Spot Blight Eminent Domain

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“SPOT BLIGHT” EMINENT DOMAIN

VALUATION OF PROPERTIES FOR SPOT BLIGHT TAKINGS

BACKGROUND

There has been a lot of discussion in recent years about the use of eminent domain by local government. While the use of eminent domain has long been controversial, ever since Kelo v. New London (545 U.S. 469 (2005)), municipalities have looked upon almost any use of this legal remedy as anathema to the practice of good government. In Kelo, the U.S, Supreme Court determined that the taking of land from one party for redevelopment by another was in fact a valid use of eminent domain. The public response to the Kelo decision was strong and not positive. In 2007, the New Jersey Supreme Court handed down its own answer to Kelo with their decision in Gallenthin v. Paulsboro (924 A.2d 447 (Sup. Ct., N.J., 2007)), wherein they stated that the owner of vacant land could not be forced into redevelopment, as long as their property did not contribute to the blighting of the neighborhood. 

All of this adverse public reaction to the U.S. Supreme Court decision has left many municipalities unwilling to even consider the use of a tool that has the words “eminent domain” in its title. Nevertheless, spot blight eminent domain (or “spot blight”, for short), is a powerful and strategic tool that can be used to improve neighborhoods for existing residents, and not simply redevelop them for the highest bidder.

Spot Blight is a surgical and specific tool for the redevelopment or rehabilitation of real property. It can be used on either residential or commercial property, but cannot be used on vacant land. The tool is designed to address situations where a particular abandoned property or set of properties is adversely affecting the value of nearby occupied properties. It can only be used on properties that have been determined to be legally abandoned and thus, cannot be used to harass homeowners into giving up their property.

Understanding the above is critical when designing an abandoned property policy, as it is particularly important to communicate to residents when the use of spot blight in their neighborhood is being considered.

 





Would using spot blight to rehabilitate
the property on the left really hurt
those currently living next door?



“SPOT BLIGHT” EMINENT DOMAIN
“Spot blight” eminent domain, or the power to use eminent domain to take individual abandoned properties, exists under the laws of many states.  New Jersey local governments have such powers through the Urban Redevelopment Act. Spot blight eminent domain can only be used against properties that are on the municipality’s abandoned property list. A spot blight eminent domain proceeding against a property can be brought at any time after the expiration of the period of time for the owner to appeal inclusion of the property on the list.

Spot blight eminent domain is a powerful tool to deal with scattered abandoned properties, such as where one or two abandoned single family houses are found on an otherwise stable block, and where:

  • The nature of the area or the city’s objectives do not justify use of the redevelopment statute; and
  • The property cannot be obtained through other means; or the delay associated with other means of acquisition, such as tax foreclosure, would be harmful to the community.

The issue of delay is highly important with respect to abandoned properties. Delay not only leads to further deterioration of the property and higher rehabilitation costs, but it can affect the health and safety, as well as property values, of the people living nearby.  Eminent domain under New Jersey’s “quick-take” rules is a relatively speedy process, and can take less than 6 months from the initial negotiations with the owner to the point where the municipality has title. Moreover, the owner may be paying taxes on the property and the municipality may not be able to use tax foreclosure against the property. As noted previously, a property can be found to be abandoned and placed on the abandoned property list even though taxes are being paid.

VALUATION OF PROPERTIES FOR SPOT BLIGHT TAKINGS
The United States Constitution, as well as New Jersey law, requires that all takings of property under eminent domain be at fair market value. While that principle is straightforward, the question of what constitutes fair market value in any particular situation is far more complicated. Both the criteria for determining fair market value and the application of those criteria to specific properties have provided fodder for thousands of court cases and disputes.

