Highest and Best Use as a Critical Factor in Valuation for Redevelopment Condemnations
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The document discusses highest and best use as a critical factor in property valuation for redevelopment condemnations. It provides background on just compensation requirements and defines highest and best use. The document summarizes key considerations in determining highest and best use, including physical possibility, legal permissibility, financial feasibility, and maximally productive use. It also discusses how New Jersey case law has established that highest and best use analysis must demonstrate reasonable probability, not just possibility, of alternative uses or approvals. The document uses a Bloomfield train station property as a case study example.
![Highest and Best Use
•The definition of highest and best use is as follows:
• The reasonable, probable and legal use of property that results in the highest value.
The four criteria that the highest and best use must meet are physically possible,
legally permissible, financially feasible and maximally productive.
• The use of an asset that maximizes its potential and that is possible that is possible,
legally permissible, and financially feasible. The highest and best use may be for
continuation of an asset’s existing use or for same alternative use. This is determined
by the use that a market participant would have in mind for the asset when
formulating the price that it would be wiling to bid (International Valuation Standards -
IVS)
• [The] highest and most profitable use for which the property is adaptable and needed
or likely to be needed in the reasonably near future. (Uniform Standard's for Federal
Land Acquisitions)
Source: The Dictionary of Real Estate Appraisal 6th Edition
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Highest and Best Use as a Critical Factor in Valuation for Redevelopment Condemnations
- 1. Highest and Best Use as a Critical Factor in Valuation for Redevelopment Condemnations New Jersey Institute for Continuing Legal Education Annual Redevelopment Institute February 8, 2019
- 2. The Panel Anthony F. Della Pelle, Esq. , CRE McKirdy, Riskin Olson & DellaPelle, PC Arthur A. Linfante, MAI, CRE. SCGREA Integra Realty Resources – Northern New Jersey Kevin P. McManimon, Esq. McManimon, Scotland & Baumann, LLC 2
- 3. Just Compensation • "...nor shall private property be taken for public use without just compensation." • U.S. Const. Amend. V • "Private property shall not be taken for public use without just compensation. Individuals or private corporations shall not be authorized to take property for public use without just compensation first made to the owners." • N.J.S.A. Const. Art. 1, Sec. 20 3
- 4. Elements of “Fair Market Value” (Just Compensation) • Willing buyer & seller • Neither being under a compulsion to act • Being fully informed of all facts and circumstances about the acquired property (even if not known on date of value) 4
- 5. Highest and Best Use •The definition of highest and best use is as follows: • The reasonable, probable and legal use of property that results in the highest value. The four criteria that the highest and best use must meet are physically possible, legally permissible, financially feasible and maximally productive. • The use of an asset that maximizes its potential and that is possible that is possible, legally permissible, and financially feasible. The highest and best use may be for continuation of an asset’s existing use or for same alternative use. This is determined by the use that a market participant would have in mind for the asset when formulating the price that it would be wiling to bid (International Valuation Standards - IVS) • [The] highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future. (Uniform Standard's for Federal Land Acquisitions) Source: The Dictionary of Real Estate Appraisal 6th Edition 5
- 6. Highest and Best Use •The Most Critical Conclusion in the Analysis • Before a property can be valued, an opinion of highest and best use must be developed for the subject site, both as if vacant, and as improved or proposed. By definition, the highest and best use must be: • Physically Possible – analyzes physical constraints from the site analysis section of the report. • Legally Permissible - analyzes all legal issues affecting the site including zoning, environmental, deed restrictions, etc. • Financially Feasible – an analysis of those uses that will generate a commensurate profit with each project type. • Maximally Productive – that use capable of producing the highest value from among the permissible, possible, and financially feasible uses. 6
- 7. Highest and Best Use •Highest and Best Use Conclusions • As Vacant – what would be built on the site if the site were vacant and available for development to its highest and best use • As Improved – what is the ultimate determination considering the improvements in place as of the valuation date • Continued use • Demolition • Renovation • The Use • The User (buyer or occupant) • Timing of the Use 7
- 8. Highest and Best Use • Conclusion of the property’s Highest and Best Use is critical, and determines the appraisal methodology utilized and the selection of market data (comparables) for analysis. • Owner is not limited to value for the use to which property is currently being put. Owner is entitled to value for highest and best use. Case law State v. Caoili, 135 N.J. 252 (1994) State v. Gorga, 26 N.J. 113 (1958)
- 9. Highest and Best Use Dependent on: – Zoning – Lot size, configuration, topography – Neighborhood, surrounding uses – Market demand – Environmental contamination/remediation issues?
