Rising real estate values, eminent domain taking cited; litigation could raise prices again
OCEAN CITY – Ocean City will pay at least $17.1 million for the Klause and Palmer Center properties the city took by eminent domain. The price tag could rise if the former owners continue to litigate the issue.
Some debate arose Thursday night during the Ocean City Council meeting in discussion on a pair of ordinances that covered increased costs for the properties on the land the city wants to keep free from development from 16th to 17th streets and from Haven to Simpson avenues – between the Ocean City Free Public Library and Emil Palmer Park.
Early in the meeting, city solicitor Dorothy McCrosson laid out a timeline for the purchase of the lots involved in the two ordinances and how the appraisals rose since the city first tried to buy the Klause property in 2018.
Before council voted unanimously to approve the ordinances, Fairness In Taxes President Dave Breeden, whose organization blocked the original purchase in 2018, asserted the way the city conducted eminent domain proceedings allowed the judge to let later, higher appraisals rule, costing the city a few million dollars extra.
Breeden was defending FIT because the organization conducted a petition drive that ended up stopping the original purchase of the land that was home to a former Chevrolet dealership.
The city offered to buy the nearly two-acre parcel for $9 million, but FIT argued it was overpriced and later pointed to an assessment that put the fair market value at $6.9 million.
However, in the ordinances approved Thursday, the city will spend just over $9.9 million for the former Klause property alone.
Breeden said FIT was not to blame for the higher price.
On two smaller adjacent properties owned by Palmer Center (former city councilman John Flood’s family) an original appraisal put the value at $5.6 million but the city agreed to pay another $1.6 million for a total of $7.2 million because of a later appraisal.
One point that isn’t in contention is that between 2018 and 2022, property values have soared in Ocean City. While Breeden contends the city could have acquired the properites for lower appraised values, the city’s attorney for the eminent domain said nothing is guaranteed during litigation and it wasn’t prudent to act as Breeden suggested.
Ocean City timeline
McCrosson laid out the timeline leading up to Thursday night’s vote.
Council approved buying the Klause property in August 2018 but FIT began an ultimately successful petition drive to stop the purchase in late October just before the city’s sales agreement expired. The Klause family would not extend the agreement and “the opportunity to buy it was gone,” McCrosson said. The Klauses went to the planning board and got approval to build houses on the property.
In August 2019, council authorized the city to negotiate for the property and got appraisals, but in March 2020 the city’s offer was rejected. The city decided to take the property by eminent domain and by Dec. 18, 2020, had put $6.9 million into court in escrow for the purchase. (FIT pointed to the $6.9 million assessment as proof the city’s original offer of $9 million was too high.)
Before the declaration of taking the property was filed in the county clerk’s office, the city discovered $1 million in mortgages on the property and had to amend its complaint, which was filed March 1, 2021. The following summer the Klause family filed a motion asking the court to update appraisals because property values had risen substantially. The court agreed, McCrosson said, and the new value in December was set at $9.96 million.
The ordinance approved Thursday was for the additional $3.06 million (plus $25,000 for closing out environmental concerns).
A similar scenario played out with the two properties owned by Palmer Center. An offer for the property in 2019 was rejected and in June 2020 the city filed to take the property by eminent domain. That summer the court agreed with the owner’s request for a new appraisal. By December 2020, the city deposited $5.6 million with the court for the purchase price.
The owners asked again for another appraisal and it was granted.
The new purchase price was set at $7.2 million. The ordinance on the agenda Thursday night was for the additional $1.6 million in purchase price and another $1.6 million to be held for environmental cleanup, which the city expects to recoup after it has the work done.
As McCrosson explained, COVID caused real estate markets nationwide to increase substantially, which was good news for sellers but “not such good news for property buyers like us.”
FIT: It’s not our fault
During public comment, Breeden said the problem with the higher valuations that cost the city more money came about because counsel for the city in the eminent domain proceedings did not follow the law, allowing the judge to rule in favor of the new appraisals.
Breeden said when a local government condemns a property, three steps must be done in a timely manner – filing a verified complaint that the municipality wants to take the property and notifying the parties involved, filing an official declaration of taking and depositing into court the estimated funds to cover the taking. That third step, he said, must be done at the same time the official declaration is filed.
