### TEXA S C OU R T OF A PPEAL S, THIR D DIST R ICT , AT AU STIN

NO. 03-04-00152- CV

St at e of Te xa s, App e lla nt

v. Cottonwood H oldin gs, Ltd., A Texas Limite d Par tnership, App ellee

F ROM THE P ROB ATE COURT NO. 1 O F TRAVIS COUNTY NO. 2393, H ONO RAB LE ORLINDA NARANJO , JUDGE PRESIDI NG

M E M O R

A N D U M O P I N I O N
The State of

Te xas ( State ) a

pp e a ls f ro m a jur y ve rd ic t awa

rd ingdama g e s to Cottonwood Holdings, L td. (Cottonwood) for a parc el of land taken by condemnation and for damag e to t he remaining land as a result of t he taking. The S tate contends that the t rial court erre d in restricting appra isal testimony to an ec onomic unit of 39 acr es or less and in excluding the use of Cottonwood’s init ial purcha se of the land as a compar able sa le for a

ppraisal pur

poses. We aff

irm the jud g me nt o f t

he tr ia l c ourt
. BACK GR OUND This is a condemnation case in w hich the State took 9.107 acr es of a 109-ac re pie ce of pr op e rt y ow ne d b y

Cottonwo od to make imp ro ve me nts to F .M
. Roa d 97 3, wh ic h in te rs e c ts w ith state hig hway

290 east of Austin. The condemnation occur red in J une 2002. Cottonwood boug ht the 109-a cre proper

ty and seve ral other

trac ts of land three y ear s befor e the c ondemnation with theThe St a te d e p o s it e d $ 9 1 , 0 7 0 , th e a mo u n t o f th e s p e c ia l c o mm is s io n e r s ’ aw ar d , in to the 1 reg istry of the c ourt on J une 14, 2002, for the use a nd benef it of Cottonwood. Cot tonwood withdrew this amount by

order of the c ourt. The judg ment deducte d the $91,070 from the total am o u nt awa rded by the jury for a net a war d of $264,930 plus pre- judgme nt and post-judg ment interest and c os ts o f c ourt
. 2 purp os e of

c re a tin g a ma ste r- pla

nn e d c o mm u n i ty c a lle d “ Sha do wg le n, ” wh ic h in c lud e d c omm e rc ia l, residential, multi-family , and retail uses. A 70-acre portion of t he 109 acr es was subject to an option contra ct that gave Shadowg len R esidential C ommunity the ex clusive right to purcha se the 70-a cre trac t at a set pric e until the y ear 2021. The pa

rt taken by

the State was a portion of the 39-a cre trac t of land no t su bje c t to the op tio n c on tr a c t. After Cottonwood objected to the s pecia l commissioners’ conde mnation awar d, the
case was set f

or trial. At a pr e-tria l hear ing, the court ruled that the larg est economic unit the pa rties could use for appra isal purposes wa s 39 acr es, the re maining por tion of the 109 ac res that wa s not subject to the option contra ct. At the conc lusion of trial, the jury awa rded Cottonwood $250,862 as compensation for the par

t taken and $105,138 as damag es t o the remaining 30 acr es. The trial c ourt
re nd e re d ju dg me nt i n a c c or da nc e wi th t he ve rd ic t. 1
DI SCU SSIO N Th e S t a t e a

p p e a l s t h e t r i a l c o u rt ’ s j u d g m e n t , ar g u i n g t h a t t h e t r i a l c o u rt e r r e d in
re str ic tin g the e c on omi c un it t o a ma ximum of 39 a c re s and in e xclu din g e vid e nc e of the ini tia l sa le of the 109-a cre trac t to Cottonwood in 1999. The State contends that the trial cour t’s ruling s resulted in an er roneous jury

verdic t reg ardingthe amount of c omp en s ation due for the taking of Cottonwood’s land. Compensation for land taken by eminent domain is measure d by the fa ir-mar

ket value of the land at the time of

taking
. E

x x o n P ip e li n e Co

. v . Zwahr , 8 8 S. W. 3 d 6 2 3 , 6 2 7 ( T e x.3

20 02 ); City of

Harlingen v. Estate of Sharboneau , 48 S.W .3d 177, 182 (Tex. 2001). Dete rmination of fa ir -m ark e t va lue re qu ir e s me a suri ngthe dif ference bet we e n th e va lue of the land imm e diate ly befor e and immediate ly

afte r the taking
. Exx on Pipeline , 8 8 S. W.3 d at 62 7; Cal le jo v. Brazos Elec

. Power Coop. , Inc. , 755 S.W. 2d 73 , 76 (T e x. 19 88 ). Ma rk e t va lue is d e fi ne d a s th e pr ic e the pr op e rt y would bring when of

fer ed for sale by one who desires to se ll but is not oblige d to do so and boug ht by one who desires to buy but is under no nec essity

to do so. State v. W

indham , 837 S.W .2d 73, 77 (T e x. 19 92 ). I n d e te rm ini ngmark e t va lue , th e jur y may c on sid e r a ll u se s to wh ic h th e pr op e rt y is
re a so na b l y a d a p t a b l e an d f o r w h i c h i ti s ( o r

i na l l r e a s o n a

b l e p r o b a b i l i t y w i l l b e c o m e ) a va ilable within the forese eable future. Id.

