How Do You Define "Community"?

In my second post I discussed a recent minimum compensation case I had against a metro-area municipality. One of the issues that came up in that case was how does one define the word "community" as it is used in Minnesota Statute 117.187.


In that case the property owners owned a small "mom and pop" used car dealership in the west metro that also had one service bay with a hoist. The property owners estimated that 80-90% of their clientele lived within 5 minutes of their shop.


In searching for a comparable replacement property within their community that would serve as the basis for their minimum compensation claim, we were unable to locate a property that was currently available on the market in that immediate area. Once we determined no comparable properties existed in that immediate area we had two options: (1) expand the scope of our search for comparable properties, which would expand the property owner's community; or (2) obtain an estimate for how much it would cost to construct a similar building on property available within that immediate area. We decided to simultaneously pursue both options so the property owners could make an informed decision on how they wanted to proceed with their minimum compensation claim.

We determined that it was going to cost well in excess of $1 million to construct a new building on an existing property within the property owner's immediate area. We also determined that a comparable replacement property existed on the market for $779,000. However, that property was approximately 17 miles away, but was still located on the west side of the metro area. The property owners concluded it was more reasonable to use the existing property as the basis for its minimum compensation claim, even though it was 17 miles away, than submitting a claim based upon the cost to construct a new building.

When the municipality finally concluded its minimum compensation study it identified several properties that it thought could serve as potential comparable replacement properties. All of those properties were on the market for less than the comparable replacement property identified by the property owners. The properties identified by the municipality were all located in St. Paul or the east side of the metro area. Those properties were probably closer in size, age and condition that the property identified by the property owners, but served a completely different client base.

We argued that even though the comparable replacement property identified by the property owners was 17 miles away, it was still at least on the west side of the metro area and closer to their existing client base. We also argued that the properties identified by the municipality were so far away from their existing client base, that the property owners would essentially be creating a new going concern because they would have to start all over in creating a new client base. Unfortunately, the matter never went to a commissioners hearing so we did not reach any definitive conclusion on this issue.

However, this case raises the interesting question of what constitutes a property owner's community. Is community narrowly defined as the municipality in which the property is located, is it more broadly defined as the property owner's customer base/service area or is it based upon a number of different factors.

From my perspective community must be decided on a case-by-case analysis of the particular facts of the property owner. No two cases are going to be exactly alike because the community for a small mom and pop used car dealership is going to nothing like an internet based retail service. Some of the factors to consider when trying to identify a property owner's community should include a combination, or all, of the following:

1. Location;
2. Traffic counts;
3. Visibility;
4. Accessibility for clientele;
5. Competition in the area;
6. Service area;
7. Customer base;
8. Type of business; and
9. Licensing, permitting and zoning issues.

Minimum Compensation Claims in Cases of Partial Acquisitions

I received an email from a follower of this blog that I wanted to post for possible feedback. The person that sent the email is a right-of-way acquisition specialist for a suburban municipality.

In his email, the person stated that he thought that the minimum compensation statute is only applicable in cases where the entire property is taken or in cases where the remainder of the property may be considered an uneconomic remnant.

I responded by noting that I thought he was correct in his understanding of the statute. The statute does say "when an owner must relocate". Presumably, this means that the property owner can no longer use it for its intended purpose because the remainder does not meet setback requirements, zoning restrictions, etc.

For example, an ordinary strip taking for right-of-way purposes that does not affect the improvements would most likely not require a minimum compensation payment. That person would be entitled to compensation for the property taken and severance damages, if any, to the remainder of the property. However, if the strip taking affects the improvements, but is not a total take, and the business or resident can no longer remain on the property, then I think that property-owner would be entitled to a minimum compensation payment.

The tougher question becomes what happens in the case of a strip taking that affects the future development potential of that property. The strip taking doesn't currently affect the owner's use of the property, but maybe that property is in transition to some higher and better use because it had be previously rezoned during an amendment to the city's comprehensive plan. Right now the property is being used for residential purposes, but had been previously rezoned to office/commercial and the property owner had plans to convert their home to small office space (for an insurance office or real estate sales office). Now the property owner is nearing retirement and wants to earn rents from the conversion of their property to small office rentals. If the strip taking were to affect the use of the home for small office, would that property owner be entitled to a minimum compensation claim for the future use of that property?

That also leads to another question, how would you value that minimum compensation claim. Are their damages based upon purchasing a comparable property within the community for its current use or any possible future uses based upon the rezoning of that property. My guess is that they would be entitled to a minimum compensation claim based upon a comparable property located within a similarly zoned area. Just my thoughts.

