Taxpayers and tax professionals researching market conditions to determine fair market value should consider any impending government actions. Even a rumor of a government project that would require acquisition of a property through eminent domain, or would impose restrictions on future use, can reduce the property's market value and taxable value.
Property values begin to suffer even before community leaders approve the final plans or begin work on such a project. That's because the belief that the project will occur places a cloud on the property owner's ability to sell and on the price attainable in a sale.
A potential buyer would be reluctant to acquire a property that will be involved in future condemnation litigation, with its inherent costs and delays, nor would a buyer welcome the uncertainty that those plans place on the property's future use.
The government taking may not involve acquisition of the property as a whole. Rather, it may remove some rights of use through restricting zoning, creation of conservation corridors or the diversion or rerouting of traffic, for example.
The property value declines because the wheels are turning to take away some of the rights of ownership, perhaps as much as 100 percent of those rights. The property owner carries the burden of convincing the taxing authority of diminished value resulting from rumored or pending acts of government.
Fair market value determinations must match reality. A title search would not reveal the threat of a government taking, but the valuation process cannot assume clear title in the face of the cloud imposed by the contemplated taking of some of the owner's bundle of rights.
An array of public improvements has the potential to affect property values, with an equally wide range of implications for taxable value. "They sky is falling because a highway is coming through here someday" is at the extreme, but other property owners may learn of the future imposition of a conservation easement on coastal properties, or a restriction on land use, allowable sign dimensions, or other rights. Any of these limitations would have a direct and immediate effect on value.
Calculate the damage
When the reality of a government action hits, it may take up to 100 percent of the property's fair market value. The taxpayer should weigh the seriousness of the threat and the probability and timing of it actually occurring. Then the taxpayer should measure the weighted estimate against the value of the property without the threat.
If the property is in "the path of progress," questions to consider in determining its value are: Who will buy it? What is its anticipated economic life? And what purpose will it serve?
First, determine the seriousness of the threat. What is the likelihood of it occurring? Next, calculate the remaining life of the present use of the property in the face of the impending government action. If it is going to happen, when will that be?
In the case of projected highway takings, the probability is high. Once announced, the highway's completion is almost assured. The present use has a limited and uncertain life.
Market observations show that buyers avoid properties in the path of progress. The development of a highway project is a time-consuming process that can hang over a property for years, suppressing value.
Another diminishing value aspect of an impending road taking is that the property/s neighbors may defer, or altogether cease, to maintain their properties, a condition sometimes called "condemnation blight." Broken windows won't be replaced, leaking roofs won't get patched and buyers won't buy. Buyers will purchase, however, a competing property unthreatened by condemnation.
Anticipated or threatened taking for regulatory reasons likewise diminishes market value. Suppressed industrial expansion is one example, such as when a local authority announces it doesn't want noise or the use of industrial-use pollutants in proximity to a new residential development.
The force of regulation frequently drives industrial uses away from new residential development or expanding metropolitan uses. Community leaders may deem junkyards or outdoor storage undesirable and force those uses away. Forcing such uses away from the metropolitan area threatens future use of local properties, and therefore limits property value.
Taxpayers need to help taxing authorities understand that the portion of the government that weakens property values by taking away property rights should suffer the resulting loss of property taxes.