(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
STATE OF NEW JERSEY, by the COMMISSIONER OF TRANSPORTATION V. FREDERICO R. CAOILI, ET AL.
(A-62)
Argued November 30, 1993 -- Decided March 22, 1994
HANDLER, J., writing for a unanimous Court.
Estrella and Frederico Caoili owned approximately one acre of land located near a highway in
Dover Township. On July 15, 1989, the State of New Jersey, Commissioner of Transportation (State), filed
a complaint to condemn the property for the purpose of constructing a "jug-handle" turn for a nearby
highway. At that time, the property was zoned for residential use and two single-family homes were located
on the property. The State determined that $232,500 was just compensation for the property and it
deposited that amount into court. The owner disputed that determination and a panel of commissioners
was appointed to appraise the property. The commissioners determined that the "highest and best use"
of the property was to divide it into three residential lots. They found the fair market value of the property
to be $278,000. The commissioners declined to consider the possibility that a use variance might have
been obtained for the property, finding such a variance too speculative.
The State appealed from the commissioners' finding. A jury trial was held to determine the fair
market value of the property at the time of the taking. During the trial, the owners submitted evidence
through experts, of the existence of a reasonable probability that the property would receive a zoning
variance for commercial development. At the conclusion of trial, a jury awarded the owner's $351,000 as
just compensation. As part of its deliberations and verdict, the jury responded affirmatively to a special
interrogatory asking: "In arriving at your decision as to just compensation, did you include in your
calculation a potential subdivision of the property to utilize part thereof for commercial use?"
On appeal, the Appellate Division determined that the trial court's disposition of the evidence
relating to potential zoning and subdivision changes and the valuation methodology were correct, and
affirmed the judgment. The Supreme Court granted certification.
HELD: In determining the fair market value of condemned property as a basis for just compensation,
the jury may consider a potential zoning change affecting the use of the property provided the
court is satisfied that the evidence is sufficient to warrant a determination that such a change
is reasonably probable. If the evidence meets that level of proof, it may be considered in
fixing just compensation in light of the weight and effect that reasonable buyers and sellers
would give to such evidence in their determination of the fair market value of the property.
1. In a condemnation proceeding, all reasonable uses of the property bear on its fair market value.
Most relevant in ascertaining that value is the property's highest and best use. The reasonableness of a
use of condemned property, including its highest and best use, must be considered in light of any zoning
restrictions that apply to the property. (pp. 8-9)
2. In State v. Gorga, the Court imposed a two-step standard governing the consideration of evidence of zoning changes affecting the future use of property. It established one standard for the admissibility and another for the substantive consideration of such evidence. The Gorga Court stated that if, as of the date of the taking, there is a reasonable probability of a change in a zoning ordinance in the near future, the influence of that circumstance on the market value as of that date may be shown, but that before allowing a jury to consider the issue, a trial court should first decide whether the record contains sufficient evidence
of a probability of a zoning change to warrant consideration by the jury. To avoid unbridled speculation,
the determination of the property's fair market value should be based on more cogent evidence indicating
beyond a mere possibility that the change of use is likely and, further, that such a change would be an
important factor in the valuation of the property. The important inquiry is the reasonable belief of a buyer
and a seller engaged in voluntary negotiations over the fair market value of property that a change may
occur and will have an impact on the value of the property, regardless of the degree of probability. (pp.
9-14)
3. No prejudicial error occurred with respect to the disposition of the evidence relating to the potential
zoning changes in light of the applicable standard of proof. Although the jury should not have been
allowed to consider a potential variance without a prior finding that sufficient evidence existed to show that
the variance was reasonably probable, such a finding is implicit in the trial court's admissibility ruling when
measured against the evidence presented. As long as the evidence actually considered by the jury
enabled it to conclude that a zoning change was reasonably probable, the effect of that evidence in light
of the weight that a buyer and a seller would give that factor in determining the fair market value of the
property was for the jury to assess. Moreover, any possible error with respect to the admissibility of the
evidence relating to the potential variance was mitigated by the disposition of the evidence relating to the
potential subdivision. Furthermore, if the jury answered "yes" to the special interrogatory, it must have
concluded that the variance change for commercial use was reasonably probable. The court's
determination of admissibility and its instruction concerning the evidence of a potential zoning change did
not appear to have confused or misled the jury to the prejudice of the State. (pp. 14-17)
4. The admissibility of evidence of a potential subdivision of condemned property is conceptually no
different from the Gorga principles regarding the admissibility of evidence of a potential zoning change.
