How do we value property in eminent domain? When the government takes your property for a public purpose, like a road or school, they have to pay you “just compensation,” the reasonable value of the property they took and/or damaged.
How “just compensation” is determined
In North Carolina, just compensation is defined by case law and statutes to be the fair market value of your property – the value that a willing buyer and willing seller would agree to if both were typically motivated, reasonably informed, under no duress, and the project was not happening.
If the government is only taking part of your property, just compensation would be the difference between the fair market value of your property immediately before the government’s taking, minus the fair market value of your remaining property immediately after the taking (how much someone might offer you if the project was magically built and in its complete state).
However, these hypothetical buyers and sellers are made to ignore some of the conditions that would typically affect the value of the property. For instance, they will be forced to ignore a new median that complicates how people enter and/or leave their property. Some medians can force the traveling public to drive a mile or more out of their way every time they enter or leave. This would devalue the property on the open market, but is supposed to be ignored by the hypothetical buyer and seller in a condemnation case.
At the NC Eminent Domain Law Firm, we typically try to do it two ways. First, we bring our combined 20 years of experience exclusively handling these types of cases to bear on the valuation process. We’ve dedicated our careers to land condemnation cases and we know what to look out for to try to make sure you’re receiving a fair offer.
If we’ve reviewed your offer and think your land is worth more, we then assemble the appropriate team to gather and present evidence – the type of knowledge a reasonably informed buyer and seller would have in the local market. As you can imagine, the knowledge and team are different if a house, a subdivision, an office building, a factory, or a mall is involved. With our experience, we help determine what information is needed, what information should be excluded, and which team needs assembled to collect and present the data.
Besides a lawyer, the team can consist of an appraiser, land planner, engineer, environmental consultant, brokers and developers.
Determining highest and best use
By law, you are supposed to be paid for your property’s “highest and best use.” When building your case, this is typically your attorney’s starting point after learning of your property’s physical characteristics. All properties have multiple potential uses. But not all uses are reasonably or legally possible, and typically only one use will maximize a property’s value. The use that maximizes a property’s value is its highest and best use.
For example, a property with a highest and best use as a fast food restaurant will typically sell for more than a property whose highest and best use is for a single family residence.
Technically, a property’s highest and best use is one that is
- Physically possible (Think: “Will it fit?”)
- Legally permissible (Think: zoning)
- Financially feasible (Think: profitable)
- Maximally productive (Think: most profitable)
You have to determine a property’s highest and best use before you value it. If you’re using a team, most of their purpose is to determine highest and best use. For instance, a land planner will tell you if a proposed use will fit on the property and whether the proposed use is legally permissible. A mall will not fit on 3 acres and will not be allowed on 150 acres that are zoned residential.
Proving your land’s value
Once you have determined the property’s highest and best use, you will need a value witness to testify to what the property is worth. Value witnesses come in three types: property owners, realtors/market participants, and appraisers.
In North Carolina, a property owner is entitled to tell the courts what they think their property was worth before the taking, after the taking, and consequently the just compensation to which they are entitled. They are allowed to make these broad conclusions; but typically are not allowed to tell a jury all the reasons why. Oftentimes this is because they are not allowed to repeat hearsay in court at trial. Hearsay is a statement made in court repeating what someone told them out of court. What other local properties sold for is typically hearsay. So, the owner is handicapped when it comes to testifying in court. This is just one reason why we strongly recommend you do not try to go through the land condemnation process alone.
A broker, realtor or other market participant is someone who can qualify before the judge as an expert in land values in the local market. Unlike a property owner, a broker or market participant can tell the jury hearsay like local sales data and prices, after they’ve convinced a judge that they’re an expert and qualified to give their opinion.
Finally, an appraiser is someone licensed to value real property in North Carolina. An appraiser is an expert witness, so they also have to convince a judge of their expertise and that their opinion falls within their area of expertise and is well-supported by data, prior to speaking to the jury. But judges are used to hearing from appraisers in condemnation cases; and so it is typically easier to get their opinions before a jury than the opinions of realtors.
An appraiser typically uses at least one of three methodologies to form his/her opinion of the value of the subject property.
The first is the “sales comparison approach.” This is the approach people are probably most familiar with. When my wife and I purchased our home, an appraiser was hired to see if the sales price was reasonable. She found 3 similar homes to ours that sold nearby, made sure the sales were not too old, and compared them to our purchase price. While this approach is easy to understand, it works less well on a McDonald’s or a mall.
The second approach to valuing property in condemnation cases is the “cost approach.” Here, an appraiser takes an improved property (a property with houses, buildings, or other “improvements”) and divides it, putting the land into one column and the improvements in another. The appraiser then uses the sales comparison approach to value the land only. He/she then determines how much it would cost to build the improvements new and estimates their depreciation. The cost of rebuilding the improvements new, minus the depreciation, gives us an approximate value. This value is then added to the value of the land; and, this is assumed to be the fair market value of the entire property. This methodology, though valid, can understate the actual value of the property, since the appraiser must make a lot of discretionary decisions concerning the reproduction cost new of the improvements and their appropriate depreciation. This can skew the entire analysis.
Finally, the appraiser can estimate the fair market value of the property using the “income approach.” In this approach, the appraiser determines the “market rental income” for the subject property. This can be its actual income or something different. It is the rental rate the property could generate, based on the market. This income will be computed yearly and given a reasonable/market driven vacancy rate. The appraiser then has to determine what rate of return the market expects from renting properties like the subject. This can sometimes be determined by finding how much similar properties sold for and dividing their yearly rental income by the purchase price. The market’s expected rate of return is called the capitalization rate or “cap rate”. The appraiser then divides the market rental income by the market’s expected rate of return and the conclusion is an approximation of the market value of the entire property.
For example, if the market rental income is $24,000 per year and the market expects a 10% rate of return, the fair market value of the property would be $240,000. While this approach is typically best for income producing properties, market income and capitalization rates are notoriously difficult to determine.
Ideally, an appraiser, supported by the appropriate team of professionals, uses all three methodologies to estimate the fair market value of the property and reconciles the three estimates into a final conclusion of value.
When the condemning authority presents you with its appraisal, check and see if the appraiser used all three appraisal methodologies.
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