Rick’s Café Californian

California’s water world is abuzz with the revelation that the BDCP involves acquisition of land parcels for the project’s diversion facilities and 30-mile twin tunnels, either by acquisition or by Eminent Domain.   As Rick Blaine (aka Humphrey Bogart) stated in Casablanca, “I’m shocked.  Shocked to find that gambling is going on in here.”

The BDCP acquisition program will push takings litigation into new territory. Eminent domain commonly involves one public agency and a single landowner. The BDCP “kicks it up a notch” by involving hundreds of landowners. This will transform “political coalitions” into joint legal defense alliances. Prior experience suggests that the BDCP will find that their actual acquisition costs many multiplies of their initial estimates.

The Shadow of Eminent Domain

All infrastructure projects need real property and the BDCP is no exception. While Hydrowonk has not studied in great detail the confidential planning document that made its way into the public domain, my experience with infrastructure projects suggests that BDCP acquisitions will be a mix of permanent versus temporary use of real property and surface versus sub-surface impacts. Especially for parcels located on the tunnels’ right-of-way path, acquisitions may only require portions of parcels involving sub-surface impacts.

Eminent domain is normally used only when there is an impasse in negotiations between government entities and landowners. This is probably little or no solace to landowners who find their farms on an acquisition list. Their choice is between a “voluntary deal” and a court fight. The planning document lists the teams of experts including agricultural appraisers and the like. Look for their work product to shape the economics of BDCP offers in “voluntary negotiations.”

The Lesson from Domenigoni

The Metropolitan Water District of Southern California experience with Diamond Valley Lake is an interesting case study. Metropolitan decided to condemn agricultural lands owned by the Domenigoni family. Like BDCP plans, Metropolitan retained agricultural appraisers to value the Domenigoni’s lands. Metropolitan made a pre-trial deposit of about $7 million to fund the taking.

Landowners are owed “just compensation” in a takings that is based on the highest and best use of the property. At trial, the Domenigoni’s lawyers submitted evidence that the Domenigoni lands were in the pathway of urban development. Further, land development companies had already identified the property for potential development. Domenigoni’s experts valued the land and severance damages at $43.2 million. Metropolitan’s experts had bumped their valuation to $14 million at trial.

The jury awarded the Domenigonis $43.2 million (the jury did not split any baby). With interest and paying the family’s legal fees, Metropolitan resolved the case for about $50 million. Metropolitan’s final costs were about seven times their pre-trial deposit.

Hydrowonk’s Experience

Hydrowonk has been an expert in takings litigation over the years (representing private landowners, surprised?). My clients were large, sophisticated, well-capitalized parties (billionaire oil man in Texas and Conaway Ranch in California). They marshalled extensive defenses of their property and its valuation. In both instances, the “spread” in the valuation of public agency experts versus landowner experts was wide. In both instances, the public agency abandoned their taking as they saw material risks that proceeding to trial exposed them to significantly higher payment obligations than their experts opined.

For the water rights portion of the litigation, the centerpiece of the valuations involved the highest and best use of water rights. While the specifics varied between the two cases, both situations involved the reasonable prospect of water marketing opportunities. Agricultural land appraisals are misleadingly low.

BDCP Takings

Here are Hydrowonk’s predictions.

First, landowners have a strong incentive to form a joint legal defense. The issues surrounding permanent versus temporary takings, surface versus sub-surface impacts, highest and best use of resources and severance damages should be argued and valued from a common conceptual and factual framework. Collective landowner action will yield better outcomes for them than solitary, individual action. Given that political coalitions against the BDCP have already formed, adding a legal action committee to their efforts seems inevitable.

Second, landowners will be asked to engage in “voluntary negotiations” to set a price for their land and water rights. If the owner doesn’t strike a deal, eminent domain will follow. But rational bargaining should reflect informed knowledge about what to expect from the eminent domain litigation, and quite often an owner who makes a “voluntary” deal with the government is leaving money on the table.  Once landowners achieve a consensus on the highest and best use of the resources taken, severance damages and other legal and factual matters, the odds of a better price greatly increase.

Third, the discussion to date has been mysteriously silent about the water resources (surface and ground) of the targeted parcels. A permanent taking of an agricultural operation, for example, will cease the use of surface water and groundwater. The valuation of “water rights” was one of the major issues in the Conaway Ranch litigation. A sophisticated defense of landowner interests in BDCP litigation should include water resource issues.

Finally, look for the BDCP’s costs to enter the takings litigation. The annual cost of BDCP water is at least between $800/AF and $1,000/AF when properly analyzed.  As such, BDCP water users have expressed a valuation for water. Sophisticated lawyers and experts will use this information in reaching opinions about the fair market value for taken property.

Takeaway

Eminent domain is inevitable for large infrastructure projects. From this perspective, Hydrowonk finds the buzz around the BDCP planning efforts a bit puzzling. They are inevitable. There is gambling at Rick’s Café American.

The more interesting questions revolve around what the “litigation casino” will look like. Unless the targeted landowners go “quietly into the good night” (which I don’t see happening), the BDCP should add a large contingency factor to their  acquisition budget.