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Many people throughout the United States invest in rental properties. These properties afford investors a good opportunity to build equity in real estate holdings with minimal cash investment and, in some cases, generate significant monthly rental incomes.
Like all real estate property, however, rental properties are sometimes subject to eminent domain, which is the government’s power to take private property in certain cases. Notably, governments may authorize private parties, such as utility companies, oil and gas companies, or railroads, to exercise eminent domain as well.
Generally speaking, to exercise eminent domain and take private property, the taking must serve a public purpose and the owner of the property must receive “just compensation” for the property. Because U.S. courts have found the “public purpose” requirements expansive, the majority of disputes regarding eminent domain focus on what exactly “just compensation” means in a given case.
Typically, just compensation requires the government to pay a landowner the fair market value of a property, which refers to the price a willing, knowledgeable, and unpressured buyer would pay a willing, knowledgeable, and unpressured seller in the market. For income-generating properties, however, this analysis falls short, because it fails to account for the value provided by the income generated by the property.
For this reason, when income-generating rental properties are subject to eminent domain, an income capitalization approach—which looks to projected future income the property will generate—determines just compensation for the owner. To use this approach, a property owner must first determine the net operating income of a property, which is calculated by taking the rental income and subtracting the percentage of vacant units and annual operating expenses such as management, repairs, utilities, and taxes. To arrive at a property value, apply the net income to a capitalization rate (which many factors will help to determine).
As this should make clear, determining the value of a rental property is significantly more complicated than determining the value of a single-family owner-occupied property. For this reason, rental property owners who face condemnation should contact a lawyer immediately to ensure that they receive the compensation they deserve under the law.
If you believe that your rental property is subject to an eminent domain action or are in the midst of an active dispute, contact an attorney as soon as you can. At Sever Storey, our eminent domain lawyers are committed to getting our clients the compensation they deserve and are not afraid to challenge a proposed exercise of eminent domain if justice demands it. We have offices in Ohio, Illinois, Indiana, North Carolina, and Kentucky, and we serve clients facing eminent domain actions of all kinds throughout the United States. To schedule a free case review with one of our lawyers, call our office today at (888) 318-3761, or send us an email through our online contact form.
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