B-233552, Feb 14, 1989
B-233552: Feb 14, 1989
Just compensation is measured by the fair market value of the property taken. 2. Fair market value is not the only standard of just compensation. The Supreme Court has indicated that other measures of just compensation are appropriate "when market value has been too difficult to find. You are preparing a report involving the role played by the Department of Energy's (DOE) Richland office in efforts to promote the conversion of the Washington Public Power Supply System (Supply System) nuclear power plant l (WNP-1) to a production facility. One issue to be addressed in your report is the validity of a September 17. Just Compensation Eminent domain is the power of the sovereign to take property for public use without the owner's consent.
B-233552, Feb 14, 1989
APPROPRIATIONS/FINANCIAL MANAGEMENT - Judgment Payments - Market values - Computation - Real property - Condemnation DIGEST: 1. The Fifth Amendment of the Constitution provides that no "... private property shall be taken for public use, without just compensation." Generally, just compensation is measured by the fair market value of the property taken. 2. Fair market value is not the only standard of just compensation. The Supreme Court has indicated that other measures of just compensation are appropriate "when market value has been too difficult to find, or when its application would result in manifest injustice to the owner." 3. Courts generally employ three methods of valuation in condemnation proceedings - comparable sales, capitalization of earnings, and replacement costs. 4. Condemnation of the Washington Public Power Supply System nuclear power plant I (WNP-1) presents a unique fact situation which may not lend itself to the usual methods of valuation. 5. The Attachment B to the report (Davis report) prepared for DOE's Richland office appears to present a fairly accurate picture of the common methods of valuation that a court may consider in assessing the value of the WNP-1. Just Compensation and Valuation Methods in Condemnation Proceedings (B-233552; Code 301842)
Evaluator, RCED - Jack Paul
Assistant General Counsel, OGC - A. R. Kasdan
Attorney-Adviser, OGC - Mindi Weisenbloom:
At the request of Chairman George Miller, Subcommittee on Water and Power Resources, House Committee on Interior and Insular Affairs, you are preparing a report involving the role played by the Department of Energy's (DOE) Richland office in efforts to promote the conversion of the Washington Public Power Supply System (Supply System) nuclear power plant l (WNP-1) to a production facility. One issue to be addressed in your report is the validity of a September 17, 1987, analysis of the WNP-1 conversion prepared for the DOE Richland office. /1/ (Davis report). connection, with Chairman Miller's request you asked us to describe how courts generally define "just compensation" and to identify the usual methods of valuation that they use in determining this amount in condemnation proceedings. In addition, you requested that we discuss the methods of valuation included in the September 17, 1987, Davis report's Attachment B "Condemnation Authority, Procedures, and Methods of Valuation."
Eminent domain is the power of the sovereign to take property for public use without the owner's consent. This power is limited by the just compensation clause of the Fifth Amendment of the Constitution that provides, in pertinent part that no:
"... private property shall be taken for public use, without just compensation." /2/
The only standard mandated by the Constitution is that the compensation for the taking of property be "just" which in turn "evokes ideas of 'fairness' and 'equity'" See, United States v. Commodities Trading Corp., 339 U.S. 121, 124 (1950).
The Supreme Court has interpreted the just compensation clause of the Fifth Amendment and found:
"The noun 'compensation' standing by itself, carries the idea of an equivalent. ... And this is made emphatic by the adjective 'just.' There can, in view of the combination of those two words, be no doubt that the compensation must be a full and perfect equivalent for the property taken." Monongahela Navigation Co. v. United States, 148 U.S. 312, 326 (1892).
In numerous decisions, the Supreme Court has stated that the underlying principle of just compensation is that the owner "is entitled to be put in as good a position pecuniarily as if the property had not been taken." United States v. 564.54 Acres of Land, More or Less Situated in Monroe & Pike Counties, Penn., 441 U.S. 506, 510 (1979) and cases cited therein. The Court, however, has recognized that the while the owner is entitled to be indemnified for his loss of property he is not entitled to more. Id. Accordingly, based on the theory that condemnation is in rem /3/ and that the government takes tangible property and not personal rights, the Court has generally excluded from condemnation awards the owner's "consequential" losses such as removal expenses, loss of business value, business opportunity, and good will, as well as, the special value an owner places on his property. See, J. Gelin and D. W. Miller, The Federal Law of Eminent Domain, Secs. 2.4(B), 3.1 (Michie, 1982).
