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Condemnation Risk Planning: Denial Is Not A Strategy

August 25, 2017

Overview

In the past, few Puget Sound property owners or their business tenants would have given a moment’s thought to identifying contingencies for the prospect of a condemnation. Today’s environment is very different. Sound Transit plans to add 62 miles of light rail and 37 stations to its existing system. WSDOT’s Connect Washington plan anticipates $9.4 billion in highway construction and improvements. Many of these and other projects will necessitate the exercise of eminent domain.

Aside from certain limited relocation benefits, financial recovery for condemnation is limited to the value of the real property itself. This means that business losses and lost opportunity costs are generally not compensable, even if they are a direct result of the taking. However, there are some steps you can take in advance to maximize the chances of a favorable outcome in negotiations or at any ultimate trial. These should be made a part of your business plan.

Lease terms are often critical. If you have tenants or are a tenant yourself, review your lease(s) for any provisions governing full or partial condemnation. The lease may or may not allow for termination, and may address whether the “just compensation” award is to be shared between the owner and tenant. If leases are about to expire in the face of a potential condemnation, savvy owners will focus on this critical area.

Tax assessment challenges can hurt. If your property may be facing a future condemnation, it could be unwise to challenge a tax assessment of your property. Such a challenge could be used against you as an admission of lower value in the government’s condemnation action.

Title can be key. In Washington State, “severance damages” are available when the government takes a portion of a single parcel of land or of one or more multiple parcels that were used as a unit. Severance damages are meant to compensate the owner for the devaluation of the land that remains. A severance payout is only available, however, if the property taken and the property that remains have in essence unity of ownership. Therefore, if an owner has several parcels that are either contiguous or used as a unit, the owner should review the status of legal title for each parcel with his or her tax advisor and strongly consider making them all the same. Make sure that you identify any holders of partial interests in the property, including easement owners, tax liens, mineral rights, mortgagees, and lessees. All of these will be affected to one extent or another by the condemnation, and there may be some opportunity for adjustment of these various interests prior to the start of the condemnation process.

Preserve entitlements. Zoning advantages, permit applications, and the like should never be abandoned simply because a public project may require the condemnation of a development. Land use entitlements are an attribute of realty. They often add value to “the dirt” that may be recoverable in the eminent domain process. Moreover, the routing of a public transportation project sometimes gets modified. This recently occurred with the location of Sound Transit’s Kent/Des Moines station. And virtually all of these projects depend on a federal grant decision.

Act early. This is perhaps the most important step an owner or tenant faced with a condemnation can take. Denial in the face of a potential threat can provide short-term comfort, but it is not a business strategy. The early collection of information about a potential threat of condemnation, as well as early consultation with your business planning team and supporting professionals, can pay dividends in the long run by protecting your right to “just compensation” and relocation benefits. You can hope you will never need this contingent protection, but you will sleep better knowing that it is in place.

Related article: Seattle Waterfront’s Local Improvement District: An Introduction

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