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Eminent Domain Business Losses

Proposed Eminent Domain Law a Good First Step

State Sen. Doug Eckerty, R-Yorktown, has introduced a bill that could change the landscape for public universities and their use of the power of eminent domain.  The proposed bill looks to be a strong move in the right direction in terms of leveling the playing field for landowners involved in the eminent domain process, but it realistically does not go far enough.  Senate Bill 54 would require state colleges or universities using eminent domain to acquire property including an operating business to pay the business owner the capitalized value of the estimated future earnings of the business after the date the state educational institution would acquire the property.  The payment of future earnings would be in addition to the current requirements that the property owner be paid the fair market value of the property and all improvements as well as any other damages to which he is entitled.

Another way to understand the impact of this bill is to say that it would require state universities to compensate business owners for the value of their property and their business losses resulting from the taking.  Business losses are established by determining the present value of future earnings.  The present value of future earnings is computed using a formula that relies on previous earnings and then accounts for the business’s projected growth and the risk that earnings will stop or end up lower that the estimate. This somewhat complicated formula is used to value the business.  The important takeaway is that this valuation method considers the current benefit of realizing future cash flows now, rather than in the future.

Indiana, among many other states, currently has a land-centric compensation system, which ignores potential economic injuries to businesses located on properties subject to eminent domain.  Indiana law compensates the land or business owner for the value of the property, but it does not take into account the losses the business incurs as a result of the taking.  Rarely is a business subject to eminent domain and able to avoid any negative financial impacts.  Considerations like location, customer loyalty, etc. are almost always affected by eminent domain, and these factors play an important role in a business’s viability.  Many businesses are so greatly affected by the process that they are unable to survive, and thus businesses owners are often left uncompensated for major injuries resulting from the taking.  This is an insufficiency that must be addressed.  The power of eminent domain is an important tool for the State, but landowners must be compensated fully for any and all losses suffered.

This bill is a step in the right direction in terms of truly compensating property and specifically business owners affected by eminent domain, but it ultimately does not go far enough.  The bill’s impact should be expanded to cover eminent domain actions taken by any actor when an operating business is involved.  Certain business owners should not be left without true compensation simply because they were not lucky enough to be located next to a state college or university.  All actors exercising the power of eminent domain and all individuals affected should be treated equally under the law.

This is not to say however that no limitations should be placed on the recovery of business losses.  It should not be the business owner’s goal to become unjustly enriched through the eminent domain process.  Therefore it would likely be prudent, in an effort to prevent windfall returns to those businesses that are able to relocate and resume effective operations, to limit the compensation to the business losses that cannot reasonably be recouped through relocation of the business or other reasonable means.

Other states, although few in number, have already taken steps to compensate property and business owners for what are generally considered “business losses.”  And they have applied the compensation for business losses theory to eminent domain proceedings initiated by all actors.  California and Minnesota are prime examples.  These states have applied the general idea in the Indiana bill, but have refined it with the addition of some limitations.  Each state has its own term to describe business losses, but they are generally defined as “the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage.”  Additionally, each state places three important limitations on the award of compensation for business losses: (1) The loss must be caused by the taking of the property of the injury to the remainder. (2) The loss must not be reasonably preventable by a relocation of the business or by taking steps and adopting procedures that a reasonably prudent person would take and adopt to prevent these losses. (3) Compensation for the loss must not be duplicated in the compensation otherwise awarded.

The California and Minnesota statutes achieve just what the eminent domain laws should be designed to accomplish.  They allow for the true compensation of land and business owners for the full extent of damages caused by eminent domain proceedings.  As stated above, proposed Senate Bill 54 is a step in the right direction in terms of properly compensating property owners affected by the eminent domain process.  However it falls short of being the perfect solution.  The idea stands to be refined in a number of ways including by expanding its scope to reach all eminent domain takings and by establishing limitations to prevent over-compensation.  

The ultimate goal is to implement a system that properly compensates property owners for the taking of their land.  And although there is more work to be done, Indiana has taken a significant step towards this goal with the proposal of Senate Bill 54.  Many other states without similar laws stand to do the same by proposing legislation similar to Senate Bill 54, and laws like those in California and Minnesota should be considered a viable blueprint for taking that step.

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