Land Clearance for Redevelopment Corp. v. Doernhoefer

• Decision Date: 10 May 1965
• Docket Number: No. 50693,No. 1,50693,1
• Citation: 389 S.W.2d 780
• Court: Missouri Supreme Court
• Parties: LAND CLEARANCE FOR REDEVELOPMENT CORP. v. Elmer G. DOERNHOEFER et al., In Re Apportionment Proceedings, A. & L. Dunn Mercantile and Loan Company, Lessee, Respondent, v. Jacob S. GOLLUB, Frieda Gollub, David Kirsch and Ethel Kirsch, Lessors, Appellants

Page 780

389 S.W.2d 780

LAND CLEARANCE FOR REDEVELOPMENT CORP. v. Elmer G. DOERNHOEFER et al., In Re Apportionment

Proceedings, A. & L. Dunn Mercantile and Loan

Company, Lessee, Respondent, v. Jacob S. GOLLUB, Frieda Gollub, David Kirsch and Ethel

Kirsch, Lessors, Appellants.

No. 50693.

Supreme Court of Missouri, Division No. 1.

May 10, 1965.

Armstrong, Teasdale, Roos, Kramer & Vaughan, Harry S. Kramer, Jr., William H. Webster, Fred Leicht, Jr., St. Louis, for respondent.

John Grossman, St. Louis, for defendants-appellants.

HOUSER, Commissioner.

This is one branch of proceedings brought by Land Clearance for Redevelopment Corporation against numerous property owners in St. Louis to condemn land for the Downtown Sports Stadium Urban Renewal Project. The owners of the fee, the lessee of a portion of the building involved, and the tax collector were named as defendants in the proceedings affecting Parcel 128, which consisted of a lot and 3-story business building located at the southeast corner of 6th and Pine Streets. Commissioners made one lump sum award of $190,000 as the value of the whole property without apportionment as between lessors, lessee and tax collector, all of whom claimed an interest in the property. No exceptions were filed. The award of $190,000 was paid into the registry of the court. The sum of $2,862 was allowed by the court and paid to the collector for real estate taxes due the city. This is a contest between the former owners of the fee, the lessors Jacob S. Gollub and David Kirsch and their wives, and the corporate lessee, A. & L. Dunn Mercantile & Loan Company, as to the proper apportionment as between them of the balance of $188,138. Tried to the court without a jury, judgment was rendered for lessee for $21,875. The former owners of the fee and their wives appeal, claiming that lessee is entitled to nothing, but if entitled to something the maximum allowable is $5,755. Accordingly, at least $16,120 is in dispute and we have jurisdiction. Art. V, Sec. 3, Mo.Const. 1945, V.A.M.S.; Sec. 477.040, V.A.M.S.

The lease agreement was entered into July 27, 1950 for a term of 20 years at $750 monthly rental for the first 5 years and $800 for the next 15 years, with an option of renewal in lessee for an additional 10 years at the same rent and under the same terms and conditions by giving 6 months' previous notice in writing of its intention to renew. At no time did lessee exercise its option to renew. Lessee occupied the first floor, balcony and basement of the building. Other tenants occupied portions of the second and third floors. Lessee paid $250 per year for steam heat; $100 per year for water. In connection with its occupancy of the premises lessee made improvements at a cost of approximately $60,000. The date of taking under the condemnation proceedings was March 11, 1963. At that time there remained unexpired approximately 7 1/2 years of the original 20-year term of the lease. After March 11, 1963 lessee continued to occupy the premises under arrangement with condemnor for temporary occupancy at $800 per month and finally moved from the premises on June 22, 1963.

Lessee's vice-president gave as his opinion that the value of the 7 1/2 years remaining of the original 20-year leasehold estate was $25,000 and that based upon 17 1/2 years the value was $50,000. Lessee produced two qualified appraisers who testified that the leasehold had a value of $40,000 and $35,000, respectively. Its first appraiser took into consideration the terms of the lease; the rental being paid for similar locations in the area; the length of time the lease had to run to expiration; the possible value of the privilege of renewal, which he valued at $1,000; the price being paid for similar type properties in the downtown area based on income; existing market conditions and future market trends. He testified that properties on the same side of 6th Street in the block north of the demised premises were commanding square foot rentals of $7.50, $5.40, $5 and $4.50, and that the fair rental value of the demised premises was $4.15 a square foot or $15,000 a year. He confirmed his $40,000 evaluation by capitalization of income and by separately computing the present day value of the reversionary interest. Lessee's second appraiser inspected the premises and familiarized himself with the terms of the lease. He was familiar with other comparable rental properties in the vicinity of 6th and Pine. He took into consideration the amount of money lessee spent improving the premises, which he said enhanced the value of the leasehold estate beyond the amount of the contract rental. His estimated value of $35,000 for the unexpired portion of the lease did not take into consideration the value of the option. While in his opinion the option had value, he did not assess its value.

