Tag Archives: partial property taking

Buyer Beware: Permanent Fixtures v. Personal Property and Why it Matters

Buyer-Beware-Permanent-FixtThe analysis and classification of property plays a critical role in the success of your eminent domain case. An analysis must be performed to define between personal property (including trade fixtures), permanent fixtures, and other forms of property. The real property offer that a displacing public agency makes depends on this analysis, but it’s dangerous to assume that their analysis is, by its nature, automatically accurate. Misclassification can cost a displaced business millions of dollars in out of pocket expenses. A close examination of the analysis should be performed to weigh the benefits and drawbacks of the classifications that have been made.

I recently worked with a business that would have been $4.5m out of pocket had they accepted the offer from the displacing agency. It came down to the issue of permanent fixtures vs. trade fixtures (personal property). The displacing agency made an offer of $4m for items that the agency classified as permanent fixtures. In order for the displaced business to reestablish its operations, the business would, in fact, have had to buy these “fixtures” back from the agency at salvage value, estimated by the agency at $500k. By my estimation, the relocation costs would have cost $8m in reinstallation at the new location. The result would have been $4.5m out of pocket, all because of the acceptance of the property analysis.

Defining Fixtures:

Permanent fixtures are typically equipment that cannot be moved and therefore becomes part of the real property. They will be purchased as real property, and are not eligible for relocation benefits.

Trade fixtures are typically items used in the business trade, which can be easily detached, thereby, converting to personal property when detached, which then are eligible for relocation benefits. The definitions and criteria used for classifying permanent fixtures and trade fixtures will be discussed at another time in the future.

Understanding the Advantages and Disadvantages of Classifying Items as Fixtures

Example 1: Case Study – COMPANY X & AGENCY Z

I was asked to evaluate Agency Z’s real property acquisition offer, which included a personal property and fixture analysis for COMPANY X. There were three areas of concern:

#1: Permanent Fixture v. Personal Property

#2: Installation Classified as Fixture v. Reinstallation of Personal Property

#3: Infrastructure Classified as a Fixture v. Reinstallation of Personal Property

#1: Permanent Fixture v. Personal Property – AGENCY Z classified many items as permanent fixtures, which are typically classified as personal property. It was in COMPANY X’s interest to re-classify some or all items as personal property.

Value: AGENCY Z valued approximately $4.2m of the items as permanent fixtures, which could, or should, have been classified as personal property.

Adverse effects of a permanent fixture classification:

Permanent fixtures are not eligible for relocation benefits; therefore if COMPANY X desired to relocate an item classified as a permanent fixture, the costs for moving, reconnecting, and/or modifying, were not reimbursable and would have been COMPANY X’s responsibility.

The permanent fixture classification of items is not good when:

  • The item will be needed at the replacement property
  • Code upgrades are needed for the item’s reinstallation
  • Significant infrastructure is needed for the item’s reinstallation such as, plumbing, footings, venting, power, etc.

Positive effects of a permanent fixture classification:

Fixtures can be abandoned and paid out for the amount of the fixtures Value in Use, which can potentially be greater than abandoning the same item if it were classified as personal property.

When abandoning an item as personal property, the amount received is the lesser of; the Value in Use, or, the estimated cost to move and reinstall.

When abandoning an item classified as a fixture, the amount received is the appraised “Value in Use”, or also called “Value in Place”.

In other words, reimbursements for abandoning an item as a fixture will always be equal to, or better than, abandoning the same item when it is classified as personal property.

Fixtures are good when:

  • The fixture is not needed at the replacement property
  • The business is closing
  • The item’s Value in Use is greater than the cost to buy it at salvage value plus its reinstallation cost (not common)

Changing items classified as permanent fixtures to a classification of personal property:

In the case of COMPANY X, these items included machinery and equipment, which was installed for the business of treating customer products. These items were not installed for operating the real property, as would a permanent fixture.

