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The Limits To The “Cost To Cure” Approach To Determining Damages

The cost to cure approach is one used by appraisers to address damages when only part of a property is being acquired for a roadway or similar project. The cost to cure put simply, determines the cost to restore a property and “cure” the damages that result from the partial acquisition. The most common example is a situation where a road is being moved or widened and is going to remove a barrier of trees. The cost to cure would determine the cost to plant new trees to replace the function of the lost trees and cure the damages that result from the loss of the wind break, the noise barrier, and visual barrier that existed in the before situation.

However, the cost to cure approach has its limitations one of which is a legal limitation unknown to many. This legal limit is that the “cost to cure” is a mitigative measure and not a necessarily a market measure of damages. Mitigation means to lessen. It is important to remember that the cost to cure approach is a way to “lessen” the damages otherwise created in the marketplace and not necessarily a way to “determine” the damages.

The Minnesota Court of Appeals concisely states this in a 1986 court case:
The proper measure of damages is the difference in market value of the property alleged to have been injured before and after the acts complained of, unless the cost of restoring the property to its natural condition is shown to be less than the difference in value, in which case the cost of restoration is the measure of relief to which the property owner is entitled.
Bulletin Pub. Corp. v. City of Cottage Grove, 379 N.W.2d 685, 687 (Minn.App.,1986) citing Sallden v. City of Little Falls, 102 Minn. 358, 361-62, 113 N.W. 884, 885 (1907) (emphasis supplied).

In a partial acquisition case, the test for damages in Minnesota is the difference in the before value of the property (prior to the taking of any part of the property) as compared to the after value of the property (which includes the value of the remainder). This analysis captures the loss in value for the part taken and the diminishment in the value of the remaining property (i.e. severance damages to what is left).

In many cases, the easiest way to capture this reduction in value from the before to the after is to determine what it will cost to restore the property to what it was in the before or so it seems. Problems arise when one assumes the cure always represents the difference in the market value in the before as compared to the after. It is true, that the cost to cure works well in small takings when finding real market evidence is difficult (i.e. you take down a portion of a fence). However, the cost to cure cannot always be justified in the market. An example is the acquisition of one parking space as part of a road widening project. Assume the business already has more parking than required by code or business needs. A cost of cure approach would be to estimate the cost of purchasing the building next door, demolishing it, and creating the lost parking space. But, would the market ever do that? No, the market would just reduce the price of the property in the after by the value of a supplemental parking space.

Remember, the cost to cure is a mitigative measure meaning it is a way to reduce the damages not to increase them. The market impact difference is always the maximum damage. The damages are limited by the actual market difference if the cost to cure exceeds the amount the market would punish the seller for the deficiency.

The lesson is to avoid being too quick with the cost to cure approach. It can end in a wacky number that does not represent how the market will react to a partial acquisition. Certainly, we can all think of fact situations where it would seem that the cost to cure is mandated, but the law requires us to look at the market not the individual owner. Look at the after value in isolation – did you end up at or near zero. If you put a “for sale” sign out front in the after in the “as is” condition, would you really have to give the property away for someone to take it?

The mistake is to look at what is lost rather than what remains. The check on the cost to cure approach is to look at the after number. Many times, it all seems logical until you look at the after number.

J.D. Eaton’s book on Real Estate Valuation in Litigation 2nd Edition has a very good discussion of cost to cure. I am sure some of what is in my head came in part from Eaton.

© 2015 Rinke Noonan