[Nicole Garnett (guest-blogging), February 14, 2007 at 3:24pm] Trackbacks
Replacement, not Market, Value

First, a comment on Ilya's thoughtful response to my post yesterday. Ilya argues that my story about Catholic churches along Chicago's expressways is more about political power than subjective value. I don't deny this. Catholics had clout in 1950s Chicago. But, I also stand by my argument that high-subjective value may intensify political opposition to takings (and therefore, increase the likelihood such efforts will succeed). Ilya is also right to point out that many thousands of private homes, with high subjective values, have been taken over the years. As I argue in my paper, subjective value alone may not be enough; homes may not provide the natural rallying points for collective action that the parish churches did.

I agree completely that that the avoidance phenomenon I discussed yesterday will not zero-out owners' subjective losses. More money (and perhaps public use review) also is needed to protect owners. It is curious, however, that the eminent domain literature focuses almost exclusively on the compensation mandated by the Constitution, rather than the amount of compensation that the Takers actually pay property owners. This literature overlooks the extent to which owners frequently are legally entitled to substantially more than the fair market value of their property. This oversight might be the result of confusion over terminology -- the compensation is frequently labeled "relocation assistance"; it also might result from law professors' constitutional-law-centric orientation. But to even begin a discussion of the compensation question, it is necessary to understand what federal and state laws actually require governments to pay dislocated owners. This post provides a brief outline of these legal entitlements.

Federal Relocation Assistance

Uniform Relocation Assistance and Real Properties Acquisition Act of 1971 (enacted in response to the concern that the individuals displaced by highway and urban renewal projects suffered substantial financial hardship) requires federal agencies, as well as state and local agencies receiving federal funds, to provide relocation assistance whenever they displace property owners. The Uniform Act essentially guarantees that owners receive their property's replacement value, not its market value, by requiring Takers to ensure that displacees can secure comparable replacement housing,. Takers must take whatever steps are necessary, including, as a last resort, the purchase or construction of a new home "in order to re-house displaces and permit a project to continue in a timely fashion." Takers must also compensate displaced owners for moving expenses, as well as mortgage, and closing costs; businesses are entitled to receive up to $10,000 for "reestablishment" expenses.

The replacement-dwelling guarantee can substantially improve the housing situation of displaced occupants. Because the replacement dwelling must be "decent, safe, and sanitary," "adequate in size to accommodate the occupants," "within the financial means of the displaced person," and "in a location generally not less desirable than the location of the displaced person's dwelling" Takers sometimes must secure a larger, more expensive home for a resident—for example, because a family's current dwelling lacks the appropriate number of bedrooms for their children under local housing codes. Technically, the displacing agency is directed to pay up to $22,500 to enable a homeowner to purchase an appropriate residence. (Tenants are entitled to up to $5,200.) It is fairly clear, however, that that these limits are routinely exceeded.

State Relocation Assistance

Since federal funds help finance many highway and redevelopment projects, the extent of the Uniform Act's guarantee is quite broad. Moreover, most states extend it to all projects receiving state funds, and a few require it for condemnations by any public entity. In addition, there is a trend toward providing additional compensation for dislocated businesses. For example, direct recovery of business losses, such as a loss of good will, is allowed in a handful of states.

Relocation Assistance In Practice

A handful of empirical studies provide a snapshot of how relocation-assistance programs work in practice. Two themes emerge from these studies: First, the dollar amount of relocation-assistance received by residents displaced by eminent domain usually is quite generous. Second, relocation assistance frequently falls short of fully compensating businesses for their losses. U.S. Department of Transportation's Relocation Retrospective Study, conducted in 1995, provides the most complete recent picture of residential relocation assistance. This study found that residential property owners were pleased overall with the relocation assistance that they received. In fact, nearly ninety percent of the homeowners (and all but one tenant) surveyed indicated that they were "able to significantly upgrade" their housing.

In contrast, business relocation assistance is almost universally condemned as insufficient. One survey of 224 businesses found that the maxium business-reestablishment payment ($10000) was "almost universally considered inadequate." Interestingly, business owners' most significant complaint is that the maximum reestablishment payment falls far short of the costs needed to make modifications required by various regulatory codes, especially the Americans with Disabilities Act. Even in states which have elected to use state funds to exceed the $10,000 maximum, business owners complain that their code-compliance costs are not covered.

Undercompensation Revisted?

