Highest and Best Use, Mitigation?
Eminent domain practitioners are well versed in analyzing a property’s highest and best use. Under these principles, a property being condemned is not necessarily valued based on its current, existing use. Where the appraiser can show that the property’s actual value is based on a different use, that use can often be the foundation for the valuation (assuming that other use meets the four-part test of highest and best use, which is beyond the scope of this post; if you’re really bored today, here’s a link to Wikipedia’s discussion of highest and best use).
In County of Santa Barbara v. Double H Properties, LLC (March 15, 2016) the Court of Appeal analyzed a somewhat unique California Tiger Salamanderhighest and best use argument. There, the County was condemning a conservation easement in order to create a habitat for the California tiger salamander. In addition to valuing the property as rural agricultural land (the same highest and best use the County’s appraiser applied), the owner’s appraiser sought to value the easement by analyzing value of the property for “mitigation credits.” Such credits arise where a developer seeks to develop one property, impacting sensitive habitat. In order to obtain entitlements, the developer can often mitigate those impacts by purchasing “mitigation credits” in an approved mitigation bank. The mitigation bank, in turn, preserves other property with sensitive habitat as an offset to the impacts the developer’s project will cause. (If all this sounds a bit complicated, it is. But you don’t really need to understand the details in order to understand this court decision, so please keep reading. If you really want to learn more about mitigation banking, the EPA has a detailed fact sheet that will get you started.)
In Double H Properties, the appraiser opined that the property had a higher value when viewed as mitigation credits than it did when viewed as rural agricultural land. The County sought to exclude that “alternative” valuation as mitigation credits, and the trial court agreed with the County.
The key to understanding the decision is understanding that the owner did not (at least according to the Court of Appeal) finish the analysis necessary to support the alternative valuation. The owner’s appraiser conducted no analysis and offered no opinion regarding whether the property was eligible for marketable mitigation credits. And the owner did not designate any expert on that subject. In the absence of evidence that either (1) the property already qualified for mitigation credits (apparently, it did not), or (2) it was reasonably probable that the property could be entitled for such credits, the Court of Appeal upheld the trial court’s decision to exclude the alternative valuation.
A few other comments about this case are warranted. First, the owner apparently did submit a declaration by a zoologist in an effort to prove the property’s viability for mitigation credits. This may indeed have carried the day, but for one crucial problem. The owner had not designated the zoologist as an expert and, therefore, his opinions regarding the property’s viability (or potential viability) for mitigation credits was inadmissible. This highlights a key issue in eminent domain cases: if you want a witness to testify to an opinion, that witness must be listed on the expert designation.
Second, the case also contains a clever attempt by the owner to recover attorneys’ fees incurred by the owner’s lender in defending the eminent domain action. We have often run into situations where the mortgage contains an attorneys’ fees provision that forces the owner to pay its lender’s attorneys’ fees in defending the action. In the absence of a finding that the owner is entitled to recover attorneys’ fees (again, beyond the subject of this post) those lender’s fees become something the owner must pay.
But in the Double H Properties case, the lender apparently agreed to tack those attorneys’ fees on to the owner’s loan balance. Thus, at the end of the case, the owner had a larger outstanding loan on its remainder property. The owner claimed that this qualified as compensable severance damages.
I actually find this to be a pretty clever argument, but the Court of Appeal was unpersuaded. It concluded that no published decision has ever recognized “costs incurred due to a contractual agreement between the property owner and a third party” as a source of severance damages, and it declined to create such law.
Finally, one other important note about this case. It is an unpublished decision, which means it cannot be cited as precedence in any other case. So while it may be interesting, it does not create any new law.
Originally published in California Eminent Domain Report, By Rick Rayl on March 23, 2016