Eminentdomainlegal Blog

On December 29, 2011, the California Supreme Court issued its opinion in California Redevelopment Association v. Matosantos, the case which addressed the constitutionality of the laws passed by the Legislature preventing redevelopment agencies from engaging in new business and requiring them to wind up and dissolve.  The Court upheld the Legislature’s action in dissolving redevelopment agencies; but struck down the Legislature’s attempt to allow some agencies to continue in existence if they “voluntarily” paid over some of their tax increment financing to help finance police, fire, school and other “core” governmental services.

Responding to a declaration of “state fiscal emergency” made by former Governor Arnold Schwarzenegger and renewed by current Governor Jerry Brown, the Legislature passed two laws.  The first called for the dissolution and winding up of redevelopment agencies.  The second allowed those agencies that “voluntarily” paid over some of their tax increment financing for other purposes to remain in existence.

The California Supreme Court, in Matosantos, held that the first law was valid and constitutional.  The State creates redevelopment agencies; and, it can also end their existence.  The Court, however, struck down the second law because it violated a provision of the state constitution forbidding the Legislature to take tax increment financing revenue from redevelopment agencies once they had received it.

The decision will have the following impacts unless further legislation or constitutional amendments are passed:

1. Redevelopment agencies will no longer be the “point” agencies for future redevelopment projects.  Such projects will have to be sponsored and implemented directly by other local bodies such as cities and counties.
2. These other local bodies will have to use their own eminent domain powers to implement such projects.  Elimination of “blight” continues to be a recognized “public use” justifying the use of eminent domain in particular circumstances.  Redevelopment may still proceed in order to eliminate such blight, using eminent domain where necessary; but such redevelopment will no longer proceed through separate redevelopment agencies.  Instead, it will proceed through these other local bodies.
3. The primary financing mechanism for redevelopment agencies was “tax increment financing”; i.e. the increase in property tax revenue generated by redevelopment through the elimination of blighted areas.
4. As redevelopment agencies wind up and dissolve, completing the projects that existed prior to Matosantos and paying off their pre-existing indebtedness, this tax increment financing will go to other governmental agencies and be available for use as part of general funds for other “core” governmental services.
5. This means that, if these other local agencies so choose, there will be less money available for redevelopment.  Nevertheless, these local agencies may opt to continue to use these funds, now part of their general funds, for redevelopment purposes and for eminent domain to implement redevelopment.
6. In the current environment of severe budget shortfalls at all levels of government, it is to be expected, however, that less and less money will be allocated and used for redevelopment.  This will help alleviate part of the budget shortfall; but it is regrettable in the long run because it means that again we are robbing our future and the monies needed to develop our future in order to pay for the financial irresponsibility of our past and present.  The “Golden State” is becoming more and more the “IOU State.”

By Joseph S. Dzida, The Law Firm of Callanan, Rogers & Dzizda, LLP

Assert Your Eminent Domain Rights

As an apartment owner, you have rights, even when the government uses eminent domain to acquire your building.  Under the United States Constitutions, you have the right to payment of “just compensation” for the property taken.  Under the California Constitution, you also have the right to payment of “just compensation” if you are damaged by a governmental entity.

You are entitled to the fair market value of your land, building and improvements.  Lender fair market appraisals often differ from those used in eminent domain.  For example, lenders appraise property at its “most probable price.”  A higher standard applies in eminent domain.  By law, the government must pay not a low-ball value, not an “average” value, and not even a “most probable” value.  It must pay the “highest price” you would receive in an arms’ length transaction on the open market.

Government appraisers often low ball properties.  For example, they  have selected so-called comparables from areas under the LAX flight path that are infested with drug dealing and prostitution when they appraised apartment properties that are located miles away in much nicer areas.  Sometimes, they project downward market trends using general “data” compiled for broad areas when sales prices are actually increasing in the specific neighborhood of the property.

