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Will new environmental laws redefine just compensation?

A partial take condemnation case recently filed by a state roads department contains all of the elements for a heated confrontation between calssic case law doctrine and the implementation of new environmental legislation. The conflict is triggered by the rapidly rising tide of hazardous and toxic waste and related cases resulting from the proliferation of federal, state, and local environmental, conservation, toxic control, clean air, clean water, wetlands, and emergency disclosure laws. (1)

The condemnation in the Maryland state roads department case imposes the following conditions.

* A fee and easement taking;

* Damages, to the remaining roperty; and

* Personal liability on the property owner under federal and state environmental laws.

The fee taking and in rem damage to the reminder portions of the condemnation can be addressed in the conventional fair market value manner; however, how should the in personam liability damage to the owner be treated?

Such in personam damage is different from that cosistently rejected by the courts in past cases because it arises not from subjective or even objective inquiry, but instead is imposed by the operation of new statutory law itself as it applies to the results of the taking. In other other words, an owner's in personam damage now cannot be ignored as a compensable element of the condemnation.

Certainly it is incumbent upon appraisers to address this problem. Perhaps constructive technical advice can be offered to the courts that reflects a concern to avoid inequities previously caused by equating all damage to property market value.

It should be emphasized that while the derivation of in personam damages from new law is unique to each case, elements such as the property rights of hereditament and devisement and the perpetuation of long-vested, personalized family interests (e.g., graveyards, historic place titles, and gardens) often have been present in condemnation cases. However, they never have been compensated for as such in damage awards. This case law inertia must be overcome if just compensation is to be awarded. It is true that the problem, if seen as a deeper conflict of principle between an inadequate remedy at law on the one hand and the equitable demands of normal definitions of the word "just" on the other, is more complex than it appears. But at least the courts now have a solid new statutory law foundation on which to base an equitable legal decision.

In addition to discussing the state roads department case, this article reviews how the courts came to equate just compensation with market value. This should provide a basis for interpreting the effects of these new laws on just compensation.

THE CASE

The facts of the case appear to be straightforward. The amount of $9,925 was paid into court under the state's "quick take" condemnation process, as proffered payment in full for the following property rights.

* Fee take of 0.365 acres (of 6.46 acres improved with four houses);

* Perpetual drain easement of 0.021 acres;

* All rights of access to the new highway prohibited except as the state may approve; and

* Perpetual easement to discharge the flow of water from or into the existing water-way -- or onto existing ground.

Similarly, the current property use as a residential holding appears or dinary, and

* Includes an owner's residence and three tenant houses;

* Is heavily wooded throughout and is not in floodplain;

* Has substantial state road frontage on three sides;

* Has county water and sewer available (but are currently unused);

* Is bisected by a stream flowing northeast to southwest through the site; and

* While currently zoned low-density residential, is considered ripe of rezoning.

The taking will, however, be highly damaging to the property because the state plans to

* Remove 304 trees and all natural vegetation screening in the 0.365-acre take area between the residences and the road (125 feet);

* Install an unlined, earth-berm drainage catch basin with a designed depth of nine feet, a volume of over one half million gallons, a discharge pipe of five feet in diameter, and a chain-link fence atop the dam;

* Convert a two-lane state road into a major dual highway designed to handle up to 80,000 vehicles per day within ten years; and

* Install 9.263 acres of new highway so that all runoff from the parking lot and roadbed, whether toxic, polluted, or otherwise, drains into channelled concrete flues that empty through the catch basin into the small stream that bisects the property between two of the residences.

THE APPRAISAL PROBLEM

In this case, the appraisal may persuade the court that there is a vast discrepancy between the just compensation and the fair market value (2) of the property. It is problematic that the owner of the property will possibly be exposed to an environmental liability and the resultant costs.

