Expropriation: A Price on Your Property
PIPELINE OBSERVER — Blog Series - Putting ‘fair market value’ on trial
In a genuinely fair market, a property’s worth can only be decided by the landowner. But expropriation and eminent domain practices put the value decision in the hands of government. The following six articles take a critical look at the concept of ‘fair market value.’
Fair Market Value: The Myth
Is it okay to steal as long as you promise ahead of time to pay damages?
The only person who can determine the value of property is the owner of that property. There is no such thing as fair market value other than the price that the actual owner is willing to sell to an actual buyer.
In Canada, the term for the legal theft of private property is “expropriation.” In the U.S. it’s called “eminent domain.” This legalized plunder is considered acceptable in many jurisdictions — after all, the victims are given compensation in the form of “fair market value.”
Fair market value is defined in these jurisdictions as the price it is imagined a willing buyer would pay a willing seller. “Willing” being the operative word, of course.
In a marketplace, a buyer and a seller both gain from a transaction. Sellers wants the buyers’ money more than they want their property, and buyers wants the sellers’ property more than they want their money. Both have their desires met in this voluntary transaction. It’s a win-win situation.
There are numerous reasons sellers who have exactly the same item for sale might charge different prices for it. Sometimes property is valued so much by its owners that they won’t part with it for any price.
As soon as the term “fair market value” is bandied about, you can be sure that the marketplace of willing buyers and sellers has nothing to do with it.
What’s the fair market value of a locket you can buy from Walmart for $20? What would the fair market value be if that locket were given to you by your wife on her deathbed? The only person who can determine the value of property is the owner of that property. There is no such thing as fair market value other than the price at which the actual owner is willing to sell to an actual buyer.
Pretending that you know what would happen if you had a willing seller of the property in question is completely ignoring the fact you actually have a real-life property owner in front of you who is telling you what the fair market value of his or her property is.
The idea behind fair market valuation is rooted in the Common Law concept that victims of crimes ought to be restored to wholeness by the perpetrator. This most often takes the form of some form of economic compensation to help the victim overcome the damages caused by the crime and return to a fully restored state.
On its face, fair market value seems just. Why shouldn’t criminals compensate victims? However, it only takes a minute to notice there is a real problem with fair market value.
We don’t say its okay to rob another person provided you promise ahead of time to pay damages. We would still consider it a criminal act, and we deal with the perpetrators of crimes by locking them up or sanctioning them somehow. We certainly don’t institutionalize these crimes and make them a government program.
Consent is the missing ingredient when we bring up the term “fair market value.” Consent is the difference between a boxing match and an assault, between a legitimate transaction and theft. No amount of money makes it okay to violate another person.
We have to decide whether we take property rights seriously or not. It was property rights, the idea that the individual ought to be protected from the mob, that led to the flourishing of western civilization. We undermine property rights at our own peril.
Tim Moen grew up on a farm in Northern Alberta. Leader of the Libertarian Party of Canada, Tim is also a public speaker, filmmaker, businessman and firefighter/paramedic.
Published in PIPELINE OBSERVER Spring 2017
Fair Market Value: The Illusion
Markets cannot ascribe a value to something — only individuals can.
By Danny LeRoy and Zach Gorham
A willing seller is a necessary part of a fair deal
Advocates of eminent domain — known more accurately as expropriation in Canada — justify its use with the claim that when property is taken from private individuals for public use, they are compensated with the fair market value of what had been their property. While at first this may seem reasonable, further consideration reveals that it is not.
According to the Canada Revenue Agency, fair market value is “the highest price … obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact.”
What this unobserved highest price is can only be a guess. And your guess is as valid as mine or anyone else’s. A definitive amount beyond dispute is also out of reach. No matter how well-educated or well-intentioned, arbitrating a “fair market price” is not a substitute for actual market processes.
Consider the case of an expropriated parcel of land. With fair market valuation, the previous use of the property is taken into consideration and the owner is also compensated for the loss of the productivity of the land. If the land had an agricultural use, for instance, the owner would receive some compensation for the crops he would not be able to grow in the future
But several problems immediately arise.
First, we do not and cannot know how much the land would actually sell for on the open market. A potential buyer’s willingness to pay is personal, specific to time, place and circumstances. There may be several potential buyers willing to pay different prices for the same property, but who these people are and what they are willing to pay is not knowable.
Second, transactions on the open market always involve willing buyers and sellers mutually agreeing on price. If the seller values his property more than the money the buyer is willing to give up for it, no transaction occurs.
