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Subjective Value, Alternatives to Eminent Domain, and the Colorado Military Condemnations:

At Concurring Opinions lawprof Kaimipono Wenger raises some interesting points in response to my post on the US Army's efforts to use eminent domain to take over 400,000 acres of land belonging to Colorado ranchers in order to build a new training ground for troops. In particular, he questions my suggestion that the Pentagon should build its new training facility land already owned by federal government rather than using eminent domain, and my argument that - if eminent domain is used - the ranchers should be compensated for the "subjective value" they place on the property as well as its market value.

I. Using Land Already Owned by the Government as an Alternative to Eminent Domain.

Wenger argues that I am wrong to believe that the new facility should, if possible, be built on land already owned by the government rather than on property taken from unwilling private owners. He notes that, in some instances, using land already owned by the government will be inefficient or excessively costly. However, I did not claim that land already owned by the state should be used in every conceivable scenario. To the contrary, I noted in my original post that using eminent domain might be the way to go if "the [privately owned] Colorado site really is superior to any potential alternative." My argument was merely that using government-owned land or land purchased from willing private sellers should be preferred to eminent domain if other considerations are relatively equal. I would also add that some degree of efficiency could be sacrificed to avoid using eminent domain in cases where the harm to private owners is very great or if the efficiency gains of eminent domain are outweighed by the costs of the takings process itself (including litigation, enforcement, and opportunity costs, among others).

II. Compensation for "Subjective Value."

Wenger also questions my suggestion that the government should compensate the Colorado property owners for their loss of "subjective value" - the value that they attach to their property over and above its market price. Current legal doctrine requires the government to pay only "fair market" value to owners who lose their property to condemnation. This approach leads to the infliction of uncompensated losses on owners and in some cases leads to the use of condemnation in cases where the benefits to the government are actually smaller than the losses suffered by the owners (if subjective value is taken into account).

Wenger does not deny any of the above. But he argues against compensation for subjective value because "[t]hat would be a major change in takings law, and would affect vast numbers of takings, since many property owners attach some subjective value to their property." Wenger seems to assume that I advocate having courts try to ascertain and require compensation for an exact subjective value for each owner in every condemnation.

Trying to calculate subjective value on a case by case basis would indeed probably be unworkable. But there are many other ways to provide at least some compensation for subjective value. For example, courts could require the government to pay a set premium (say 10-15%) above the market price of condemned property, as is done in Britain and Canada. Alternatively, it could establish rules of thumb regulating the size of the required premium based on the type of property being condemned(perhaps more for homes and small businesses than for investment property). Even if we reject all potential judicial efforts to require compensation for subjective value, one could still argue that the legislature should undertake to provide such compensation on its own initiative.

The fact that the right level of compensation for subjective value is difficult to ascertain and that such compensation not required by current American legal doctrine, doesn't mean that we should simply assume that that value is zero and leave it completely uncompensated. As Wenger himself puts it, "[P]roperty owners often attach subjective value to their property, and thus the value to an owner is often greater than market value. That's why the property is still in the hands of _these_ owners, after all."

That said, I am myself skeptical of theories that claim that increasing compensation can solve all the problems created by eminent domain. For my explanation of that skepticism, see this article (pp. 214-18). In many situations (as I explain in the article), the difficulties involved in estimating and compensating subjective value strengthen the case for abjuring the use of eminent domain altogether.

UPDATE: Wenger also raises some other issues, mostly related to my own uncertainty about whether the potential Colorado taking is justified on grounds of its utility to the Army. I can't address them because I lack the needed expertise on the factors involved in choosing locations for military training facilities. As I noted in the original post, I chose not to discuss them precisely because "I lack the expertise to judge."

Wenger also misinterprets my post as implicitly advocating some sort of general rule of takings based on an analysis of equity and efficiency. No such general point was intended, though I can to some extent see how my original post could be misinterpreted in this way.

Related Posts (on one page):

  1. Subjective Value, Alternatives to Eminent Domain, and the Colorado Military Condemnations:
  2. U.S. Army May Use Eminent Domain to Take 418,000 Acres of Colorado Ranchers' Property:
John (mail):
Of course, the constitution says "just" compensation, not "fair market value," so there is wiggle room there, but for the centuries of precedent on the books.
11.13.2007 10:57pm
Milhouse (www):
I like the solution Robert Heinlein came up with in The Number of the Beast...: Each property owner must declare the amount for which he would be willing to sell it, and pays taxes based on that amount. The valuation may be adjusted at any time, but whenever it's increased the owner must pay 3 years' back taxes on the difference. Anybody may offer to pay the declared value of a propert and the owner must accept the offer or increase the valuation.

