Leathem Smith Lodge, Inc. v. State
| Citation | 94 Wis.2d 406,288 N.W.2d 808 |
| Decision Date | 08 April 1980 |
| Docket Number | No. 77-221,77-221 |
| Parties | LEATHEM SMITH LODGE, INC., et al., Condemnee-Respondents, v. STATE of Wisconsin, Condemnor-Appellant. |
| Court | United States State Supreme Court of Wisconsin |
Bronson C. LaFollette, Atty. Gen., and David T. Flanagan, Asst. Atty. Gen., for appellant.
Roger Pinkert and Pinkert, Smith, Koehn & Weir, Sturgeon Bay, for respondents.
This is an appeal by the State of Wisconsin from a judgment awarding damages to Leathem Smith Lodge for the condemnation of a portion of its property for highway purposes. The state's principal argument on appeal is that the trial court erroneously excluded the opinion evidence of its appraisers based upon the income and net profits of the Leathem Smith Lodge. We conclude that the trial court, utilizing appropriate standards, properly exercised its discretion in the exclusion of the evidence. We affirm.
The state's brief is replete with citations and authority tending to show that the trial court could have admitted income evidence as proof of the value of the property before and after taking. The state's argument misses the crucial point which is dispositive of this appeal. The question is whether the trial court abused its discretion in excluding the evidence. The burden of showing an abuse of discretion rests upon the condemnor, who offered the rejected evidence. Herro v. Department of Natural Resources, 67 Wis.2d 407, 423, 227 N.W.2d 456 (1975); Gawin v. Redevelopment Authority of City of Milwaukee, 52 Wis.2d 380, 190 N.W.2d 201 (1971).
"The admission of evidence touching upon the value of property appropriated in condemnation cases must be left largely to the discretion of the trial judge." 5 Nichols, Eminent Domain, sec. 18.1(3), pp. 18-38-40.
Hence, the only significant question on this appeal is whether the trial court appropriately exercised its discretion. Because the exercise of discretion hinges upon the proper application of law to the facts of record, it is necessary to review the factual context of this action.
The record shows that the state condemned for highway purposes a strip of land containing approximately 12.4 acres traversing the premises of the Leathem Smith Lodge, an integrated resort facility. The total acreage of the premises was 102.2 acres. The Lodge is located in the City of Sturgeon Bay and includes 2900 feet of riparian property located on the Bay. Approximately 648 feet of shoreline was taken by the condemnation.
At the time of condemnation, Leathem Smith Lodge was operated by its owners, Donald and Ruby Fredrickson, and had been a successful going business under their management since 1948. The Fredrickson family lived on the premises in a separate four-bedroom, two-story house. The Lodge was open nine months of the year and consisted of a restaurant and bar, 44 hotel and cottage rental units, a marina, a nine-hole golf course and driving range, a heated swimming pool, tennis courts, and a club house.
Approximately 80 of the 102.2 acres were actively used for resort purposes. The condemnation bisected the golf course and precluded its further use. After the condemnation, the swimming pool and Lodge were about 240 feet from the new highway and bridge across Sturgeon Bay.
The witnesses for both parties generally agreed that, as the result of the condemnation, the highest and best use of the property was changed from resort use to use as a roadside motel. It is undisputed that the financial success of the enterprise was heavily dependent on the management efforts of the Fredrickson family.
The only question at trial was the amount of the award. The crucial issue was the proper method of valuing the property before and after the taking.
The expert witnesses for the condemnee presented valuation testimony based upon comparable sales (the market value approach) and upon cost (cost of reproduction less depreciation).
The state's witnesses before trial had valued the property by the cost method, but at trial, because operating statements of the Lodge only then became available to them, valued the property, before and after taking, on the basis of the income prior to taking and projected income after the taking. The state's original computation of value using the cost approach was substantially higher than the amount later calculated using the income method. 1
The trial court, upon objection by the property owner, refused to admit evidence of value based upon the income method. The trial court stated that the income method was speculative and unnecessary, because other appraisers had been able to arrive at the before-and-after-taking figures by using the cost and market methods.
The testimony of the property owners' expert witnesses produced the following values:
Before After Damages
--------------- ---------- --------------
Fredrickson $1,650,000 $ 800,000 $850,000
Orr 1,475,290 525,190 950,100
Starr 1,700,000 1,006,000 694,100 2
Kielisch 1,660,000 1,105,000 555,000
Packard--cost of reproducing
similar nine-hole golf
course, exclusive of
land, at a different
location 317,000
The state's witnesses, in an offer of proof, using the income method testified to the following before-and-after values:
Before After Damages
-------- -------- ---------
Fay $550,000 No value - - - - -
given
Abraham 680,000 $555,000 $125,000
Olson 650,000 550,000 100,000
Abraham and Olson valued the 22 acres of unimproved property not used in the resort business as residential property using the market approach. The principal portion of their valuations was based upon Fay's report, which was derived by examining the financial records of the resort for the preceding six years.
This court has adopted standards for the admission or exclusion of income evidence that are consistent with recognized treatises on the subject.
The general rule applicable to the admission of income evidence and the exceptions to the rule are well stated in 5 Nichols, Eminent Domain (3rd ed.), sec. 19.3(1), at 19-48.1:
"Exceptions to rule. It has been held that where the character of the property is such that a profit is produced thereby without the labor of the owner being expended thereon or where the profits derived from its use are the chief source of its value evidence of such profits is admissible as a criterion of the value of the property.
"Where property is so unique as to make unavailable any comparable sales data evidence of income has been accepted as a measure of value. . . ." Accord : A. Jahr, The Law of Eminent Domain, sec. 150, at 232-33 (1953); 29A C. J. S. Eminent Domain 273(3), at 1198-1201; Annot., 96 A.L.R.2d 666.
These general standards were specifically followed in Mancheski v. State, 49 Wis.2d 46, 50, 181 N.W.2d 420 (1970), and Lambrecht v. State Highway Comm., 34 Wis.2d 218, 225-27, 148 N.W.2d 732 (1967). In each of these cases, the court stated that evidence of net income is ordinarily inadmissible for purposes of establishing property values in condemnation cases involving commercial enterprises, because business income is dependent upon too many variables to serve as a reliable guide for determining fair market value. These cases follow Nichols in noting that there are exceptions to the general rule of the inadmissibility of income evidence when (1) the character of the property is such that profits are produced without the labor and skill of the owner, (2) profits reflect the property's chief source of value, and (3) the property is so unique that comparable sales are unavailable. Mancheski, supra at 50, n. 4, 181 N.W.2d 420; Lambrecht, supra at 226-27, 148 N.W.2d 732.
As a starting point, it should be noted that Wisconsin law holds that income evidence is never admissible where there is evidence of comparable sales. Rosen v. Milwaukee, 72 Wis.2d 653, 662-63, 670-71, 242 N.W.2d 681 (1976); Lambrecht, supra at 227, 148 N.W.2d 732. Nichols, Supra, sec. 19.3 (5), p. 19-66 states that:
"Where property is so unique as to make unavailable any comparable sales data evidence of income has been accepted as a measure of value."
Because there was evidence of comparable sales in this case, the trial judge properly excluded the income method of valuation. The state argues that the sales were not comparable, because no appraiser was able to identify a sale of a full-service resort similar in nature and scale to the Leathem Smith Lodge for use as a comparable. The record shows, however, that the condemnee's witnesses Starr, Orr, and Kielisch furnished comparable sales data by using the sales of property that were similar to the components that made up the Lodge property. The trial court, in concluding that these sales provided adequate comparable sales data for the use of the market approach, stated:
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