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 [email protected].