What is “Just Compensation”?

The standard of just compensation for the taking of property (as well as determining the indirect damages — see below) is valuation at the “highest and best use” of the property. Thus, even if property is being underutilized, the claimant is entitled to the value as if it was being used to its full reasonable potential. This does not mean, however, that the potential highest and best use can be speculative or hypothetical. It must be realistic based on the zoning (or potential re-zoning — see below) or the character and history of development of the surrounding area.

Often, this can result in a zoning issue. For example, undeveloped residentially zoned property in a valuable commercial zone may still be valued at its commercial value provided the claimant can show a high probability of re-zoning. The burden, however, is on the claimant to prove this probability and proof must be clear and convincing of the probability that such zoning change or approvals would have been granted.

A condemnation is a taxable event at the time of vesting. Section 1033 of the Internal Revenue Code of 1954, as amended, deals with “involuntary conversions” and affects reinvesting of proceeds of the condemnation proceeding so as to accomplish a deferral of any capital gains.

THERE ARE STRICT TIME LIMITATIONS UNDER THESE SECTIONS! IMMEDIATE TAX ADVICE SHOULD BE SOUGHT WITH RESPECT TO THESE MATTERS AND AS TO ANY OTHER PROBLEMS WHICH MAY AFFECT AN OWNER AS A RESULT OF THE CONDEMNATION — WE EMPHASIZE — AT THE TIME OF TAKING. DO NOT WAIT UNTIL THE AWARD IS ACTUALLY RECEIVED, WHICH MAY BE YEARS THEREAFTER.

The damages can be both “direct” and “indirect.” Direct damages are the value of the property physically taken. Indirect damages, which are also known as “severance” or “consequential” damages, are the loss in value to the remaining property by reason of the taking of a portion of the property (e.g., loss of frontage or access) or by reason of the use to which the condemned parcel is being put by the government (e.g., a landfill or an incinerator). [There is a technical difference between “severance” and “consequential” damages. Severance damages represent the loss in value (i.e., diminution) in the utility or potential of the remainder land by reason of the taking. Consequential damages are the damages caused to the remainder land resulting from the use of the land taken by the government. For example, if the government takes part of your property to erect an incinerator or toxic waste facility, the resulting damages are consequential.]

A condemnation trial is essentially a trial involving different opinions of expert witnesses. An appraisal must be filed and will be exchanged with the condemning authority which will have its own appraiser and appraisal report. Cases involving partial takings require expert engineering testimony and reports to identify the severance or consequential damages. Where the valuation question of “highest and best use” is dependent on the likelihood of a zoning change, an expert land planner and report will also be required.

All of these reports must strictly conform to specific rules and requirements and filed and exchanged within a specified time in advance of trial. See EDPL §508.

The trial of a claim involving the State is held in the Court of Claims and a trial of a taking by a local government is held in the Supreme Court in the County in which the property is located.

Except in the rarest of circumstances, the claimant cannot collect for the loss of business value, or going concern value, or loss of profits. Damages are strictly limited to the value lost in the real estate, fixtures and equipment. [The legal philosophy underlying this concept is that you cannot recover “business” damages since the condemnor is not “taking” business — just real estate — and the government is obligated to pay only for what it takes — not what the property owner may be losing (i.e., lost profits, etc.).] Leases which speak in terms of the tenant retaining a claim for “business” or “going concern” value have no valuation significance in the process of determining just compensation.

Where the condemnation award is “substantially in excess of the amount of the condemnor’s proof,” the court, “in its discretion,” may award as additional compensation the actual and necessary costs, disbursements and expenses, including reasonable attorney, appraiser and engineer fees actually incurred. EDPL §701 and §702. An application for such fees can only be made at the end of the case. In settlement negotiations, the right to reimbursement is often an important issue for negotiation.