Opinion ID: 1794141
Heading Depth: 1
Heading Rank: 12

Heading: Reproduction Cost

Text: A builder called by Westgate testified that in his opinion the replication cost, or a cost to reproduce the pool facility, was $502,303. In reaching his opinions, the appraiser for Westgate referred to in subpart (i) above relied upon that testimony. The district urges that as the land and the fixtures should have been valued as a whole rather than separately, neither the opinion of the builder nor those of the appraiser should have been received. In effect, the district argues that such testimony violated the unit rule in valuing fixtures. We agree that there are three generally accepted approaches used for the purpose of valuing real property in eminent domain cases: (1) the market data approach, or comparable sales method, which establishes value on the basis of recent comparable sales of similar properties; (2) the income, or capitalization of income, approach, which establishes value on the basis of what the property is producing or is capable of producing in income; and (3) the replacement or reproduction cost method, which establishes value upon what it would cost to acquire the land and erect equivalent structures, reduced by depreciation. Ellis v. City of Kansas City, 225 Kan. 168, 589 P.2d 552 (1979); Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 377 N.E.2d 909 (1978); Manchester Housing Auth. v. Reingold, 130 N.H. 598, 547 A.2d 219 (1988); 4 Nichols' The Law of Eminent Domain § 12C.01[3] (rev.3d ed.1995). Each of these approaches is but a method of analyzing data to arrive at the fair market value of the real property as a whole. Correia, supra . We also agree that the unit rule is applicable whenever the market data approach is employed, Ellis, supra, and that this rule requires that the value of improved property be considered as a whole, without the assignment of separate costs for the land and individual improvements, Dept. of Transp. v. First Bank, 260 Ill.App.3d 490, 197 Ill.Dec. 686, 631 N.E.2d 1145 (1992). See, Ellis, supra ; Milwaukee & Sub. Transp. v. Milwaukee County, 82 Wis.2d 420, 263 N.W.2d 503 (1978); Alaska State Housing Authority v. DuPont, 439 P.2d 427 (Alaska 1968). Although we have not heretofore adopted the unit rule by name, we have demonstrated a preference for valuing condemned property as a whole. See, Y Motel, Inc. v. State, 193 Neb. 526, 227 N.W.2d 869 (1975) (ordinarily, entire property involved is to be valued and damages to it assessed as a whole); Medelman v. Stanton-Pilger Drainage Dist., 155 Neb. 518, 52 N.W.2d 328 (1952) (when land taken has valuable deposits of minerals, or contains sand, gravel, peat, or other materials of value, or is covered with growing crops or trees capable of being converted into lumber, circumstances may be considered so far as they affect market value of land, but part of realty cannot be separately valued for its materials as an item additional to value of land for purpose of sale). In addition, our dicta have referred to the unit rule by name. Pettijohn v. State, 204 Neb. 271, 281 N.W.2d 901 (1979) (measure of value in suit by lessee for value of improvements sold by lessor not like unit rule in eminent domain proceedings). However, as Westgate's appraiser used the reproduction cost method in assessing the value of Westgate's property, and as the unit rule is applicable only for the market data approach, the issue is not whether the unit rule was violated, but, rather, whether the appraiser was properly allowed to consider the cost of reproduction in giving his opinion as to the value of Westgate's property. We have declared that methods of valuation other than the market data approach may be used in certain circumstances. In Iske v. Metropolitan Utilities Dist., 183 Neb. 34, 47, 157 N.W.2d 887, 896 (1968), we held that capitalization of income of rentals from a reasonably prospective use of the property is an acceptable method of arriving at the value of the property as a factor in the determination of its present market value.... In First Baptist Church v. State, 178 Neb. 831, 836-37, 135 N.W.2d 756, 759-60 (1965), we observed in dicta: Where there is proof that there is no market value of property with a specialized use, such as a church, convent, hospital, college premises, or the like, the general rule is that resort may be had to some other method of fixing the value of property.... Depending on the nature of the property, the authorities have supported different methods of determining value in these situations. Expert testimony as to reproduction or replacement cost, less depreciation, has been approved in many cases as competent foundation evidence to support an opinion as to valuation. See, also, Graceland Park Cemetery Co. v. City of Omaha, 173 Neb. 608, 114 N.W.2d 29 (1962). It is generally held, and we agree, that the reproduction cost method as an independent test of value may be used only in rare cases where there is a lack of comparable sales of similar property, where the structures on the property are in some sense unique, or where the character of the improvements is unusually well adapted to the kind of land upon which they exist. Manchester