Court Opinion

ID: 9552319
Source: CourtListenerOpinion
Date Created: 2023-08-07 19:08:41.315589+00
Date Added: 2024-06-11T15:26:07.519396
License: Public Domain

Schroeder, J.,
dissenting: The decision of the court on the issue here presented does little more than attribute incompetence to thé jurors who served at the trial. In my opinion this is unwarranted.
Counsel for the appellant conceded in the trial court the use of gross receipts in arriving at a rental figure to ascertain the fair market value of a piece of property by the income approach was proper. He stated:
“I have no objection to the appraisers learning of that in the course of their investigation and taking it into consideration. My objection is putting it directly in evidence before the jury.”
In substance, the court says to permit a witness to testify and give his expert opinion based upon certain facts readily provable is proper, but the facts upon which the opinion is based must be barred from the record.
The expert in arriving at his opinion on property valuation by using the income approach must ascertain the rental value of the property by taking into account the volume of business which experience has shown the particular piece of property is capable of producing. Undoubtedly, should the expert witness attempt to render such an opinion without the evidence of sales upon which it is based, an objection could be made that no proper foundation had been established for the opinion. Thus, proof of sales, in this case gross receipts, actually made over a period of years was necessary to support an expert’s opinion upon which he calculated the economic rent attributable to the property condemned.
In the trial of this case the expert real estate witnesses who testified agreed there are three generally accepted approaches used by *697appraisers in valuing property: (1) The market data approach which is based upon what comparable properties had sold for; (2) the depreciated replacement cost or cost approach which is based upon what it would cost to acquire the land and to build equivalent improvements less depreciation; and (3) the income approach or capitalization of income which is based upon what the property is producing or is capable of producing in income.
The income approach was recognized by this court more than a decade ago in Eisenring v. Kansas Turnpike Authority, 183 Kan. 774, 332 P. 2d 539, and has subsequently been followed.
The special circumstances under which Eisenring was applicable were said to exist by at least one of the expert witnesses in this case — that the income approach is the best method of determining value when it is a known factor and there are no other comparable real estate sales, as here.
On appeal the court is concerned with the admission into evidence of gross sales figures which enabled the expert witnesses to compute the economic rent to which the subject premises would be entitled under the type of percentage leases shown by the evidence to be applicable to similar operations. Thus, the complaint of error assigned on appeal is limited solely to evidence tendered as a foundation for the income approach.
There was expert testimony in the trial that the income approach was used to a far greater extent in valuing commercial property because such properties are bought for their ability to produce a return.
Now the jury heard all the testimony including that on direct and cross-examination, and was well apprised of the facts and the extent to which the gross income figures were used in valuing the property here in question. In my opinion the jury was competent to weigh such evidence, sift out the chaff and give credence where it was deserved. It is the function of opposing counsel on cross-examination of the expert witness to bring out all relevant facts to assist the jury in this determination. (See Cline v. Kansas Gas & Electric Company, 182 Kan. 155, 159, 318 P. 2d 1000, dissenting opinion.)
Under K. S. A. 26-508 (effective January 1, 1964) an appeal taken from an award in the condemnation action “shall be docketed as a ■civil action [in the district court] and tried as any other civil action.” (Now K. S. A. 1970 Supp. 26-508.)
*698Our present code of civil procedure also became effective January 1, 1964. It incorporated Article 4, which is a uniform code of evidence. As such it is applicable to the trial of condemnation actions.
Under K. S. A. 60-407, all evidence is admissible if it is relevant to the issue being investigated, but where a party may be prejudiced by the admission of evidence, the trial judge may in his discretion exclude it, if he finds that its probative value is substantially outweighed by the risk that its admission will unfairly and harmfully surprise a party who has not had reasonable opportunity to anticipate that such evidence would be offered. (K. S. A. 60-445; and State v. Hinton, 206 Kan. 500, 479 P. 2d 910.)
Clearly, on the record here presented, there was no surprise to the appellant because his counsel informed the jury in his opening statement that the landowner was "going to show the amount of business." At any rate, the trial judge in the exercise of his power of discretion admitted the evidence, and there is no showing tire trial judge abused the exercise of his power of discretion in admitting the evidence.