Think about that in a real context. If you are not willing to take anything less than $10,000 for your used car and a potential buyer is only willing to offer $8,000 for it, will the deal be done? The answer is no. Both buyer and seller must agree on a price for there to be a transaction.
In the case of expropriation, the monetary value to the seller of the property is not taken into consideration. It is only the monetary value of the property to potential buyers that is taken into account.
How can this be considered fair? Would it be a fair transaction if the guy that came to look at your car got to buy it for the $8,000 he wants to pay for it, without consideration of what you wanted to sell it for?
A related issue is that in any exchange, value never equals price. Think of it in terms of another real-life example. If a real estate tycoon wants to build a hotel on top of Grandpa’s old farm, is the value of the farm only the value of the land? What if you grew up on that farm and had wonderful memories of Grandma and Grandpa there and wanted to keep the land in the family for generations to come?
There is more value to that land to you than any price it could fetch. How does the concept of “fair market value” as defined by the proponents of eminent domain/expropriation account for this kind of valuation? How do you tangibly quantify emotional attachment?
The takeaway point is perhaps the subtlest aspect of economic theory: the relation between value — which is subjective, non-quantifiable and specific to time, place and circumstance — and price, which is objective and measurable.
The difference between prices and expressions of subjective valuation is most clearly seen through interpersonal exchange. Every time we decide to buy something, we give up something we value less (a specific amount of money) in exchange for something we value more (a specific quantity of a specific good or service). The same is true for the counterparty to the transaction, the seller, who gives up something he or she values less (a specific quantity of a specific good or service) in exchange for something he or she values more (a specific amount of money).
The resulting price may be public knowledge, but the value to the individuals is known, and can be known, only by them.
Also important to note is that markets are processes, not sentient beings.
Markets cannot ascribe a value to something — only individuals can. Moreover, processes have no sense of justice; rather, it is the actions of individuals that can be ethical or not. The concept of fair market value, as something objective, quantifiable and calculable, is an illusion.
More importantly, in the absence of market processes, it’s impossible to arrive at a price.
Governments may have the legal ability to apply the dubious concept of “fair market value” to establish an exchange ratio for a good or service. But this ratio is not a price, properly understood. A taking via expropriation, in lieu of a property sale, is not a market-based transaction, since one of the parties, in this case the seller, is coerced.
Compensation for legalized takings is not comparable to prices discovered through the free interplay of buyers and sellers in the unhampered market.
Danny LeRoy, PhD., is an economics professor at the University of Lethbridge where he is also coordinator of the Agricultural Studies program. Areas of research include commodity production, marketing and trade, government interventionism and Austrian Economics. He occasionally blogs at Mises.ca.
Zach Gorham was born and raised in Southern Alberta. He is currently studying Agricultural Biotechnology at the University of Lethbridge and has a keen interest in Austrian Economics.
Published in PIPELINE OBSERVER — SPRING 2017
Fair Market Value: The Problem
What makes something actually fair?
As with many things, it depends whom you ask.
Sometimes it’s literally an offer you can’t refuse
You’ve likely dealt with the idea of fair market value before. Maybe it was regarding an appraisal for a house, a piece of equipment or livestock inventory.
What about when a pipeline company approaches a landowner to negotiate an easement? A lot of discussion about compensation will revolve around the fair market value of the property.
If a pipeline company and a landowner cannot come to an agreement regarding compensation, the National Energy Board will arbitrate the conflict. The end result is inevitably the expropriation of the land, with the owner required to accept compensation based on “fair market value.”
Section 97 (1a) of the National Energy Board Act says if a matter goes to arbitration, the NEB’s arbitration committee will determine the level of compensation based on “the market value of lands taken by the company.”
Section 97 (2a) defines “market value” as “the amount that would have been paid for the lands if, at the time of their taking, they had been sold in the market by a willing seller to a willing buyer.”
There are two main problems with this system:
First, the negotiation dynamic is clearly different when a federal regulator casts its shadow over the process. Pipeline companies know that if negotiations break down, then the NEB’s arbitration will generally produce their desired result anyway.
This would tend to encourage landowners to grant the easement to avoid an arbitration process with a foregone conclusion.
The second issue is at a more fundamental level. “Market value” is not an appropriate tool when determining compensation for the expropriation of someone’s land.
Referring to some idea of market value is fine if it lines up with a price a landowner is happy to accept. If not, then it’s nothing more than a stick to beat the landowner with.
Here is the critical point: “fair market value” is based on an assessment value. This is determined by looking at comparable transactions.
