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Highest and Best Use: Economic Feasibility
By
M. Robert Goldstein and Michael J. Goldstein
It is an axiom in condemnation proceedings that property
must be valued for its "highest and best use." Highest
and best use has been defined as "the most profitable
likely use to which a property can be put." It has also
been defined as "the use of land which may reasonable
be expected to produce the greatest net return to land over
a given period of time, and "that legal use which will
yield to land the highest present value." (American Institute
of Real Estate Appraisers, Appraisal Terminology and Handbook
(Fourth Edition), page 92.)
What is clear is that whether by lack of knowledge, lack
of capital, change of circumstance or plain indifference or
any other reason, not all real estate is put to its most productive
or highest and best use and that actual use is not the determinant
of the value of the property. Since fair market value presupposes
a price between not only a willing buyer and seller, but knowledgeable
ones, and at the highest price obtainable in the market, that
price must reflect the most profitable use of the property,
its highest and best use.
It is not unexpected then that condemnees, looking to maximize
their recovery, have been given to project more valuable uses
for their property than its actual use and that condemnees,
looking to minimize their exposure, should look at the property
much more conservatively and with a jaundiced eye. It also
should not be surprising that there should be a wide variance
in appraised values between condemnors' and condemnees'
appraisers, despite the competing appraisers being reasonable
and honest, when the underlying assumptions of each as to
most profitable use are different.
In dealing with the issues raised in this context, the appellate
courts have reacted to various fact patterns. While their
decisions, of necessity, have sounded like black letter rules,
and in some instances have been treated as such by lower courts,
they have, for the most part, been a recognition that the
rule merely reflects the action of the market place and must
have a common sense application.
‘Proof of Facts'
Thus, a use projected far enough into the future that any
benefit from it would be so discounted by the market so as
to yield no appreciable present value could not be considered.
The rule stated by the Court, was "that a speculative
use of this character must be substantiated by proof of facts
that indicate a likelihood that the property would be put
to such a use within the reasonably close future." (Matter
of City of New York (Wilson), 21 AD 2d 652, 653, 249 NYS
2d 811, aff'd. 16 NY 2d 814, 263 NYS 9.)
Further, a use base on nothing in reality, substantiated
by no facts and being merely the product of the claimant's
imagination and hypothetical, cannot be the basis of an award
(Matter of City of New York Shorefront High School-Rudnick,
25 NY 2d 146, 303 NYS 2d 47). Thus, in Triple Cities Shopping
Center, Inc. v. State of New York, 26 AD 2d 744, 272 NYS
2d 207, aff'd. 22 NY 2d 683, 291 NYS 2d 801, an owner,
who claimed that the purpose for which he bought the taken
property was to build a gas station and motel on the property,
but who could not show any activity on his part at that direction
and who, as the court stated, could not show any commercial
activity at all in the immediate vicinity of the taking was
denied a valuation on that basis. The same was said as of
the early 1960's as to the potential for a high rise
apartment development at Ninety-third Street and First Avenue
in the Matter of City of New York (Wilson), supra.
(Our father tells us of the condemnation judge who pooh-poohed
the possibility of apartment house development in Kew Gardens
and adjacent Forest Hills during the trial for the building
of Grand Central Parkway in the 1930's).
It is the lack of activity in the adjacent area that is really
the key to the problem in most instances. When does the challenge
to a proposed best use arise? Usually when there is a vacant
piece of land with a use claimed for it consistent with nothing
in the vicinity or where a use is claimed different than the
use it is actually being put to and again there is nothing
in the vicinity used similarly, or even worse, the uses in
the vicinity are inconsistent with such a use.
Some Issues Clear
It is clear, from those same facts, that not every vacant
piece of land or differently used property gives rise to a
contest on the issue of highest and best use. Who would argue
that a parking lot on Park or Fifth Avenues in the vicinity
of Fifty-seventh Street has a highest and best use for a high
rise residential or commercial building? Why? Because the
extrinsic facts of the surrounding uses makes quite clear
what the best use is.