Does anyone else have any thoughts on the issues raised in this post?

What Does the Phrase "Must Relocate" Mean

In Minnesota Statute 117.187 it states that "When an owner must relocate, the amount of damages, at a minimum, must be sufficient for an owner to purchase a comparable property in the community." While the statute defines "'owner' as the person or entity that holds fee title to the property" it does not define the word "relocate".

Obviously, there is no case law on this issue and, as of right now, there does not appear to be any consensus as to whether the minimum compensation statute only applies to an owner-occupant that actually moves and reestablishes at a new site or if it applies as well to an owner that leases the property to a tenant. This is important because many, if not the majority, of commercial property owners are not owner-occupants of their properties. If we take the narrow view of the phrase "when an owner must relocate" it would appear that this statute would only apply to a small number of property owners.

It would seem incongruent for the legislature to adopt such a sweeping change in eminent domain law, but intend for it to only apply to the small number of property owners that are also actually owner-occupants. From my perspective, the legislature would not have intended such a result and that property owners that are not owner-occupants to end up in a worse position just because they did not also occupy the property they owned.

Additionally, what about cases where the property is owned by an LLC with only one shareholder (or is a closely held corporation) and the business is owned by that same person, but owned as an S-Corp. Technically it is the business that must relocate, not the LLC. 117.187 is unclear as to whether the LLC be entitled to make a minimum compensation claim or if it would be barred from doing so because it does not have to relocate. Based upon my understanding of the statute and the legislature's intent in adopting it, this is the exact type of case for which it was intended to apply. The small business that is in risk of losing everything because it cannot afford to purchase a replacement site and therefore, such a hyper-technical reading of the statute is not warranted.

However, here is an ongoing case that may not be so easily reconciled in light of the phrase "when an owner must relocate." In this current case the property and building are owned by 5 different partners in equal percentages. However, only 2 of the 5 partners own the business that occupies the building. Clearly, that business must relocate, but it is only owned by 2 of the 5 partners that own the property. Are all 5 property owners entitled to make a minimum compensation claim or are they barred from doing so because all 5 property owners do not also own the business. What if the 5 property owners transferred title to the property to the 2 owners of the business prior to the filing of the Petition with the district court, would this make the 2 partners/business owners entitled to make a minimum compensation claim.

There is also not yet any case law or consensus as to whether the owner actually has to relocate and reestablish at a new site. Under traditional eminent domain proceedings a property owner is not required to purchase a replacement property to receive payment for the property being taken by the acquiring authority. The reason for this is that the property owner is being compensated for the damages they have incurred as a result of the taking of their property. Clearly, 117.187 identifies minimum compensation as another way to calculate the damages suffered by a property owner. However, it also says "must relocate". Does this mean a property owner that makes a minimum compensation claim must actually purchase a replacement property in order to make a minimum compensation claim.

This is important because there are no temporal requirements in the statute for when a person has to purchase a replacement property. As a practical matter, is the property owner supposed to wait to end of the condemnation proceedings so they know how much they have to spend on a replacement site and are the damages awarded placed in escrow with the district court, only to be released once a replacement site has been secured. What happens if the property owner purchases a replacement property, but it is for less than the amount they claim they are entitled to under their minimum compensation claim. Should they only receive payment based upon what they purchase and actually occupied when there is no such language in the statute.

If it is determined that a property owner must purchase a replacement property in order to obtain payment based upon a minimum compensation claim, how long are they required to own that property. If there are no temporal requirements in the statute, what happens if the property owner purchases a replacement property in order to secure their minimum compensation claim, but then one day later immediately put the property back up for sale on the market. This would seem to be wasteful and not really necessary for a property owner to make a minimum compensation claim.

Do you have any thoughts raised on these particular issues.

Two Current Residential Minimum Compensation Claims

I currently have two residential minimum compensation claims against a metro-area county that are very interesting as to how the county is approaching the acquisition of the two homes.

The two homes are located next door to each other and have very similar objective characteristics.

For House #1 the county based its offer to purchase solely upon the appraised value of the home and, as far as I can tell, did not perform a minimum compensation study. As part of its duties under the relocation regulations, the county did recognize that it was going to cost our clients more to purchase a comparable replacement dwelling than it offered to pay them for their home. However, the county informed our clients they could only make a claim for the increased cost to purchase a comparable replacement dwelling as a housing replacement payment under the relocation regulations. This means in order to get the additional compensation necessary to acquire a comparable replacement property, our clients would have spend the extra money to do so.