Moreover, it is not material or fatal that the owners failed to take any steps toward subdivision approval at
the time of the taking. The trial court correctly admitted the evidence of the subdivision under the
reasonable probability standard as expressed in its cautionary instruction. The subdivision involved only
a single lot and was clearly authorized by the current land-use regulations. Moreover, there was evidence
demonstrating, as a threshold matter, that a potential variance for the commercial use of that lot was also
reasonably probable. There was no error in the introduction of that evidence. (pp. 18-22)
5. There are three valuation methodologies that may be used in appraising condemned property with
a reasonable probability of a zoning change. Plaintiffs' experts used the comparable sales approach in
their property appraisal. So long as the method used yields a current value rather than future value, it
makes no difference whether the appraiser starts with the value as currently zoned and adjusts upward,
assigning a "premium" to reflect the likelihood of a zoning change, or starts with the value of the property
as it is likely to be zoned in the future, assigning a "discount" of that value to account for the likelihood of
such a zoning change. The Court does not read or apply any of the observations in Gorga to mandate that
in the valuation process experts must use addition instead of subtraction. Here, the methodology used by
the owners' experts was reasonable. (pp. 22-26)
Judgment of the Appellate Division is AFFIRMED.
JUSTICES CLIFFORD, POLLOCK, O'HERN, GARIBALDI and STEIN join in JUSTICE HANDLER'S
opinion. CHIEF JUSTICE WILENTZ did not participate.
SUPREME COURT OF NEW JERSEY
A-
62 September Term 1993
STATE OF NEW JERSEY, by the
COMMISSIONER OF TRANSPORTATION,
Plaintiff-Appellant,
v.
FREDERICO R. CAOILI and
ESTRELLA L. CAOILI,
Defendants-Respondents,
and
HUDSON CITY SAVINGS BANK, a Banking
Institution of New Jersey; NEW
JERSEY NATIONAL BANK, a Banking
Institution of the United States of
America; JAMES SAVIDGE and TOWNSHIP
OF DOVER, in the County of Ocean, a
municipal corporation of New Jersey,
Defendants.
Argued November 30, 1993 -- Decided March 22, 1994
On certification to the Superior Court,
Appellate Division.
Lorinda Lasus, Deputy Attorney General, argued
the cause for appellant (Fred DeVesa, Attorney
General of New Jersey, attorney; Joseph L.
Yannotti, Assistant Attorney General, of
counsel).
Peter H. Wegener argued the cause for
respondents (Bathgate, Wegener, Dugan & Wolf,
attorneys).
The opinion of the Court was delivered by
HANDLER, J.
This is a condemnation case in which the dispute centers on
the fair market value of property taken by the State of New Jersey
under its eminent domain powers. The main issue posed by the case
relates to the standard of proof applicable to evidence of a
potential zoning change affecting the use of the condemned
property. Also at issue is the type of valuation methodology that
may be followed in determining the fair market value of condemned
property when the record contains sufficient evidence of a
prospective zoning change affecting the use of the property.
At trial, the property owners introduced evidence of potential
zoning and subdivision changes affecting the land's future use.
Based on that evidence, the jury returned a verdict awarding
compensation to the owners. The State appealed and the Appellate
Division, in a reported decision, affirmed the judgment,
262 N.J.
Super. 591 (1993). The State sought certification, which this
Court granted,
134 N.J. 477 (1993).
Estrella and Frederico Caoili owned nearly an acre of land located near a highway in Dover Township. On July 15, 1989, the State of New Jersey, Commissioner of Transportation, filed a complaint to condemn the property for the purpose of constructing a "jug-handle" turn for a nearby highway. At that time the
property was zoned for residential use. 262 N.J. Super. at 593.
Although there was some dispute as to whether the property was
subdivided into two lots at the time of taking, two single-family
homes were located on the property. Id. at 594. A 262-foot border
of the property ran along a highway on which were located a number
of nearby commercial establishments, including a gas station, bank,
and bus garage. Ibid. Another portion of the property fronted on
a residential street that led into a large residential development.
Ibid.
The State determined that $232,500 was just compensation for
the property and it deposited that amount with the Clerk of the
Superior Court. Because the owner disputed the State's
determination of just compensation, a panel of commissioners was
appointed to appraise the property. The commissioners determined
that the "highest and best use" of the property was to subdivide it
into three residential lots and they valued the property
accordingly, finding a fair market value at the time of the taking
of $278,000. 262 N.J. Super. at 594. The commissioners
specifically declined to take into account the possibility that a
use variance might have been obtained for the property because they
found that obtaining such a variance was improbable and "too
speculative." Id. at 595.
The State appealed from the commissioners' finding, and a jury
trial was held to determine the fair market value of the property
at the time of the taking.
