Eminent Domain: Scope of the Project Rule and its effects
The "Scope of the Project Rule" is an arcane fact of law which prevents property owners whose property is acquired from claiming benefit caused by the project of the condemning authority. There are enormous price differentials between appraisals on property as zoned compared to appraisals on the same property taking into consideration the zoning for the new project. Many people who lose a house, for instance, to a condominium project can’t understand why they cannot value their land for condos. The answer is the "Scope of the Project Rule." However, this may be about to change in New Jersey as it applies to redevelopment projects and property to be acquired under the Local Redevelopment Housing Law.
The following is a brief synopsis of the “Scope of the Project Rule” which is presently the law in the State of New Jersey:
The scope of the project doctrine only excludes value attributable to a governmental project from the date the government is "committed to the project". Jersey City Redevelopment Agency v. Kugler, 58 N.J. 374, 379 (1971).United States v. Miller, 317 U.S. 369, 63 S.Ct. 276, 87 L.Ed 336, (1943); United States v. Reynolds, 397 U.S. 14, 90 S.Ct. 803, 25 L.Ed.2d 12(1970).
The scope of the project doctrine was articulated in the seminal case of United States v. Miller, 317 U.S. 369, 87 L.Ed. (adv. 251), 63 S.Ct. 276 (1943), as follows:
[S]pecial value [of the condemned property] to the condemner as distinguished from others who may or may not possess the power to condemn, must be excluded, as an element of market value. (emphasis added) 317 U.S. at 375
As early as Olson v. United States, 292 U.S. 246, 54 S.Ct. 704, 78 L.Ed. 1236 (1934), the U. S. Supreme Court held that because just compensation includes all elements of value that inhere in the property, the land’s most profitable use must be considered, even if that use is the same as the use for which it is being taken.
Nor does the fact that it may be or is being acquired by eminent domain negative consideration of availability for use in the public service. (citations omitted) It is common knowledge that public service corporations and others having that power frequently are actual or potential competitors not only for tracts held in single ownership but also for rights of way, locations, sites and other areas requiring the union of numerous parcels held by different owners. And to the extent that probable demand by prospective purchasers or condemnors affects market value, it is to be taken into account.
The scope of the project rule has always been enunciated carefully to limit its application to government projects. For example, in the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (42 USC 34651 et seq.), Title III on Uniform Real Property Acquisition Policy (Sec. 301) it is provided as follows:
Any decrease or increase in the fair market value of real property prior to the date of valuation caused by the public improvement for which such property is acquired, or by the likelihood that the property would be acquired for such improvement . . . will be disregarded in determining the compensation for the property . . . (emphasis added).
Jersey City Redevelopment Agency v. Kugler, 58 N.J. 374 (1971) is equally clear that it addressed enhancement or depreciation caused by an "announcement by a public agency that a public improvement was planned for a particular location or area." 58 N.J. at 379 (emphasis added).
In what is by far the most comprehensive judicial treatment of the scope of the project doctrine, the 5th Circuit Court of Appeals defined the scope of the project rule as follows:
The scope of the project rule can be stated easily enough: If the condemned land was probably within the scope of the governmental project for which it is being condemned at the time the government became committed to that project, then the owner is not entitled to any increment in value occasioned by the government’s undertaking the project . . .
The underlying notion of the "no value attributable to Government demand" principle, then is that the Government, when pursuing public benefits through its condemnation power, should not have to spend more for property than would a reasonable and willing private purchaser solely because (emphasis in original) it is exercising its condemnation power on behalf of the public; instead, Government is to be equated to a private purchaser buying the property for its "highest and best" nongovernmental use in an open market (emphasis added). . .