When only part of the land is taken, the landowner is entitled to (1) the marke t value of the part take n and (2) the damag e to the re mainder a s a re sult of the taking
. Id
. at 75-76. W hen the par t taken ca n be conside red an independe nt e conomic unit, the market va lue ca n be dete rmined without ref

ere nce to the re mainder. Id
. at 76. Howeve r, if the pa rt taken c annot be c onsidered a n ind e pe nd e nt e c on omi c un it r e fl e c tin g the hig he st an d be st use of the pr op e rt y , the mark e t va lue mus t be dete rmined by

adding some portion or all of the r emainder to construct an e conomic unit. Id
. Adm iss ibil it y o f 109 -a c r e tr ac t a s e c ono m ic unit

We f ir st a dd re ss t he State ’s argume nt t

hat th e tr ia l c ourt

e rr e d in c on c lud inga s a matter of la

w that no more tha

n 39 acr es of the 109- acr e tra ct could be used as an e conomic unit for deter mining market value. We re view the tria l court’s c onclusions of law de novo
. State v. He al , 917 S.W .2d 6, 9 (Tex. 1996) . Under de novo revie w, we exercise our own judg ment, rede termine4

eac h leg al issue, and a ccor d no defe renc e to the trial court’s c onclusion. Qu ic k v . Ci ty of A us tin , 7 S.W .3d 109, 116 (Tex. 1998).

At a pre -trial hea

ring in this case, the trial court concluded that an economic unit of more than 39 acr es of the 109-acre trac t was inappropriate beca use the 70 a cre s subject to an option contra ct wer e not s olely owned a nd controlled by

Cottonwood. The State argues that the trial c ourt
err ed because an opti onee does not acquire any rig hts to the property

until the option i s exercised. Ho we ve r, a t th e tim e the op tio n c on tr a c t wa s for me d, the op tio ne e ob ta ine d a n e qu ita ble int e re st w ith which it could leg ally

preve nt Cott onwood from se lling the land. See Goswami v. Me tropolit an Sav. & Loan Ass’n , 7 51 S.W. 2d 48 7, 48 9 ( Te x. 19 88 ) ( op tio n c on tr a c t g a ve op tio ne e e qu ita ble int e re st in pr op e rt y and sta nd ing to c on te st va lid ity

of fo re c los ur e sa le ); Hi tc hc oc k Pr op s. , Inc. v . Levering , 77 6 S. W.2 d 2 36 , 2 38 (T e x. Ap p. —H ou sto n [1s t D ist .] 19 89 , w ri t de nie d) (s a le of op tio n to purc ha se
rea l estate c onstitut es sale of interest in land under

Real Estate L icense Act beca u s e option gives op t i o n ee eq u itable intere st in land). Be cause Cottonwood would have to obtain consent f rom the optionee in orde r to sell the entire 109-ac re tra ct, C ottonwood could not be consider ed a w illing
s e ll e r f o r p u r p o s e s o f d e te r mi n in g ma

r k e t v a lu e . T h u s , th e tr ia l c o u rt p r o p e r ly r e s tr ic te d

the
e c on omi c un it t o 3 9 a c re s o r l e ss.

The State c ontends that the trial cour t’s deter mination of the size of the maximum economic unit violates the principles set forth by the supreme court in W indham . H ow e ve r, the fa c ts in this case ar e distinguishable from those in W indham , and our r

uling is consist ent with that case
. T h e d is p u te in W

i n d ham arose when the State a nd landowner

disag ree d as to the amount of
re ma ini ngland to be a dd e d to the pa rt take n in

or de r t o f or m an a pp ro pr ia te e c on omi c un it. Whil e the landowne r propose d a total of 3.84 a cre s in support of his theory that the hig hest and best use w as5

commerc ial development, the State soug ht to use the e ntire 19-a cre parc el to support its contention that the hig hest and be st use was to hold the land for investment purposes. The trial c ourt restric ted the appr aisers’ testimony to a 3.84-a cre economic unit, thus preve nting the S t at e from presenting evidenc e in support of its theory of hig hest and be st use. On appea l, the supreme c ourt reve rsed the trial court a

