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When private property is taken for a public use under the power of eminent domain, our federal and state constitutions require that the property owner be paid "just compensation." Courts have interpreted just compensation to be limited to the market value of the real estate taken, plus any loss in value to the property retained by the owner after the taking.
A recent constitutional amendment and enabling statue in Virginia now allows business owners in that state to claim lost profits in addition to traditional just compensation related to real estate value. Under the new Virginia statute, though, lost profits are limited to the first three years after the date of taking.
Virginia now joins Minnesota and Florida in recognizing that businesses, and not just real estate, can be harmed from a taking. This is especially important for convenience stores because those businesses are particularly sensitive to changes to their real estate. These changes can occur whether the taking merely removes some of the property from its existing, ongoing location or forces the convenience store to relocate to a different property.
When a convenience store must relocate, the new location may not be as profitable as the former one. This is usually reflected in lower revenues. This can be caused by lower traffic counts or unfavorable demographics, among other reasons, associated with the new location.
Under Virginia’s three-year rule, the yearly profits for the first three years after the taking should be compared to the last year of profits at the former location. Any difference that is lower will be the amount of recovery.
In this situation, the owner must be careful to ensure that the last year of profits at the former location does not represent less than stabilized performance. If it does, an appraiser must conduct an analysis to produce the stabilized revenues that would have been achieved. If revenues were rising at the time of taking, the appraiser should reflect this as well by showing before-taking profits rising during the three-year period.
Even if a convenience store is not required to relocate, lost profits can result from a variety of reasons. Reduced parking may make coming to the store less convenient, so customers will simply choose to patronize a store that is more so. A change or loss of access can produce the same result. Likewise, the construction project that required the taking may present both a physical and psychological barrier for patrons deciding to visit the store.
The lost profit calculation still includes three years of actual profits from the date of taking where no relocation occurs. The before-taking profits, for comparison, will be the profits that the store would have produced if the project had never been conceived, planned or ever built. In other words, the taking would never have occurred. The before-taking profits should still be analyzed for the same stabilization issues noted above.
Virginia’s new statute has one advantage over the Minnesota and Florida statues. It applies if the convenience store is forced to relocate or remains at the pre-taking location. Florida’s statute only applies in the latter situation, while Minnesota’s rule only applies for relocations. These states, however, recognize all business value loss and do not limit such loss to three years of profits.
This creates some important points to understand and consider. First, the actual loss of business value -- or going concern value -- caused by the taking may actually be more than three years of lost profits, but that extra loss is not recoverable. Second, timing for the formal hearing to determine just compensation may be an important consideration. If post-taking profits are extraordinarily low, it may be wise to delay any hearing to allow as much actual performance as possible to be introduced as evidence. Third, the before-taking profits may be subject to significant disagreement, especially if non-stabilized factors impacted them.
All in all, though, Virginia’s new constitutional amendment is a welcome change in the state’s laws. Loss of profits to convenience stores caused by a taking is now finally recognized.
Dan Biersdorf is the principal attorney for Biersdorf & Associates, a nationally recognized eminent domain law firm. He has successfully handled eminent domain cases in appellate and state supreme courts across the country, and frequently lectures on property valuation matters. Biersdorf & Associates handles eminent domain cases of all types and sizes, and has 16 eminent domain trial attorneys located throughout the country.
Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News.