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.
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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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