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What Is Just Compensation in Eminent Domain Cases?

The U.S. Constitution bans the government from taking private property for public use unless it pays the landowner "just compensation." But determining an appropriate value for a piece of property is often more complex. This article will discuss the amount of just compensation in an eminent domain case.

What Is the Power of Eminent Domain?

Eminent domain is the process through which the government takes private property for a public purpose in exchange for "just compensation." The takings clause of the Fifth Amendment of the U.S. Constitution authorizes this. The United States Constitution says no "private property [shall] be taken for public use, without just compensation."

But what is just compensation for real property? Ideally, just compensation should make a landowner whole again. In other words, it should place the owner in the same relative position as if the taking did not happen. This generally means that the law entitles the landowner, even if they are not a willing seller, to:

  • The fair market value of the land
  • The amount of the property's depreciation due to the government's action
  • Compensation for the highest and best use they could have made from their property

But the valuation issue is rarely simple and is highly disputed in eminent domain cases. The government's offer might not equal the sale price of the entire property. A condemning authority might argue for a lower fair market value of the property. It might discount the value of improvements or say there has only been a partial taking of private property rights. In that case, the government could argue that the landowner can continue occupancy of the remaining property. It can say the landowner is entitled to less compensation.

Property Valuation

Typically, valuation in eminent domain cases turns on the "fair market value" of the property at the time of the taking. But, the issue of fair market value is often hotly debated between the landowner and the government. It's not uncommon for both parties to hire expert witnesses to testify about the issue of fair market value.

Determining fair market value is highly dependent on the factual circumstances of the case. Some factors considered when determining fair market value include:

  • Size of the property
  • Accessibility
  • Zoning and geographic location
  • Unique characteristics
  • Level of development and value of improvements
  • Current use or potential use
  • Residual damages or losses an owner suffers beyond the value of the property

Typically, just compensation does not include factors like:

  • Time, stress, and expense of moving
  • The emotional loss of a social network or connection to a neighborhood.

This may feel deeply unfair to those forced to uproot their lives and homes due to eminent domain. There is an important caveat to this. Dispossessed property owners can file a separate claim with the appropriate government agency. How and where to file will depend on location and which government agency is doing the taking.

There are three classic methods for property valuation:

  1. Market approach
  2. Income approach
  3. Cost approach

Market Approach

In the market approach for valuation, recent property sales get compared to the property to project fair market value. This type of valuation works well with residential properties as long as relevant recent comparable sales are available. Ideally, the comparable properties should have similar characteristics like:

  • The number of bedrooms and bathrooms
  • Features, such as a fireplace, pool, or garage

Income Approach

The income approach is appropriate for income-producing properties. This method determines value based on projected future income. To use the income approach, it's important first to understand the accurate net operating income of the property.

To calculate net operating income:

  1. Take the rental income and subtract the "vacancy factor" (percentage of available units that are vacant or unoccupied) and
  2. Annual operating expenses (such as property taxes, utilities, and management costs)

After that, apply a capitalization rate multiplier to the net income to determine a value.

Cost Approach

The final valuation method — if the other two are not appropriate or accurate — is the cost approach. A property may contain a specialty structure. This building is designed for a highly specific purpose that is so unique that the only way to replace it would be to reproduce it. For example, the owners may have reinforced the building for use as a vault to protect valuable personal property.

Here, the cost approach is appropriate. Under this approach, the value of the land gets determined as if the property were vacant. Next, they calculate the cost of replacing or duplicating existing structures on the land. They determine the structures' loss in value due to depreciation, subtracting this amount from the estimated replacement cost. Finally, they add the estimated land value to the depreciated value of the structures to reach the total property value.

Speak With a Lawyer About Just Compensation

Maybe you're facing the loss of property due to eminent domain. Or you're struggling to understand property valuation or just compensation. A good first step is to get professional legal advice. Speak with an eminent domain attorney today.

An eminent domain lawyer is a real estate attorney with experience in condemnation proceedings. They can represent you in a condemnation action in which the government deprives you of your property rights.

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