Lessors produced two qualified appraisers. Their first appraiser stated that the economic rental of the property was $10,600 per year, or $3.03 per square foot--$1,000 per year more than the rent reserved in the lease. This $1,000 per annum he called a leasehold savings, or profit of the leasehold interest. He arrived at the figure $10,600 by considering the property, the terms of the lease, the length of the unexpired term, what other comparable properties in the vicinity were renting for, adjusted to location, and other relevant factors. He projected the $1,000 over a period of 7 1/2 years, using an 8% factor under the Inwood table of discount, which brought the amount down to a present cash value of $5,500, $5,475 to be exact, as the value of the unexpired portion of the lease. Projected over a 17 1/2 year period, which assumed that lessee exercised the option, he said the value would be $9,250. He testified that under the formula approved in City of St. Louis v. Senter Commission Co., 233 Mo.App. 804, 108 S.W.2d 1070, assuming an annual rental of the demised premises of $9,600 plus $4,375 received by lessors as rent from the 2nd and 3rd stories (the demised premises producing from 60 to 70% of the rentals), the unexpired portion of the leasehold would be without value; that there would be a negative value (that is, a value less than the amount of the rent). Lessors' second appraiser, having thoroughly inspected the property, in answer to a hypothetical question, was of the opinion that the economic rental value of the demised premises was $10,650 per year, or $3.00 a square foot. Applying discount values he arrived at a leasehold value of $5,750 for 7 1/2 years; $9,700 for 17 1/2 years. He also testified that the leasehold would have no value under the Senter case formula. He conceded that previously (at a time when the original lease term had 8 years to run) he had given an opinion in writing valuing lessee's interest at $19,610.59.

The trial court made findings of fact and conclusions of law; declared that the interests of landlord and tenant are to be determined from the evidence introduced showing the fair market value of the tenancy; that no arbitrary rule should be followed in arriving at such value; that the rule of the Senter case and of the prior case of McAllister v. Reel, 53 Mo.App. 81, aff. 59 Mo.App. 70, applied to this case, would result in an unconscionable division, falling short of the constitutional inhibition against the taking of private property for public use without just compensation. Relying upon City of St. Louis v. Brown, 155 Mo. 545, 56 S.W. 298; State of Mo. ex rel. State Highway Commission v. Douglass, Mo.App., 344 S.W.2d 281, and Edmund Realty Co. v. Walmer Bldg. Co., 8th Cir. (1941), 123 F.2d 54, as announcing the proper rule of apportionment, the court declared that the value of the leasehold should be determined from the testimony of qualified expert witnesses as that value which a buyer under no compulsion to purchase the tenancy would pay to a seller under no compulsion to sell, taking into consideration the period of the lease yet to run, including the unexercised right of renewal, the favorable and unfavorable factors of the leasehold estate, the location, type and construction of the building, the business of the tenant, comparable properties in similar neighborhoods, present market conditions and future market trends, and all other material factors that would enter into the determination of the reasonable market value of the property. The bonus value, sometimes referred to as the leasehold savings or profit, is the difference between the economic rental and the contract rental. The economic rental is the actual market value of the use and occupancy. In its memorandum opinion the court observed that lessors' witnesses fixed the economic rental at $10,600. The contract rental was $9,600 per year. The court fixed the bonus value at $1,250. Multipying $1,250 by 17 1/2 years the court arrived at the figure $21,875 as the value of the leasehold, and rendered judgment for lessee for that amount.

On this appeal lessors' first point (that judgment should have been entered for lessors awarding no damages) is based upon the proposition that the lease had no value. Lessors would adopt the formula applied in the Senter and McAllister cases, supra, the theory of which is that the lessee is entitled to nothing when the annual rent is more than 6% of the award over and above the obligations and burdens assumed by lessee. Taking the annual rental income from the entire building in 1956 as the basis of their computations, lessors figure that the $9,600 received from lessee constituted 73% of the annual rent from the whole building; that 73% of the $190,000 award is $138,700; that 6% of $138,700 is $8,322, and since lessee paid a rental of $9,600 per year it was paying an excess rental over the true value and therefore the unexpired term of the lease was without value. We agree with the trial court that it would be unconscionable to hold that the lease was without value on the basis of that formula. Such a result...