At trial, the State moved to exclude the appraisal report of
the owners' experts, Jon Brody and William Steinhart (the
"Brody/Steinhart Report"), on the ground that the evidence was
insufficient to support their conclusion that a reasonable
probability existed that the property would receive a zoning
variance for commercial development. In their report, Brody and
Steinhart valued the property at $445,000. Id. at 594. They
arrived at that figure by comparing the property to allegedly
similar properties and estimating the value of the property based
on the recent sale prices of those properties. The properties used
for comparison in the Brody/Steinhart Report were all zoned for
commercial use at the time of their sale. Brody and Steinhart
justified the use of commercially-zoned property in their appraisal
by claiming that a reasonable probability existed that the property
would receive a use variance, which would allow the property to be
used for a specific nonresidential purpose. In valuing the
property, the experts discounted the sale prices of the comparison
properties by ten percent to account for the fact that the property
had not yet obtained a zoning variance. The State also objected to
the introduction of the appraisal report on the ground that the
valuation methodology used by Brody and Steinhart was improper.
In denying the State's motion to exclude the Brody/Steinhart
Report, the trial court found that
there [are] . . . sufficient facts and
circumstances spread upon the record which
would justify the prospective purchaser as of
the date of taking in concluding there may be
a zoning change, and further that the price .
. . that prospective purchaser would be
willing to pay and the price that that
prospective seller would be willing to accept
would be reflective of that circumstance.
At trial, Brody testified that "based on analyzing and looking
at close to fifteen years worth of variances that had taken place
in Dover Township," the property had a "very strong probability of
obtaining a variance to utilize that parcel of land for something
other than what it's presently zoned for."
One of the State's three witnesses, William Burke, testified
that in his opinion the property had a fair market value at the
time of the taking of $232,500. Burke arrived at that figure by
comparing the property to allegedly similar properties, but the
comparison properties used in Burke's appraisal were residential
properties because he believed that a reasonable probability
existed that the zoning for the property would remain residential.
The State's next witness, Joseph Layton, testified that in his
opinion the property could not meet all the requirements that an
applicant must satisfy before a variance will be granted and
therefore no reasonable probability existed that the property owner
could obtain a variance. James Henbest, a Deputy Zoning Officer
and Assistant Planner for Dover Township, testified for the State
that he had previously told Layton that it was unlikely that the
property would receive a variance.
The possible subdivision of the property into three lots was
also the subject of testimony. The court decided to admit that
testimony so long as the jury found that it was reasonably probable
that the property could be subdivided into three lots. It gave the
jury a cautionary instruction to that effect.
On cross-examination, Burke, over the State's objection,
testified that although he had not considered the possibility of a
subdivision when making his appraisal, the property could be
subdivided into three lots consistent with the physical
requirements of the relevant zoning ordinance. Burke further
testified, however, that no reasonable probability existed that an
owner of the property could get approval to subdivide because
subdividing would harm the residential integrity of the area.
Henbest also testified, on cross-examination, that it was possible
to subdivide the property into a third lot which bordered the
highway. He stated, however, that if the property were subdivided
in that manner a "better than 50/50 chance" existed that a variance
would be granted for that third lot.
The court instructed the jury that zoning regulations may
restrict the types of uses that may be considered in determining
the highest and best use of the property. With respect to the
potential variance, the court said:
But suppose there were signs that the law
regulating the property's use might change so
as to permit a use in the future which would
make the property more valuable or less
valuable.
Parties negotiating a price for the sale of
the property would not ignore these signs, nor
should you.
It is for you to determine what effect, if any, any indications of a zoning change or planning change would have on the market value. You may consider that the change then
appeared so speculative that there would have
been no effect on the property's value.
You may consider the change so likely that
the value of the property would fully reflect
the change. You may consider that change
would have appeared uncertain but would have
some effect on the property.
With respect to the potential subdivision, the trial court, as
already mentioned, had provided a cautionary instruction when it
admitted testimony, namely, that the jury could consider the
potential subdivision only if it found that the subdivision was
reasonably probable. In submitting that issue to the jury, the
court gave the following instruction:
Now if you do consider this [potential
subdivision], you must find -- and in all
cases you must use this standard: Is it
reasonably probable that the governmental body
is going to allow this? And [if] it could be
subdivided.
There are certain standards that have to be
met, and they were . . . gone into detail
during the attorneys' summations, but
nonetheless, you have to find that it is
likely that it would be allowed.
The jury awarded the owners $351,000. The jury responded
affirmatively to the following special interrogatory: "In arriving
at your decision as to just compensation, did you include in your
calculation a potential subdivision of the property to utilize part
thereof for commercial use?"
On appeal, the Appellate Division determined that the trial
court's disposition of the evidence relating to potential zoning
and subdivision changes and the valuation methodology were correct,
and affirmed the judgment. 262 N.J. Super. at 594.
When the State exercises its power to take private property under the Eminent Domain Act, N.J.S.A. 20:3-1 to -50, the State must pay the property owner just compensation for the property taken. N.J. Const. art. I, ¶ 20. 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." State v. Silver, 92 N.J. 507, 513 (1983). It is the "value that would be assigned to the acquired property by knowledgeable parties freely negotiating for its sale under normal market conditions based on all surrounding circumstances at the time of the taking." Id. at 514.
