• Valuing Condemned Land Using the Development Approach: Lehigh-Northampton Airport Authority v. Fuller
  • February 24, 2011 | Author: Lawrence B. Abrams
  • Law Firm: Rhoads & Sinon LLP - Harrisburg Office
  • In a recent case, the Pennsylvania Commonwealth Court has affirmed the condemnee’s use of the “development approach” to value land taken under the power of eminent domain when the condemnee had filed a plan complying with local zoning regulations prior to the date of the taking. In Lehigh-Northampton Airport Authority v. Fuller, the Court allowed a condemnee’s expert to value the condemned land by estimating the present value of the net income stream from the sale of undeveloped residential lots. 862 A.2d 159, 167 (Pa.Cmwlth. 2004). The Commonwealth Court held the development approach is an appropriate valuation method for determining the fair market value of Pennsylvania real estate in eminent domain cases where testimony establishes that plan approval is likely.

    Determining fair market value under the Eminent Domain Code

    The Eminent Domain Code allows a condemnee to recover “just compensation” for the taking of private property for public use. 26 P.S. §1-601. “Just compensation” is defined as the difference between the fair market value of the condemnee’s entire property interest immediately before the condemnation and the fair market value of that property interest immediately after the condemnation. Id., §1-602(a). The principal determinant to be considered in valuing the condemnee’s property interest is the property’s “highest and best use”, both before and after the taking. Id., §1-603(2).

    That done, the Code then explicitly lists several valuation approaches that a valuation expert may use to determine the property’s fair market value, including generally accepted comparable market value, reproduction cost and capitalization techniques. Id., §1-705(2). In passing the statute, the Legislature intended that the Code “...take cognizance of and permit testimony of all modern appraisal methods.” Id., Comment -- Joint State Government Commission, §1-705.

    The development approach and early Pennsylvania case law

    The development approach is a particularly accurate appraisal method where the evidence establishes that single-family residential development is the highest and best use of the property. The development approach involves analyzing the subdivision plan to find the number and size of the lots, estimating the income from the sale of those lots, subtracting out development costs, determining the time frame over which those lots would be sold, and then calculating the present value of the income stream from the sale of those lots. The approach replicates the mental mechanics that a sophisticated buyer of the property would apply.

    Early Pennsylvania case law, however, was unfavorable to the notion that a condemnee’s property could be accurately valued by reference to the number of lots into which the property could be subdivided. See Kerstetter v. Commonwealth, 404 Pa. 168, 171 A.2d 163 (1961). Pennsylvania courts reacted negatively to claims by property subdividers that the fair market value of the condemned property necessarily equaled the aggregate value of the individual lots to be subdivided, and stated that such aggregation violated the “unit rule”, which prohibited basing condemnation awards on the aggregate value of subdivided lots. Id.; D’Alfonso v. Department of Transportation, 5 Pa. Commw. 341, 291 A.2d 117 (1972). Given the strength of this precedent, Pennsylvania courts had refrained from embracing the development approach despite its accuracy in reflecting the real world calculations of the hypothetical “willing buyer.” See Michael Hino, What’s It Worth?: Using the Subdivision Approach to Value Real Property in Pennsylvania Eminent Domain Cases, Pennsylvania Law Weekly, RE2 (May 2004).

    Within the past ten years, however, as valuation methods have become more sophisticated, Pennsylvania courts have increasingly found that the subdivision approach does not violate the “unit rule”, provided that the evidence shows that the condemnee’s expert based the value of the property on the condemnee’s entire property interest, not on the aggregate value of the individual parcels. Appeal of Commonwealth, Department of Transportation, 146 Pa. Commw. 23, 27, 328 A.2d 872, 875 (1992). Yet despite this growing acceptance, there was no case that practitioners could look to for explicit support of the subdivision approach.

    Lehigh-Northampton: Valuing fair market value using the development approach

    Lehigh-Northampton provides such support. In Lehigh-Northampton, the Airport Authority condemned 107 acres of land in Lehigh and Northampton counties. 862 A.2d at 161. A residential land development had been in full swing on an adjacent parcel. Shortly before the Declaration of Taking was filed, the landowner had filed subdivision plans, none of which had been approved at the time of condemnation; however, at least one plan was proven to be in compliance with all existing zoning regulations. Id. at 161-62. The owner’s expert testified that residential subdivision was the highest and best use of the property. Id. at 163.

    The Board of View reported an award for just compensation of $2,000,000. Id. at 162. On appeal, a jury awarded just compensation of $3,500,000. Id. The Airport Authority appealed, objecting to the condemnee’s appraiser’s use of the development approach in valuing the condemned land. Id. at 166.

    The Commonwealth Court found that the appraiser’s use of the development approach was proper. Id. at 167. The Court noted that this approach had been sanctioned by the Court in other contexts and had also been approved by lower federal courts. Id. at 166. In the instant case, the Court said, a proper foundation had been laid for the development approach in that subdivision plans had been filed with the necessary governing bodies. Id. at 167. The Court quoted the trial court’s finding that the condemnee’s evidence “virtually eliminated conjecture and placed approval and development of the land squarely within the realm of reasonable certainty....” Id.

    The Airport Authority argued that the development approach violated the “unit rule”, but the Commonwealth Court disagreed. Id. at 166. Citing prior case law, the Commonwealth Court stated that, because the condemnee’s expert did not reach his determination by simply adding together the value of individual lots, the testimony did not violate the “unit rule.” Id. at 165. Under the development approach used in the case, the Court continued, the value of individual lots is essential, but only as one piece of data among other pieces, all of which are utilized to calculate a fair market value of the condemned land as a whole. Id. at 165-66.

    Conclusion

    Lehigh-Northampton is an important case for practitioners who specialize in eminent domain law. Prior to this decision, there was no strong precedent upon which to argue that a valuation obtained using the development approach was proper in eminent domain cases. Other cases had touched on the issue, but none provided the explicit affirmation of the approach that Lehigh-Northampton provides. The result is a step forward for Pennsylvania property owners in allowing practitioners to introduce fair market valuations based on solid accounting concepts actually used by sophisticated buyers and sellers in the land development business.