Relocation assistance generally provides owners with above-market compensation, but it does not guarantee that they are fully compensated for their losses. To fully understand the nature and extent (if any) of the undercompensation problem, we need to know more about how eminent domain works in practice. We need to understand what happens during pre-condemnation negotiations—the subject of my post tomorrow. We also need to know whether Takers tend to target certain disadvantaged owners (the poor, minorities, the politically powerless), and, if so, whether these owners are also systematically disadvantaged with respect to compensation as well. These empirical questions cry out for more research.

jallgor (mail):
As a particpant in a pre-eminent domain negotiation I am looking forward to your next installment but i have to wonder how much empirical research can be done on the subject. For obvious reasons, developers will typically demand confidentiallity regarding any deal they come to with willing landowners.
In my own circumstances, I bought the property in question because I thought the area was ripe for development and expected real estate values to rise sharply. When a developer came along and wanted the city/state to condemn the property my chief complaint about fair market value was that it ignored the fact that my investment opportunity was being taken away from me. I wasn't ready to sell and how can you come up with a present day value for what I hoped the property would be worth in 5 or 6 years (my original time frame for selling)? Imagine the government forcing you to sell a stock that you just bought because you were certain it was a great undervalued company. I haven't seen you mention this harm in your analysis.
2.14.2007 5:48pm
This is off-topic but I have the solution to the whole problem of compensation for ED takings....

For property taken for public use:

Anyone who has property taken by a government is allowed to accept the money offer or pick any other property in the same jurisdiction. If it is a state level seizure, then they can pick any property in the state. If it is national, then any property in the nation. City, then any property in the city. Any property regardless of comparative value. If you currently live in a two room hovel, you can pick the high rise office building downtown if you want to. Or the White House. Or the Statue of Liberty. Whatever. However, the owner of the property has the right to say no. In which case you pick another property. If it gets to the point where you've been told no for more than 50% of the properties then you get to keep your original property and the development is replanned. The idea is that people are more likely to make the tradeoff between having the shiny new bypass and someone else's living room. But when it is that person's living room they may have a different story.

For private development:

In addition to picking any property in the same jurisdiction, you get to pick any property owned by any principle in the organization that wants to do the development. And this goes back as many steps removed from the original company as long as you never cross a line where ownership is less than 20%.

The purpose of this is to prevent the creation of a series of puppet companies without any assets of their own. That is, if Warren Buffet owns 21% of Berkshire-Hathaway. BRK owns 55% of Bob Johnson Holdings. Bill Gates owns 44% of BJH, and Steve Allen owns the other 1%. Plow-and-Pave MiniMalls and Office Buildings Inc., is a wholly owned subsidiary of BJH. PPMMOB wants to build a new strip mall right through your house. You get to pick any property owned by PPMMOB, any property owned by Bill Gates or BJH, any property owned by BRK, or any property owned by Warrent Buffet. But not anything owned by Steve Allen. Once you reach the 50% nay level, they have to put their mall elsewhere.

In all cases any compensation would be whatever amount was offered as FMV of the original property.