As they reach far beyond historic simple property rights such as those of quiet possession, the terms "ownership" and "indicia of ownership" are generating new legal definitions, interpretations, and investigation as a result of environmental liability laws. The efficacy of this judicial exercise, while still evolving, has already potentially included as open to environmental liability all present owners, all past owners, and possibly more distantly related ownership positions such as that of mortgagees in bankruptcy. (3) The inclusion of an exculpatory clause purports to protect innocent owners by providing a forum to prove why they should not be held for SuperFund cleanup costs. However, this construction implies that owners are guilty until proven innocent. (4)

This particular partial take condemnation case should be appealed to the U.S. Supreme Court. It presents a clear example of a situation in which the courts' historic precedent to routinely equate just compensation with fair market value can no longer withstand the demands of innumerable new environmental laws. These laws force recognition of separate in rem real property values and in personam responsibilities as well as the liabilities of real property ownership.

Further, the discrepancy between just compensation and fair market value is readily apparent in this case because the fair market value of the taking plus damage to the remainder interests far exceeds the fair market value of the entire property in the first place (i.e., the before value). This condition can only exist because the damage is not solely to the remaining physical property but affects the owner as well. The damage is thus not only a simple present loss, but a future, ever-increasing source of constant liability.

It is the owner, rather than the property, who is left after the taking with financial responsibility for such contingencies as contamination, dangerous stream bed attractions, storm water discharge damage, and other potentially dangerous health risks to family and tenants from hazardous or toxic waste stream deposits as well as their clean-up costs.

Although the historic market value scenario may be applied to the taking and to the damage to the remaining property, according to this method the owner's new liabilities and responsibilities after the partial taking are not taken into account. Thus, while in theory the damage to the remaining property could be compensated for to the extreme of its entire value, the owner's remaining exposure should not be ignored in the context of a just compensation award.

DAMAGE THEORY--PARTIAL

VERSUS TOTAL

TAKES

The niceties of just compensation awards under partial take, in contrast to those under total take, are becoming more apparent. In total take cases, market value remains the most important criterion, with few exceptions made in the name of expediency. In cases in which market value may not be "the best measure of value," (e.g., in a temporary taking case), the court may award the owner speculative operating loss intead of market value in the form of rent. (5)

In partial taking cases, however, a double, triple, or even higher standard of just compensation may develop to cover all facets of loss to the owner, depending on the extent and nature of the taking. Regardless of how fervently this "owner's loss" theory of just compensation is embraced by academicians or even fully recognized by the courts, (6) market value awards appear to reflect the "condemnor's gain" as well as a tendency to settle for less than the owner may deserve. Necessary considerations that result in owner loss may include values attributable to 1) the actual fee/easement take, 2) the resulting damage to the remaining property (an in rem appraisal), and 3) the resulting award necessary to provide for in personam damage to the owner's personal estate resulting from new environmental law liability. Such in personam damage has less to do with property rights than with responsibilities of ownership.

The in personam damages in particular pose the problem. No total take case heard by the Supreme Court has made both in rem (market value) and in personam (owner loss) just compensation awards. However, environmental impact on the question of damages in partial take cases may cloud the issue enough for in personam damage awards to slip into acceptance under the aegis of the Supreme Court's disclaimer of "not making a fetish of market value." (7)

NATURE OF DAMAGES

The nature of the damages claimed in this case hinges primarily on careful blending of the usual endemic appraisal techniques with technical procedures associated with the implementation of the new environmental protection laws. The hybrid technique is necessary because the taking itself not only damages the remaining property, but seriously affects the well-being of the owners by forcing liability on them under new laws. These laws admittedly might not be compensable under historically established case law. Many higher courts have asserted their independence from a set formula for establishing just compensation while simultaneously taking market value to be the best criterion, especially when such a value is readily available. (8) Therefore, in personam damages postulate principles not yet accepted as a standard in judging. But these very principles engender the conflict between new legislative law and established case law.

An appraiser who disclaims knowledge of legal ramifications performs a serious disservice to clients. Changes such as these make it necessary for appraisers to become better informed about real estate law.

