City of St. Paul v. Rein Recreation, Inc., 50266.

• Decision Date: 22 August 1980
• Docket Number: No. 50266.,50266.
• Parties: CITY OF ST. PAUL, Petitioner, Appellant, v. REIN RECREATION, INC., formerly Watergate Marina, Inc., Respondent.
• Court: Minnesota Supreme Court

298 N.W.2d 46 (1980)

CITY OF ST. PAUL, Petitioner, Appellant, v. REIN RECREATION, INC., formerly Watergate Marina, Inc., Respondent.

No. 50266.

Supreme Court of Minnesota.

August 22, 1980.

Edward P. Starr, City Atty., and Jerome J. Segal, Asst. City Atty., St. Paul, for appellant.

Larkin, Hoffman, Daly & Lindgren, James P. Larkin, Christopher J. Dietzen, Wendell R. Anderson, and James Miley, Minneapolis, for respondent.

Heard, considered, and decided by the court en banc.

OTIS, Justice.

This appeal involves a controversy between the City of St. Paul (hereafter the City) and Rein Recreation, Inc., formerly Watergate Marina, Inc., (hereafter Rein) concerning compensation for a condemned parcel of real estate along the Mississippi River in southwest St. Paul. The jury awarded $2,250,000 for the property. The City appealed contending primarily that the admission of certain evidence was error. We affirm.

In August 1969, Clayton G. Rein, Rein's sole shareholder, president, and chairman of the board of directors, along with a partner, acquired a 24.8 acre parcel of land on the Mississippi River near Davern Street in St. Paul. The land contains two river harbors and lies between Crosby Park and Hidden Falls. In 1970 the partnership also obtained a forty-year lease from the St. Paul Port Authority of an adjoining five-acre tract. Clayton Rein, a real estate developer since the 1940's, procured the property as part of a plan for building a luxury apartment complex consisting of two twenty-four story, 234-unit, high-rise apartment buildings, a marina, and an amenities building between the towers that was to include a restaurant, private dining rooms, a swimming pool, sauna, and other facilities. St. Paul city officials knew of the planned development since 1969.

The partnership was dissolved in 1971 when Clayton Rein bought out his partner's interest and formed Watergate Marina, Inc., later renamed Rein Recreation, Inc., which became the owner of the property. Another corporation, C. G. Rein Co., served as general contractor for the development.

Rein proceeded to plan the development after a 1969 market study indicated the existence of an immediate demand for 270 apartment units plus an additional future demand. The study was corroborated in 1976.

After acquiring the property, Rein obtained height clearance for the project from the Federal Aviation Agency. Under a maintenance clause from the Army Corps of Engineers, Rein was allowed to dredge the two river harbors pursuant to two existing permits. Dredged material was deposited as fill on the building sites.

On June 1, 1972, Rein received a special use permit allowing the construction of a large parking lot for use in conjunction with the other facilities. On December 29, 1972, a building permit was issued for one of the towers, the amenities building, marina, and parking lot. In 1973, under this permit, 800 piles were driven to a depth of ninety feet. These pilings were to be used solely for the first tower and amenities building. Some buildings and other facilities on the property were demolished or moved. In 1974 Rein upgraded the marina by building new concrete boat slips and a gas dock. During this period the marina was operated at a loss as a separate business. Rein also received a Pollution Control Agency permit for the discharge of air conditioner water and a Department of Natural Resources permit for a well.

Rein first became aware of opposition to the project in 1972. The land involved is located near the confluence of the Mississippi and Minnesota Rivers, and opponents were concerned with the effect of the towers on the riverview. Possible alterations in the project were explored but were discarded as unfeasible.

