Court Opinion

ID: 9528375
Source: CourtListenerOpinion
Date Created: 2023-08-07 03:40:33.930694+00
Date Added: 2024-06-11T13:25:58.502005
License: Public Domain

Newton, J.,
dissenting.
I dissent. The primary question deals with the valuation by plaintiffs’ expert on the basis of gross income from room rentals. The gross was then compared with that of other motels sold throughout the midwest and prices paid.
As stated in Annotation, 7 A. L. R. 163, and in 27 Am. Jur. 2d, Eminent Domain, § 285, p. 83, and § 431, p. 338, American jurisdictions have held with remarkable unanimity that evidence of profits derived from a business conducted on property is too speculative, uncertain, and remote to be considered as a basis for ascertaining the market value of property taken in eminent domain proceedings. Nebraska adheres to this rule. See, Verzani v. State, 188 Neb. 162, 195 N. W. 2d 762, pertaining to a racetrack; Bickels v. State, 178 Neb. 825, 135 N. W. 2d 872, involving a grocery store. There is a generally recognized exception to this rule in regard to rental properties where the income is derived directly from *536the use of the real property as distinguished from a business. See, Annotation, 65 A. L. R. 455; 27 Am. Jur. 2d, Eminent Domain, § 433, p. 342. In the case of business income much depends on such factors as management, available capital, advertising, business connections, the times, etc. In 5 Nichols on Eminent Domain (3d Ed.), § 19.3 (1), it is stated in regard to commercial property: “If the owner of property uses it himself for commercial purposes, the amount of his profits from the business conducted upon the property depends so much upon the capital employed and the fortune, skill and good management with which the business is conducted, that it furnishes no test of the value of the property.” Nichols states in vol. 5, § 19.21, that: “Although existing rents have been held admissible as evidence of market value, they are not generally accepted as the sole criterion of market value. * * *
“In considering evidence of existing rents as an element in the determination of market value care must be taken to distinguish between gross rentals and net rentals. It is the latter which is ordinarily considered as an evidentiary factor in the valuation process.”
In view of the foregoing, to what extent is the gross income of a business, as distinguished from net income or profits, affected by similar considerations? In the present instance the gross income from the lounge and restaurant business were not considered. They were apparently thought to be either inadmissible or of no consequence. Plaintiffs’ expert witness figured valuation in the case of motels by multiplying gross room rentals by a factor of three to four. This factor was fixed by considering other elements such as condition of buildings, modernity, furnishings, rates, competition, location, type of business, and presence of a lounge and restaurant for service to customers, etc.
It must be conceded that the room rentals received by a motel are not essentially derived from the direct use or inherent value or productivity of the real estate. On *537the contrary, there are many other elements involved, such as the cleanliness, modernity, furnishings, rates, and general attractiveness of the rooms, the availability of restaurant, lounge, and convention facilities, and management, advertising, business connections referring business as in the case of Holiday and Ramada Inns, etc. In other words, many of the same factors which render net business income inadmissible are also present in regard to gross room rentals. There are not many cases dealing directly with this subject but the majority rule appears to be that such a method of determining valuation is not proper or admissible.
In regard to a radio station, it was held that gross income was inadmissible. See Johnson County Broadcasting Corp. v. Iowa State Highway Commission, 256 Iowa 1251, 130 N. W. 2d 707.
In Wilson v. Iowa State Highway Commission, 249 Iowa 994, 90 N. W. 2d 161, it was held that the gross income from a cafe was inadmissible to prove value.
In City of Chicago v. Central Nat. Bank in Chicago, 5 Ill. 2d 164, 125 N. E. 2d 94, it was held that evidence of gross receipts from a restaurant offered to show rental value of the condemned property was inadmissible to prove market value.
In City of Bonner Springs v. Coleman, 206 Kan. 689, 481 P. 2d 950, the admission of gross income from a farm machinery business for the purpose of estimating the value of the realty was held to be prejudicially erroneous.
In May v. Dewey, 201 Va. 621, 112 S. E. 2d 838, it was held that evidence of rent paid by a tenant to a landlord was admissible to prove the value of land, but evidence as to gross sales or percentage thereof from which rent was computed was not admissible.
In Commonwealth, Department of Highways v. Fister (Ky. App.), 373 S. W. 2d 720, it was held that gross income from a motel business was incompetent on the question of value.
*538In State ex rel. State Highway Commission v. Flynn (Mo. App.), 263 S. W. 2d 854, it was held that evidence of rental income from unfurnished apartments was admissible, but not rental income from furnished apartments which reflected not only value of the realty but also of personal property.
In Brinsfield v. Baltimore City, 236 Md. 66, 202 A. 2d 335, it was held that experts may arrive at value of property condemned by considering gross sales but they may not reveal amount of gross sales so considered, at least not on direct examination, nor may they arrive at fair market value by capitalizing gross sales. The case dealt with a retail store business.
' In Regents of University of Minnesota v. Irwin, 239 Minn. 42, 57 N. W. 2d 625, it was held in a condemnation case: “The rental value of furnished premises may be considered in determining reasonable market value, provided a proper deduction for value of furnishings is taken into consideration.”
In Commonwealth, Department of Highways v. York (Ky. App.), 390 S. W. 2d 190, it was held that an expert witness could not compute the value of a motel solely on the basis of income.
There are a few cases where formulas such as were here used have met with approval. See, Standard Oil Co. v. Commonwealth, Department of Highways (Ky. App.), 414 S. W. 2d 570; State ex rel. Department of Highways v. Bowles (Okla.), 472 P. 2d 896. They represent a minority view. A person buying a business, together with the property upon which it is located, is, of course, interested in the volume of business done and the gross and net profits. This definitely affects the price he will pay for such a business and property. The difficulty is that a business is not a compensable property and the amount paid for it cannot be separated from the value of the property. The use of formulas based upon either gross or net profits necessarily includes compensation for the business as well as the prop*539.erty. It appears that experts in the field of motel sales use the gross income formula heretofore mentioned. As heretofore pointed out, that formula deals not with the value of .the, real property but with the value of the business as a whole. I conclude that evidence of net profits from the motel business was properly excluded and that evidence of value based on á system of multiplying gross room- rents was erroneously admitted.
It is asserted that management has a minimal effect on the gross income of a motel. This is obviously incorrect. A manager who operates a motel in the highest motel tradition cannot be compared with a manager who operates a rundown, filthy motel with a lack of those desirable facilities found in the better operated institutions. It is apparent that the latter type of manager can take over a first-class motel and run it into the ground in a comparatively short period of time. Had we such a manager in the Y Motel who had permitted its business and consequently its gross income to deteriorate, plaintiffs’ expert would necessarily, under his formula, have had to reduce his estimate of the value of the property by thousands of dollars due solely to the type of business operation. Notwithstanding this factor, the essential value of the real estate would remain unchanged. This clearly demonstrates that using such a criterion, the value of the real estate and the value of the business cannot be separated. The majority opinion inadvertently recognizes this factor when it states: “To permit a person, even a qualified one, to appraise a tract of land on the basis of capitalization of income by an estimate of the operation of a typical business would be guesswork at every stage.”
Actually this is exactly what the plaintiffs seek to do, to capitalize the gross income of the motel.
Boslaugh, J., joins in this dissent.