Eminent Domain Report

In his September 16 article entitled DWP outmaneuvered on Kern County land purchase, Los Angeles Times reporter David Zahniser described a story full of political intrigue. It seems someone with ties to Mayor Villaraigosa acquired a property out from under the Department of Water and Power (DWP), only to immediately offer to sell the property to DWP at a hugely inflated price. While the article focuses mainly on the political aspect of the situation (e.g., did the buyer know about DWPs plans for the property when it purchased it, etc.), the eminent domain angle is also interesting.

The property, known as Onyx Ranch, encompasses about 68,000 acres east of Bakersfield. It has long been viewed as a potential site for a wind farm, and the DWP sought to acquire it for that purpose. As DWP was working on obtaining control over part of the property through a partnership with Padoma Wind Power, J. Ari Swiller stepped in an bought the property for $42 million. Even before closing escrow on the purchase, Swiller offered to sell part of the property to DWP for $65 million. When DWP balked, Swiller sold the property to the City of Vernon (which has its own electric utility company). Now, DWP must contemplate condemning the property from Vernon if it wants to proceed with the wind farm.

Stripping away the politics, this situation highlights a precondemnation strategy that landowners can sometimes use. By knowing an agency’s planned condemnations in advance, sophisticated landowners look for opportunities to purchase properties ahead of the condemnation. Where they can negotiate a great deal or, more typically, where they can assemble multiple parcels to create a more valuable highest and best use for the combined parcels, they can reap huge rewards. With a known government buyer waiting in the wings, such property flips can be quite profitable. Of course, as with all high reward strategies, this gambit comes with considerable risk:

1. The government’s plans or funding may change, and the intended condemnation may never materialize, leaving the owner with a property he or she probably never wanted in the first place, facing the prospects of looking for a buyer that may not exist.
2. Such purchasers must buy knowing they are walking into a lawsuit against the government, a though many may find unappetizing.
3. The government holds a significant ace up its sleeve any time an owner tries to hold it hostage by charging far more than a property is really worth because it knows the seller badly needs it. In the real world, sellers in such situations can command huge premiums, because a seller who must have a particular property will pay far more than its fair market value. When the purchaser is the government, it can largely ignore such demands for premiums, knowing it can condemn the property at its fair market value.

In the end, while this landowner strategy can (and has) been used quite successfully in some circumstances, it requires a sophisticated landowner and an initial seller willing to sell for far less than what the buyer thinks will be its fair market value when the government comes calling.