Daily Development for
Thursday, April 25, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

I am posting this from home, late at night, after several end of term receptions. I don't believe that I have posted this item before, but I don't have access to my complete Daily Development files. I hope you'll excuse me if this is a duplicate.

Note that there are two "bad news" cases - an eminent domain case and a tax case.

EMINENT DOMAIN; DAMAGES; PROPERTY CONDITION: The fair market value of property acquired by eminent domain must be determined by the actual condition of that property, not what a reasonable person would know about the property at the time of condemnation. Consequently, the condemnor may prove the impaired value of the land as wetlands even though neither condemnor and condemnee knew that the property contained wetlands at the time of taking. State v. Shein, 662 A.2d 1020 (N.J. Super. A.D. 1995). The state condemned a portion of wooded, vacant land owned by the condemnee for highway improvement purposes. The owners did not contest the condemnation but did challenge the state's estimated just compensation. After the procedure to determine just compensation was begun, the state, for the first time, learned that the property might contain fresh water wetlands protected by a state statute. It hired an environmental scientist to conduct a wetlands evaluation. The scientist concluded that the property did qualify as wetlands and so testified.

The owners presented no countervailing evidence. Instead they attempted to show that reasonable parties negotiating at arms' length for the purchase of the property at the time of the condemnation could not reasonably have been expected to know the property contained wetlands and that the property should be valued accordingly. The trial court agreed with the owners and so charged the jury. The jury returned a verdict of $250,000, although the state had reduced its valuation from $132,000 to $48,300 after learning that the property qualified for wetlands protection. On appeal, this intermediate appellate court reversed, holding that the value of the property is to be determined by the price at which it would change hands between "knowledgeable" persons at the time of condemnation. "Knowledgeable" includes knowledge of the actual conditions of the land and not simply knowledge which a "reasonable buyer and seller" would have.

Reporter's Comment: If this case indicates a trend, it may behoove condemning authorities to condemn first and then conduct environmental investigations of the property with the hope of discovering environmentally sensitive features that adversely affect its "fair market value." Because states have access to experts in these areas, it seems likely that many landowners facing condemnation will suddenly discover their property worth far less than they might have expected because it becomes "wetlands," "habitat for endangered species," or possesses some other environmentally sensitive characteristic severely restricting its development possibilities.

FEDERAL INCOME TAX; DEDUCTIONS; BUSINESS LOSS; "TAKINGS:" Taxpayer whose property is designated as wetlands cannot take loss deduction where the taxpayer may have a claim against the government. Lakewood Associates v. Commissioner, T.C. Memo. 1995-552. Although the wetlands designation may constitute a "taking" of the taxpayer's property, the taxpayer cannot report a loss unless it is first ascertained with reasonable certainty that reimbursement will not be received from the government.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. This item, however, has not been. It is an April Fool story. But no one ever reads this fine print anyway. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Laprica Mims at the ABA. (312) 988 5260.

Items reported here and in the ABA publications are for general information (and, in this case disinformation) purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.