ORIGIN OF DAMAGES

This case's truly distinguishing feature is the devastating effect of the change in property use forced by the state taking. Not until the impact of the take area's new use on the remaining property's use and the accompanying perpetual easements are studied does the full damage pattern become apparent.

By imposing certain risks on the remaining land, the taking effectively eliminates its further present use for normal residential purposes. The property is currently zoned low-density residential and is located less than 300 yards from a major 1-95 interchange, and thus appears ripe for rezoning. (The land use has remained uncharged and the land unbuilt since 1957.)

The property's highest and best use is not its current residential use, but is rather a commercial or light industrial use in keeping with the surrounding environment and the projected land development and the projected land development envelope. Further, a commercial-industrial land use would offer a better opportunity to manage the problems imposed by the taking. Rezoning is now the objectively preferable option for the land. The factual considerations of property value appreciation, neighborhood zoning, and compatible land use in addition to the added implications of the take dictate rezoning. Localities are wont to rely heavily on changes (e.g., economic, physical, and environmental) or mistake to justify rezoning. In Village of Euclid v. Ambler Realty Co., however, the court favored the status quo except when the present zoning "has no foundation in reason and is a mere arbitrary or irrational exercise of power, having no substantial relation to the public, health, morals, safety or public welfare in its property sense."

There is little doubt that a prospective buyer would pay a higher price for the case property than its current and zoned use value. If this were not the case the property would be unsalable after disclosure of the condemnation taking threat. However, a buyer would understand the value of the rezoning to the highest and best use, and could be expected to make a contingent offer and to attempt to bring about the rezoning. (10) Whether property should be rezoned to its highest and best use is a proper issue for the court's consideration in a condemnation case. As the court notes in United States v. 320.0 Acres of Land, the impact on value as a result of rezoning to highest and best use should be considered. The court refers generally to 4 Nichols on Eminent Domain, paragraph 12.322 (1), which provides that "Such likelihood [rezoning] may be considered if the prospect . . . is suffeciently likely as to have an appreciable influence on present market value." (11) The court also refers to Wolff v. Commonwealth 1 Cir. 1965, which states that "The test of course is not either possibly [suc] or probability of rezoning in absolute terms, but the fair market value of the locus in light of the changes as they would buyer and seller . . . . We think that any possibility market value must be regarded." (12)

IN REM DAMAGES TO THE

REMAINING PROPERTY

The in rem damages to the property include landscape alternations, environmental problems, and economic changes.

Landscape alterations

The changes to the landscape are as follows.

* 304 trees and all vegetation removed, thus causing major aesthetic alterations in the critical take area; and

* Forest screening removed, thus exposing the passing traffic as well as the chain-link fence around the drainage settlement pond.

In addition, physical dangers, and installation damage are caused by the following conditions.

* A 1/2-million-gallon drain basin retained by an earthen dam;

* The creation of a dangerous; attractive public nuisance;

* The 60-inch discharge pipe and supporting structures;

* The stream bed debris, pollution, and hazardous/toxic waste;

* The probable containmination of the drinking well and clear water spring;

* The severe erosion caused by the enormously increased volume of storm water discharge that changes the course, current, and cross-section of the stream bed; and

* The dumping of water, trash, liquids, metals, debris, dead animals, oil, ga, and grease onto the property.

Environmental problems

The following environmental problems exist.

* Nontidal wetland legislation violations;

* Hazardous waste contamination of the stream bed through property as well as the drain basin; and

* Potential pollution of spring-and well-water drinking supplies.

Economic changes

Possible harmful economic consequences to the remaining property are as follows.

* The extend and severity of damages to the remaining property wil destroy the current use (low-density residential);

* Rezoning will be difficult as a result of a recently passed zoning law; and

* After disclosure, the property will lose its present use, be unable to be insured or financed for future use, and without use will become unmarketable until rezoned.

Damage to the remaining property is thus complete; that is, the loss encompasses the difference between the before and after values of the property.

