Eminent Domain: Date of Valuation, Blight Declaration and Constitutional Considerations

On October 11, 2006, the Honorable Patricia K. Costello, Essex County Assignment Judge,  issued an opinion in the matter of City of East Orange v Kason Associates, Inc.  Docket No.: ESX-L-8278-05. This seven page opinion addresses two issues:

  1. Date of Valuation
  2. The propriety of appraising the subject project as a “going concern.”

The Eminent Domain Act  N.J.S.A. 20:3-30 provides for the date of valuation to be the earliest of four possible dates:

a. The date of interference with the use and enjoinment of the property
b. The date of entry
c. The date of the filing of the complaint
d. The date of the declaration of blight

In the subject case, Judge Costello felt constrained to use subsection (d) of the statute, calling for the date of declaration of blight as the date of valuation. This is premised on the Court’s literal reading of the statute that the earliest of four possible dates should be the date utilized. The property owner argued that the aforementioned subsection of the statute should be read in conjunction with N.J.S.A. 20:3-38, which provides that “the value of any land or other property being acquired in connection with development or redevelopment of a blighted area shall be no less than the value as the date of the declaration of blight by the governing body upon a report by the planning board.” This section of the statute would provide a floor as to value protecting the property owner from a diminution of value caused by the declaration of blight.

The attorneys for the property owner attempted to show the Court that the date of value by stipulation in other blight cases is normally the date of the filing of the complaint; this is so primarily because the date of blight is too remote from the date of the commencement of the action. For example, in Long Branch, all the beachfront properties were blighted in 1996. The complaints were filed in 2002 for Beachfront North Phase I and in 2005/2006 for Beachfront North Phase II. Thus, there was a six to ten year gap between the blight and the filing of the complaint. In Asbury Park, the gap between the initial blight and the filing of the first eminent domain complaints was almost 20 years.

In the case before Judge Costello, the gap between the declaration of blight and the filing of the complaint was 18 months (April 12, 2004 – October 21, 2005). The Court felt there was no substantial time delay in pursuing the condemnation process. Therefore, no constitutional implications were raised by the use of a significantly earlier date. The Court referenced the New Jersey Supreme Court case Jersey City Redevelopment Agency v. Kugler, 58 N.J. 374 (1971), where the gap between the declaration of blight and filing of the complaint was 9 years.

There is no hard and fast rule that speaks to when the passage of time becomes so great that the strict interpretation of the statute must yield to the constitutional guarantee of just compensation (see City of Ocean City v. Mafucci, 326 N.J. Super. 1 (App Div 1999); Desai v. Board of Adjustment Town of Phillipsburg, 360 N.J. Super, 586 (App Div. 2003), certification denied 177 N.J. 492 (2003), (noting that the valuation of the property should comport with the facts and circumstances of the case, so as to assure the property owner just compensation, as contemplated by the Constitution).

The Court concluded “Kason should not be given a windfall as a result of the declaration of blight, or of the minor time lapse between the blight and the filing. The increase in value either as a result of and subsequent to the declaration or as a result of other market factors does not mean that Kason should reap that benefit.”

What windfall? The Court notes in footnote 1: “While neither side has offered facts to explain the valuation difference in this case, I infer from their positions both sides would agree the property appreciated between the blight designation and the filing of the Complaint. The extent of the appreciation is unknown to the Court.”

Eighteen months is not an insignificant amount of time, especially viewed in the light of the accelerating real estate market which was occurring between 2004 and 2005. The property owner was not seeking a windfall in utilizing the date of the filing of the complaint as the date of valuation. He was merely seeking to get the benefit of his continued ownership of the property up to the point of the commencement of the action (filing of the complaint) and the transfer of the title to the City of East Orange. While the Court notes that it did not have any evidence before it regarding the appreciation in the real estate market, it could be easily demonstrated that the appreciation occurred through general market forces and not as a result of the actions of City of East Orange in blighting the property. There is, therefore, no project enhancement at play here.

An issue regarding the date of valuation which impacts the constitutional guarantee of just compensation should not have been decided without an evidentiary hearing and the testimony from the respective real estate experts. This opinion should not be viewed as an precedent by municipal condemning authorities in blight cases to use the date of the declaration of blight as the date of valuation.

Ironically, on the same date as the receipt of the Judge Costello’s opinion, the CLE International Eminent Domain Conference in Princeton, New Jersey, featured a presentation by John Buonocore, Jr., Esq., of McKirdy & Riskin on this issue. Buonocore addressed this very point in his conference report: 

If the statute is taken literally (and ignoring unlikely “possession” or “subsection [c] – type” claims), subsection (d) appears right on point in redevelopment situations. The date of value under a literal reading is the date of determination that the area in which the property is located was determined to be “blighted” or “in need of redevelopment” by the governing body pursuant to N.J.S.A. 40A:-12A-6(b)(5).

There is a problem with that construction of the statute. It is clearly unconstitutional as applied in cases where the redevelopment designation was years prior to the taking and values have risen generally in the meantime. Date of value rules do not exist in a vacuum but within the context of fundamentals: Every rule of law in the condemnation context – including date of value rules – is subordinate to the constitutional rule that an owner shall receive just compensation. The date of value must comport with the constitutional mandate of “just compensation.” U.S. Constitution. Amend.V; N.J. Const. Art I, ¶ 20. 

- excerpt from "Condemnation in the Redevelopment Context: Date of Value, Post-Blight Declaration Dimunition in Value, Project Enhancement, Scope of the Project and Other Project Influences" presented by John Buonocore, Jr., Esq., October 12, 2006

Written By:Richard Chaiken, MAI On October 16, 2006 10:10 AM

Value Date: Perhaps the solution is for the appraiser to show the values for each date in question. Then the change in value over time, if any, can be demonstrable evidence of the unconstitutionality of the earliest date denying just compensation.
As for Going Concern: Perhaps the solution is to develop value from Gross Revenues and, like a hotel or restaurant or movie theater valuation, deduct income to non-compensable items (Busines or Going-Concern deducted as a management fee of 4% or 5%) and capitalize the rest (including FF&E). The NOI developed as a residual from Gross Revenues is usually greater than NOI from comparables that do not have the synergistic benefits of the existing use.

Written By:Keith Williams, Esq. On October 20, 2006 12:09 PM

I think the more important question here (than the date of valuation for "blight" designated properties) is what did the landowner do within his community to help it avoid being considered "blighted" by other community members in the first place?

The designation of "blight" does not happen overnight. It is usally the result of years of property deterioration within a particular community. Property owners do not repair obvious structural damage to buildings, neglect landscaping duties on remaining land, and generally allow the neighborhood where they own property to be reduced to shanties and slums. That is the direct cause of blight and deterioration. The recognition of that poor upkeep of a neigborhood by the remainder of the community by calling it "blighted" and in need of cleaning by "redeveloping" does not cause blight in the same way that coughs and sneezes do not cause colds or flu.

With all this shouted rhetoric about abuses within eminent domain, there needs to be equal attention paid to the lack of activity by property owners in declining communities which leads to falling property values initially. What all this attention to Kelo is doing is giving slumlords and offensive neighbors a disincentive to actually perfom responsible property managment. All these lawyers wouldn't shout so loud about preventing condemnation if they realized that they are setting the stage for allowing their next door neighbor to run a crack house and yard based auto-repair shop next to their law office and the local municipality can't shut it down because they can't condemn to rid the city of nuisances.