How to determine value from rent in Eminent Domain?
Business owners frequently experience a loss in business value when a portion of their property is acquired through eminent domain. We recently evaluated a partial takings case for a property owner who operates a retail business that will likely realize a 20% decrease in business value once the taking occurs. The owner is of course particularly concerned about recovering business damages. Unfortunately, he resides in a state that doesn’t allow business damage claims in eminent domain cases.
Recovering the loss of business value in an eminent domain case is not an option in many states. In New Jersey for example, these payments are not available. “It is settled that the business profits derived from a ‘going business’ conducted on property taken by condemnation are not the subject of independent compensation aside, and apart, from the market value of the land seized.” State by State Highway Comm’r v. Williams, 65 N.J. Super. 518, 524, 168 A.2d 233, 236 (App. Div. 1961).” However, in Minnesota and Florida, statutes exist that allow business owners to recover business damages in certain cases. Review MN statute 117.186 and Florida Statute 73.071(3)(b) for additional information.
Although we would not be able to utilize the loss of revenue or rental income as it relates to its effect on net profits for this particular case we evaluated, we would be able to utilize the loss of revenue in its relationship to real estate value. For retail properties, gross revenues for a business relate to real estate value through the concept of percentage rent. Real estate value for these properties is determined by calculating a net rent as a percentage of the gross revenues. This net rent is then capitalized to reflect a real estate value. Where the revenues have experienced significant loss because of a taking, the after value, based upon the percentage rent from revenues generated after the taking occurs, will be compared to the value based upon the net rent of gross revenues in existence before the acquisition. This differential will be a before and after damage analysis for the case. It will reflect all damages for the loss of the land being acquired as well as any severance damages to the remainder parcel which a property owner still owns and operates as their retail business.
We determined that the appraisal utilized by the State for its acquisition basically would constitute a valuation of the part taken in this particular case. In that regard, the analysis by the State failed to recognize the commercial zoning and actual commercial use for the acquired property in the operation of the subject property in its highest and best use.
As you can imagine, hiring experts who understand these concepts as they relate to eminent domain cases is imperative for a successful outcome. Our firm recently obtained a favorable verdict for a case that went to trial where percentage rent was the critical issue in determining damages in that case, State of Minnesota vs. Donald Prow, et al.