Guardian Pipeline and Comparative Appraisal
Takings are a fact of our constitutional system. Often, they're the method for beginning any public improvement or development. Construction lawyers frequently come across the issue in highway expansion or stadium projects. The results are mixed, and the topic can lead to some harsh rhetoric from critics. One only has to remember the Kelo v. City of New London opinion and the ensuing humorous attempt at establishing the "Lost Liberty Hotel" in place of Justice Souter's house, to understand just how much people can get worked up. Few things can have as much sentimental value as someone's home - or in the case of a farmer, as land. (For an interesting discussion of the Kelo decision and the ensuing problem of the "holdout" owner in takings actions, read this entry by Judge Posner at the Becker-Posner Blog)
Guardian Pipeline v. 950.90 Acres is an opinion about the attempts of farmers to overturn a commission's decision regarding the value of their land. Guardian Pipeline was authorized by the FERC to construct a pipeline that included the necessary condemnation of portions of more than 100 parcels of land in northeastern Illinois in order to put the pipeline underground. A commission was appointed by the district court to receive evidence and propose findings to the district judge. The proposed findings and resulting offers for the land or damage to the land during construction were accepted by all but three defendants. Those defendants challenged the commissions findings which were adopted by the district court. The defendants then appealed and the seventh circuit delivered an opinion upholding the decision.
The decision, written by Judge Easterbrook, presents an interesting solution. Takings of partial portions of land in Illinois are governed by the "unit rule." (Read the concurring opinion in the cited case to see that the method has its critics.) In actions involving such takings, the unit rule means that the property subject to taking must be valued as a whole and the owner given the benefit of its assessment at the "highest and best use" of the property at the time of the taking. Often, comparable parcels of land are sought out by the parties "experts" for evaluation and assessment. Normally, three to eight parcels (five to seven in most cases) are compiled in a report. An average value per square foot is assessed for the exemplars. That value is applied to the total square footage of the proposed portion of the parcel to be taken and the result is the amount of compensation offered by the taking entity, or the value between the parcel before and the parcel after the taking is assessed with the same per-square-foot methodology being used. Sometimes assessments include the cost of work to bring the land back into a usable fashion (for instance having to repave a portion of a parking lot that has been decreased in size by a taking). But often, any such arguments about external factors which the owner feels will require extra compensation are not included in the appraisal and must be argued over in court.
These types of appraisals caused the court in Guardian to wonder:
- "What puzzles us is why both sides were fixated on pairwise comparisons--that is, matching each subject parcel with a supposedly "comparable" parcel that does not have a transmission-corridor easement (whether for oil, gas, or water underground, or rail or electricity above ground), appraising that parcel, and then comparing the appraised value of the "matched" parcel with appraised values of the subject parcel with a pipeline easement. That process is full of problems. No other parcel will be identical to the subject parcel except for its lack of a transmission corridor easement. Location and other attributes always differ, setting the stage for debate about whether an appropriate comparison has been selected. And even if very similar parcels can be found for comparison, the appraisals are just estimates. Each of these comparisons requires two appraisals: one of the "matched" parcel, and one (informed by the comparison) of the subject parcel with the easement."
Suggesting a different approach, based on regression analysis and citing the FJC's Reference Manual on Scientific Evidence, the court opined that:
- "A different approach would be to gather data about the actual selling prices of real estate with and without transmission-corridor easements and use these data to determine how much the easement reduces the value of real estate in real transactions. The law of large numbers would make up for the lack of closely matched comparison pairs. How many feet of transmission easement encumbers a parcel is a continuous variable and could be one independent variable in a regression. Daniel L. Rubinfeld, Reference Guide on Multiple Regression, in Reference Manual on Scientific Evidence 179-227 (Federal Judicial Center 2d ed. 2000), provides a good description. Using real transaction prices reduces the role of guesswork. Although no one suggested such an approach in this proceeding, litigants (and district judges) should keep it in mind for the future, as it has the potential to be faster, less expensive, and more accurate than a parade of witnesses offering estimates that cannot be verified."
This method not only makes sense, it seems to be a more scientific and mathematically sound strategy than a method based on comparative appraisals and should be considered by the Illinois Supreme Court and lower courts as a substitute for the unverifiable method in use today. Such a method often has "experts" applying "principles" and coming out miles apart in their appraisals depending upon which party to the litigation they represent.