In the cases applying the latter principle, the value excluded is a direct product of the Government’s actions as a condemnor, and is, by definition, a value that could not be obtained from private purchasers; it is an artificial value not to be found in the private market. (emphasis added) US v. 320.0 Acres of Land, More or Less, Etc., 665 F.2d 762 at 781(1979)
As can be seen, the cases are careful to distinguish those elements of value which flow solely from government demand, i.e. an "artificial value" which could never be realized by the owner in the private real estate market, from those elements of value which would exist separate and apart from the government project which are always part of the constitutionally mandated just compensation. Indeed, recognition of and payment for the latter is mandated by the constitutional guarantee of just compensation, Miller, supra, 317 U.S. at 376.
The New Jersey State Assembly has recommended changes to the Local Redevelopment Housing Law, N.J.S.A. 40A:12A-1 et seq. This bill known as the Burzichelli bill (A-3257) passed the Assembly and its companion bill S-2088 is presently before the Senate Community and Urban Affairs Committee chaired by Senator Rice of Newark. Senator Rice has taken no action on the bill but said he will consider it in September. The important provision of the bill as it pertains to compensation in eminent domain cases is that it does away with the "Scope of the Project Rule" as it presently benefits developers on redevelopment acquisitions. See blog of June 23, 2006, Kelo Anniversary, and portions concerning A-3257.
If the Senate passes the present version of the bill and Governor Corzine signs it into law, developers will be facing significantly higher costs in acquiring property for projects. The property owners will now be able to claim the zoning and use contemplated by the project. For example, in Long Branch, New Jersey, where single family residential properties have been acquired, this was the highest and best use permitted under the underlying zoning. Homeowners, where property has been taken, were faced with providing evidence of value based on single family residential. If the law changes, the homeowner could provide proof of what his land is worth for high-rise condominiums. The value would be significantly higher. The additional cost of property acquisition could make some projects uneconomic for the developer.
I'm unfamiliar with the current political climate regarding this issue. Any predictions on the likelihood of success for these bills and when they are likely to take effect?
As an appraiser specializing in eminent domain, and who exclusively represents property owners, the recision of the Project Rule or Project Enhancement would be a large step towards a more "just compensation." The rule was created to protect the government in pursuing a true "public use." With the morphing of "public use" into "public purpose" the Project Rule protects nothing except the profits of the developers. What the rule ignores is that in a free market, absent from eminent domain, a developer assembling a large site most often has to pay premiums for certain parcels, especially when news of the assemblage becomes known. Thus, the case law is not correct in that increases in value occur in a taking that would not normally occur in the marketplace. That may be valid for a true public use taking (roadway, etc.) but it is contrary to actual market behavior in a typical public purpose taking for redevelopment. However, what the rule really fails to reflect however, is that more often than not, takings typically first act to decrease property values, which is known as "condemnation blight" and is the opposite of project enhancement. This is typically the case because most projects are announced in advance and the takings are challenged. The properties scheduled to be acquired are suspended in limbo and are difficult to mortgage, sell or lease. The fairest way to proceed would be to eliminate the Project Rule only for any taking that is not a true "public use." In this way, the government, when acting to provide a true public benefit, is still protected, and developers, looking to line their pockets through the taking of private property, have to pay the going rate.
In all this hype over Kelo, I hope that private property advocates don't shoot themselves in the foot. I hope you understand that the "scope of the project" rule works both ways and that the government will be able to argue for a decrease in property values due to an announced project that drives the market down. Every property owner has forgotten the market downturns of the 90's and talk about property values like day traders talking tech stocks in early 2000. The market is already turning down in many places and certain government uses simply do not cause an uptick in value for surrounding property. Landfills are the best example I can think of, but water treatment facilities, sewer pump stations, and refueling depots come to mind as well. I hope the attorneys who push for this valuation change will be there to explain to their clients when the government successfully argues for a decrease in the values due to a project and take the property for less than market values.
Bill, I am so glad you were there when I needed you. You were able to win for me almost four times what the City of Long Branch initially offered. Forget all those lawyer jokes....I believe and trust in Carlin and Ward. You guys changed my life. I remain,