Eminent Domain and Market Value: Safeguarding Just Compensation for Property Owners Through Favorable Appraisal Practice

By Orell C. Anderson, MAI, FRICS, ASA

Overview

Eminent domain, the power of the state to seize private property for public use, is a contentious issue that requires a delicate balance between public benefit and private property rights. The concept of fair market value is central to this process, ensuring property owners receive just compensation. Various states employ different terminologies and standards in their codes of civil procedure, influencing how compensation is calculated and perceived. This article explores the nuances in the definitions of fair market value across states, particularly focusing on those that aim to favor property valuation in eminent domain cases, without advocacy.

Definitions of Fair Market Value

California: California is one of the states that explicitly defines fair market value as "the highest price" the property would bring in a competitive and open market. This definition ensures that property owners receive compensation reflective of the maximum potential market value on the valuation date.

Pennsylvania: While Pennsylvania does not use the term "highest price" in its eminent domain code, it emphasizes fair market value and includes provisions for compensation related to partial takings and severance damages. This approach ensures that property owners are compensated for both the value of the taken property and any additional economic impacts resulting from the taking.

Washington: Similar to Pennsylvania, Washington state focuses on fair market value without specifically using the term "highest price." The statutes emphasize comprehensive valuation methods to ensure just compensation.

North Carolina: North Carolina highlights the "highest and best use" of the property in its eminent domain discussions. While the term "highest price" isn't explicitly used, focusing on the highest and best use can lead to favorable outcomes for property owners by considering the most valuable potential use of the property.

States Favoring Property Owners

Several states have enacted laws to protect property owners, especially following the Kelo v. City of New London decision in 2005, which broadened the scope of public use in eminent domain.

Florida: Florida amended its constitution to prohibit the transfer of private property taken by eminent domain to private entities. This amendment effectively limits eminent domain to public uses, offering significant protection to property owners.

Ohio: Ohio's legislation restricts the use of eminent domain for economic development, ensuring property is taken only for genuine public use. This limitation safeguards property owners from potential misuse of eminent domain for private gains.

Georgia: Georgia requires a higher standard of proof for public use and provides robust protections against the taking of property for economic development. These measures ensure a rigorous evaluation process that favors property owners' rights.

Michigan: Post-Kelo, Michigan passed laws preventing the use of eminent domain for economic development or increasing tax revenue, further protecting property owners from unjust property seizures.

Pennsylvania: Pennsylvania's eminent domain laws include provisions for additional compensation for severance damages and economic impacts, ensuring property owners are comprehensively compensated.

Texas and New York: Both states emphasize the "highest price" a property would bring in an open market transaction between a willing buyer and seller. This emphasis ensures property owners are compensated at the most favorable market rate.

Favorable Appraisal Practices

Although no state explicitly instructs real estate appraisers to favor property owners, several states have practices that indirectly ensure favorable outcomes:

Pennsylvania: Emphasizes fair compensation, including mechanisms for severance damages and changes in property access due to eminent domain, benefiting property owners.

Texas: Requires appraisals to reflect the highest and best use of the property, ensuring owners are compensated for the most valuable potential use.

California: Provides for "goodwill" compensation acknowledging the value beyond the physical property, which is particularly advantageous for business owners. Additionally, the CCP defines fair market value as the "highest price" rather than the "most probable" price. Consequently and in the ‘spirit’ of that definition, appraisers are to err on the side of the property owner.

Florida: Ensures the highest and best use of the property is considered during valuation, aiming for fair and potentially higher compensation for property owners.

Conclusion

Understanding the specific language and definitions used in each state's code of civil procedure is crucial for accurate appraisal and compensation in eminent domain cases. However, property owners often argue that the compensation provided does not reflect the true value of their property, especially when considering non-economic factors like emotional attachment or the impact on their livelihood. Currently, that is true, as appraisers are only allowed by courts to opine on economic matters. While explicit instructions to appraisers to favor property owners are rare, the overall legal framework in many states is designed to ensure property owners receive just compensation. As eminent domain continues to evolve, these protections play a vital role in maintaining a fair balance between public needs and private property rights.