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State of New Jersey v. Simon Family Enterprises, L.L.C.

367 N.J. Super. 242, 842 A.2d 315 (App. Div. 2004)

EMINENT DOMAIN; VALUATION—A determination of a property’s highest and best use is not limited to viewing the property as it then exists; if it is possible to utilize the property as part of an assemblage, then a judge must determine if an assemblage if probable, and if it is, a jury is to consider what a buyer might pay for the property given the probability.

In an effort to build a connecting road between a freeway and a local road, county officials approached a landowner to purchase a section of his property. Negotiations stalled, leading to involvement by the State. After the owner rejected the State’s final offer, the State, through its Department of Transportation, filed a complaint in condemnation, declaring a taking of about one-third of the owner’s land. It deposited the amount of its final offer, $308,000, with the court.

After the taking, the owner entered into a land purchase option agreement with a third party for the sale of the remainder of his land. The third party had the right to terminate the agreement if, within 450 days, it couldn’t get the the permits and approvals it needed for development within 450 days. When approvals could not obtained within the necessary time, a new agreement was reached, slightly reducing the price per acre and providing for three additional option periods. The new agreement also obligated the buyer to purchase the land at full price even if it could not obtain the necessary approvals. After the approvals were obtained, the property owner sold an adjacent parcel to a third party.

Simultaneously, the court-appointed condemnation commissioners issued their report on the State’s taking of a different portion of the owner’s land, declaring that $360,000 was the proper compensation. At a trial that followed, the lower court ruled that evidence relating to the price in the option contract was admissible, but that the price for the adjacent land was not.

On appeal, the State contended that the lower court erred in its analysis of the admissibility of the evidence of the owner’s sale of the adjacent land. Specifically, it argued that the lower court should not have allowed the owner’s expert to testify about the best use of the property because such use was not financially possible. It also argued that the lower court kept evidence from the jury that would have shown that the taking did not diminish the value of the land that remained.

When deciding just compensation for a portion of a property taken, a court must consider that the property’s owner is entitled not only to just compensation for the value of the portion actually taken, but also for the diminution of value of the remaining land, or severance damages. To make such a determination, a two-step procedure is employed. First, the court must make an initial, gatekeeping determination as to whether an assemblage was probable in the near future, based on market conditions and the conditions of the property. If it determines that this is probable, the jury must be instructed to consider what a willing buyer would pay for the probability of a future assemblage over and above the fair market value for the property used for the existing use. Furthermore, a court need not determine the degree of probability, so long as there is a reasonable probability. A jury may, however, consider the degree of probability if necessary to determine the amount a buyer would be willing to pay.

After reviewing this lower court’s role as gatekeeper, based on the State’s claim that the owner’s expert used speculatory claims, the Appellate Division held that an inquiry into the fair market value of the property should not be limited to the actual use of the property on the date of the taking, but rather should be based on the highest and best use. In determining “highest and best use,” the Court used a four-part test. The highest and best use is the use that is 1) legally permissible, 2) physically possible, 3) financially feasible, and 4) maximally profitable. The State’s appeal focused on the third prong, financial feasibility. In determining financial feasibility, an appraiser estimates the future gross income that can be expected from each use. Vacancy and collection losses and operating expenses are then subtracted from each gross income to obtain the likely net operating income from each use. A rate of return can then be calculated. If the net revenue capable of being generated from a use is sufficient to satisfy the required rate of return on the investment and provide the requisite return on the land, the use is financially feasible.

The Court held that so long as an expert followed the above analysis, the lower court was not required to independently determine that the proposed development plan is or is not reasonably probable to occur. Here, all of the experts agreed that the property was essentially vacant land, and any proposed development would merely be just that, a proposal. And, the owner’s proposal was one such conceptual plan which fell within the approved analysis.

The State also argued that the owner should not have been permitted to assert that the highest and best use of the property was anything other than the use represented by the third party’s purchase contract for the balance of the tract that was not being taken, and that the jury should not have been permitted to consider any other conceptual analysis. The Court disagreed. That contract was, at the time of the trial, only an option which the buyer had the right to exercise under certain conditions and its relevance in establishing the fair market value was indirect. Furthermore, the contract was admitted into evidence and was specifically considered by the jury.

Lastly, the state also contended that N.J.S.A 2A:83-1 required that the information regarding the purchase of adjacent land be admitted, useable by the jury as mitigation of the damages claimed by the owner. The Court disagreed. It held the statute only abolished the hearsay rule to allow admission into evidence of comparable sales through a witness who did not participate in the sales and who otherwise could not adduce direct proof of such sales. The statute does not require a court to admit all contracts into evidence. Specifically, the particular contract was not offered for consideration as a comparable sale. Therefore the State’s objection was irrelevant. In addition, the taking resulted in a loss of access, for which the purchase of the adjacent property did not cure.

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