In a condemnation proceeding, all reasonable uses of the property bear on its fair market value. However, most relevant in ascertaining fair market value is the property's highest and best use. State v. Hope Road Assocs., 266 N.J. Super. 633, 641 (App. Div. 1993), certif. granted, __ N.J. __ (1994); State v. Mehlman, 118 N.J. Super. 587, 590 (App. Div. 1972); Julius L. Sackman & Patrick J. Rohan, 4 Nicholas on Eminent Domain §12.02[1], at 12-75 (1993) (hereinafter Eminent Domain). The reasonableness of a use of condemned property, including its highest and best use, must be considered in light of any zoning restrictions that apply to the property. Hence, the zoning restrictions that govern the use of the property are material factors in determining its fair market value. State v. Inhabitants of Phillipsburg, 240 N.J. Super. 529,
541 (App. Div. 1990); John C. Schneider, Note, The Admissibility of
Zoning Ordinances as Evidence of Fair Market Value in Eminent
Domain Proceedings,
12 Syracuse L. Rev. 352 (1961). Because the
inquiry into the uses of property is usually wide-ranging, "courts
in this state have shown considerable liberality in admitting
evidence of market value, particularly in terms of the highest and
best use of the subject property." Silver, supra, 92 N.J. at 515.
That evidence encompasses all "relevant facts at the time of the
taking[, which] may include those that have a bearing on an
available future use of the property." Ibid.
This Court in State v. Gorga,
26 N.J. 113 (1958), addressed
the standard for judging the sufficiency of evidence of potential
zoning changes affecting the future use of condemned property in
considering its highest and best use as a basis for determining its
fair market value. There, as in this case, the condemned
residentially-zoned property was located on a highway. State v.
Gorga,
45 N.J. Super. 417, 419 (App. Div. 1957), aff'd,
26 N.J. 113
(1958). Almost all the other property along the highway was zoned
for business use, ibid., and a real estate expert testified that a
"reasonable chance" existed that the property owner could get the
property rezoned for business use. Id. at 420. The defendants
sought to admit evidence of a zoning ordinance adopted ten months
after the taking of the property that had changed the zoning of the
condemned property from residential to commercial use. Ibid. The
trial court excluded the evidence, and the Appellate Division
reversed on the ground that the subsequently enacted ordinance was
relevant evidence because it demonstrated that at the time of the
taking a zoning amendment was a reasonable probability. Id. at
421-22.
The Court acknowledged that both "probable" and "remotely
possible" zoning amendments could affect the price agreed on by
hypothetical reasonable buyers and sellers. 26 N.J. at 116. It
reasoned, however, that allowing consideration of all zoning
changes that were merely possible could lead to "unbridled
speculation" regarding the fair market value of such property.
Ibid. The Court therefore imposed, in effect, a two-step standard
governing the consideration of evidence of zoning changes affecting
the future use of property. It established one standard for the
admissibility and another for the substantive consideration of such
evidence. It stated: "if as of the date of taking there is a
reasonable probability of a change in the zoning ordinance in the
near future, the influence of that circumstance upon the market
value as of that date may be shown," but that before allowing a
jury to consider the issue, the trial court should first decide
whether the record contains sufficient evidence of a probability of
a zoning change to warrant consideration by the jury. Id. at 116-17.
Lower courts interpreting Gorga generally have applied a
standard of probability at least with respect to the admissibility
of evidence of an available future use of condemned property.
E.g., Hope Road Assocs., supra, 266 N.J. Super. at 645-46; State v.
Wildlife Preserves, Inc.,
134 N.J. Super. 287, 289 (App. Div.
1975); State v. Market Assocs.,
134 N.J. Super. 282, 285 (App. Div.
1975); see Hoechst Celanese Corp. v. Bridgewater Township,
12 N.J.
Tax 532, 539 (Tax 1992) (indicating that for tax assessment
purposes Gorga requires that a zoning change or variance must be
probable rather than merely possible before such evidence is
admissible); Romulus Dev. Corp. v. Town of West New York,
7 N.J.
Tax 305, 318 (Tax 1985) (same), aff'd sub nom. Romulus Dev. Corp.
v. Weehawken Tp.,
9 N.J. Tax 90 (App. Div. 1987); Linwood
Properties, Inc. v. Fort Lee,
7 N.J. Tax 320, 335 (Tax 1985)
(same).
