Although it seems contrary to some of the most revered of the “fundamental rights” protected by the United States and North Carolina Constitutions, one of the most ancient powers of governmental agencies (and since the Industrial Revolution, a few private and semi-private corporations such as utility companies and railroads) is the power to take private property1 from the owner and use it for a “public purpose.” In fact, the Fifth Amendment to the United States Constitution and the “Law of the Land” clause of Section 19 of the North Carolina Constitution recognize this necessary power of government by providing that private property may not be taken for public use “without just compensation” being paid to the owner. “Just compensation” is the ultimate issue in any Taking proceeding, but, in any given case, there can be vast differences of opinion as to what compensation is “just” under the applicable facts.
Who Can Take Private Property Against the Will of The Owner?
In North Carolina, there are a myriad of public, semi-public, and private entities that have the power to take private property against the will of the owner. The Department of Transportation (“DOT”) is the most well known, but others include municipalities, counties, school boards, water and sewer authorities, natural gas companies, railroads, and teleT companies, to name just a few.
For What Purposes Can Private Property be Taken?
A requirement of the Fifth Amendment to the United States Constitution, and universally a requirement of North Carolina’s laws governing Takings, is that private property can be taken from the owner solely to accomplish a public purpose. Despite recent outcries from many groups challenging the right of government to take private property from one private owner and turning it over to another private owner for purposes such as redevelopment of dilapidated areas, federal and North Carolina courts have been very liberal in determining that a public purpose exists and, as a result, the public purpose requirement is usually not difficult for the condemning body to prove. Judges make the determination of whether a Taking is for a public purpose, but the issue of just compensation is determined by juries consisting of the owners’ peers.
Initial Valuation of the Property to be Taken
Typically, the condemning body does a significant amount of groundwork before approaching the property owner to discuss the acquisition of a owner’s property.2 By the time a property owner is contacted, engineers will have completed the design work for the intended project, and appraisers will have been consulted as to the value of the property sought to be acquired. This appraisal work, however, is often part of a large body of appraisal work for the entire project, and the appraisers may not have taken into account all of the factors that make up the value of the property that is being taken from a particular owner. Furthermore, appraising value is the art of predicting the sale price for a specific piece of property if a willing buyer and a willing seller were to negotiate fairly without any unusual pressure to buy or sell. It sometimes is surprising to see how two similarly-qualified appraisers differ drastically as to the “just compensation” issue with respect to the same piece of property. Thus, while the condemning body will approach a property owner armed with an “appraisal” of the value of the owner’s property, the parties often negotiate a different price for a voluntary purchase, and it is not unusual, if a Taking proceeding becomes necessary, for the final award to bear little resemblance to the value stated in the initial appraisal.
Easements
The condemning body may elect to take only an easement for a particular use or uses over or under an owner’s property, rather than the entire ownership interest, or “fee simple title,” to the property. If that is the case, the description of the use or uses for which the condemning body is obtaining a right is very important to the just compensation issue. For example, if the condemning body purchases or takes only an easement to install a sewer line, it has no right to install a water line and must purchase or take that right in a separate transaction if it wishes to run a water line under the property. On the other hand, if the condemning body purchases or takes the right to install “public utilities” over or under the property, it does not have to purchase or take a separate easement to install both a sewer and a water line.
In North Carolina, the owner of property over which someone else has an easement typically has the right to continue to use the property as long as the owner’s use does not unreasonably interfere with the easement holder’s permitted use of the easement area. For example, the property owner has the right to drive or farm on the property over which one condemning body has an easement to install a sewer line below ground and another condemning body has the right to install overhead electric or teleT lines. The property owner, however, would not have the right to install an in-ground swimming pool or grow tall trees for timber harvesting over the same property. Because the property owner retains the right to use the property for some, but not all, uses, appraisers often determine that the just compensation due to a property owner for the Taking of an easement is less than the just compensation which would be due if the Taking involved the entire ownership interest in the property. Again, however, appraisers can differ on this issue.
Highest and Best Use
The value of property in a Taking case must be based on the “highest and best use” to which the property could be put. For example, if the property is being used as farmland but would have a higher value as a residential subdivision, then the value of the property as a residential subdivision should be used in determining the amount of just compensation due to the owner. In order to make this determination, it is often necessary to have engineers, land planners, environmental consultants, and other experts examine the property. This issue is often a major point of contention between the condemning body and property owners.
Partial Takings
Most Takings involve the acquisition of only a portion of an owner’s property.3 When that occurs, just compensation typically is measured by comparing the fair market value of the entire property just before the Taking with the fair market value of the portion of the property belonging to the owner just after the Taking. The difference between those two values can be considered to be the just compensation due the property owner. For example, if a property fronts on a public road and the DOT takes only a portion of the property for a highway widening project, the property owner is entitled to recover the difference between the value of the entire property just before the Taking and the value of the owner’s remaining parcel just after the Taking. Since the remaining parcel still will enjoy highway frontage, the value of the property after the Taking may not be a great deal less than its value before the Taking, even though the parcel is smaller in overall size. Again, how these partial Takings affect the value of a property can be a major point of contention in a Taking case.
The Tax Implications to the Property Owner of a Taking
One positive aspect of a Taking for the property owner is how the IRS treats the payment made by the condemning body for the property taken. Generally, gain or loss realized from the sale or other disposition of property must be recognized in the year in which the sale or disposition occurs. However, Section 1033 of the Internal Revenue Code provides an exception by allowing a property owner to defer the recognition of gain in connection with a Taking. To take advantage of the exception, the property owner must purchase “like kind” replacement property within two years (or three years for certain real property held for use in a trade or investment). It is important to note that the property owner is not necessarily limited to the price offered by the condemning body. Once the threat or imminence of a Taking exists, the property owner can sell the property to a private party and still defer the gain, provided the other requirements of Section 1033 are met.
Effect of the Stimulus Act
The American Recovery and Reinvestment Act of 2009 (“Stimulus Act”) provides funding for government projects which will undoubtedly result in more Taking proceedings by federal, state, and local authorities. It is estimated that $6.1 billion will be allocated to North Carolina and ear-marked for such projects as school construction, transportation infrastructure construction and improvements, water and sewer projects, and public housing. Approximately $1.14 billion of North Carolina’s funds will be spent on the construction of roads, bridges, and water/sewer systems. About 40% of that money already has been allocated to “shovel-ready” projects, but the remaining 60% is scheduled to be spent over the next two years.4 Many of these projects will require the responsible governmental authority or agency to either purchase or take private property to complete the project .
Conclusion
Taking cases, especially those involving commercial property, can be complicated and challenging. With good guidance and advice, the great majority of these cases can be resolved amicably and to the satisfaction of all parties after the valuation issues are explored. For those cases that cannot be resolved, it is essential for the parties to have competent legal counsel with jury trial experience to represent them in court on the issue of just compensation.
For further information regarding the issues described above, please contact Ryal W. Tayloe.
