Just Compensation… The Peter Roff Solution

The Constitution places two basic restrictions on government’s use of its power to take private property. First and foremost, they have to accord due process to the property owner. This can take a lot of different forms, and we’ll discuss the due process issue in a later article on the blog (some of the most serious property rights problems arise from the manner in which states or the federal government consider what’s fair. New York, for instance, considered “due” process to include not directly informing a property owner that their property was going to be taken). But I digress.

Second, and unfortunately considered by many to be the most important part of the equation, is that “just compensation” be paid. I say “unfortunately” because really, without a fair process to consider the taking itself, can the compensation really be measured “justly”?

But because a tremendous amount of emphasis is placed on the issue of compensation, I thought we’d talk about it today. The courts have, for the most part, determined that “just compensation” is “what a willing buyer would pay to a willing seller” – ie, the “fair market value”. The problem is, of course, that governments are notorious for undervaluing the property, or having the property appraised with all sorts of encumberances.

The problem is intensified when government threatens to take the property prior to the valuation, and the property is appraised as it would be with the threat hanging over it. Considering that little free market use can be made of the property with such a cloud, “condemnation blight” ensues –the value of the property drops sharply. At the very least, property should be valued as though it were absent such artificial restrictions.

The compensation issue is made worse when the property is being taken for one of these private-to-private takings. In this case, what would have normally been a truly free-market negotiation between the developer who wants the property and the current property owner – with the current property owner being able to set his own price. Of course, the future value of the developer’s project would be taken into consideration when determining the asking price. Anyone engaging in serious property rights reform via legislation ought to look carefully at this aspect of the issue, and consider some way of bridging the gap between what’s currently considered “just compensation” and what ought to be just.

One such solution was proposed to me over a year ago by Peter Roff, the author and political strategist. Roff’s solution, which I agree with wholeheartedly, is to have governments consider not the current value of the property, but the value of the property after the proposed development is completed (or something remotely approaching that). Sure, it’s not an exact science, and there would be some speculation involved.

But on the other hand, it is a much more fair solution for the person whose property would be taken. What’s more, it places a bit more constraint on governments considering using their power of eminent domain capriciously. Certainly, the city of Lakewood, OH wouldn’t have been so cavalier pronouncing vast portions of its city as “blighted” for the purposes of condemnation if they had been forced to consider the value of that property following condemnation.

As legislation is being considered at the state and federal levels, the compensation issue must be taken into account. Raising the bar would help alleviate some of the sting of the taking, while making governments think twice about doing it.

Soon to come: Fixes to the problems of "Due Process".