How a secured party can understand its rights in eminent domain Featured

8:00pm EDT April 25, 2010

When a property is condemned through the process of eminent domain, banks often have a vested interest in that property through a deed to secure debt, but rarely do they get involved in the financial negotiations for that property, even though doing so would be in their best interest, says Carl Varnedoe, an attorney in the eminent domain practice group at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC.

“Banks have demonstrated a great reluctance to be principally involved in the protection of their secured interest,” Varnedoe says. “Instead, they’ve left it up to the property owner, even though security agreements give the secured party — the lending institution — the right to collect all condemnation proceeds. Lending institutions have a huge stake in the game, and they have a legal right to participate in the proceedings, but, for some reason, they don’t get principally involved in the determination of what their security — the condemned property — is worth. Even though they’re entitled to the proceeds, they just allow the property owner to fight the fight.”

Smart Business spoke with Varnedoe about property owners’ rights in eminent domain and how banks could benefit by being involved in the process.

Who can condemn property?

Any governmental agency or quasi-governmental agency that has been granted the power of eminent domain can take private property and convert it to public use. Because of the tremendous growth in the Atlanta area and the need to expand existing infrastructure as well as create new infrastructure such as roads and bridges, the state of Georgia and other entities have been extremely active in the condemnation arena in the last 15 years.

What is the first thing a business owner should do when notified of condemnation proceedings?

If a condemning authority knocked on my door, the first thing I would do is seek out competent counsel to review what is being proposed to assess from an economic standpoint whether the interest being acquired and the potential impact to the remaining property justifies retaining counsel to pursue the matter.

As a general rule, particularly when public money is being spent, condemning authorities feel an obligation to purchase whatever interest they need for as little as possible. The role of an attorney is to assess, with the help of expert witnesses, whether the compensation offered is adequate to compensate for the loss of the property and to ensure that the condemning authority accounts for all compensable interest in the property.

There is almost always more money available to the property owner than the initial offer from a condemning authority. Market value exists within a range, which lends itself to negotiation. That is where an attorney with knowledge of applicable law becomes invaluable.

Who must be notified of the condemnation proceedings, and who has the right to participate in negotiations?

The Georgia Department of Transportation, for example, has to run a 50-year chain of title, and if it gets as far as a condemnation lawsuit, it has to provide notice to anyone who appears in that 50-year chain, including secured parties.

Whether it’s a private equity agreement or a traditional lending institution that has provided financing for the purchase and development of the property, almost every security agreement assigns the right to collect all condemnation proceeds to the secured party. This is true even when proceeds are paid in lieu of condemnation as the result of the property owner’s agreement to ‘voluntarily’ transfer the requisite property interest and avoid formal litigation. The secured party is entitled to share in the condemnation award to the extent its security is impaired by the taking. In an overly simplistic example, if 10 percent of a $100,000 property is condemned, the value of the land taken is $10,000. If the bank is holding a $50,000 note, the bank is entitled to the $10,000 award, which is applied to the outstanding principal indebtedness.

Keep in mind that market value of a property can vary widely. For example, there was a vacant tract of land that the condemning authority thought was worth about $24,000. After getting involved, at the end of the day, the property owner was paid close to $1 million.

If I’m the bank holding the security deed and there is a potential million-dollar swing in value, I would definitely want to participate in the process and have a say in the outcome. Secured parties are well versed in the adverse economic impact that foreclosures have but may not fully appreciate the equally devastating adverse impact a condemnation may entail.

The bank is ultimately the beneficiary of the condemnation award and should be more principally involved in the process. Selecting the proper counsel who can put together a team of experts to comprehensively and aggressively value the interest being impacted is critical.

A condemnation is really a government-initiated foreclosure, whether it’s a partial foreclosure or a total one, and banks haven’t appreciated the wonderful opportunity this presents. Banks should pay closer attention to condemnation actions and the impact it has on their security and take on a test case or two on a substantial property to determine if there’s a need to be more systematically involved in protecting their security when a condemning authority comes knocking.

Carl Varnedoe is an attorney in the eminent domain practice group at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. Reach him at (404) 589-0009 or cvarnedoe@bakerdonelson.com.