For House #2 the county based its offer to purchase upon the results of its minimum compensation study (as far as I can tell though, the county did not perform one), in which the county concluded it was going to cost our clients more to purchase a comparable replacement property than they would be paid for their home based upon the county's appraisal. Obviously, this is the exact opposite of what the county informed our clients that own House #1.

The importance of this distinction is that under Minnesota Statute 117.187, compensation based upon that statute is just another measure of damages like fair market value and does not require the property owner to actually purchase a comparable replacement property to receive compensation. This means the property owner can take that payment and purchase whatever kind of replacement property they would like (or no property at all if they so choose) whether it cost more or less than the comparable replacement property upon which their compensation was based. While compensation based upon the relocation regulations requires a displaced homeowner to actually purchase a new home worth at least as much as the comparable replacement property identified by the acquiring authority to receive a housing replacement payment.

Based upon my interpretation of Minnesota Statute 117.187, because it is going to cost both of our clients more to purchase a comparable replacement property than what they would be paid based upon the appraisals, the county should have made offers to both clients based upon the cost to purchase comparable replacement properties.

Does anyone have a reasonable explanation why the county would choose to follow Minnesota Statute 117.187 in one residential case, but do the exact opposite of that procedure for their next door neighbor?

Minimum Compensation Claim Against Metro-Area Municipality

As the minimum compensation law is so new, no appellate decisions have yet been rendered on this law. As far as I am aware there have not yet even been many successful commercial minimum compensation claims. However, I recently settled a minimum compensation claim on behalf of a commercial property owner against a Twin Cities-area municipality that I thought I would share with you.

In that case our clients owned commercial property that the municipality wanted to acquire as part of a redevelopment project. When the municipality made its initial offer to our clients to acquire their property it based its offer upon a fair market value appraisal and did not perform any sort of minimum compensation study to determine how much it was going to cost our clients to acquire a comparable property within their community. The municipality's fair market value appraisal determined the value of the property to be $444,000 and its initial offer to purchase the property was $484,000.

After receiving the municipality's offer, our clients had their own fair market value appraisal done on the property and a minimum compensation study to determine how much it was going to cost them to purchase a comparable replacement property for their business. The appraisal determined the fair market value of the property to be $555,000, but the minimum compensation study determined it was going to cost our clients $779,000 to buy a comparable replacement property for their business.

Prior to the adoption of Minnesota Statute 117.187, our clients would have received compensation for their property based solely upon the two fair market value appraisals for their property. This would have meant they most likely would have received somewhere between $444,000 and $555,000 for their property. However, as a result of Minnesota Statute 117.187, our clients ended up selling their property to the municipality for $620,000, which is $65,000 more than their own fair market value appraisal said their property was worth. Clearly, this case demonstrates the value of 117.187 for property owners.

In order to take advantage of this new law a property owner and/or their attorneys have to be able to spot the critical issues involved in making a minimum compensation claim.

First Posting

This is the posting for the new minimum compensation blog. The purpose of this blog will be to analyze trends, developments and case law, from a pro-property owners perspective, on the new process for how to calculate the damages suffered by property owners that are having their property taken by governmental entities in the State of Minnesota.

For those of you that are not aware of the phrase "minimum compensation", here is a bit of background on that new way to calculate damages in an eminent domain proceeding.

As part of the Eminent Domain Reform Bill passed by the Minnesota legislature in 2006, the legislature adopted a new statute, which addressed a new way to calculate the damages for owners that are having their property acquired by the government.

That new statute, Minnesota Statute § 117.187, states that:

"When an owner must relocate, the amount of damages payable, at a minimum, must be sufficient for an owner to purchase a comparable property in the community and not less than the condemning authority's payment or deposit under section 117.042, to the extent that the damages will not be duplicated in the compensation otherwise awarded to the owner of the property. For the purposes of this section, 'owner' is defined as the person or entity that holds fee title to the property."

Based upon this statute, in Minnesota, property owners that must relocate are now paid the higher amount of:

1. The appraised fair market value for their property; or
2. The cost to purchase a comparable property located in their community.

It appears that the legislative intent in adopting this new statute was to compensate eligible property owners with a sufficient amount of money so they are able to purchase a reasonable replacement property. In the past the actual cost a property owner might pay to replace their property was not a factor. However, this new statute will assist property owners in acquiring replacement properties without being in a worse position than they were prior to the taking.