Mitigation Bank Swampland in King County WA. Photo Courtesy of King County WA.

In Eminent Domain cases, the acquiring entity or condemnor, must compensate the landowner for the property they are taking. Fulfilling this requirement typically raises two questions:

             1) How much should the landowner receive for their land?

             2) How should we determine that amount?

Under Texas law, a landowner is entitled to compensation for an amount to be determined by an application of the “Highest and Best Use” (HBU) principle. The principle requires that the value of the land be established, not merely by evaluating the current use, but by analyzing four factors. Thus, a landowner may receive an amount derived from a potential highest and best use, rather than the current one. Therefore, an application of the HBU principle must operate within the boundaries established by these four limiting conditions. The purported HBU must be:

             1) Legally permissible

             2) Physically possible

             3) Financially feasible

             4) Maximally productive

In short, the HBU attempts to hold the condemnor responsible for the greatest compensation amount that can be sustained by an objective analysis of a respective property.

An interesting application of the principle was attempted recently in the California case of County of Santa Barbara (Plaintiff and Respondent) v. Double H Properties, LLC (Defendant and Appellant). This case was initiated by the County for the purposes of obtaining an easement to serve as a habitat for the endangered California Tiger Salamander. In valuing the land, the owner’s appraiser submitted two theories, one which analyzed the property as rural farmland, and one which calculated the value of the property when used for mitigation credits.

Mitigation credits are a way that a developer can obtain entitlements when a project is likely to impact an environmentally sensitive or protected habitat. To earn these entitlements, the developer can purchase mitigation credits with a mitigation bank. The bank then purchases and preserves another property to offset the environmental impact of the original construction.

The owner’s appraiser argued that, only when the land was valued as mitigation credits, did it fulfill its highest and best use, and obtain the greatest value. Their assessment also exceeded in value the one put forth by the County’s appraiser, who valued the property as farmland. The County moved to exclude the landowner’s valuation, a motion which the Trial Court granted.

The owner took the case on appeal. In reviewing the Trial Court’s dismissal of the owner’s mitigation credit theory, it became apparent to the Appeals Court that the appraiser had never provided any evidence that the land could be entitled for mitigation credits. In other words, the appraiser had failed to show that the use of the land for mitigation credits was affirmatively permissible in the law. The Appellate Court held that the Trial Court did not abuse its discretion in excluding the mitigation credit appraisal.

This will likely not be the last time we see this argument made in regards to a highest and best use analysis in California or elsewhere.