Housing Auth. v. Reingold, 130 N.H. 598, 547 A.2d 219 (1988); Ellis v. City of Kansas City, 225 Kan. 168, 589 P.2d 552 (1979); Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 377 N.E.2d 909 (1978); Alaska State Housing Authority, supra ; State v. Burnett, 24 N.J. 280, 131 A.2d 765 (1957); DURA v. Pogzeba, 38 Colo. App. 168, 558 P.2d 442 (1976). However, we agree as well with the observation of the New Hampshire Supreme Court in Manchester Housing Auth., 130 N.H. at 602, 547 A.2d at 222, that there is no need to adopt a rigid rule limiting the use of reproduction cost evidence to cases involving indisputably unique buildings with special characteristics. Rather, where the trial court, in the exercise of its sound discretion, has permitted the jury to consider reproduction cost evidence in an eminent domain proceeding, we will find no error on review if the record documents either (1) the property's uniqueness, or (2) the presence of a number of alternative safeguardsfor example, recourse to the reproduction cost method as a last resort, other appraisals, challenges to the evidence on cross-examination, and instructions to the jury on its duty to consider all of the evidence in determining valuethat probably minimize the risk of excessive influence on the jury. See, also, Correia, supra (although cognizant that cost reproduction data does not always reflect meaningful measure of value, trial judge should be allowed to exercise discretion in determining when special conditions exist so as to justify use of such data). We thus conclude that it would be imprudent to limit the use of the reproduction cost method in this state only to unique buildings, as improved property may exist in the midst of an expanse of vacant land, resulting in a lack of comparable sales which would make the use of the market data approach impossible. We also agree with the Illinois Supreme Court's view that a finding of uniqueness or special use is proper `only when property has special capabilities which make it unmarketable at its true value due to unique improvements    .' People ex rel. Director of Finance v. YWCA, 74 Ill.2d 561, 569, 25 Ill.Dec. 649, 653-54, 387 N.E.2d 305, 309-10 (1979). In that case, the condemner sought to condemn land and a building containing a swimming pool, among other things. The court found that the property was not of a special use and that the improvements were not of such a unique nature as to render use of the fair market standard unjust or determination of market value impossible. Here, too, the presence of the swimming facility does not make Westgate's property unique. However, the lack of uniqueness is not alone determinative of whether use of the reproduction cost method is proper in this case. Westgate's appraiser, in discussing the market data approach, testified: Now, in the case of the Westgate pool, it was a major problem because there were no pools for sale, there is not a general market for pools; I could not [go] out and find sales of pools. So in this case, the market approach is not applicable in the sense of finding another pool for sale. There has been one pool sale that I had been aware of and in my opinion, it was not a market sale so there was no way I could use the market approach. So I considered the market approach and could not use it. . . . . I concluded [the income approach] was not appropriate because it's not an income property and it's notwas not built for nor run for income production. Under that circumstance, the reproduction cost method was an available method to determine value. Thus, it cannot be said the trial court erred in admitting the appraiser's opinion merely because the opinion relied on the reproduction cost method. The difficulty is that Westgate's appraiser also stated that the highest and best use of the land as vacant was commercial, and as improved was recreational. In arriving at his opinion as to the value of the property, the appraiser valued it at $3 per square foot as if it were vacant commercial land and then included in his opinion of value the cost of the pool. It is this method to which the district objects. As stated in 4 Nichols' The Law of Eminent Domain § 12B.11[1] at 12B-83 to 12B-85 (rev.3d ed.1995): The problem of the appraiser and of the court is to determine the extent to which the value of the land is enhanced (or, conversely, diminished) by the structure upon it. Implicit in the utilization of evidence of reproduction cost is the fact that the structure adds value.... The proper measure of just compensation is market value of the land with the buildings upon it, with the owner receiving nothing for the buildings unless they increase the market value of the land. Accordingly, evidence of the structural value of the buildings is not admissible as an independent test of value. When, however, it is shown that the character of the buildings is well adapted to the location, the structural cost of the buildings, after making proper deductions for depreciation by wear and tear, is a reasonable test of the amount by which the buildings enhance the market value of the property. The appraiser explained that he valued the land as commercial real