This 1. ensures that property is used for its most efficient purpose; 2. ensures that people are fairly compensated for their land; and 3. solves the ongoing problem in most places with property valuations that are woefully out of date and/or patently wrong.

I'd add a few wrinkles such as: 1. for genuine public use, the valuation can be frozen as of the day before the plans are announced, and on the discovery of evidence that the plans were leaked the freeze date can be moved back. 2. Certain limited kinds of property, such as graves or landmarks, can be exempted from the system.
11.14.2007 1:07am
Jonathan H. Adler (mail) (www):
Approximately 40 percent of Colorado is already government owned (35 percent by the federal government). This may be relevant when the Army or the state argues that it needs a given parcel of privately owned land within the state.

JHA
11.14.2007 8:14am
JOe:
The compensation should be fair value, which brings an interesting question. Big city decides to built a football stadium to generate more revenue for (big city football team owner - tax dollars benefiting private individuals - just a note). Numerous small homes with a values of $50,000 are in the proposed condemned area. Typically when big developer starts buying up property to develop, the surrounding area and the target area values climb. therefore, should the compensation for the condemned small house be the $50,000 (the value before development) or a much higher value because of its now higher and best use?
11.14.2007 9:19am
Jam:
The uSC does not grant "eminent domain" authority to the Central government but only grants authority to purchase property for specific purposes and ONLY with the consent of the State. Has Colorado granted permission to the Central government to PURCHASE the land?

Article 1, section 8:
To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings;
11.14.2007 9:46am
Dan Weber (www):
One alternative I've heard of is that people just list their desired selling prices for their property with the county. Anyone can come by and buy your property up at that price.

The reason to not put "one billion dollars" there? Because that's also considered the assessed value for taxation purposes...
11.14.2007 11:10am
TSW:
Illya,

Your proposal to pay a fixed, across-the-board premium does solve many of the obvious problems with case-by-case subjective value determinations. But if we assume that everyone attaches the same subjective value to his or her home, then isn't the subjective value premium already built in to the market price? If all sellers overvalue their homes by roughly the same amount, then wouldn't that inflated price constitute the fair market value? (Assuming "fair market value" means the price a willing buyer should expect to pay when buying from a willing seller). In other words, don't private buyers already have to compensate sellers somewhat for the sentimental interest that they're giving up? And if the government already pays what a private buyer would have to pay, then aren't they also compensating for this interest? So why should the government have to pay a premium on top of that? (These aren't rhetorical questions, aside from reading Posner's book I know nothing about law and economics.)

Milhouse,

I don't think Heinlein made that system up. I think it was actually used in ancient Athens.
11.14.2007 1:56pm
Adam J:
Jam- that section has nothing at all to do with eminent domain- it has to do with jurisdiction, not ownership.
11.14.2007 2:57pm
Jam:
Purchasing?
11.14.2007 3:12pm
TSW:
Jam,

I think the idea is that Congress can only exercise exclusive jurisdiction over those places with state consent. At any rate, Art. I Sec. 8, cl. 17 grants Congress a particular power. It does not serve as a limitation on Congress' other powers. I think land purchases can be "necessary and proper" to exercising many other federal powers, so there is no need to rely on that clause.
11.14.2007 3:25pm
Adam J:
TSW- Obviously a voluntary seller doesn't "overvalue" his home beyond the market price, he wouldn't sell it at the market rate if he did so. If the owner values his home more then the market rate, he won't sell at all. Therefore, it's generally safe to assume that a current owner values his land above the market rate (otherwise he would have already sold it).

The premium works in practice something like this; Suppose an owner values his land at 120% of FMV, and the government values it at 105% of FMV. The owner obviously won't voluntarily part with his property, since he can only get 100% of FMV on the market and between 100 and 105% from government. However, the government will still have an incentive to take, it nets 5% of the FMV in profit. The result of the taking however is an economically inefficient transaction(the net social loss is 15% of the properties FMV). A 10% premium would stop this taking however- bc the government doesn't value the land at 110%.

