When advocates for property owners take on an eminent domain case, they aim to achieve the best result possible for their clients. In some cases, that means fighting the taking. In other cases, the taking is inevitable, and the objective is to maximize compensation. Despite advocates’ best efforts, however, some property owners are inevitably left worse off as a result of the taking.
The goal of just compensation is to place “the property holder in as good a position as she would have been had the taking not occurred.”1 But just compensation—which is based on the “objective” standard of what a property would sell for on the open market—often does not achieve that goal, because owners “subjectively” value their property for more than it would sell for on the open market. That makes sense. If, after factoring in the costs and inconveniences of relocating, a property owner values his or her property less than the open market does, he or she would sell it.
This article explains why a subjective approach to just compensation would lead to more just outcomes for property owners, along with why implementing such an approach would be impractical. It then discusses ways some jurisdictions compensate property owners beyond the market value of their property to capture some of the intangible losses and make property owners closer to whole. Following that discussion, the article summarizes some of the more creative reforms academics have proposed to target this compensation conundrum.
The article concludes by suggesting that states pay displaced homeowners a multiple of fair market value based on how long the owners have occupied the home. That multiplier—based on the average difference between property owners’ subjective value and fair market value—would, on average, fairly compensate property owners and also incentivize condemnors to take property only when the value of the public project exceeds the owners’ subjective losses.
The Shortcomings of Basing Just Compensation on an Objective Standard
When the government condemns private property for public use, it is required to pay “just compensation” to the property owner.2 The theory behind this mandate is that no individual owner should bear the burden of paying for a project for which the public, as a whole, benefits.3 The requirement that the government pay just compensation also helps ensure that the government does not take property that is more valuable to the private owner than it is to the public at large.
As the Supreme Court has explained, “just compensation” is intended to place “the owner of condemned property ‘in as good a position pecuniarily as if his property had not been taken.’”4 In other words, the just compensation should make the property owner “whole.”5
Courts usually implement the compensation requirement through a “fair market value” standard.6 Although jurisdictions use varying phrasing, fair market value is generally defined as “[w]hat a willing buyer would pay in cash to a willing seller at the time of the taking.”7
The problem with this standard is that it does not make all property owners “whole.” A homeowner who is not actively selling his or her property is not a “willing seller” and likely values it more than the open market. Judge Posner described this well:
Compensation in the constitutional sense is … not full compensation, for market value is not the value that every owner of property attaches to his property but merely the value that the marginal owner attaches to his property. Many owners are “intramarginal,” meaning that because of relocation costs, sentimental attachments, or the special suitability of the property for their particular (perhaps idiosyncratic) needs, they value their property at more than its market value (i.e., it is not “for sale”). Such owners are hurt when the government takes their property and gives them just its market value in return. The taking in effect confiscates the additional (call it “personal”) value that they obtain from the property.8
The shortcomings of determining compensation using an objective standard are particularly pronounced in the residential context. As a straightforward illustration, consider a five-person family that has lived in a suburban home for many years. The children are friends with the neighbors across the street and are comfortable in their local public school. The parents renovated their home to support their hobbies—installing a golf simulator in the basement and garden in the backyard—and have purchased furniture that compliments the home’s unique layout. The family is comfortable and has no intention of moving, even before considering the inconveniences of physically relocating their personal possessions. This family is not a “willing seller” and would turn down offers for the home’s “fair market value.”
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Subjective losses also exist in the commercial context, even if they are not always obvious.9 For example, consider a family-owned pizza shop. The secret behind the business’s success—besides its charming décor, which includes walls adorned with Polaroids of local celebrities with the owner—is the brick oven, which the founder built himself using techniques he learned in his small hometown in Italy before immigrating to the United States. The current owner is the founder’s grandson and the third generation to own and operate the business. His fondest childhood memories are of his dad teaching him the art of pizza-making at the shop. Several businessmen have attempted to franchise the business and offered to purchase it based on multiples of its revenue and profits, but the owner has turned them all down without hesitation. Like the homeowners described above, the pizza maker is not a “willing seller” and would turn down offers for the “fair market value” of his property.
These examples illustrate some ways that just compensation based on an objective market value ignores the owner’s subjective losses. Property is unique, and the objective standard fails to account for the owner’s sentimental attachment to the property and its community and other idiosyncratic tastes. Compensation based primarily on market value also ignores the complications involved in relocating (not to mention out-of-pocket expenses such as attorney’s fees and closing costs that are often not recoverable).
