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Public infrastructure projects typically take years of planning. And sound government forecasting necessitates identifying future roads or extensions on general plan documents. If a property owner decides to purchase property that is likely to be impacted by a future public project, once that project comes to fruition and it's time to acquire the property, how does the valuation work? Do the appraisers consider the project and its impact on the property, or do they disregard it? This is a complicated, fact-intensive issue, and one that requires balancing eminent domain laws regarding the project-influence rule and the valuation requirements of highest and best use.
In a recent unpublished decision, City of Morgan Hill v. Garcia (2025 Cal.App.Unpub. Lexis 6669), the court held that if the project was known at the time of the property's purchase, it should be considered for valuation purposes, but only to the extent it impacts the future development potential.
Background
In Morgan Hill v. Garcia, a developer purchased a 4-acre property in the 1970s with the intent of developing the property for housing. Prior to the purchase, a portion of the property was the location of a planned road extension which had been identified in the City's general plan. The developer entitled the property and set aside an area for the future road extension. Over the years, the City went back-and-forth on whether it would move forward with the road extension and whether it had the necessary funding, and during that period, the developer submitted new plans which would use the area set aside for the road extension for additional residential lots. The development plans were denied by the City, and the City eventually moved forward with filing an eminent domain action to acquire the property needed for the road extension.
The City valued the road extension area based on raw, unentitled land, at $3.7 million. The developer's appraiser valued the road extension area at $8 million based on the assumption of reasonable probability that, but for the road extension project, the developer would have obtained residential land use entitlements. The owners argued that the project influence rule requires the court to ignore the road extension designation in the circulation element, and the jury should be able to consider evidence that, absent the road extension, there was a reasonable probability that they would be able to entitle for residential lots the area being acquired.
The City filed a legal issues motion to determine whether the developer's valuation methodology was appropriate, and the court agreed with the City, concluding that the property should be valued as unentitled land. The parties stipulated to the City's valuation, and the developer appealed.
Appellate Decision
On appeal, the Court grappled with how to apply several eminent domain laws, including the project influence rule, the concept of highest and best use, and evidence of a reasonable probability of a zone change.
The Court held that the property had been identified as the site of the road extension – and thus subject to probable condemnation – since before the developer purchased it. Based on this key fact, the Court concluded that the fair market value was set at the time of the purchase – not as to the precise value of the land, but as to "the uses and purposes for which the property is reasonably adaptable and available."
Based on this conclusion, the Court of Appeal held that the trial court properly excluded the developer's valuation theory premised on the non-existence of the project because the project had been included in the fair market value since before the developer purchased the property. The developer knew since the time of purchase it was reasonably probable the property would be condemned and did not anticipate building homes on the area slated for a road extension.
But what about the project-influence rule – shouldn't that mean the road extension project gets disregarded in the valuation? The Court held that the property should be valued in its existing state – unentitled, residentially-zoned land, rather than its future use as a roadway. But the value of the property should not be assessed using a more valuable, alternate use, such as having entitlements for residential development, after its probable inclusion in the project from back in the 1970s.
And what about the possibility of a zone change – shouldn't the developer be able to demonstrate that absent the project, the developer could secure entitlements to build residential lots on the area where the road was planned as the property's highest and best use? The Court explained that the trial court properly acts as a gatekeeper before such evidence is presented to a jury, and cannot allow in evidence that is speculative. Here, the Court stated that "[e]vidence of a hypothetical, past possibility that without the project, the property could have been upzoned, or might have received an entitlement for development, is not persuasive to establish fair market value as of a later date of valuation."
Conclusion
Confused? Rightfully so. Under the Court's analogy, public agencies should lay out all their future project plans decades in advance, and if a property changes ownership, that eventual buyer would know of the project at the time of purchase, and therefore should not consider that area for development. While neither the public agency or the developer argued it, this felt like a situation where any development of the site would potentially trigger a dedication of the road extension, which would be a different valuation approach altogether.
The takeaway is that every situation is unique, and court rulings on the project influence rule do not seem completely consistent. To be safe, before purchasing property that may be subject to a future public acquisition, understand the risks and take it into account as part of the purchase price.
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