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When Market Value Isn’t Enough: The Pitfalls of Objectively Measured Just Compensation

By August 11, 2023September 18th, 2023No Comments

When we take on an eminent domain case, our primary goal is to put our client in the best position possible.  In some cases, that means fighting the taking itself, as my dad (and boss) did in the well-known Wayne County v. Hathcock case, which established a new precedent for what constitutes a “public use” for which the government may condemn private land in Michigan.  In other cases, our primary objective is to maximize the compensation available to our clients.

Despite our best efforts, however, some property owners are inevitably left worse off as a result of the taking.  The goal of just compensation is to leave “the property holder in as good a position as she would have been had the taking not occurred.”  City of Detroit v. King, 207 Mich. App. 169, 183 (1994).  But just compensation—which is based on the ‘objective’ standard of what a property would sell for on the open market—often does not achieve that goal, because most owners ‘subjectively’ value their property for more than it would sell for on the open market.  That makes sense.  If, after factoring in the costs and inconveniences of relocating, property owners value their property less than the open market, they will sell it.

As an illustration, consider a family that has lived in a home for several years.  The children are friends with the neighbors across the street and are comfortable in their local school.  The parents have renovated and decorated the home to suit their style and preferences.  The family has no intention of moving, and it would be inconvenient to move all their personal property.  As you can imagine, this family is unlikely to sell their home for its open-market value.

As that example illustrates, the objective, open-market value ignores intangible losses, such as sentimental attachments to the property or its community, as well as idiosyncratic tastes.  It also fails to account for out-of-pocket expenses such as relocation costs, attorney’s fees, and closing costs.

In this blog, I explain why, at least in theory, a subjective approach to just compensation might lead to more just outcomes, along with why such an approach would be impractical.  I then discuss alternative ways condemnors can—and in some cases already do—compensate property owners beyond the open market value of their property to ensure that they are placed in as good of a position as they would have been in had their property never been taken.

The shortcomings of just compensation based on an ‘objective’ standard:

When the government condemns private property for public use, it is required to pay “just compensation” to the property owner.  The theory behind that is that no individual owner should bear the burden of paying for a project for which the public as a whole benefits.  The requirement that the government pay just compensation also helps ensure that the government does not take property that is more valuable to the private owner than the public at large.

As the Supreme Court has explained, just compensation should ideally place “the owner of condemned property ‘in as good a position pecuniarily as if his property had not been taken.’”  United States v. 564.54 Acres of Land, 441 U.S. 506, 510–11 (1979) (quoting Olson v. United States, 292 U.S. 246, 254 (1934)).  In other words, the just compensation should be enough to leave the property owner indifferent to the taking.  However, a person who is not selling their home values it more than the open market.  As a result, the open-market standard does not leave owners “whole.”

Judge Posner described this well in Coniston Corp. v. Village of Hoffman Estates, 844 F.2d 461, 464 (7th Cir. 1988):

Compensation in the constitutional sense is … not full compensation, for market value is not the value that every owner of property attaches to his property but merely the value that the marginal owner attaches to his property.  Many owners are “intramarginal,” meaning that because of relocation costs, sentimental attachments, or the special suitability of the property for their particular (perhaps idiosyncratic) needs, they value their property at more than its market value (i.e., it is not “for sale”).  Such owners are hurt when the government takes their property and gives them just its market value in return.  The taking in effect confiscates the additional (call it “personal”) value that they obtain from the property….

Just compensation based only on an objective determination of what a property would sell for on the open market therefore leaves many property owners worse off.  It also may lead to ‘inefficient’ takings, in which the public derives less value from the taking than the private owner.

The problem with subjective damages:

In a perfect world, just compensation should leave the property owner subjectively indifferent to the taking.  In practice, however, it is impractical—if not impossible—to calculate an owner’s subjective valuation of their own property.  How can you put a monetary value on a subjective feeling or attachment?

The final determination of just compensation is typically left to a jury.  Can we really expect a jury to assess an individual property owner’s subjective value accurately?  We surely can’t leave it to property owners to state their own number.

To make matters worse, using subjective valuations would make it difficult for government decision-makers to estimate beforehand how much a public project will cost.