A number of jurisdictions have also used a standard of
probability as a basis for admissibility of evidence of future use
of condemned property. E.g., Flood Control Dist. of Maricopa
County v. Hing,
709 P.2d 1351, 1358 (Ariz. Ct. App. 1985);
Department of Transp. v. Sconyers,
261 S.E.2d 728, 730 (Ga. Ct.
App. 1979); Ada County Highway Dist. v. Magwire,
662 P.2d 237, 239
(Idaho 1983); Lombard Park Dist. v. Chicago Title & Trust Co.,
242 N.E.2d 440, 446 (Ill. Ct. App. 1968); Hartland Township v.
Kucykowicz,
474 N.W.2d 306, 309 (Mich. Ct. App. 1991), appeal
denied,
479 N.W.2d 666 (Mich. 1992); In re Petition of Mackie,
108 N.W.2d 755, 756 (Mich. 1961); Nashville Housing Auth. v. Cohen,
541 S.W.2d 947, 950-52 (Tenn. 1976); Eminent Domain, supra, §
12C.02[2], at 12C-74-93; see also James D. Eaton, Real Estate
Valuation in Litigation 92-100 (1982) (approving "reasonable
probability" in the sense of "imminent" as the standard regarding
admissibility of evidence of rezoning) (citing Lombard Park Dist.,
supra) (hereinafter Eaton).
Federal courts have likewise followed the approach taken by
Gorga:
The federal rule is that in a condemnation
case, it is the responsibility of the trial
judge to screen proper potential uses and
exclude from jury consideration those which
have not been demonstrated to be practicable
and reasonably probable uses. Thus, the trial
judge should first screen evidence concerning
potential uses, and then decide whether the
landowner has produced credible evidence that
a potential use is reasonably practicable and
reasonably probable within the near future.
If credible evidence of a potential use is
produced, the jury is to decide whether the
property's suitability for such use enhances
its market value and, if so, by how much.
[Eminent Domain, supra, § 12B.
14[1], at 12B-158 ("Potential
Subdivisions").]
That two-step approach was expressed in United States v.
341.45 Acres of Land, 633 F.2d 108 (8th Cir. 1980), cert. denied
sub nom. Bassett v. United States,
451 U.S. 938,
101 S. Ct. 2017,
68 L. Ed.2d 324 (1981):
First, the trial judge should screen the
evidence concerning potential uses. Then, the
trial judge should decide whether "the
landowner has produced credible evidence that
a potential use is reasonably practicable and
reasonably probable within the near future . .
. . " If credible evidence of the potential
use is produced, the jury then decides
"whether the property's suitability for this
use enhances its market value, and if so, by
how much."
[633 F.
2d at 111 (quoting United
States v. 341.45 Acres of Land, 605
F.2d 762, 817 (5th Cir. 1979)).]
The Appellate Division here did not construe Gorga as imposing
a threshold requirement for the admissibility of such evidence,
namely, that the evidence must demonstrate a reasonable probability
that such a zoning change would occur. It interpreted "reasonable
probability of a change" as used in Gorga to require only "that a
reasonable buyer and seller would consider the likelihood of a
change to be a factor affecting the price, though the change is not
more likely than not." 262 N.J. Super. at 596.
In dispensing with any requirement that there must be a
judicial finding of reasonable probability of a zoning change
before such evidence may be considered by the jury, the Appellate
Division relied to a great extent on the following passage from
Gorga: "in short if the parties to a voluntary transaction would as
of the date of taking give recognition to the probability of a
zoning amendment in agreeing upon the value, the law will recognize
the truth." 26 N.J. at 117. That observation, however, was based
on the premise that the trial court would have made an antecedent,
threshold determination of a probability of a zoning change.
We remain convinced, as was the Gorga Court, that allowing a
factfinder to consider evidence of a zoning change that indicates
at most that a change was not probable or only possible could lead
to "unbridled speculation" regarding the fair market value of such
property. Id. at 116. The risk of unsound and speculative
determinations concerning fair market value is real when that
determination is based on evidence of a future change that is
inherently vague or tenuous because it suggests no more than the
possibility of change. That risk can be reduced substantially if
the determination of fair market value is based on more cogent
evidence indicating beyond a mere possibility that a change of use
is likely and, further, that such a change would be an important
factor in the valuation of the property. The court can accomplish
that reduction in risk by performing, in effect, a gatekeeping
function by screening out potentially unreliable evidence and
admitting only evidence that would warrant or support a finding
that a zoning change is probable.
The jury, however, need not be required to find that the
zoning change is probable. We agree with the Appellate Division
that in the jury's consideration of evidence of a zoning change,
the critical inquiry is the reasonable belief by a buyer and seller
engaged in voluntary negotiations over the fair market value of
property that a change may occur and will have an impact on the
value of the property regardless of the degree of probability. As
stated by the Appellate Division, "even though the parties to a
voluntary transaction may not believe that a zoning change is more
likely than not, their belief that there may be a change should be
taken into account if that belief is reasonable and it affects
their assessment of the property's value." 262 N.J. Super. at 596-97.