The problem is particularly severe when applied to abandoned property, for which, almost by definition, there is no effective market. In this situation, conventional real estate appraisal tools result in wildly inconsistent outcomes, depending on the individual doing the appraisal. In order to address this problem, the Abandoned Properties Rehabilitation Act added specific guidance for the valuation of abandoned properties taken through spot blight eminent domain. The standards are set forth in N.J.S.A.55:19-102. The procedures required by the act is described step-by-step as follows:

Step 1: The appraiser must determine the full cost, including not only construction and site remediation, where necessary, but all relevant soft costs such as fees, permits, architectural or engineering costs, legal expenses and marketing expenses either (a) to rehabilitate the property or (b) to demolish the property and construct a new building on the site, under existing planning and zoning regulations (N.J.S.A. 55:19-102[a]).

In determining whether it is more appropriate to use rehabilitation, or demolition plus new construction, as the basis for valuation, the appraiser should take into account both sound planning considerations and economic feasibility. The appraiser should consult with municipal planning officials before making that determination. If the appraiser does not have detailed knowledge of current construction and/or rehabilitation costs in the immediate vicinity of the subject building, he or she should seek out individuals, such as local CDC staff, developers, or municipal housing officials, who can provide that information.

Where there is a compelling reason to pick one or the other alternative, the appraiser can analyze that alternative alone. If there is no compelling reason to prefer one over the other, the appraiser should run the numbers for both alternatives, in order to be able to reach the most appropriate conclusion. If the appraiser uses new construction as the basis for valuation, the cost figure must include the cost of demolition and preparation of the site for the new building.

General contractors are rarely a reliable source of information about total development costs, since they are generally only familiar with the construction or hard costs of a project, which may represent 75% or less of the total project cost.
 
Step 2: The appraiser must then determine what the realistic market value will be for the property after new construction or rehabilitation, as the case may be, taking into account the market conditions particular to the neighborhood or subarea of the municipality in which the property is located (N.J.S.A.55:19-102[b]).

The relevant market conditions for purposes of the appraisal are those of the immediate neighborhood or sub-area, not the city or region. This is particularly important, because in many urban areas, real estate values can change dramatically from one part of the city to the next, sometimes within a matter of a few blocks. If, under Step 1, the appraiser has analyzed both the new construction and rehabilitation options, the appraiser should determine the realistic market value at this point under both alternatives, since there may be some variation between the two values.

Step 3: The appraiser must compare the costs determined in Step 1 with the post rehabilitation and/or post-construction market value determined in Step 2. If the appraiser finds that the cost exceeds the value, the law provides that “there shall be a rebuttable presumption in all proceedings under this subsection that the fair market value of the abandoned property is zero, and that no compensation is due the owner.” If, on the other hand, the appraiser finds that the market value exceeds the cost, the appraiser can look at other factors, such as comparable sales or income ratios, as long as the combined cost of the “as is” value and the cost to reuse the property do not exceed the subsequent market value.

The law provides that this approach to valuation must be used in all spot blight eminent domain proceedings. Since it requires that the appraiser address questions that are not within every appraiser’s competence or knowledge base, it places the burden on the appraiser to obtain that information by seeking out individuals with specialized expertise in areas such as urban rehabilitation.

Click here to view an illustration of the appraisal process for a hypothetical building that is the subject of a spot blight taking under this section of the law.

QUICK-TAKE EMINENT DOMAIN

Eminent domain laws in the United States follow either a ‘quick-take’ or ‘slow-take’ process. Under a quick-take process, if the municipality and the property owner cannot agree on the fair market value of the property up front, the municipality can get title to the property immediately, with the issue of value to be resolved later, sometimes - if it ends up going to court – years later. Under a slow-take process, the issue of value must be resolved first, and only then does the municipality decide whether it wants to go through with the condemnation and take title to the property.  

Eminent domain in New Jersey follows the quick-take process. If the municipality and the property owner do not agree on the value of the property, the municipality files a declaration of taking in Superior Court and deposits what it considers to be fair market value with the court. That action gives the municipality title to the property, unless the municipality’s right to use eminent domain in the particular case is challenged. That rarely happens, particularly if the municipality is careful about following the requirements of the law. After the municipality gets title to the property, a process spelled out in the state Eminent Domain Law (N.J.S.A. 20:3) is followed to determine the value of the property. If it is found in the end to be more than the amount deposited by the municipality with the court, the municipality must come up with the difference.