Opinion ID: 1386758
Heading Depth: 2
Heading Rank: 3

Heading: Market Value and Construction Delay

Text: A leading eminent domain treatise states: Where a partial taking is effected by eminent domain, the general rule is that any element of damage which results in a diminution of value of the remainder area is a factor which must be considered. The different elements of damage to remaining land recoverable when part of a tract is taken are as numerous as the possible forms of injury. The mere fact that injuries will be temporary and incident to the period of construction only is no ground for disallowing recovery, since a purchaser might pay less if he knew such injuries were to be inflicted. Nichols § 14.08, at 14-187 through -190. Consistent with this approach, the Arizona Court of Appeals has held that any factor bearing on the market value of a retained parcel is admissible. State ex rel. Miller v. J.R. Norton Co., 158 Ariz. 50, 52, 760 P.2d 1099, 1101 (App. 1988); accord San Diego Gas & Elec. Co. v. Daley, 205 Cal. App.3d 1334, 1345, 253 Cal. Rptr. 144, 150 (1988) (condemnee should be compensated for any characteristic of the project that causes an adverse impact on the fair market value of the remainder). For example, in Moschetti v. City of Tucson, the court of appeals held admissible evidence of a possible rezoning of a residential parcel into commercial property and the effect of that prospect on the land's market value. The court concluded that evidence having a material bearing on market value should be admissible, without regard to whether it relates to an eventuality that might or might not occur in the `near' or more `distant' future, as long as the prospect of the event has substantial present influence on market value.  9 Ariz. App. 108, 113, 449 P.2d 945, 950 (1969) (emphasis added). The 6 to 9 year construction delay in this case could have a substantial present influence on the property's market value. A potential purchaser today conceivably will pay less for commercial property adjacent to a freeway that will not be fully constructed for several years than he or she will pay for comparable property at an interchange that is completed and functioning. In other words, the delay places a cloud upon the property that may reduce its appeal to prospective buyers, potentially lowering the property's market value, and thereby creating a real and present injury. See City of Salinas v. Homer, 106 Cal. App.3d 307, 165 Cal. Rptr. 65 (1980) (property owners awarded damages because they would be required to advise potential purchasers that the city owned a strip of land that, in the future, it could use for purposes other than underground utilities). For example, prior to the taking in this case, the Circle K Corporation held a lease from Title USA on the property adjacent to the freeway. Assuming that Circle K exercised the lease's extension options, the agreement would have provided Title USA with $90,000 income per year for 30 years. According to Title USA, however, Circle K canceled the lease, pursuant to its terms, because it concluded that construction delay would diminish the location's profitability. Although the finder of fact must determine what weight to give this evidence when measuring damages, we have held that rental income is a proper element to consider when valuing property because it affects the price a willing buyer would pay and a willing seller would accept. See Stockholders & Spouses of Carioca Co. v. Superior Court, 141 Ariz. 506, 509, 687 P.2d 1261, 1264 (1984); see also State v. Hollis, 93 Ariz. 200, 204, 379 P.2d 750, 752 (1963). Thus, to preclude Title USA from offering evidence of the impact of construction delay on market value would ignore our responsibility in condemnation proceedings to bring the values of the real-world market place into the courtroom. See Moschetti, 9 Ariz. App. at 112-13, 449 P.2d at 949-50. For the same reason, we do not believe that § 12-1122(A) requires a different outcome. Arbitrary application of a statute is not required when it would result in unjust compensation to the property owner. Uvodich v. Board of Regents, 9 Ariz. App. 400, 406, 453 P.2d 229, 235 (1969) (discussing § 12-1123's requirement that property be valued as of the date of summons). [2] Developments in California's eminent domain law since Schultz aptly illustrate the potential for unjust compensation if we were to apply the Defnet/Schultz rule by rote in this case. In 1975, the California legislature replaced the statute at issue in Schultz with more comprehensive eminent domain legislation. In particular, § 1263.440 was added to the California Code of Civil Procedure to remedy the injustice occasioned by the Schultz holding. It provides: The amount of any damage to the remainder and any benefit to the remainder shall reflect any delay in the time when the damage or benefit caused by the construction and use of the project in the manner proposed by the plaintiff will actually be realized. Cal.Civ.Proc.Code § 1263.440(a) (Deering 1981) (emphasis added). In its comment to the statute, the Law Revision Commission expressly repudiated the indiscriminate approach to compensation applied in Schultz: It has been held that damage and benefit must be based on the assumption that the improvement is completed. See, e.g., People v. Schultz. ... Subdivision (a) alters this rule and requires that compensation for damage to the remainder (and the amount of benefit offset) be computed in a manner that will take into account any delay in the accrual of the damage and benefit under the project as proposed. Although we must evaluate a statute similar to California law prior to 1975, we do not believe that we must arbitrarily apply the rule in Defnet simply for consistency's sake. We are governed foremost by the Constitution, and the Constitution requires just compensation. To ensure just compensation, we believe that Title USA must be allowed to present evidence of the impact of construction delay on the property's market value. We caution, however, that we hold only that construction delay may be compensable. The ultimate determination is for the trier of fact in each case. The key consideration is whether and to what extent the delay affects market value. If, as is quite usual, the construction delay unavoidably associated with a project does not affect the property's value, that delay is irrelevant for purposes of severance damages and special benefits. Just compensation requires only that the State remedy real damages resulting from the taking, not imagined harms or dubious attempts to inflate condemnation awards. As noted in Nichols: Damages alleged to flow from the taking of part of a tract are not allowed if they can have no effect on present market value. Thus, damages that are too contingent, speculative and remote to affect the present market value need not be considered. 4A Nichols § 14.09, at 14-241.