Construction projects raise eminent domain issues
Public infrastructure projects can be a headache for any business owner. But when government agencies exercise their power of eminent domain to take all or part of a property, even temporarily, it can have a devastating impact on a franchisee’s bottom line.
Eminent domain law allows various government entities at the city, state and federal level to take private real estate for public use in exchange for a fair market value with or without the permission of the property owner. Eminent domain is typically used to assemble land for public projects such as road improvements, utilities and schools, as well as redevelopment projects aimed at expanding the tax base. The key for business owners is securing just compensation for the real estate and any business losses.
Oftentimes, cases where the government takes only part of a property can be more complicated, because the franchise needs to determine the value of the real estate, as well as assess whether the project itself impacts the remaining property and causes damages, says Leslie Fields, a partner in the Denver law office of Faegre & Benson. Partial takings have the potential to affect a variety of land use issues such as the access, parking, signage, zoning, internal circulation, noise and visibility.
For example, Fields worked on one case in Colorado where the state took only a small strip of land from the front of a fast food restaurant to make way for road improvements. However, the section in question just happened to include the entrance and exit onto the main thoroughfare. The fast food chain was left with only one point of entry at the rear of the property that customers could only access by taking the on-ramp to a state highway. “That taking totally destroyed the ability to use that property for a fast food restaurant, and caused significant damages,” Fields says. In that case, the owner was forced to close the business and sell the real estate.
Boom in public projects
Franchisees often target high-traffic, high-visibility locations in order to capture customer attention. But it is that prime real estate that often lands them directly in the path of public improvements such new interchanges, widened roadways and expanded utility service. Such projects are on the rise thanks to the government stimulus dollars that began flowing to public projects last year.
The American Recovery & Revitalization Act that was signed in 2009 appropriated $787 billion for spending and tax cuts as a means to stimulate the struggling U.S. economy. Nearly one-fourth of that money - $180 billion - was earmarked for infrastructure projects such as improvements to roads, bridges and utilities. Those stimulus dollars will continue to fuel more public projects throughout 2010 and into 2011. “I think those stimulus projects are going to continue to unfold. Some of that money was for the planning of long-term projects, and we haven’t seen all of the condemnations for those,” Fields notes.
Gas stations and convenience stores, in particular, are often impacted by eminent domain because they tend to locate on main intersections and roadways, and they have very specific site requirements related to the layout of the pumps and traffic flow for cars, trucks and fuel supply trucks. “They don’t always have a lot of space, so even a small taking can have a significant impact on the layout of the property and how it functions,” Fields says.
Real estate overshadows business
One of the biggest problems with eminent domain in many states is that while the government agency is more than willing to compensate the property owner for the value of the real estate, they are reluctant to pay for the value of the business that is lost, notes Mark Dayman, partner at CapVal-American Business Appraisers LLC in Atlanta. Some states simply don’t have the staff resources to understand and evaluate those business values. Oftentimes, the only way to obtain that compensation is through litigation, he adds.
Securing compensation for a business loss becomes an even bigger issue if a franchisee is occupying the property as a tenant and does not own the property. The tenant would have to look at what protection they have within their lease agreement, or pursue their own legal action against the city or state agency in order to get compensation.
Dayman worked on one case that involved a convenience store that was leasing a space. The property was taken by eminent domain, and the state compensated the landlord for the value of the real estate. The convenience store operator had to take their claim to court in order to get compensation for their business loss. “States are not against paying for the business value, but their mechanism for doing so is not well defined,” Dayman says.
Another challenge for franchisees that file suit is proving that their business was negatively impacted by the partial taking, and not due to some other reason such as a drop in sales due to the recession. “One of the things that always helps for franchisees is good records on their true revenues to be able to prove the loss of value,” Dayman adds.
One of the first steps a franchisees should take when faced with a partial taking is to do their homework and learn as much as they can about a project and the potential impact on their property. Even though a condemnation may impact a small section, it can have significant repercussions on the overall business.
“Sometimes you look at these design plans and you don’t always understand what is going on,” Fields says. For example, one retail property owner reviewed the plan related to a public project and saw that it involved the taking of only a very small portion of land. But a closer examination revealed that the city’s intent was to build a 40-foot-high wall to screen a light rail project. The wall would have blocked all visibility of that retail center from the adjacent highway. “You can imagine what impact that has on a retail center that is dependent on the flow of traffic and the ability to be seen,” Fields says.
Second, it is important to hire good professionals that know eminent domain law and the appraisal process. Third, don’t make quick or rash decisions. Oftentimes, a governmental entity will ask for possession of the property, provide an appraisal, and settle the case. Or, in some cases the government agency may ask for control of the property while the issue of compensation is still being negotiated. It is important to take the time to know all of the facts before a settlement is accepted. “If you give up possession, you don’t have the same bargaining power,” Fields says.