To deal with these tactics, you need the services of a forensic appraiser experienced in addressing eminent domain issues and testifying.

You also have rights when the government relocates your tenants before taking possession of your building and paying you for it.  The government is not allowed to engage in such unreasonable pre-condemnation conduct.  You are entitled to lost rents and any other damages you suffer as a result.

A typical tactic is to move your tenants out, leaving you with the property’s carrying costs.  The government will wait for you to assert your right to payment of the lost rents, and will often wait until you show that you have the help of experienced eminent domain counsel before agreeing to pay your lost rents.

By the time the government starts to relocate your tenants, it will have already put together its own team of legal, appraisal and other experts to protect its interests.  You should do likewise.  Don’t wait for the government’s help.  Too often, it acts only to help itself.  It will act on its own schedule and at its own convenience unless you assert your rights and demonstrate that you have your own team in place to protect them.

Your tenants and you (if you live in the building) are entitled to relocation benefits set by law.  Though helpful, often these benefits are insufficient to pay all of the costs of relocation.  Furthermore, if financing a relocation is difficult, the government must also advance monies to fund the relocation.

Once the government files an eminent domain lawsuit to acquire your building, it may file a motion to obtain possession prior to a final determination of the compensation due you.  It can do this only if it deposits into court what it thinks the property is worth, based on its own appraisal.  You can withdraw this money and still claim more; though, if you withdraw the deposit, you cannot contest the government’s use of eminent domain to acquire your property.  Once you withdraw the deposit, the only issue left to determine is how much you will be paid.

If you have a loan against your building, it and any accrued and unpaid taxes will typically be paid off  from the funds on deposit.  Sometimes, however, the government deposits less than what is owed, claiming that the property is upside down and not worth the debt.  This may create “hardship” sufficient to prevent the government from obtaining early possession of your property.  A few brave judges have so held, though others have granted the government possession despite these unfair and inadequate offers.

From a tax standpoint, acquisitions by the government using eminent domain are treated as involuntary transfers subject to Internal Revenue Code section 1033.  Like a 1031 exchange, payment of taxes on capital gains from such a transfer may be deferred in a 1033 exchange.  Generally a replacement property must be acquired within two years.  For certain investment and business property, however, the replacement must be acquired within three years.  You need to consult with your accountant and tax advisers regarding whether you qualify for this type of exchange and regarding the governing replacement period.

In addition, under California law, the property tax basis for the building taken in eminent domain may be transferred to replacement property.    This is most easily done by acquiring new property in the same county as the old (most county’s have a form to fill out for this); though “theoretically” you should also be able to transfer to a replacement property in a new county.  You need to investigate the procedures at an early stage of your search for a replacement so that you can address and overcome any procedural difficulties early on.

Eminent domain has been described as the “legal equivalent of being hit by lightning.”  When an apartment is acquired by the government, the owners may lose their livelihood and both the owners and the tenants may lose their homes.  The best defense is to be proactive and prepared to assert and defend your constitutional rights.

Passively waiting for the bulldozers to arrive is NOT good strategy.  As discussed above, do not be penny wise and pound foolish.  Assemble a team of legal and appraisal experts to help you get or save you more money than they cost.  Surprisingly, most people do not get help and simply take what the government offers.  The  government knows this and often does not even negotiate seriously until it sees that you have help and the guts and wherewithal to fight for and protect your rights.   The law helps those who help themselves.

For more information call 213-599-7595.