Of course, the flaw with an artificial premium is it won't stop all inefficient takings- suppose the government valued the land at 115% of FMV- it would still have an incentive to take when it's inefficient.
11.14.2007 3:25pm
TSW:
Adam J.,

I get your point about "overvaluing," and I hesitated to use it myself. It's a bad term. You're right that a seller can't overvalue above the market place. What I meant by overvaluing is something like this: if we assume that part of the value a landowner attaches to his land is "subjective," then the remainder must be the "objective value" of the land. I meant overvaluing above this hypothetical objective value.

But I don't think "objective" value actually exists, or at least it's not equivalent to market value. Illya implies that by only giving landowners market value, the government is depriving them of the "subjective" component of their land's value. This seems to me to conflate market value with hypothetical "objective" value.

Because this probably makes no sense, let me use your example. I can understand how an individual landowner could value his land at 120% FMV. But this implies to me that he's particularly sentimental about that property -- more so than other landowners in equivalent positions. What I don't understand is how everyone could uniformly value his land over FMV. It seems that no one would ever sell land if that were true.

So I think that some sentimental/subjective value has to be built in to the FMV. People who are less sentimental than average sell, people who are more sentimental don't, and people who are average are indifferent. In other words, I think the FMV already includes the average sentimental value. So I don't see how people who get FMV are being subjectively ripped off unless they're more sentimental than similar landowners would be in their situation. Does this make any sense?
11.14.2007 3:54pm
Adam J:
TSW- you're right of course, there's no true "objective" value, the only thing that is objective is the price that buyer and seller agree upon in an exchange.

However- "What I don't understand is how everyone could uniformly value his land over FMV. It seems that no one would ever sell land if that were true." I'm misusing FMV I guess, I simply meant what price the owner would get on the market if he were to sell the property (which FMV is an estimate of). But it's pretty clear that owners don't uniformly value their land above the price they could get on the market- people voluntarily sell their land all the time.

Subjective value isn't built into the price in a free market transaction (which FMV attempts to find). All you can tell from price is this;
(subjective value of property to buyer) > price > (subjective value of property to seller).
11.14.2007 4:10pm
Adam J:
Also- "I can understand how an individual landowner could value his land at 120% FMV. But this implies to me that he's particularly sentimental about that property -- more so than other landowners in equivalent positions." Just want to note that because an owner's subjective value is above FMV does not mean there's sentimental attachment. The government claims that the land is vital to national defense shows they have a high subjective value of the land-is that because they are sentimental?
11.14.2007 4:14pm
Adam J:
One more thing- "So I don't see how people who get FMV are being subjectively ripped off unless they're more sentimental than similar landowners would be in their situation. Does this make any sense?" They're being ripped off because they are getting less then they value the land. In a free market transaction this can never occur, because an owner will simply choose not to sell. The owner need not be sentimental, he could have a unique use for the property that gives the land more value to him then the next person. FMV won't recognize this subjective value- even if its not sentimental.
11.14.2007 4:33pm
Jam:
It can only be "Necessary and Proper" within a delegated authority. The military cannot be empowered to purchase by Congress unless Congress has the authority. The "Consent of the Legislature of the State" is still a requirement.
11.14.2007 7:15pm
Adam J:
Jam- As much as I would love to find a limitation on eminent domain in that Clause of the Constitution (or any other), it quite clearly has nothing to do with eminent domain. All that provision means is that if property is purchased by the Fed without consent of the state, then both the state and Fed still maintain concurrent jurisdiction. However if the state does consent, then the Fed gets exclusive jurisdiction and the state can no longer has any authority over that land. The Fed doesn't need any consent to purchase (or seize as the case may be), only to exercise exclusive jurisdiction.

Also, Congress quite clearly has authority in this situation even in the narrowest reading of necessary and proper, as Congress has the power to support armies.
11.14.2007 7:41pm
Thomas_Holsinger:
There is nothing wrong with the federal taking in this instance. I can, however, see a use for the "subjective value" doctrine in Kelo takings - when the property is taken for private rather than public use.
11.14.2007 8:09pm
Jam:
Eminent Domain is a purchase by forcing the other side to sell. It is a purchase all the same. Congress can authorize the purchase only for certain purposes, otherwise, why list anything at all.

