Opinion ID: 2599789
Heading Depth: 1
Heading Rank: 2

Heading: Trial Evidence on Fair Market Value

Text: When, as here, an entire tract of land is taken in a condemnation action, the measure of compensation is the fair market value of the property at the time of the taking. K.S.A. 26-513(b); City of Wichita v. Meyer, 262 Kan. 534, 548, 939 P.2d 926 (1997); Urban Renewal Agency v. Tate, 196 Kan. 654, 657, 414 P.2d 28 (1966); The proper remedy for a taking in Kansas is controlled by statute. Butler County R.W.D. No. 8 v. Yates, 275 Kan. 291, 294, 64 P.3d 357 (2003). K.S.A. 26-513(e) defines fair market value as the amount in terms of money that a well informed buyer is justified in paying and a well informed seller is justified in accepting for property in an open and competitive market, assuming that the parties are acting without undue compulsion. Whether a prior sale is too remote in time is a question to be determined by the district court in the exercise of judicial discretion. Mettee v. Kemp, 236 Kan. 781, 790, 696 P.2d 947 (1985); Willsey v. Kansas City Power & Light Co., 6 Kan.App.2d 599, 615, 631 P.2d 268 rev. denied 230 Kan. 819 (1981). There are three generally recognized approaches to valuation of real property: (1) the cost approach, i.e., the reproduction cost of the property at the time of the taking less depreciation; (2) the market data approach, i.e., the value of the property based upon recent sales of comparable properties; and (3) the income approach, i.e., the capitalization of net income from the property. City of Wichita v. Eisenring, 269 Kan. 767, 774, 7 P.3d 1248 (2000). K.S.A. 26-513(e) provides that fair market value is determined by using any one or more of these methods. The jury trial in this case began on June 13, 2005. At the trial, Dean did not offer his opinion of the value of the property at the time of the taking. Glacier's expert witnesses' values for the property's fair market value were $4,518,602, $4,000,000, and $4,657,000. KDOT's experts set the total fair market value of the subject property at $463,000 and $530,000. One of KDOT's experts was Bernie Shaner, a real estate appraiser. Shaner had appraised Lot 3 in 1993 when Burlington Northern Railroad, the property's previous owner, was going to sell it. His more recent appraisal work on Glacier's property began in July 2002. Shaner acknowledged that the economic conditions in 1993 were [p]robably not the same as they were in 2003, but he indicated that the plat, which was in effect when Shaner performed his 1993 appraisal, had not been modified. Shaner also believed it significant that the property remained subject to a restriction under which it could not be developed until access from a public street was created on the property. This restriction was still in effect as of the date of the taking. In Shaner's opinion, the highest and best use of the property was industrial, as a storage yard with a small office. Under this scenario, a building of approximately 2,000 square feet could be built and could use a septic system rather than extended utilities. Shaner testified that another alternative would develop 24.45 acres in the floodplain by using dirt fill and by extending the utilities to the property; however, Shaner expected the $3 million process necessary to prepare the property to outstrip its ultimate value. Another alternative, Shaner said, was to improve a smaller 4.5-acre site outside the floodplain. The estimated $312,000 cost associated with extending utilities and building road improvements would reflect the worth of the 4.5 acre building site. The district court permitted KDOT to introduce, over objection, exhibits showing the prices Glacier paid in 1995 and 1996 for the two parcels of land. These prices were recorded in real estate sales validation questionnaires, or certificates of value (COVs), which are required to accompany a deed or instrument providing for the transfer of title to real estate or affidavit of equitable interest in real estate that is recorded in the office of the register of deeds. K.S.A. 79-1437c. Such questionnaires are to be retained for 5 years and then destroyed. The COVs showed the total paid for the subject property was $200,527plaintiff's Exhibit 11 showed Lot 3 sold for $155,527, and plaintiff's Exhibit 12 showed Lot 1 sold for $45,000. Shaner testified about the COVs, equating them to affidavits. Because of the passage of time between the purchases and the taking, Shaner said that the purchase prices offer[ed] just a little indication as to what the market said that property was worth at that point in time. He admitted that he did not identify the information in the COVs as comparable sales in his valuation calculations for KDOT. In conducting his appraisal on Lot 1, Shaner considered the market data approach and testified that the building on the property was of the lowest quality, despite improvements made by Dean. As part of this approach, Shaner examined four comparable sales and made adjustments for passage of time, market conditions, location, access, quality, design, age, condition, and flood zone location. Calculating the comparable sales to be between $14.20 and $20.04 per square foot, Shaner estimated the building on Lot 1 to have a value of $18 per square foot, or approximately $150,000. Shaner also valued Lot 1 by using the income approach and examined rental comparables. After figuring the net operating income of the building on Lot 1 and calculating the capitalization rate, Shaner arrived at a value of $160,000. Shaner used the market data approach to value Lot 3. He testified that, although Lot 3 consisted of more than 32 acres, approximately 8 acres lay in the channel of Turkey Creek. He therefore considered the usable area to be 24.45 acres. Shaner also testified about conditions of the property that would present challenges to development, such as limited road access and routing to the property. Moreover, Shaner said, a majority of the tract was in a 100-year floodplain. In addition, the sewer lines and public water lines did not lie within the property, and Shaner estimated it would cost about $40,000 to extend those lines under railroad tracks to the property line. Shaner examined five comparables and made adjustments for size, zoning, density, access to utilities, location, and access to each piece of property. These calculations led him to estimate Lot 3's value at $210,000. In addition to Lots 1 and 3, Shaner valued Glacier's reversionary interest in two billboards on the property. Using comparable rentals, Shaner estimated the rent on each to be $18,000 per year. At the time of the taking, Glacier would have gotten one of the billboard