nd held that when the highe st and best use of the land is disputed, a trial court must allow both parties to pre sent evidenc e to the jury reg ardingtheir theory

of hig hest and be st use. W indham is rea dily distinguishable from this case. Althoug h the landowne rs there ha d o wn e rs hip a nd

c on tr ol o f th e ent ir e 19 -a c re tr a c t, t he y a sse rt e d th a t th e y

ha d a le g a l r ig ht t o
un ilate ra lly

c arv e ou t a

3. 84 -a c re str ip o f l and

a dja c e nt t o a

hig hw ay in or de r t o s up po rt the ir proposed highest a

nd best use, commer cial deve lopment. Unlike the landowne rs in W indham , Cottonwood did not unilatera lly desig nate a

parc el of its land for use as an economic unit in order to suit i ts theory

of hig hest and be st use. Rather, the trial court made a leg al deter mination that 70
acr es of the 109-ac re tract were not suitable for inclusion i n an ec onomic unit because they wer e not
ow ne d and c on tr oll e d so le ly by Cottonwo od
. As a re su lt, the tr ia l c ourt re str ic te d the e c on omi c un it to a ma ximumof 39 a c re s, the e nti re re ma ini ngpo rt ion of land no t bu rd e ne d b y the op tio n c on tr a c t. I f Cottonwood had then ar g ued that it had the rig ht to desig nate the ec onomic unit as only 12 of the 39 acr es, t his case would fall squar ely within the rea lm of W

indham . Howeve r, no such unilater al de sig natio n is pr e se nt h e re . Rathe r, the tr ia l c ourt pr op e rl y fo un d tha t the size of the e c on omi c un it must be within the 39 acre s controlled by Cottonwood. This case is further disting uishable bec ause W indham dealt spec ifically with the
a dmi ssi bil ity

of bo th part ie s’ e c on omi c un its when the highest and best use of the land was disputed ; the par ties here advanc e the same theory of hig hest and best use for the 109- acr e tra ct or the 39- acr e6

trac t. I n W

indham , the par

ties disputed whether

the hig hest and be st use wa s t o hold the land for investment or to use it f

or commerc ial development. I n order to argue their r espec tive theories, the parties e ach ne eded to use a diffe rent e conomic unit—19 acr es for the State and 3.84 a cre s for the landowner . I f the trial c ourt restric ted the ec onomi c u n i t t o the size proposed by one par ty or the oth e r, the op po sin g pa

rt y wo uld be fo rc e d to fo rf

e it i ts t he or y of hig he st a nd be st us e . As a

re su lt, the su pr e me c ourt he ld that bo th the or ie s of hig he st and be st u se , a nd thu s b oth pr op os e d e c on omi c
u n i t s , s h o u l d

b e s u b m i t t e d t o t h e j u r y. Ho we ve r, in thi s ca se bo th part ie s ag re e that th e hig he st a nd be st u se of

the pr op e rt

y is to hold i t for re al estate investment. The State’s a ppraiser , David Obe rre nder, te stified that the hig he st a nd be st u se of

bo th t he 10 9- a c re and

39 -a c re parc els was to h old the m a s a

re a l e state investment for futur e deve lopment of single -family homes, with potential commerc ial capa biliti es in the are a fa cing F.M. 973. Similarly , Cottonwood felt t hat t he highest and be st use of the land w as to hold it for investment, as evidenc ed by its purcha se of the land to be included in a ma ster-pla nned community containing single -fa mily homes, apar

tments, r etail fa cilities, a school, and a g olf course
. At the t ime of condemnation, Cottonwood had obtained approva l of i ts plan from the Cit y of Manor , ha d b e g un

c on str uc tio n o n th e g olf

c ours e and

ro a ds , and wa s in the pr oc e ss of ob ta ini nga g re e me nts to rec eive utilities. F urthermor e, the option contra ct on the 70-a cre trac t is evidence that Cottonwood purcha sed the land f

or investment purposes a

nd that it actively

soug ht developer s to buy the land. Neve rtheless, the pa

rties contend that the y dispute highe st and best use be cause they dis a g re e a s to ho w l on g it w ill take to de ve lop re a l e state on the 39 -a c re tr a c t and a s to t he fe a sib ili ty of building multi-family

as opposed to sing le-fa

mily homes. Howeve r, disputes a bout w hat ty

pe of residential f

acilities will eventually

be built as one pa

rt of an e x pansive de velopment and a bout the7

approximate time-line in which that will occur do not constitute conflicting theories of highe st and be st u se . Re g ard le ss o f w he the r t he pr op e rt

