have the right to apply property taxes to the parcel.  So long as each parcel is being taxed equally, there is typically no special impact on value. 

Right of Eminent Domain:  Implied is that this right will be used legally and fairly.  

Right of Escheat:  In the event that an owner dies without heirs or a will, the state often assumes ownership.  The government then has the right to either use the property or sell the rights.  The purpose of state intervention is to maintain the property in a useable and transferable condition, (so that the property eventually gets back on the tax rolls). 

Rights of Police Powers:  Police powers as applied to real estate refer to the powers of the local government to impose zoning, building codes, health and safety regulations, and other ordinances that must be followed by the property owner.  

Larger Parcel Determination

Larger Parcel

The concept of the larger parcel is an essential component of Eminent Domain valuation.  Once the Larger Parcel has been determined, the potential for  damages can then be considered, and if warranted, applied to the severed property.  For the Larger Parcel determination, the questions needing to be answered  include - Is the property under the control of a single individual or business and does the property have the same highest and best use?  More specifically the three major tests to determine the Larger Parcel are: 

The benefits of the larger parcel should extend for a reasonable amount of time.  Although the time period is not specifically defined, it must be long enough for the real estate market to recognize and react to its presence.  

Remainder

In eminent domain, the remainder is referred to as the property that remains in the land owner's control after the taking of the partial acquisition by the condemning authority.

The value of the remainder is of critical importance for the determination of damages to the land owner, and therefore compensation.  The handling of the value the remainder varies depending on the laws governing eminent domain in the state where the property resides, and will be discussed below. 

Highest and Best Use

As a definition, the Highest and Best Use is the legal use of a property that is physically possible, financially feasible, and results in the highest value.  Highest and Best Use of a property does not remain the same forever.  It can change, and does change, with respect to the use and timing of the use.   This is true because of economic changes, and changes in marketability. 

If an eminent domain action results in a partial taking, there are  in effect, two independent valuations that need to be performed.  A Highest and Best Use analysis must be preformed before and after the taking. With the HBU determined in both instances, a valuation can be preformed.    The loss in value is the difference between property market value before the taking and the market value after the taking.  

Two methods of Partial Acquisitions Value

Chart of State (vs) Federal rule

There are two methods to value partial acquisitions.  Those are are the State Method (summation) and the Federal Rule, (before and after). 

Under the State Method, payment is made for the value of the part taken plus damages to the remainder property minus benefits to the remainder property.   In the State Method, the amount of damages minus the amount for benefits can not be less than zero.

Under  the Federal Rule, payment is the difference between the value before the acquisition and the value after the acquisition.  Under the Federal Rule the benefits can offset both the value of the part taken and damages to the remainder. 

It is important to understand that using the Federal Rule, if the land owner gets an increase in value to his property (benefits) because of the taking, the owner may get zero compensation.  So in essence, using the Federal Rule as applied to benefits, land can be taken with zero compensation to the land owner.