A short one today, but worth reading because the Kentucky Supreme Court's opinion in Kentucky Transportation Cabinet v. Atkins, No.2023-SC-0173 (Dec. 19, 2024) highlights an important point: when offering evidence of the compensation owed for the taking of income-producing property--and "[d]etermining the value of condemned real property is not a science"-- it isn't "speculative" to consider what a hypothetical purchaser in a market free of project influence would pay for the anticipated income stream.
If that conclusion seems kind of obvious to you, it wasn't to the Kentucky Transportation Cabinet, which asserted the trial court abused its discretion by allowing the owner's appraiser to testify that the Cabinet's taking for a highway project of the fee simple interest of land containing subsurface coal obligated it to pay compensation based on the potential income from coal royalty payments for the coal.
The Supreme Court disagreed, concluding that the trial court was well within its discretion to allow presentation of evidence of the property as producing coal royalties:
Despite the Cabinet’s arguments to the contrary, a property’s capacity to produce future income for its owner can be appropriately considered as affecting its fair market value, as long as that income is “derived from the intrinsic nature of the real estate itself, as distinguished from the profits derived from a business operated on the land.” Any estimation of income expected to be produced by the condemned property can then “be capitalized to give some fair indication of what an investor would pay [at the time of condemnation] for the privilege of receiving that income over some foreseeable period of time.” The income capitalization approach is particularly well-suited to valuing real property that contains valuable minerals, because the “value of minerals under land . . . usually lies not in their value in the ground but in the future income to be gained by their eventual extraction and sale.”
Slip op. at 10-11 (citations omitted).
But you don't just take the amount of coal in the ground and multiply it by the market price of coal. Instead, "a more robust application of the income capitalization approach might consider how the costs of mining, risks associated with the coal market, or inflation affect the fair market value of the condemned property." Slip op. at 12.
The court rejected the Cabinet's argument that the evidence of this future income was too speculative. See pages 12-13 of the slip opinion for the details why. The short story is that the owner's appraiser considered the cost and risks in coal mining, and discounted the potential income stream to account for time and inflation. This considered the "'contingencies and uncertainties of business' while estimating the fair market value of the Owners' property." Slip op. at 13.
And, of course, all just compensation valuations are to some degree speculative because the court is trying to calculate the value which an arms-length transaction would assign, when by definition a forced acquisition by eminent domain is not free-market, nor arms-length:
Determining the value of condemned real property is not a science, and such an endeavor necessarily requires some degree of speculation.
Slip op. at 14 (citations omitted).
A good reminder worth checking out.
Ky. Transp. Cabinet v. Atkins, No. 2023-SC-0173-DG (Ky. Dec. 19, 2024)