Sounds familiar to the General Welfare argument that many use to justify an unlimited power for the Feds to do whatever they want.
11.14.2007 8:37pm
Adam J:
Jam- It's not particularly conducive to start bellyaching about the current expansive interpretation of Federal jurisdiction when the topic at hand is national defense, which clearly falls within federal jurisdiction even in the narrowest interpretations of the enumerated powers. It's pretty silly to start complain about the strained interpretation of section 8 and then interpret the DC clause in such a strained fashion. The DC clause is a method for the Fed to gain exclusive jurisdiction over land, it does not in anyway limit what land the Fed can purchase.
11.14.2007 8:57pm
Ilya Somin:
Your proposal to pay a fixed, across-the-board premium does solve many of the obvious problems with case-by-case subjective value determinations. But if we assume that everyone attaches the same subjective value to his or her home, then isn't the subjective value premium already built in to the market price? If all sellers overvalue their homes by roughly the same amount, then wouldn't that inflated price constitute the fair market value?

No. The market value is what the owner would be able to get had he chosen to sell on the open market. That might well be (indeed, is likely to be) less than the value he himself assigns to the property. This is true even if everyone does assign the same subjective value premium to their own property. Just because everyone believes that their personal property is 10% more valuable than the market value doesn't mean that the market price will change to reflect that fact. The market price is determined by what OTHERS are willing to pay for your land, not by the amount that you are willing to take.
11.14.2007 9:01pm
TJIT (mail):
I want to reemphasize Jonathan Adler's point that the government owns massive amounts of land in the West. This massive ownership can create negative social and economic impacts in the states where the government owns massive amounts of land.

That is a very strong argument against condemning additional private land for government use.

Additionally part of the land that was condemned for the original Pinon canon military training area ended being turned over for use as a public park.


If they did not need the land for military use then it is probably reasonable to think they don't need any additional land now.
11.14.2007 9:23pm
TJIT (mail):
Ranch land is not as fungible as people think.

It can take decades of work to optimize the health and productivity of the range. Not to mention the decades of work that can be spent improving the water supply and working facilities.

Replacing a ranch is nothing like buying a different house in the same city. Trying to accurately assess the values of these assets is not straight forward particularly when they are done in a forced sale situation.
11.14.2007 9:42pm
Jam:
Adam J: As an untrained in the legal field individualk, I read the text of the Constitution, and interpret what I read. "National defense" is still constrained by delegated authorities. Just because there is an explicit amendment against "quartering of troops" it does not mean that absent that amendment the Feds had the authority to do it.

Am I bellyaching? No. Article 1, section 8 controls in what areas can Congress pass [Federal] laws. Unless Congress has the authority and passes legislation in that specific area, like the military, the feds/military cannot do.
11.15.2007 11:43am
Adam J:
Jam- First your point was that the fed needed consent of the state, because you misread the DC clause. Next your point seemed to be that eminent domain could only be used for only for purposes enumerated in section 8- clearly irrelevant because the use of eminent domain is being used for national defense, which is enumerated in section 8. Now your point seems to be that Congress needs to give the army authority to use eminent domain- clearly a nonissue because nobody disputes this.
11.15.2007 3:10pm
TSW:
That might well be (indeed, is likely to be) less than the value he himself assigns to the property. This is true even if everyone does assign the same subjective value premium to their own property. Just because everyone believes that their personal property is 10% more valuable than the market value doesn't mean that the market price will change to reflect that fact. The market price is determined by what OTHERS are willing to pay for your land, not by the amount that you are willing to take

1. If every person with land to sell thinks his land is worth 10% more than what anyone else is willing to pay for it, then how is there a real estate market? Why would people who value their properties above the price others would pay ever sell?

2. The fact that voluntary land deals are made indicates there can't be an irreconcilable gulf between the way landowners (potential sellers) and others (potential buyers) value land. If potential seller thinks his land is worth 110k, and potential buyer thinks its only worth 100k, then there are three possibilities: (A) no deal is made; (B) seller sells for less; or (C) buyer buys for more.

If (A) occurs, the buyer could always look elsewhere. But if every seller attaches the same premium, he'll encounter the same situation. Since land does get bought/sold this can't be the case.

If (B) occurs, and the seller voluntarily takes less than 110k, then it seems he didn't actually value the land at 110 in the first place, i.e. the premium didn't exist.

But assuming ex hypothesi the premium does exist, and assuming deals do get made, that seems to leave (C). If all landowners insist on 110k and won't sell for less, then buyers will have to pay at least 110k. In this situation, it seems that the market price has to rise.
11.16.2007 2:41pm
Jam:
To acquire property within a State the Feds, for the purpose of National Defense, still is qualified by the requirement that the State approve the purchase.

The Feds have no eminent domain power.
11.17.2007 9:09am