Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_08-cv-01829/USCOURTS-azd-2_08-cv-01829-0/pdf.json

Nature of Suit Code: 210
Nature of Suit: Land Condemnation
Cause of Action: 28:1358 Land Condemnation

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NOT FOR PUBLICATION

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

United States of America, 

Plaintiff, 

vs.

75.746 Acres of Land, more or less, situate

in Maricopa County, State of Arizona, et

al.,

Defendants. 

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No. CV-08-01829-PHX-FJM

ORDER

The court has before it the United States’ motion for partial summary judgment (doc.

51), defendants Ashby Investment Company and Ashby Land, LLC’s response (doc. 54), and

the government’s reply (doc. 55).

I.

On October 6, 2008, the government filed a declaration of taking concerning a portion

of defendants’ farmland near Luke Air Force Base in Maricopa County, Arizona. The estate

to be taken is an easement over about 76 acres of defendants’ 211-acre property. The

easement permits the government to do certain things designed to facilitate the operation of

Luke Air Force Base, and it restricts defendants’ use of the property. Land in the vicinity of

the base is also subject to a number of complex regulations apart from the easement. Since

about 1982, the property has been leased to Bickman Farms, which grows rose bushes,

among other crops, and pays defendants annual rent. The lease runs through 2010.

Case 2:08-cv-01829-FJM Document 58 Filed 04/07/10 Page 1 of 5
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As evidence of just compensation in this condemnation proceeding, defendants intend

to offer the expert testimony of Stephen Brophy, an appraiser who has investment and

agricultural experience in the area. Brophy has an interest in Santa Lucia Farms, which also

grows rose bushes near Luke Air Force Base. In his appraisal, he evaluated the diminution

of value of the entire 211-acre property in order to determine the effect of the easement. Due

to prior restrictions affecting the approximately 76 acres subject to the easement, Brophy

concluded that the subject property’s pre-condemnation highest and best use was agricultural.

He valued it using an income-based approach. He also concluded that the highest and best

use for the less-restricted portion of defendants’ property was, and still is, industrial. Brophy

valued this land using a sales comparison approach.

The parties offer excerpts from a standard industry text on appraising, which, although

helpful, largely confirm the importance of hearing expert testimony at trial in this case.

According to our understanding, the income-based approach in question incorporates the

annual net operating income from an income-producing property and a capitalization rate,

which is an expression of a potential buyer’s expectations considering associated risks and

market conditions. The approach is designed to determine what a buyer would pay at the

present time for the anticipated future benefits of owning a property.

In contrast, the sales comparison approach determines what a buyer would pay at the

present time based on what other buyers have paid for similar properties in the past,

presumably in anticipation of future benefits to the extent that the properties were incomeproducing. Thus, one can extrapolate an appropriate capitalization rate in a given market

from the net operating income and sale prices of comparable properties. On the other hand,

if there are few comparable sales, the income-based approach provides an alternative

valuation method where net operating income and a capitalization rate can be estimated.

When applying the income-based approach, Brophy used cost and revenue

information from rose bush farming at Santa Lucia Farms instead of Bickman Farms, which

operates on the subject property. He also estimated a capitalization rate based on his market

experience instead of deriving one from comparable sales. The parties dispute whether the

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sales Brophy used to value the less-restricted portion of defendants’ property could serve as

comparable sales for valuing agricultural property. Brophy concluded that the only relevant

sales of agricultural property in the area were completed in contemplation of future industrial

development, and thus were not useful to value property restricted to agricultural uses.

In advance of a bench trial set to determine defendants’ just compensation pursuant

to Rule 71.1(h), Fed. R. Civ. P., the government moves for partial summary judgment with

respect to defendants’ proposed use of the income-based approach.

II.

