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"What's It Worth - Who Wants
To Know?"
The Valuation of Real Property in
Litigation
By Michael Rikon
Introduction
The title of this article is, of course, meant to grab the
readers attention. It is, however, a truism that value of
real property is often not simple to fix. We all recall the
study of the legal dilemmas that faced "Black Acre" in law
school, but the focus on the value of"Black Acre" is far more
illusive. If beauty is in the eye of the beholder, then value
of real property lies in the one who has title, but not always.
Real property value is very dependent on the factual circumstances
presented. It is also dependent on the reason for the need
to value the property.
Real property rarely presents itself in a perfect model
of circumstance for valuation. This does not mean that one
occasionally does not get lucky. There can be a very recent
sale of a condominium unit in the same building, in the same
line, and only one floor away. This rarity aside, real property
is usually unique in a number of factors including its location.
It generally lasts forever and is of limited supply. Its value
may be very dependent on its use which could be unique to
its present owner. What real property is worth may not be
equated to what it cost. Nor does fair market value necessarily
mean assessed value. Real property value will often vary depending
on subjective factors, legal issues and the very nature ofthe
inquiry. In this article we will address the valuation of
real property as it may appear in the context of litigation.
Eminent Domain
In no other field of litigation is value so keenly put in
issue than in a condemnation case. It is the primary inquiry.
Condemnation is a harsh remedy. It is the forced sale of property.
In many cases, the owner would not part with title no matter
the price. Yet, the power of eminent domain is inherent in
the sovereign. There is nothing in our constitutions which
create the power to condemn and that is because it existed
before our constitutions came into existence. What does exist
is a limitation on that power. The Fifth Amendment to the
United States Constitution and Article 1, Sec. 7(a) of the
New York State Constitution provide that in the event that
property is taken for a public use, the owner must receive
"just compensation." The search for what exactly constitutes
"just compensation" is the paramount issue in any condemnation
case.
The constitutional requirement of "just compensation" requires
that the property owner be indemnified so that he may be put
in the same relative position, insofar as this is possible,
as if the taking had not occurred. Olson v. United States,
292 U.S. 246 (1934) City of Buffalo v. J.W. Clement Co.,
Inc., 28 N.Y.2d 241(1971); Rose v. State of New York,
24 N.Y.2d 80 (1969); Marraro v. State of New York,
12 N.Y.2d 285 (1963). It is the general rule that "just compensation"
is to be determined by reference to the fair market value
of the property at the date of the taking, (Ketchikan Cold
Storage Company v. State, 491 P.2d 143 (1971), Anderson
v. Chesapeake Ferry Company, 186 Va. 481, 43 S.E.2d 10
(1947), Matter of Board of Water Supply of City of New
York, 277 N.Y. 452 (1938), County of Erie v. Fridenberg,
221 N.Y. 389 (1917)), and fair market value is the price for
which the property would sell if there was a willing buyer
who was under no compulsion to buy and a willing seller under
no compulsion to sell. City of Wichita v. Eisenring,
269 Kan. 767 (2000); Lower Manltattan Loft Tenants v. New
York City Loft Board, 1991 U.S. Dist. LEXIS 2018; Keator
v. State of New York, 23 NY2d 337 (1968). The fundamental
question then to be answered by the Court in valuing damages
is "what has the owner lost?," not "what has the taker gained?"
Boston Chamber of Commerce v. Boston, 217 U.S. 189,
195 (1910). This is so because the owner is to be put in as
good a position pecuniarily as it would have occupied if the
property had not been taken. United States v. Miller,
317 U.S. 369, 373 (1943).
In a condemnation claim, a former owner (at this stage,
a claimant) is not limited to a study based on the property's
actual use, for the property must be valued on its highest
and best use regardless of the actual use. United States
v. 320.O Acres of Land, 605 F.2d 762 (1979). As will be
discussed below, this differs significantly from tax reduction
cases.
Not only is an owner allowed to project a value of the property
on a different highest and best use, but that owner may also
have the trial court consider the reasonable probability of
re-zoning the property. Masheter v. Okio Holding Co.,
38 Ohio App.2d 49 (1973); Matter of Town of lslip (Mascioli),
49 N.Y.2d 354 (1980); Morton Grove Parlc Dist. v. American
National Bank & Trust Co., 39 I11.App.3d 426 (1976); Spriggs
v. State of New York, 54 A.D.2d 1080 (1976).
