Business Relocation: Part One An Overview of the Relevant Law

By: Stephen T. Hosch, Darrell V. Koehlinger and Robert J. Strachota

Introduction
Our clients often ask questions about the condemnation and relocation process: Will I incur out-of-pocket expenses in the process of moving my residence/business to a new location? Will my business suffer as a result of the forced move? Who will determine the value of my property? How much will it cost to move my residence/business? Is the new location suitable for my purposes? Are there hidden expenses? Who pays for what? How will I know if the government's offer is fair? Do I need a lawyer?

In simple terms, if government acquires your property using its power of eminent domain, then government is required by law to provide you with just compensation for the real estate taken and, in appropriate circumstances, relocation assistance. An overview of Eminent Domain Law can be found in Valuation Viewpoint/Fall of 1999 (Part One) and Winter of 2000 (Part Two). Generally, just compensation is the fair market value of the real property (based on a willing buyer and a willing seller). The Appraisal Institute defines relocation as the "process in which a federal, state or local public agency provides relocation services, paying moving costs and related expenses to individuals, families, and businesses displaced by urban renewal projects or other federal or federally assisted programs": required by statute.

It is important to understand that just compensation and relocation are two distinct types of benefits that may be available to persons and businesses impacted by condemnation. Condemning authorities generally recognize their constitutional obligation to pay fair market value or just compensation for the real estate. However, many do not understand and therefore often fail to recognize their obligation to provide relocation assistance. In this issue, our readers will find an overview of the law pertaining to government's obligation to provide relocation assistance with specific emphasis on business relocation. We will also address the related topic of fixtures/equipment compensation, and offer the reader some insight into the fixtures/equipment and relocation issues that affect overall compensation and, in turn, real estate valuation techniques. We will present a case study and "frequently asked questions" in a subsequent issue of Valuation Viewpoint.

The Governing Law
Government's obligation to provide relocation assistance to businesses or individuals who are required to move or relocate as a result of a public project is established by the Uniform Relocation Assistance and Real Property Acquisition Act of 1970, as amended; 42 U.S.C. §§ 4601-4655 ("URA"); and the regulations implementing the URA, 49 CFR Part 24. The purpose of the URA is to establish a uniform policy for the fair and equitable treatment of persons displaced as a result of programs or projects undertaken by a condemning authority. The governing regulations articulate three basic policies of the URA:

1. To ensure that owners of real property to be acquired for federal and federally-assisted projects are treated fairly and consistently, to encourage and expedite acquisition by agreements with such owners, to minimize litigation and relieve congestion in the courts, and to promote public confidence in federal and federally-assisted land acquisition programs;
   
2. To ensure that persons displaced as a direct result of federal or federally-assisted projects are treated fairly, consistently, and equitably so that such persons will not suffer disproportionate injuries as a result of projects designed for the benefit of the public as a whole; and
   
3. To ensure that agencies implement these regulations in a manner that is efficient and cost effective.

The URA by its terms applies only to federal agencies and federally-funded projects. Minnesota, however, like many states, has incorporated by reference all of the provisions of the URA regarding relocation assistance, services, payments and benefits regardless of whether the project is funded in whole or in part by federal financial assistance.

Relocation Assistance
Entitlement to relocation assistance under the URA depends on whether the potential claimant is a "displaced person." This critical term is defined in the URA and implementing regulations: 42 U.S.C. § 4601(6); 49 C.F.R. § 24.2. Essentially, a "displaced person" is any person:

• who moves from real property or
  
• moves his personal property from real property
  
• as the direct result of a written notice of intent to acquire, the initiation of negotiations for, or the acquisition of, real property in whole or in part for a public project.

A business that meets the definition of "displaced person" is entitled to various forms of relocation assistance, including advisory services and payments based on actual reasonable moving costs and related expenses or, under certain circumstances, a fixed payment.

Relocation-Actual and Reasonable Moving Expenses
The displaced business is entitled to payment for actual moving and related expenses, as the condemning authority or agency ("Agency") determines to be reasonable and necessary, including expenses from:

1. Transportation of personal property. Transportation costs for a distance beyond 50 miles are not eligible, unless the Agency determines that relocation beyond 50 miles is justified.
   
2. Packing, crating, uncrating, and unpacking of the personal property.
   
3. Disconnecting, dismantling, removing, reassembling, and reinstalling relocated machinery, equipment, and other personal property, including substitute personal property.
   