The Fifth Amendment to the United States Constitution prohibits the taking of private

property without just compensation. Just compensation is usually expressed as the market

value of a property at the time of a taking, that is, “what a willing buyer would pay in cash

to a willing seller,” United States v. Miller, 317 U.S. 369, 374, 63 S. Ct. 276, 280 (1943), in

consideration of the “highest and most profitable use” of the property. Olson v. United

States, 292 U.S. 246, 255, 54 S. Ct. 704, 708 (1934). The owner has the burden of

establishing the market value of the condemned property with competent evidence. See

United States v. 174.12 Acres of Land, 671 F.2d 313, 314 (9th Cir. 1982). Competent

evidence includes expert testimony that would assist the trier of fact, if it is both based on

sufficient facts or data and the product of reliable principles and methods applied reliably.

Rule 702, Fed. R. Evid.; see Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589-90, 113

S. Ct. 2786, 2795 (1993). In effect, the government moves to exclude Brophy’s testimony

because it would not assist the trier of fact and it is the result of an unreliable application of

the income-based approach without sufficient information.

The government contends that defendants impermissibly seek future lost profits as

consequential damages through the income-based approach. Just compensation does not

encompass consequential damages, such as future lost profits. See Omnia Commercial Co.

v. United States, 261 U.S. 502, 509, 43 S. Ct. 437, 438 (1923). In response, defendants

maintain that they are not requesting consequential damages. We agree. The government

is apparently concerned that the income-based approach is tantamount to a determination of

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future lost profits because it derives the present value of a property from the anticipation of

future benefits. However, the approach uses the perspective of a potential buyer in the

market, not expectations specific to the property owner. Therefore, it is not a measurement

of the owner’s future lost profits. Despite its reservations, the government does not dispute

that the income-based approach is an approved appraisal method in the Ninth Circuit. See

United States v. 99.66 Acres of Land, 970 F.2d 651, 655 (9th Cir. 1992). We reject the

government’s general concerns with the approach itself.

Next, the government argues that Brophy’s application of the income-based approach

is unreliable because he uses estimated income from farming operations on the subject

property instead of defendants’ income from leasing the property. There are several reasons

why the lease could be significant. If the property were encumbered by a non-market-rate

or long-term lease, it might affect what a potential buyer would be willing to pay for the

property. But the parties apparently agree that the Bickman Farms lease was near the market

rate, and it extended for only several years beyond the date of the taking. In any case, the

government does not contend that the lease affected the property’s market value.

It is also possible that applying the income-based approach to defendants’

longstanding income from lease payments would render a more accurate market value than

applying it to estimated income from farming operations. But the government does not

contend that this analysis would yield a different market value, nor does it suggest that

agricultural appraisers favor leasing income over farming income when applying the incomebased approach. Rather, the government reasons that, because defendants earn income from

leasing and not from farming, “the application of the income approach in this instance does

not reflect the market value of the property to the owner.” Motion for Partial Summary

Judgment at 2-3. As mentioned above, however, the income-based approach determines a

property’s market value from the perspective of a potential buyer, as it must. The value of

the property cannot be specific to its owner and still be a market value. We reject the

government’s contention that Brophy unreliably applied the income-based approach by

failing to incorporate defendants’ lease payments.

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The government also challenges Brophy’s decision to use financial information from

Santa Lucia Farms instead of Bickman Farms. We share the government’s skepticism of an

income-based valuation of a property that does not include an evaluation of the property’s

actual production of income. Defendants contend that Brophy’s use of information from

Santa Lucia Farms as a proxy was appropriate in this case because the farm grows rose

bushes in the same area as the subject property and Brophy had personal knowledge of its

costs and revenue over a three-year period. While Brophy’s lack of knowledge of the subject

property’s income production is problematic, we conclude that, under the circumstances, it

goes to the weight of his testimony and does not render it inadmissible for lack of sufficient

information.

Finally, the government challenges Brophy’s use of an estimated capitalization rate.

Defendants maintain that Brophy’s substantial investment and farming experience in Arizona

qualify him to estimate a reasonable capitalization rate for agricultural property in the area

of Luke Air Force Base. Given the apparent lack of comparable sales of property restricted

to agricultural uses from which a capitalization rate could have been derived, Brophy’s

estimation of a capitalization rate from market experience does not render his testimony

unreliable.

Accordingly, IT IS ORDERED DENYING the United States’ motion for partial

summary judgment (doc. 51).

DATED this 7th day of April, 2010.

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