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CapX2020 and ‘Buy the Farm’

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By: John T. Schmick

Over the past ten years Minnesota statutes pertaining to the use of eminent domain powers have changed. Once biased towards the condemning authority, eminent domain laws are now more balanced and the rights of both property owners & government are considered. The most recent trend is to develop one set of rules for all condemning authorities. Thus, Minnesota’s eminent domain procedures now emphasize Public Service Corporations (PSCs). While there remains room for improvement, the eminent domain process, as it relates to utility company takings, is vastly improved.

Statutes pertaining to pipeline and power line takings are located in MN Statutes Chapter 216: Utilities; not in the more well-known MN Statutes Chapter 117: Eminent Domain. Often referred to as the ‘Buy the Farm’ statute, PCS guidelines are found in MN Statute 216E.12 subd. 4. Chapter 216E describes Electric Power Facility Permits; section 12 references Eminent Domain Powers: Power of Condemnation; and subdivision 4 focuses specifically on Contiguous Land. This obscure statute regulates the process whereby real property is acquired to accommodate a high-voltage transmission line with a capacity of 200 KV or greater. If a PSC uses its eminent domain powers to take part of a property, the owner has the option to also require the utility company to acquire, in fee interest, any amount of contiguous land to which the owner has an interest. Simply stated, when a property is condemned for a high-voltage power line, the owner has the right to insist the utility company (PSC) buy all or any part of the adjacent land. The property owner is also entitled to relocation as an alternative to living next to a power line.

The 345 KV CapX2020 power line (currently under construction in various parts of Minnesota), falls within the scope of MN 216E.12 subd. 4. Thus, any property owner affected by this project must make a decision: negotiate for damages based on a traditional before and after taking valuation analysis, or require the utility to buy the entire property. Some consider the statute burdensome for utility companies, but that’s not necessarily true. Even if the PSC is forced to purchase the entire property at the front end, the ultimate cost to the utility company should be marginal. Once the power line has been constructed and the easement recorded, the utility company is free to sell the property. The difference between the cost to purchase the land from the original property owner and the price for which the PSC sells the land is the true reflection of the damages caused by a new power line to the property. If the real estate market is in a growth mode when the PSC sells, the utility company may realize a profit and project costs will be minimal. If the market is in decline, final project costs may be higher. In either case, the utility company takes the same market risk as every other property owner. Thus, the true cost of the project is borne by the utility company, not the property owner, which is appropriate given that the purpose of eminent domain laws is to protect the property owner while allowing government entities and PSCs the power to acquire land for public use.

Central Corridor Issues

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By:  John T. Schmick

Development of Light Rail Transportation (LRT) along University Avenue in St. Paul has been front page news as pre-construction activity for the project, such as moving utility lines, begins. A recent article in the Highland Villager (Getting out while they can, Feb. 23-Mar. 8, 2011) highlights some of the problems created by the project including the most common complaint: loss of on-street parking that is forcing businesses to relocate or close. Often overlooked in news articles of this nature are the many zoning changes that also impact corridor properties.

In an upcoming article (Spring Issue 2011) of the Shenehon Newsletter, author John Schmick discusses problems created for property owners by zoning changes made prior to eminent domain takings for the Central Corridor LRT project. The Central Corridor Overlay District, enacted in 2008 and due to expire in June 2011, put in place new zoning performance standards for corridor properties. When the overlay district expires, it will be replaced by permanent zoning changes that include many of those same (or similar) performance standards. New requirements for building setbacks, development density, and on-site parking will have a dramatic impact on properties in the Central Corridor area. These changes created a tremendous shift in non-conformity for many properties which must be addressed in the eminent domain cases that are now in the pre-taking negotiating stage. Understanding how these changes affect current and future property owners and businesses along the corridor is essential to the successful resolution of condemnation litigation.

Central Corridor: Underlying Valuation Issue

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By: John T. Schmick

While many people are aware of the plans to expand light rail service between Minneapolis and St. Paul, few understand how underlying zoning issues will impact property values in the new corridor. The Minnesota Department of Transportation (MnDOT) must acquire enough land to support the construction and operation of the light rail system. Property owners along the corridor, with land subject to the eminent domain process, will be asked to sell/rent their land for the project. Determining a fair price for the land to be taken is complicated by recent zoning changes.

In 2008, the city of St. Paul added a Central Corridor Overlay District to the city’s zoning code. The overlay district is an interim measure which restricts new development in advance of the actual eminent domain process and construction of the corridor. The Central Corridor Overlay District includes a provision that the district will expire on June 20, 2011, roughly three years after its adoption. The temporary nature of this zoning classification is meant to give the city time to review and update its zoning code. It also reduces potential claims for damages to new development projects. However the timing of the provision and the fact that it applies to the anticipated eminent domain acquisitions does raise some questions.

Look for a full discussion of zoning changes and their impact on property values in the next issue of our newsletter, Valuation Viewpoint.

Overhead Utility Crossings: Is the Impact Based on Perception or Reality?

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Shenehon Company is pleased to announce an upcoming article by John Schmick and Robert Strachota in the July/August 2010 issue of International Right of Way Association Magazine regarding compensation for Overhead Utility Crossings.

The extensive infrastructure of utility pipelines and power lines in the United States ultimately creates situations where utility lines cross active railroad tracks and/or non-active rail corridors. Historically, crossing fees were little more than negotiated agreements between the utility company and the railroad. Fees were not based on market-supported land valuations which reflect the actual impact of a crossing on the corridor. This article describes how to measure the change in value, if any, due to the presence of overhead power lines on a rail corridor.

At this time, the railroad industry favors two methods to determine usage fees. The first is the Rate Sheet method; it is essentially a fixed price list based on wire, pole, or pipe size. However, the Rate Sheet method bears no relationship to land values and is contradictory to the railroad’s most widely used valuation technique, the across-the-fence (ATF) method.

A second method for determining usage fees is the Occupancy Factor. A percentage of fee simple land value (typically 30%) is randomly selected to represent the impact of the utility line on the rail corridor. However, there is no market support for this method because appraisers and railroad companies fail to consider the economic profile and highest and best use of the subject land when assigning an occupancy factor.

The article presents a discussion of larger parcels, highest and best use, valuation and the adjustment process, and economic profile of the subject. While individual crossings have unique characteristics, the majority of utility crossings have little to no measurable impact on the rail corridor. In the final analysis, the usage fee must relate to the value captured by the utility crossing.