Fair Market Value
The Supreme Court has developed a number of "working rules" and "practical standards" to determine what is a full equivalent of the property taken. See, United States v. Cors, 337 U.S. 325, 332 (1949). Foremost among these working rules is the general guide that just compensation normally is to be measured by "the market value of the property at the time of the taking contemporaneously paid in money." Olson v. United States, 292 U.S. 246, 255 (1934) cited in United States v. 50 Acres of Land, 469 U.S. 24, 29 (1984).
Market value, or fair market value as it is also known, entitles the owner to receive "what a willing buyer would pay in cash to a willing seller at the time of taking." Kirby Forest Industries v. United States, 467 U.S. 1, 9 (1984). This may amount only to the salvage value of property that has no other value, Chicago and North Western Transportation Co. v. United States, 678 F.2d 665 (7th Cir. 1982), or a value based on the prospect of developing a property to the "highest and best use" for which it is suitable. Olson, supra, at pp. 255-56.
Fair market value represents an objective, measurable standard that disregards subjective values which may only be significant to an individual owner or to the government. Therefore, fair market value generally excludes both the "enhancement of value resulting from the government's special or extraordinary demand for the property" /4/ Cors, supra, at p. 333, as well as, the "value of property that springs from subjective needs and attitudes" of the owner. See, Kimball Laundry Co., v. United States, 338 U.S. 1, 5-6 (1949). In short, the Supreme Court has stated that just compensation is based on the value of the property which is capable of transfer from owner to owner and which has an external validity which can be measured. Kimball, supra. This standard was chosen to strike a fair balance between the public's need and the property owner's loss. United States v. Toronto, Hamilton, and Buffalo Navigation Co., 338 U.S. 396, 402 (1942)
The standard of fair market value, however, is not a rigid rule to be applied in every case. Rather, the Supreme Court has indicated that other measures of just compensation are appropriate "when market value has been too difficult to find, or when its application would result in manifest injustice to owner or public. ..." Commodities Trading Corp., supra, p. 123. In such instances, the guiding principle is "What compensation is 'just' both to the owners whose property is taken and to the public that must pay the bill." Id.
Methods of Valuation
Although there is no rigid techniques for determining "just compensation, courts have generally employed three methods of valuation in condemnation proceedings. The Federal Law of Eminent Domain, supra, 4.1-4.3. These are:
1. comparable sales approach when the tract is one in an active commercial market. This method is usually used for property often sold such as houses, raw land, undeveloped natural resources;
2. capitalization of earning for income-producing properties. This is usually used for property such as office and apartment buildings; and
3. reproduction costs (with or without depreciation). This method is usually used for property with special uses such as hospitals, churches, schools, roads, and public buildings. /5/ Id.
The comparable sales approach and the capitalization of earnings method are designed to reach the fair market value of property. On the other hand, the reproduction cost approach is used when the property has no fair market value and some other measure of just compensation is appropriate.
Since the concept of fair market value is so interwoven with the anticipated selling price of a particular piece of property, courts have generally recognized that sales of comparable properties provide the best evidence of fair market value. Snowbank Enterprises, Inc. v. United States, 6 Cl. Ct. 476, 485 (1984). The capitalization of earnings method, however, is used where income producing potential would be a key element in the market value of the property. It would be appropriate only when actual income from the property can be established in a continuing on- going business. Foster v. United States, 2 Cl. Ct. 426, 448 (1983). Under this method, the value of a particular piece of property is shown by calculating the present value of the income the property could be expected to generate over its useful economic life. Id. at p. 447.
When the property taken is of the type that is seldom traded, it often lacks a 'market value' in that there is no market for the property from which to ascertain its value. In these circumstances, resort to some other technique for determining 'just compensation' is necessary. The replacement cost approach is such an alternative. It produces a valuation estimate by establishing the cost to replace the property, less depreciation, at a different but comparable site. Snowbank Enterprises, Inc., supra, at p. 485. Courts have generally not favored this approach since it often results in high valuations and it frequently cannot be established that the property can actually be replaced. Id.