4. Storage of the personal property for a period not to exceed 12 months, unless the Agency determines that a longer period is necessary.
   
5. Insurance for the replacement value of the personal property in connection with the move and necessary storage.
   
6. Any license, permit, or certification required of the displaced person at the replacement location. However, the payment may be based on the remaining useful life of the existing license, permit, or certification.
   
7. Professional services necessary to plan, move, and install the relocated personal property at the replacement location.
   
8. Relettering signs and replacing stationery on hand at the time of displacement that are made obsolete as a result of the move.
   
9. Actual direct loss of tangible personal property incurred as a result of moving or discontinuing the business. The payment shall consist of the lesser of:
   1. The fair market value of the item for continued use at the displacement site, less the proceeds from its sale; or
      
   2. The estimated cost of moving the item, but with no allowance for storage. (If the business is discontinued, the estimated cost shall be based on a moving distance of 50 miles.)

10. Purchase of substitute personal property. If an item of personal property which is used as part of the business is not moved but is promptly replaced with a substitute item that performs a comparable function at the replacement site, the displaced person is entitled to payment of the lesser of:
    1. The cost of the substitute item, including installation costs at the replacement site, minus any proceeds from the sale or trade-in of the replaced item; or
       
    2. The estimated cost of moving and reinstalling the replaced item but with no allowance for storage.

11. Searching for a replacement location. A displaced business or farm operation is entitled to reimbursement for actual expenses, not to exceed $1,000, as the Agency determines to be reasonable, which are incurred in searching for a replacement location.

A displaced person or entity may elect to take full responsibility for the move of the business, and the Agency may make a payment for a person's moving expenses in an amount not to exceed the lower of two acceptable bids or estimates obtained by the Agency or prepared by qualified staff. At the Agency's discretion, a payment for a low-cost or uncomplicated move may be based on a single bid or estimate.

Relocation-Additional Eligible Expenses
In addition to the aforementioned expenses, a qualified displaced business, farm, or nonprofit organization may also receive a payment, not to exceed $10,000, for expenses actually incurred in relocating and reestablishing such small business, farm, or nonprofit organization at a replacement site. Reestablishment expenses must be reasonable and necessary, as determined by the Agency. Eligible expenses include, but are not limited to, the following:

1. Repairs or improvements to the replacement real property as required by Federal, State, or local law, code or ordinance.
   
2. Modifications to the replacement property to accommodate the business operation or make replacement structures suitable for conducting the business.
   
3. Construction and installation costs for exterior signing to advertise the business.
   
4. Provision of utilities from right-of-way to improvements on the replacement site.
   
5. Redecoration or replacement of soiled or worn surfaces at the replacement site, such as paint, paneling, or carpeting.
   
6. Licenses, fees and permits when not paid as part of moving expenses.
   
7. Feasibility surveys, soil testing and marketing studies.
   
8. Advertisement of replacement location.
   
9. Professional services in connection with the purchase or lease of a replacement site.
   
10. Estimated increased costs of operation during the first two years at the replacement site for such items as:
    1. Lease or rental charges,
       
    2. Personal or real property taxes,
       
    3. Insurance premiums,
       
    4. Utility charges, excluding impact fees.

11. Impact fees for one-time assessments for anticipated heavy utility usage.

Relocation-Fixed Payment
The fixed payment option provided under the URA and discussed in the governing regulation is not an additional payment available to displaced businesses. It is a payment "in lieu of the payments for actual moving and related expenses, and actual reasonable reestablishment expenses": 49 C.F.R. § 24.306(a). The minimum amount of payment available under this option is $1,000; the maximum amount is $20,000.

A displaced business is eligible for the fixed payment only if the displacing agency determines that:

1. The business owns or rents personal property which must be moved in connection with such displacement and for which an expense would be incurred in such move; and, the business vacates or relocates from its displacement site.
   
2. The business cannot be relocated without substantial loss of its existing patronage (clientele or net earnings). A business is assumed to meet this test unless the Agency determines that it will not suffer a substantial loss of its existing patronage; and
   
3. The business is not part of a commercial enterprise having more than three other entities which are not being acquired by the Agency, and which are under the same ownership and engaged in the same or similar business activities.
   