In conclusion, we now hold, consistent with our decision in
Gorga, that in determining the fair market value of condemned
property as a basis for just compensation, the jury may consider a
potential zoning change affecting the use of the property provided
the court is satisfied that the evidence is sufficient to warrant
a determination that such a change is reasonably probable. If
evidence meets that level of proof, it may be considered in fixing
just compensation in light of the weight and effect that reasonable
buyers and sellers would give to such evidence in their
determination of the fair market value of the property.
The further question is whether prejudicial error occurred in
this case with respect to the disposition of the evidence relating
to the potential zoning changes in light of the applicable standard
of proof. We conclude that it did not.
The trial court, in denying the State's motion to exclude the
report of the owners' experts, did not make an express
determination that the evidence would warrant a determination that
the potential zoning variance was reasonably probable. The trial
court found that a prospective purchaser would believe that a use
variance might be granted and that that possibility would affect
the price at which the purchaser would buy the property.
Nevertheless, that the trial court understood that such
evidence of probability was present and that it would warrant jury
consideration is fairly inferable. The only evidence that formed
the basis for the court's finding consisted of the Brody/Steinhart
Report, which expressed the experts' opinion that the zoning
variance was reasonably probable. Thus, although the jury should
not have been allowed to consider a potential variance without an
express antecedent finding that sufficient evidence existed to show
that the variance was reasonably probable, such a finding is
implicit in the trial court's admissibility ruling when measured
against the evidence that was actually presented. We may assume
the admissibility ruling would have been the same if the court had
consciously attempted to conform and express its finding on
admissibility under the correct standard.
The court instructed the jury that it must "determine what
effect, if any, any indications of a zoning change or planning
change would have on the market value." In so doing, the trial
court used language that mirrors that of the model civil jury
instructions regarding potential zoning changes. See Model Civil
Jury Instructions Manual § 10.02(B) (1978). Thus, as long as the
evidence actually considered by the jury enabled it to conclude
that a zoning change was reasonably probable, the effect of that
evidence in light of the weight that a buyer and seller would give
that factor in determining the fair market value of the property
was for the jury to assess.
Moreover, any possible error with respect to the admissibility
of the evidence relating to the potential variance was somewhat
mitigated by the disposition of the evidence relating to the
potential subdivision. See discussion infra at __ (slip op. at 18-22). The court instructed the jury to consider that evidence so
long as the jury found it reasonably probable that the property
could be subdivided into three lots. Guided by that instruction,
the jury responded affirmatively to the following special
interrogatory: "in arriving at your decision as to just
compensation, did you include in your calculation a potential
subdivision of the property to utilize part thereof for commercial
use?" In the context of the evidence, the reference in the special
interrogatory to the use of the property for "commercial purposes"
could relate only to a change of use by variance from residential
to commercial. To answer that question affirmatively, as the jury
did, it must have concluded that the variance change for commercial
use was reasonably probable. That interpretation of the jury's
determination is consistent with and supported by the testimony of
the State's expert, Henbest, who testified that if the subdivision
were granted, a "better than 50/50 chance [existed] that a variance
would also be granted."
The trial court's determination of admissibility and its
instruction concerning the evidence of a potential zoning change do
not appear to have confused or misled the jury to the prejudice of
the State.
The State argues, further, that unlike evidence of a zoning change consisting of a use variance, the threshold for evidence of a subdivision is much greater than even reasonable probability and that the evidence of a subdivision was insufficient to permit the jury to consider its valuation of the property. We disagree.
The admissibility of evidence of a potential subdivision of condemned property is "conceptually no different" from the Gorga principles regarding the admissibility of evidence of a potential zoning change. Hope Road Assocs., supra, 266 N.J. Super. at 643; see, e.g., 341.45 Acres of Land, supra, 633 F. 2d at 108; United States v. 47.3096 Acres, 583 F.2d 270, 272 (6th Cir. 1978); Inhabitants of Phillipsburg, supra, 240 N.J. Super. at 541-42. Many decisions express the standard of admissibility of evidence of a potential subdivision as evidence that the subdivision is not a remote or speculative event. See J.D. Perovich, Annotation, Admissibility of Evidence of Proposed or Possible Subdivision or Platting of Condemned Land on Issue of Value in Eminent Domain Proceedings, 26 A.L.R.3d 780 (1969 & Supp. 1993).
Whether the standard is couched in terms of probability or remoteness, courts usually find relevant under that standard whether the property owner has taken steps to effectuate a subdivision. Id. at 786 ("[W]here the condemnee has sought to enhance the value of the condemned land by introducing evidence that the land was adaptable or suitable for subdivision purposes, and where, from the evidence, it appeared that the landowner had
taken no tangible steps toward the development of the land into a
subdivision, such . . . evidence has been held to be
inadmissible."). Some of our own cases reflect that understanding.
