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Shifting the Date of Value for Public Agency Acquisition Appraisal Assignments

The Appraisal Journal
03/17/14

Abstract

Eminent domain cases typically revolve around the date on which property is valued to determine the just compensation. That date of value is set by statute; typically, it is the date on which the agency deposits the amount of probable compensation to be awarded. But sometimes, an agency's activities negatively affect the value of a property before the deposit is made. In such circumstances, property owners may attempt to hold the agency responsible for such declines in value by claiming precondemnation damages or a de facto taking. While both claims involve holding the condemning agency accountable for damages caused by its precondemnation conduct, the difference in assessing damages is significant. This article examines the key differences between these two related claims.


Valuation assignments for public agency acquisitions typically revolve around a date of value—the date on which property is valued in determining the amount of just compensation the acquiring agency must pay. In most states, the date of value is set by statute. But sometimes, the agency's activities, such as project planning and acquisition efforts, negatively affect the value of the property.

Appraisers are usually required to ignore projectinduced influence, but property owners may attempt to hold the agency responsible for such declines in value by claiming (1) precondemnation damages or (2) a de facto taking. While claims for precondemnation damages and for a defacto taking are similar in that they both involve holding the condemning agency accountable for damages caused by the agency's preacquisition conduct, the difference in assessing damages is significant. Appraisers for both property owners and public agencies should understand the nuances of each type of claim, including when the date of value used in the assignment may shift, thereby affecting property values and damages.

De Facto Takings

Although each state may have a different set of rules, generally, a de facto taking occurs when a government agency's actions impact a property in such a way that would constitute a compensable taking. In order to prove a de facto taking, the landowner must demonstrate that a government agency's particularly oppressive acts result in a taking of the property either through a physical invasion of the property or through a direct legal restraint on the property.1 In assessing damages for a de facto taking, the property is to be valued on the date that the taking occurs, and all decline in value after that date is to be borne by the government agency. Since the de facto taking is said to have occurred at this earlier date, damages would include any losses wholly unrelated to the preacquisition activity of the public agency, such as losses due to a general decline in the real estate market in the area after the de facto taking.

The primary examples of where courts have found a de facto taking include the following situations:

  • The government created a substantial impairment of access, ingress, or egress to a property
  • The government constructed improvements on property without formally acquiring the property
  • The government undertook repairs near or on a property, subsequently destroying the property or its use
  • The government occupied the airspace above property, thereby interfering with the owner's use and enjoyment
  • The government's actions effectively amount to exercising dominion and control of the property

For example, in Peacock v. County of Sacramento2 a property owner was planning a residential subdivision development. Because the county determined that development of a portion of the owner's property would interfere with a planned airport runway, it enacted an ordinance prohibiting obstructions in excess of zero feet on the impacted property. The county intended to purchase the necessary property and negotiations commenced. The owner's development applications were denied on multiple occasions until a third, smaller subdivision of twenty-five lots was approved. The owner found that the high costs of such a small development made the project economically unfeasible. In the owner's lawsuit against the county, the court found that the owner was deprived of the beneficial use of a portion of the property and was prevented from subdividing the property. The court also found that the county intended to maintain the status quo and use of the property as unimproved land to prevent any increase in the cost of its acquisition. The court of appeal agreed that while not any one of the county's actions standing alone constituted inverse condemnation, when taken as a whole the actions resulted in a de facto taking. The owner was entitled to the fair market value of the impacted portion of the property as of the date that the agency's actions effectively resulted in a taking.

Similarly, in People ex rel. Dept. of Transp. v. Diversified Properties Co. III,3 a developer was informed that a 3-acre strip of the owner's 17-acre property may be acquired for a freeway. The state informed the developer it would acquire the property at fair market value once its development was imminent. The owner submitted development plans for its remaining 14-acre property assuming the 3-acre strip would be acquired, and the local government agency decided that an additional 1.5- acre portion of the property was necessary for the right-of-way. The developer resubmitted the plans, now excluding 4.5 acres. The local agency approved the proposal, but restricted its development until the state confirmed its future freeway corridor. The state finally made an offer to acquire the strip, and told the developer if it did not accept the offer, the state could wait ten years until it needed the property, further delaying any development of the property. The developer sued for inverse condemnation and thereafter, the state filed a direct condemnation action. The court explained that the state "merely ‘sat back' and allowed the [local agency], by way of its development restrictions, to ‘bank' the subject property for the state—presumably so that the state could, at a later date, condemn the subject property in an undeveloped (and, consequently, less costly) condition." The developer was compensated for the fair market value of the property taken based on its commercial highest and best use and received prejudgment interest dating back to the date of the de facto taking.

