Eminent domain

[Stephen J. Vertin MAI]

I had an interesting conversation with an eminent domain attorney yesterday. So anyone who has further knowledge on this issue their input is greatly appreciated. Subject is an old functionally obsolete 190,000/sf industrial facility. The taking is about 6,000 square of the corner of it. This includes its three story office (most likely the most valuable part of the property) section. Did both sales comparison and income capitalization approaches. We had some discussion of formatting issue. Nothing I saw as major or could not be organized in a manner to his liking. Attorney explained, by law (at least in the state of Illinois) only the sales comparison approach is applicable to the value of the whole. The court will not consider income only as possible and I emphasis possible support indication. This may be 101 for some of you but I had never heard this before but there may be a number of reasons for it which is not germane to the question.

I am taking the post back to the subject property. My research indicates many of these properties are being purchased by investors so I valued the whole with emphasis on both approaches to value. However, since the law indicates only the sales comparison approach is applicable is it considered a jurisdictional exception to not emphasis income or remove the approach all together.

USPAP defines a jurisdictional exception as:
JURISDICTIONAL EXCEPTION: an assignment condition established by applicable law or regulation, which precludes an appraiser from complying with a part of USPAP

And regarding the RULE, USPAP states:
“The JURISDICTIONAL EXCEPTION RULE provides a saving or severability clause intended to preserve the balance of USPAP if compliance with one or more of its parts is precluded by the law or regulation of a jurisdiction. When an appraiser properly follows this Rule in disregarding a part of USPAP, there is no violation of USPAP.”

I understand jurisdictional exceptions are some of the most misunderstood concept in our business but this truly appears to be a case where it is applicable. Any input is greatly appreciated. How have others handled this?

 

[Pittsburgh Pete]

I suspect all states are different. I am not privy to all of the eminent domain code.

Would seem to be a stumbling point for certain properties would it not? Have been in discussions with a property owner of a KFC which is to be taken by Penndot for a road project. His problems go to the "imminence of condemnation" (long story but he is being "screwed" by certain idiosyncrasies of PA's eminent domain code--at least that's my take--waiting to here from an experienced attorney) but can't imagine attempting to value his property, subject to a long term lease, without an income approach.

That said, investors purchasing for "income potential" or for future use of the site? Significant difference in motivation that could call the income approach into question despite the buyer being an investor.

 

[Amy Perkins]

I would still do the cost approach and the sales approach, the attorney just can't use it in court. If the law prevents you from using the cost approach in the report, put it in the file. Before doing this call another eminent domain attorney and ask them if you are restricted from putting it in the report. It sounds like a before and after appraisal. Value it before, then value it after the taking. The difference is called severance damages if it exceeds more than the value of the partial taking as it's contribution to the value of the entire property.

 

[Pittsburgh Pete]

I'm assuming you're dealing with an Illinois eminent domain law anomaly. The following is from Penndot's approved eminent domain form:

The appraiser is asked to consider all applicable approaches to value, but to develop only those approaches necessary to produce a credible and persuasive appraisal.

 

[Stephen J. Vertin MAI]

I'm assuming you're dealing with an Illinois eminent domain law anomaly. The following is from Penndot's approved eminent domain form:

The appraiser is asked to consider all applicable approaches to value, but to develop only those approaches necessary to produce a credible and persuasive appraisal.

Pete: I am not sure. As I said I have never heard this before (meaning only sales comparison was relevant). However, most of the eminent domain cases I have been involved with were land and several where the sales comparison approach was dominate. I have never run into this before. That is why I am putting on here.

 

[Terrel L. Shields]

There have been court cases where the judge rejected the CA or the IA. I don't think I've ever heard of one who rejected the sales approach. In the sales approach the units of comparison might be income related however, which should accomplish the goal of a income based value. They should mesh pretty well and therefore, the CA and IA would support the SA.

 

[hastalavista]

In the sales approach the units of comparison might be income related however, which should accomplish the goal of a income based value. They should mesh pretty well and therefore, the CA and IA would support the SA.

My thought, exactly.
Income analysis would be used to support the SA adjustments.

 

[Financially Feasible]

As they say in the movie "Beetlejuice", the eminent domain code "reads like stereo instructions"...

Although I don't know if this paragraph is completely applicable, you may want to check it out (my bold):

(735 ILCS 30/10-5-50) (was 735 ILCS 5/7-119)
Sec. 10-5-50. Admissibility of evidence. Evidence is admissible as to: (1) any benefit to the landowner that will result from the public improvement for which the eminent domain proceedings were instituted; (2) any unsafe, unsanitary, substandard, or other illegal condition, use, or occupancy of the property, including any violation of any environmental law or regulation; (3) the effect of such condition on income from or the fair market value of the property; and (4) the reasonable cost of causing the property to be placed in a legal condition, use, or occupancy, including compliance with environmental laws and regulations. Such evidence is admissible notwithstanding the absence of any official action taken to require the correction or abatement of the illegal condition, use, or occupancy.
(Source: P.A. 94-1055, eff. 1-1-07.)

http://www.ilga.gov/legislation/ilcs/ilcs5.asp?ActID=2819&ChapterID=56

Further, there were only two known instances of the word "valuation" in the code... both concerning valuation dates. There were no results for a search under "sales", "sales comparison" or "income capitalization". There were three results for "income" but two were concerning "low-income households". Therefore, upon my VERY brief review of the code, I can't find anything regarding the applicability (or not) of the income approach (aside from the section shown above).

Attorney explained, by law (at least in the state of Illinois) only the sales comparison approach is applicable to the value of the whole. The court will not consider income only as possible and I emphasis possible support indication.

My bold. It is my understanding that in order to use the Jurisdictional Exception rule, there has to be superseding law with which to use the JE rule and to not comply with USPAP for that particular issue. Therefore, I would advise to have the lawyer show you where exactly this law is in IL law. If it can't be shown to you, then you can't invoke the JE rule and would then proceed with valuing the property with 100% USPAP conformity.

I hope that helps, Stephen. Good luck!

 

[Stephen J. Vertin MAI]

My bold. It is my understanding that in order to use the Jurisdictional Exception rule, there has to be superseding law with which to use the JE rule and to not comply with USPAP for that particular issue. Therefore, I would advise to have the lawyer show you where exactly this law is in IL law. If it can't be shown to you, then you can't invoke the JE rule and would then proceed with valuing the property with 100% USPAP conformity.

No argument from me. Those were my thoughts also.

 

[Terrel L. Shields]

I think that is a first...we agree. I think