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November 30th, 2015 — By — In Articles

How is Property Valued in a Condemnation Proceeding?

When a government agency, utility, energy company or other entity takes private property through eminent domain (known as “condemnation”), the landowner is entitled to the payment of just compensation. This right to just compensation is firmly established in the Fifth Amendment to the U.S Constitution, as well as state constitutions and laws across the country.

But, what does it mean for compensation to be “just,” and who decides what is a just amount? Someone has to place a value on the land taken.  And, when the “taking” involves an easement or regulation, the property owner’s losses may not be strictly tied to the value of the affected property.

Determining What Constitutes Just Compensation

The Fifth Amendment of the United States Constitution provides that private property may not be taken for public use without payment of “just compensation”  to the private owner of the property. A property owner should be fairly and fully indemnified for the loss of the property.  As such, an owner has the right to recover the equivalent in financial compensation of the property condemned.   

Through the payment of just compensation, a landowner is entitled to be restored to the financial position he or she would have been if the property had not been taken. Generally, the measure of damages for property taken by eminent domain is its fair market value.  Fair market value is a practical standard to aid the parties and courts in determining what constitutes just compensation.  Fundamentally, this involves obtaining one or more appraisals of the property being condemned.

However, as we have previously discussed, the appraisal of property for purposes of a condemnation proceeding will not necessarily be the same as its appraisal for other purposes, such as for purposes of obtaining bank financing. As a result, working with an attorney and appraiser who have specific experience in eminent domain matters will be critical to ensuring that you receive just compensation for your condemned property.

Conducting Appraisals for Condemned Property

Generally speaking, appraisers in eminent domain cases use three different approaches to value real property that is being condemned. These are:

  • The market data (comparable sales or sales comparison) approach
  • The cost approach
  • The income capitalization approach

The market data approach is most common. With this approach, the appraiser will analyze recent sales of properties that are comparable to the property being condemned in terms of size, location, zoning and other factors. The appraiser will then perform an adjustment to account for specific details and may weigh comparables differently in order to come up with a market value for the subject property.  The market data approach theorizes that a property that is similar in size, style, age, improvements, location, and all other characteristics should have a value similar to other comparable properties in the area around the same date of sale.

The cost approach will generally be used to appraise unique and special-use properties, however, it may also be the best method to appraise condemned property when market data may be scarce. The cost approach method estimates the replacement value of a property by determining the cost of its components – the land and improvements.  Rather than valuing a property as a whole, the cost approach establishes the value by adding the separate values of the land and improvements together.

The income capitalization approach is generally employed with income-producing properties, such as rental properties and some commercial properties.  The income capitalization approach estimates the property’s value by evaluating how much income a property is capable of producing.  This approach is the most technical of the three approaches.  This approach considers three principals: anticipation, supply & demand and substitution.

  • Principle of Anticipation – A buyer of property will base the purchase on an expectation of the future benefits. Value is defined as the present worth of future benefits, or, how much a buyer will pay today for something that he believes he will get in the future.
  • Principle of Supply and Demand – The value of property is a function of supply and demand. For example, the rent an owner can set for property will depend on the amount of similar properties and the demand for such property in that area.
  • Principle of Substitution – Rent levels are based on a comparison of the rental rates of surrounding properties and the possibility that a tenant could select an alternative or substitute property.

“Equitable Principles of Fairness”

Ultimately, the goal in eminent domain proceedings is to arrive at a fair market value for the condemned property. There are few hard-and-fast rules, and the U.S. Supreme Court has stated that satisfying the Fifth Amendment’s requirement for just compensation “derives just as much content from the basic equitable principles of fairness . . . as it does from technical concepts of property law.” United States v. Fuller, 409 U.S. 488, 490 (1973). As a result, if you are questioning a valuation of your condemned property, it is in your best interest to seek experienced legal representation.

Owners’ Counsel of America | Experienced Eminent Domain Attorneys Nationwide

For more information about seeking just compensation in eminent domain proceedings, contact an eminent domain attorney with Owners’ Counsel of America for a free initial consultation. Call our office at (877) 367-6963 or locate an attorney in your state today.