Likewise, in Foster v. City of Detroit,4 the owners of three lots, two improved with rental housing and one vacant, were notified their property would be acquired by the city. In the years between 1949 and 1954, a condemnation action commenced; the owners were told by city officials not to improve their property; several blocks adjacent to their properties were condemned and leveled by the city; they lost their tenants; their buildings deteriorated and were vandalized and burglarized; they lost their insurance; and the city made them tear down the buildings at their own expense. Ultimately, the condemnation action was abandoned in 1960. The city commenced a new condemnation action in 1961 for the three lots and valued them as vacant property. The court found that the city substantially contributed to and hastened the deterioration of the property and decline in value of the area in general and found that a taking occurred in 1954. The owners were entitled to fair market value as of 1954, the cost of demolition, lost rents until 1954, plus interest.

As evidenced in these examples, a public agency can be liable for a de facto taking even where there is not a physical taking of property. A particularly harsh zoning regulation alone may give rise to a de facto taking, especially if it is calculatingly designed to decrease any future acquisition price. However, claims for de facto takings are heavily fact specific and can vary depending on the government actions and circumstances of the property.

Also, the threshold for proving a de facto taking is a high one; there are numerous cases where no de facto taking was found, either because the government's use of a zoning restriction was a legitimate exercise of its police powers, the government had legitimate reasons for denying development applications, or the government was not converting the property to a public use.5

Precondemnation Damages

Like de facto takings, there is no nationwide bright-line rule for precondemnation damages—or "condemnation blight"—liability. But generally, liability may accrue where a government agency acts improperly either by unreasonably delaying an eminent domain action following an announcement of intent to condemn or by other oppressive or unreasonable conduct prior to condemnation, and as a result of such actions, the property in question suffers a diminution in market value. Typically, the agency must go beyond reasonable project planning and cross into the acquisition stage, and there must be a specific and direct injury to the property itself, rather than in the general project area.6

Unlike a de facto takings claim, the date of value for precondemnation damages does not shift to an earlier date. As a result, the public agency is not required to compensate the landowner for damages to the property occurring after the announcement if the injury is not unreasonably caused by the condemning agency. Instead, in assessing damages, the landowner is entitled only to those losses caused by the agency's actions, which are typically measured by the loss of use or diminution in the market value of the property. The landowner is not entitled to any decline in market value that is caused by general conditions unrelated to the activities of the condemning agency.

For example, in People ex rel. Dept. Pub. Wks v. Peninsula Enterprises,7 the state's planned freeway ramp modification called for the acquisition of 72,000 square feet of a 92,000-square-foot vacant parcel. The impacted property owner had obtained a zone change to permit commercial development of the property, had expended $25,000 in grading, and had negotiated a lease upon development completion. The property owner submitted multiple different development proposals to the local agency, which were routinely denied. Three years after notifying the owner of the planned acquisition, the state passed a resolution to condemn the property. The court found the state had unreasonably delayed in bringing the action. The jury awarded the property owner the value of the property and precondemnation damages.

Similarly, in Stone v. City of Los Angeles8 the owner of a 325-acre agricultural and industrial parcel leased the property to a farm. The local agency passed a resolution to acquire the property, yet waited three years to institute condemnation proceedings. The owner did not pursue development of the property because it thought the city would be condemning, and the owner did not spend money to repair and replace the farm equipment on the property. As a result, rental income diminished and the property eventually became a pasture for sheep. The court found that the government unreasonably delayed condemnation, and held that loss of use damages were recoverable.

Likewise, in City of Buffalo v. George Irish Paper Co.,9 a landowner owned a five-story commercial building that included a railroad siding into the building to allow all-weather loading. In 1954, the city initiated a redevelopment project that included the owner's property and notified the owner that the building would be demolished in 1962. After much publicity about the project, in 1961, the city began notifying the owner's tenants that the property would be taken for the project. The city also removed the owner's railroad siding and cut off garbage pickup to the property, which caused the owner to lose its tenants and fall behind in its mortgage and property tax payments. The court found the city had caused a cloud of condemnation over the property that impacted the true value of the property and deprived the owner of substantial use and benefit of its property, thereby entitling the owner to compensation for such precondemnation conduct.

As evidenced in the case examples mentioned, government agencies may face precondemnation liability even though their activities are significantly less than those that would constitute a de facto taking. Claims for precondemnation damages, like de facto takings, are fact specific and there is a strong focus on the reasonableness of the government's actions and its specific and direct impacts on the particular property owner in question. While not as high a threshold as de facto takings, the threshold for proving precondemnation damages is still relatively lofty. For example, there are many cases finding that a government agency's planning efforts for public works projects do not entitle an owner to precondemnation damages, especially where the project is large and takes substantial planning, and where the plans are tentative and subject to change.

Case Example: Caltrans v. McNamara

A recent California case exemplifies how a valuation assignment—and the calculation of compensation— can be extraordinarily different depending on the particular claim.

The 2013 California Court of Appeal decision in State of California Department of Transportation (Caltrans) v. McNamara,10 chronicles the key differences between the related claims of precondemnation damages and a de facto taking.

In McNamara, the owners of a 1.24-acre property had long planned to build a home but became concerned when they learned of a potential freeway bypass project in the area that could impact their property. After being assured by the state that the potential project lacked funding, the McNamaras built their retirement home and moved into the home in 2004.