4. The business is not operated as a displacement dwelling solely for the purpose of renting such dwelling to others.
   
5. The business is not operated at a displacement site solely for the purpose of renting the site to others.
   
6. The business contributed materially to the income of the displaced person during the 2 taxable years prior to displacement.

49 C.F.R. § 24.306(a).

Relocation-Excluded Expenses
Ineligible moving and related expenses are numerous. They include, but are not limited to, the following:

1. The cost of moving any structure or other real property improvement in which the displaced person reserved ownership. However, this part does not preclude the computation under Sec. 24.401(c)(4)(iii).
   
2. Interest on a loan to cover moving expenses.
   
3. Loss of goodwill, profits, or trained employees.
   
4. Any additional operating expenses of a business incurred because of operating a new location except as provided in Sec. 24.304(a)(10).
   
5. Personal injury.
   
6. Any legal fee or other cost for preparing a claim for a relocation payment or for representing the claimant before the Agency.
   
7. Physical changes to the real property at a replacement location of a business except as provided in Secs. 24.303(a)(3) and 24.304(a).
   
8. Costs for storage of personal property on real property already owned or leased by the displaced person.

Real Property Acquisition
In addition to establishing the governing framework for relocation assistance, the URA and governing regulations set forth the federal government's general policies with respect to real property acquisition. Generally, these policies apply only to acquisition of real property for federal projects and federally-funded projects. Federal acquisition policies require that before the initiation of negotiations, the real property to be acquired shall be appraised and the owner, or the owner's designated representative, shall be given an opportunity to accompany the appraiser during the appraiser's inspection of the property.

The criteria to be used for preparing appraisals is explained in the governing regulations: 49 CFR § 24.103. The format and level of documentation for an appraisal depend on the complexity of the appraisal problem. The regulations provide that the condemning authority or agency ("Agency") is required to develop minimum standards for appraisals consistent with established and commonly accepted appraisal practice for those acquisitions which, by virtue of their low value or simplicity, do not require the in-depth analysis and presentation necessary in a detailed appraisal. A detailed appraisal shall be prepared for all other acquisitions. A detailed appraisal shall reflect nationally recognized appraisal standards, including, to the extent appropriate, the Uniform Appraisal Standards for Federal Land Acquisition. An appraisal must contain sufficient documentation, including valuation data and the appraiser's analysis of that data, to support his or her opinion of value.

The Condemnation Appraisal Team
The real property to be acquired includes land, buildings and fixtures. Based on our experience in conducting condemnation appraisals, we have concluded that the issue of compensation for fixtures, whether movable or immovable, is the biggest problem confronting the appraiser. In many non-residential appraisal assignments, the building owner and the tenant are different parties; each is entitled to compensation. However, owner compensation is different from and separate from tenant compensation. The Unit Rule, which clarifies this, will be discussed in our Summer 2002 issue. During the required property inspection, the real estate appraiser will review with the owner and tenant which property components belong to whom and how compensation will be determined. A team approach is essential to get the best results for the client. The minimum number of experts recommended is three: the real estate appraiser, the fixture appraiser, and the relocation expert.

The allocation of property components to owner or tenant and the decision as to which expert handles which components rests most often with the real estate appraisers. It is essential that the real estate appraiser be knowledgeable about the various forms of compensation that arise as the result of a condemnation. These include the following:

1. Compensation for Real Estate: includes the land and building;
   
2. Compensation for Fixtures/Equipment: includes both movable and immovable; and
   
3. Relocation Payments: reimburses the tenant or fee-owner being dislocated.

Appraisers who regularly conduct condemnation appraisals will find it useful to become familiar with the URA, the URA regulations, and the laws in their local jurisdictions. For the most part, laws regarding the valuation of real estate and the appropriate methods of valuation have been set forth relatively clearly throughout the country. However, the laws regarding compensation for fixtures/equipment and the reimbursement of relocation expenses have been given less attention over the years, making compensation in these areas much less clearly defined.

The acquisition of tenant-owned improvements is addressed in Section 24.105 of the URA regulations. It provides that when acquiring any interest in real property, the Agency shall offer to acquire at least an equal interest in all buildings, structures, or other improvements located upon the real property to be acquired, which it requires to be removed or which it determines will be adversely affected by the use to which such real property will be put. This shall include any improvement of a tenant-owner who has the right or obligation to remove the improvement at the expiration of the lease term.