#2: Installation Classified as Fixture v. Reinstallation of Personal Property – AGENCY Z classified the installation as a fixture for items they classified as personal property. Typically, the installation of personal property items is not classified as a fixture or personal property. Installation is simply part of relocating and reinstalling the personal property.

Value: AGENCY Z had valued approximately $1m installation of personal property as a fixture.

Negative effects: (same as above)

Positive effects: (same as above)

#3: Infrastructure Classified as a Fixture v. Reinstallation of Personal Property – AGENCY Z had classified the infrastructure items as fixtures, such as: plumbing and electrical.

Value: Electrical $195k; Plumbing $739k

Negative effects of infrastructure as a fixture:

Most replacement buildings would not have had the level of infrastructure needed to support COMPANY X’s equipment needs for plumbing and electrical. If the plumbing and electrical had costs exceeding AGENCY Z’s fixture value, COMPANY X would have have had to pay the extras out of their own pocket.

Positive effects of infrastructure as a fixture:

If COMPANY X happened to locate a replacement building that included most of their needed plumbing and electrical (which was doubtful), then AGENCY Z’s infrastrucure value and payment may have put money in COMPANY X’s pocket.

If COMPANY X chose to go out of busines, then having the infrastructure catagorized as a fixture would have been good for COMPANY X.

Example 2: Heat Treating Furnace

A very specific example of the pitfalls of accepting an offer from the displacing agency can be illustrated with this heat treating furnace as one particular item owned by this business. In this case, the agency offered to purchase this item as a permanent fixture at $66k and made it eligible for purchase by the owner from the agency for $8.5k.

However, permanent fixtures, as this furnace was classified by the agency, are not eligible to receive reimbursements for moving and reinstalling. The cost to move and reinstall a furnace like this is estimated at $140k, as shown in the Relocation Cost Analysis spreadsheet below.

For the business to have opened shop at another location using the agency’s valuation the business would have had to purchase this furnace for $8.5k and then spend $140k to move and reinstall it.  They would have received $66k from the agency but would have been out of pocket $82.5k.

Reclassifying a furnace like this from a permanent fixture to personal property allowed relocation benefits to pay for the full relocation costs of $140k with no out of pocket expenses for the business.

Buyer Beware Permanent Fixtures v Personal Property and Why it Matters

As these examples illustrate, it’s critical to understand the advantages and disadvantages of classifying items as fixtures. It’s potentially extremely expensive and detrimental to a displaced business to assume that an analysis is automatically correct. If you are at risk of having your property taken by eminent domain, scrutinize the analysis of fixtures v. personal property to weigh the benefits and drawbacks of the classifications that have been made in your case. If you have any questions regarding the question of fixtures, personal property, relocation, or other areas of eminent domain, get in touch and I’d be happy to discuss the matter with you.

Partial Property Taking: Understanding the Impacts

1When a public entity takes partial property through eminent domain, it’s important to understand the impacts and issues to the remaining property. All too often, the public entity’s proposed cure is flawed, frequently eliminating all but a very small portion of the property’s key needs. The property owner must equip him or herself with experts who understand the pitfalls of partial property taking and will look out for their best interest.

In the case of partial property taking, it’s vital to:

  • Understand the property as it exists before the property taking
  • Understand the property taking
  • Understand the zoning and building codes for the area
  • Understand the State’s proposed cure to the remaining property
  • Identify any missing elements of the agency’s proposed cure
  • Prepare a preliminary design and estimated cost to cure the remaining property, if there are shortcomings in the agency’s proposed cure

As a consultant focused on business and property owners impacted by public agencies taking private property through eminent domain, I have an in-depth understanding of these matters. I apply my extensive experience to help identify the property impacts, provide a reasonable design to solve the impacts, and prepare reasonable costs to construct the necessary changes to the property.

My background includes ownership of a business that performed equipment design/build and installation work, as well as ownership in a general contracting firm that constructed commercial projects,including ownership of a steel fabrication and installation business.

