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In the Post-Kelo Eminent Domain War, Public Agencies Win Battle Concerning Valuation of Property Subject to Potential Dedication Requirement

By: Bradford B. Kuhn, Rick E. Rayl
08/17/07

Congress, state legislatures, and the public caught eminent domain fever following the United States Supreme Court's 2005 announcement of the decision in Kelo v. City of New London decision. Now, California courts seem to have jumped on the bandwagon, issuing a series of key eminent domain decisions this year. In just the past few weeks, courts have issued two rulings landowners applaud (see California Supreme Court Seeks to Clarify Roles of Judge and Jury in Eminent Domain Cases, and California Court of Appeal Approves of New Method to Value Business Goodwill in Eminent Domain Cases). Now, the court has issued a decision condemning agencies can tout. In State Route 4 Bypass Authority v. Superior Court of Contra Costa County, the court confronted the often misunderstood question of whether a dedication requirement satisfies the constitutional requirement that it be "roughly proportional."

When a public agency is acquiring property, a portion of which the landowner would be required to dedicate as a condition of development (whether it be for a public street, flood control, etc.), the property that would be required for dedication is valued based on its existing use -- not based on its highest and best use. In the State Route 4 Bypass Authority case, the court first provided a clear framework for analyzing dedication requirements in the eminent domain context. Three key questions predominate:

1. Reasonable Probability of Dedication: In order to value the property at the lower, pre-development value, the agency must prove that a reasonable probability exists that the public entity would have conditioned approval of developing the property on the specific dedication.

2. Essential Nexus: To satisfy the constitutional standard identified in Nollan v. California Coastal Commission (1987) 483 U.S. 825, the agency must show that the dedication would advance the same objective for which it would be imposed.

3. Rough Proportionality: To satisfy the constitutional standard identified in Dolan v. City of Tigard (1994) 512 U.S. 374, the agency must demonstrate that it made an individualized determination and concluded that the required dedication is "roughly proportional" both in nature and extent to the impact of the proposed development.

The State Route 4 Bypass Authority ("Bypass Authority") sought to acquire two parcels in connection with the extension of a new highway in eastern Contra Costa County. Before the valuation trial, an issue arose as to the validity of a right-of-way dedication requirement applicable to the properties, which required landowners proposing development to dedicate a 110-foot strip of land for the highway. Although the highest and best use of the property was commercial or residential development, the Bypass Authority’s appraiser valued the portion that would have been required for dedication based on its existing, agricultural use.

The trial court had no difficultly finding that the dedication requirement satisfied the "reasonable probability of dedication" and "essential nexus" tests, but concluded that the dedication failed to meet the "rough proportionality" test. The Court of Appeal disagreed, and its analysis of "rough proportionality" -- and how it is proven at trial -- are the central focus of the opinion.

While the case has larger implications in the land use context, the key holding for eminent domain practitioners may be the court’s determination concerning how public agencies prove that they made an individualized determination that the requirement qualifies as roughly proportional. This issue has been problematic because in the eminent domain context, the dedication requirement is typically hypothetical -- which makes it difficult for the agency to show that it had made the required "individualized determination" that the dedication requirement would be roughly proportional. The State Route 4 Bypass Authority court helped solve this dilemma, holding that the agency can meet Dolan’s "rough proportionality" standard through hypothetical assumptions presented at trial. In other words, the agency need not have made any individualized determination on rough proportionality prior to filing the condemnation action. Rather, the agency can meet the Dolan test by offering testimony at trial that had the owner sought to develop the property, the agency would have conducted an individualized determination, and that such an individualized determination would have established that the dedication requirement qualified as roughly proportional.

In State Route 4 Bypass Authority, the agency’s witnesses testified that all property owners along the right-of-way would have been subject to the same 110-foot dedication requirement, without regard for the proposed development, suggesting there was no individualized determination. (Indeed, this was one of the facts the trial court focused on in finding the dedication requirement to be unconstitutional.) The City Engineer testified, however, that as part of the litigation, he individually reviewed the properties in question and determined that the impacts of their development on the transportation system would greatly outweigh the cost to the property owners of the dedication. The Court of Appeal held that this litigation analysis by the City Engineer satisfied Dolan.

The court then went on to clarify what "rough proportionality" means in this context. The court explained that the test does not require that all similarly-situated owners be treated the same. Specifically, the constitution does not preclude the agency from imposing dedication requirements that would result in some owners bearing a larger burden of the project costs than other owners. Rather, the focus is on whether the burden placed on the particular owner is roughly proportional to the impact of that owner’s proposed development.

While this may seem like a fine line, it becomes crucial in situations where, as is often the case, the fees and dedication requirements will not fully recoup the project costs. In such situations, it is possible that no owner will pay his or her full share, based on the impact the owner’s project will create. Thus, all the dedication requirements would satisfy Dolan, even if some owners are forced to bear a disproportionate share as compared to their neighbors.

This is precisely what happened in State Route 4 Bypass Authority, where the owner argued that he was being forced to contribute a much larger portion of the costs of the project just by virtue of the fact that his property happened to lie within the right-of-way, triggering the dedication requirement that most other owners would not have to bear. Because the court concluded that even this more burdensome share was roughly proportional to the impact of the owners’ proposed development, it did not matter that the owner had to "pay" far more than surrounding property owners.

The bottom line: It is a losing battle for a property owner to challenge a dedication or development fee on the basis that the exaction or financial burden being placed on the owner’s property is greater than a similarly situated developer. And condemning agencies now know they can satisfy the "individualized determination" test by presenting evidence at trial as to the dedication’s rough proportionality to the impacts caused by the property’s development at its highest and best use.

Rick Rayl has experience litigating a broad range of complex civil litigation issues and focuses on real estate development, complex business disputes, and condemnation matters. He can be reached at rrayl@nossaman.com or (949) 833-7800. Brad B. Kuhn specializes in business and commercial litigation with an emphasis on eminent domain, inverse condemnation and other real estate disputes. He can be reached at bkuhn@nossaman.com or (949) 833-7800.

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