Severance Damages
Severance damages are compensation awarded to a property owner when only a portion of their land is taken by eminent domain, and the remaining property suffers a reduction in value as a direct result of that partial taking.
Key Takeaways
- Severance damages compensate property owners for the decrease in value of their remaining land after a partial eminent domain taking.
- These damages are distinct from the compensation for the taken portion itself and focus on the harm to the 'remainder' property.
- Common methods for calculating severance damages include the 'Before and After' method and the 'Cost to Cure' method.
- Factors like impaired access, loss of utility, increased noise, or loss of aesthetic appeal can contribute to severance damages.
- Property owners should seek professional appraisal and legal counsel to accurately assess and claim appropriate severance damages.
What are Severance Damages?
Severance damages refer to the compensation a property owner receives when a government entity or authorized private party exercises its power of eminent domain to acquire only a portion of their property, and the remaining, untaken portion suffers a loss in value as a direct consequence of that partial taking. This compensation is separate from the fair market value paid for the actual land acquired. The core principle is to make the property owner whole, ensuring they are not financially disadvantaged by the government's action.
In real estate investing, understanding severance damages is crucial, especially when dealing with properties that might be subject to infrastructure projects like road expansions, utility easements, or public land acquisitions. A partial taking can significantly impact a property's highest and best use, development potential, or operational efficiency, directly affecting its investment value.
How Severance Damages Are Determined
The determination of severance damages is a complex appraisal process that assesses the diminution in value of the remaining property. It requires a thorough analysis of how the partial taking impacts the utility, access, aesthetics, and overall marketability of the untouched portion of the land. The goal is to quantify the financial harm caused to the remainder.
Key Factors in Assessment
- Impaired Access: If the taking restricts ingress or egress to the remaining property, making it less convenient or impossible to use.
- Loss of Utility or Functionality: For example, a commercial property losing critical parking space or a residential lot becoming too small for its intended use.
- Increased Noise, Pollution, or Visual Blight: If the new public use (e.g., a highway) negatively impacts the quality of life or business operations on the remaining land.
- Loss of Aesthetic Appeal: Particularly relevant for properties where views or natural features contribute significantly to value.
- Changes in Zoning or Development Potential: If the taking alters the remaining property's ability to be developed according to its highest and best use.
Calculating Severance Damages
Two primary methods are commonly used by appraisers to calculate severance damages:
1. Before and After Method
This is the most common and often preferred method. It involves determining the fair market value of the entire property before the taking, and then determining the fair market value of the remaining property after the taking (considering the negative impacts). The difference between these two values, minus the value of the land actually taken, represents the severance damages.
Example: An investor owns a 5-acre commercial parcel valued at $1,500,000. The state takes 1 acre for a road widening project. The fair market value of the 1 acre taken is $300,000. After the taking, the remaining 4 acres are now landlocked and valued at only $800,000 due to impaired access.
- Value of entire property before taking: $1,500,000
- Value of remaining property after taking: $800,000
- Diminution in value of the whole property: $1,500,000 - $800,000 = $700,000
- Value of the taken land: $300,000
- Severance Damages: $700,000 (diminution) - $300,000 (taken land value) = $400,000
2. Cost to Cure Method
In some cases, the damage to the remainder can be mitigated by making specific improvements or changes. The Cost to Cure method calculates the reasonable cost to restore the utility or value of the remaining property. This method is typically used when the cost to cure is less than the diminution in value if no cure were undertaken.
Example: A developer owns a retail plaza. A partial taking for a utility easement removes a small portion of their parking lot, reducing the total available spaces below zoning requirements. The cost to reconfigure the parking lot and add a new entrance to meet zoning and restore functionality is estimated at $75,000. If the diminution in value without this cure would be $150,000, then the severance damages would be the $75,000 cost to cure.
Legal and Practical Considerations
Navigating a partial taking and claiming severance damages requires careful attention to legal and appraisal details. Property owners should be proactive in understanding their rights and the potential impacts on their investment.
Navigating the Process
- Engage an Experienced Appraiser: Hire an independent appraiser specializing in eminent domain to provide an objective valuation of both the taken land and the severance damages to the remainder.
- Consult Legal Counsel: An attorney specializing in eminent domain can help interpret state laws, negotiate with the condemning authority, and represent your interests if litigation becomes necessary.
- Document All Impacts: Keep detailed records of how the partial taking affects your property's use, income, and potential development. This includes photos, surveys, and financial statements.
- Understand Your Rights: Be aware that the initial offer from the condemning authority may not include adequate severance damages. You have the right to negotiate and challenge their appraisal.
Frequently Asked Questions
What is the difference between compensation for the taken land and severance damages?
Compensation for the taken land refers to the fair market value of the specific portion of your property that the government acquires. Severance damages, on the other hand, are additional compensation for the loss in value of the *remaining* property that you still own, caused by the partial taking. It's the impact on what's left, not just what's taken.
Can severance damages be claimed if the government takes an easement instead of full ownership?
Yes, absolutely. Even if the government only acquires an easement (a right to use a portion of your property for a specific purpose, like a utility line), it can still lead to severance damages. If that easement restricts your ability to use or develop the remaining property, or otherwise diminishes its value, you may be entitled to severance damages for the impact on the untaken portion.
Are severance damages taxable?
Generally, compensation received for the taking of property, including severance damages, is considered a return of capital and is not immediately taxable up to your adjusted basis in the property. However, if the total compensation exceeds your basis, the excess may be treated as a capital gain. It's crucial to consult with a tax professional or real estate attorney to understand the specific tax implications for your situation, as rules can vary by jurisdiction and individual circumstances.
How long does it take to resolve a severance damages claim?
The timeline for resolving a severance damages claim can vary significantly. It depends on the complexity of the case, the willingness of the condemning authority to negotiate, and whether the case proceeds to litigation. Simple cases might settle within a few months, while complex disputes involving significant value or unique property impacts could take several years to resolve through the courts. Engaging experienced professionals early can often expedite the process.