North Carolina Inverse Condemnations: Recovering Property Taxes and Interest
In North Carolina, government agencies (and, in some cases, private third parties like utility companies) can take private land for "public use." Generally, these are called condemnation proceedings. When private land is taken via a condemnation proceeding, the government agency (or the private party) must pay "just compensation" for the land taken.
Under North Carolina law, "just compensation" is mostly defined as the fair market value of the land/property taken. This is measured in the same way that a house, building or farm is appraised for a purchase or sale. If there is a partial taking -- say, just the edge of the parcel for a road widening -- then "just compensation" is defined as the diminished fair market value of the whole property. This diminished value is calculated by comparing the fair market value of the remaining property immediately before and after the taking. In addition to the fair market value, in some circumstances, two other items may be included in the definition of "just compensation:" reimbursement of property taxes and interest. Here is a brief summary.Overpayment of Property Taxes
In North Carolina, non-exempt land is generally subject to ad valorem property taxes. Ad valorem is a legalistic way of saying property taxes based on the value of the real property. The tax rates are set by the local governments which, generally, means set by the county. For example, in Mecklenburg County, the average effective property tax rate is 1.05% of the assessed value.
In many condemnation cases, there is no reimbursement for property taxes because title to the property is transferred almost immediately. Because title transfers almost immediately, this also means that the government agency (or the private third party) takes almost immediate physical possession of the land/property. In those types of cases, generally, there is no reimbursement for property tax overpayments because there is no overpayment. Prior to the taking, the landowner was paying property taxes based on the assessed value. After the nearly-immediate taking, the landowner is no longer responsible for paying the property taxes. As such, generally speaking, there has been no overpayment.
However, when there is an effective taking of land -- called an inverse condemnation -- there is usually no physical possession taking of the land. An example is where the North Carolina Department of Transportation (“NCDOT”) formerly was allowed to designate land/property as lying in a potential road corridor pursuant to the MAP Act. Under the MAP Act -- which was declared unconstitutional by the North Carolina Supreme Court -- landowners were prohibited from building improvements on their land if the land was so designated. Obviously, a limitation of that sort severely impaired use of the land/property, but did so without the NCDOT taking title or possession of the land.
Under such circumstances, the landowner has suffered a diminution of value, but is still paying property taxes based on the former full value of the land. Further, it may take some time for the landowner to prosecute litigation to recover "just compensation" for the taking. But, litigation takes time and, while the litigation is proceeding, the landowner is still paying property taxes based on the un-diminished value of the property.
North Carolina courts have held that, under these circumstances, a landowner can recover any property tax overpayments. Depending on the facts of the case, a landowner might be entitled to a full reimbursement of property taxes paid from the date of the taking. See Thompson v. Department of Transportation, Case No. COA19-72. (NC Court of Appeals 2020).Prejudgment Interest
"Just compensation" also includes prejudgment interest. The interest due is calculated from the date of the taking to the date that the judgment is paid. In most condemnation proceedings, the government agency (or private third party) must deposit a certain amount with the Clerk of Court (say, $200,000). However, that amount is often an underpayment and can be litigated. If the landowner succeeds in proving that more compensation is due (say, $300,000), then the prejudgment interest is due on the amount awarded in excess of the amount deposited. Prejudgment interest is also recoverable in an inverse condemnation case.
Whenever prejudgment interest can be recovered, the landowner must choose between accepting the statutory rate for prejudgment interest (8%) or arguing that prejudgment interest should be calculated based on a "prudent investor's diversified portfolio" standard during the relevant period of time. Proving that prejudgment interest should be paid at more than the statutory rate can be difficult and will necessitate the use of accounting and other experts.Contact Arnold & Smith, PLLC. Today
For more information, and to schedule a confidential consultation with experienced and dedicated property law attorneys in Charlotte, contact Arnold & Smith, PLLC. Use our “Contact” page or give us a call at 704.370.2828. We handle land use, zoning and condemnation legal matters in Mecklenburg County and elsewhere in North Carolina. We have offices in Charlotte, Lake Norman, and Union County.