What is Eminent Domain? (Complete Guide)

As a real estate investor, eminent domain is something you should know about. If you own property in an area that the government needs for a road expansion, fire station, railway, or something else that benefits the public, it may be legally taken from you, whether you want to sell or not.

If you receive an eminent domain notice, however, you do have the right to due process. You may be able to contest the offer or demonstrate to the court that there are reasonable alternatives to the taking of your property.

What Is Eminent Domain?

Eminent domain is when private property is taken by the government for public use. The property owner, however, must receive just compensation for it. The power of eminent domain is derived from the Fifth Amendment to the United States Constitution and can be used by the federal government, as well as state and local governments.

The eminent domain process is simple. When the government wants to build a new courthouse or park, expand a highway, or open a school, for example, it will first try to buy a property by making an offer to the owner. If the owner refuses to sell, the government can exercise its authority of eminent domain by having the court condemn the property in favor of the government.

With eminent domain, “condemnation” doesn’t refer to the condition of a property. It doesn’t mean that it is a distressed property, is unsafe, or uninhabitable. Rather, it refers to the legal process of acquiring private property for public use.

Eminent domain may also be used when government activity interferes with a person’s use of their property. For example, a government-run shooting range near residential property, airport traffic over a farm, or other such disturbances may result in properties being taken.

Key Principles of Eminent Domain

To use eminent domain to take a property, four important criteria must be met. They include public use, just compensation, due process, and necessity.

Public use

For the government to legally take someone’s property, the purpose must be for a public use. Common examples include:

• Utilities
• Schools
• Flood control
• Road expansion
• Infrastructure upgrades 
• Historical site preservation
• Parks and recreation areas
• Environmental preservation

Over time, courts have expanded the definition of public use to include projects that benefit the public more generally. For example, eminent domain may be used to encourage economic growth in a community through the removal of existing structures so that new businesses will find the area attractive. Governments may also use eminent domain to acquire land for the development of shopping centers, housing communities, stadiums, and arenas.

Just compensation

When a government uses eminent domain, property owners must receive just compensation. This means the government must pay property owners fair prices for their properties.

Most commonly, the compensation a property owner will receive is based on the current fair market value, which is the amount a seller could reasonably expect to receive on the open market. The valuation may be complex if the government takes land that contains natural resources, and disputes about what constitutes fair market value may arise.

Due process

Owners have the right to due process when eminent domain is used to take their properties. This means they have a say in the matter and can contest the government’s actions in court. They can challenge whether the taking was necessary and can also dispute the compensation they are receiving.

A local government could use eminent domain to take a farm for a new park, for example. The owner may not feel as though the amount offered is sufficient because it doesn’t include compensation for the minerals that could someday be mined. The owner can have the property appraised and sue the government for a higher amount.

Necessity

When a property is taken through eminent domain, it must be necessary to complete a public project. There can be no other reasonable alternatives.

If a local government uses eminent domain to take a property to build a new school, for example, the government must demonstrate that there are no other reasonable locations for it. The property that is being taken is essential to the completion of the project.

Can a Property Owner Dispute Eminent Domain?

Property owners don’t always want to sell. Some may feel personal connections with their properties. They may also have invested time or money in improvements that they believe are not reflected in the government’s offer.

For these and other reasons, eminent domain cases are often disputed. In a public-use development where eminent domain is used, planners determine which properties may be affected and work with their appraisers to determine fair market values. The government then presents offers to purchase the properties.

If the owners agree, the transactions proceed and are fairly straightforward. If the parties are unable to come to terms, however, the dispute moves to condemnation proceedings.

Once in condemnation, a property owner can have the property appraised, and an attorney may sue for a new amount. Other challenges may also be brought to condemnation proceedings, including the project’s validity and whether it serves the public. Property value, however, is the most common dispute involving eminent domain.

Eminent Domain Examples (Notable Cases)

The legal concept of eminent domain has evolved over the years. Here are three important Supreme Court cases that greatly influenced the interpretation of eminent domain law.

Kohl v. United States (1875)

Kohl v. United States was the first U.S. Supreme Court case to assess the federal government’s eminent domain powers. It involved the federal government taking land in Cincinnati, Ohio, to build a post office, customs office, and other government facilities. The petitioners argued that the court did not have jurisdiction in the state, and the government could not acquire the land without proper state legislation.

The court ruled in favor of the federal government. Justice William Strong emphasized that the federal government’s eminent domain power was “essential to its independent existence and perpetuity.”

Berman v. Parker (1954)

In Berman v. Parker (1954), the plaintiff, Max Morris, owned a department store in an area that was designated as “blighted” and was authorized for seizure and redevelopment. Morris sued on the basis that the District of Columbia Redevelopment Act and its seizure of his land to build housing violated his right to due process. Morris passed away while the case was being decided, and one of his executors, Samuel Berman, continued the case on behalf of the estate.

The court found that the seizure of Morris’s property was not a violation of his Fifth Amendment rights. This unanimous decision expanded the definition of “public use” to include “public purpose”—in this specific case, low-income housing.

Kelo v. City of New London (2005)

This narrow 5-4 decision by the U.S. Supreme Court dramatically expanded how eminent domain can be used. In this case, the city of New London, Connecticut, wanted to revitalize its ailing and distressed economy. As part of a development plan designed to benefit the public, the city council allowed a private, nonprofit entity to exercise eminent domain in the city’s name.

Susette Kelo and others in the area, however, refused to sell their properties, so the city condemned their homes to force the owners to accept compensation. Kelo alleged that the seizure of her property was a violation of the public use element of the Fifth Amendment takings clause because the government intended to use the land for economic development, which is not solely public. Kelo’s property was not blighted, yet it was being transferred to a private firm for development.

The court ruled that redistributing the land was part of a detailed economic plan that included public use. Even though the transfer was from one private party to another, the goal of economic development served an important public purpose.

Interestingly, the court also held that state and local governments should be allowed to determine for themselves “what public needs justify the use of the takings power.” At the end of the opinion, the court added, “We emphasize that nothing, in our opinion, precludes any state from placing further restrictions on its exercise of the takings power.”

Since the decision, 44 states have reformed their eminent domain laws. A dozen other states have amended their state constitutions to stop eminent domain for private gain. In nine states, courts either rejected the Kelo ruling or strengthened protections for property owners.

Eminent Domain FAQ

Final Thoughts

No one ever wants to receive a letter stating that a property is being taken by eminent domain. If you do, keep in mind that you will receive just compensation for it, which you can then use to pay off your mortgage and buy another property. If you believe the offer is too low, you have the right to due process to demonstrate to the court that it’s worth more.

Eminent domain also doesn’t always mean you will lose all of a property you own. It may sometimes be used to take a small part of a property. It could be used to take a few feet of your property, for example, to expand a road or for a flood control project.As a passive real estate investor, you can minimize the potential risk of eminent domain by diversifying your real estate portfolio by owning different property types in different locations. This is also a good practice to protect you from other risks such as wildfires, floods, local economic downturns, and other threats.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.