Eminent Domain Damages: Highest and Best Use Valuation

The damages that property owners are entitled to receive under the rules of eminent domain law are based on a term that’s called highest and best use.

Highest and Best Use is defined as the use for a parcel of property that produces the highest value for that property in the marketplace.  Eminent domain law dictates that just compensation be determined by the property’s highest and best use.  Let’s say for example you have a piece of vacant land that is zoned residential that could be developed into a commercial shopping center.  If this land is being acquired from you by the condemning authority, you are entitled to receive compensation based upon the property’s highest and best use, which in this scenario would be commercial development, even if you are not using it to that level.

In another example, let’s say you are a homeowner with an extra large lot that abuts a four-land highway.  Although you are still using your property for residential purposes, the vast majority of the properties around you have been converted into some kind of commercial use.  Although your property is still zoned residential, under the highest and best use rules, if you sold your property in the market place, the likely buyer would not continue using it as such.  They would recognize that converting the property into a commercial use consistent with everything else in the neighborhood would bring the most value to the land.

This example helps explain highest and best use and how it relates to eminent domain law.  In this scenario, if just compensation as determined by the condemning authority was based upon the residential use and not the most valuable commercial use, then you the property owner are justified in pursuing a claim for additional compensation because the rules for determining damages were not followed correctly.

Inconsistent Highest and Best Use

Another point I would like to address is the concept that eminent domain damages cannot be added from inconsistent highest and best use to maximize a recovery in eminent domain. Confusing enough? Stay with me for another minute while I give an example to clarify the situation.

Assume that you have an agricultural piece of property located on the edge of a municipality.  In fact, because of the property’s close proximity to the municipality, the land value for your property is no longer agricultural, and instead would be valued as commercial property in the market place because a reasonable buyer would not continue using the land for agricultural purposes.  Instead, they might choose to put a Wal-Mart or a Walgreens, or whatever commercial development is appropriate in that particular area.  Although the appropriate highest and best use for your land is commercial development, you are still operating it as a farm, and the state department of transportation informs you that they are planning to construct a new road that will cut your farm in half.  Because of this new road cutting your farm in half, you will now have to drive five miles down different roads in order to travel from your buildings on one side of the road to your remainder property that you still own on the other side of the road.  This will cost you heaps of money to do this day in and day out.  Is that a valid recovery under the rules of eminent domain law?

This is absolutely a valid basis for recovery under an agricultural highest and best use.  But, what about the property’s commercial highest and best use?  Can the direct damages (value of the land actually acquired) be based upon a commercial highest and best use and the severance damages (damages for loss of value to remainder because of additional transportation costs) calculated based upon the agricultural highest and best use to produce the largest recovery?  Unfortunately, the answer to this question is no.

In this circumstance, you need to calculate your damages in two ways: first, you need to look at your damages based upon its value determination from the commercial use; and secondly, you need to determine your value based upon the land as agricultural with the additional damages from the extra transportation required to access the other side of your property.  You will of course find that the direct damages for your taking is obviously going to be a lot higher when the value of the land is based upon commercial land values than those same direct damages would be if it’s considered an agricultural farm.  The question remains is whether the sum of the additional damages that you are entitled to receive as a result of the extra transportation costs, plus the value of your land as agricultural land under the agricultural highest and best use will exceed the value of the commercial highest and best use that really applies for your property.

If the answer is no, then obviously your damages are going to be based on the commercial highest and best use.  You will not use the agricultural highest and best use.  The lesson I want to emphasize from this example is, you cannot use your direct damages based upon your commercial highest and best use and then apply the extra damages you incur from transportation costs under the agricultural highest and best use.   You cannot use the best of both, you instead need to pick one of the other.