Eminent Domain and the Distortions of Fair Market Value

If a small house in a lower-middle class neighborhood would sell to another potential homeowner who intended to occupy the property and use it in the same manner as the seller-- and its price was say, $159,000, then one could argue that the Fair Market Value of the house (and property) is somewhere near to $159,000. But lets say this neighborhood is found to be well located and situated for mixed-use, commercial and residential due to changing demographics in a city. Then lets say that the property catches the eye of a wealthy developer who plans to do large scale redevelopment over the entire area, then the Fair Market Value can no longer be assessed based upon what another homeowner who intended to simply re-occupy the same property would be.

This brings me to look at property based on two views. The first is 'as-is' market value which, in the first case mentioned above, the house and property is probably worth around $159,000 give or take. But the second scenario is a 'will-be' market value. So the question becomes, how do you assess the 'will-be' market value of property whose use will change dramatically once the developer takes ownership?

My belief is that in the second case, fair market value should be assessed as what the property would be worth if the planned development had already taken place, or some reasonable percentage thereof. If multiple parcels are being taken in one action, then the sum total of the whole group should be assessed in this manner, then divided appropriately between each property holder. So, if ten parcels are taken at a 'will-be' fair market value of $8,000,000, then each property owner should receive around $800,000.

The only question remaining is how does one arrive at a 'will-be' figure? It's reasonable to concede that the value is in the redevelopment, so one can't realistically value the property assuming that all developments take place. As we all know, the property gets some of its value by the actions of the owner so the compensation shouldn't be based upon the not-yet completed development. But it should be based upon the type of property that the government zones this land as in the process of the eminent domain taking. For instance, if I buy a piece of downtown real estate in Seattle, and plan to place a 1,900 square foot rambler on it, I'm still going to pay the tens of millions of dollars for that piece of real estate. And, if this miracle occurs and I actually get this real-estate and subsequently place my small rambler on it, the property is not suddenly only worth $159,000. The property is still worth tens of millions (less what structures I had to raze to build the rambler). This is self evident.

It is fantastically unfair that we then believe that the owner of a $159,000 lower-middle class home in a quiet neighborhood is only going to get $159,000 if the developer plans to put a glass and steel office building, restaraunt, health club and pharmaceutical research facility on it. If after the developer finishes his intended project, the property is valued at $15,00,000, it seems perfectly fair that the rezoned but undeveloped land would be worth maybe 1/4 of that value: $3,750,000. If there were ten equally sized parcels that made up the property package then each owner would receive $375,000.