The novel, The Hitchhiker’s Guide to the Galaxy, begins with its hero lying in front of a bulldozer trying to prevent his home from being taken and destroyed in eminent domain.  Unfortunately, for most people impacted by eminent domain (including our hero), by the time the bulldozers get there, it is too late.  If you are a target of eminent domain, be proactive early and often.  Many times, property and business owners impacted by eminent domain decide to wait until the government moves them on its own schedule and at its own convenience without regard to their needs or concerns.  They lose the opportunity to negotiate for realistic help on a realistic schedule, while the government can still adjust and change its own plans.  For example:

• A large manufacturing plant with press brakes and other heavy equipment was targeted by Caltrans for eminent domain, but Caltrans took years to formulate its plans and obtain federal funding, all the time leaving the plant owners in limbo as to whether and when they would be condemned and forced to move.  We advised this client to take a more proactive approach, to find a relocation site for themselves without waiting for the government to do it for them, and to try to be the “squeaky wheel” that gets the grease rather than the silent bystander waiting for the bulldozers to arrive.  As a result, the client searched proactively for and found a viable relocation site only a block away.  We then asked Caltrans on the client’s behalf to provide advance relocation funding and to formally approve the relocation, pointing out that Caltrans might end up spending far more if the client ultimately could not relocate and was put out of business by the taking.  Caltrans then claimed that it lacked the authority under federal funding laws to help the relocation.  It also claimed that federal regulations barred it from “approving” a relocation when the entire public project still awaited final plans and final approvals.  We pointed out that Caltrans was wrong.  Federal law not only allowed Caltrans to help; it required Caltrans to help. Two months after our initial request, Caltrans approved the relocation and funded it in seven figures.
  
• A large, but family owned, rubber parts manufacturer faced loss of the entire business in eminent domain, if it could not relocate.  We advised the client to hire a relocation consultant who, for a reasonable fee, prepared a budget estimating the cost of relocation and a schedule showing how long it would take.  Both of these are key.  Under general eminent domain law, the government typically gives no more than 120 days notice that it will take possession of property taken in eminent domain.  For many businesses, that is too little and too late.  The business simply cannot be moved in that small a time period.  With a budget and a schedule, however, we helped this client make the case for early approval of relocation and relocation funding.

Be proactive.  The government moves on “government time.”  You have to push the government sometimes to recognize that it is dealing with real people, real businesses and real employees who have real human needs and concerns that should be protected and addressed, even if the bureaucracy has to do a little more work.

Bankruptcy and Eminent Domain

Several federal cases have recognized that the stay automatically imposed when a bankruptcy case is filed may bring state eminent domain proceedings to a halt.  While governmental actions to enforce its police or regulatory powers are not halted by the filing of a bankruptcy case, the mere exercise of the power of eminent domain without any public safety or important regulatory issue at stake is subject to the automatic bankruptcy stay.  For example, if the government takes property in eminent domain in order to increase its tax base (as in the famous Kelo case decided by the United States Supreme Court), no police or regulatory powers are at stake.  If the taking might destroy a business and force it into bankruptcy, the filing of a bankruptcy Chapter 11 petition could stay the eminent domain proceeding pending the outcome of the bankruptcy case.  While bankruptcy petitions must never be filed in bad faith or for frivolous purposes, in the appropriate situation a property or business owner forced into bankruptcy by an eminent domain proceeding may seek the protection of the bankruptcy courts and the protection of the automatic stay imposed in bankruptcy proceedings.

Increasingly, property owned or leased by nonprofits is becoming a target of eminent domain.  Governmental agencies seeking to acquire land for public use gravitate toward what they perceive to be the path of least resistance.  They look for what they hope will be the weakest opponents, what they hope will be the cheapest property and what they hope will be the easiest property to acquire with the least political opposition.  However, nonprofits have rights in eminent domain, and the law and the courts are slowly beginning to recognize and protect those rights. For example:

• In April 2011, a judge in San Diego County held that a City did not have the right to take property devoted by a nonprofit to keeping at risk youths off the street and out of gangs.  The court held that the City lacked evidence that the property was “blighted.”
• Under California law, special valuation rules are applied to property owned by nonprofits when there is no other market for such property.
• Courts are increasingly recognizing that eminent domain may also destroy or damage the business goodwill value of nonprofits when the eminent domain power is used to force them to relocate into more expensive business quarters.

If your nonprofit owns or leases property threatened by eminent domain, contact us for a free consultation.