Of course it would never happen, but it would certainly be interesting to see what arguments people would put forth as to why it's ok to take my land but not theirs.
2.14.2007 6:43pm
Gideon Kanner (mail):
It is true that condemnees on the lowest rungs of the economic ladder can occasionally benefit from relocation assistance laws by receiving better dwellings than those from which they were displaced. But that is a small part of the problem -- people like that are ccomparatively few. For others, the problem is that there is no meaningful review of penurious adminstrative awards -- the judicial review (where available) is not de novo. Also, some states take the position that they will only pay the housing supplement if the homeowner-condemnee accepts the prelitigation offer.
But those are peripheral matters. The real problem is the undercompensation that takes the form of "lowball" government offers that are often less than their own appraisals. See Althouse v. US (Fed.Cl.) and the dated but excellent article by Reskin and Rohan (or was it Berger &Rohan?) in the Columbia Law Review in the 1960s, inquiring into condemnation practices of Nassau County, New York -- which turned out to be a moral snake pit. Then there are all those congressional hearings from the 1960s. Read 'em. As I recall, the Illinois Supreme Court dealt recently with the low-ball problem (offers below condfemnors' appraisals) in a case in which the condemnor argued for a "right" to make such offers on the theory that (a) this would leave room for negotiations, and (b) would save the state money. The court didn't buy it.
Those government appraisals are prepared on a mass-production basis by appraisers who are low bidders and who have incentives to ccome in low in order to curry condemnors' favor and get future employment. Also, there is a time lag between appraisal preparation and offers, during which values can change -- dramatically so in California.
The real action is in appraiser battles in which competing opinios of value are presented to juries, although condemnors frequently settle those omce they see the owners evidence obtained through discovery. There, as I indicated, the track record clearly shows that condemnors' opinions of value do not fare well when tested in court. That is not because condemnees' lawyers are geniuses or magicians, but because the government often offers "lowball" figures. This is best seen in very large cases where the spreads between condemonors' and condemnees' figures run into seven or eight figures. In a vast majority of those cases condemnors lose big on valuation. Data on request.
The run-of-the-mill condemnee is generally screwed because he or she cannot afford proper representation and proper appraisal assistance, unless the spread between offer and demand is very large. Except in Florida where the condemnor has to pay the owner's litigation expenses, win or lose. Elsewhere condemnation is, alas, a big boys' game, except for some pro bono work that is done by some condemnation lawyers.
The other BIG problem is that most ordinary people don't think they can "fight city hall" and they accept the low ball offers in large numbers. The result is that the condemning agecy reaps a windfall by settling the acquisition of most parcels on the low side, without litigation. Thus, the higher, above-apraisal verdicts condemnors have to pay after trials are offset by the huge numbers of low ball settlements. So they have incentives to do what they do. Also, they can rely on most judges bending over backweard to help them out. The California courts have repeatedly said that because "fears have been expressed" that liberal compensation will cause an "embargo" on public works to be declared, it is their duty to keep condemnation awards low.
2.14.2007 6:44pm
Gideon: Can you provide some evidence of people "accept[ing] the low ball offers in large numbers?" I'm genuinely curious. For example, out of all properties taken in the US in 2006 how many were in cases where the accepted offer was substantially below market (say 10% or more), and how many properties was that? If you don't have data for the whole US, pick a state or sufficiently populous region for which you do have data.
2.14.2007 7:59pm
Gideon Kanner (mail):
California condemnors, notably CalTrans, have historically bragged that some 90% of their offers are accepted, without involvement of a lawyer or appraiser. A few years ago the Salt Lake Tribune conducred a study and found that of the people who refused UDOT offers and litigated value, some 80% recovered more, the average increase being 40%. There are older studies that I mentioned above. The reason why the URA requires condemnors to offer the full amount of their appraisal is that they didn't do it before its enactment. The current degree of compliance with that statute has not been studied that I am aware of, but there have been a few cases that provided clues. I mention one above (the Illinois case). Another ploy is to offer to buy an owner 's property and when challenged say, "Condemnation? What condemnation? We're just a little ol' buyer like anyone else, negotiating for a good price." See the California Melamed case where they got away with it.
The kind of data you want don't exist and cannot exist because there is no way to ascertain market value without a trial or some kind of inquest on a large enough scale. Remember that, as SCOTUS once put it, FMV is a guess by an infored person; FMV is not a fact but an opinion.
In the end, remeber that jurors WHO ARE TAXPAYERS THEMSELVES have no problem awarding more that most offers in most cases that go to trial.
But you made me think, and I'll have to make inquiries and see what data are available. Jury verdicts are a good source, but they don't deal with acquisitions that never went to trial.
2.14.2007 8:30pm
Viscus (mail) (www):
This is a very fascinating analysis by Nicole. I think VC made an excellent choice by having her guest blog.
2.14.2007 9:08pm
David C. (www):
I would love for someone to "take" my house. At least in Wisconsin, it has been my experience (from reviewing plans at the state level) and the private consulting side in assisting municipalities take property, I could not be so lucky to have some government entity want my property.
2.14.2007 10:15pm
Andy Freeman (mail):
> This literature overlooks the extent to which owners frequently are legally entitled to substantially more than the fair market value of their property.

"fair market value" is the price that a willing seller would accept and that a willing buyer would offer. There may actually be a range of prices where both parties are willing, but there are two willing parties.

In takings, there isn't a willing seller, at least not at the price(s) offered, so it is somewhat disengenuous to use that term to describe a price arrived at by substituting a proxy for the seller.
2.15.2007 1:19am
Viscus (mail) (www):
Andy Freeman,

Fair market value is objective, not subjective. Thus, if there are five objectively identical properties across the street, and they all sell their property for $150,000 then the fair market value of your property is $150,000, even if you wouldn't personally sell for less than $200,000. One idiosyncratic owner does not fair market value make. The term "market" refers to many buyers and many sellers and many transactions. Not merely one transaction.

Yes, fair market value is determined by willing buyers and willing sellers. But it is determined on a market basis, not an individual basis.

In this example:
$200,000 is your subjective individual value.
$150,000 is fair market value.
2.15.2007 2:50am
markm (mail):
Viscus: FMV might be objective, but it's not precise. Good appraisals are often more than 10% higher or lower than the final sale price between willing buyers and sellers.
2.15.2007 8:25am
Dick Schweitzer (mail):
Is it possible to cut through all the legislative jargon, frosted by judicial gloss and synthetic expertise, and understand that the remedies proposed (and enforced) do not meet the standard required, which is ---restitution.

Restore affected parties to their status quo ante!

