From a small northwestern observatory…

Finance and economics generally focused on real estate

Eminent Domain and Severance Damages

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As I mentioned in my newsletter last week, several of our investment clients – and their attorneys – have called recently about eminent domain “takings” of their investment property.  Specifically, the acquiring agencies often fail to understand how a partial acquisition can impact the highest and best use – and thus the value – of the part remaining. 

Let’s take a very simple example, which is actually drawn from our files from several years ago.  A highway department wants to change the turn radius on a thoroughfare, and will “take” a slice of the front of a car dealership.  The before-and-after sketch looks a bit like this:

The highway department proposed that since they were only taking about 20% of the land, and none of the building, the highway department proposed a very minimal estimate of just compensation – about 5% of the total value of the site.  However, the dealer was able to successfully show that the highest and best use of this site was for a car dealerships, and those were valued heavily on the ability to provide road-frontage display of cars.  Hence, the loss of the ability to display 30 vehicles was a very real damage to the remainder.  The Court accepted the dealer’s theory on this, and the just compensation was significantly higher than originally proposed.

My good friend, David Matthews, and I wrote a chapter about “Rails to Trails” acquisitions in the Appraisal Institute’s 2019 book, Corridor Valuation.  In it we noted, that the severance damages to the adjacent properties can often exceed the value of the rail right of way being taken.  In a recent court case in Oregon, a landlord provided overflow parking for a rental house on an adjacent parcel, which was “taken” for a transportation easement.  The rental house itself wasn’t touched, per se, but now the tenants would have to park on the street.  The landlord was able to show that the loss of the adjacent parcel impacted the marketability of the rental house.  In Sweden, they have done exensive studies on the value impact of new rail lines on adjacent residential and commercial properties, and found that the noise has a statistically significant impact on value, even when no actual land is being taken. 

The examples go on, and while this may seem to be a situationally specific problem, there are extensive common themes and common methodologies which can be brought to bear to measure this.  You’ll probably see more about this from us in the very near future. 

Written by johnkilpatrick

August 6, 2020 at 2:41 pm

Posted in Uncategorized

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