Update on the Eminent Domain Case in Seoul

https://www.internationalappraiser.com/2017/05/another-appraisal-in-seoul-eminent.htmlMy previous post on this matter spoke of a naturalized U.S. citizen who was having her home seized by the Seoul Municipal Government for a private development project. She was one of a few holdouts who insisted that she was not being properly compensated for her home in downtown Seoul. Both the U.S. and Republic of Korea constitutions and a treaty between the two nations guarantee “just compensation” for citizens who have their properties condemned for beneficial public projects, such as highways and public railways, in a system commonly known as “eminent domain”.

This particular case is reminiscent of a famous eminent domain case in the U.S. known as Kelo vs. City of New London, in which the city of New London, Connecticut was attempting urban renewal through the use of eminent domain for a private real estate developer. Mrs. Kelo was the lead plaintiff. The Kelo case went all the way to the U.S. Supreme Court, who decided in 2005 in favor of the city of New London and defended the concept of private takings. The project ultimately failed, returning New London back to its blighted state and costing taxpayers $78 million. 

The system of reimbursing displaced real estate owners changed in South Korea prior to 1990 due to the rapid appreciation of land prices and values.  Rather than compensating property owners according to “market value”, which is the fundamental concept of “just compensation”, the government moved to an “announced price” system that some other governments use to accomplish price controls which effectively avoid paying full market value for expropriated property. The city of San Jose in Costa Rica is an example. This announced price system is known in Korea as the “Officially Announced Land Price” (OALP).  

The Seoul Municipal Government’s OALP operates from a CAMA (Computer-Aided Mass Appraisal) system, based on statistical algorithms, much like many cities in the world do. At the Pan Pacific Congress of Appraisers, Valuers and Counselors in Seoul in 2008, which I attended, the OALP algorithm for Seoul at that time was presented in English as follows:

The dependent variable that the valuation algorithm solves for is the price per square meter of land area, not building area, because land in Seoul is worth far more than most buildings on it due to the shortage of land.

Notice that almost every input variable is a dummy variable. Dummy variables are binary variables with the value of 1 or 0, depending upon the presence or absence of a particular condition, such as being “adjacent to a narrow road”.

There are only two quantifiable input variables in this model: the land area and the distance to railways or highway. Missing from this model are so many quantifiable variables such as distance to subway stations, distance to shopping, distance to schools, quality of schools, floor area ratio (ratio of building area to land area), and land slope.

Since the Ministry of Land, Infrastructure and Transportation is the same Korean ministry that exercises the powers of eminent domain and licensing and discipline of appraisers, there is also an inherent conflict of interest. Per scholar Byungkoo Cho, “when MOLIT perceives a certain compensation amount to have been calculated as excessively high, the appraisers may receive disciplinary actions such as suspension of business or revocation of licenses.”Byungkoo Cho, “Just Compensation in Eminent Domain in Korea: From the Perspective of Fairness,” Eminent Domain: A Comparative Perspective (2017, Cambridge University Press).

Nevertheless, MOLIT does measure the disparity between its announced prices and market-based sales transactions, and most recently disclosed that average OALP was only 63.3% of actual sales prices in year 2014, and considerable land price inflation has occurred since then. By my calculation, OALP in 2016 for this neighborhood averaged only 27.5% of sales prices, with the highest reading being 41.5%.

Public assessment agencies often conduct their own internal assessment/sales ratio studies (or sometimes sales price/assessment ratio studies) to calibrate their systems.  Some masterful studies have been published by the states of Washington and Virginia in the U.S.

The Korean client’s lawsuit against the private taking ultimately lost in Korean courts, but the treaty between the U.S. and the Republic of Korea mandates an international arbitration for a U.S. citizen.  We expect to be heard at the International Arbitration Centre in Hong Kong.

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