A government entity acquires land for a public project through its power of eminent domain. Prior to initiating formal condemnation proceedings by filing a complaint in eminent domain in Superior Court, the government must fulfill several legal requirements, including appraising the property it seeks to acquire and making a purchase offer to the owner according to specific sections of the California Government Code.
Once the eminent domain case begins, the process focuses on two aspects: (1) clearing title and possession for the government, and (2) paying the owner "just compensation" for the property to be acquired. In California, "just compensation" can include a claim for loss of business goodwill from a business owner if the business is located on the property that the government seeks to acquire.
The valuation of property in eminent domain attempts to simulate a market transaction. However, because the transaction is not voluntary and because the purchase is accomplished using public funds, it operates under a completely different and specific set of rules under the term "fair market value." Eminent domain and the "just compensation" requirement adhere to its own sections of the California Code of Civil Procedure and the California Evidence Code. Appraising the property typically involves a detailed search for comparables that must meet the numerous factors set forth in the applicable sections of portions of the California codes. Because the valuation process is governed by California code, court opinions interpret the code and give further guidance and requirements on valuing property in eminent domain.
While the goal is to simulate a market transaction, an eminent domain proceeding is unlike any other property transaction or court case, and can often involve substantial overlap of other areas of law, including property contamination, business relationships and corporate structuring, tax, finance, contracts, and land use and zoning.
There are three different approaches to value that the appraiser will consider. This first is the sales approach. Using this approach to value, sales of similar property are analyzed and compared to the property being appraised. This establishes the estimated price that a current buyer would pay for the property.
Another approach to valuation an appraiser will consider is the income approach. In this case, the appraiser will look at current or potential income uses for the property. If there are current leases or other income producing parts of the property, these will be taken into consideration.
Finally, the appraiser will consider the cost approach. This approach looks at how much it would cost to rebuild the structures on the property plus the land value. Each of these approaches to value should be considered to the extent that they apply to the property that is part of the eminent domain proceeding. Experienced legal counsel can help guide the California property owner through the process.
Source: cacities.org, "Property owner's information pamphlet on use of eminent domain in California", Accessed on July 8, 2017