Denver Urban Renewal Authority v. Berglund-Cherne Co.

• Decision Date: 06 September 1977
• Docket Number: BERGLUND-CHERNE,No. C-959,C-959
• Citation: 193 Colo. 562,568 P.2d 478
• Parties: DENVER URBAN RENEWAL AUTHORITY, a body corporate and politic of the State of Colorado, Petitioner, v.COMPANY, a Colorado Corporation, Respondent.
• Court: Colorado Supreme Court

Page 478

568 P.2d 478

193 Colo. 562

DENVER URBAN RENEWAL AUTHORITY, a body corporate and politic of the State of Colorado, Petitioner, v. BERGLUND-CHERNE COMPANY, a Colorado Corporation, Respondent.

No. C-959.

Supreme Court of Colorado, En Banc.

Sept. 6, 1977.

Rehearing Denied Sept. 26, 1977.

John H. Williamson, Denver, for petitioner.

Dawson, Nagel, Sherman & Howard, Raymond J. Turner, Denver, for respondent.

Gorsuch, Kirgis, Campbell, Walker & Grover, Joseph M. Montano, Denver, for The American Institute of Real Estate Appraisers, Colorado Chapter No. 22 and the Society of Real Estate Appraisers, Denver Chapter No. 9, amicus curiae.

ERICKSON, Justice.

The Denver Urban Renewal Authority (DURA) commenced an eminent domain proceeding to condemn two parcels of real property owned by Berglund-Cherne Co. (property owner). The property which is the subject of this condemnation proceeding is located at 8th and Curtis Streets in the City of Denver and is within the Auraria Urban Renewal Project. Trial of the issues was before a commission. The commission filed a certificate of ascertainment and assessment which set the total value of the parcels at $263,800. The award of $245,800 for the larger of the two parcels was appealed by DURA to the court of appeals. The Court of appeals affirmed the award and sustained the commission's rulings on the admissibility of certain evidence. Denver Urban Renewal Authority v. Berglund-Cherne Co., Colo.App., 553 P.2d 99 (1976). We granted certiorari and now affirm the court of appeals.

The three issues DURA raises relate to testimony as to the value of the condemned property and are:

(1) Whether the capitalization of income approach may be used to determine the value of owner-occupied property in eminent domain proceedings.

(2) Whether an expert witness can render an opinion based upon hearsay information as to income from a lease.

(3) Whether a property owner, who is not an expert witness, may testify as to his opinion of the accrued depreciation when expressing an opinion of the value of his property.

We answer the questions in the affirmative.

I.

In arriving at an opinion as to value, real estate appraisers traditionally utilize three approaches:

(1) The market data or comparable sales method.

(2) The cost of construction or reproduction costs less depreciation method.

(3) The capitalization of income method.

The court of appeals in its opinion implies that the capitalization of income approach is inappropriate and inadmissible when owner-occupied property is the subject of eminent domain. In our view, the income approach is admissible and income from a lease may be utilized by an owner to support his opinion as to value. Opinions as to the value of real property, whether based upon the comparable sales approach, the capitalization or income approach, or the reproduction costs less depreciation approach, all are intended to provide an owner or an expert with a method of arriving at the fair, actual cash market value of the property to be condemned. Market data or the comparable sales approach generally provides the best evidence of value. United States v. 3,698.63 Acres of Land, 416 F.2d 65 (8th Cir. 1969). The capitalization of income approach is utilized by appraisers to formulate an opinion as to value which reflects the net income generated by the property during the remainder of its productive life.

The economic rent which the property will command in the open market less deductions for normal operating expenses equals net operating income. To arrive at the fair market value of the property, the net operating income is then capitalized at a rate of return which is anticipated for similar properties.

Many factors enter into the weight which is to be given the income approach: inflation, the prime interest rate, the availability of similar property for rental purposes, as well as the cost of operating and maintaining similar property for rental purposes.

By its very nature, the capitalization of income approach depends upon the expert employing an estimate not only as to rental value, but also as to expenses and as to the rate of return on such an investment over a long period of time.

