What is fair compensation?
Fair compensation refers to the compensation that individuals receive when their property is seized by the government for public use. For example, when the national road network was built in the 1950s, many owners had their property seized because the government needed the land to build the interstate road network.
The just remedy is provided by the Takings clause of the fifth amendment and is generally considered to be fair market value. However, what the government considers fair compensation cannot be considered “fair” by the person whose property is seized. The ability of government to take private property for public purposes is called eminent domain.
Key points to remember
- Fair compensation is paid to landowners for the legal seizure of personal property or land.
- It is legally defined under the Takings clause of the fifth amendment.
- Landowners receive fair market value for their property, but it can often be difficult to determine fair market value.
- There are different methods for determining the value of a property, including the market approach, the income approach and the cost approach.
Understanding fair compensation
The idea behind fair compensation is to repair the estate of the individual, as if the takeover had not taken place. This means paying the fair market value of the property.
However, people who lose their home by a deed of eminent domain may not consider the fair market value of the property as fair compensation for their loss, as it does not take into account the time, stress and cost of the move. to a new property. Fair compensation also does not take into account the loss of neighborhood social ties or the emotional connection that the owner may have with the property. Fair value is often disputed in matters of eminent domain.
Fair compensation factors
When determining fair compensation, the following questions are taken into account:
Fair market value of the land
The price the owner of the property would receive if he were willing, but not forced, to sell the land can be used to determine the fair market value of the land. For example, if a landowner decided to want more land and put their existing property up for auction, the auction price would be considered fair market value.
Fair market value of land improvement
Land improvement refers to structures that enhance the value of land seized. Land improvement may include individual dwellings, barns and separate garages. Intangible land improvements must also be taken into account. For example, land near an area with natural resources can be considered a land improvement.
If only part of the property is foreclosed, residual damage refers to damage to the remaining property due to the foreclosure. Damage caused by residues can include the inability to use the best part of the land, any change or shape of the land and the new proximity of the land to public infrastructure, such as roads or service equipment.
Although less common, homeowners can benefit from foreclosure of their land. For example, if part of an owner’s land is seized for a new service road that allows the property to be divided, this advantage can be used to offset the total compensation received.
Property assessment methods
There are three generally accepted methods for valuing a property in a prominent domain case. These include the following:
1. Market approach
The market approach is quite simple in that the foreclosed property is compared to recent sales of properties with similar characteristics. This method is generally used to assess residential properties.
2. Income approach
The income approach is best used for properties that generate income. In these cases, the property’s operating income must be determined first. Then income and the capitalization rate are used to arrive at the value.
3. Cost approach
The cost approach takes into account a very specific structure on the property that is unique enough that the owner needs to recreate it on any future property. The value of the empty land would be taken into account, plus the cost of replacing the new structure and less the depreciation of the current structure.