Ken,
Run do not walk to an attorney. I say this not because you need to engage in a drawn out legal battle but because you need strong legal council on your side. Find a firm that specializes in this area of law (real estate and most importantly eminent domain law).
I had a rental property taken by the California Department of Transportation through eminent domain. The bad news, it was a very trying time, it was an emotional roller coaster, and in the end I had to give up the property (in my battle I knew that would ultimately be the end result). The goods news is that when the dust settled we received about 10% above what the current market value of the property was, there were absolutely no selling expenses borne by me, they paid all of the escrow costs and we had a check literally one week after the deal was signed. The deal literally became: Agreed upon price minus outstanding mortgage = check to JHAP.
I am sorry to hear this is happening to you Ken. The brutal truth is that you are in for a rough ride but hopefully it will lead you on to a path you were meant to follow, and hopefully you will get a fair price for your property.
+1 on the specialist appraisal. It's difficult to refute a specialist.
Please, please contact a good attorney.
Also have your CPA review the rules for a "Section 1033 Exchange." (please note I referenced code section 1033 not 1031).
