Property Valuation In Condemnation Law

Michigan Const. Article 10, § 2 provides that "[p]rivate property shall not be taken for public use without just compensation therefore being first made or secured in a manner prescribed by law." When natural market forces define the price of real estate, the concept of "just compensation" or fair payment, is easily defined: It is simply the amount of money that you can get for your property.

The Uniform Condemnation Procedures Act¹ (UCPA), sets forth the procedures that must be followed to acquire property². Although the UCPA is nominally a procedural act, certain provisions are germane to the valuation process. Under the UCPA, the date that the complaint is filed is generally the date of valuation, as well as the date that title to the property vests in the condemnor³. In other words, the real estate appraisers for both the condemning agency and the property owner, and ultimately the jury if the case is litigated, attempt to determine what the property was worth as of that date.

A fundamental principle of condemnation law holds that the property must be valued as if the condemnation project had not been contemplated⁴. Michigan law precludes an appraiser from considering any increment of value, whether positive or negative, that is attributable to the project for which the property is being condemned. For example, if the announcement of an urban renewal project exacerbates the deterioration of a blighted area, a condemnee will not be expected to suffer the loss of value attributed to the project. Similarly, if awareness of a condemnation project enhances the value of property, the landowner is not entitled to the increase in value due to the project⁵.

Just compensation is based upon the "fair market value"of the property. Fair market value is defined as:

Because fair market value is defined as the highest price that the property would have been able to have been sold for, a key determining factor in the valuation of property is the appraiser’s opinion of the "highest and best use" of the property. Highest and best use is defined as "the most profitable and advantageous use the owner may make of the property even if the property is presently used for a different purpose or is vacant, so long as there is a market demand for such use.⁷" The contrast between property values based upon differing opinions of highest and best use (e.g., residential versus commercial) can be substantial.

In determining the highest and best use, appraisers are permitted to consider the reasonable possibility that impediments to development which existed on the date of taking would have been successfully addressed (e.g., rezoning, variances, site plan approvals, extension of utilities)⁸. The ideal is to recreate what reasonably would have occurred had the condemnation not taken place. Appraisals that are not grounded in reality have been held to be inadmissible. [find zoning case].

In Consumers Power Co v Allegan State Bank⁹, the court recognized an exception to the general rule that "the enhanced value due to the use for which the land is appropriated will not be included in the measure of compensation.¹⁰ The court permitted the property owner to value the property with a highest and best use of gas storage; the same purpose for which the property was being condemned. In reaching its decision, the court stated that:

Other jurisdictions have viewed this principle as permitting owners to claim the same highest and best use as the condemnor, where the proposed use could be carried out by the private sector. For example, in County San Diego v Rancho Vista Del Mar¹¹ the court stated that:

It should be noted that in Consumers Power Co, the court specified that the feasibility of the highest and best use must have a basis independent of the announcement of the project. Although Michigan law has not extended this principle to the extent enunciated in Rancho Vista Del Mar, condemning agencies must be aware of the possibility that an owner might be permitted to argue such theories before the jury.

Where only part of parcel has been condemned, damage to the remainder, or severance damages, are measured by calculating the difference between the market value of the property not taken before and after the taking¹². Damage to the remainder arises of out such factors as diminished access or diminished utility resulting from the decreased size of the parcel. It is exceedingly rare for a municipality to condemn less than a total parcel for an urban renewal project, unlike takings for construction of roads and highways. In urban renewal cases, there generally is no need to determine severance damages.

However, in certain cases, a discrete parcel might represent an integral part of a unified farm or business, giving rise to claims of business interruption or even a total taking of the good will of the entire business. MCL 213.51(g) defines "parcel" as "an identifiable unit of land, whether physically contiguous or not, having substantially common beneficial ownership, all or part of which is being acquired, and treated as separate for valuation purposes"(emphasis added). It is essential that the municipality be aware of whether a parcel which is not physically contiguous to a condemned parcel within the development area is actually part of larger business operation. Where such "parcels" are involved, the condemning agency should have a reasonable idea of the potential ramifications of the situation. Often, the municipality might be able to "swap" parcels, minimizing any damage to the business that arguably might be caused by the condemnation.

