State by Com'r of Transp. v. Caoili

• Decision Date: 22 March 1994
• Citation: 639 A.2d 275,135 N.J. 252
• Parties: STATE of New Jersey, by the COMMISSIONER OF TRANSPORTATION, Plaintiff-Appellant, v. Frederico R. CAOILI and Estrella L. Caoili, Defendants-Respondents, and Hudson City Savings Bank, a Banking Institution of New Jersey; New Jersey National Bank, a Banking Institution of the United States of America; James Savidge and Township of Dover, in the County of Ocean, a municipal corporation of New Jersey, Defendants.
• Court: New Jersey Supreme Court

Page 252

135 N.J. 252

639 A.2d 275

STATE of New Jersey, by the COMMISSIONER OF TRANSPORTATION Plaintiff-Appellant, v. Frederico R. CAOILI and Estrella L. Caoili, Defendants-Respondents and Hudson City Savings Bank, a Banking Institution of New Jersey; New Jersey National Bank, a Banking Institution of the United States of America; James Savidge and Township of Dover, in the County of Ocean, a municipal corporation of New Jersey, Defendants.

Supreme Court of New Jersey.

Argued Nov. 30, 1993.

Decided March 22, 1994.

Lorinda Lasus, Deputy Atty. Gen., argued the cause for appellant (Fred DeVesa, Atty. Gen. of New Jersey, attorney; Joseph L. Yannotti, Asst. Atty. Gen., of counsel).

Peter H. Wegener, Lakewood, argued the cause for respondents (Bathgate, Wegener, Dugan & Wolf, attorneys).

The opinion of the Court was delivered by

HANDLER, J.

This is a condemnation case in which the dispute centers on the fair market value of property taken by the State of New Jersey under its eminent domain powers. The main issue posed by the case relates to the standard of proof applicable to evidence of a potential zoning change affecting the use of the condemned property. Also at issue is the type of valuation methodology that may be followed in determining the fair market value of condemned property when the record contains sufficient evidence of a prospective zoning change affecting the use of the property.

At trial, the property owners introduced evidence of potential zoning and subdivision changes affecting the land's future use. Based on that evidence, the jury returned a verdict awarding compensation to the owners. The State appealed and the Appellate Division, in a reported decision, affirmed the judgment, 262 N.J.Super. 591, 621 A.2d 546 (1993). The State sought certification, which this Court granted, 134 N.J. 477, 634 A.2d 525 (1993).

I

Estrella and Frederico Caoili owned nearly an acre of land located near a highway in Dover Township. On July 15, 1989, the State of New Jersey, Commissioner of Transportation, filed a complaint to condemn the property for the purpose of constructing a "jug-handle" turn for a nearby highway. At that time the property was zoned for residential use. 262 N.J.Super. at 593, 621 A.2d 546. Although there was some dispute as to whether the property was subdivided into two lots at the time of taking, two single-family homes were located on the property. Id. at 594, 621 A.2d 546. A 262-foot border of the property ran along a highway on which were located a number of nearby commercial establishments, including a gas station, bank, and bus garage. Ibid. Another portion of the property fronted on a residential street that led into a large residential development. Ibid.

The State determined that $232,500 was just compensation for the property and it deposited that amount with the Clerk of the Superior Court. Because the owner disputed the State's determination of just compensation, a panel of commissioners was appointed to appraise the property. The commissioners determined that the "highest and best use" of the property was to subdivide it into three residential lots and they valued the property accordingly, finding a fair market value at the time of the taking of $278,000. 262 N.J.Super. at 594, 621 A.2d 546. The commissioners specifically declined to take into account the possibility that a use variance might have been obtained for the property because they found that obtaining such a variance was improbable and "too speculative." Id. at 595, 621 A.2d 546.

The State appealed from the commissioners' finding, and a jury trial was held to determine the fair market value of the property at the time of the taking.

