A Pair of Kings Ace the Agencies: Just Compensation Requires Disregarding Impacts From Delayed Projects

In homage to the upcoming season, I am writing the 12 Days of Condemnation, highlighting a dozen of my favorite eminent domain decisions. Fourth, a pair of cases addressing the Scope of the Project Rule, which prevents owners from suffering where the prolonged delay in a project has negatively impacted property value.

The goal of just compensation is to place property owners in the same position they would have been had the taking not occurred.  Sometimes, the announcement of a project can impact values. The impact can go both directions. For example, if the Department of Transportation announced a plan to construct a new highway interchange in an area used exclusively for farming, the anticipation of potential commercial development could increase values. In that situation, it would not be fair for the government to be forced to pay commercial values instead of agricultural values, where the increase in value is attributable solely to the project necessitating the eminent domain acquisition. Alternatively, the announcement of a project can suppress values. For example, a project to create a wastewater treatment facility adjacent to residential properties would result in a decrease in value. It would not be fair to force the property owners to suffer in that situation.

This legal concept is called the scope of the project rule. It is summarized in two places in Michigan law. MCL 213.70 states that "a change in the fair market value before the date of the filing of the complaint which the agency or the owner establishes was substantially due to the general knowledge of the imminence of the acquiring by the agency . . . shall be disregarded in determining fair market value . . . the property shall be valued in all cases as though the acquisition had not been contemplated." A standard jury instruction elaborates upon this rule.

The process of determining the value on the date of taking may be complicated by the government's actions leading up to the taking, if those actions have had an effect on the market value of the property. In such case, you must disregard any change in value resulting from such actions and grant compensation on the basis of what the market value of the property would be if such actions had not occurred. In other words, in arriving at market value you should disregard any conditions which may exist in this area resulting from the prospect of condemnation for this project and the other proceedings leading up to this condemnation case.

You should determine the value of the property as though this project had not been contemplated.

This does not mean that the announcement of the project acts to insulate the properties concerned from normal economic forces. The market may go up or down, the property may deteriorate or be improved, and you should recognize those factors. However, a change in value directly traceable to the prospect of this condemnation should not penalize either owners or the public. By the same token, you should disregard any increases in value which may have occurred by reason of the prospect of the completion of the project.

In re Acquisition of 306 Garfield (Detroit v King), 207 Mich App 169 (1994), is a great example of the scope of the project rule. Detroit announced plans to construct a new hospital and to acquire Ms. King’s adult foster care business in fee. After that announcement, the property partially burned down, then was vandalized, and was not reconstructed. The Court of Appeals upheld a verdict awarding the value of the property, less the cost of repairing the fire damage. “In seeking that value, she asked that the court recognize that had it not been for the threat of condemnation, followed by the actual resolution and then the filing of the complaint, she would have rebuilt the property after the fire and continued her business. She sought the value of the property as restored, less the cost of restoration. In short, she asked to be put in the position she would have been in had the taking not occurred, acknowledging that she must bear the costs of the fire.”  “The trial court concluded, and the city conceded, that defendant’s failure to repair the fire damage to her property was reasonable in light of the threat of condemnation. Indeed, it would be contrary to public policy and common sense to require the expenditure of considerable sums on a building that is expected to be demolished.”

Because of the scope of the project rule, it is important to understand how long a project has been contemplated and whether that project specifically targeted a property. If the property was targeted for acquisition, impairing its value, then the effect must be disregarded. In essence, in order to value the property, it is necessary to rewind history until the point immediately before the contemplation of the project began impacting it and then evaluate how history would have played out absent such an impact. In Bertha King’s case, absent the project, she would have spent the money to restore her business and for that reason, she was paid the full value of the property less the cost of restoring it (which was not attributable to the project). If the impact has been ongoing for decades, the history must be rewound for decades. 

A North Carolina opinion that coincidentally involved a property owner named King extended this rule back decades. In Raleigh-Durham Airport Authority v King, 33 SE 2d 622 (1985), the airport director “testified that for twenty to twenty-two years the airport has been involved in the expansion project,” including a “bond referendum” that made it clear that the expansion was contemplated. The property owner’s appraiser testified that this publicity “dampened the growth in the area and in turn its property values.” Since North Carolina follows the scope of the project rule, the opinion confirmed that the owner’s appraiser “quite correctly did not take into account the decrease in the property’s value due to the airport’s long-range expansion plans.”

In my experience, agencies often fail to account for the impact of their own actions in stifling the development and value of properties. Properly taking this into account can result in significantly larger just compensation payments.

These are favorite cases of mine because I cited them both in a multi-million dollar case when I was a young lawyer. I am still representing that client, decades later. In that case, a project was contemplated to alter a highway interchange. This project was not universally agreed upon by the local municipalities, resulting in lengthy delays including while a lawsuit between the municipalities wound its way through the appellate courts. It was the owner’s appraiser's opinion that the uncertainty surrounding this project resulted in development being undertaken at a different location in the city decades earlier. Instead of applying agricultural values, commercial land values were used. The condemning authority sought to strike the appraisal and that request was denied. My client was paid commercial land values as a result.