Pursuant to MCL 213.51, an "owner" is any person possessing an estate, title, or interest in the property. Other than the value of the real estate, the most significant damage claims associated with urban renewal projects often involve matters related to the operation of a business. The condemnation may result in modification or termination of a lease or other contractual arrangements (e.g., franchise agreements, lender obligations). Displaced business owners may also claim business interruption damages or a total taking of the going concern of the business.

For example, in City of Detroit v Michael's Prescriptions¹³, the Court of Appeals stated that "it is clear that recovery of the going concern value of a business lost to condemnation will depend on the transferability of that business to another location. If the business can be transferred, nothing is taken and compensation is therefore not required¹⁴" In Michael's Prescriptions, the Court of Appeals found that the lower court did not abuse its discretion in admitting evidence of loss of going concern, where relocation of a pharmacy was arguably foreclosed because the condemnation project scattered established customers and eliminated other business-generating businesses, including the pharmacy’s monopoly over a nearby emergency room’s prescription business.

If a business can be moved, as is commonly the case, business interruption damages must be considered. Business interruption damages include the additional costs associated with the relocation or the business; i.e., increased rental expenses, advertising expenses and labor. However, because of their speculative nature, damages for lost profits are not recoverable in a business-interruption case¹⁵. A business cannot recover for both business interruption and loss of going concern, because the "two theories are mutually exclusive.¹⁶"

Although relocation costs may appear be minimal, it is important to assess the viability and potential exposure associated with business-related claims. Even in cases where a loss of a going concern claim is asserted without adequate foundation, increased litigation costs will be necessary in conjunction with filing an appropriate motion to ensure that the jury will be precluded from deciding that the business has been taken.

The lease itself may also have value. The basic formula for determining the value of a leasehold is the difference between the fair market rental value of the remainder of the term and the rent reserved in the lease¹⁷. If the fair market value of lease exceeds the contract rent, the lease has value to the lessee and visa versa. When valuing a leasehold, it is possible that the term of the lease can exceed the contract term of the lease. The United States Supreme Court succinctly explained that:

1. Significant amendments were made to the UCPA,(1980 PA 87), which became effective on January 1, 1997.
2. MCL 213.51 et seq (Public Act.1980, No. 87, as amended) provides "procedures for the condemnation, acquisition, or exercise of eminent domain of real or personal property by public agencies or private agencies."
3. MCL 213.70; MCL 213.57.
4. MCL 213.70; SJI2d 90.15.
5. See In re Urban Renewal, Elmwood Park Project (Cassese) 376 Mich 311, 319; 136 NW2d 896 (1965), (citing Anderson v United States, 179 F2d 281(5th Cir 1950); United States v Chandler-Dunbar Water Power Co, 229 US. 53 (1913).
6. SJI2d 90.06 (citing Consumers Power Co v Allegan State Bank, 20 Mich App 720, 744-745; 174 NW2d 578, 591 (1969).
7. SJI2d 90.09
8. See State Highway Commissioner v Eilender, 373 Mich 46; 127 NW2d 890 (1964)
9. 20 Mich App 720; 174 NW2d 578 (1969).
10. Id at 737.
11. 20 Cal Rptr2d 675, 16 Cal App 4th 1046 (1993).
12. Department of Transp. v Sherburn, 196 Mich App 301, 304-05; 492 NW2d 517 (1992).
13. 143 Mich App 808, 819 (1975).
14. Id at 819. See also Detroit v. Whalings, 43 Mich App 1 (1972).
15. City of Detroit v Larned Associates, 199 Mich App 36, 42; 501 NW2d 189 (1993)(citing In re Slum Clearance, 332 Mich. 485, 496, 52 NW2d 195 (1952)).
16. Larned Associates, 199 Mich App at 42 (citing Detroit v. Michael's Prescriptions, 143 Mich App 808, 819, n2, 373 NW2d 219 (1985)).
17. Pierson v H.R. Leonard Furniture Co, 268 Mich 507, 522 (1934).
18. Almota Farmers Elevator and Warehouse Co v US, 409 US 470 (1973).