We recognized the validity of an opinion based on the income approach in Denver Urban Renewal Authority v. Cook, 186 Colo. 182, 526 P.2d 652 (1974). The lack of comparable sales to support a market data approach made it necessary in the Cook case to consider the capitalization of income as a basis for supporting the expert's opinion. While we are aware that some jurisdictions limit the income approach to such situations, United States v. Certain Interests in Property in Cumberland County, State of North Carolina, 185 F.Supp. 555 (E.D.N.C.1960), aff'd, 296 F.2d 264 (4th Cir. 1961); State v. O'Neal, 150 So.2d 608 (Ct.App.La.1963), we believe the better rule is to permit its use even if other methods of appraisal are available. United States v. 1.16 Acres, More or Less in City of Stamford, County of Fairfield, State of Connecticut, 300 F.Supp. 1021 (D.Conn.1969); City of Baltimore v. Concord Baptist Church, Inc., 257 Md. 132, 262 A.2d 755 (1970); Salt Lake County v. Kazura, 22 Utah 2d 313, 452 P.2d 869 (1969); 5 Nichols on Eminent Domain, § 19.23, p. 19-34 (Rev. 3d ed. 1975).

The approach which we have elected to follow takes into account the practice followed by appraisers in preparing an opinion as to value. Appraisers do not adopt an isolated approach to reach an opinion as to value, but attempt to utilize all three approaches to test the validity of their conclusion as to the fair and actual cash market value of the property to be condemned. Opinion evidence as to value requires that the unique and different characteristics of every individual piece of property be analyzed for its comparability to other property that bears comparable characteristics. Factual circumstances may cause one approach to valuation to be more appropriate than another. Rarely are two pieces of real estate identical, and usually each parcel of real property has advantages and disadvantages which are not possessed by another. No purpose is served by limiting testimony to one approach or to the most appropriate method of attaining an opinion as to value. Recognition should be given to all relevant factors which tend to provide a means for arriving at a fair evaluation.

The trier of fact has the duty to weigh the opinion and judge the credibility of an expert witness on value to determine which of the three approaches is most indicative of the actual market value of the property to be condemned.

In Cook, we considered two methods of calculating economic rent in considering the expert's opinion as to the value under the income approach. We permitted an expert witness in Cook to express an opinion as to economic rent based upon use of the comparable rental approach. However, in Cook, we disapproved the calculation of rental value by utilizing a percentage of gross sales to arrive at value, because such an approach fell within the business profit rule and could not be a determinant in reaching rental value.

The business profit rule, long followed in Colorado, requires the exclusion of business profits generated by an enterprise on the property. The foundation for the rule is that (1) the business itself is not being condemned and can be relocated, and (2) business profits are more a function of the entrepreneurial skills of management than of the value of the land. Auraria Businessmen Against Confiscation, Inc. v. Denver Urban Renewal Authority, 183 Colo. 441, 517 P.2d 845 (1974); City and County of Denver v. Hinsey, 177 Colo. 178, 493 P.2d 348 (1972); 5 Nichols on Eminent Domain, § 19.3(1), p. 19-48.1 (Rev. 3d ed. 1975). Under the business profit rule, evidence of the character and volume of business conducted on the premises is admissible only for the purpose of showing a use to which the land could be put. Denver v. Hinsey, supra; Denver Urban Renewal Authority v. Cook, supra; City and County of Denver v. Quick, 108 Colo. 111, 113 P.2d 999 (1941).

But a crucial distinction must be made between "profits derived from a business conducted on the premises" and "profits derived from the land itself". Only the first is inadmissible under the rule. This court has previously held that evidence of farm and rental income is admissible as "profit derived from the land itself". Denver Urban Renewal Authority v. Cook, supra; Montgomery Ward & Co., Inc. v. City of Sterling, 185 Colo. 238, 523 P.2d 465 (1974); Denver v. Quick, supra; Farmers' Res. & Irr. Co. v. Cooper, 54 Colo. 402, 130 P. 1004 (1913). We hold that the fair economic rental value of commercial property is also evidence of "profit derived from the land itself" and is therefore admissible as a determinant of value in conjunction with the income approach. 1 Orgel, Valuation Under the Law of Eminent Domain, § 180, p. 704 (2d ed. 1953).

II.

DURA contends that the court of appeals erred in ruling that its expert witness could not testify to an opinion based upon hearsay information as...