Meanwhile, the state was taking steps to build its bypass project. After initially designating the McNamaras' property as a "full take," the state redesigned the project to save the home. But the impacts were still severe: no front door access during four years of construction, an unusable driveway, a destroyed septic system, no access to the well that was the home's sole source of water, and a highway less than fifty feet from the residence's front door. The McNamaras were not provided with the details of the impacts until 2007; they stated that they would have never built the home had they known about the plans. The McNamaras started looking for a new home, but they did not have the financial ability to purchase a replacement property until they received the purchase proceeds from the state.

The state did not file its eminent domain action until 2008. Using the deposit proceeds, the McNamaras were finally able to purchase a replacement property in 2009. As trial approached in the condemnation action, the parties exchanged expert appraisal reports. The McNamaras' appraiser valued the take at $1.55 million and concluded the property should have been acquired in 2006, at which time it would have been worth an additional $400,000. The state's appraiser valued the take at just over $1 million, with no amount for precondemnation damages.

The trial court found the state liable for precondemnation damages beginning in 2006. The jury then awarded the McNamaras $1.2 million for the property, plus $175,000 for precondemnation damages. The trial court then issued a judgment notwithstanding the verdict, finding the McNamaras were entitled to $400,000 for precondemnation damages since that was the only opinion of value offered on the issue. The state appealed.

On appeal, the state argued that the McNamaras had not proven that the state's pre-acquisition conduct caused any diminution of value to their property, and therefore, they were not entitled to recover any precondemnation damages. The court of appeal agreed.

The McNamaras' damages calculation compared what their property would have been worth if it were condemned in 2006 instead of in 2008. Such a comparison may have been appropriate if the McNamaras were alleging a de facto taking, which allows compensation for all decline in value after the taking regardless of cause. However, they were seeking precondemnation damages and as such, could only recover for a decline in value directly attributable to the state's conduct. The difference in value of their property in 2006 versus 2008 was solely caused by a general decline in market conditions, not by the state's actions. There was no evidence that the state's conduct affected the value of the property, affected its value as a residence, or prevented the McNamaras from using their property as they continued to live on the property during that period. Because the McNamaras could not prove precondemnation damages caused by the State's conduct, the court reduced their damages award by $400,000.

Conclusion

Both precondemnation damages and de facto takings claims involve liability for preacquisition conduct by a public agency, but the way damages are assessed is different and as such, can lead to significantly different amounts of compensation.

Where there has been a de facto taking, the date of value shifts to the date of the taking and any and all decline to the property's value after that date is chargeable to the public agency, including damages wholly unrelated to the actions of the agency, such as a general decline in the real estate market in the area.

In contrast, if an agency is liable for precondemnation damages, the date of value does not shift and the agency is only liable for damages specifically caused by its activities from the inception of such activities up until the date of value. In other words, there is no liability for any decline in the value of the property caused by general market conditions unrelated to the activities of the agency.

De facto takings unquestionably have a higher threshold of liability as compared to the activities that may give rise to precondemnation damages. However, in seeking compensation, appraisers must thoroughly understand the differences between the two related claims, as the recovery may be significantly different in a rapidly changing real estate market (such as the one experienced in McNamara between 2006 and 2008). In a declining real estate market, a property owner would much rather succeed with a de facto takings claim, shifting the date of value to an earlier date to avoid the market downturn. On the other hand, in an increasing real estate market, a property owner would be better off with a precondemnation damages claim, saving the date of value for as late as possible, while still seeking to recover for damages (such as lost rents) that may have occurred beforehand.

McNamara serves as a good reminder that appraisers, property owners, public agencies, and attorneys need to be aware of the distinction between a de facto taking and precondemnation damages because it could have a dramatic impact on the assessment of the just compensation to be paid. It could also impact the legal instructions given to experts, and particularly, instructions related to the date of value.


1 See, for example, Klopping v. City of Whittier (1972) 8 Cal. 3d 39, 46.
2 (1969) 271 Cal. App. 2d 845.
3 (1993) 14 Cal. App. 4th 429.
4 254 F. Supp. 655 (E.D. Mich. 1966).
5 See, for example, Friedman v. City of Fairfax (1978) 81 Cal. App. 3d 667, City of Walnut Creek v. Leadership Housing Systems (1977) 73 Cal. App. 3d 611, Toso v. City of Santa Barbara (1980) 101 Cal. App. 3d 934, and Briggs v. State of California (1979) 98 Cal. App. 3d 190.
6 See Klopping at 51–52.
7 (1979) 91 Cal. App. 3d 332.
8 (1975) 51 Cal. App. 3d 987.
9 (1969) 299 N.Y.S.2d 8.
10 Opinion available at
https://www.courtlistener.com/calctapp/6jLu/p-ex-rel-caltrans-v-mcnamara/.

 

Reprinted with permission from The Appraisal Journal (March 2014). © 2014 by the Appraisal lnstitute, Chicago, lllinois.

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