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State of New Jersey v. Robbins

A-5310-03T3 (N.J. Super. App. Div. 2005) (Unpublished)

CONDEMNATION; VALUATION—Where the highest and best use of a property is as an assemblage, existing uses are treated as “interim uses,” and the value of the property therefore is to be based upon its sale value and not on its value as a rental property.

A commercial property improved by a small commercial building was condemned so that it could be used for highway improvements. The commercial building was leased to the operator of a bagel shop. The lease contained no condemnation clause. The tenant made a claim for a share of the condemnation award to reflect the fair market value of its leasehold. Based on the claim, an allocation hearing was held at which the testimony was presented mostly by experts. The tenant’s expert opined as to a particular leasehold value, but admitted that the highest and best use of the property was as a vacant parcel “for assemblage with adjoining parcels to create a pad site or commercial site.” The landlord’s expert valued the leasehold interest at zero, agreeing “that the best and highest use of the property [was] as assemblage, particularly because of its non-conformity.” The expert continued that under standards of the Appraisal Institute, the bagel shop “should be viewed as ‘an interim use awaiting assemblage.’” Because the bagel shop “would have to be demolished to achieve the property’s highest and best use, [the owner’s expert opined that] the leasehold value [was] not related to the assemblage value.” Further, the landlord’s expert concluded that the rent being paid by the bagel shop owner was the same as the reasonable market rent, “resulting in a leasehold value of zero.”

The lower court found that the tenant had not demonstrated that the fair market value of the lease was greater than the rent reserved. It also found that where the highest and best use of a property is for assemblage purposes, the bagel shop was, in fact, an interim use, and that the likely disposition of the space would not be a future rental, but would be a sale of the space and the surrounding land. The Appellate Division agreed.

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