The U.S. Constitution prohibits the government from taking private property for public use unless it first pays the landowner "just compensation." But determining an appropriate value for a piece of property is often far from straightforward. Read on to learn more about just compensation in an eminent domain case.
What Is Eminent Domain?
Eminent domain is the process through which the government takes private property for public use in exchange for "just compensation." This is authorized through the Takings Clause of the Fifth Amendment of the U.S. constitution which states that no "private property [shall] be taken for public use, without just compensation."
But what does the term "just compensation" mean? Ideally, just compensation should make a landowner whole again—in other words, place the owner in the same relative position as if the taking did not occur. This generally means that the landowner is entitled to the value of the land or the amount that the property has depreciated due to the government's action. However, the issue of valuation is rarely a simple one and is often highly disputed in eminent domain cases.
Valuation of Property
Typically, valuation in eminent domain cases turns on the "fair market value" of the property at the time of the taking. However, 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 offer testimony about the issue of fair market value.
A determination of fair market value is highly dependent on the factual circumstances of the case. Some factors that are considered when determining fair market value include:
It's worth noting that typically just compensation does not include factors like time, stress, and expense of moving, or the emotional loss of a social network or connection to a neighborhood. This may feel deeply unfair to those who were forced to uproot their lives and homes due to eminent domain.
There are three classic methods for property valuation: the market approach, income approach, and cost approach.
Using the market approach for valuation, recent property sales are compared to the instant property to project fair market value. This type of valuation works well with residential properties, so long as there are relevant recent comparable sales available. Ideally, the comparable properties should have similar characteristics (like the number of bedrooms and bathrooms) and features, such as a fireplace, pool, or garage.
The income approach is appropriate for income-producing properties. This method determines present value based on projected future income. To use the income approach, it's important to first understand the accurate net operating income of the property. Net operating income is calculated by taking the rental income and subtracting the "vacancy factor" (percentage of available units that are vacant or unoccupied) and annual operating expenses (such as property taxes, utilities, management costs). Thereafter, a capitalization rate multiplier is applied to the net income to determine a value.
The final valuation method—used if the other two are not appropriate or accurate—is the cost approach. If a property contains a "specialty" structure (a building designed for a highly specific purpose) that is so truly unique that the only way to replace it would be to reproduce it, then the cost approach is appropriate. Under this approach, the value of the land is determined, as if the property was vacant. Next, the cost of replacing or duplicating any existing structures on the land is calculated. The structures' loss in value due to depreciation is determined, and this amount is subtracted from the estimated cost of replacement. Finally, the estimated land value is added to the depreciated value of the structures to reach the total property value.
Speak with a Lawyer About Just Compensation
If you are facing the loss of property due to eminent domain or are 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.