Last summer, I wrote a blog about why just compensation—which is based on the ‘objective’ standard of what a property would sell for on the open market—shortchanges residential property owners subjected to eminent domain. In February, I had the honor of co-presenting this topic at the American Law Institute’s Eminent Domain & Land Valuation Litigation Seminar in New Orleans. In anticipation of that presentation, I spent considerable time rewriting my blog (a more formal version is forthcoming in The Practical Real Estate Lawyer) and thinking through this problem.
After considering the problem more, I came to a couple of conclusions. First, the shortcomings of the ‘objective’ market-based standard for just compensation are particularly pronounced for displaced homeowners, who almost always ‘subjectively’ value their property for more than it would sell for on the open market. We should first focus on solutions in that context. Second, I concluded that the most practical and workable solution is to provide displaced homeowners a multiple of the market value of their home based on how long they have occupied it. That multiplier—which would be based on the difference between property owners’ subjective value and fair market value—would, on average, fairly compensate property owners. It would also incentivize condemnors to take property only when the value of the public project exceeds the owners’ subjective losses.
This blog serves as an update to my original blog. As in the original blog, it begins by describing the deficiencies of compensating displaced homeowners based on the fair market value of their property. Next, it describes the impracticality of implementing a purely subjective just compensation standard. And, finally, it explains why states should adopt a multiplier approach for displaced homeowners using theory, policy, examples, and responses to the most common counterarguments.
The shortcomings of basing just compensation on an ‘objective’ standard
When the government condemns private property for public use, it is required to pay “just compensation” to the property owner. The theory behind this mandate is that no individual owner should bear the burden of paying for a project for which the public as a whole benefits. See, e.g., Armstrong v. United States, 364 U.S. 40, 49 (1960) (“The Fifth Amendment’s guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”). The requirement that the government pay just compensation also helps ensure that the government does not take property that is more valuable to the private owner than it is to the public at large.
As the Supreme Court has explained, “just compensation” is intended to place “the owner of condemned property ‘in as good a position pecuniarily as if his property had not been taken.’” United States v. 564.54 Acres of Land, 441 U.S. 506, 510–11 (1979) (quoting Olson v. United States, 292 U.S. 246, 254 (1934)); City of Detroit v. King, 207 Mich. App. 169, 183 (1994) (explaining that the goal of just compensation is to place “the property holder in as good a position as she would have been had the taking not occurred”).
In other words, the just compensation should make the property owner “whole.” See United States v. Va. Elec. & Power Co., 365 U.S. 624, 633 (1961) (“The guiding principle of just compensation is reimbursement to the owner for the property interest taken. . . . He must be made whole but is not entitled to more.”).
Courts usually implement the compensation requirement through a “fair market value” standard. Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10 (1984) (“‘Just compensation,’ we have held, means in most cases the fair market value of the property on the date it is appropriated.”). Although jurisdictions use varying phrasing, fair market value is generally defined as “[w]hat a willing buyer would pay in cash to a willing seller at the time of the taking.” Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10 (1984).
The problem with this standard is that it does not make all property owners “whole.” A homeowner who is not actively selling his or her property is not a “willing seller” and likely values it more than the open market.
Judge Posner described this well:
Compensation in the constitutional sense is . . . not full compensation, for market value is not the value that every owner of property attaches to his property but merely the value that the marginal owner attaches to his property. Many owners are “intramarginal,” meaning that because of relocation costs, sentimental attachments, or the special suitability of the property for their particular (perhaps idiosyncratic) needs, they value their property at more than its market value (i.e., it is not “for sale”). Such owners are hurt when the government takes their property and gives them just its market value in return. The taking in effect confiscates the additional (call it “personal”) value that they obtain from the property . . . .
Coniston Corp. v. Village of Hoffman Estates, 844 F.2d 461, 464 (7th Cir. 1988).
The shortcomings of determining compensation using an ‘objective’ standard are most glaring in the residential context. As a straightforward illustration, consider a five-person family that has lived in a suburban home for many years. The children are friends with the neighbors across the street and are comfortable in their local public school. The parents renovated their home to support their hobbies—installing a golf simulator in the basement and garden in the backyard—and have purchased furniture that compliments the home’s unique layout. The family is comfortable and has no intention of moving, even before considering the inconveniences of physically relocating their personal possessions. This family is not a “willing seller” and would turn down offers for the home’s “fair market value.
