Determining Fair Market Value

There are 3 approaches to value property. The Comparable Sales, Income and Cost Approaches.

1. The Comparable Sales Approach is based on the theory that no one would pay more for any property than they would pay for a comparable property. This approach looks at sales of similar properties to determine what someone would pay for the owner’s property. The question that the appraiser, owner and agency must answer is how comparable or similar to the owner’s property are the other sales that have occurred.
2. The Income Approach looks at the value of property from the perspective of an investor. In other words, what would someone pay for the income that could be generated and the residual value of the owner’s property.
3. The Cost Approach is not used as often. It is typically only used when the other approaches are not reliable indicators of what the property would sell for. It is used for unique or special purpose property.

Each parcel of real property is different and, therefore, no single formula can be used to appraise all properties. Among the factors an appraiser typically considers in estimating fair market value are:

• The location of the property;
• The age and condition of improvements on the property;
• How the property has been or may be used;
• Whether there are any lease agreements relating to the property;
• Whether there are any environmental issues, such as contaminated soil;
• Current and potential future zoning and land use requirements;

These factors and others impact how the property compares with similar properties in the area that have been sold recently; how much rental income the property produces, or could produce if put to its highest and best use; and how much it would cost to reproduce the buildings and other structures, less any depreciation.

Fair market value is based on the highest and best use for the property. It is not limited to the property’s current use.

Copy of the Appraisal

With its purchase offer the agency is required to provide a summary of the appraiser's opinion, and the basis for the agency's offer. Among other things, this summary must include:

• A general statement of the agency's proposed use for the property;
• An accurate description of the property to be acquired;
• A list of the improvements covered by the offer;
• The amount of the offer; and
• The amount considered to be just compensation for each improvement which is owned by a tenant and the basis for determining that amount.

The agency is only required to provide a copy of the full appraisal if the property is an owner-occupied residential property with four or fewer residential units. Otherwise, the agency may, but is not required, to disclose its full appraisal during negotiations. Different disclosure requirements apply during the litigation process if the issue of fair market value goes to court.

Owner's Appraisal

An owner may decide to obtain its own appraisal of the property in negotiating the fair market value with the agency. If the process proceeds to a court determination of value, the owner will need to obtain its own appraisal.

At the time of making its initial offer, the agency must offer to reimburse the owner the reasonable costs of an independent appraisal of the property, not to exceed $5,000. To be eligible for reimbursement, the independent appraisal must be conducted by an appraiser licensed by the State Office of Real Estate Appraisers.

California Law provides that this reimbursement must be paid by a "public entity". This appears to exclude public utilities and other non-governmental agencies that have the power of eminent domain.

Only Part of the Property is to be Acquired

If only a portion of the Owner’s property is taken, there will usually be a dispute over payment for the loss to the remaining property.

In general, when only a part of the property is needed, every reasonable effort should be made to ensure the owner does not suffer a financial loss to the "remainder" property. The agency will pay the fair market value of the property being taken as well as compensation for any loss in value to the remaining property that is not offset by the benefits conferred by the project. The compensation for the loss in value to the remaining property is often referred to as "severance damages."

Also, if any remaining part is of such a size, shape, or condition as to be of little market value, the agency will offer to acquire that remaining part also called a remnant.

A Business Operated on the Property - Goodwill

The owner of a business that is conducted on the property being acquired has a right to compensation for lost business goodwill if the loss is caused by the acquisition of the property. "Goodwill" consists of the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage.

Loans on/against the Property

Where the agency is acquiring the entire property, generally the compensation payable to the owner is first used to satisfy outstanding loans or liens as in a typical real estate transaction. Where less than the entire property is being acquired, whether outstanding loans or liens are paid from the compensation will depend on the particular facts and circumstances.

The Price Offered by the Agency

If the owner and the agency are unable to reach an agreement on a mutually satisfactory price, the owner is not obligated to sell or enter into a purchase agreement.

If the owner reaches a voluntary agreement to sell the property or an interest in the property to the agency, payment will be made at a mutually acceptable time. Generally, this should be possible within 30 to 60 days after a purchase/sale contract is signed by all parties.

The agency will typically pay all of the transaction and escrow costs.

The Owner And The Agency Are Unable To Reach An Agreement On The Property's Fair Market Value

The agency, to the greatest extent practicable, should make every reasonable effort to acquire the property by negotiated purchase. If the negotiations are unsuccessful, the agency may either file an eminent domain action in a court located within the same county where the property is located or it may decide to abandon its intention to acquire the property. If the agency abandons its intention to acquire, it must promptly notify the owner.

If the agency proceeds with eminent domain, the first step is for agency staff to request authority from the legislative body to file a condemnation action. The approval from the legislative body is called a "Resolution of Necessity." In considering whether condemnation is necessary (usually called a hearing), the legislative body must determine:

• Whether the public interest and necessity require the project;
• Whether the project is planned or located in the manner that will be most compatible with the greatest public good and the least private injury;
• Whether the property is necessary for the project; and
• Whether an appropriate offer with supporting data was provided to the owner.

