By Joseph S. Dzida, The Law Firm of Callanan, Rogers & Dzizda, LLP
Assert Your Eminent Domain Rights
As an apartment owner, you have rights, even when the government uses eminent domain to acquire your building. Under the United States Constitutions, you have the right to payment of “just compensation” for the property taken. Under the California Constitution, you also have the right to payment of “just compensation” if you are damaged by a governmental entity.
You are entitled to the fair market value of your land, building and improvements. Lender fair market appraisals often differ from those used in eminent domain. For example, lenders appraise property at its “most probable price.” A higher standard applies in eminent domain. By law, the government must pay not a low-ball value, not an “average” value, and not even a “most probable” value. It must pay the “highest price” you would receive in an arms’ length transaction on the open market.
Government appraisers often low ball properties. For example, they have selected so-called comparables from areas under the LAX flight path that are infested with drug dealing and prostitution when they appraised apartment properties that are located miles away in much nicer areas. Sometimes, they project downward market trends using general “data” compiled for broad areas when sales prices are actually increasing in the specific neighborhood of the property.
To deal with these tactics, you need the services of a forensic appraiser experienced in addressing eminent domain issues and testifying.
You also have rights when the government relocates your tenants before taking possession of your building and paying you for it. The government is not allowed to engage in such unreasonable pre-condemnation conduct. You are entitled to lost rents and any other damages you suffer as a result.
A typical tactic is to move your tenants out, leaving you with the property’s carrying costs. The government will wait for you to assert your right to payment of the lost rents, and will often wait until you show that you have the help of experienced eminent domain counsel before agreeing to pay your lost rents.
By the time the government starts to relocate your tenants, it will have already put together its own team of legal, appraisal and other experts to protect its interests. You should do likewise. Don’t wait for the government’s help. Too often, it acts only to help itself. It will act on its own schedule and at its own convenience unless you assert your rights and demonstrate that you have your own team in place to protect them.
Your tenants and you (if you live in the building) are entitled to relocation benefits set by law. Though helpful, often these benefits are insufficient to pay all of the costs of relocation. Furthermore, if financing a relocation is difficult, the government must also advance monies to fund the relocation.
Once the government files an eminent domain lawsuit to acquire your building, it may file a motion to obtain possession prior to a final determination of the compensation due you. It can do this only if it deposits into court what it thinks the property is worth, based on its own appraisal. You can withdraw this money and still claim more; though, if you withdraw the deposit, you cannot contest the government’s use of eminent domain to acquire your property. Once you withdraw the deposit, the only issue left to determine is how much you will be paid.
If you have a loan against your building, it and any accrued and unpaid taxes will typically be paid off from the funds on deposit. Sometimes, however, the government deposits less than what is owed, claiming that the property is upside down and not worth the debt. This may create “hardship” sufficient to prevent the government from obtaining early possession of your property. A few brave judges have so held, though others have granted the government possession despite these unfair and inadequate offers.
From a tax standpoint, acquisitions by the government using eminent domain are treated as involuntary transfers subject to Internal Revenue Code section 1033. Like a 1031 exchange, payment of taxes on capital gains from such a transfer may be deferred in a 1033 exchange. Generally a replacement property must be acquired within two years. For certain investment and business property, however, the replacement must be acquired within three years. You need to consult with your accountant and tax advisers regarding whether you qualify for this type of exchange and regarding the governing replacement period.
In addition, under California law, the property tax basis for the building taken in eminent domain may be transferred to replacement property. This is most easily done by acquiring new property in the same county as the old (most county’s have a form to fill out for this); though “theoretically” you should also be able to transfer to a replacement property in a new county. You need to investigate the procedures at an early stage of your search for a replacement so that you can address and overcome any procedural difficulties early on.
Eminent domain has been described as the “legal equivalent of being hit by lightning.” When an apartment is acquired by the government, the owners may lose their livelihood and both the owners and the tenants may lose their homes. The best defense is to be proactive and prepared to assert and defend your constitutional rights.
Passively waiting for the bulldozers to arrive is NOT good strategy. As discussed above, do not be penny wise and pound foolish. Assemble a team of legal and appraisal experts to help you get or save you more money than they cost. Surprisingly, most people do not get help and simply take what the government offers. The government knows this and often does not even negotiate seriously until it sees that you have help and the guts and wherewithal to fight for and protect your rights. The law helps those who help themselves.
For more information call 213-599-7595.