Now, I apply that background to my over 15 years as a consultant working with relocating businesses along with preparing preliminary designs and cost estimates to make remaining properties functional after a partial property taking. This work includes the use of guidelines based on the Federal Uniform Relocation and Acquisition Act.

I use the knowledge gained from this background and apply it to assist my clients who are sometimes private property owners, businesses owners, and frequently public agencies. For those clients, I search for problems created by property takings, develop solutions to those problems, develop the costs for those solutions, and provide those costs and designs to the client and/or representatives of the condemning agency.

My work has included several hundred properties, many of which have been complex takings. Here is an example of a recent case. In my role, I reviewed the impacts and issues to the Company X property in the same light and diligence as with all of my typical private and public agency clients.2

Case Study – Company X – Partial Property Taking

Property as it Exists
The property, as it existed, included two shop buildings of 3,600 square feet each, and two tow yards. Each of the buildings and tow yards had ample access for maneuvering towed and dysfunctional vehicles into and out of each area. The attached drawing, Layout Before Property Taking, shows the maneuvering capabilities for each of the key areas and the uses of the property. Also, noted on the drawing are (5) key elements of the property that relate to the current use, as well as, any likely intended users of these buildings and property, such as an automotive repair shop.

The key elements to this property were as follows:

  • Customer parking adjacent to the office
  • Easy tow vehicle access into the buildings
  • Easy tow vehicle access into the storage yards
  • Convenient parking near shop and office areas
  • Convenient shipping and receiving
  • Convenient parking for work on large vehicles

Property Taking
The property taking was along the northern portion of the entire property. The property line prior to the taking was located sixty-five feet north of the north face of the existing building that was used as an auto body shop. Thirty feet of property was being taken, which placed the new property line thirty feet to the south, which is thirty-five feet north of the building. The driveway entrance was also moved thirty feet south.

Improvements within the area of the property taking included a ten-foot landscape buffer, a paved area used for vehicle maneuvering and parking, a pole sign, and a car canopy.

RC Zoning and Parking Design Requirements
An exhaustive search of the codes was not performed, but key items were found and described here. The RC zoning allowed auto body shops as a permitted use. There were approximately thirty-six permitted uses listed of which only a few uses would have been practical at this location. This zoning had requirements for eight-foot wide sidewalks placed in all walk areas including through parking and driveways. Also required were covers over sidewalks at building faces. Wrecked motor vehicle compounds were no longer a permitted use, of which there were two on this property that were allowed due to grandfathering.

Parking in the RC zoning was not allowed on the street side of the building and parking had to meet ADA, stormwater, and landscaping requirements. The quantity of parking stalls calculated to ¾ of a stall per 600 square feet of building square footage. This equated to nine stalls for the 7,200 square feet when combining the two buildings on the site. A designated loading area of ten feet by forty feet was also required.

State’s Proposed Cure
The State’s proposed cure of $67,000 included relocating the existing Tow Yard #1 to the east of the existing Tow Yard #2 to make room on the west side of the building for replacement parking. The state included costs to provide asphalt pavement for the parking, and crushed rock and fencing for the relocated tow yard. The State did not include any design for this work, only a highlighted aerial photo indicating the shape or footprint of the proposed areas (see attached drawing, State’s Proposed Cure).

The State also included a drawing, State’s Tow Vehicle Maneuvering, which indicated that a tow truck could maneuver a vehicle into the body shop for repairs. This was an important item for the existing auto body shop, as it would have also been for an automotive repair shop, which was also a permitted use.

State’s Missing Elements
The State did not consider all of the issues related to installing new parking and relocating the tow yard. The attached drawing, State Proposed Cure Expanded for Codes, was based on the State’s proposed cure, but with the added missing elements that were necessary to meet current codes, which were required when adding the State’s new elements such as parking or crushed rock for the tow yard. The drawing also pointed out other missing elements needed for this property to properly function under the State’s proposed cure.

