Eminent Domain | Replacement Cost Valuation Approach

Eminent Domain Valuation of Property

There are generally three recognized methods of valuing property in eminent domain actions: sales comparison approach; replacement approach; and the income approach. Each method has its own strengths and weaknesses.

Generally, the sales comparison approach provides the greatest indicator of fair market value, as it relies on concrete evidence. It is hard to argue that a piece of ground did not sell for what it actually sold for. After learning the purchase price, it is simply a matter of analyzing the subject property (the property subject to eminent domain proceedings) against the comparable. If it has a lot of the same characteristics and is in the relatively same location chances are they are pretty close in value.

Replacement Cost Approach can Supplement Comparable Sales Approach or Replace it

Generally the replacement cost approach is used to supplement the comparable sales approach. Theoretically, in a perfect world, each of the three approaches would render exactly the same values for the property. Each is designed to determine the fair market value of the property, and there can only be one, so in a perfect world each method would come out the same. That doesn't happen, though, for several reasons, the primary reason of which is that each method requires some level of subjective analysis.

Using the replacement cost approach, the subjectivity shows itself in the amount of depreciation afforded to the property in question. To have depreciation there must be some depreciable asset on the property (land doesn't generally depreciate), usually a building. Assuming you have that, the replacement cost approach, in a nutshell, goes as follows: (1) determine the value of the underlying land, as if there were no building or other fixture on it; (2) determine what it would cost to replace the building or fixture exactly the way it is (there are books that provide replacement cost information); and (3) - this is the subjective part - depreciate the replacement cost to a present value (ie - get the new building in the condition of the actual building and see what the cost of that is).

I think this, as with other posts, shows not only how difficult analyzing a property can be, but also the advantages that can be gained by retaining an experienced eminent domain attorney. Your eminent domain attorney should not only be familiar with this methodology, but also the weaknesses associated with the method and the areas in which progress can be made against the condemning authority.

For example, a good eminent domain attorney would know not only about the subjective nature of each of these methods, but that if you can show that the building is made of materials superior to those used by the appraiser in their valuation using the replacement cost approach the value of the property can be substantially increased. Also, an experience eminent domain attorney would know how to attack the amount of depreciation given to the building to increase its value.

If your property has been valued using the replacement cost approach, please consult an eminent domain attorney. If they can't substantially increase the payment you receive from the government for them taking your property, at least you can have the piece of mind of knowing that you received just compensation for the taking of your property.

Eminent Domain Attorney