estate because the value of the land as unimproved is developed specifically for the cost approach. And it's saying if we had to replace this facility and buy land to replace it, what would that land be worth? That's the unimproved part. However, that is an incorrect statement regarding the replacement cost approach. Therefore, an appraiser utilizing the reproduction cost method cannot include as a factor the value of existing improvements, unless the improvements enhance the value of the land. As noted previously, in this case Westgate's appraiser valued the land as commercial real estate, its highest and best use as vacant land. It was therefore erroneous to include the cost of replacing the pool, as this did not enhance the property's value as commercial real estate. The situation would be otherwise if the highest and best use of the land were recreational, for then the existing improvements would enhance its value. The question is not what it would cost the condemnee to go out and purchase similar property and construct the same type of improvements on that property; rather, the question is what is the value of the property owned by the condemnee as of the date of the taking. The replacement cost method allows a condemnee, when there are no comparable sales available, to value the land and the improvements separately to arrive at the fair market value so that any enhancement of the value of the land by the improvements will be taken into consideration. But where the highest and best use of the condemnee's land is valued in such a way, i.e., commercial real estate, the value of which is not enhanced by the existing improvements, it is illogical to factor in the replacement costs of the improvements. Since the existing improvements do not enhance the value of the land, the need to value them separately does not exist. See, Ark. State Highway Comm. v. Richards, 229 Ark. 783, 318 S.W.2d 605 (1958) (in absence of showing that cost of particular improvement aids in determining market value of whole estate, evidence of cost should be excluded); Connecticut Printers, Inc. v. Redevelopment Agency, 159 Conn. 407, 270 A.2d 549 (1970) (general rule is that proper measure of damages is not market value of land plus reproduction cost of improvements, but market value of property as improved, in view of all uses to which it is adaptable and available; structure or improvement may add little or nothing to value unless it is of such character that it is adapted to some prospective use which affects market value of land); Commonwealth v. Stamper, 345 S.W.2d 640 (Ky.1961) (improvements should be considered only to extent they enhance value of land to which affixed; if owner builds expensive house on land in slum area, cost of house is not fair test of amount by which house enhances market value of property because, as practical matter, property will not be marketable for sum commensurate with cost of house). In Ark. State Hwy. Comm'n v. Toffelmire, 247 Ark. 74, 444 S.W.2d 241 (1969), three witnesses for the condemnee all testified that the highest and best use of the entire property at the time of the taking was commercial, yet they all intermingled residential and commercial values. One expert valued the land before the taking as commercial in the amount of $40,964 and the improvements as residential in the amount of $28,153. The Arkansas Supreme Court reversed the jury's award, stating: Clearly, in a commercial use evaluation, the value of the improvements, both before and after the taking, should [be] based on commercial worth. Our case of Arkansas State Highway Comm'n v. Griffin, 241 Ark. 1033, 411 S.W.2d 495 (1967), sets out the rule. There we said a verdict rendered by a jury which was partially based on testimony relating to commercial value of the land, and partially based on testimony relating to the land's value for residential purposes, would not be proper.... 247 Ark. at 75, 444 S.W.2d at 241-42. A similar result was reached in Matter of Co. of Nassau, 43 A.D.2d 45, 51, 349 N.Y.S.2d 422, 429 (1973), wherein the court stated: By no approach, therefore, can consideration be given to the improvements on the land as an alternative to the highest and best use as vacant land available for residential purposes. Where, as here, the highest and best use is for the land to be employed for a different purpose, no substantial value can be accorded to the improvement which has to be torn down. In Acme Theatres v. State of New York, 26 N.Y.2d 385, 388-389, 310 N.Y.S.2d 496, 499, [258 N.E.2d 912, 914 (1970)], this principle was enunciated as follows: This is abundantly clear when we consider that in order to achieve a use of the land for purposes other than a drive-in-theatre, it would be necessary to demolish the buildings located thereon, whose existence is inconsistent with that highest and best use [emphasis supplied]. It is illogical to award damages for buildings that must be destroyed to achieve the use contemplated in the award of damages for the land. See, also, Ark. State Hwy. Comm'n v. Pearrow, 1 Ark.App. 289, 614 S.W.2d 695 (1981) (judgment reversed where expert who valued land at $6,400 per acre for commercial purposes also