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Memorandum

U.S. Department of Transportation
Federal Highway Administration

Subject: Policy and Guidance Supercompensation Payments Incurred for Acquisition of Real Property on Projects Eligible for Federal Funding

From:
ORIGINAL SIGNED BY:
Susan B. Lauffer
Director, Office of Real Estate Services

To:
Division Administrators
ATTN: Division Realty Professionals

Date: January 27, 2007

Reply to: HEPR


Purpose

The purpose of this memorandum is to provide guidance concerning Federal-aid participation for "supercompensation" payments, which are state mandated payments in excess of the fair market value of a condemned property.

Guidance

Supercompensation payments, where necessary to satisfy just compensation requirements under applicable State law, are a direct cost of acquisition that is eligible for reimbursement pursuant to 23 CFR 710.203. As with other costs of acquisition (e.g., administrative settlements, court awards, and costs incidental to the condemnation process), where appropriately documented and otherwise eligible, the amount by which the mandated just compensation exceeds fair market value is a direct eligible cost for reimbursement. This conclusion is consistent with earlier guidance on the reimbursement of costs associated with relocation benefits that are required by state law but exceed Uniform Act requirements.

Where a supercompensation payment is made, that amount must be included in the calculation of relocation benefits under 49 CFR Part 24, Subpart E--Replacement Housing Payments (RHP). The supercompensation payment is a component of the "acquisition cost" of the displacement dwelling.

The FHWA considers the eligibility of supercompensation payments to be a Title 23, CFR issue, not a Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (Public Law 91-646) (Uniform Act) issue. FHWA regulations reflect the view that the States are in the best position to determine how to allocate their share of the available Federal dollars. The FHWA believes that it is incumbent upon the State highway agencies to work within their governments to determine whether "supercompensation" payments are constitutionally supportable and in the best interest of their transportation program.

At this time, there is little or no data on the effect of supercompensation payments on the Federal-aid highway program. As a result, it is not possible to determine whether participation in State-mandated supercompensation payments conflicts with stewardship principles applicable to the Federal-aid program. Because of the lack of data, it is important for FHWA and the States to monitor the experience with supercompensation payments. Divisions should work with their State partners on ways to collect appropriate data on the State's experience, over time, with supercompensation payments. This will permit the affected States and FHWA periodically to assess the effects of supercompensation requirements on the Federal-aid program.

Background

In response, in part, to concerns over acquisition of private property through exercise of eminent domain, and generally following the decision by the U.S. Supreme Court in the case ofKelo v. City of New London, 545 U.S. 469 (2005), various states have enacted or considered legislation to mandate just compensation payments in amounts that exceed fair market value. As a result of these legislative actions, questions have been raised concerning eligibility for reimbursement of that portion of the payment in excess of fair market value (FMV).

The term "supercompensation" as used herein refers to legislatively mandated eminent domain damage payments that are based on payment of 100 percent of fair market value plus some additional percentage for inconvenience, sentimental value, or some other type of personal imposition. For example, in Missouri, recent legislation addressing compensation associated with acquisition of property by exercise of eminent domain defines "Just Compensation" to be FMV multiplied by 125 percent (homestead taking) or FMV multiplied by 150 percent (heritage taking). In each case, the state law mandated definition of just compensation is applicable to acquisitions by eminent domain undertaken by the acquiring agency, and is intended by law to be an amount greater than fair market value as established by the approved appraisal(s).

As required by the Uniform Act (and consistent with the U.S. Constitution and most state constitutions), acquiring agencies are required to pay property owners just compensation for acquisition by eminent domain of real property acquired for projects funded in whole or in part with Federal funds. Further, the amount of just compensation must be determined by an appropriate public official of the acquiring agency, and be based, in part, on approved appraisals undertaken consistent with the Uniform Act and implementing regulations to establish FMV.

Like other costs of acquisition that exceed fair market value (i.e. cost of administrative settlements, court awards, and costs incidental to the condemnation process (See 23 CFR 710.203 (b)), where appropriately documented, the amount by which just compensation exceeds fair market value, is a direct eligible cost if all other requirements are met. Paragraph 8 of the Federal-Aid Policy Guide (FAPG) Non-regulatory Supplement for Part 24, Subpart B, Section 24.102 states that:

"...federal funding participation in an initial offer that exceeds the amount of the approved appraisal is permissible if the file contains an appropriate explanation."

This conclusion on the eligibility of supercompensation payments is consistent with earlier guidance provided in response to questions concerning participation in costs associated with relocation benefits required by state law that exceed minimum requirements under the Uniform Act. Information in Questions and Answers at FHWA's Office of Real Estate website at Part 710, Right-Of-Way - General - Questions and Answers (http://www.fhwa.dot.gov/real_estate/uniform_act/policy_and_guidance/) provides, in part,

Q: The Right-of-Way and Real Estate Regulation, 23 CFR 710.203 (12/99) States that Federal funds may be used for any project related costs for acquisition which are required under State laws. A separate reference is made to payments associated with displacement from acquired property under the Uniform Act Regulation at 49 CFR Part 24. Does this mean that Federal funds can participate only in payments required under State law for acquisition, but not for relocation assistance? If so why? Some States have laws that provide for relocation payments exceeding the benefits provided under the Uniform Act as well as laws that provide additional payments in acquisition. Is there any way that the States can streamline their accounting work efforts and be reimbursed for both acquisition and relocation costs required under State laws?