How Real Property Is Valued
Appraisers estimate property value by utilizing three approaches
to analyze real estate data. The three classic methods ofvaluing
real property are (a) market data or comparable sales approach,
(b) income capitalization approach, and (c) the cost approach.
The cost approach is rarely used in condemnation cases for
real estate. Real property must constitute a "specialty" for
the cost approach to be employed. A "specialty" has been defined
as a building designed for a unique purpose. People ex
rel. New York Stock Exchange Building v. Cantor, 248 N.Y.
533 (1928). For a building to be a "specialty," it must be
truly unique so that only the owner would have use for it
and the sole way to replace it would be by its reproduction.
Commonwealth v. Massachusetts Turnpike Authority, 352
Mass. 143 (1967). The cost approach requires the appraiser
to find a value ofthe land and then add the estimated value
ofthe improvements. The value ofthe improvements is found
by finding the current cost of constructing a reproduction
of the valuation subject and then subtracting depreciation.
All incremental costs are also considered and added to value.
Matter of City of New York (Salvation Army), 43 N.Y.2d
512 (1978). While the cost approach is rarely used in a condemnation
real property case, it is always used in a trade fixture case.
Matter of City of New York (Fulton Park U.R. - Kerievsky),
57 A.D.2d 954, affd. 44 N.Y.2d 974 (1974); See also Certain
Lands v. Bee Frank, Inc., 112 Wisc.2d 1 (1983), rev'd
on other grounds, (cost approach method used as part of "unit
rule").
The market data, or comparable sales approach is used when
the subject property is similar to other properties which
have been sold, or perhaps are currently for sale in the subject
property neighborhood. This method works well for residential
properties and is always used for vacant land. The appraiser
will analyze the sales by making a grid to show the expert's
adjustments for location, size, time, zoning, marketing factors,
view and other factors that a buyer would consider, all with
the idea that the comparable sales, as adjusted, will indicate
a value of the subject.
In reviewing an appraiser's adjustment factors, one must
be alert for any large adjustment since the greater the adjustment,
the less reliable the sale. Sometimes a condemned parcel,
often denominated as a "damage parcel," (an archaic description
that survives) may have been recently purchased. The Court
ofAppeals ofNew York has held that a recent sale, if not explained
away as abnormal in any fashion, is evidence ofthe "highest
rank" to determine the true value of the property at that
time. Plaza Hotel Assoc. v. Wellington Assoc., 37 N.Y.2d
273 (1975); Schonfeld v. Hilliard, 218 F.3d 164 (2000).
However, while the best evidence of value may be a recent
sale of the subject property between a seller, under no compulsion
to sell, and a buyer, under no compulsion to buy, (State
ex rel. Lincoln Fireproof Warehouse Co., v. Board of Review,
60 Wisc.2d 84 (1973); Matter of Allied Corp. v. Town of
Camillus, 80 N.Y.2d 351 (1992)), a recent sale of such
property is not relevant to the question of value if it is
established that such a sale was "abnormal" and, therefore,
not reflective of market value. Gold-Mark 35 Associates
v. State of New York, 210 A.D.2d 377 (1994); Dennis
v. County of Santa Clara, 215 Cal.App.3d 1019 (1989).
If the property was purchased for development, the owner
is entitled to a far greater return than mere acquisition
costs. Since an owner is entitled in condemnation to be fully
indemnified, that owner should be entitled to recover not
only the fair market value ofthe land, but all costs expended
and an entrepreneurial return on the investment. lfthe use
is specific, for example, the construction and operation of
a new funeral parlor or self-storage facility which was well
advanced when condemned, that claimant is entitled to receive
exactly what the owner would have received in a fair market
sale. In other words, the property increased in value substantially
because of the owner's money, knowledge and hard work. Every
step that was taken to advance the project would provide an
incremental and, perhaps, geometrical increase in value. This
is because "a sagacious and experienced prospective purchaser
on the day of the taking would undoubtedly have taken into
consideration the net rental income which might have been
derived from (the) property ifthe taking had not intervened
. . ." Levin v. State of New York, 13 N.Y.2d 87 at
91 (1963); See also U.S. v. 25,406 Acres of Land, 172
F.2d 990 (1949).
