Fair market value of condemned property is at highest and best use on date of taking, even if owner did not use property to full potential.According to the Supreme Court of New York, Appellate Division, the fact that the most profitable use of a parcel can be made only in combination with other land does not necessarily exclude that use from consideration if the possibility of combination is reasonably sufficient to affect market value.
On March 29, 2006 (the vesting date), the Metropolitan Transportation Authority (MTA) acquired five properties in lower Manhattan through eminent domain. The properties were owned by three claimants: DLR Properties, LLC (Riese), Collegiate Church Corporation (Collegiate), and 200 Broadway Joint Venture Co., LLC (Joint Venture), an entity in which Collegiate had a 49.9% interest. The properties consisted of 204 Broadway, a two-story retail and office building owned by Collegiate; 200 Broadway, a one-story retail building owned by Joint Venture; 198 Broadway, a twelve-story office building owned by Collegiate; 194 Broadway, a three-story retail building owned by Riese; and 192 Broadway, a nine-story office building owned by Collegiate. Prior to trial, MTA and Collegiate reached a settlement as to the value of 192 Broadway. However, the settlement left open for trial the issue of whether 192 Broadway's unused development rights, totaling approximately 25,000 square feet, had additional value. Unused development rights, also known as air rights, represent the difference between the maximum permissible floor area and the actual built floor area on a zoning lot. Unused development rights can be transferred from one lot to an adjacent lot through a zoning lot merger.
After condemnation, a trial was held to determine whether any of the claimants were entitled to additional compensation. At trial, MTA's appraiser argued that the properties should be valued separately. He valued the properties at $57,000,000 for 204 Broadway, $15,500,000 for 198 Broadway, and $21,950,000 for 200 Broadway, for a total of $74,450,000. He also concluded that the air rights to 192 Broadway could not be transferred because there was no zoning lot merger as of the vesting date. MTA's appraiser found the highest and best use for 194 Broadway to be to demolish the building and construct a mixed-use retail and residential building on the site. He valued this property as of the vesting date at $27,440,000.
Collegiate and Joint Venture maintained the highest and best use of their properties was a residential condominium building to be built on an assemblage of the properties at 198, 200, and 204 Broadway, along with the air rights from the properties at 192 and 194 Broadway. The Collegiate/ Joint Venture appraiser determined that Collegiate/ Joint Venture's interest in that assemblage had a value of $112,000,000 as of the vesting date.
Riese's appraiser assumed the building would remain and that the air rights could be sold to a neighboring property. He determined the total value of the building plus its air rights to be $60,630,000.
On September 11, 2009, the trial court found that the three northernmost properties, 204, 200, and 198 Broadway, were, for all intents and purposes, under common ownership and there was a reasonable probability that Collegiate and Joint Venture would have assembled these properties. The court also found that it was reasonably probable that Collegiate/Joint Venture would have acquired Riese's property as part of the assemblage, which would allow for the inclusion of 192 Broadway's air rights. The court used a sales comparison approach and determined that the value of the three northern properties and 192 Broadway's air rights was $106,510,521. The court found Riese's property had a value of $35,224,396. MTA appealed the judgments.
The appellate court stated that the well-settled measure of damages in a condemnation case is the fair market value of the condemned property in its highest and best use on the date of taking. The court noted that this is true, even though the owner may not have been using the property to its full potential at the time of taking. Additionally, the court stated that the fact that the most profitable use of a parcel can be made only in combination with other lands does not necessarily exclude that use from consideration if the possibility of combination is reasonably sufficient to affect market value.
In 1998, Collegiate owned three of the five properties and retained a broker to explore the possibility of acquiring the other two properties. The appellate court found sufficient evidence that Collegiate's interest in pursuing assemblage of the entire block started long before condemnation was contemplated. Therefore, the Supreme Court of New York Appellate Division affirmed the lower court's decision.
Matter of Metropolitan Transportation Authority
Supreme Court of New York, Appellate Division
July 21, 2011
86 A.D.3d 314 (N.Y. App. Div.)