Opinion ID: 1581660
Heading Depth: 2
Heading Rank: 1

Heading: Business Value Testimony in Eminent Domain Proceedings

Text: What this issue involves is just compensation. The Iowa Constitution requires the state to provide just compensation to the owner of land affected by a taking. Private property shall not be taken for public use without just compensation first being made, or secured to be made to the owner thereof, as soon as the damages shall be assessed by a jury.... Iowa Const. art. I, § 18. However, what constitutes just compensation has historically been an elusive question. 26 Am.Jur.2d Eminent Domain § 294, at 705 (1996). The general rule states: A court may consider all factors indicative of the value of the property, and which would have been present in the minds of a willing buyer and a willing seller, unless the considerations advanced are too speculative or remote, and thus not a necessary, natural, or proximate result of the taking. Id. § 297, at 707-08 (footnotes omitted). This rule has been restated in our cases. A jury may, of course, consider ... the advantages the land possesses which a seller would press to the attention of a buyer. Heins v. Iowa State Highway Comm'n, 185 N.W.2d 804, 807 (Iowa 1971). When the entire property is taken, our general rule is that the measure of damage is the reasonable market value at the time of condemnation[,] ... [or] what a willing buyer would pay in cash to a willing seller.... Aladdin, Inc. v. Black Hawk County, 562 N.W.2d 608, 611-12 (Iowa 1997) (citation omitted). However, our cases also place a limitation on what type of evidence a jury may hear when making its just compensation determination. Where condemnation of a fee interest is sought, generally evidence of business profits is inadmissible as an [independent] element of damage or as relevant in determining the value of the land because it is too uncertain and depends upon too many contingencies. ... The fundamental reason for the exclusion of evidence of profits lies in the rule of substantive law that the condemnor takes only the real property, not the business located thereon. The courts have generally stated that business profits are the result of so many factors and that their repercussion on the market is so remote, that the evidence is more likely to mislead than to aid in the determination of market value. Twin-State Eng'g & Chem. Co. v. Iowa State Highway Comm'n, 197 N.W.2d 575, 578 (Iowa 1972) (citations omitted). The profits of a business are too uncertain, and depend upon too many contingencies to safely be accepted as any evidence of the [useable] value of the property upon which the business is carried on. Wilson v. Iowa State Highway Comm'n, 249 Iowa 994, 1006, 90 N.W.2d 161, 169 (1958) (citation omitted); accord Comstock v. Iowa State Highway Comm'n, 254 Iowa 1301, 1308, 121 N.W.2d 205, 209 (1963) (determining that [a]nticipated profit has too many variables including managerial skill to be the measure of damages). Several Iowa cases have recognized that business value may be a relevant factor when the property condemned is a leasehold. See Twin-State Eng'g, 197 N.W.2d at 582. [W]e conclude such evidence as to the nature and prosperity of plaintiff's business was a proper item to be considered along with all facts, circumstances and elements disclosed by the evidence as tending to establish the reasonable value of the lease at the time it was taken. The evidence tended to be descriptive of the injury resulting to the leasehold by condemnation. Id. (emphasis added). When the state condemns the fee, however, our court has clearly recognized: This court has, following the traditional rule, not allowed evidence concerning profits when only the fee is being condemned. City of Des Moines v. McCune, 487 N.W.2d 83, 84 (Iowa 1992). In McCune, we upheld the district court's rejection of evidence as to the going-concern value of a business on land condemned by the city. Id. In another case, we held that the district court's failure to sustain an objection made to testimony of profits and revenue of a business on the condemned property was an abuse of discretion. Wilson, 249 Iowa at 1006-07, 90 N.W.2d at 169. [T]he profits of a business conducted upon land taken for the public use is not admissible in proceedings for the determination of compensation which the owner of the land shall receive. Id. at 1006, 90 N.W.2d at 169 (emphasis added) (citation omitted). The only exceptions we have recognized to this rule are leaseholds and land used for agricultural