If the subject property is income producing, it should be
valued by the income capitalization approach. Simply put,
this approach finds the present value of real property based
on its future income. In condemnation, the property is valued
as if it is free and clear of all liens, encumbrances and
leases. 41 Kew Gardens Road Associaies v. Tyburski,
70 N.Y.2d 325 (1987); Matter of City of New York (Franklin
Record Center, Inc.), 59 N.Y.2d 57 (1983).
The appraiser makes an extensive market study and estimates
the economic rent of the property. Actual rents must be considered.
Housing Authority of Little Rock v. Rochelle, 249 Ark.
524 (1970); Matter of City of New York (Maxwell), 15
A.D.2d 153, aff'd, 12 N.Y.2d 1086 (1963); Marjal Realty
Corp. v. State of New York, 23 A.D.2d 941 (1965). Actual
rents provide the best indicator of fair market rental, especially
if there is no indication that the actual rental is too high
or too low. Casino Reinvestment Development Authority v.
Katz, 334 N.J. Super. 473 (2000); Matter of City of
Albany (A.D. Johnson), 136 A.D.2d 818 (1988).
The appraiser then estimates the expenses of the property.
The net income is then applied to a capitalization rate which,
itself, is determined by a study ofvarious economic factors
including the retums on other investments, taking into account
mortgage, equity components, and risk. The rate ofcapitalization
should be a reflection ofthe market, i.e, what an investor
would require from an investment in a property of similar
age, kind and condition. The resulting "cap" rate is then
divided into the net income to indicate a value for the property.
Care must be taken not to capitalize a speculative or hypothetical
income stream from a non-existent structure. Winooski Hydroelectric
Co., v. Five Acres of Land, 769 F.2d 79 (1985); Matter
of City of New York (Shore Front High School - Rudnick),
25 N.Y.2d 146 (1969). However, a property with an existing
lease and in development may certainly be valued on a capitalization
approach for that is exactly what a buyer would do when purchasing
the property. Chicago v. Lord, 276 I11. 544 (1916);
Sparkill Realty Corp. v. State of New York, 254 App.
Div. 78, affd 279 N.Y. 656 (1938).
Partial Takings
Sometimes a condemnor does not take all of your property.
A partial taking is a frequent occurrence in a street widening.
As a general rule, the measure of damages in a partial taking
case is the difference between the fair market value ofthe
whole before the taking and the fair market of the remainder
after the taking. U.S. v. 4.0 Acres of Land, 175 F.3d
1133 (1999); State of New Jersey by Commissioner of Transportation,
149 N.J. 320 (1997); Acme Theatres, Inc. v. State of New
York, 26 N.Y.2d 385 (1970); Diocese of Buffalo v. State
of New York, 24 N.Y.2d 320 (1969); Frank Micali Cadillac-Oldsmobile
v. State of New York, 104 A.D.2d 477 (1984).
The damages that result are broken down into direct and
consequential. Direct damages represent the value for the
property, whether real or trade fixtures, which are within
the area condemned or appropriated.
Consequential damages are those which result to the portion
of the property remaining (the remainder), not only by reason
of the direct taking, but also by virtue of the use to which
the appropriated parcel is put by the condemnor. United
States v. 33.5 Acres of Land, 789 F.2d 1396 (1986) (road
construction caused invasion of knapweed to remainder); Raleigh
C&S Railroad Co., v. Mecklenburg Mfg. Co., 169 N.C. 156
(1915) (railroad use); South Buffalo Railroad Co. v. Kirkover,
176 N.Y. 301 (1903) (railroad use); Dennison v. State of
New York, 28 A.D.2d 28, aff'd. 22 N.Y.2d 409 (1968) (damages
to remainder caused by loss of view and noise); Criscuola
v. Power Authority of New York, 81 N.Y.2d 649 (1993) (loss
of value to remainder caused by high voltage power line).