Resort to condemnation cases prior to January 1, 1964, concerning the evidence admissible in the trial of condemnation actions is fraught with danger. For example, this court recognized it to be proper for the landowner in the trial of a condemnation action to examine his own expert valuation witnesses on direct examination concerning similar sales to disclose their knowledge and bolster their opinion. (Ridglea, Inc. v. Unified School District, 206 Kan. 111, 476 P. 2d 601.) Under the old rules, such examination of the landowner’s expert witnesses was highly improper. It was only upon the cross-examination of such expert witnesses, prior to the new code of civil procedure, that similar sales could be brought into evidence in an effort to test the credibility of the value expert.
In my opinion the court fails to recognize our new code of evidence applicable in the trial of condemnation actions, and is confusing the condemnation law in this state by resorting to old concepts. Cases from other jurisdictions relied upon to bolster the court’s opinion fall in this category. (Kansas is one of the first states in the union to adopt the uniform code of evidence.)
The court tends to treat the gross income figures used by the appellant in the trial of this action as novel. It is common knowledge that the rental value of many leases on commercial properties, particularly in shopping centers, is based in substantial part upon a fair percentage of the gross receipts.
*699The use of percentage leases and capitalization of the rental derived therefrom to determine the fair market value of commercial properties is neither new, novel nor theoretical, as stated in Percentage Leases, The Basis of Equality Between Lessor and Lessee (11th Ed. 1967, published by the Commercial and Investment Division of the National Institute of Real Estate Brokers of the National Association of Real Estate Boards):
“During the last 30 years, almost every important lease of retail business property has contained a provision for percentage rental. It has proved to be a fair and equitable method of effecting a satisfactory rental contract for both parties. To estimate fair market rental value of commercial real estate, it is necessary to determine its productive value, the income that it is capable of producing. Its fair rental value is the amount of rent that users of the property can be expected to pay. What a user can pay is generally based, like all other operating expenses of any business, upon the reasonable percentage of the volume of business that a lessee of the property can afford.
“This is a standard basis, now widely applied, used by Boards of Assessors and some of the Courts, to determine the fair market value of commercial properties.” (p. 11.) (Emphasis added.)
In The Appraisal of Real Estate (4th Ed. 1964, published by the American Institute of Real Estate Appraisers of the National Association of Real Estate Boards), it is stated:
“It should now be apparent that the capitalized income method is actually the direct method of estimating value and that the accrued depreciation estimate in the cost approach is its by-product. The income approach contemplates that deterioration and obsolescence operate to reduce either or both the quantity and the duration of the net income which the property can produce. Hence, the influence of physical, functional, and economic depreciation on value is reflected in the income-stream estimate. Under the income approach, therefore, the influence of depreciation — existing or anticipated — is provided for in the process of estimating the quality, amount, and probable duration of the income and, consequently, property value.” (p. 208.)
The subject is dealt with extensively in McMichael & O’Keefe, Leases, Percentage, Short and Long Term (5th Ed. 1959). In this connection see, also, Garvey Grain, Inc. v. MacDonald, 203 Kan. 1, 15, 453 P. 2d 59, both court and dissenting opinions.
Even assuming the trial court erred in admitting evidence of the gross income the property here in question was capable of producing annually, there were three well-qualified real estate appraisers who testified as to the value of the property based on the valuation of the land arrived at by the market data, or sales of comparable properties, approach and the valuation of the improvements based on the cost of replacement less depreciation approach. *700By this approach and in accordance with K. S. A. 26-513 (c), the difference between the value of the entire property immediately before the taking and the valuation of that portion of the tract remaining immediately after the taking (this being the total damages to the landowner) was testified to by Scott Stanley as being $50,000; by Rex Vickers as being $54,623; and by Kenneth Martin as being $57,068. There was no objection to this evidence and no contention is made on appeal that such evidence was incompetent for any reason. The jury’s verdict of $48,000, on which judgment was entered, was well within the range of value testimony established by these expert witnesses. (Kansas State Highway Commission v. Roepke, 200 Kan. 660, 438 P. 2d 122.) Therefore, the admission of the evidence of gross sales to form a foundation for valuation by the income approach could, at best, amount only to a technical error or irregularity which did not prejudicially affect the substantial rights of the appellant, and should be disregarded pursuant to K. S. A. 60-2105 and K. S. A. 60-261.
It is respectfully submitted the judgment of the lower court should be affirmed.