IN PERSONAM DAMAGE TO

OWNERS

To determine the resulting in personam damages to an owner, the cost-to-cure approach is customarily used. This approach entails consideration of costs to eliminate damage items one by one. The following in personam damages may occur in this case.

* Perpetual risks to health and life of inhabitants, tenants, guests, invitees, and even trespassers. This is because trespassers can be neither insured against after risk disclosure to an insurance company nor avoided. Even outright sale of the property is seriously jeopardized by disclosure.

* Liability for hazardous waste cleanup indefinitely, (13) presumably at least to the extent that it would be necessary to plead and prove an innocenta defense.

* Response costs of indefinite duration to treat monitoring, auditing, investigation, anad planning as well as other financial considerations. (14)

* Loss of ownership rights such as quiet possession, financing, and hereditaments.

* Loss of viable economic use in the form of rents.

If the cost-to-cure approach were applied to the problem of the atrisk private water and sewer systems currently in use, for example, the cost to cure this damage would be the cost to hook up to the public systems available. This would amount to approximately $20,000 for all four residences.

Unfortunately, this approach is not practicable because such damage items as the dangerous, attractive nuisance aspect of the large runoff basin, the perpetual toxic waste risks to health, or the loss of marketability cannot be eliminated. If after disclosure, the liability risks cannot be adequately insured against, the only practical alternative is self-insurance (i.e., the owner must have enough funds to meet any possible claims, because an insurance company will not issue a policy). Insurance against the following risks must be considered.

* Health risks from hazardous or toxic waste pollutants to family, guests, tenants, invitees, and even trespassers;

* General liabilities caused by such problems as the dangerous, attractive public nuisance; and

* Monitoring costs and ownership cleanup defense, if not liability itself.

The funds necessary to self-insure against these risks are readily calculated by determining the present value amount necessary to provide reasonable protection, as risk increases from year 1 at least through year 10.

A sample capitalization projection to fund the risk in keeping with minimal funding criteria (e.g., bonding) required by the Comprehensive Environmental Compensation and Liability Act (CERCLA) cleanup obligations, may be calculated. The techniques illustrated in Table 1 reasonably indicate the loss in terms of dollars.

VARIANCES IN JUST

COMPENSATION

A final observation addresses a comparison of the difference in the just compensation award depending on whether the take is partial or total. While not based on an appraisal format and not using precise figures, the analysis shown in Table 2 provides an approximate amount of just compensation for both partial and total takes. The figures suggest that the condemnor would do well to proceed with the partial take ($470,000) rather than the total take ($850,000).

These figures do not take into account the in personam damages, however. If the condemnor proceeds with the partial take appear readily identifiable and actually imposed by CERCLA. The court would thus award them not as a taking but as damages, for which a precedent has been set in partial take cases anyway. The just compensation award would then be altered to include:

If ghe condemnor were to proceed on the total take basis, however, the court would be far less likely to award the in personam losses as well as the before-market value, because no such precedent has been established. The award would therefore be $850,000, which would lead the condemnor to conclude that it would be better to proceed with the total take ($850,000) basis rather than the partial take ($1,110,000) basis.

Just compensation from the condemnee's point of view is shown in Table 3.

If it is true that numbers can be juggled to proved almost anything, the courts may use the new forensic numbers of the environmental statutes to derive a new meaning for just compensation.
TABLE 1 Capitalization Projection to Fund Risk
1) Sum necessary to defray an ultimate potential health risk and
general liability
 exposure of $1,000,000: 6% annual conversion for 10-year
exposure basis. Capitalized
present value of $1 to be collected later, formula:
 1 / base = 1 / + interest[n.supp.] = / 1.06[10.supp.]
 (1.06) x (1.06) = [(1.06).sup.2] = 1.1236
 [(1.06.supp.2] x [(1.06.supp.4] = 1.26247696
 [(1.06.supp.4] x [(1.06.supp.4] = [(1.06.supp.8] =
1.59384807451
 [(1.06.supp.8] x [(1.06.supp.2] = [(1.06.supp.10 =
1.579084769651
 $1,000,000 x / 1 / =
 1.79084769651
 $1,000,000 x 0.558394777 = $558,395
2) Monitoring costs, etc.
 $150,000 x 0.5583948 = $83,759
 Total in personam damages = $642,154