But since an actual sale has not taken place for the property in question, the assessment is ultimately arbitrary and subject to favouritism and collusion.
Just because some similar properties in your area sold for a million dollars doesn’t mean it’s fair for you to accept the same for yours. After all, what if you’d rather have the land as it is instead of that million?
Obviously in the case of arbitration, there hasn’t been both a willing buyer and seller. There has been no exchange that gives us a price paid as a historical fact.
What makes something actually fair? As with many things, it depends whom you ask.
But think about buyers and sellers. If I say, “This is a fair price,” you might disagree. Maybe you’re the buyer and you think the price is too high. Or maybe you’re the seller and you think the price is too low.
How can you settle that? You can only look at outcomes. If the buyer and the seller make a deal and complete an exchange, they must have thought it was fair. If no exchange happens and they walk away, obviously they couldn’t agree about what was fair.
We can joke about how “a good compromise makes everyone mad,” but really, nothing is fairer than a voluntary exchange (an insight given by some of the earliest economists over 500 years ago).
Compare this with the situation where a company wants to do federally regulated pipeline work on your property and talk compensation. Unfortunately, even when rooted in some notion of fair market value, that isn’t always a fair process.
Sometimes it’s an offer you can’t refuse.
Literally.
C. Kenneth Reeder is a Calgary financial analyst providing mergers and acquisitions advisory services for mid-sized, privately held companies in Western Canada. He works with many clients in the oilfield services sector. He is also the editor of CanadianMarketReview.com.
Published in PIPELINE OBSERVER — SPRING 2017
Farmers protest the use of eminent domain to take their land
The Real Reason to Oppose the Dakota Access Pipeline
By Ryan McMaken
“People who lose their property to eminent domain proceedings are almost never made whole.”
The ongoing protest over the Dakota Access Pipeline near Standing Rock Indian Reservation in North Dakota makes for some good theatre, but the protesters have as yet been unable to demonstrate that the pipeline actually trespasses on Indian lands, or that it will likely lead to groundwater pollution.
Both trespassing and water pollution are serious issues that would rightly open up the owners — in this case, Energy Transfer Partners — to crippling lawsuits.
In North Dakota, however, the pipeline passes through private property and a likelihood of groundwater pollution has not been established.
Defenders of the pipeline like to point all this out. But, those same defenders also conveniently ignore that other parts of the pipeline, including parts that pass through Iowa, rely on eminent domain (known in Canada as expropriation) to secure land rights for the pipeline owners.
The Daily Caller reports:
Eminent domain was used in other portions of the route in Iowa, prompting farmers to sue the Iowa Utilities Board (IUB) in an effort to prevent the company from gaining the right to use the property-seizing tool. A judge eventually allowed the DAPL use of the land.
In May 2016, farmers began suing the pipeline developers in an effort to prevent the use of eminent domain to seize private property for the benefit of the pipeline owners. There are 1,295 properties along the 557-km route through Iowa.
As of November 2016, the owners of 17 parcels had sued over the fact that the State of Iowa handed over 200 pieces of land under eminent domain laws.
While the pipeline owners have attempted to obtain voluntary easements in most cases, it appears that when negotiations for easements break down the pipeline developers resort to seizing the private property via eminent domain. Moreover, the use of eminent domain calls even the “voluntary” easements into question since it is quite plausible that the pipeline developers “encourage” the granting of the easements by threatening to pursue eminent domain seizures should the landowner refuse the easement.
In October, according to farmer Cyndi Coppola, pipeline developers trespassed on her farm in Calhoun County, Iowa, and began digging up the topsoil for pipeline construction. Coppola was arrested on her own property for protesting the dig.
In spite of the blatant violation to private property that eminent domain presents, many conservative politicians — the same ones who claim to support property rights — also support eminent domain. Indeed, during the Republican debates last year, candidates expressed unwavering support for eminent domain when pressed on the topic of oil pipelines.
Republicans have even begun supporting eminent domain for seizure of private lands for private uses. Historically, eminent domain was restricted (at least in theory) to public uses such as highways. The use of eminent domain for private uses, such as a Trump hotel in one case and privately owned shopping centres in others, has long been seen as an abuse.
During the Republican debate, Jeb Bush attempted to differentiate his support for eminent domain from Donald Trump’s support. Bush wrongly claimed that the Keystone Pipeline — which also relies on eminent domain — is for public use, when the pipeline is privately owned and built to profit its owners. Trump exposed Bush’s deception, in the process essentially demonstrating that both candidates favoured the seizure of private land for someone else’s private use.