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
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For over 40 years, ALI CLE has been bringing eminent domain practitioners together to examine the latest issues, engage in healthy debate, and get the information they need to stay current in their practice. This year, Eminent Domain and Land Valuation Litigation 2025 is taking place in San Diego, California, on January 30-February 1, 2025, in person or via live webcast.
Eminent Domain and Land Valuation Litigation 2025 is “the place to be” for all eminent domain and land use practitioners. Whether your interests include relocation, regulatory takings, inverse condemnation, or valuation issues, topics abound for everyone through a customizable curriculum.
This annual conference will feature 30+ panels with a broad base of 60 speakers from across the country. Get perspectives and insights from the private and public bar, non-profit law firms, appraisers, law professors, and more.
Get a glimpse into some of the topics on this year’s schedule:
Property Rights at the Supreme Court: Devillier and Sheetz and What’s Next
The Basics of a Condemnation Case
Eminent Domain National Law Update
Leveraging Expertise in Eminent Domain Litigation: Working with Land Planners, Engineers, and Other Predicate Expert Witnesses
Slow Take: Possession, Rent, Relocation, and Offset
Guiding the Trolley: Perspectives on Professional Ethics in Eminent Domain for Lawyers, Appraisers, and Right of Way Agents
B-25s and Psycho Chickens: The Story of United States v. Causby and How Physical Invasions Overtook the Right of Use
And much more!
With concurrent sessions, you can tailor your experience to focus on the topics most relevant to your practice; foster connections that are invaluable to your career; and explore the latest legal developments, trends, and strategies with experts and peers.
Join us in sunny southern California to get reinvigorated, reconnected, and ready to provide expert counsel to your clients. Register today and experience the professional growth, connection, and community that make this conference a must-attend event every year.
Join us in San Diego, CA, in 2025 for ALI CLE’s upcoming program, Eminent Domain and Land Valuation Litigation 2025. Attend in-person or live via webcast on January 30-February 1, 2025. To learn more about this program and to register for the in-person course or live webcast, click here.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
When real property subject to condemnation is within an area of urban renewal2 or is underutilized, understanding the potential for a highest and best use that differs from a property’s current use, as of the date of condemnation, is critical. This article will explore how to identify an underutilized property, provide practical and legal considerations for counsel and appraisers as they approach the highest and best use for a property in urban renewal areas and prepare for trial, and discuss how and when urban renewal may (and may not) impact the maximum potential use of the subject property.
Urban renewal, whether it occurs organically or through government-driven development and condemnation, evokes a discussion of gentrification of neighborhoods that remains a controversial subject, with the benefits of increased economic activity offset by a decrease in affordable housing and the displacement of residents or businesses who can no longer afford rising costs. This article seeks only to provide guidance so that appraisers, condemnors, landowners, and counsel can identify transitional areas in process and effectively evaluate just compensation in an eminent domain case.
IDENTIFICATION OF AN AREA IN TRANSITION
There are a number of signposts that lead to the identification of a neighborhood that may be in transition from a blighted area to one with burgeoning economic development and improved living conditions. These signs include:
Rehabilitation projects in the vicinity;
Growth of restaurant, bars, and retail stores that pop up in historically industrial areas;
Increasing sales activity and property values;
Government investment in infrastructure and updated facilities;
Nearby brownfields redevelopment activity;
Increasing residential population, particularly higher-income individuals or families, attracted by lower property values and rehabilitation opportunities;
Official local and federal government policy findings supporting or encouraging urban renewal (e.g., tax incentives or zoning overlay designations).
Not all of these signs are visible in the initial stages of transition. However, in a geographic area with significant population growth, these changes can occur rapidly. Speculative investment boosts the momentum of such changes, which can often include covered land plays where interim uses may defray the costs of holding the property until redevelopment is imminent and where an eventual sale of the property for such redevelopment would reflect a premium.
Join us in San Diego, CA, in 2025 for ALI CLE’s upcoming program, Eminent Domain and Land Valuation Litigation 2025. Attend in-person or live via webcast on January 30-February 1, 2025. Learn more about the program and stay in touch for program updates here!