E.g., Hope Road Assocs., supra, 266 N.J. Super. at 633 (finding
evidence on prospect of subdivision approval of condemned site as
"within the discretion of the court, [which] . . . ordinarily
depends upon the adaptability and availability of the site for the
proposed subdivision, and evidence that the developer has taken
some steps toward obtaining the subdivision"); Beech Forest Hills,
Inc. v. Morris Plains,
127 N.J. Super. 574, 584 (App. Div. 1974)
(allowing valuation of subject property as subdivided lots;
however, property owner had already obtained subdivision approval
when taking occurred); see In re Proceedings to Acquire Lands,
107 N.J.L. 110 (E. & A. 1930) (holding that property owner in
condemnation proceeding was precluded from introducing into
evidence maps made after taking because they were too speculative).
As stated by the Appellate Division in Inhabitants of Phillipsburg,
supra:
where the landowner has tendered evidence of a
proposed or possible subdivision, attempting
to establish the number or value of individual
lots and where the evidence indicates that the
developer had not made affirmative efforts
before the condemnation to effectuate the
development of the subdivision, the evidence
has been held to be inadmissible in most of
the cases.
The State stresses that the owners here had not taken any steps toward obtaining subdivision approval at the time of the
taking. The State argues that because the appropriate threshold
was not met, the testimony regarding a potential subdivision was
inadmissible.
In many cases involving a potential subdivision, the
feasibility of the property for the particular subdivision is a
highly material factor bearing on the optimum use of the property
and its fair market value. The "adaptability and availability" of
a proposed subdivision often presents a complex issue. See Hope
Road Assocs., supra, 266 N.J. Super. at 633. Subdivisions are
frequently tied in with numerous other requirements affecting the
potential development of the property that implicate not only the
division of property but its configuration; the application of bulk
requirements affecting the location and placement of proposed
structures; necessary on-site improvements involving
infrastructure, services, and the like; access to the property;
surrounding roads; and needed off-site improvements. Consequently,
courts will insist on some evidence relating to the feasibility,
suitability, and practicability of a proposed potential subdivision
and, especially where such a proposed subdivision is complex,
whether the owner has undertaken "affirmative efforts" to obtain
approval of such a subdivision.
We do not consider the absence of such evidence in this case
to be material or fatal. The property is not a large tract with
the potential to be subdivided into numerous lots as a basis for a
large-scale or complex development. It is a relatively small
parcel and the proposed subdivision would create only one more lot
from a tract with two lots. Those lots are already developed with
existing improvements and infrastructure. Moreover, the proposed
subdivision was fully authorized by current local land-use
regulations. Further, the record contains testimony about the
subdivision as an aspect of the proposed variance. Thus, in
context, the subdivision was considered in conjunction with the
variance, and its likelihood appeared even less problematic than
that of the variance.
Under those circumstances, the trial court correctly admitted
the evidence of the subdivision under the reasonable probability
standard as expressed in its cautionary instruction. Given the
fact that the subdivision involved only a single lot and was
clearly authorized by the current land-use regulations, as well as
the evidence demonstrating, as a threshold matter, that a potential
variance for the commercial use of that lot was also reasonably
probable, we are satisfied that no error surrounded the
introduction of that evidence.
We note that the Appellate Division in Hope Road Associates,
supra, ruled that jury instructions relating to potential
subdivisions must "explain that there must be a reasonable
probability, from a willing buyer's and a willing seller's point of
view, that defendant would, in the immediate future acquire an
interest . . . and secure approval from the municipality." 266
N.J. Super. at 646-47. The trial court here instructed the jury to
consider the evidence of the subdivision so long as the jury found
reasonably probable that the property could be subdivided into
three lots. That instruction imposes a greater burden of proof
with respect to a jury's consideration of evidence of the future
subdivision than does the parallel instruction relating to evidence
of a future variance. However, we do not address whether that
aspect of the jury instruction was correct in light of this record.
The owners in this case do not challenge that instruction.
Moreover, the State's primary argument relates to the sufficiency
of the evidence of the subdivision, not to the standard governing
the jury's consideration of that evidence.
The State also disputes the valuation methodology used by the owners' experts and considered by the jury.
Three valuation methodologies may be used in appraising condemned property with a reasonable probability of a zoning change: the reproduction cost, the capitalization cost, and the comparable value. American Institute of Real Estate Appraisers, The Appraisal of Real Estate 51-53 (1983); see Eminent Domain, supra, § 12C.01[3][a]-[c], at 12C-24 to -38. Our courts have consistently refrained from mandating that a specific methodology be used in appraising condemned property. For example, in Mehlman, supra, 118 N.J. Super. at 587, the court declined to designate which method of appraisal should have been used, stating that an appellate court should determine only whether the method used at trial was reasonable. Id. at 591; see County of Middlesex v. Clearwater Village, Inc., 163 N.J. Super. 166, 173 (App. Div.
1978). "[T]here is no precise and inflexible rule for the
assessment of just compensation. The Constitution does not contain
any fixed standard of fairness by which it must be measured.
