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State of New Jersey by the Commissioner of Transportation v. 200 Route 17, L.L.C.

421 N.J. Super. 168, 22 A.3d 1012 (App. Div. 2011) (Unpublished)

CONDEMNATION; VALUATION — A condemning authority is only required to pay for a building in its “as-is” condition subject to the reasonable possibility of future renovations and approvals required to improve the property to its highest and best use, less the risks and costs of such a venture.

The State filed a complaint and declaration of taking for a portion of a property, including a building and blacktop parking lot. Before trial, the State moved to exclude the testimony of the property owner’s expert because he valued the property as a renovated retail property, and the State believed that such a valuation was speculative. The lower court denied the motion, holding that the valuation was not speculative because it was reasonably probable that those improvements and changes would be made, and that there was a basis to submit it to the jury as to whether or not those expenses were reasonable. At trial, both sides introduced their experts. The State’s expert valued the property in its physical condition at the time of taking and used the cost approach method. The State’s expert acknowledged there was a reasonable probability that the owner could obtain the land use approvals to renovate the building for its highest and best use as a commercial property.

The property owner’s expert used all three approaches in valuing the property: cost approach, comparable sales approach, and income approach. Its expert concluded that the highest and best use of the property would be as a commercial or retail building. He said in order to achieve that use, the property would need renovations to create an appropriate exterior for the property. The jury returned a verdict for an amount closer to the property owner’s expert’s valuation.

The State appealed, arguing that the lower court should not have allowed the property owner’s expert to testify as to the value of the property as a commercial retail use based on a speculative renovation. According to the State, his testimony should have been limited to valuing the property in its existing physical condition. The Appellate Division agreed with the State.

Under eminent domain, the State has the power to take private property as long as it pays the owner an amount representing just compensation. “Just compensation” is the fair market value of the property as of the date of the taking, determined by what a willing buyer and a willing seller would agree to, neither being under any compulsion to act. Calculating value in a condemnation case is based on the property’s highest and best use. Highest and best use is considered the use at the time of the appraisal that is the most profitable, likely use or alternatively, the available use and program of future utilization that produces the highest present land value if such use has a probability of achievement.

The property owner’s expert suggested that in order to achieve the highest and best use, the property needed renovations to create that retail space. The lower court allowed this testimony because it found that there was enough credible evidence that the potential change could be reasonably practical and reasonably probable, and was not speculative. It looked to the fact that part of the property already was being used for retail purposes and that the State’s appraiser confirmed that the existing structure could be modified, and then used for retail purposes.

In the State’s appeal, it argued that the lower court erred in allowing this testimony and that it was too speculative to appraise the property using the value as if the property contained a commercial building, when currently, the property only had a service area as well as a warehouse, office, and retail space. In essence, it argued that putting a “certain amount” to the modifications was too speculative.

The Appellate Division held that the test is what would a willing buyer would pay a willing seller, without compulsion, for a substandard building, knowing that the buyer would be obligated to obtain appropriate land use and building approvals, as well as spend additional amounts to achieve the property’s highest and best use. It found that this was different from the property owner’s approach of assuming that the building was already improved and then deducting the costs of the improvement. The property owner argued that the building should be valued as a renovated commercial structure, even though it was not renovated. The Court held that this approach was too simplistic. The highest and best use is a hypothetical concept which requires an assumption that all of the improvements and renovations an owner may have made to a property are in place. Speculative improvements to the property that do not exist on the valuation date cannot be considered in valuing a property. Prior to the taking, there was no evidence or indication that the property owner planned to make any of the listed renovations. The State should not be responsible or be required to pay for any of the hypothetical improvements that the property owner could have made to its property but didn’t. The State is only required to pay for the building “as-is,” considering the reasonable possibility of future renovations and approvals required to improve the property to its highest and best use, less the risks and the costs of such venture.

Thus, the Court concluded that the State was entitled to a new trial on the issue of the fair market value of the property. Therefore, it vacated the jury award and remanded the matter for a new trial.


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