APPRAISAL CONSIDERATIONS
Often, a landowner will identify new opportunities for the use of his property. In many circumstances, the landowner has invested in real property in an area of renewal due to the opportunity of growth and increased economic conditions and income. Longstanding property owners are often keenly aware of changing conditions and property value increases and have already considered or planned a conversion of property to a more profitable use. Less frequently, condemnors and their appraisers share this vision, particularly in the nascent phase of transition.
In cases where an appraiser evaluates the opportunity for a change in highest and best use, she must be cognizant of several factors in order to make a proper valuation analysis. These factors include, but are not limited to:
Physical characteristics;
Environmental condition;
Restrictive covenants or other legal restrictions upon use;
Surrounding uses;
Demographics;
Zoning and reasonable probability of rezoning;
Feasibility/market demand;
Consistent use theory; and
Interim uses.
Naturally, these factors are typically examined in the context of the well-known and studied highest and best use criteria: (i) physical possibility; (ii) legal permissibility; (iii) financial feasibility; and (iv) degree of profitability.3
When determining a reasonable probability of rezoning, appraisers may need to address specific criteria, whether by statute or in relevant and binding jurisprudence. In Illinois, for example, the LaSalle/Sinclair Factors4 which detail the following hurdles that must be met in order to satisfy the requirements:
The compatibility with the existing use and zoning of nearby property;
The extent to which property values of the subject property are diminished by the existing zoning restrictions;
The extent to which the proposed amendment promotes the public health, safety, and welfare of the municipality;
The relative gain to the public, as compared to the hardship imposed upon the applicant;
The sustainability of the subject property for the purpose for which it is presently zoned;
The length of time that the subject property in question has been vacant, as presently zoned, considered in the context of development in the area where the property is located;
The consistency of the proposed amendment with the comprehensive plan, and any adopted land use policies; and
That the proposed amendment will benefit the needs of the community.
Other states have worded the criteria somewhat differently. For example, in Colorado, those factors include the following: (i) rezoning of nearby property; (ii) growth patterns; (iii) change of use patterns and character of the neighborhood; (iv) demand within the area for certain types of land uses; (v) sales of related or similar properties at prices reflecting anticipated rezoning; (vi) physical characteristics of the subject property and of nearby properties; and (vii) the age of the zoning ordinance.5
At minimum, any appraiser should include examples of similarly rezoned properties and an analysis of the factors that would provide support that a market participant would expect future benefits. This might be inferred via land sales or sales of buildings to be adapted for reuse under the proposed (and reasonable) rezoning. In some cases where easily identified transactions are scarce or non-existent, more detailed supply/demand analyses might be necessary. Often the appraiser’s investigation must involve consultation with not only the landowner and market participants, but also environmental consultants, local zoning officials, and other professionals.
Environmental issues merit special consideration in areas transitioning from industrial to commercial or residential. In many circumstances, particularly in properties zoned and used for heavy industrial purposes, contamination is present or has been remediated. If the former, the costs of remediation must be considered in any valuation analysis involving a change of use. If the latter, there may exist restrictions on certain types of uses, or contracts with state or federal environmental agencies which restrict certain uses.
The concept of consistent use theory is sometimes overlooked. In an area of urban renewal, some appraisers will identify a highest and best use of investment (i.e., holding the property awaiting a higher value),6 but omit the benefits or income of an existing use in a valuation analysis. Consistent use is “the concept that land cannot be valued on the basis of one use while the improvements are valued on the basis of another.”7 However, using the example of a hypothetical property which serves as both a potato farm and waterfowl hunting grounds, while “it is a violation of the consistent use theory to value a parcel for two uses that are mutually exclusive, it is permissible to value a parcel for two uses that are not incompatible and can take place simultaneously.”8 Thus, because a property can always be used for something in addition to holding as an investment, appraisers should examine other compatible uses, even if they believe a neighborhood transition makes it prudent for a landowner to hold until values ripen. Thus, the concept of interim use, which embraces the concept of dual highest and best uses, may be suitable in most neighborhood transition cases and should be explored.
Furthermore, many market participants of properties—in the areas where the trend of development begins to be a more fundamental question in the highest and best use analysis of a particular site – will refer to income-producing sites as covered land plays. This reflects a perspective that existing and continuing income is strong enough to warrant a short-to-long-term hold, but where the majority of an investor’s return will be recovered upon sale for redevelopment. In these scenarios, capitalization rates for properties might be lower than average rates, as the overall rate must consider not only the year-over-year return, but also the return at the end of the holding period, which in cases like these would reflect a premium.