Subjective damages can exist in the commercial context, but they are usually not as obvious. Instead, commercial owners often incur damages that are not compensable for other reasons. For example, many condemned businesses have “lost profits” that courts deem too “speculative” or “uncertain” to be included in just compensation.
The practical difficulties of implementing a subjective compensation standard
In an ideal world, just compensation would leave property owners subjectively indifferent to takings. Unfortunately, there are many practical difficulties in implementing a subjective standard.
As an initial matter, it is difficult to place a monetary value on subjective feelings and attachments. If you knock on the door of a settled homeowner and ask them what it would cost for them to sell their home that minute, they will likely struggle to find a number. In the eminent domain context, we surely could not trust property owners to answer honestly. Imagine how hard it would be for a jury to make that determination.
A subjective standard would create other complications for trials. The property owner and condemnor would likely have to litigate how much the property owner really cares about their property. Property owners who wanted to move before the taking would be incentivized to exaggerate their sentimental attachment. Both sides may seek to present character witnesses to speak to the owner’s honesty (in stating how much he or she values the property) or involvement in the community or neighborhood (to show attachment).
As a further complication, the unpredictability of property owners’ subjective values would make it impossible for government decision-makers to predict ex ante how much a public project will cost. By contrast, under the current standard, they can generally estimate the market values of the properties they need to condemn.
As Justice Marshall explained, these complications are the reason we use an objective standard:
Because of serious practical difficulties in assessing the worth an individual places on particular property at a given time, we have recognized the need for a relatively objective working rule. The Court therefore has employed the concept of fair market value to determine the condemnee’s loss. Under this standard, the owner is entitled to receive “what a willing buyer would pay in cash to a willing seller” at the time of the taking.
United States v. 564.54 Acres of Land, 441 U.S. 506, 511 (1979) (citations omitted).
The most feasible alternative: Supplementing market value with a multiplier
One of the most promising and practical proposed reforms targeted at accounting for the fact that displaced homeowners are not “willing sellers” is to supplement fair market value with a “bonus.” That bonus—which is calculated using a multiple of fair market value—approximates the difference between the fair market value and the property owner’s subjective value, which I refer to below as the “subjective surplus.” Because the subjective surplus is likely larger for owners who have occupied their homes longer, the bonus should vary with the length of ownership.
There are many advantages to supplementing market value with a bonus multiplier. First, and most importantly, at a macro-level, this approach can force just compensation to internalize the subjective surplus. Second, this approach uses the existing market-based analysis, which is far more workable than the purely subjective approach. Third, this approach leads to relatively predictable costs for government planners. And, finally, if this approach is executed correctly—ideally someone will perform a study estimating how much property owners truly value their property relative to its market value and in relation to how many years they have owned the home—then it will incentivize condemnors to take property only when a project’s value exceeds the affected owners’ subjective losses.
Some of the most prominent property rights experts have discussed the benefits of this type of reform. Professor Richard Epstein, for example, stated that “[b]onus values . . . have a great deal to recommend them.” Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain 184 (1985). He continued, “[I]f no bonus values are awarded, . . . compensation will . . . fail in its central purpose, as no original owner will be indifferent between retention of the basic property and the substitute award.” Id.
In a statement to the Senate Judiciary Committee in the wake of Kelo v. City of New London, Professor Thomas Merrill said, “Another promising reform idea would be to require more complete compensation for persons whose property is taken by eminent domain. . . . For example, Congress could require that when occupied homes, businesses or farms are taken, the owner is entitled to a percentage bonus above fair market value, equal to one percentage point for each year the owner has continuously occupied the property. This would provide significant additional compensation for the Susette Kelos and Wilhelmina Derys who are removed from homes they have lived in for much of their lives.” The Kelo Decision: Investigating Takings of Homes and Other Private Property: Hearing Before the S. Comm. on the Judiciary, 109th Cong. 122 (2005) (statement of Thomas W. Merrill, Professor, Columbia Law School), https://www.judiciary.senate.gov/imo/media/doc/merrill_testimony_09_20_05.pdf.
There are many potential variations to this type of proposal. For example, it can apply exclusively to residential takings, where the subjective surplus is more pronounced. And the bonus can also be tied to the amount of time the owner has occupied the residence, which likely correlates to the owner’s subjective surplus. BYU Law Professor John Fee incorporated both concepts into his proposed reform, which is to supplement just compensation for displaced homeowners by 2% for every year the owner continually resided at the home up to a maximum bonus of 60%. John Fee, Eminent Domain and the Sanctity of Home, 81 Notre Dame L. Rev. 783, 791 (2006).
