What Is Just Compensation?

Just compensation refers to the compensation individuals receive when their property gets seized by the government for public use. For example, when the national highway system was constructed in the 1950s, many homeowners had their property seized because the government needed the land to build the interstate highway system.

The just compensation remedy is provided by the Fifth Amendment's Takings Clause and is usually considered to be fair market value. However, what the government considers just compensation may not be regarded as such by the person whose property is seized. The government’s power to take private property for public use is called eminent domain.

Key Takeaways

  • The government can seize your property through eminent domain when it is needed for public use.
  • Just compensation is the compensation paid to property owners for this seizure. It is legally defined under the Takings Clause in the Fifth Amendment.
  • Property owners are paid fair market value for their property but often determining what fair market value is can be difficult.
  • There are different methods in determining the value of a property and these include the market approach, income approach, and the cost approach.

Understanding Just Compensation

The idea behind just compensation is to make the individual whole again as if the property taking did not occur. The means by doing so is to pay the fair market value for the property.

However, individuals who lose their homes through eminent domain may not consider the fair market value of the property to be just compensation because it does not take into account the time, stress and cost of moving to a new property. Just compensation also fails to consider the loss of neighborhood social ties or the emotional connection the owner may have to the property. Fair value is quite often disputed in eminent domain cases.

Factors of Just Compensation

When determining just compensation, the following issues need thorough consideration:

Fair Market Value of Land

The price the property owner would receive if they were willing, not forced, to sell can be used to help determine the fair market value of the land. For example, if a landowner decided that they wanted a more significant piece of land and auctioned their existing property, the auction sale price would be considered fair market value.

Fair Market Value of Land Improvement

Land improvement refers to structures that improve the value of the taken land. Land improvement may include detached dwellings, barns, and separate garages. Intangible land improvements must also be taken into consideration. For instance, land near an area with natural resources may be considered a land improvement.

Residue Damage

If only a portion of the property is seized, residue damage refers to the damage on the remaining property due to the seizure. Residue damages may include the inability to use the best part of the land, any change or shape to the land and the land’s new proximity to public infrastructures, such as roads or utility equipment.

Benefits

Although less frequent, property owners may benefit from publicly taken land. For example, if part of an owner’s land gets seized for a new service road that allows the property to be subdivided, that benefit can be used to offset the total compensation received.

Methods for Property Valuation

There are three generally accepted methods to value a property during an eminent domain case. These include the following:

1. Market Approach

The market approach is fairly straightforward in that the seized property is compared to recent property sales with similar characteristics. This is typically best applied to residential properties.

2. Income Approach

The income approach is used best for properties that generate income. Here it is needed to first determine the operating income of the property and then employ a capital rate multiplier to the net income to arrive at the value.

3. Cost Approach

The cost approach takes into consideration a very specific structure on the property that is unique enough that the owner would need to recreate it on any future property. The value of the empty land would be taken into consideration plus the cost of replacing the new structure minus the depreciation of the current structure.