The counsel did not do that on behalf of the city, Breeden said,.
“The city failed to follow state law. … As a result, date of valuation was extended and it was $7.2 million instead of $5.6 million” for the Palmer properties, Breeden said. “It is like me going to settlement on a house saying I completed all the paperwork but don’t have the financing but please still give me the house.
“State law is clear on what needs to be done in order to complete condemning property,” Breeden said.
He said the same thing failed to happen with the Klause purchase, that because the city didn’t make that deposit to coincide with the official declaration, again the judge ruled the owners could have a newer appraisal in the ever-rising real estate market.
“What this boils down to is the city in both the Palmer and Klause matters did not deposit the funds in accordance with state law. As a result, the clock kept on ticking. If they deposited the funds on May 28, 2020, we would be sitting at basically $6.9 million and not $9.9 million. If they deposited the funds timely in the Palmer matter, we would be sitting on $5.6 million, not $7.2 million.”
He said depositing the funds is so “basic and elemental” it “begs the question, ‘why wasn’t it done?’”
Breeden drew a reprimand from City Council President Bobby Barr after he told Councilwoman Karen Bergman, “Don’t give me a dirty look.”
“It was not FIT’s fault,” Breeden said. “If the city complied with the law and deposited the funds it would be at $6.9 million, not $9.9 million. … The taxpayer was not protected in these two purchases because of the lack of compliance with following the law.”
Counsel: Both parties bound to fluctuations in the market
Mike Ash, attorney for the city on the eminent domain proceedings, reached via email, said the city is obligated to pay fair market value and both parties are bound to fluctuations in the market.
“The defendants have aggressively argued that they are entitled to the increase in property values; had the market collapsed, they would have aggressively opposed any effort to update the appraisals to reflect the decrease in property value,” Ash wrote in response to questions from the Sentinel.
Ash said Breeden, in listing the three steps for an eminent domain acquisition, was describing a “quick take” option. He said that was “theoretically available” to the city at the start of litigation, but the property owners immediately filed opposition to the taking.
Rather than bond and pay money into the court, “the more prudent” course of action was to wait for a court order favoring the city’s right to take the properties.
The court did that, entering an Order for Judgment July 29, 2020 for the Klause property and Aug. 14, 2020 for the Palmer properties, and imposed conditions including updated appraisals for the taking.
Ash said the city was using appraisals from Sept. 11, 2019 for the Klause property and one Palmer property, and a March 3, 2019 appraisal for the other Palmer property. Since the city was acquiring all the properties together, it had a new appraisal filed within the timeframe for the court order. With required updated bonding and filings, the city had the funds available and documents in place in December 2020, he added.
Ash said even had the city deposited the money immediately – which he reiterated wasn’t prudent because the court hadn’t ruled yet on the condemnation – it would not have definitely locked in the lower appraisal.
“It is likely the property owners would make the same arguments for a later valuation date in an effort to capture more compensation in a hyper-inflated market,” Ash said.
Asked if depositing the money immediately, as Breeden suggested, would have guaranteed a lower appraisal, he responded, “One cannot say that anything is ‘guaranteed’ once the matter is subject to litigation.”
He noted if the city had acquired the property through a negotiated sale (as attempted in 2018) rather than eminent domain, there would have been finality with the price.
“However, by proceeding to acquisition through litigation, there are litigational risks the city is exposed to. This motion on the valuation date is an example of an adverse outcome in litigation,” Ash said.
Ash said the city will consider all of its options, including an appeal of the judge’s decision about the appraisals, “upon receiving a final judgment.”
Because the sale prices could end up decided in a jury trial, as both the Klause and Flood families have been trying to get the highest value for their land, Ash said “it is possible” the final cost of the city acquiring the parcels could exceed the total $17.1 million.
At the council meeting, McCrosson made a similar point.
She said if the former property owners disagree with a commission’s decision on the value of the land, they can take their fight to a jury trial.
After questions from some council member who had asked her about the validity of the FIT president’s comments, she said Ash was available to discuss the matter with them.
By DAVID NAHAN/Sentinel staff