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
This article will focus on how lawyers and appraisers can work together to tackle difficult appraisal problems that don’t lend themselves easily to a simple comparable sales approach or where such an approach requires larger adjustments than are typical because of a dearth of similar properties.
We will first provide legal and appraisal resources supporting the use of alternative appraisal techniques and then, because these are the kinds of cases that often require litigation to determine value, we will discuss examples of how they have been applied.
GENERAL EMINENT DOMAIN CONCEPTS SUPPORT EXPANSIVE EVIDENTIARY RULES
When dealing with difficult valuation problems, referring to bedrock eminent domain concepts can help guide the process.
A valuation trial seeks to replicate the marketplace, and any competent evidence that would be considered by a prospective buyer or seller is generally admissible. As early as 1879, the United States Supreme Court established that “in determining the value of land appropriated for public purposes, the same considerations are to be regarded as in a sale of property between private parties. The inquiry … must be what is the property worth in the market.”1
Join us in San Diego, CA, in 2025 for ALI CLE’s upcoming program, Eminent Domain and Land Valuation Litigation 2025. Attend in-person or live via webcast on January 30-February 1, 2025. Learn more about the program and stay in touch for program updates here!
State courts have recognized these principles as well. In replicating the marketplace, “the fact finder is tasked with determining how much a willing buyer would pay for the property if the owner had voluntarily offered it for sale.”2 The factfinder should consider any competent evidence “which would be considered by a prospective vendor or purchaser or which tend to enhance or depreciate the value of the property taken is admissible.”3
Thus, recognition should be given to all relevant factors which tend to provide a means for arriving at a fair valuation in eminent domain proceedings.4
Difficulty in determining compensation doesn’t eliminate the obligation to do so. A condemnee must recover all damages upon the trial of the condemnation suit, no matter how difficult their ascertainment may be.5
Supreme Court holdings recognize that market value “is not an absolute standard nor an exclusive method of valuation,” and will depart from it when justice requires.6
In United States v. Commodities Trading Corp., the Court indicated that it “has never attempted to prescribe a rigid rule for determining what is ‘just compensation’ under all circumstances and in all cases.”7
In United States v. Fuller, the Supreme Court explained that fair market value “is not an absolute standard nor an exclusive method of valuation. The constitutional requirement of just compensation derives as much content from the basic equitable principles of fairness as it does from technical concepts of property law.”8 When fair market value is “too difficult to find, or when its application would result in manifest injustice to owner or public, courts have fashioned and applied other standards.”9 State courts have recognized similar indemnity principles.10
There are no set formulas for determining just compensation. Many state courts have recognized that just compensation is the central question to be decided and have rejected rigid adherence to specific methods or formulas, even when determining market value. “These formulas are all means to this end; there is no artificial formula by which alone such compensation may be determined.”11 Instead, courts have tried “to find working rules and practical standards that will accomplish substantial justice such as, but not limited to, market value.”12
Case law has also addressed the use of various appraisal techniques when valuing unique or scarce properties.
The Comparable Sales Approach
The comparable sales approach is the most used approach to determine value in condemnation proceedings, and some courts suggest it is the only method to be considered when adequate sales data is available. The following concepts should be remembered when applying this technique to unique or scarce properties.
Comparable sales are not necessarily identical properties.13 Property can be similar but “possesses various points of difference.”14
The admissibility of allegedly comparable sales is typically within the discretion of the court or commission.15 When a comparable sale is admitted only in support of the appraiser’s opinion, it generally does not have to possess the same degree of comparability as when submitted as direct evidence of value.16
An even greater degree of difference in comparable sales may be allowable when there is little else available.17
Other Techniques and Approaches to Value
Courts and appraisal literature also recognize the use of other traditional and non-traditional approaches to value and alternative valuation techniques when dealing with special and unique properties. Other techniques may also be applicable when there is a dearth of comparable sales.