The departure of jurisprudence from the moral discipline of Equity, in search of the certainties of codification, have launched these thousands of ships of lawyers' explorations.
2.15.2007 10:47am
Andy Freeman (mail):
> Thus, if there are five objectively identical properties across the street, and they all sell their property for $150,000 then the fair market value of your property is $150,000, even if you wouldn't personally sell for less than $200,000.

The above assumes its conclusion. Things are never identical, no matter how much your argument requires otherwise.

The fact that you don't value that one of those places is where my daughter took her first step doesn't mean that that place doesn't have additional value to me.

In fact, even with the same property (which is identical to itself), we see that different buyers will agree to different prices. Why? Because they place different values on the various pieces that make up the whole. For example, some people would rather live on a corner while others would rather live in the middle of the block. Same property, same seller, different agreement point.

Note that takings explicitly rejects the "identical" and "equivalent" assumption. Takings efforts almost always chooses a specific set of properties. It's never "we're going to buy 10 acres", it's "we're going to take {specific} 10 acres". It doesn't accept "identical" or equivalent value subsitutes, but insists that takees must. It doesn't say "what can we get for $10 million?", it says "we want {specific} for $10 million", a price that the sellers must be coerced to accept.
2.15.2007 1:07pm
Andy Freeman (mail):
Under CA's Prop 13, the taxable value of a property can increase no faster than 2%/year except when said property changes hands.

If we take the house of the proverbial little old lady and she buys an "identical" house for the amount that she received from the takings, her property taxes are likely to increase by several times.
2.15.2007 8:47pm
Viscus (mail) (www):
Andy Freeman,

Obviously, the point about identical properties is an unreasonable assumption. However, the point is that fair market value is objective, not subjective. It is determined by markets, not individuals.

I am not saying that determining fair market value is a precise science. I am only saying that it is not determined solely by the idiosyncratic views of the current owner.
2.15.2007 11:42pm
Viscus (mail) (www):
I should clarify what I mean about "unreasonable assumption." I don't mean that it was unreasonable for me to make it for the purposes of illustration. It is perfectly reasonable for that limited purpose. I mean it is unreasonable to think that it reflects reality very often. It is probably not overwhelmingly common for two properties to be objectively identical. (Of course, with identical properties in a subdivision, perhaps some properties are...)
2.15.2007 11:45pm
Andy Freeman (mail):
> It is determined by markets, not individuals.

Markets are individuals. A transaction is between two parties, not between two averages.

Uncoerced transactions are clearly subjective. It's absurd to argue that averaging subjective values somehow produces an objective value.

We know that different people place different values on the same thing, so it's absurd to argue that the average is somehow the justified when it comes to coercion.
2.16.2007 11:36am
Viscus (mail) (www):

Not to get too much into semantics, but...

"Markets are individuals."

Markets may be individuals, but they are not equivalent to one individual.

From the perspective of one individual, the prices that other individuals have arrived at for equivalent properties can be said to be objective. That is, those transactions did in fact occur at the prices in question. These transactions and the prices at which they occurred are objective facts about the world. Fair market value is determined based on such objective facts about the world, rather than the idiosyncratic subjective views of one individual (which, for all way know, are not even accurately stated, given the motivation of the individual to receive the highest price possible).

Now, you might think this is absurd. Which is fine. But this is how things are typically thought of.

One final note. "Objective truth" strictly speaking, does not exist, since all facts are perceptions that come to us through our senses. And our senses, of course, can be flawed. Strictly speaking, you cannot prove that you are something other than a brain in a vat, and all your sensory perceptions about the world are nothing more than the results of some mad scientist. That everything and everyone around you is not merely a figment of your imagination. However, pragmatically, we all accept the existence of the world as an external reality.

The word objective is used loosely to refer to external facts about the world, not as a dogmatic reference to absolute truth. So, when I say that fair market value is objective, I mean that it is based on external facts about the world. As opposed to subjective valuation, which is internal, not external.

I don't think there is anything "absurd" about referring to the transactions of others concerning roughly equivalent properties as objective (external) versus the price you are dreaming about in your head as subjective (internal).

In determining fair market value, should we give more weight to subjective valuation? Should a judge be able to weigh an individual's testimony concerning the value of the property in question to them. In my view, the answer is yes. But, as a general matter, when it comes to determining fair market value, objective evidence is often the only sort of evidence of value considered. Even if other sources are allowed, objective evidence usually dominates the determination. Overall, it is accurate to say that fair market value is objective rather than subjective. Obviously, as a matter of degree rather than as a matter of absolutes. As always, also depending on the laws of the jurisdiction and on what the judge had for breakfast.
2.16.2007 6:49pm