Saturday, March 15, 2014

Fair Play at The Colony?

     Occasionally, states and corporations use eminent domain to acquire public and private land to use for projects such as pipelines, electricity lines, and highways. When a person owns a piece of land and it is seized through eminent domain, the condemning entity must purchase the property at fair market value. 
     This is normally a fairly straight forward process. The difficult part is determining what the fair market value is. A piece of property has a current value on the open real estate market. It also has an intrinsic value based on the fact that the land will still be there in the future and therefore must be accounted for. This is further complicated when the land has an owner and someone who owns a lease to it.
      This is the case on all land owned by the Fairhope Single Tax Colony. The Colony has a long history and owns a surprising amount of land in and around the city of Fairhope. When someone buys a house and it sits on Colony land, that person owns the house and any other improvements on the property, but the Colony owns the land. The person purchasing the house receives a 99 year lease on the land it sits on.
     This works without complication a majority of the time. When there are problems, they are generally quickly solved with amicable solutions. However, the State of Alabama has been using eminent domain to expand roadways on the eastern shore of Baldwin County affecting owners and lessees of property along the expansion routes. 
     Once all parties involved have agreed to the value of the land being taken, the funds are distributed. But how are they to be fairly distributed between the Colony and a lessee? The Colony, lessees and Alabama have spent years in court trying to answer this question. 
     Presumably, the formula for distribution of State funds of eminent domain properties concerning owners and lessees is as follows: Take the purchase price plus economic rent less the contract rent subtracted from State funds with the remainder going to the Colony.
     Economic rent is basically the benefit you receive by owning something of value such as a patent or land. This can sometimes be a difficult number to track down but in the case of Colony land, litigation has provided a solution. Several factors may be considered when calculating the value of a leaseholder's interest. They include: the length of the unexpired term of the lease; the fair market value of the lease; the highest and best use of the property; the utility of any portion of the land in which the leaseholder has an interest remaining after the condemnation, and any other damages sustained by the leaseholder.
     Contract rent is the rent charged by the Colony calculated as .002 x tax value of the land. This is now called the demonstration fee.
     Unexpired term of the lease is 99 years as the lease is renewable at any time. 
     State funds is the price paid by the state for the seizure of land.
     Anything left over is the Colony's share of the money. 
     For Example: The State has agreed to pay $10,000 for a piece of land to expand the highway. The tax value on the land is $10,000, therefore the contract rent is $20 per year. The economic rent is $100 per year.
Price of Land + Economic Rent = Total Value
10000 + 9900 = 19900

Economic Rent x Remainder of Lease = Total Economic Rent
100 x 99 = 9900

Contract Rent x Remainder of Lease = Total Contract Rent
20 x 99 =  1980

Economic Rent - Contract Rent = Leaseholder Value
9900 - 1980 = 7920

Leaseholder Value + Purchase Price = Total Leaseholder Value
10000 + 7920 = 17920

State Funds - Total Leaseholder Value = Remainder
10000 - 17920 = -7920

Remainder + Contract Rent = Colony Share
-7920 + 1980 = -5940

In this simplified example (every case will be fact specific), the Leaseholder Value and Colony Share exceeded what the State had agreed to pay. In this instance, Alabama law states a lessee must be reimbursed first. This means the leaseholder would get $10,000 and the Colony would receive $0. The leaseholder loses $7,920 in property value and the Colony loses $1,980 due to the state only paying $10,000 for a piece of property worth $19,900.

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