What's it Worth?

Eminent domain challenges the property valuation process.

By Andrew Prince Brigham, JD

Eminent domain gives government the power to condemn or take away privately owned property for public purposes. In recent years this has come to include selling or transferring land to private entities for economic development purposes. Eminent domain power exists in state, county, and city governments; school boards; water management districts; and semiprivate entities. The power can be asserted against any private ownership: absolute fee ownership, leasehold, contract, and future interests.

While the U.S. Supreme Court’s 2005 decision upheld the constitutionality of taking property for economic development purposes, it created a backlash of regulations reining in eminent domain at the local level. However, in most cases, eminent domain challenges revolve around determining a property’s value. An unusual case involving industrial waterfront land illustrates the variety of factors that can influence a property’s value.

Case Details

For eight years, Tom Scholl, a third-generation coal worker, tried to buy a 70-acre parcel along the St. Johns River in Jacksonville, Fla. He wanted to develop a deep-water bulk-cargo depot for Keystone Coal Co. and other affiliated companies to offload coal, coke, and anthracite from sources around the world.

During that time period, other potential purchasers showed interest in the property, including Jaxport, the local port authority, which twice passed on purchasing the property. While the property’s value in terms of port expansion was clear, the 12-acre landfill on the site presented more risk than most potential buyers were willing to absorb. Therefore in April 2005, Scholl secured a letter of commitment to purchase the parcel for $8 million, which he considered a bargain. He knew he was accepting the environmental risk associated with the landfill, but saw great potential in the property as an intermodal gateway for coal.

Taking Action

After Scholl’s purchase, Jaxport determined that it wanted the property after all and began discussions with Drummond Coal Co. to negotiate a long-term lease on Keystone’s property. This lease included a minimum guarantee of $11 million annual rent.

Ultimately Jaxport condemned the property and began a slow taking. Around this time, the U.S. Supreme Court handed down its Kelo v. New London decision, setting set off a firestorm of protest from property owners who realized eminent domain’s consequences. As a result of the Kelo decision, Florida, along with several other states, passed legislation and a constitutional amendment prohibiting the use of eminent domain for most private-to-private takings. However, Keystone Coal Co. was not grandfathered in and was obligated to rely on the courts to defend its property rights.

Determining Value

Unfortunately for Keystone, Jaxport prevailed in the courts, winning the right to take Scholl’s property. But in a slow take eminent domain proceeding, the condemning authority has the right to wait until the property’s value is determined before making a final decision of whether or not to take the property. In April 2008, a jury trial began to determine the Keystone parcel’s value. Jaxport valued the property at $17 million, while Keystone’s appraiser testified that the value was actually in the $60 million range.

In the pretrial rulings, the trial judge prevented the jury from hearing any evidence of the income to be made by Jaxport, leaving the attorneys who tried the case to prove the measure of full compensation through comparable sales alone. The problem was the lack of any truly comparable sale properties. The local properties all needed significant dredging or had inadequate water frontage.

Sales properties from other port cities along the East Coast, including Charleston, S.C., Savannah, Ga., and Tampa, Fla., were inferior and involved buyer and seller motivations that did not reflect the Keystone property’s highest and best use. Jaxport’s lawyers argued heavily that Scholl’s bargain price paid in 2005 still reflected the property’s market value in 2008.

Keystone’s lawyers showed the jury the facts and circumstances that made the property extremely valuable. These facts included the announcement of the widening of the Panama Canal and the anticipated shift in shipping routes from the West Coast to the East Coast, ports’ actions to ready themselves for this shift, and the scarcity of available comparable properties in Jacksonville.

When the trial concluded, Keystone’s attorneys helped win a jury verdict valuing the property at $67 million, the largest eminent domain jury verdict in a Florida circuit court. As a result, after two years of litigation, Jaxport’s governing board changed its mind and decided not to proceed with the taking.

In this case, the jury’s determination of full compensation leveled the playing field between Jaxport and Scholl. While the government is entitled to take private property through eminent domain, it does not have the right to take a property owner’s bargain or economic advantage away.

Even though Scholl prevailed, other property owners throughout the country continue to fight similar battles with both governmental and quasi-governmental entities. The important point for property owners to remember is that a steadfast refusal to cave coupled with a clear, fact-intensive presentation to a jury or commission can be effective to quell a condemning authority’s strategy to acquire property at the cheapest price possible.

Andrew Prince Brigham, JD, is a partner with Brigham Moore in Jacksonville, FL. Contact him at (800) 445-1440, abrigham@brighammoore.com or www.eminentdomain.com.