May 01, 2017

Construction Interference Damages Validated by Minnesota Supreme Court

Large-scale road construction projects often cause temporary inconvenience to, and loss of value on, adjacent parcels of private property. Long detour routes, noise, dust, dirt and vibrations can persuade potential customers to go elsewhere to avoid inconvenience. These factors can also influence economic decisions of those occupying the private property. The Minnesota Supreme Court has held that to the extent these inconveniences cause a temporary reduction in the value of the private property, evidence of those inconveniences is admissible in a condemnation case.

Case Background

Minnesota’s law on the subject of “construction related interferences” is based upon the 1992 Minnesota Supreme Court decision  State v. Strom, 493 N.W.2d 554 (Minn. 1992). The Strom case involved a major road reconstruction project that converted a previously existing highway into a freeway standard roadway. Before the project, the highway consisted of two lanes in each direction separated by a grass median. The project converted the roadway into a controlled access freeway with multiple lanes in each direction and interchanges with “on and off” ramps at various locations.

The property at issue in the Strom case was located just west of downtown Minneapolis. The property was improved as a multitenant office building. Before the project, the property was immediately adjacent to the previously existing highway, and it enjoyed convenient and immediate access to that highway. The roadway project involved in this case was a massive reconstruction project that lasted eight years. During construction, the access “route” from the highway to the building was changed many times and was often quite circuitous, making it difficult to access the building. In considering this access issue the Minnesota Supreme Court held that evidence regarding often changing and difficult access routes was a form of construction interference evidence that could be considered by the fact finder in the case. Additionally, the Court held that evidence of noise, dust and vibrations generated by the project could also be considered by the fact finder.

The evidence in Strom showed that during construction the occupancy of the office building at issue dropped from 91.6% to 56.7%, and that the net rental rate dropped from $10.59 per square foot to $7.90 per square foot. The district court held that evidence of these temporary losses in the ability of the property to generate revenue is admissible in a condemnation case. The district court’s order was ultimately appealed to the Minnesota Supreme Court and, in a case of first impression, the Court held that evidence of these types of temporary interferences, and the resultant temporary loss in value of the property (based upon an impaired ability to generate income to the owner) were factors that could be taken into consideration by the fact finder in determining the just compensation due to the landowner.

Supreme Court Analysis

The Supreme Court began its analysis of the question of the admissibility of evidence of construction-related interferences with an overview of basic condemnation law. It noted that Minnesota statute section 117.025 subd. 1 defines a taking as “every interference, under the right of eminent domain, with the possession, enjoyment, or value of private property.” The court noted that the clear intent of Minnesota law is to fully compensate Minnesota citizens for losses related to property rights incurred because of state actions. Turning then to the evidentiary issue, the court stated the well-known rule that “to determine the fair market value of property in a condemnation proceeding ‘any competent evidence may be considered if it legitimately bears upon the market value.’” Additionally, the court stated that “[t]o determine the value of property taken in an eminent domain proceeding, the general rule is that ‘subject to the caveat that such proof must be competent, relevant and material, evidence of any matter which would influence a prospective purchaser and seller in fixing the price at which a sale of the property would be consummated may be considered.’” Stated otherwise, the court said that “evidence will be admitted concerning any factor which would affect the price a purchaser willing but not required to buy the property would pay an owner willing but not required to sell it[.]” The court stated that “[t]o not admit such evidence causes factors ordinarily considered when negotiating a price for a particular piece of property to be excluded and would result in the determination of a fair market value not of the property at issue but of some nonexistent hypothetical piece of property.” 

Based upon these principles of existing Minnesota condemnation law, the supreme court held that while this type of evidence is admissible in a condemnation case, construction-related interference damages cannot be treated as a “separate” item of damage but are to be included instead “as a factor to be considered by the finder of fact in determining the diminution in market value of the remaining property.” In other words, the court said that damages for construction-related interferences cannot be a “separate line item” in an appraisal of the property but should instead be included as a factor to be considered in the overall analysis of the “before value” of the property compared to the “after value,” which is the fundamental manner by which compensation is determined in a Minnesota condemnation case. Typically, in an appraisal prepared for a condemnation case on a multitenant commercial building, the “income approach” to value will be employed by the appraiser. In an income approach appraisal the appraiser will analyze the “temporary” reduction in the ability of the property to generate income to the owner due to the construction-related interferences.

The reasoning of the Strom case is based entirely upon Minnesota common law and statutory law. Its holding concerning the admissibility of evidence of construction related interferences has not been cited in any jurisdiction outside of Minnesota. Nevertheless, the case presents careful analysis concerning why this type of evidence should be admissible in a condemnation case and thus may be useful to practitioners in other jurisdictions.

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