Real estate investing can enable property owners to turn quite a hefty profit every month by taking in rent. However, one thing that can throw a wrench into the works is eminent domain. Sticky situations like eminent domain require experts, which is yet another reason to hire a property manager before a problem actually occurs.
What is eminent domain and how does it work?
Eminent domain is the government’s right to seize private property. The government has the right to acquire property held by private citizens for public use if the correct governing body approves the acquisition.
After the government takes a citizen’s property, the owner is entitled to payment of different forms. The owner may have the right to be compensated for the market value of the property, any negative impact to the rest of the property caused by the government’s acquisition of part of it, loss of business, disturbance or difficulties relocating.
Property owners can also seek more compensation than what the government initially provides by making a legal claim before the appropriate court or the government body that’s administering the acquisition.
Problems with compensation
One issue residential or commercial property management companies can help with is compensation for the appropriated property. Getting the compensation you are entitled to can be a difficult task, especially since the government may not offer an acceptable amount of compensation for the loss of business caused by its acquisition of the owner’s rental property.
Owners who rent their property out face significant losses if they count on the income generated by the property. Thus, the compensation offered by the government often seems like just a drop in the bucket compared to what is being lost. Suddenly, they no longer have recurring income every month that they can count on. Their balance sheet looks very different than it did just the month before. And yet, those whose property is seized face little or no recourse from the government.
It is impossible to tell the future when it comes to eminent domain or any other public affairs. However, it is possible to forecast possible outcomes, and this is something property management firm should be doing for its clients.
Property managers can create valuation projections for the owners they work with, gauging what the property might be worth in the near term, medium term and long term. Part of that projection should be staying on top of current events in the neighborhood and analyzing how those events might impact the value of the property. Managers can monitor what local government agencies are doing, including government boards, commissions and other bodies that are connected to eminent domain actions.
Property managers can employ a number of techniques to help the owners they work with retain control over their property or at least maximize the amount of compensation they will receive. Firms should never assume that all is lost when eminent domain is involved. Taking a stand is an important part of a quality property manager’s job. In fact, the best property managers will not accept the that everything is automatically lost in cases of eminent domain.
Here’s how property managers should handle eminent domain
Forbes shared an example of an eminent domain case from Los Angeles. The city approved construction for its rail system and subway to be extended. The route was to run along Wilshire Boulevard, affecting some of the most valuable commercial properties in the country. The nature of the situation made it appear that everything was lost for affected property owners. However, an experienced property management firm was able to make the most out of the situation and avert a disaster for commercial property owners.
The author’s firm prepared to negotiate with the government by drawing up a professional analysis which placed the client’s firm in a very favorable light. The goal of the presentation was to show the government what the highest possible rental losses on the property could be if it were seized under eminent domain.
If the firm was successful, it would increase not only the value of the property but also the expense for the government in seizing it.
An alternative solution for maximum value
In addition to increasing the value of the properties, the presentation could also set the owner up to resist the government’s acquisition of it under eminent domain. Instead, the property owner may be able to keep it with a long-term lease until construction on the rail project was finished.
The firm hoped to convince government officials that they would save quite a bit of money by doing things this way. It also wanted to show how some of the headaches involved in eminent domain could be averted, along with all the negative publicity that would be involved in the project.
The property management firm also recommended that its clients acquire a number of adjoining properties that were also under the threat of seizure under eminent domain. Acquiring those other properties could increase the value of the combined property even more in the six to eight years that would pass until the rail project would be finished.
It’s too early to tell if the solution will be successful, but the property manager said it does appear to be working. Government officials often don’t want to take part in lengthy legal battles with commercial property owners, especially those with a lot of money to combat the problem. Additionally, property managers understand the market much better than government officials do.
At first glance, it might seem like these solutions won’t work, but property managers are better positioned to be able to come up with ideas for managing eminent domain crises than the owners themselves are. Savvy property managers who are experienced in such matters can think outside the box to find ways to maximize value for their property owners.
About the Author
Sabine Ghali, Managing Director at Buttonwood Property Management, a property management company in Toronto. She is an entrepreneur at heart who endeavors to help investors create real estate wealth over time in the Greater Toronto Area. Sabine is published in a number of media outlets, including Entrepreneur, Forbes, Toronto Star, Toronto Sun, and Gulf News, among many others.