As Justice Marshall explained, these complications are the reason we use an objective standard:

Because of serious practical difficulties in assessing the worth an individual places on particular property at a given time, we have recognized the need for a relatively objective working rule.  The Court therefore has employed the concept of fair market value to determine the condemnee’s loss.  Under this standard, the owner is entitled to receive “what a willing buyer would pay in cash to a willing seller” at the time of the taking.

564.54 Acres of Land, 441 U.S. at 511 (citations omitted)

Alternative ways to compensate displaced owners:

Because paying displaced property owners only for the market value of their property typically leaves them in a worse position than they would be absent the taking, some governments provide alternative and additional means of compensation.

More than market value:  In Michigan, for example, there is a state constitutional provision that requires condemnors to pay owners 125% of the fair market value if the taken property is their primary residence.  See Mich. Const., art. X, § 2 (“If private property consisting of an individual’s principal residence is taken for public use, the amount of compensation made and determined for that taking shall be not less than 125% of that property’s fair market value, in addition to any other reimbursement allowed by law.”).  Several other states have similar practices.  See, e.g., Ind. Code § 32-24-4.5-8 (West) (mandating that condemnors pay property owners 125% of fair market value for agricultural land and 150% for fair market value for residential property); Mo. Ann. Stat. § 523.039 (West) (providing for just compensation that is 125% of fair market value for “homestead taking[s]” and 150% of the fair market value if a family has owned the taken property for over fifty years).

Relocation and re-establishment costs:  Displaced property owners are sometimes entitled to relocation costs.  For federally funded projects, for example, the Federal Uniform Relocation Assistance and Real Property Acquisition Act provides many relocation and re-establishment costs for displaced property owners.  As my dad and I explained in The Practical Real Estate Lawyer last fall, Congress enacted this legislation to help displaced homeowners relocate and prevent businesses from closing.

Attorney fees and costs:  In Michigan, condemnors are required by statute to pay for the dislocated landowners’ attorney fees and costs.  See Mich. Comp. Laws Ann. § 213.66.  Other states vary in how they treat reimbursements for fees and costs.

(Please note that these are merely examples and not exclusive.)

Reform proposals:

Several academics have proposed reforms that attempt to make displaced landowners closer to subjectively indifferent to takings.  Here are a few:

  • Abraham Bell & Gideon Parchomovsky, Taking Compensation Private, 59 Stanford L. Rev. 871 (2007) proposes a “novel self-assessment mechanism that enables the payment of full compensation at subjective value.” Under the authors’ proposal, once the government announces the possibility of an eminent domain project, each property owner is required to state how much they value their property, and the government can then either take the property at that price or abstain and leave the property subject to two restrictions that are intended to keep owners honest.  First, the owner cannot sell for less than the self-assessed price (adjusted based on the local housing price index).  And second, the future tax liability is based on the self-assessed price (with appropriate adjustments).
  • Alberto B. Lopez, Weighing and Reweighing Eminent Domain’s Political Philosophies Post-Kelo, 41 Wake Forest L. Rev. 242 (2006) suggests including subjective damages such as “mental distress” as part of just compensation. Lopez points out that similar damages are available in other areas of law in which they are equally uncertain and difficult to calculate.
  • James Kelly, “We Shall Not be Moved”: Urban Communities, Eminent Domain and the Socioeconomics of Just Compensation, 80 St. John’s L. Rev. 923 (2006) proposes that homeowners not be subject to eminent domain for redevelopment unless a majority of the homeowners affected by the project approve the plan. Kelly further proposes that relocation laws should guarantee homeowners “an alienable entitlement to be offered replacement housing in the redeveloped district area.”
  • Michael A. Heller & Rick Hills, Land Assembly Districts, 121 Harvard L. Rev. 1465 (2008) proposes that neighborhoods form “land assembly districts” that can collectively negotiate with developers over the acquisition of land.
  • Nathan Bu, Note, Taking Stock: Exploring Alternative Compensation in Eminent Domain, 49 Colum. Hum. Rts. L. Rev. 213 (2018) suggests an “equity-based” system for compensating property owners that gives them a stake and vote in the project.

As I see it, courts have increasingly granted damages for intangible harms such as emotional distress over the past half-century.  Perhaps we should have more discussions about introducing those damages in the context of eminent domain to ensure that property owners are truly made whole and that government agencies do not condemn property where the harm to the property owners exceeds the value to the public.  Please write us with any thoughts or creative solutions.  We would love to hear them.