Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Just Compensation

What it is:

Just compensation is the fair market value that a federal or local government must pay to a property owner in order to seize that private property for public use.

How it works (Example):

Let's say John Doe lives in a house on one acre next to Highway 47. The state wants to widen the road due to the higher traffic and the new casino that was built down the road. In order to widen the road, the state needs the space on either side of the road.

Because the state deems the road necessary, it seizes John's property and gives him $250,000 for it. John does not have the opportunity to say no, though he can challenge whether the $250,000 is fair market value. Generally, the fair market value is the price at which similar properties have sold recently or the price at which a willing seller would sell to a willing buyer.

The police power of local and federal governments generally is what gives them the authority to seize property for public use. The fifth and fourteenth amendments of the U.S. Constitution permit the government to exercise its power of eminent domain and requires "just compensation" for seized property.

In some cases, the property owner starts the eminent domain proceedings. This is called inverse condemnation, and property owners typical apply it when a government has used a property without just compensation (typically, this happens when the government has polluted the property).
 

Why it Matters:

Eminent domain is a controversial topic, and just compensation makes it all the more controversial. Though taking property may be necessary for the public good (particularly in the case of health and safety), it is sometimes difficult to forcibly separate a person from his or her property. On top of this is the notion of what constitutes fair market value when the person is required to sell the property under duress (not to mention the cost of moving off the property and the expense of purchasing another property).

Additionally, there is considerable question regarding whether implementing additional heavy regulations on a particular property is effectively the same as seizing the property because it significantly reduces the owner's "use and enjoyment" of the property, and thus entitles the owner to just compensation. Last, there is considerable controversy about what constitutes valid public use. For instance, some courts have allowed cities to clear bad-looking neighborhoods simply to beautify the town. Others have allowed governments to seize property and give it to businesses that build factories or other job-creating facilities on the property. In those cases, the just compensation or fair market value of a piece of farmland, for example, will look tiny compared to the fair market value of the property once the city rezones the land for commercial use in order to give it to the buyer.