Although the replacement method of valuation is often considered when the property has no fair market value, courts may use any method of valuation that is just and equitable in these situations.
The Davis Report Attachment B
The Davis report in Attachment B "Condemnation Authority, Procedure, and Method of Valuation", Section VII, B-51 - B-64, addresses the determination of just compensation with respect to the condemnation of WNP -1. The Attachment concludes that:
"WNP-1 presents a unique and complex valuation problem which does not lend itself to analysis under the traditional methods of valuation. There appears to be no readily ascertainable market for unfinished nuclear plants. The plant is not in operation and consequently does not have an income stream upon which to determine a going concern. It is uncertain whether the plant will ever come into operation and have value in excess of its salvage value. Therefore, none of the traditional methods of valuation provides a clear measure of compensation, with the possible exception of salvage value."
Based on our limited review of the law of eminent domain, we would agree that the condemnation of WNP-1 presents a unique factual situation which may not lend itself to the usual methods of valuation.
The Davis report Attachment B discusses methods of valuation including fair market value (as measured by comparable sales or the salvage value of the plant's component parts), reproduction cost, original cost less depreciation and going concern value-intangible assets (capitalization of earnings). We will summarize each of these methods identified in the Attachment.
A. Fair Market Value
It is noted in the Attachment that in determining the amount of just compensation, a court must first determine if there is a market value for WNP-1. If the only value that WNP-1 may have in the market is the value of its dismantled parts, this market value might be based on its salvage value. According to the Attachment, this might be the only reasonable approach to determine WNP-1's market value. The Attachment indicates, however, that salvage value would only be appropriate if it does not result in a "manifest injustice" to the Supply System.
The starting point for a fair market value analysis is whether there is a market for the property. This market is based not only on the present use of the property but also the uses to which it could reasonable be converted. See, Katsos v. Salt Lake City Corp., 634 F.Supp. 100, 107 (D. Utah 1986) Therefore, as the Attachment points out, the court will have to determine if there is any potential market for WNP-1. This market analysis will take into consideration the current condition of the facility, its likelihood of completion, and it possible alternative uses. The court may consider the facilities salvage value, but, as the Attachment points out, would only use this as a measure of compensation if it would not result in unfair treatment of the Supply System.
B. Reproduction Cost
The Attachment indicates that reproduction costs less depreciation has been used as a valuation method when there is no market for a property and the property owner wants or needs to relocate the activity to another place. For publicly owned property, there is a similar valuation method known as the substitute facility doctrine which requires payment of the cost of replacing the facility if the public activity is required to continue the function at another location. The Attachment notes that the Supply System is under no obligation to replace WNP-l. Moreover, the Attachment states that while the replacement method may best approximate the value of the WNP-1 to DOE because the special purpose structure can be adapted to its needs, just compensation generally is measured by the property loss to the owner and not the gain to the taker. The Attachment indicates that a variation on this approach would be to argue that the value of WNP-1 is the cost to the Bonneville Power Administration (BPA), to replace the power it would produce less the cost of completing WNP-1. According to the Attachment, BPA and the Northwest Power Planning Council are developing estimates of this value.
Our review indicates that the replacement cost method or the substitute facility doctrine is generally not appropriate when the owner has no need or obligation to replace the facility. Moreover, the Supreme Court has stated that if a fair market value can be ascertained it should be used as a measure of just compensation rather than the replacement value or, in the case of a publicly owned property, the value of a substitute facility. We also note, that in at least with respect to streets that "EwOhen no substitute facilities are necessary ... no compensation is allowed." United States v. 3,727.91 Acres of Land in Pike County, State of Missouri, 416 F.Supp. 525, 528 (E.D. Miss, N.D. 1976) and cases cited therein, reversed 563 F.2d 357 (8th Cir. 1977). This is based on the concept that the municipality suffered no financial loss because of the taking. Id. Finally, although the Supply System is the owner of the WNP- 1, BPA owns the facilities output and in accordance with the WNP-1 Net Billing Agreement is obligated to pay the total annual cost of the facility, including the debt service on the WNP-1 bonds. Therefore, a court may determine the value of the facility with reference to BPA, e.g. -the cost to BPA of replacing the power that WNP-1 was to produce less the cost of completing WNP-1. However, if a court was to adopt this method, it probably also would consider that the government's new use of WNP-1 will produce power as a by-product to be used by BPA.
