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How "Highest and Best Use" Can Substantially Impact Just Compensation for Landowners

December 18, 2017

The taking of private property for public use is referred to as condemnation or eminent domain. While federal, state, and municipal governments may unilaterally take private property for public use, landowners are constitutionally entitled to "just compensation."[1]  In South Carolina, "just compensation" is determined by considering "only the value of the property to be taken, any diminution in the value of the landowner's remaining property, and any benefits" that the remaining property will gain from the project.[2]  The concept of "just compensation" is simple in theory, but complex in practice.

The entity condemning the property (the condemnor) must appraise the fair market value of property before any property is actually taken from a landowner. "Fair market value is that price which a willing buyer will pay a willing seller, neither being under compulsion to buy or sell and both being fully informed of all uses to which the property is adopted and for which it is capable of being used."[3]  In appraising the fair market value of property, "[a] landowner is entitled to compensation upon the basis of the most advantageous and profitable use of his land."[4]  In other words, the appraised value of condemned property will be based upon the "highest and best use" of the property. "[A] property's highest and best use must be physically possible, legally permissible, financially feasible, and maximally profitable."[5]  The determination of highest and best use can be the most important factor in whether a landowner is properly compensated for property taken by condemnation.  Ordinarily, this determination is made based upon the opinions of expert appraisers; those hired by the condemnor versus those hired by the landowner.

First, an appraiser will consider "the site size, shape, land area and topography" to determine which uses of the condemned property are physically possible. [6]  In addition, an appraiser may also consider "the availability of public utilities" in determining which uses of the condemned property are physically possible.[7]  For example, the highest and best use of a quarter (1/4) acre parcel of land could not be as a municipal airport because such a use would not be physically possible.

Second, an appraiser will consider limitations such as "those imposed by private deed restrictions, zoning, building codes and environmental regulations" to determine the legally permissible uses of the condemned property.[8]  For example, the highest and best use of property zoned for residential use could not be as a shopping center because such a use would be legally impermissible.

Third, an appraiser will consider "those uses that meet the conditions imposed by the two previous criteria and which may be expected to produce a positive financial return" to determine which uses of the condemned property are financially feasible.[9]  A recent case regarding the assessed value of one hundred twenty-one (121) condominium units in Mt. Pleasant, South Carolina highlights the importance of determining the financially feasible uses of property. [10]  In 2006, the taxpayer's predecessor in title converted the units from apartments to condominiums.[11]  When the units were converted from apartments to condominiums, the assessed value of the property nearly doubled because the highest and best use of the property also changed from apartments to condominiums.[12]  Even though the units were titled as condominiums, they were actually used as apartments as of December 31, 2007, which was the date of valuation.[13]  At trial, the taxpayer introduced evidence demonstrating "that it was not financially feasible for the property to be sold off as condominiums as of December 31, 2007."[14]  The Administrative Law Court agreed with the taxpayer and held that the highest and best use of the property was as apartments because "it simply was not financially feasible for the property to be sold as condominium  units as of December  31, 2007."[15]

Finally, an appraiser will detem1ine the maximally profitable use of the condemned property by evaluating the financially feasible uses of the condemned property and selecting the use which "provides the highest rate of return, or value (given a constant rate of return)."[16]  In other words, the highest and best use of condemned property will be the most profitable of the financially feasible uses.

A landowner must be compensated according to the fair market value of the condemned property based upon its highest and best use, even when the landowner has no intention of using the condemned property for its highest and best use.  For example, the Supreme Court of South Carolina found that a landowner was entitled to compensation based upon evidence that the highest and best use for his property was rural residential development even though the landowner testified that "he had never tried to sell any of [the land]; that he had been approached by would-be purchasers; that he didn't care to sell at all, and that he had no intention whatever of selling any rural residential lots or sites."[17]

A landowner is entitled to the fair market value of the condemned property, but not the speculative value of the property.[18]  The highest and best uses which may be considered in appraising the value of the condemned property "must be so reasonably probable as to have an effect on the present market value of the land."[19]  For example, if it is determined that the highest and best use of a parcel of farm land is residential  development, then it is permissible for an appraiser to consider the "price a developer of real estate subdivisions would pay, as of the date of the taking, for the property to be developed into a subdivision. "[20]  On the other hand, it would be impermissible for an appraiser valuing raw land to consider the "amount the developer could expect to receive [if] the lots [were] sold to prospective homeowners."[21]

The appraisal value of the property must also account for "any damage or any decrease in actual value of the remainder of the landowner's property which are the direct and proximate consequence of the" condemnation.[22]  Thus, the appraisal value of the property must account for any decrease in the fair market value of the remaining property, "taking into consideration the use for which the land was taken and all the reasonably probable effects of its devotion to that use."[23]  A landowner may introduce evidence regarding the highest and best use of the property before and after the taking in order to demonstrate a decrease in the fair market value of the remaining property.[24]  In the Bolt case, a landowner was permitted to introduce evidence that the successful commercial chicken farm which he owned and operated on the property before the condemnation was the highest and best use of the property.[25]  Further, the landowner in Bolt was also permitted to introduce evidence that his remaining property was no longer suitable for a commercial chicken farm.[26]  The landowner in Bolt was compensated, not for the loss of his business, but for the decrease in the fair market value of his remaining land which resulted from the land no longer being a suitable location for a commercial chicken farm.[27]

Often, the highest and best use of property before condemnation and after condemnation is not readily apparent. The current use may or may not be the best and most profitable use.  Also, the current use may no longer be feasible after a partial condemnation or a condemnation that places a restrictive easement on the subject property.  The highest and best use analysis can make a substantial different in the compensation a landowner will receive for condemned property. It is important for the landowner's appraiser to work closely with landowner's attorney to insure all the highest and best use factors are properly considered.[28]



[1] U.S. CONST. amend. V; U.S. CONST. amend. XIV, §1.

[2] S.C. Code Ann. § 28-2-370.

[3] Hous. Auth. of City of Charleston v. Olasov, 282 S.C. 603, 608 (Ct. App. 1984).

[4] S.C. State Highway Dep't v. Bolt, 242 S.C. 411,418 (1963).

[5] Charleston Cty. Assessor v. LMP Props., 403 S.C. 194, 198 (Ct. App. 2013) (internal quotation marks omitted).

[6] Charleston Cty. Assessor, Petitioner, 09-ALJ-17-0533-A-CC,  2013 WL 5410720, at *5 (Sept. 20, 2013).

[7] Id.

[8] Id.

[9] Id.

[10] Charleston Cty. Assessor, Petitioner, 09-ALJ-17-0533-A-CC, 2013 WL 5410720 (Sept. 20, 20 13). While this case involved a dispute over the assessed value of property for tax purposes, not condemnation proceedings, the Administrative Law Court applied the "highest and best use" test to determine the value of the property.

[11] Id. at *1-2.

[12] Id. at *2.

[13] Id. at *6-8.

[14] Id. at *5.

[15] Id. at * 12.

[16] Id. at *5.

[17] S.C. State Highway Dep't v. Bryant, 253 S.C. 400,406 (1969).

[18] Olasov, 282 S.C. at 608.

[19] Carolina Power & Light Co. v. Copeland, 258 S.C. 206, 215 (1972).

[20] Copeland, 258 S.C. at 216.

[21] ld.

[22] Bolt, 242 S.C. at 417.

[23] Id.

[24] Id. at 419.

[25] Id.

[26] Id.

[27] Id.

[28] Special thanks to Harris "Mac" Watkins for his invaluable contribution to this article.

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