Relocating the parking or the tow yard required the addition of impervious surfaces such as asphalt or crushed rock. Adding impervious surfaces or simply adding new parking required code upgrades such as landscaping, sidewalks, a dedicated loading area, the proper number of parking stalls, and handicapped stalls with ADA access between the parking and the building entrances. Including these required items, as shown on the drawing, required more space than the State showed on their drawing. Including the required sidewalks and landscaping on the street side of the building reduced the existing driveway and parking to a width of fourteen feet, leaving only enough width for a one-way driveway, which left the building nearly useless for its intended use, and most permitted uses. The State’s proposed cure eliminated all but a very small portion of the property’s key needs.

The tow vehicle maneuvering, as shown on the State’s drawing, failed to meet the State’s intentions, and the needs of the property in two areas. The first problem was that the State did not include the ten-foot landscape buffer in their drawing, which would eliminate the ability to maneuver this vehicle as they had shown. The second problem was that the State’s drawing showed a need for at least a sixteen-foot wide building entrance door to maneuver a vehicle into the building. At the time, the building currently had twelve-foot wide doors; adding any wider doors would have required structural changes to the building, which would have triggered major code upgrades to the entire building. Those code upgrades would likely have caused the building to be demolished and rebuilt new, for economic purposes.

3The State’s suggestion of relocating the tow yard had three fatal flaws:

  1. The first flaw was that the tow yards were grandfathered in and were no longer a permitted use within the RC Zoning, therefore, relocating the tow yard would not have been allowed. Necessary permits would not have been issued, which would have resulted in the loss of one tow yard.
  2. Secondly, creating a solid surface, such as crushed rock suggested by the State, would have triggered other code upgrades to the site including landscaping and likely sidewalks. Either of those items would again have narrowed the driveway that connected to the proposed relocated tow yard, as well as, connecting to the remaining Tow Yard #2, and would have resulted in no access to either tow yards.
  3. Additionally, this driveway narrowing eliminated the ability for truck traffic to pass by the existing septic system, again preventing access to the tow yards.

Adding the code-required elements to the State’s design for curing the remaining property left the design unworkable for making the remaining property functional after the property taking. Tow truck access to the building would have been eliminated, one tow yard would have been eliminated, the other tow yard would not have been accessible, and critical locations for customer parking would have been completely lost.

Attempts to correct or solve these shortcomings of the State’s design proved unattainable because of the remaining narrow driveway, which could not be expanded. Therefore, an alternative design was prepared and discussed in more detail below.

Alternative Design
Alternative to the State’s design and shown on the attached drawing, Alternative Proposed Cure, depicts a design that replaced the minimum needed functions of the remaining property after the property taking. This design took into consideration the RC zoning and the needs and functions for many of the permitted uses listed for the RC zoning.

This design included the removal of the existing Shop #1 and replacement with a new building located to the east. A circular driveway was included of a standard width to allow reasonable traffic flow for all vehicles and combinations of vehicles. Parking was placed in proper locations and in proper quantities. The remaining site was brought up to current codes as required with sidewalks, ADA access, landscaping, and stormwater systems. (This was a preliminary or basic design, in that an exhaustive review for the best design or a design meeting all required codes had not yet been performed.)

The cost for this project was estimated at $1,118,186. The estimate included work and costs from the beginning to the end of the project including, design, permitting, construction, and taxes.  The costs were prepared from preliminary quotes from various local contractors and vendors, as well as with the use of in-house costs from similar projects.

The State’s design was not complete enough to show how it would cure the needed elements for the remaining property after the property taking.
Expanding that design to include the code required items showed that the State’s design did not cure the elements needed for the remaining property to remain functional in its after condition.

The proposed alternative design took into consideration the necessary elements for meeting current codes and included the minimum needed elements for the remaining property to properly function. Based on this alternative design and estimated costs, the cost to cure the remainder property was estimated at $1,118,186.

I created the alternative design and its estimated costs. It was my expert opinion – now justified – of what would be necessary to cure the functions of the remainder property after the property taking.

If you have any questions regarding partial property taking and would like an opinion regarding understanding the impacts, please don’t hesitate to get in touch.