Following Kelo v. City of New London, a few states implemented bonus multipliers. Michigan, for example, did so through a constitutional provision that requires condemnors to pay owners 125% of the fair market value if the taken property is the owner’s primary residence. See Mich. Const. art. X, § 2 (“If private property consisting of an individual’s principal residence is taken for public use, the amount of compensation made and determined for that taking shall be not less than 125% of that property’s fair market value, in addition to any other reimbursement allowed by law.”). In Indiana, condemnors must pay displaced property owners 125% of fair market value for agricultural land and 150% of fair market value for residential property. See Ind. Code § 32-24-4.5-8. In Missouri, condemnors must pay 125% of fair market value for “homestead taking[s]” and 150% of the fair market value if a family has owned the property for fifty years. Mo. Ann. Stat. § 523.039. And in Rhode Island, condemnors must pay 150% of the fair market value of property taken for economic development purposes. R.I. Gen. Laws § 42-64.12-8(a).
Similar reforms also exist outside of the United States. For example, in the United Kingdom, displaced residential property owners are entitled to 10% compensation bonuses. In some Canadian provinces, such as Ontario, there is a 5% bonus. In Australia, the bonus is fixed at $10,000 for federal takings and 10% in some of its states. In India, residential property owners are entitled to 30% bonuses. And in Pakistan, residential property owners are entitled to 15–25% bonuses depending on the acquiring entity. M.J. Todd, The Application of Solatium Payments in the Assessment of Public Works Compensation 45–46 (2009) (unpublished Master of Property Studies dissertation, Lincoln University, N.Z.), https://researcharchive.lincoln.ac.nz/server/api/core/bitstreams/2f354145-00fb‑4972-956a-549a2703cbd6/content.
The multiplier approach is not a perfect solution. Perhaps its most critical shortcoming is its reliance on an approximation of the subjective surplus. If executed correctly, it will capture how much the average homeowner values his home relative to its fair market value. However, two homeowners who have occupied their homes for equal periods of time may have extremely different feelings about them. One owner may be a new empty nester looking to downsize. The other may have young children settled into the local public school. This approach would overcompensate the former owner and undercompensate the latter.
Some academics have criticized this type of reform for providing larger bonuses to wealthier property owners. Brooklyn Law Professor Brian Lee, for example, has argued that “paying owners fixed-percentage bonuses above the taken property’s fair market value” is “markedly unjust” because it “perniciously treats rich people’s sentiments and autonomy—their personhood—as more valuable than poor people’s personhood, thereby failing to respect the moral equality of the rich and poor and their equal value as persons.” Brian Angelo Lee, Just Undercompensation: The Idiosyncratic Premium in Eminent Domain, 113 Colum. L. Rev. 593 (2013). In criticizing this proposed reform, however, Professor Lee fails to grapple with its underlying motivation: internalizing the subjective surplus. On average, that surplus scales with home value. If you knock on the door of an off-market home with a $100,000 market value and offer its owner $50,000 over market value, the owner is far more likely to accept it than if you make the same $50,000-over-market-value offer to a homeowner in a $10,000,000 home.
The bonus method may not be perfect, but it is the best alternative to the ongoing system that systematically undercompensates disclosed homeowners.
Conclusion
Just compensation, which is determined using the ‘objective’ standard of the property’s market value, systematically undercompensates property owners, who ‘subjectively’ value their property more than the open market. Consequently, many displaced property owners—especially in the residential context—are not made whole by just compensation. The existing standard also leads to bad policy, because condemnors may take property even when the value to the public is less than the condemnees’ subjective losses.
Unfortunately, there are many practical issues that dissuade states from implementing a purely subjective just compensation standard.
Nevertheless, as explained above, states should—and in a few cases already have—adopted a ‘bonus multiplier’ to the just compensation compensation afforded to displaced homeowners. If executed correctly, that bonus will, on average, compensate property owners based on how much they value their properties (even if some owners may be over- or under-compensated depending on how they feel about their property relative to the average owner). This approach would also provide better incentives to condemnors, who would be discouraged from taking property where the public benefit is less than the condemnees’ subjective losses. Hopefully more states will begin to adopt this reform.