A: Yes, the Right-of-Way and Real Estate regulation allows participation in relocation payments required by State laws. The States accounting efforts can be streamlined. The issue in 23 CFR 710.203 is fiscal and related to participation in costs incurred as a result of project activities. It includes the costs of the many activities necessary to provide the real property necessary for a project. This fiscal participation is based on a broader concept than requirements of the Uniform Act. The programmatic requirements of the Uniform Act are for the provision of certain levels of payment to individuals affected by acquisition and relocation activities, but do not address the source of these payments. Every State must provide assurances of compliance with the Uniform Act. However, some States also have State laws providing for benefits in addition to those required under the Uniform Act.

Similarly, participation in the payment of acquisition costs that exceed Uniform Act requirements, including supercompensation payments, does not increase the amount or availability of Federal funds. It only affects how a State elects to use the funds available from all its sources.

For these reasons, we consider the issue of federal aid participation for States' legally mandated costs for acquisition and relocation to be a Title 23 issue and not a Uniform Act issue. If a State must pay damages exceeding the requirements in the Uniform Act, the cost is considered a legitimate project expense under Title 23 and is eligible for FHWA reimbursement pursuant to 23 CFR 710.203.

It remains important, however, to review all relevant facts of a particular acquisition when applying this guidance and the cited references. The guidance is applicable to "supercompensation" as defined above - a component of just compensation and a state mandated cost of acquisition. The particular cost must be reviewed on its merits to determine if it is eligible for reimbursement as a direct cost of acquisition. As for example, for reimbursement of the cost of an administrative settlement, the administrative settlements must comply with justification requirements of 49 CFR 24.102(i); so too should there be a sufficient factual basis to support the cost of a supercompensation payment, such as written documentation identifying the cost as a requirement of state law given the specific facts associated with the particular acquisition.

A secondary issue, which does pertain to Uniform Act requirements, concerns the consideration of "supercompensation" payments in determining eligible relocation benefits under 49 CFR Part 24, relating to a Replacement Housing Payment (RHP). That provision provides, in part,

24.401 Replacement housing payment for 180-day homeowner-occupants.

(b) Amount of payment. The replacement housing payment for an eligible 180-day homeowner-occupant may not exceed $22,500. (See also §24.404.) The payment under this subpart is limited to the amount necessary to relocate to a comparable replacement dwelling within one year from the date the displaced homeowner-occupant is paid for the displacement dwelling, or the date a comparable replacement dwelling is made available to such person, whichever is later. The payment shall be the sum of:
(1) The amount by which the cost of a replacement dwelling exceeds the acquisition cost of the displacement dwelling, as determined in accordance with paragraph (c) of this section; (24 CFR 401 (b))

(c) Price differential-(1) Basic computation. The price differential to be paid under paragraph (b)(1) of this section is the amount which must be added to the acquisition cost of the displacement dwelling and site (see §24.2(a)(11)) to provide a total amount equal to the lesser of:
(i) The reasonable cost of a comparable replacement dwelling as determined in accordance with §24.403(a); or
(ii) The purchase price of the decent, safe, and sanitary replacement dwelling actually purchased and occupied by the displaced person. (24 CFR 401 (b))

As noted above, the calculation of an RHP amount requires consideration of the "acquisition cost" of the displacement dwelling. Acquisition cost, though not defined in 49 CFR Part 24, has been considered to include all costs incurred in acquiring the real property. This is in accord with 23 CFR 710.203, referenced above, that provides eligibility for costs incurred in real property acquisition including "Usual costs and disbursements associated with real property acquisition required under the laws of the state", such as: the cost to acquire real property, including incidental expenses; and the cost of administrative settlements, legal settlements, and court awards.

Considering supercompensation payments, defined by state law, as a component of "acquisition cost" for purposes of an RHP calculation is not only consistent with the provisions governing reimbursement, it is also consistent with the manner in which other acquisition costs eligible for reimbursement (such as administrative settlements, legal settlements, or court awards) have been treated in determining the eligibility for, and the amount of, any RHP authorized by the Uniform Act and regulations at 49 CFR Part 24. Moreover, inclusion of supercompensation payments in the RHP calculation will ensure the avoidance of duplicate payments consistent with the provisions of the Uniform Act and 49 CFR 24.3.

In addressing these issues, reference is made to provisions of the Uniform Act, 23 CFR Part 710, 49 CFR Part 24, and other resources, as further described on Appendix A to this Guidance.

Conclusion

States are in the best position to determine how to allocate their share of the available Federal dollars. The FHWA believes that it is up to the State highway agencies to work within their governments to determine whether "supercompensation" payments are constitutionally supportable, and whether the use of Federal dollars, thereby reducing the amount available for other purposes, is in the best interest of their transportation program.

However, while recognizing that such costs may be eligible for reimbursement as a cost of the project under 23 CFR 710.203, there remains an unanswered question whether reimbursement of State-mandated payments that exceed traditional concepts of just compensation may prove to be inconsistent with the stewardship of Federal-aid highway funds. It is important to monitor supercompensation payments and practices to determine whether such payments do present stewardship issues. FHWA Divisions should work with their State partners to collect data that will permit an assessment of the State's experience with supercompensation payments under State law.

For further information, you may contact the Office of Real Estate Services Point of Contact serving your Division or Arnold Feldman by telephone at (202) 366-2028 or by email at arnold.feldman@dot.gov.

Appendix

Updated: 09/05/2014
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