In jurisdictions that generally allow only the comparable sales approach, or that favor it over other techniques, the lack of comparable sales may justify using the income or cost approach to value.18
Lack of market evidence may also support using less traditional valuation techniques. For example, when a property “is of a kind seldom exchanged, it has no ‘market price,’ and then recourse must be had to other means of ascertaining value, including even value to the owner.”19 In such cases, parties may have to “resort … to [using the] best available data which, even though speculative, under some circumstances may be sufficient to allow a jury to make an informed estimate of value.”20
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
It is axiomatic that “you can’t get the value right if you get the highest and best use wrong.”1 There may be no more fundamental concept in the valuation of property under the Fifth Amendment’s just compensation clause than that fair market value is determined in light of a property’s highest and best use.2 It is well-established that market value and highest and best use are connected—the market value of a property is the value of the property at its highest and best use.3
This article will explore highest and best use, its analytical definitions, both legal and appraisal, and the evidentiary application to assist in preparing the expert witness for trial.
The Uniform Standards of Professional Appraisal Practice (USPAP) Rule 1-3 provides:
When necessary for credible assignment results in development a market value opinion, an appraiser must … (b) develop an opinion of the highest and best use of the real estate. Comment: An appraiser must analyze the relevant legal physical and economic factors to the extent necessary to support the appraiser’s highest and best use conclusion(s).4
The Appraisal of Real Estate defines highest and best use as “[t]he reasonable probable use of property that results in the highest value.”5
The Dictionary of Real Estate Appraisal has a similar definition:
The reasonably probable and legal use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.6
A thorough analysis of highest and best use issues provides a firm foundation for the appraiser’s opinions and helps the appraiser identify the most likely purchaser for the property in the open market.7 Highest and best use is that reasonable and probable use that supports the highest present value, as defined, as of the effective date of the appraisal.8
The four criteria to determine highest and best use are:
Legal permissibility: Is the proposed use legal under existing zoning or other applicable rules, regulations, and bylaws as of the date of value? If not, is there a reasonable probability of securing legal entitlements (e.g., permits, zoning variances)?
Physical possibility: Can the land physically (size, shape, frontage, access, wetlands) support, sustain, promote, and accommodate the proposed use?
Financial feasibility: Can the land be developed to the use proposed in a financially sound manner? Is the cost associated with achieving the proposed future use (e.g., demolition, site preparation, environmental remediation) reasonably related to the return generated in terms of value (and profit)?
Maximum profitability: Will the proposed use produce the highest economic land value and generate both a return of and a return on the capital invested?9
The tests of physical possibility and legal permissibility must be applied before the tests of financial feasibility and maximum profitability as “[t]here is little to be learned from analyzing the financial feasibility of an illegal, or physically impossible, use.”10
These four tests have the following three essential components: (i) a property’s physical, legal, and locational attributes; (ii) the economic demand for the potential alternative uses of the property; (iii) estimates of the financial rewards for each alternative use.11
Join us in San Diego, CA, in 2025 for ALI CLE’s upcoming program, Eminent Domain and Land Valuation Litigation 2025. Attend in-person or live via webcast on January 30-February 1, 2025. Learn more about the program and stay in touch for program updates here!
Legal Definitions
Legal definitions should be, and are, aligned with appraisal standards. The US Supreme Court has stated the rule as follows: An owner of lands sought to be condemned is entitled to their “market value fairly determined.”12 That value may reflect not only the use to which the property is presently devoted but also that use to which it may be readily converted.13
According to the prevailing holdings in the states, highest and best use is that use of the property, among all those reasonably probable uses, that impacts the reckonings of the willing buyer and seller when arriving at the most probable selling price for a property in a free and open market. Highest and best use is that alternative from among all reasonable alternatives that will bring the highest value return to the owner, taking into consideration site capacity, infrastructure, neighborhood conditions, zoning trends, and data dealing with costs and values. Highest and best use is not restricted to the existing use of the property by the owner at the time of the taking (date of valuation), nor necessarily only those uses allowed as a matter of law (e.g., by zoning). In determining market value, a factfinder may consider all uses to which the property is reasonably adaptable and for which it is (or in all reasonable probability will become) available within the foreseeable future. The probability of a property’s use for all purposes, present and prospective, for which it is either presently adapted and/or to which it might in reason be applied, must be considered. It is the legal, possible, and probable employment that will give the greatest present value to land or realty while preserving its utility. With discounts for likelihood of being realized and for futurity, the values of potential uses of land taken are elements that should be considered in fixing just compensation.14
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
