A Comprehensive Guide to Eminent Domain Just Compensation

In an eminent domain case, when a governmental agency or other condemning authority takes private property, the property owner is constitutionally entitled to receive eminent domain just compensation for the taking. This refers to the amount of money that will make the owner whole and indemnify them for the loss of the property. Frequently, just compensation is measured by determining the amount that the owner could receive for the property on the open market, assuming the owner wanted to sell the property. But what exactly does that calculation entail?

To determine the value of just compensation and present the court with their opinion of a property’s value, appraisers typically employ three methods: the comparable sales approach, the cost approach, and the income approach.

1. The Comparable Sales Approach

The comparable sales approach, sometimes referred to as the “market” approach, is the most frequently used method by appraisers to determine property values in eminent domain proceedings. This method is crucial in ensuring eminent domain and just compensation is fair and accurate.

Using market data, appraisers compare similar, recently sold properties with the property that is being condemned. This comparison involves analyzing properties with similar characteristics, such as size, location, and condition. The appraiser then makes adjustments to the property’s value based on these individual characteristics relative to its comparables. For example, if the condemned property is larger or in a more desirable location than the comparable properties, its value may be adjusted upwards. Conversely, if it provides less favorable features, the value might be adjusted downwards.

Understanding what is eminent domain and how just compensation is calculated can be complex. Property owners facing eminent domain proceedings often seek the expertise of an eminent domain lawyer. These legal professionals can provide valuable guidance on the appraisal process and ensure that property owners receive fair compensation for their condemned property. By leveraging the comparable sales approach, property owners can be confident that their compensation reflects the true market value of their property.

2. The Cost Approach

Under the cost approach, a property’s land and improvements are considered separate entities. The total value equals the market value of the land plus the estimated construction costs of any improvements located on the land. This approach is integral to determining eminent domain and just compensation in certain scenarios.

To value the land, the comparable sales approach is used, comparing similar, recently sold properties. For the improvements, the cost approach employs a specific formula. This formula calculates the reproduction cost of the improvements and then determines a “present value” by considering the relative age and condition of those improvements. Depreciation factors are applied to the reproduction cost to reflect wear and tear or obsolescence.

Although the cost approach is not utilized as often as the comparable sales approach, it proves useful when limited market data is available. For instance, unique, special purpose, or uncommon properties are best evaluated using this method to calculate fair market value. This ensures that even in the absence of comparable market data, property owners receive fair eminent domain just compensation.

Property owners often ask, “Can you fight eminent domain?” Understanding the cost approach can be vital in these cases. By employing this method, property owners can better challenge the compensation offered, ensuring it truly reflects the property’s worth. Therefore, comprehending the nuances of the cost approach is essential for those navigating eminent domain proceedings.

3. The Income Approach

The income approach is typically used to value income-generating properties such as apartment buildings, offices, or retail stores. Appraisers determine fair market value through the income approach by estimating the amount of income a property will generate in the future and determining what a buyer would pay for those future earnings. This method is particularly relevant for calculating eminent domain just compensation for commercial properties.

While appraisers generally use one of three methods to determine property values, arriving at a property valuation is a complicated and nuanced process. Various factors, such as a property’s potential to be developed into something more valuable, can significantly affect appraisal values. This complexity often arises in the context of eminent domain vs. condemnation, where understanding the valuation process is crucial.

Although victims of condemnation are entitled to just compensation, the government may not always offer property owners the true market value. Condemnation law ensures that property owners are compensated fairly, but disputes can arise over what constitutes just compensation. If you are unsure about an appraisal of your property, an experienced eminent domain attorney can help you navigate the valuation process and ensure you receive the “just compensation” that the Fifth Amendment of the United States Constitution guarantees you.

Understanding the nuances of the income approach can be vital for property owners seeking fair compensation. By estimating future income and determining its present value, appraisers can provide a more accurate valuation, ensuring that property owners are fairly compensated for their income-generating properties.

The author acknowledges the assistance of John Oettinger, a summer intern at McKirdy & Riskin, in preparing this article.  Mr. Oettinger is a member of the Class of 2018 at the University of Michigan’s Ross School of Business.