Eminent Domain Questions

Top Ten List

  1. What is eminent domain?
  2. How is the compensation for my property determined?
  3. What if real estate values go down?
  4. What about my rental income?
  5. What about damage to my business?
  6. Am I eligible for relocation assistance?
  7. Can I negotiate with the government on my own without paying attorneys’ fees and appraisal costs?
  8. Will I be able to stop the government from taking my property or business?
  9. How does the process of eminent domain work?
  10. This talk of eminent domain has been going on for years now. Can I just wait and see if there is ever more than just talk?

1. What is eminent domain?

Eminent domain, sometimes called condemnation, is the power granted by the federal and state constitutions to governmental agencies allowing them to acquire private property for public use upon payment of compensation.

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2. How is the compensation for my property determined?

The government must pay fair market value. Fair market value is “the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.” Fair market value is not a lowball price. It is not the “most probable price” used by many lenders in valuing property. Nor is it an unreasonably high price that somebody might pay because they do not know all the facts or because they have urgent necessity to acquire the property. It is the highest price that would be paid on the open market, by a buyer acting at arm’s length, knowing all the facts and not acting under pressure. You do not have to take what the government offers. Often the government will deposit into court what it thinks your property is worth. You can withdraw this deposit and still claim that your property is worth more than the amount of the deposit.

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3. What if real estate values go down?

When values go down, property owners can be hurt. They may receive less if they hold out and sell after values have gone down. However, sometimes the sales in a declining market are the result of pressure. The only people selling are those who must sell. As discussed above, such sales should be ignored in determining fair market value. In addition, sometimes the values in an area decline because potential buyers know that the government is interested in building a project in the area. The government’s project freezes values in the area and prevents normal market activity. Such project-related decreases must also be ignored. Before accepting the government’s offer, you need advice regarding whether it actually reflects fair market value.

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4. What about my rental income?

Sometimes governmental agencies freeze a property’s value by preventing normal activity, but leave the owners hanging while the project proceeds on the government’s schedule without regard to the needs and concerns of the impacted owners. For example, sometimes the government relocates tenants, but delays in acquiring the property itself. In such situations, the government is liable for the lost rents. You should get legal help to negotiate a lost rents agreement with the government, so that you are compensated for your lost rental income.

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5. What about damage to my business?

It is not just real property owners that are entitled to protection. Business owners are also entitled to compensation. California allows businesses to recover lost or damaged goodwill. Goodwill is the intangible part of business value. In simple terms, it is what a knowledgeable buyer might pay for a business, over and above the value of its tangible assets, because of the benefits of the location of the business. When a business is forced to move through eminent domain, this intangible value may be lost or damaged, because the business can no longer remain where it operated and must relocate at higher cost.

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6. Am I eligible for relocation assistance?

Some but not all the costs of moving a business and reestablishing it at a new location will be reimbursed by the government by way of relocation benefits. There are two main types of relocation benefits: (a) moving expense; and (b) reestablishment expense. In simple terms, moving expense is the cost of moving your business to a new location. Usually, the government will pay most of this cost (though payment may be delayed). Reestablishment expense is the cost of getting the new location ready for your business. The regulations cap benefits for reestablishment was recently raised, no matter what the size or complexity of the impacted business. The federal cap was recently raised to only $25,000.

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7. Can I negotiate with the government on my own without paying attorneys’ fees and appraisal costs?

You can try to protect your own interests. The government has its own team of experts to help protect its interests. This is because expert help usually leads to better results. If the government is better off having a team of experts protect its interests, would you be better off as well if you had your own team? How can you afford help? Experienced eminent domain attorneys usually work on a contingency fee basis. This means that you do not pay attorneys fees unless you recover more than the government offers. The contingent fee is usually a percentage of the amount recovered over and in excess of what the government offers. Furthermore, in some cases, the attorneys will advance appraisal and other costs. Check with legal counsel and obtain a written fee proposal so that you clearly understand how you will be charged. Usually you cannot recover your attorneys’ fees and expenses from the government. Only in rare cases is such recovery allowed; for example, where an eminent domain case is dismissed or abandoned, or where the court finds that the government made an unreasonable final offer while the owner made a reasonable final demand.

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8. Will I be able to stop the government from taking my property or business?

If the government does not follow the law in acquiring your property or business, you may be able to stop the taking. However, this is very, very rare and usually happens only in cases where the government makes a big mistake or engages in outrageous misconduct. Therefore, while sometimes the taking may be slowed or delayed (as in those few cases where the government does not follow environmental laws); it is very rare for a taking to be stopped.

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9. How does the process of eminent domain work?

The first step is for the government to identify your property and the area around it as the preferred site for a government project. This usually involves environmental study and planning. During this study period, the government may ask to come onto your property to conduct tests for hazardous substances and other conditions that may impact the government’s ability to build the project. The second step is for the government to appraise your property and make a written offer for it. The third step is for the government to pass a “resolution of necessity,” confirming that it cannot acquire the property without resort to eminent domain. Once a resolution of necessity is passed, the government usually promptly files an eminent domain lawsuit, naming the impacted property and business owners as defendants. The government usually requests an order for immediate possession. To get it, the government must deposit into court what it thinks the property is worth. While exceptions exist, the government usually acquires the right to take possession within 120 days of its request. The parties then prepare for trial. Appraisals are obtained and exchanged. The parties try to negotiate settlement. Before trial, the parties exchange written final offers and demands. If the case does not settle, trial begins. The jury determines the amount of compensation that the government must pay. All other issues are determined by the judge. Normally, once you “realize a gain” on the property taken, you can replace it with similar property in a tax free 1033 exchange. Because you are losing the property in eminent domain, the law gives you more time than normal to complete the exchange (three years for investment and business property, two years for other property-see your tax adviser or CPA to get the specifics).

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10. This talk of eminent domain has been going on for years now. Can I just wait and see if there is ever more than just talk?

You can wait, but people often wait too long. As discussed in question number 9, the eminent domain process begins slowly but finishes quickly. Once the process moves into high gear, it may be too late. The best strategy is to be proactive. Do not wait for the eminent domain bus to stop on your schedule. You may be hit and run over by it. Do not wait for government help. While the government will send many people to smile at you and have nice conversations with you, these people work for the government. They do not work for you. Find experienced legal counsel who will refer you to experienced appraisers. Start looking for relocation opportunities. You know best what relocation sites will work for you. The government will protect its interests. You should protect yours.

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