And it is also quite clear that no other proof of highest
and best use is required much less that such use is economically
as well as physically feasible. (Matter of City of New
York (Broadway Cary Corp.), 34 NY 2d 535, 354 NYS 2d 100;
Rochester Urban Renewal Agency v. Lee, 83 AD 2d 770,
443 NYS 2d 479 (4th Dept.).) It is equally clear
that proof would be needed of a potential for such a use if
the same claim were made for land in rural New York State
or in some other undeveloped area or even while the surrounding
area does not make clear that such a development is reasonable
probable. Matter of City of New York (Broadway Cary Corp.),
supra; Matter of City of New York (Jomar Real Estate Corp.)
94 AD 2d 724, 462 NYS 2d 260, aff'd. 61 NY 2d 843, 473
NYS 2d 963; Larig v. State of New York, 58 AD 2d 734,
396 NYS 2d 122 (4th Dept.).
In the Matter of City of New York (Broadway Cary Corp.),
supra, the Court reversed the findings of the trial court
that a vacant piece of land "situated in an area zoned
for light manufacturing" had a highest and best use as
a shopping center since the claimants failed to substantiate
their contention by proof of "the economic feasibility
of the proposed venture." The Court noted that in Shorefront
High School-Rudnick, 25 NY 2d 146, at p 149, 303 NYS 2d
47 that it "is likely that the expert would consider
the availability of financing, costs of construction, taxes,
possible profits and the like in arriving at his conclusion
concerning the highest and best use of the land." At
first blush, without reading the record for the facts of the
case and without consideration of the facts in Matter of
City of New York (Jomar Real Estate Corp.), supra, one
might believe that another level of proof was now to be required
in all of these cases, that of an economic feasibility report
requiring another level of expensive expert witness testimony.
Common Sense Approach
But common sense dictates otherwise. Vacant land, parking
lots or old brownstone or townhouse buildings at or near the
corner of Fifth Avenue and Fifty-seventh Street do not require
and economic feasibility report to demonstrate that more of
the same of what has been built around it is its highest and
best use. If that can be accepted as a fact, and it seems
unquestionable that it should be, then we know that such a
report is not required in all cases. What is it then that
Broadway-Cary was talking about and what is it that
Jomar decided in its name. The plot of land in Broadway-Cary
Corp. was located in Staten Island in a manufacturing
area across the street from a low rent housing project. There
did not appear to be a residential base of sufficient purchasing
power to support a shopping center. While the zoning was M-1,
that by itself had no meaning as it permitted shopping centers
of right. Its real significance was that the area was developed
as light manufacturing, and plain common sense raised warning
lights against making assumptions that such a development
could be economically successful. It was against that background
that the Court called for proof of economic feasibility.
The facts in Jomar had some points similarity but
were on the whole different.
Again the property was zoned M-1, it was in Staten Island
and it was vacant land. But unlike the facts in Broadway-Cary
it was situated directly across the street from a newly developed
residential area with no existing shopping facilities for
about a mile, except for an isolated store here and there.
At the time the property was condemned and in connection with
a variance to permit the construction of a shopping area within
the targeted residential area the City Planning Commission,
based upon a study, made findings of the need for much more
square feet of store space in the area than would be provided
for in the condemned property. The icing on the cake was that
the owners had not only prepared plans for a shopping center
prior to any projected condemnation and had been prevented
from filing same by reason of the proposed condemnation, but
had done work on preparing the land itself including its grading,
putting in of street improvements and sewers and acquired
sewer hookup rights for the shopping center. This was deemed
sufficient proof of highest and best use without a "formal
feasibility study." (An informal study had been testified
to by the claimant's appraiser).
Thus, it seems to us, we are back to square one. Common sense
rules the day. There are no absolute criteria in establishing
what a market is and what it does. There are no black letter
rules of what constitutes proof of highest and best use. There
is no absolute criterion of an economic feasibility study
to justify a proposed use. It is not an appraisers' full
employment rule. While proof is required to justify a use
different than the way the property is actually being used
or different than is consistent with the surrounding area
or even different than plain common sense seems to indicate
it appears that there is no absolute requirement of what that
proof is. And we believe that is how it should be.
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