In 1973 the legislature enacted the Critical Areas Act, Minn.Stat. ch. 116G (1978), which limits certain types of development thought to adversely affect the environment in designated areas. Later Minn.Reg. MEQC 51-57 (1974) were adopted to implement the act. The Metropolitan Council and the Minnesota Environmental Quality Board shortly thereafter recommended that the Mississippi River Corridor, which includes the land at issue, be declared a critical area. Legal notice of public hearings regarding the designation was issued on April 25, 1975. On October 18, 1976, Executive Order 130 (amended on November 5, 1976, by Executive Order 130A), 1 State Reg. 768, 796 (1976), designated the corridor as a critical area. Land in the corridor thereby became subject to restrictions prohibiting certain development, including high-rise buildings.

In August 1974 Rein was contacted by city officials who indicated that the City was interested in acquiring the property. Two months later Rein told the City that he was willing to halt work on the project if the City was serious. There was little further communication between the parties.

In March 1975 the St. Paul city attorney indicated that the building permit issued to Rein in 1972 had lapsed because one year had passed without work on the project. Rein sought and received a declaratory judgment holding that the permit remained valid.

The City formally began condemnation proceedings against the property in May 1976. Shortly thereafter a public purpose finding was made. The commissioners' report, filed on December 28, 1976, awarded $1,400,000 for the property — $1,350,000 for the land owned by Rein in fee and $50,000 for the leasehold. Because the commissioners felt that the Critical Areas Act likely would prevent construction of a second tower and, in any event, a prudent investor would not erect the second tower, they based their award on the potential construction of only one tower.

On August 15, 1977, Rein commenced a declaratory judgment action to determine whether the Critical Areas Act and regulations limited development of the property. The reason for fixing Rein's right to develop his property was that the market value in eminent domain must be determined with reference to permissible uses under applicable land use regulations.¹ See District of Columbia v. Lot 813 in Square 568, 232 F.Supp. 714, 717 (D.D.C. 1974), aff'd sub nom., Rubenstein v. District of Columbia, 346 F.2d 833 (D.C.Cir.1975); Note, The Admissibility of Zoning Ordinances as Evidence of Fair Market Value in Eminent Domain Proceedings, 12 Syracuse L.Rev. 352, 354 (1961).

The district court found that on the date of notice of the proposed Mississippi River Corridor critical area designation, Rein had obtained building permits for all structures save the second tower. Construction of the second tower had not started nor had Rein received any official authorization regarding that tower. Moreover, Rein had shown no expenditure of monies directly in furtherance of the second tower and the district court felt that the demand for this type of apartment and the vagaries of the money market make conjectural any predictions regarding the eventual construction of the second tower. The court concluded that Rein had a vested right to complete the project, except that the right did not extend to the second tower.

Before the ensuing condemnation trial commenced, the district court made several evidentiary rulings. Excluded was evidence of the owner's expectations and speculations, potential profits, and development costs incurred by the owner. Evidence was permitted concerning the owner's plan for development, building permits, and certain other development permits. During the course of the trial the court also admitted evidence of Rein's progress toward completing the development.

In addition, before trial the City conceded that a luxury, high-rise apartment complex was the highest and best use of the property.

At trial, William Muske, an expert called by Rein, estimated the value of the condemned property, including the leasehold, at $2,793,000. The leasehold portion was appraised at $105,000. In forming his opinion, Muske considered land records, applicable land use regulations, similar properties, as well as the land and improvements including pilings. The valuation also embodied a reclamation of certain architectural fees that Muske felt a buyer would include in the purchase price as expenditures toward the highest and best use. He did not, however, consider out-of-pocket development costs or potential profit. He opined that while the Critical Areas Act would limit the height of a second apartment building, it would not significantly affect the value of the property because a large number of low-rise units could be constructed in spite of the act.

Joseph Bettendorf, another Rein expert, valued the property at $2,640,000. His appraisal excludes Rein's out-of-pocket costs, but takes into account certain costs incurred through 1974 such as engineering, construction, piling, and architectural fees which Bettendorf felt would be taken into account by a willing buyer and seller in agreeing on a price for the property.

Thomas J. Delaney, the City's expert, valued the property at $950,000 based on a potential for 400 apartment units. This figure encompasses certain costs such as engineering studies and plans as well as the land and improvements. The appraisal represents Delaney's...