How is “Just Compensation” Determined in Eminent Domain Matters?
In an eminent domain case, when a governmental agency or other condemning authority takes private property, the property owner is constitutionally entitled to received “just compensation” for the taking. This refers to the amount of money that will make the owner whole and indemnify him, her or it for the loss of the property. Frequently, just compensation is measured by determining the amount that the owner could receive for the property on the open market, assuming the owner wanted to sell the property —but what exactly does that calculation entail? In order to determine the value of just compensation and present the court with their opinion of a property’s value, appraisers typically employ three methods: the comparable sales approach, the cost approach, and the income approach.
1. The Comparable Sales Approach
The comparable sales approach, sometimes referred to the “market” approach, is the most frequently used method by appraisers to determine property values in eminent domain proceedings. Using market data, appraisers compare similar, recently sold properties with the property that is being condemned. Then, based on the individual characteristics of the property (size, location, etc.) relative to its comparables, the appraiser adjusts its value up or down.
2. The Cost Approach
Under the cost approach, a property’s land and improvements are seen as separate entities, where total value equals the market value of the land plus the estimated construction costs of any improvements located on the land. The land is valued using the comparable sales approach. The improvements are valued using the cost formula, which calculates the reproduction cost of the improvements and then concludes a “present value” by considering the relative age and condition of those improvements by applying depreciation factors to the reproduction cost. The cost approach is not utilized as often as the comparable sales approach, but proves useful when limited market data is available. For example, for unique, special purpose, or uncommon properties, the cost approach may be the best method to calculate fair market value.
3. The Income Approach
The income approach is usually used to value income-generating properties such as apartment buildings, offices or retail stores. Appraisers determine fair market value through the income approach by estimating the amount of income a property will generate in the future and determining what a buyer would pay for those future earnings.
While appraisers generally use one of three methods to determine property values, arriving at a property valuation is a complicated and nuanced process. Various factors, such as a property’s potential to be developed into something more valuable, can seriously affect appraisal values. Although victims of condemnation are entitled to just compensation, the government may not always offer property owners true market value. If you are unsure about an appraisal of your property, an experienced eminent domain attorney can help you maneuver through the valuation process and ensure you receive the “just compensation” that the 5th Amendment of the United States Constitution guarantees you.
The author acknowledges the assistance of John Oettinger, a summer intern at McKirdy & Riskin, in preparing this article. Mr. Oettinger is a member of the Class of 2018 at the University of Michigan’s Ross School of Business.