assigned value of $31,040 to condemnees' dwelling which did not contribute to commercial use of property). As we have determined that it was wrong to allow Westgate's appraiser to testify as to the value of the property including as a factor the cost of reproducing the pool facilities, the question becomes whether this error was prejudicial. Westgate contends that it was not, as the district's appraiser also used the reproduction cost method in arriving at the $190,259 value of the land taken, using comparable sales of commercial real estate. In the opinion of the district's appraiser, the highest and best use of the property was recreational. In order to determine the value of a portion of the land, the district's appraiser used comparison sales with land that had commercial, quasi-commercial, and industrial uses. To that value, and the value of the property in the floodway, he added the value of the improvements. It is true that normally, an objection to inadmissible evidence is waived if the objecting party later introduces similar evidence. State v. Lee, 247 Neb. 83, 525 N.W.2d 179 (1994). However, the rule does not apply where the objecting party introduces similar evidence solely for the purpose of meeting the adversary's case by explaining or rebutting the original evidence. Id. The evidence given by Westgate's appraiser and that given by the district's appraiser are not similar, notwithstanding that both used the reproduction cost method and comparable sales of commercial real estate to arrive at the value of the underlying land. The difference between the testimony of Westgate's appraiser and that of the district's appraiser is that while Westgate's appraiser valued the property as commercial and used comparison sales of other nearby commercial properties because of their similarities, the district's appraiser valued the property as recreational and used comparison sales of other properties, not because of their designation as commercial or industrial, but because of their similarities in location, zoning, and proximity to a floodway or flood plain. The district's appraiser testified: I searched for any kind of sales that had similarity with the subject; emphasizing again a property with portions in the floodway and floodway fringe and also zoning. I tried to find as many as I could that had zoning that was similar to the subject. In addition, the expert looked for sales that had similar locations and similar sizes. In contrast, Westgate's appraiser stated that we have to evaluate the property as unimproved as part of the assignment. As for the unimproved portion of the assignment, I looked for comparable unimproved sales. The unimproved highest and best use was as commercial, and the comparable sales were commercial and they were largely unimproved. Westgate's appraiser went on to state that he looked for properties that had land in the floodway, in the flood plain, and in a location for similar commercial or potential commercial uses. Of the six comparison sales Westgate's appraiser considered, all had as their highest and best use, in his opinion, commercial use. Indeed, he emphasized the commercial aspects of each comparable sale, i.e., their locations with respect to Interstate 80 or major thoroughfares and their visibility from Interstate 80, in discussing why each sale was a proper comparison. Proximity to and visibility from Interstate 80 do not seem to be factors that would affect the value of property that is used for a recreational use in the way it would affect property that has a commercial use. What is clearly lacking from the opinion of Westgate's appraiser is some foundation to show that the evidence of comparable sales of commercial real estate is material and relevant to the value of the recreational property, i.e., property with the pool facilities, so that they could be factored into the value of the whole estate. See Wear v. State Dept. of Roads, 215 Neb. 69, 337 N.W.2d 708 (1983) (generally, evidence as to sale of comparable property is admissible as evidence of market value, provided there is adequate foundation to show evidence is material and relevant; foundation evidence should show time of sale, similarity or dissimilarity of market conditions, circumstances surrounding sale, and other relevant factors affecting market conditions at time). It was therefore error to receive the testimony of Westgate's appraiser. While the amount of the verdict falls within the various value opinions, it is impossible to determine what effect the opinion of Westgate's appraiser had on the verdict. Where it does not appear from the record that evidence wrongfully admitted in a jury trial did not affect the result of the trial unfavorably to the party against whom it was admitted, its reception must be considered prejudicial error. Singles v. Union P. R.R. Co., 174 Neb. 816, 119 N.W.2d 680 (1963); Fries v. Goldsby, 163 Neb. 424, 80 N.W.2d 171 (1956); Lane v. Burt County Rural Public Power Dist., 163 Neb. 1, 77 N.W.2d 773 (1956). Thus, the district was unfairly prejudiced by the opinion of Westgate's appraiser based on both the value of the land as commercial real estate and the value of the pool facility.