C. Original Cost Less Depreciation
According to the Attachment, this approach has been used with regard to the condemnation of public facilities which provide a public service but at a financial loss. The Attachment notes that WNP-1 would not fall within this category since it is not functioning and provides no essential public service.
It appears that courts have used original costs less depreciation in situations where compensation based on salvage value would be inequitable. However, some courts have referred to original costs as the "false standard of the past" since the original cost of a facility may not reflect its present value. United States v. 55.22 Acres of Land, More or Less in Yakima County, Washington, 411 F.2d 432, 435 ftn 4 (9th Cir. 1969) citing United States v. Toronto, Hamilton and Buffalo Navigation Co., supra, at p. 403.
D. Going Concern Value - Intangible Assets
The Attachment states that a method of valuation for going concerns is a capitalization of income stream. For unprofitable utilities, the Attachment notes that one court in New York has assigned a value to the property's intangible assets such as the layout of bus routes, personnel and maintenance records and bus franchises whether used or not. WNP-1 is not operating but the Attachment indicates that the Supply System may seek recovery for its intangible assets such as its records. The Attachment also notes that in certain instances courts have recognized a "going concern" value to the condemnor - that of operating, albeit unprofitable system - and found ways to compensate the owner. However, the Attachment concludes that WNP-1 is not a going concern since it is not in operation and that the government's planned use of the facility will only produce power generation as a by product.
Generally, capitalization of earning valuation would be inapplicable for a facility that is not in operation. In order to arrive at a fair and equitable compensation, the court may consider that the government's use of the facility will in most likelihood result in the generation of power. The court may also consider a value for the Supply System's intangible assets if these assets will in some way transfer to the government.
It appears that the Attachment presents a fairly accurate picture of the common methods of valuation that a court may consider in assessing the value of the WNP-1. The Attachment notes that the court may consider a combination of these approaches or develop its own unique valuation method to reach a just and fair compensation for WNP-1. /6/
/1/ The analysis, entitled "Analysis of Legal and Institutional Issues in Acquiring the Washington Public Power Supply System's Partially Completed Light Water Reactor (WNP-1) For a Department of Energy Production Reactor", was prepared by Davis Wright and Jones, Lindsay, Hart, Neil, and Weigler, R. L. Ferguson and Assoc., and John Nuveen and Co., Inc. Westinghouse Hanford Comany, a management and operating contractor for the DOE Richland office, tasked Battelle Pacific Northwest Laboratories (PNL) to do the study. PNL retained Davis Wright and Jones to do the work.
/2/ The same limitation is applicable to states either by the state's constitution or by application of the 14th amendment requirement that no state shall "deprive any person of life, liberty, or property without due process of law." Olson v. United States, 292 US 246, 254 (1934).
/3/ An "action in rem" is a proceeding that takes no cognizance of the owner but determines rights in specific property which are, binding on any interested party. Flesch v. Circle City Excavating and Rental Corp., 210 N.E. 2d 865, 868 (1965). This is to be distinguished from in personam actions which decide the rights among persons.
/4/ In connection with this principle, fair market value would not include the highest and best use of property that exists only by virtue of the federal project being considered. See, J. Gelin and D. W. Miller, The Federal Law of Eminent Domain, 3.2(c), (1982) and cases cited therein.
/5/ In connection with condemnation of public property this is often referred to as substitution facilities doctrine.
/6/ We note that the report presents two possible scenarios for calculating a present value for WNP-1. One based on completion of the facility and the other on its termination. The report concludes that since completion is unlikely, it is their opinion that the condemnation award would probably fall within a $30 - $150 million range, e.g. slightly less than the 1996 termination value to slightly more than the 20 percent chance of completion value as estimated in the report. Although this conclusion appears plausible, we would point out that because of the unique fact situation, it would be difficult to predict with any accuracy how a court might determine the value of WNP-1.