purposes. McCune, 487 N.W.2d at 84; Wilson, 249 Iowa at 1006-07, 90 N.W.2d at 169. When the entire fee is condemned, the usual guide to the fair market value of the property is comparable sales figures. See Crozier v. Iowa-Ill. Gas & Elec. Co., 165 N.W.2d 833, 835 (Iowa 1969). This approach was utilized by the DOT's expert to arrive at his valuation of $182,500. Another approach that is employed is the cost approach, which looks at how much it would cost to build an identical building on identical land, depreciated by age. This approach was partially used by Kurth's expert, Winkel, who valued the land and building at $285,000. Kurth's second expert, Harden, then added that figure to a figure he arrived at using the capitalization of earnings approach. Kurth claims this method did not unduly consider business profits or the value of the business. We find that it did. Harden explained that he was hired by Kurth to perform a business valuation. He informed the jury that he was valuing the business and the business property, which included tangibles like furniture and equipment and also intangibles like good will, the business name, and location. Specifically in this case, Harden was trying to determine how much the Wharf, operating as a restaurant, was worth. His method was meant to provide a figure to inform a buyer what he could expect to make if he was operating a similar business on the property. He arrived at this figure by looking at the income stream of the Wharf from 1994 through 1997. He admitted that he added estimated profits for the year of 1997 to his equation, which were not accounted for because the Wharf had to close earlier in the season than normal. He referred to the profits realized in the four years adjusted by the risk of business and other business assets as the normalized net income. Once this figure was determined, he stated the next step was to anticipate what my future income from this property would be. Harden used the normalized past income to predict the normalized future income. This number was then capitalized by a flat rate resulting in a figure of $239,952. Harden characterized this as the commercial value of the property. On cross-examination, he admitted that his figure was partially based on past profits of the Wharf. When asked, And that value under your method of analysis is based on the profits of the Wharf.... Right? Harden replied, That's the way the capitalization of earnings method is used. You use expected future earnings. Certainly, evidence that the land is being used as a restaurant is highly relevant to the value of the land. See Olson v. United States, 292 U.S. 246, 256, 54 S.Ct. 704, 709, 78 L.Ed. 1236, 1245 (1934). However, specific dollar figures as to how much profit the Wharf had made, as well as specific dollar figures guessing what it could make in the future are far too speculative and may not be provided to a jury in a fee condemnation proceeding. See McCune, 487 N.W.2d at 84. Accordingly, this information was inadmissible. Although we recognize that the capitalization of earnings method is a reliable formula for determining the value of a business, it is not a valid method for assessing just compensation in fee condemnation cases. When inadmissible evidence is heard by the jury, the district court has abused its discretion. Whether this is grounds for a reversal depends upon our view of prejudice in these circumstances. In the context of eminent domain proceedings, we have said: [W]here error appears in the admission of testimony prejudice will be presumed unless the contrary affirmatively appears. Steensland v. Iowa-Ill. Gas & Elec. Co., 242 Iowa 534, 540, 47 N.W.2d 162, 165 (1951). There is no prejudice when, notwithstanding the illegal evidence, the competent evidence is such that the prevailing party is entitled to the verdict as a matter of law as being the only proper verdict that could be rendered. Id. at 541, 47 N.W.2d at 165-66. Because no figure for the real estate alone, untainted by business profits, exceeds $285,000, [1] the jury clearly was persuaded by Harden's business value figure and compensated for it in its $375,000 verdict. See Stom v. City of Council Bluffs, 189 N.W.2d 522, 530 (Iowa 1971); see also 27 Am.Jur.2d Eminent Domain § 676, at 216 (1996) ([T]he condemnation verdict or award cannot be higher than the highest estimate of the expert witnesses nor lower than the lowest.). As such, we cannot say that had this evidence been absent from trial, the jury would have arrived at the same verdict. [2]