y be c ome s a

pa rtme nt b ui ld in gs, sing le -f a mil y ho me s, or a school, both the S tate and Cottonwood ag ree that the hig hest and be st use, whateve r the size of the e c on omi c un it, is t o h old the pr op e rt

y fo r r e a l e sta

te inv e stm e nt. Fur ther, this case is consistent with W indham be c a

us e bo th p art ie s w e re pe rm itt e d to pr e se nt th eir ori gina l th e or ie s o f h ig he st a nd be st u se to t

he jur y . U nli ke the c ir c ums tanc e s in W indham , th e tr ia l c ourt ’s re str ic tio n o f t he e c on omi c un it t o n o mo re tha n 3 9 ac re s in this c a se did not deprive the State of the opportunity to pr esent its theory to the jury . I ndeed, O berr ender testified for the State that his theory of hig hest and best use would be the same for the 39-a cre and 109-a cre trac ts. For both tra cts, Ober rende r st ated that the property should be held as a rea l estate investment for f uture de velopment of sing le-fa mily homes and for potential commerc ial use of the a rea fac ing F.M. 973. Thus, the tria l court’s ruling d i d n o t o ffe nd the principle se t forth in W indham that the jury should decide be tween the parties’ competing theories of highe st and best use. Be cause Cottonwood did not posse ss sole ownership a nd control of 70 a cre s of the 109-ac re tra ct and be cause both parties adva nced the same theor

y of hi g hest and best use a nd wer e pe rm itt e d to pr e se nt t

he ir the or ie s t o th e jur

y , w e fi nd

that th e tr ia l c ourt

pr op e rl y c on c lud e d a s a
ma tte r o f l aw that th e 39 -a c re tr a c t not sub je c t to the op tio n co ntr a c t wa s the maximume c on omi c unit the parties could use to determine ma rket va lue.
Adm iss ibil it y o f 199 9 s ale price

The State also argues that the trial court err ed in e x cluding evidenc e of the sale of the 109-ac re tra ct to Cottonwood in 1999. W e apply an abuse of discre tion standard in re viewing a trial8

court’s decision to exclude evidenc e. National Liab. and Fire Ins. Co. v. Allen , 15 S.W .3d 525, 527- 28 (T e x. 20 00 ); Travis Cent. Appraisal Dist. v. Signature Flight Su pport Corp. , 140 S.W .3d 833, 843 (Tex. App.—Austin 2004, no pet.). A trial c ourt abuse s its discretion when it ac ts in an
unrea sonable or a

rbitrar y manner or without reg ard f

or any g uiding r

ules or princ iples. Ow e ns Corning Fiberglas Corp. v. Malone , 9 72 S.W. 2d 35 , 4 3 ( Te x. 19 98 ); Beaumont Bank, N.A. v. Buller , 806 S.W .2d 223, 226 (Tex. 1991). A trial cour t’s evidentiar

y ruling should be upheld if there is any leg itimate basis for the ruling
. Owens-Corning , 972 S.W .2d at 43. The pa rty seekingreve rsal of a judgme nt based on a

claimed e rror

in e x cluding evidenc e must show that the err or proba bly resulted in an im proper

judgme nt. In te rst

ate Nor thb or ou

gh P’ sh ip v . S tat e , 66 S.W .3d 213, 220 (Tex. 2001). We r e v ie w th e e n ti r e r e c o r d w h e n d e te r mi n in g w h e th e r th e c la im e d e r r o r p r o b a b ly r e s u lt e d in a n improper judg ment. Id . Asu c c e ssf ul c ha lle ng e to a

tr ia l c ourt ’s e xclu sio n o f ev ide nc e ty pic a lly require s the complaining party to show that the judg ment turns on the excluded evidenc e. Id
. The State spec ifically

contends that the 1999 sa le of the 109- acr e tra ct was releva nt and probative to support Oberr ender ’s testimony as to the m arke t value of the prope rty . Ober rende r used the c ompara

ble s ales method when determining his proposed mar ket value of

the land. When an appr aiser use s a compa rable sales ana ly sis, he collects data for sa les of prope rty s imilar to the
s u b j ec t property

and then make s upward or downwar d adjustments to the sale price s based on differ ence s in the subject prope rty
. Sharboneau , 48 S.W .3d at 182. Comparable sa les must (1) be
vo lun tary , ( 2) take pla c e ne ar i n ti me and pla c e to th e su bjec t pr op e rt y , a nd (3 ) i nv olv e land

wi th simil ar c hara ct er i s t i cs to the subject prope rty
. Id . The c ompara ble sales method f

ails when the compar ison is made to sa les that are not actually compar able to the land c ondemned. GuadalupeBlan c o R iv e r A uth . v . Kraft , 77 S.W .3d 805, 808 (Tex. 2 0 0 2 ). Deter mination of the deg ree of9

sim ila ri ty be tw e e n th e su

bje c t pr op e rt

y and the land c la ime d to be a

c omp ara ble sa le is l e ft

larg e ly to the discretion of the trial court. Sta te v . Ch ild re ss , 331 S.W .2d 230, 235 (T ex . C iv. Ap p. —E a stl and