The owner must be given notice and an opportunity to appear before the legislative body when it considers whether to adopt the Resolution of Necessity. At this point, if the owner has not already done so, the owner should call an attorney right away. The owner or its representatives can raise any objections to the Resolution of Necessity and the condemnation either orally before the legislative body or in writing to the legislative body. The owner should (and usually must) object in writing within 15 days of mailing of the notice of the hearing on the resolution.  This is a key step for the Owner to preserve the right to object to the taking of the property and/or the project.

If the legislative body adopts the Resolution of Necessity, the agency can file a complaint in court to acquire title to the property upon payment of the property's fair market value. The agency is the plaintiff. Anyone with a legal interest in the property, generally determined from a title report on the property (including tenants or mortgage holders), are named as defendants. Often, the agency will also deposit the amount the agency believes is the "probable amount of compensation" with the Court or the State Treasurer when the complaint is filed. A deposit must be made if the agency is seeking to acquire possession of the property before agreement is reached or a decision is made on the fair market value to be paid.

Possession of the Property BEFORE the Property’s Fair Market Value is Determined

In some cases, the agency may decide it needs possession of the property before the property's fair market value is finally determined. In such a case, the agency must apply to the court for an order of prejudgment possession to allow it to take possession and control of the property prior to resolution of the property's fair market value. The agency is required to schedule a hearing with the court on the proposed possession order and to give the owner notice of the hearing. Notice must generally be sent at least 90 days before the hearing date if the property is occupied and 60 days before the hearing date if the property is unoccupied. A judge will decide whether the possession order should be granted. The decision will be made by the judge by balancing the hardships of the parties.

As noted above, the agency must deposit with the court or State Treasurer the probable amount of just compensation in order to obtain possession of the property.

Oppose the motion for an Order for Possession Prior to Judgment

Owners and tenants may oppose the motion in writing by serving the agency and the court with written opposition within the period of time set forth in the notice from the agency. In ruling on a prejudgment possession order the court must balance the hardship to the owner or tenant against the hardship to the agency.

Owner can withdraw the amount deposited

Subject to the rights of any other persons having a property interest (such as a lender, tenant, or co-owner), the owner may withdraw the amount deposited with the court or State Treasurer before the eminent domain action is completed. If the owner withdraws the amount on deposit, the owner may still seek a higher fair market value during the eminent domain proceedings, but may not contest the right of the agency to acquire the property. In other words, once a withdrawal is made, the owner cannot contest that the acquisition of the property is not for a public purpose or is otherwise improper.

Increase the Deposit

The owner also has the right to ask the court to require the agency to increase the amount deposited if the amount the agency has deposited less than the "probable amount of compensation."

Contesting The Condemning Agency's Acquisition Of The Property

Provided there has been no withdrawal of the amount deposited, anyone with an interest in the property can challenge in court the agency's right to acquire or condemn the property. However the right to challenge the acquisition must have been preserved at the hearing on the Resolution of Necessity.

The agency’s right to acquire the property by eminent domain will be decided by the judge, not a jury.

The Eminent Domain Trial

Typically, the purpose of an eminent domain trial is to determine the fair market value of the property, including compensable interests such as lost business goodwill caused by the taking or severance damages. The trial is usually conducted before a judge and jury. Anyone with an interest in the property and the agency will have the opportunity to present evidence of value, and the jury will determine the property's fair market value. In cases where the parties choose not to have a jury, the judge will decide the property's fair market value. Value testimony is almost universally presented by expert testimony. Generally, each party to the litigation must disclose its respective appraisals to the other parties prior to trial.

If the owner challenges the agency's right to acquire the property, the eminent domain trial will also determine whether or not the agency has the legal right to acquire the property. In such cases, the judge (not the jury) will make this determination before any evidence is presented concerning the property's fair market value.

At the end of the trial, the judge will enter a judgment requiring the agency to pay fair market value. Once the agency pays the amount listed in the judgment, the judge will enter a final order of condemnation. The agency will record the final order with the County Recorder, and title to the property will then pass to the agency.

Interest on the Just Compensation

Anyone receiving compensation in an eminent domain action is generally entitled to interest on that compensation from the date the condemning agency takes possession of the property until the person receiving the compensation has been fully paid. The rate and calculation of the interest is determined by formula pursuant to State law. Click here to view historic interest rates paid.

Owner’s Attorneys' Fees and Costs

In an eminent domain action, the owner is entitled to be reimbursed by the condemning agency for court costs such as court filing fees. In some circumstances, the owner may also be entitled to be reimbursed by the condemning agency for attorneys' fees in the lawsuit. Whether the owner will be entitled to receive reimbursement for attorneys' fees will depend on the particular facts and circumstances of the case and the offer and demand for compensation made in the action.

Relocation Assistance

Any person, business, or farm operation displaced as a result of the property acquisition is typically entitled to relocation advisory and financial assistance for eligible relocation expenses, such as moving expenses and certain reestablishment expenses. The amount of relocation compensation is determined on a case-by-case basis in accordance with the agency’s rules and state law. Relocation benefits are handled separate and apart from the determination of the property's fair market value and are not part of the eminent domain process.

Important Note

This information is provided based on experience handling eminent domain and inverse condemnation cases for owners and condemning agencies. It is not legal advice. Every property and business is different and owners should consult an attorney early in the process and before committing to a course of action.