D. Computing Just Compensation

D. Computing Just Compensation

1. Why do we have just compensation?

a. fairness -- but fair too whom

i. Posner -- Compensation in the constitutional sense is therefore not full compensation, for market value is not the value that every owner of property attaches to his property but merely the value that the marginal owner attaches to his property

a) relocation costs, sentimental attachments, or the special suitability of the property for their particular needs

2. Why courts don't allow personal value to be computed?

a. Because of serious practical difficulties in assessing the worth an individual places on a particular property at a given time, we have recognized the need for a relatively objective working rule -- see US v. 564.54 Acres of Land

b. Note 16 CB 1163 -- Canadian approach to just compensation

i. allowances over and above market value have been made to compensate for the compulsory nature of the taking; moreoverif a condemnee can prove that her use of a tract of land generates special advantages not captured in the fair market price she is entitled to comensation for these (sentimental value is not compensable)

ii. In England they used to compensate fair market value and then 10% but this has been abandoned

3. Interesting questions?

a. Suppose that the govt condemns part of a tract of land and that the govt's use of the land will reduce (increase) the value of the rest of the tract remaining in the condemnees hands. How is just compensation computed?

b. Why did the courts treat federal condemnations of public land differently then private ones -- and allow substitute facilities? See CB 1164

4. United States v. 564.54 Acres of Land

a. Facts

i. govt condemned land used for 3 summer camps

ii. these camps were grandfathered from the building codes and as a result, the replacement cost was $5.8 million due to regulations but FMV was only $485K

b. Issue

i. What is the proper measure of compensation -- fair market value or replacement costs?

c. Reasoning

i. Court has sought to put the owner of condemned property in as good a position pecuniarily as if his property had not been taken

ii. B/c of serious practical difficulties in assessing the worth an individual places on particular property at a given time, we have recognized the need for a relatively objective rule -- Fair Market Value

a) recognizes that FMV does not necessarity compensate the owner

b) but court says that the loss of the special value to the owner is properly treated as part of the burden of citizenship -- SM 306

d. When is FMV not appropriate?

i. When market value has been too difficult to find or when its application would result in manifest injustice to the owner or public, courts have fashioned and applied other standards

ii. -- when the property has rarely been sold and there is no ascertainable mkt

a) public facilities such as roads / sewers

b) fact that the jury found a FMV does not mean that there was a mkt -- was there enough evidence for the jury to make this decision?

iii. Court has repeatedly held that non transferable values arisig from the owner's unique need for the property are not compensable and that this divergence does not violate the 5th Amendment

iv. No reason to treat respondent differently from the many private homeowners and other noncommercial property owners

e. Reasonable Necessity Standard?

i. lower courts have applied this standard to determine if the entity has an obligation to continue providing the facilities taken -- if the condemnee has such a duty to replace the property, the lower courts have reasoned that only an award of the costs of developing requisite facilities will compensate for the loss

ii. Court does not apply this standard here and does not rule on the merits of it applied to public entities

a) respondent is under no obligation to rebuild the camp and to give them substitute facilities compensation could amt to a windfall if the respondent did not rebuild the camp

iii. Finally, that the camps might have benefited the community is of no concern here -- the guiding principle is that the owner of the property must be made whole

a) to make just compensation rest on jury's determination of what benefit the property is to the community is subjective and conflicting with objective standard the court uses

f. Court leaves open the question of whether public condemnees are entitled to substitute facilities compensation but in 1984 the court ruled that where a mkt exists, public condemnees only get FMV -- see above

5. Schill's article -- SM 310-315

a. If no compensation requirement existed, the possibility that the federal govt might expropriate one's property would increase the risk of capital investment

b. Most people are risk averse

c. compensation is a method of reducing the risk of govt action to an individual by spreading the risk among taxpayers -- this leads to optimal investment in property

d. But this also leads to inefficiencies:

i. the govt's assurance of compensation eliminates for the most part, the need for the investor to consider the risk of govt action -- but what about systematic undercompensation?

ii. this leads to overinvestment b/c owners not forced to internalize the total costs of the venture which are borne by the taxpayer

e. Private market alternatives -- Kaplow SM 313 (in Schill)

i. Diversification

a) not possible for most property owners since the purchase of land represents a substantial portion of that individual's net worth

ii. Insurance? Force the owner to internalize the costs -- but there are practical restraints

a) adverse selection

b) moral hazard

c) Private insurance might also be more costly than the current system -- admin costs in the current system are not expended until the govt takes the property -- under a system of private insurance, all parties must contract with the insurance companies regardless of whether the condmenation occurred -- monotoring costs -- transaction costs -- private insurance may not be cost effective