19 60 , w ri t de nie d) ; Bo ar

d of Rege nts of Un iv . of Tex . Sy s. v . P ue tt , 519 S.W .2d 667, 67 2 (T e x. Civ
. Ap p. —A us tin 19 75 , wr it de nie d)
. I f the c omp ari so n be tw e e n the su bje c t p rope rt

y
and ano the r s a le is so a tte nu a te d th a t th e a pp ra ise r a nd the fa c t- fi nd e r c ann ot m a ke va lid a dju stm e nts for the differ ence s, the sale should not be a dmitted as a compa rable sale. Sharboneau , 48 S.W .3d at 182. Be cause Ober rende r used the c ompara

ble sales a

pproac h to de termine his proposed marke t value of the property , the 1999 sale is re levant to his testimony only if it is comparable to a
sa le of the same pr op e rt

y a t the tim e of

the c on de mnatio n in

20 02 . H ow e ve r, Ob e rr e nd e r d id n ot u se the ini tia l sa le a s a

c omp ara ble s a le in h is m ark e t va lue ana ly sis . H e te sti fi e d th a t he c ho se no t to
us e th e i n i t i a l s a l e b e c a

u s e C o t t o n w o o d h a d m a d e m an y i mp r o v e m e n t s t o t h e p r o p e rt y s inc e its purcha se in 1999. Considering that Ober rende r deeme d the sale too dif fer ent from that of the c urre nt pr op e rt y to i nc lud e it a s a

c omp ara ble sa le , th e tr ia l c ourt

did no t a bu se its dis c ret ion

in f a ili ngto admit the 1999 sales pric e.

Fur ther, the r ecor d shows that Ober rende r wa s not mist aken in f inding that the la

nd had cha ng ed considera

bly in the three y ear s since its initial purcha se. I n 1999, the 109-ac re trac t was farml an d , b u t b y

2 0 0 2 Co tt o n w o o d

h a d o b ta in e d a p p r o v a l o f

it s ma s te r - p la

n n e d c o mm u n it y from the City of Manor , arr ang ed for utilit ies to be provided to the site, and had begun construction on the g olf course and roads. Cottonwood’s de veloper testified that approximately $35 milli on had bee n invested in the master- planned community at the time of trial, including approximately $12 milli on
s p e n to nt h e f

i r s tp h a s e o f

t h e p r o j e c t f o r r o a d s a

n d u t i l i t i e s n e c e s s ar

y f o r l o td e v e l o p m e n t
. In10

addition, the purcha se price of the proper ty in 1999 was only $2,886 per a cre , wher eas O berr ender testified that his pr oposed marke t va lue for the part taken at the time of c ondemnation was $12,000 pe r a c re us ingthe 10 9-ac re e c on omi c un it a nd $1 3, 50 0 p e r a c re us ingthe 39 -a c re e c on omi c un it. Thus, acc ording to Ober

rende r, t he value of t he 39-acre trac t at the time of conde mnation was more than four times the va lue of the pr operty at the time of Cottonwood’s initial purchase
. Considering the clea

r differ ence s betwee n the 1999 sale to Cottonwood and the status of the prope rty

at the time of c ondemnation, as we ll as the fac t that O berr ender did not use the initial
sa le in h is c omp ara

ble sa le s ana ly sis , w e fi nd tha t th e tr ial cou rt

a c te d w ith in i ts d isc re tio n in excluding evide nce of

the 1999 sale.
CO NC LU SION B e c a u s e t h e t r i a l c o u rt p r o p e r l y d i s r e g ar d e d l an d u n d e r an o p t i o n c o n t r a c t in deter mining the maximum appropriate e conomic unit and did not abuse its discretion in excluding
e vid e nc e of

the 19 99 sa le of

the pr op e rt

y , w e a ff ir m th e jud g me nt.

Be a Ann Smith, J ustice Be fore Chief J ustice L aw, Justi ces B . A. Smith and Pury ear Affir med Filed: Apr il 21, 200511