City of Harligen v. Estate of Sharboneau

• Decision Date: 17 May 2001
• Docket Number: No. 99-1118,99-1118
• Citation: 48 S.W.3d 177
• Parties: (Tex. 2001) The City of Harlingen, a municipal corporation, Petitioner v. The Estate of David J. Sharboneau, deceased, et al., Respondents
• Court: Texas Supreme Court

Page 177

48 S.W.3d 177 (Tex. 2001)

The City of Harlingen, a municipal corporation, Petitioner v. The Estate of David J. Sharboneau, deceased, et al., Respondents

No. 99-1118

Supreme Court of Texas

Argued September 13, 2000

Decided May 17, 2001

On Petition for Review from the Court of Appeals for the Thirteenth District of Texas

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Chief Justice Phillips delivered the opinion of the Court, joined by Justice Hecht, Justice Owen, Justice Abbott, and Justice Jefferson.

The sole issue in this condemnation case is whether the condemnee's valuation evidence is admissible. The condemnor, the City of Harlingen, contends that the trial court erred in admitting testimony from the landowner's expert based on an appraisal method described as subdivision development analysis. Under this approach, the witness estimated the land's gross value as if it were subdivided for residential development, then discounted this value for the estimated costs of development. Based on the expert's testimony, the trial court, sitting without a jury, awarded the landowner $232,000 for the condemned land. The court of appeals affirmed. 1 S.W.3d 282. Because we conclude that the trial court erred in admitting this evidence, we reverse the judgment of the court of appeals and remand the case to the trial court for further proceedings.

I.

Between 1972 and 1979, Lois Sharboneau, individually and as representative of her deceased husband's estate, purchased five adjoining parcels of land that formed a 9.85 acre tract. In 1996, the City condemned the entire tract to expand an adjacent city park. When the condemnation occurred, the tract was zoned as open land. The special commissioners, appointed to assess damages under Texas Property Code section 21.014, determined the property to be worth $98,500. Mrs. Sharboneau, dissatisfied with this award, appealed to the statutory county court.

Before trial, the parties stipulated that the highest and best use for the condemned property was as a residential subdivision. Mrs. Sharboneau called one expert witness, Joseph Patterson, a licensed, professional real estate appraiser with more than twenty years of experience, mostly in the Rio Grande Valley area. In his testimony at trial and in an appraisal report admitted into evidence, Patterson used the subdivision development method to appraise the condemned land. This method values an undeveloped tract by calculating what a developer could expect to realize from sales of individual lots, taking into account the costs of development and discounting future revenues to present value.

Patterson first determined how many lots could be carved out of the Sharboneau land. Based on lot sizes in surrounding neighborhoods, Patterson assumed that Mrs. Sharboneau's tract could be divided into 44 lots of 7,700 square feet each. He then estimated the gross revenues for sales of these theoretical lots. Patterson reviewed recent sales of three comparable, unimproved residential lots in one nearby subdivision, which had sold for an average of $2.17 per square foot. Based on this figure, he calculated an initial sales price of $16,709 per lot on the prospective Sharboneau "subdivision." Estimating that it would take three years to sell all the lots, and including an estimated 5 percent price increase for lots sold in both the second and third years of sale, Patterson determined that the total gross sales for lots on the Sharboneau land would be $772,727.

After calculating this figure, Patterson next subtracted ongoing sale and development expenses to reach the developer's expected net sales proceeds. He itemized ongoing expenses as general overhead and sales expenses (which Patterson estimated at four percent of annual gross sales), closing costs and attorney's fees (one percent), and advertising costs (one percent). Patterson subtracted as an ongoing expense the developer's liability for property taxes, which would decrease each year as individual buyers took ownership of the lots. Patterson then subtracted an "entrepreneurial/coordination expense," perhaps better described as the developer's profit. Based on Patterson's experience with area developers, he estimated the normal profit at twenty-five percent of gross annual sales. Altogether, he calculated that the total of these ongoing expenses for the three-year absorption period would be $266,347, leaving total net sales proceeds of $508,380 for a developer of the property.