- 10. Project Influence • The problem of isolating project influence arises in several contexts • Purpose of doctrine and general applications • What can “the Project” change?
- 11. Project Influence • Ordinarily, the effect upon value of a proposed redevelopment project – either up or down - must be disregarded in valuation • Highest and best use issues - zoning • Physical condition of subject • Selection of sales or leases • Adjustments to sales or leases • Income method considerations
- 12. Project Influence • The property is valued as if the redevelopment project never occurred • Problems caused by passage of time • Project influence issues are heightened in redevelopment cases • Redevelopment Plan and Zoning Considerations • Legal permissibility and reasonable probability
- 13. HIGHEST AND BEST USE – NEW JERSEY CASE LAW
- 14. State by State Highway Comm’r v. Gorga 26 NJ 113(1958) • Partial taking of Fair Lawn property on Route 4 – zoned residential. Owner suggested commercial value. State contended property was a “swamp” and had no development potential • Fair Market Value (FMV) as of date of taking MAY be affected by prospect of an amendment of the zoning ordinance • Evidence of HBU value NOT restricted to current utilization of property • 2 Step Process: 1) Judge screen evidence: is there reasonable probability of change in near future 2) does record contain sufficient facts to evidence probability to warrant consideration by jury? • Owner entitled to receive fair market value of property for its current use or for any use which it has a commercial value in the reasonable anticipation in the near future • Must be PROBABLE NOT JUST MERELY POSSIBLE • Avoid “unbridled speculation”
- 15. Port of New York Auth. V. Howell 59 N.J. Super 343(App. Div. 1960) • Plaintiff condemned a corner of Defendant’s residential property. • Defendant’s expert’s testified the highest and best use of property was to build a “four story office and basement building”. • Trial Court rejected and App. Div. affirmed that the highest and best use determination excludes speculative and possible use if improvements and changes are made. • Collateral matters, such as calculation of costs and profits are too remote.
- 16. State by Comm’r of Transp. v. Caoili 135 N.J. 252 (1994) • Focused upon probability of subdivision and site plan approval for residentially zoned property on a State highway. • The reasonableness of a use of condemned property including its HBU must be considered in light of any zoning restrictions that apply to the property. • Holding consistent with Gorga that, in determining FMV, jury may consider potential zoning change affecting the use of the property if court deems that such a change is reasonably probable. 1) Is evidence sufficient to allow jury to consider probability of a zoning change? If YES: 2) Jury permitted to assess amount based on subdivision/site plan/zoning change
- 17. State v. Hope Road Assoc. 136 N.J. 27(1994) • State condemned 7 acres to build ramp near Route 36 and Garden State Parkway – validity of prior site plan and access to parcel was at issue. • State’s appraiser valued property for residential purposes and owner’s appraiser relied upon probability to value property for commercial use • The Court applied Gorga’s principles regarding zoning change and subdivision approval to that of site plan approval. • Trier of fact could receive evidence that a willing buyer could recognize probability of site plan approval in the near future when determining market value, however, the site plan must be viable.