At trial, the State moved to exclude the appraisal report of the owners' experts, Jon Brody and William Steinhart (the "Brody/Steinhart Report"), on the ground that the evidence was insufficient to support their conclusion that a reasonable probability existed that the property would receive a zoning variance for commercial development. In their report, Brody and Steinhart valued the property at $445,000. Id. at 594, 621 A.2d 546. They arrived at that figure by comparing the property to allegedly similar properties and estimating the value of the property based on the recent sale prices of those properties. The properties used for comparison in the Brody/Steinhart Report were all zoned for commercial use at the time of their sale. Brody and Steinhart justified the use of commercially-zoned property in their appraisal by claiming that a reasonable probability existed that the property would receive a use variance, which would allow the property to be used for a specific nonresidential purpose. In valuing the property, the experts discounted the sale prices of the comparison properties by ten percent to account for the fact that the property had not yet obtained a zoning variance. The State also objected to the introduction of the appraisal report on the ground that the valuation methodology used by Brody and Steinhart was improper.

In denying the State's motion to exclude the Brody/Steinhart Report, the trial court found that

there [are] ... sufficient facts and circumstances spread upon the record which would justify the prospective purchaser as of the date of taking in concluding there may be a zoning change, and further that the price ... that prospective purchaser would be willing to pay and the price that that prospective seller would be willing to accept would be reflective of that circumstance.

At trial, Brody testified that "based on analyzing and looking at close to fifteen years worth of variances that had taken place in Dover Township," the property had a "very strong probability of obtaining a variance to utilize that parcel of land for something other than what it's presently zoned for."

One of the State's three witnesses, William Burke, testified that in his opinion the property had a fair market value at the time of the taking of $232,500. Burke arrived at that figure by comparing the property to allegedly similar properties, but the comparison properties used in Burke's appraisal were residential properties because he believed that a reasonable probability existed that the zoning for the property would remain residential.

The State's next witness, Joseph Layton, testified that in his opinion the property could not meet all the requirements that an applicant must satisfy before a variance will be granted and therefore no reasonable probability existed that the property owner could obtain a variance. James Henbest, a Deputy Zoning Officer and Assistant Planner for Dover Township, testified for the State that he had previously told Layton that it was unlikely that the property would receive a variance.

The possible subdivision of the property into three lots was also the subject of testimony. The court decided to admit that testimony so long as the jury found that it was reasonably probable that the property could be subdivided into three lots. It gave the jury a cautionary instruction to that effect.

On cross-examination, Burke, over the State's objection, testified that although he had not considered the possibility of a subdivision when making his appraisal, the property could be subdivided into three lots consistent with the physical requirements of the relevant zoning ordinance. Burke further testified, however, that no reasonable probability existed that an owner of the property could get approval to subdivide because subdividing would harm the residential integrity of the area. Henbest also testified, on cross-examination, that it was possible to subdivide the property into a third lot which bordered the highway. He stated, however, that if the property were subdivided in that manner a "better than 50/50 chance" existed that a variance would be granted for that third lot.

The court instructed the jury that zoning regulations may restrict the types of uses that may be considered in determining the highest and best use of the property. With respect to the potential variance, the court said:

But suppose there were signs that the law regulating the property's use might change so as to permit a use in the future which would make the property more valuable or less valuable.

Parties negotiating a price for the sale of the property would not ignore these signs, nor should you.

It is for you to determine what effect, if any, any indications of a zoning change or planning change would have on the market value. You may consider that the change then appeared so speculative that there would have been no effect on the property's value.

You may consider the change so likely that the value of the property would fully reflect the change. You may consider that change would have appeared uncertain but would have some effect on the property.

With respect to the potential subdivision, the trial court, as already mentioned, had provided a cautionary instruction when it admitted testimony, namely, that the jury could consider the potential subdivision only if it found that the subdivision was reasonably probable. In submitting that issue to the jury, the court gave the following instruction:

Now if you do consider this [potential subdivision], you must find--and in all cases you must use this standard: Is it reasonably probable that the governmental body is going to allow this? And [if] it could be subdivided.

There are certain standards that have to be met, and they were ... gone into detail during the attorneys' summations, but nonetheless, you have to find that it is likely that it would be allowed.

The jury awarded the owners $351,000. The jury responded affirmatively to the following special interrogatory: "In arriving at your decision as to just compensation, did you include in your calculation a potential subdivision of the property to utilize part thereof for commercial use?"

On appeal, the Appellate Division determined that the trial court's...