[TABULAR DATA OMITTED]

[TABULAR DATA OMITTED]

(1) Some major examples of this type of legislation include federal laws such as the Comprehensive Environmental Compensatuion and Liability Act (CERCLA 42 U.S.C.S. 9601 et seq., 1980). as amended by the SuperFund Amendments and Reauthorization Act (SARA, 42 U.S.C. Paragraph 9601 et seq., 1986): the Resource Conservation and Recovery Act (RCRA, 42 U.S.C. Paragraph 6901 et seq.): the Toxic Substances Control Act (TSCA, 42 U.S.C. Paragraph 2601 et seq.): the Emergency Planning and Community Right-to-Know Act (EPCRA,42 U.S.C. Paragraph 11001 et seq,): the Clean Air Act, (42 U.S.C. Paragraph 7401-7642); the Clean Water Act, (42 U.S.C., Paragraph 1251 et req.). State statute examples from the Code of Maryland include the Natural Resources Article (Subtitle 12, Nontidal Wetlands), the Environmental Article (Title 7, Sec. 201 et seq.). and the 20 new (1991) environmental laws that amend, add to, and basically establish the state's "SuperFund Bill" to be administered by the Maryland Department of the Environment (MDE).

(2) Fair value is the term used by the Maryland State Code of Laws, Real Property Article, Title 12, sec. 12-105.

(3) United States v. Maryland Bank and Trust Co. 632 F. Supp. 575 (D. MD.1986) and United States v Fleet Factors Corp.901 F.2d 1550 (11th circ. May 23, 1990).

(4) CERCLA U.S.C.S. 9607 Paragraph 107(a)(1) and (2) and (b) and (3),

(5) See United States v. peewee Coal Co. 344 U.S. 114. 71 S. Ct. 670 (1951).

(6) See Penn Coal Co. v. Mahon 260 U.S. 393, 43 S. Ct. 158 (1922) and Lynch v. Household Fin. Corp. 405 U.S. 538 (1972).

(7) United States v. Cors 337 U.S. 325 (1949).

(8) Maryland's constitution follows the Fifth Amendment of the U.S. Constitution requiring just compensation, but the State Code of Laws (see note 2 above) specifically difenes the "fair . . . for the highest and best use.' In some cases this criterion [market value] cannot be used "or because in the circumstances market value furnishes an inappropriate measure of actual value." United States v. General Motors 323 U.S. 373 (1949). "But [the court] has refused to make a fetish even of market value, since it may not be the best measure of value in some cases." United States v. Cors 337 U.S. 325 (1949). Finally and most appropriate in United States v. 320.0 Acres of Land, 605 F. 2nd. 762 at 781 (1979), "Just Compensation is not limited to the value of the property as presently used, but includes any additional market value it may command because of the prospects for developing it to the |highest and best use for which it is suitable." (emphasis added.)

(9) Village of Euclid v. Ambler Realty Co. 272 U.S. 365 (1926).

(10) See footnote 8, U.S. v. 320 Acres of Land.

(11) Ibid.

(12) Wolff v. Commonwealth 1 Cir. 1965, 841 F. 2nd. 945, 946-7.

(13) See footnote 1, CERCLA and SARA.

(14) See New York v. Exxon Corp. 633 F. Supp 609 (S.D.N.Y. 1986), and General Electric v. Litton, 715 F. Supp. 949 (W.d. 1989).

Bowen P. Weisheit, Sr., is a practicing real estate attorney. Mr. Weisheit holds an AB and a JD degree from the University of Virginia. He has taught courses in real estate appraisal at the college level and is active in the appraisal field.
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Author:Weisheit, Bowen P., Sr.
Publication:Appraisal Journal
Date:Jan 1, 1992
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