One of the surest guides in measuring damages occasioned by
a partial taking is the F.Supp 693 (1987); Humble Oil Refining
Co. v. State of New York, 12 N.Y.2d 861 (1962). Further,
a deterioration of the quality of the income in the after
situation merits the award of U.S.Dist.LEXIS 7422; Star
Plaza, Inc. v. State of New York, 79 A.D.2d 746 (1980).
A partial taking may consist of a small taking, yet it may
cause substantial damage to the remainder, if it leaves the
remainder with unsuitable access for its highest and best
use. See Stom v. Council Bluffs, 189 N.M.2d 522 (1971).
In Priestly v. State of New York, 23 N.Y.2d 152 at
156 (1968), Judge Burke defined "suitable" as meaning "that
which is adequate to the requirements of or answers the needs
of a particular obj ect. The concepts are not mutually exclusive
and, therefore, a finding that a means of access is indeed
circuitous does not eliminate the possibility that the same
means of access might also be unsuitable in that it is inadequate
to the access needs inherent in the highest and best use of
the property involved."
Tax Certiorari
The ability of govemment to tax, similar to its power of
eminent domain, is an inherent power of a sovereign. Real
property tax laws are complex. Generally the same basic valuation
theories will apply, for as the New York Court of Appeals
has held, "the ultimate purpose of valuation, whether in eminent
domain or tax certiorari proceedings, is to awive at a fair
and realistic value ofthe property involved . . ." Matter
of Allied Corp. v. Town of Camillus, 80 N.Y.2d 351 at
356 (1992); See also City of Detroit v. Yellen, 28
Mich.App. 529 (1970).
The big difference in condemnation and tax certiorari cases
is that the law requires the maximum award based on a parcel's
highest and best use in ajust compensation claim, while a
tax certiorari inquiry will require an inquiry as to the property's
condition and ownership on the applicable valuation. 7I Am.Jur.2d,
State alzdLocal Taxation 𨽓 New York Real Property
Tax Law 𨶅 (2001).
In an excellent decision, Judge Frank Rossetti wrote in
Matter of the New Country Club of Garden City v. Board
of Assessors of Nassau County (Sup. Ct. Nassau Co., Index
12696/88, N.Y.L.J., June 14, 1991, p. 1):
"The general standard of value in assessments is market
value, although other tests can be used if market value is
not determinable. (See, Matter of Great Atl. & Pac. Tea
Co. v. Kiernan, 42 NY2d 236, 239-240; G.R.F. Inc. v.
Bd. ofAssessors ofthe Countv of Nassau, 41 NY2d 512, 515;
Matter of Hellerstein v. Assessor of the Town of Islip,
37 NY2d 1, 3, & case quoted.) This is analogous to
appropriation, although there is an overriding constitutional
standard prevails, to wit, just compensation (see,
US Const 5th Amend; NY Const, art 1, ڍ[a]). No such more
embracive constitutional standard exists in assessment law,
but there are the underlying purposes and goals of assessment
to equitably and fairly distribute the tax burden in a nondiscriminatory
manner in light of the existing "varied and multifaceted patterns
of land use." (Matter of Merrick Holding Corp. v. Bd. of
Assessors of the County of Nassau, 45 NY2d 538, 541, 544.)
In pursuit of its constitutional mandate of just compensation,
appropriation law has applied and evolved the concept of highest
and best use, whereby a condemnee's taken property is valued
according to its most valuable probable use, whether actually
so used or not (see, e.g., Matter of County of Suffolk
[Firester], 37 NY2d 649, 652). Thus, where appropriated
property has a more valuable use to which it is reasonably
probable it could or would be put in the reasonably near future,
that is the use under which the property's value is determined.
(Cf., e.g., Matter of City of N.Y. [Broadway Carey Corp.],
34 NY2d 535, 536.) This accords with the basic condemnation
principle that a condemnee should be compensated on the basis
of what he has lost. (See generally, 3 Nichols on Eminent
Domain ڎ.61 [3d ed].) In assessment, however, the statutory
prescription of valuation according to extant conditions (i.e,
RPTL 302[1], a "cardinal principle of valuation" [Matter
of Northville Inds. Corp. v. Bd. of Assessors of the Town
of Riverhead, 143 AD2d 135, 136]) has been interpreted
to require valuation of improved property according to its
existing use, not a potential one contemplated in future.