- 18. County of Monmouth v. Hilton 334 N.J. Super. 582 (App. Div. 2000) • Large 5 family house in Long Branch • Applied Gorga principles to probability of assemblage of property • 2 step process: • 1) was assemblage probable in near future from date of taking? • 2) jury must be instructed to consider, in its determination of FMV, the premium a willing buyer would pay for probability of a future assemblage over and above FMV as shown by existing use of property • Court held testimony of property owner’s expert was speculative because property valued as if assemblage already occurred
- 19. State v. Simon Family Enters, LLC 367 N.J. Super. 242 (App. Div. 2004) • State took portion of property owner’s land. Property owner entered land option purchase to sell remainder. This evidence was admissible. • Property valued on density basis in reliance upon architectural plans illustrating development potential in conformity with zoning. • Caoili analysis not applicable to ALL expert opinions of HBU. • No requirement for trial court to perform Caoili type gatekeeping function as to conceptual development plan upon which highest and best use was premised beyond obligation to exclude speculative and unreliable evidence. • AS LONG as opinions offered are NOT speculative, unreliable, and net opinions then OK to present to jury and cross examined
- 20. Union County Imp. Auth. v. Artaki 392 NJ Super 141 (App. Div. 2007) • When valuing adjacent properties condemning authority must consider “unity of ownership” in a flexible way using “substantially identical ownership” test • Plaintiff condemned multiple entire properties owned by different defendants – all related family members; argued to consider property as 1 economic unit • Since there was unity of ownership, matters consolidated and valuation is HBU of assemblage • Court held that admission of evidence of market value should be done liberally
- 21. State ex rel. Com’r of Transp. v. 200 Route 17, LLC, 421 NJ Super 168 (App. Div. 2011) • Property taken improved by 31,775 sf building • Evidence of HBU is limited to present condition of land. • Speculation as to value if property were improved = INADMISSIBLE • Here, Defendant says property should be valued as a renovated commercial structure even though it is not renovated. • Court rejects this because speculative improvements cannot be considered, HOWEVER, reasonable renovations and approvals = Ok BUT must discount the risks and costs of said improvements
- 22. Borough of Saddle River v. East Allendale, LLC 216 N.J. 115 (2013) • Plaintiff acquired 2 acre parcel from Def improved with gas station and parking. • HBU was agreed to be a bank and parking lot BUT dispute on size and reasonable probability that a variance would be granted • Competing experts may opine over likelihood of obtaining a zoning change IF the court first determines there is a reasonable probability N.J.R.E. 104 Hearing • Caoili’s gatekeeping function should be done prior to trial • Reasonable Probability: based on standards, requirements and “all of the criteria” that governs approval of bulk variance
- 23. NJ Transit Corp. v. Franco 447 NJ Super 361 (App. Div. 2016) • 3 parcels of land in 3 different municipalities • Def. required to show a reasonable probability Weehawken would either grant variance for a cul de sac or accept dedication as public street in order for Def.’s plan to work • N.J.R.E. 104 held but Def’s experts erroneously permitted as Def’s experts “did not cure the deficiency in the required analysis for reasonable probability” • App. Div. reversed Trial Court because reasonable probability that Town would have granted variance to build cul de sac not shown
- 24. Bloomfield Train Station • .62 Acres/27,000 sq ft • Long, narrow shape; sloped topography • 2-story, 3,671 sq ft Train Station Building • Historic Designation • Built in 1912 • Next to NJT rail line to NYC – Outbound side • Redevelopment Plan allows • Residential/Retail Uses • 2.5 FAR • Up to 5 Stories • Parking off-site
- 25. Tax Map/Photos of Bloomfield Property
- 26. Photos of Bloomfield Property
- 27. Photos of Bloomfield Property
- 28. Highest and Best Use • Township – renovation of Train Station, plus modest retail space • Value = $450,000 • Cost Approach; Income Approach • Prior Owner – construction of mixed-use project including 34 apartments and 12,306 sq ft of retail space • Value = $3,275,000 • Sales Comparison Approach
- 29. Witnesses • Appraisers • Value based on HBU conclusion • Architects • Description of projects • Engineers • Site constraints • Township – constraints make development infeasible • Owner – constraints are common and surmountable • Project Finance Consultants • Feasibility of proposed project • Estimate project costs, revenues and expenses
- 30. Trials • 2016 - jury verdict - $2,900,000 • 2018 - jury verdict - $1,600,000 • Jury does not indicate its HBU conclusion • Jury instructions regarding buyer/seller behavior • Clearly deeper financial feasibility analysis permitted in 2018 trial was important