Image courtesy of Wandee007 /

The Fifth Amendment provides that private property may not be taken for public use without the payment of just compensation. The payment of “just compensation” must reflect the fair market value of the property acquired in its highest and best use on the date of the taking. How is “fair market value” determined when the property taken is a permitted mining operation? The New York State Appellate Division, Second Department recently addressed the appropriate valuation methodology for land with established mineral deposits In the Matter of Metropolitan Transportation Authority (Washed Aggregate Resources, Inc.), 2013 NY Slip Op 00212 (January 16, 2013).

In Metropolitan Transportation Authority, the MTA condemned portions of Washed Aggregate’s property in connection with the extension of the Metro-North Railroad and the construction of the Metro-North Wassaic station. Washed Aggregate rejected the MTA’s offer of just compensation, and filed a claim alleging that the taking eliminated access to the remainder of its property for mining vehicles and limited its ability to exploit the land’s gravel deposits. Washed Aggregates sought consequential damages based on the projected value of its mineral resources. The MTA questioned whether Washed Aggregate was entitled to consequential damages and objected to the valuation methodology relied on by Washed Aggregate’s appraiser.

Addressing the appropriate valuation methodology, the Second Department noted that to determine the fair market value of a property with mineral resources, the courts should consider the effect of expected profits from the exploitation of resources on the land’s value, but may not award damages based upon projected revenues minus projected expenses. Similarly, it is not proper to multiply the estimated quantity of resources by a given price per unit. According to the court, these methodologies would not accurately reflect the fair market value of the land because a prospective buyer would not pay for the right to extract mineral resources in an amount equal to the amount that could be realized in business profits. Instead, a purchaser would likely pay a price based on the present worth of those rights as influenced by expected profits and taking into account those business risks associated with the particular venture. Accordingly in eminent domain proceedings a court should determine the fair market value of property containing mineral resources by considering “the value of the land as enhanced by the mineral deposit” – a value that can be established by using comparable sales that take into account the enhancement value resulting from the land’s mineral deposits.

While this holding is consistent with prior case law, it seems to fall short of the Fifth Amendment’s requirement that the condemning authority pay “just compensation” so that the property owner “may be put in the same relative position . . . as if the taking had not occurred.”Matter of City of New York [Kaiser Woodcraft Corp.], 11 NY3d 353 (2008). More specifically, failing to compensate owners of permitted mining operations for profits lost as a result of the taking of land containing mineral resources does not allow them to recoup significant economic resources spent on obtaining the required approvals necessary to extract those resources. Thus, while the decision is favorable to mine owners by recognizing “enhancement value” attributed to the presence of mineral resources, it may not go far enough to put those mine owners in the same relative position as they would have been had the taking not occurred.