The payment of “just compensation” for the taking of private property includes more than merely writing a check to the property owner after a jury determines the current fair market value of the taking. A property owner is entitled to interest on the award of condemnation as well.
Over the last year, the Federal Reserve has raised its federal funds rate multiple times. In California and Nevada, the interest rate is calculated in very different manners and the increase in the federal funds rate has differing impacts.
California
In California, a property owner is entitled to interest on any funds placed on deposit by the condemning entity and they are also entitled to interest on the delta between the amount of money on deposit and the ultimate condemnation award. The interest rate for both is set the same way.
Interest on eminent domain awards is set by California Code of Civil Procedure Sections 1268.310 through 1268.360. Interest on a compensation award is computed from the earliest of: (a) the date of entry of judgment, (b) the date the plaintiff takes possession of the property, or (c) the date after which the plaintiff is authorized to take possession of the property as stated in an order of possession. (Code Civ. Proc., § 1268.310.) Once the date on which interest will start accruing is determined, the actual computation is determined as follows: The rate of interest for each calendar quarter, or fraction thereof, for which interest is due is the apportionment rate for the immediately preceding calendar quarter. The apportionment rate is calculated by the Controller on a quarterly basis. (Code Civ. Proc., § 1268.350.) The current apportionment rate for the Surplus Money Investment Fund is 1.881%.
As an example, let’s assume the condemnation award was $100,000 and the possession period ran from January 1, 2020 to December 31, 2020. There will be four different applicable interest rates set by the Controller. The rate for the first quarter will look to the end preceding quarter, the end of 2019. Therefore, the rates from the Controller would be 1.856% (91 days), 1.650% (91 days), 1.236% (92 days), and 0.698% (92 days). The calculation to determine the amount of interest would be as follows:
The Surplus Money Investment Fund Apportionment Yield Rate is based on the average of rates earned by the State on surplus money for the applicable quarter or semiannual period. The apportionment rate has a compounding factor built into it by the Controller.
It is interesting to note that the California interest rate in California Code of Civil Procedure section 1268.310 used to be based on the “legal interest.” However, in Redevelopment Agency v. Gilmore (1985) 38 Cal.3d 790, it was determined that the use of “legal interest” was actually unconstitutional, and that an adequate interest rate must reflect market conditions. Thereafter, Section 1268.310 was amended to replace the usage of “legal interest” with the current system of basing the interest rate on the surplus money investment fund rate—which is pegged to a market rate.
Therefore, the California condemnation interest rate is not tied to the federal funds rate. Changes in the federal funds rate does not have a direct connection to the amount of interest that may be owed on a condemnation award in California. But, by altering the overall interest market (as reflected in changes to the surplus money investment fund) these changes in interest do cause an upward impact on overall compensation awards.
Nevada
Across the state line in Nevada, the rise in rates has a quicker and more dramatic impact. Under NRS 37.175(4)(b), interest on the award of just compensation must be “not less than the prime rate of interest plus 2 percent.” The “prime rate” is typically determined by a shorthand known as “fed plus 3”, meaning that the prime rate is usually three percentage points higher than whatever the federal funds rate happens to be. At the beginning of the 2022, the prime rate was 3.50%. As of June 16, 2022, the prime rate was 4.75%. And as of February 7, 2023, the fed rate is 4.75% making the prime rate 7.75%. This puts the condemnation interest rate within striking distance of 10%. If further anticipated hikes happen, condemning agencies will face interest rates on just compensation awards in excess of 12% per year. Notably, in Nevada, the interest statute sets a floor – not the ceiling.
Eminent domain valuation cases can take a year or two to go from initial deposit to trial. A lengthy suit can add significant sums to the just compensation award. For example, if a jury awards an additional million dollars in just compensation two years after the initial deposit, the bare minimum interest will be at least an additional $210,000 (assuming a 8% prime + 2 compounding once a year for two years).
Conclusion
It is important for parties in a condemnation action to keep in mind the impacts of the interest rate on the ultimate condemnation award. For condemning entities, the total amount due could end up being much higher than anticipated given the accrual of interest over the life cycle of an eminent domain action. For property owners, understanding the potential impacts of accrued interest could help them make informed decisions about settlement and proceeding to trial.
Further, in jurisdictions where the interest rate determination is tied closely to the increases in the federal funds rate, it is more important than ever for parties to a condemnation action to pay attention to the impacts of changing interest rates.