Patterson next applied a discount rate to the annual net sales proceeds to reflect the interest rate necessary to attract debt and equity capital for the development. After applying this discount rate, Patterson determined that the present value of the net sales proceeds was $413,770. But before arriving at a final estimate of the value of Mrs. Sharboneau's land, Patterson also subtracted the developer's costs for making the forty-four lots suitable for new home construction. Without offering any details about the nature of this work, Patterson estimated total costs of $123,150 for the entire tract. It is not clear whether he considered this cost an initial expense or a discounted amount for several years of work. With these costs subtracted, Patterson appraised the tract's value as $290,620, or about $29,000 per acre, and thus offered this figure as fair market value. On cross-examination, however, Patterson admitted that he had never heard of undeveloped land in Harlingen being sold for such a high amount. The trial court overruled several timely objections to the admissibility of the subdivision development evidence.¹

The City also offered an expert witness, Jesse Watson, a professional appraiser from Harlingen with additional experience in real estate sales. Watson used only the comparable sales approach to determine the land's value. Watson identified three comparable sales of vacant land in Harlingen. The first was an eight-acre tract in an industrial area about 1.5 miles from the Sharboneau site, which had sold for $6,000 per acre eight months before the appraisal. The second site was a five-acre tract three miles away, located next to an older residential area, which had sold for $7,000 per acre thirteen months before the appraisal. This site was suitable for residential development, but was somewhat inferior in location to the Sharboneau land. The third site, a seventeen-acre tract only a half mile away, was located near an existing residential area. At the time of trial, it was being developed as a residential subdivision. This tract had been sold eighteen months before the appraisal for $10,500 per acre. After making adjustments to the three comparable properties to compensate for their varying characteristics, Watson concluded that the Sharboneau land would sell for between $9100 and $10,500 per acre. Without further explanation, he gave $10,000 per acre as the reasonable sales price, thus giving the Sharboneau property a value of $98,500.

The court concluded that the property's value should be based on its highest and best use. After finding that the City's comparable sales appraisal failed to provide evidence of the property's value at its highest and best use, while Mrs. Sharboneau's subdivision development appraisal did so, the court awarded Mrs. Sharboneau $232,000 as just compensation for the condemned property.

II.

Both the United States and Texas Constitutions require governments to compensate landowners for takings of their property for public use. U.S. Const. amend. V (requiring "just compensation"); Tex. Const. art. 1, § 17 ("adequate compensation"). When a government condemns real property, the normal measure of damages is the land's market value. Tex. Prop. Code Ann. § 21.042(b); United States v. 50 Acres of Land, 469 U.S. 24, 29 (1984); Brunson v. State, 444 S.W.2d 598, 602 (Tex. 1969). Thus, the central damage issue in the typical condemnation case is how to measure the market value of the condemned property.

Market value is "the price the property will bring when offered for sale by one who desires to sell, but is not obliged to sell, and is bought by one who desires to buy, but is under no necessity of buying." State v. Carpenter, 89 S.W.2d 979, 979, modifying 89 S.W.2d 194, 202 (Tex. 1936); accord Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10 (1984). The three traditional approaches to determining market value are the comparable sales method, the cost method, and the income method. Religious of the Sacred Heart v. City of Houston, 836 S.W.2d 606, 615-17 & n.14 (Tex. 1992). Mrs. Sharboneau asks us to join several other states in recognizing the subdivision development method as a fourth approach.²

Courts have long favored the comparable sales approach when determining the market value of real property. See, e.g., Bauer v. Lavaca-Navidad River Auth., 704 S.W.2d 107, 110 (Tex. App.-Corpus Christi 1985, writ ref'd n.r.e); County of Bexar v. Cooper, 351 S.W.2d 956, 958 (Tex. Civ. App.-San Antonio 1961, no writ); accord United States v. 8.41 Acres of Land, 680 F.2d 388, 395 (5th Cir. 1982). If the goal of an appraisal is to ascertain market value, then logically there can be no better guide than the prices that willing buyers and sellers actually negotiate in the relevant market. Under a comparable sales analysis, the appraiser finds data for sales of similar property, then makes upward or downward adjustments to these sales prices based on differences in the subject property.

Comparable sales must be voluntary, and should take place near in time to the condemnation, occur in the vicinity of the condemned property, and involve land with similar characteristics. U.S. v. 33.90 Acres of Land, 709 F.2d 1012, 1014 (5th Cir. 1983); Southwestern Bell Tel. Co. v. Ramsey, 542 S.W.2d 466, 476 (Tex. Civ. App.-Tyler 1976, writ ref'd n.r.e.). Comparable sales need not be in the immediate vicinity of the subject land, so long as they meet the test of...