(See, Matter of Gen, Motors Corp. Cent. Foundry Div. v.
Assessor of the Town of Massena, 146 AD2d 851, 852, &
cases cited; Matter of BCA-White Plains Lanes v. Glaser,
91 AD2d 633, 635.)"
Valuation Of Real Property In Other
Contexts
Judges or arbitrators are often shocked at the wide disparity
in values found by appraisers for the same property in the
same case. Injudicial proceedings in New York, thej udges
who most often hear real estate valuation cases do so without
ajury. These jurists have the ability to move a case fonvard
quickly. We have heard of arbitrations dealing with the valuation
of a leasehold for a lease renewal going on for years.
Appraisals are often so subjective that they are not reliable.
Appraisals for estate tax may bear no resemblance to appraisals
prepared for the same property in a condemnation. A husband's
expert's opinion of value of the marital home is often widely
different from that of the wife's appraiser's opinion.
Case law has held that appraisers have broad discretion
as to their methods and sources of information, and may determine
"which ofthe myriad factors are relevant to a particular valuation
and how such factors impact the valuation of the parcel of
land without interference or direction" absent an agreement
expressly identifying such factors. Vitale v. Friedman,
245 A.D.2d 14 (1997).
Qualification Of Appraiser
The qualifications of a witness as an expert rests in the
discretion of the trial judge, subject to review only if the
judge has made a serious mistake, committed an error of law
or abused the discretion. Brown v. Colm, 11 Cal.3d
639 (1974); Morton Butler Timber Co., v. United States,
91 F.2d 884 (1937); Tarlowe v. Metropolitan Ski Slopes,
28 N.Y.2d 410 op. on rem'd. 37 A.D.2d 810 (1971); Meiselman
v. Crown Height Hosp., 285 N.Y. 389 (1941). Put another
way, the determination of a witness' qualification to testify
as an expert in a specific field rests in the broad discretion
of the trial court, and such a determination will not be lightly
disturbed. Union Trust Co., v. Woodrow Mfg. Co., 63
F.2d 602 (1933); Werner v. Sun Oil Co., 65 N.Y.2d 839
(1985); Smith v. City of New York, 238 A.D.2d 500 (1997).
Since a condemnation or tax certiorari claim is tried without
ajury, the Court, as the trier of fact, solely determines
the weight of the expert testimony. Baker Properties v.
Town of Hamden, 1994 Conn.Super.LEXIS 1719; City of
Gilroy v. Filice, 221 Cal.App.2d 259 (1963); Felt v.
Olson, 51 N.Y.2d 977(1980); Prince, Richardson on Evidence
(11th ed.) Sec. 7-305.
Requirement Of The Judicial Decision
The law is well established that the trial court is obligated
to explain the values it finds. Commonwealth, Department
of Highways v. Cleveland, 407 S.W.2d 417 (1966); Ridgeway
Associates v. State of New York, 32 A.D.2d 851 (1969).
The trial court is obligated to make its factual findings
and underlying mathematical calculations as explicit as possible.
Lord v. State of New York, 48 N.Y.2d 711 (1979); County
of Suffolk (Firester), 37 N.Y.2d 649 (1975). As the Court
of Appeals stated in Matter of City of New York (College
Point), 55 N.Y.2d 885 at 886 (1982), "ln determining an
award to an owner of real property, the findings must either
be within the range of the expcrt testinlony or be supported
by other evidencc ar~d adequately explained by the Court."
Commonwealth, Department of Highways v. Milby-Farmer, Inc.,
494 S.W.2d 88 (l973); Matter of City of New York (A&W Realty
Corp.), 1 N.Y.2d 428 (1956); Milsap v. State of New
York, 32 A.D.2d 586 (1969).
Conversely, if the Court's total award, as well as its various
components, is within the range of the expert testimony, it
should only be upset if the trial court committed legal error.
Roadway Express, Inc., v. Dade County, 537 So.2d 594
(1988); Matter of Alexander's Dept. Store of Valley Stream,
Inc. v. Board of Assessors, 227 A.D.2d 541) (1996); Krebs
v. Board of Assessors, 225 A.D.2d 625 (1996).
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