714.505.9000 cpas@hmwccpa.com

Eminent domain allows the government to seize private land for public use. The U.S. Constitution requires the government to pay “just compensation” — generally the property’s fair market value (FMV) — when it exercises this power. That’s where the project influence rule comes into play.

The rule in a nutshell

When the government obtains property through eminent domain (also known as condemnation), it’s often for a new project, such as construction of a new highway. That project will likely affect the value of the surrounding properties.

But, under the project influence rule, an appraiser assessing the FMV of condemned property may not consider any effects, positive or negative, of the government project. The federal government, as well as many states, follow this rule.

The rule is intended to protect both property owners and government agencies. Say, for example, that a local government is planning to build a sewage treatment plant in a residential neighborhood. That likely would depress the value of area homes, leading to lower compensation to the owners of condemned property. Conversely, if a new off-ramp is planned, the value of nearby land may increase, driving up the price the government must pay for no reason other than its project.

Valuation implications

The rule may seem sensible on its face, but it can complicate the valuation process. In the sewage treatment plant example, an appraiser trying to determine just compensation for the owner of a home in the neighborhood generally would consider the recent sales prices of other homes in the area.

If plans for the plant had already been announced, though, those prices might be deflated based on the impending project. (By the same token, the prices could be inflated if the project is seen as enhancing the area, such as by construction of a new rail line.) Or, if the government has already acquired several homes and razed them, the remaining homes may be less desirable — but the appraiser can’t consider that negative effect of the project.

The appraiser, therefore, will need to determine just when the project influence rule was triggered (that is, when the impending project began to influence values). It’s up to the appraiser to then make appropriate adjustments to the sales prices to reach FMV.

Limited scope

Note that the rule applies only to changes in value attributable to the project. The appraiser can and will consider changes due to other factors, including physical deterioration within the owner’s reasonable control.

© 2019

 

For additional Real Estate related articles click here.

Follow us on LinkedIn or Facebook.