The improvements considered to be real property are any building, structure, or other improvements which would be considered to be real property if owned by the owner of the real property on which it is located. Compensation for tenant-owned improvements is based on the amount which the improvement contributes to the fair market value of the whole property or its salvage value, whichever is greater. Salvage value is defined in Sec. 24.2 and will be discussed in our Case Study/Summer 2002 issue.

Identifying and Valuing the Real Property Components
When appraising non-residential real estate, it is recommended that the professional appraisal team conducts the property inspection with the owner and the tenant. The ideal team includes the real estate appraiser, the fixture appraiser, the equipment appraiser, and the relocation expert. During the inspection, the experts will discuss who is responsible for valuing the individual components of the property. At this time, it is also important to identify what is owned by the tenant and what belongs to the building owner. This is essential because the tenant is generally entitled to receive the lesser of the market value of the tenant improvements or the cost to move the fixtures/equipment, or the cost of new equipment (installed), whereas the building owner is entitled to just compensation for the real estate (land and building). Again, the Unit Rule, to be discussed in our Summer 2002 issue, governs the Agency's responsibility to reimburse.

We recommend that the real estate expert appraise the land and the basic building, stripping away movable and immovable fixtures/equipment, and assigning the appraisal of these components to other experts. This holds true regardless of whether the landlord or the tenant has ownership of these components. By focusing on the value of the real estate alone, the appraiser can then more easily use and apply standard comparables which do not typically include any unusual components. An exception to this recommendation occurs when the real estate appraiser also has unique knowledge about valuing fixtures and equipment. In this situation, the real estate appraiser is qualified to value the real property and its components without additional assistance from other experts. However, we still prefer to see the fixtures and equipment carved out from the real estate and separately valued. By doing so, we anticipate the difficulty of valuing the improvements themselves and avoid the basic conflict inherent in assigning a single value to a multi-component property.

Having isolated the land and the building values from the total, the appraisal team can deal with the remaining fixed assets: furniture, fixtures, and equipment. Furniture items are personal property that are readily moved and are not in any way attached to the real estate. Fixtures, on the other hand, are articles that were once personal property but have since been installed or attached to the land or building in a rather permanent manner. Equipment, another form of fixed asset, is generally not categorized as real estate and usually is not physically or legally attached to the property. Sometimes equipment can be categorized as a fixture in the sense that it has been installed or attached to the land or building. An example of each of these three categories of assets is described in the following scenario.

In the condemnation of a gas/convenience store, the appraisal team finds many examples of the types of fixed assets. A gas/convenience store usually has an office for the manager, which includes a desk, chairs, filing cabinets, and other commonly used office equipment: appropriately categorized as furniture for appraisal purposes. These are assets that can be moved to the replacement facility; the costs of the move are eligible for reimbursement under the Act. Gas/convenience stores may have many different types of fixtures, but for this article we will mention video shelving, a food snack bar, a cooler, and special cigarette shelving as examples of fixtures that have been installed and attached to the real estate that are specific to this operator's business plan. Equipment, such as the electric fuel pumps, car vacuums, and cement tank islands, are fixed assets that are not real estate but are attached or installed to the land and building in a rather permanent manner. It is our view that fixtures and equipment are compensable assets and should be valued separately from the real estate.

Fixtures and equipment may be movable or immovable. The electric fuel pumps and car vacuums in our gas/convenience store example are movable; the owner can move them to the new site and continue to use them. The cement tank islands that are designed to protect the electric fuel pumps and create a traffic pattern on site for the convenience/fuel operation are immovable. It is unlikely that they could be removed without damaging the real estate and they, themselves, would be damaged in the process.

Conclusion
Professional real estate appraisers who regularly conduct condemnation appraisals must become familiar with the various forms of compensation. As team leader, the real estate appraiser must be familiar with the special property components that are not standard in the appraisal of real estate. Involving a fixture/equipment appraiser is recommended. When the appraisal team, as a group, inspects the property, the owner and tenant are ensured of a more fair and accurate valuation of the condemned property and its various components. In the next issue of Valuation Viewpoint, readers will benefit from the experiences of relocation experts, Salo Ale of Faegre & Benson and Steve Eriksson of Eriksson Commercial Real Estate, Inc. Mr. Ale and Mr. Eriksson will present a case study and answer frequently-asked questions.

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