The situation is no different with the Dakota Access Pipeline in Iowa. The Iowa government is attempting to seize private land and hand it over to other private owners because to do so is convenient for the pipeline owners and their supporters in government.
Nevertheless, defenders of the pipeline’s trespassing are likely to maintain that violations of property rights such as this are acceptable because the former owners receive “just compensation.”
In cases like this, supporters of eminent domain like to throw around a lot of fancy terms like “highest and best use” in order to obscure the core issues at hand. But these terms do not erase the fact that if the owner were willing to sell for the price offered, then government coercion would not be necessary to seize the land.
Anthony Gregory explains in detail:
In the market, any compensation that is voluntarily agreed upon by both parties to a transaction is properly seen as just. If buyer and seller or employer and employee are both willing to make a deal, their freedom to do so, at any mutually agreeable price, is the fulfillment of justice in the world of economic exchange….
The state, unlike market participants, does not make its transactions through voluntary persuasion and bargaining, but through violence and the threat of violence. Certainly in the case of Eminent Domain — which means “supreme lordship” — we see that the victims of seized assets have never consented, otherwise a pure exchange could take place that requires no police power. No such coerced transaction can be said to entail “just compensation,” since compensation is only just when the party being compensated agrees to the deal.
Oftentimes, the state claims it is offering a “fair market value” for the property it seeks to seize, but this is a sham. The market price for something is, by definition, the price that both parties consent to. In a fair market exchange, each party gives up something he values less for something he values more, or else he wouldn’t agree to it.
It is only through such a voluntary transaction that we can determine what something’s market value is in the first place. Market value is not universal, but particular to the assets exchanged in a specific transaction. For any given piece of property, there can be no market value without market exchange.
When the state has to rely on the coercive power of Eminent Domain, it is a sure sign that the property owner is not being given something he values more in exchange for something he values less, and it is a perversion of language to describe the compensation, however high, as having anything to do with the market.
But, don’t expect this to stop builders and developers who fancy themselves as paragons of civilization who merely need to sweep aside the hicks and rubes who get in the way of “progress.” President Trump has even gone so far as to claim that owners of seized property “at least get fair market value, and if they’re smart, they’ll get two or three times the value of their property.”
At least one study has shown, however, that this is not true at all, and “people who lose their property to eminent domain proceedings are almost never made whole.”
If confronted with this, supporters of eminent domain would likely stick to their claim that government seizure of private property — much like taxation — is merely the price we pay for civilization. Trump summed it up when he claimed at the Republican debate: “Eminent domain is an absolute necessity for a country, for our country. Without it, you wouldn’t have roads, you wouldn’t have hospitals, you wouldn’t have anything. You wouldn’t have schools, you wouldn’t have bridges.”
This is just a long-winded way of saying “without government, who will build the roads?”
Ryan McMaken is the editor of Mises Wire and The Austrian. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
Published in PIPELINE OBSERVER SPRING 2017
Landowners Left in the Cold Again?
The tension between Virginia landowners and Dominion Resources
By Sean Corbett
Eminent domain, known as expropriation in Canada, threatens to overshadow a U.S. pipeline project.
The Atlantic Coast Pipeline has been proposed by Virginia-based Dominion Resources. While protesters and pundits debate environmental impact, Virginians have more immediate concerns.
In a May 2016 article for CFACT (the Committee For A Constructive Tomorrow), Richard Averitt noted that “what deeply troubles many landowners in the pipeline’s path is Dominion’s threat to ram the project down their throats using the power of eminent domain.”
The pressing issue at this point is Dominion’s plan to go through federal rather than state law. Under Virginia law, landowners enjoy greater property protection.
But Averitt sees a more ethical path:
“There is, in fact, a way to build the pipeline and protect the rights of landowners through a combination of collocation with existing easements and free-market negotiations with willing landowners. Dominion could route a majority of the pipeline through pre-existing rights-of-way and easements to minimize the project’s impact on farmers and other landowners.”
Coming into 2017, Dominion appears to be listening. It has moved its route eastward to collocate with an existing power line.
Virginia residents still remain vigilant. They are urging Governor Terry McAuliffe to require the project to use Virginia courts for any eminent domain proceedings.
The Atlantic Coast Pipeline would surely create some local jobs in the state. And it remains the most efficient means of delivering reliable energy.
Let’s hope it can move forward without pilfering local landowners.
Sean Corbett is a Calgary-based writer and filmmaker. He runs the marketing agency Repria Multimedia Corp.
Published in PIPELINE OBSERVER SPRING 2017