Courts have been careful not to reduce the concept to a formula."
Jersey City Redevelopment Agency v. Kugler,
58 N.J. 374, 387-89
(1971).
Plaintiffs' experts used the comparable sales approach in
their appraisal of the owners' property. State v. Township of S.
Hackensack,
65 N.J. 377, 382 (1974) (noting that where appropriate,
evidence of comparable sales is "most satisfactory proof" of
value). They first valued the property as if it had obtained the
variance, and then discounted that amount ten percent to account
for the fact that the variance remained a probability.
In Gorga, this Court approved the method of valuation urged by
the State:
The important caveat is that the true issue is
not the value of the property for the use
which would be permitted if the amendment were
adopted. . . . No matter how probable an
amendment may seem, an element of uncertainty
remains and has its impact upon the selling
price. At most a buyer would pay a premium
for that probability in addition to what the
property is worth under the restrictions of
the existing ordinance.
In support of his opinion of the then market
value, an expert may advert to the value the
property would have if rezoned, but only by
way of explaining his opinion of the existing
market value.
The purpose of any methodology is to arrive at an appraisal
that reflects the current value of the property and not the value
of the property at a future date. Thus, so long as the method used
yields a current value rather than a future value, whether the
appraiser starts with the value as currently zoned and adjusts
upward, assigning a "premium" to reflect the likelihood of a zoning
change, or starts with the value of the property as it is likely to
be zoned in the future, assigning a "discount" of that value to
account for the likelihood of such a zoning change, would not
appear significant.
Under the comparable-use methodology, the value of the
condemned property can be reached either by valuing the land as if
the proposed change were in place and then discounting that value
to reflect the likelihood of the change, or the value can be
ascertained by valuing the land under the existing land-use
restrictions and then adding some value to reflect that likelihood.
Although "courts appear to favor the practice of using comparable
sales with zoning the same as the existing zoning on the property
being appraised, rather than using higher-zoned sale properties and
discounting them, . . . the ultimate decision is generally left to
the judgment of the appraiser." Eaton, supra, at 95-96 ("If there
is little doubt that the property will be rezoned, and the discount
applicable to the higher-zoned sales will be comparatively minimal,
it may be advisable to use sales of higher zoned property.").
Therefore, "it has been held that an award may be made on the basis
of an impending rezoning (as an accomplished fact), minus a
discount factor to allow for the uncertainty." Eminent Domain,
supra, § 12C.03[2], at 12C-89; see also William B. Knipe, Valuing
the Probability of Rezoning,
56 Appraisal J. 217, 220 (1988)
("[T]he parties can be expected to bargain toward a price that can
be viewed as the value of the property with the more valuable
zoning classification, discounted by some amount."). E.g., State
ex rel. State Highway Comm'n v. Modern Tractor & Supply Co.,
839 S.W.2d 642, 650-51 (Mo. Ct. App. 1992); State ex rel. State Highway
Comm'n v. Carlson,
463 S.W.2d 80, 81-82 (Mo. Ct. App. 1970); City
of New York v. Nelkin,
415 N.E.2d 970, 971 (N.Y. 1980); Speach v.
Smith,
386 N.Y.S.2d 149, 150-51 (App. Div. 1976); Jones v. State,
357 N.Y.S.2d 554 (App. Div. 1974).
We view Gorga as expressing a preference that condemned
property be valued under the existing ordinance and then some value
be added to reflect the likelihood of the proposed zoning change.
That approach most clearly identifies the "premium" of the
likelihood of a zoning change that should be reflected in the fair
market value of the condemned property. Perhaps that "premium"
approach more effectively assures that the current fair market
value of the condemned property is not the value of the property as
though the proposed change were a fait accompli. 26 N.J. at 117-18. We do not, however, read or apply the observations in Gorga to
mandate that in the valuation process experts must use addition
instead of subtraction. E.g., Speare, supra, 86 N.J. Super. at
571, 575 (involving condemned property zoned residential and
fronting on highway, with respect to which both commercially- and
residentially-zoned comparison properties were used in valuing
residentially-zoned property; ruling that weight to be accorded
allegedly comparable sales is for jury to decide, but not mandating
only "premium" comparable sales approach).
We are satisfied that the methodology used by the owners'
experts was reasonable. As noted, other courts and commentators
have explicitly endorsed that methodology. Accordingly, we reject
the State's contention that the owners' evidence should have been
excluded because it used commercially-zoned properties as
comparable sales in arriving at an initial value of the property
and then discounted that valuation in accordance with their
estimation of the likelihood of such a variance to arrive at the
property's fair market value on the date of taking.
The judgment below is affirmed.
Justices Clifford, Pollock, O'Hern, Garibaldi, and Stein join in this opinion. Chief Justice Wilentz did not participate.