sites back in 16 years and 9 months; the second billboard site would have reverted to Glacier in 15 years and 11 months. Shaner concluded that the first billboard site's reversionary value was $44,881, and the second billboard site's reversionary value was $48,366, for a total of approximately $93,000. All of the above led Shaner to a total estimated fair market value for the subject property of $463,000. KDOT's second expert, Robert Marx, a real estate appraiser, also began his work in connection with the case in July 2002. He found it significant that trains surged by the subject property every 15 to 20 minutes during the day. He also found it significant that there was essentially no public access. As a result of Marx's investigation and analysis, he opined that access was highly restrictive, that any use would be subject to what the City determined was reasonable, and that the property had flood issues, including the presence of the creek on a substantial part of the property. With regard to the COVs, Marx testified that the documents provided additional support for what his company had compiled in its database regarding this property over the years. He apparently did not otherwise use the figures the documents reflected in arriving at his estimate of fair market value. Marx examined Glacier's property in light of all three approaches to valuation, but he focused on the market data approach and the income approach. Marx's opinion of the highest and best use of the building on Lot 1 was to use it as an office/warehouse building. He acknowledged that the COV indicated that this property was purchased by Glacier for $45,000 and that improvements had been made since the sale and before he performed his appraisal. Marx noted substantial improvements to the backbone of the building, such as windows, electrical service, and heating and air conditioning; he described these as expensive things. He noted that the interior of the building was older but functional. Marx examined five comparable properties upon which improvements had been made, and his adjusted comparable sales ranged from $16 to $23.58 per square foot. Marx concluded that the building on Lot 1 was valued at $20 per square foot, or approximately $160,000. With respect to the income approach on Lot 1, Marx examined six rental comparables. After figuring the net operating income of the building on Lot 1 and calculating the capitalization rate, Marx ultimately arrived at a value of $170,000. As for Lot 3, Marx's opinion of the highest and best use was outside storage for industrial applications such as masonry supplies and building products, lumber, concrete, landscaping equipment, or use by a trucking company with a lot of rolling stock. He explained that these types of industrial applications would involve no retail development. Marx used the market data approach to valuing Lot 3. He compared the sales of seven pieces of property and made adjustments based on property rights, terms and conditions, access, flood issues, size, topography, zoning, and condition. Based on an average adjusted price of 30 cents per square foot, Marx calculated the value of the usable portion of Lot 3 to be $300,000. With respect to the two billboards, Marx concluded that the total reversionary value was approximately $60,000. Given all of the above, Marx's total estimated fair market value was $530,000. Glacier presented the testimony of three expert appraisers. The first, Walter Clements, a real estate developer, used the income approach and a discounted cash flow analysis in developing his opinion on the subject property's value. Clements stated that one of the strongest attributes of the property was its visibility from I-35 and the 90,000 to 95,000 cars that passed it daily. He also viewed the property's proximity (2 miles) to the central business district in downtown Kansas City, Missouri, as favorable. Clements opined that the highest and best use of the property was as flex space for research and development or as conventional warehouse space. He examined plans prepared by an engineering firm, came up with a development strategy involving 10 proposed pad sites, and considered a 1999 plan by the U.S. Army Corps of Engineers to improve Turkey Creek. Clements said that in 2003, the year of the taking, very little property was zoned M-3 like Glacier's property, implying higher demand. He also indicated that $4 per square foot was comparable to sales for pad sites similarly zoned. He valued Lot 3 at $3,558,000 as of the date of the taking and the total subject property at $4,518,602. Ed Elder, a commercial real estate broker, also testified on behalf of Glacier. In Elder's opinion, the highest and best use of the property was a combination of industrial and some flex-type development. He explained that manufacturing, distributing, and a showroom could be combined under one roof, with just a smidge of retail. Elder could envision several companies existing under one roof on the subject property. He found the property's visibility highly significant. In addition, like Clements, Elder thought proximity to downtown Kansas City, Missouri, important. The flexibility of M-3 zoning was another positive factor in his analysis. Elder primarily focused on the market data approach in valuing the property. In examining comparable sales, he placed a value of $2 per square foot on the Glacier property and calculated the total fair market value, as of the date of the taking, to be $4 million. Glacier's third expert, Jerry Job, an industrial real estate appraiser, opined that the highest and best use of the building on Lot 1 would be industrial, and the highest and best use of the land on Lot 1 would be an industrial office/warehouse. As for Lot 3, Job testified that its highest and best use would be to develop it as flex space or as an industrial office/warehouse space. Job used the market data approach and the income approach in valuing Lot 1. Because the building on Lot 1 had been demolished before Job appraised the property, he used photos and leases associated with the building to assist him. Job testified that the building had a fair market value of $375,000. As for the two billboards on the property, he valued them at $855,000. For Lot 3, Job examined 13 comparable sales and calculated a value range between $2.11 and $2.37 per square foot. Applying those numbers, Job selected a mid-range figure of $3,175,000 for that parcel. These estimates led to a total fair market value for the subject property of $4,657,000. The jury ultimately determined that the fair market value of the subject property immediately prior to the date of taking on August 13, 2003, was $800,000.