State Dept. of Highways v. Mahaffey

• Decision Date: 30 August 1984
• Docket Number: No. 82CA0886,82CA0886
• Citation: 697 P.2d 773
• Parties: STATE DEPARTMENT OF HIGHWAYS, State of Colorado, Petitioner-Appellant, v. Louise MAHAFFEY; First National Bank in Grand Junction, Trustee; and Gena M. Harrison, as Treasurer of Mesa County, Respondents-Appellees. . II
• Court: Colorado Court of Appeals

Page 773

697 P.2d 773

STATE DEPARTMENT OF HIGHWAYS, State of Colorado, Petitioner-Appellant, v. Louise MAHAFFEY; First National Bank in Grand Junction,

Trustee; and Gena M. Harrison, as Treasurer of

Mesa County, Respondents-Appellees.

No. 82CA0886.

Colorado Court of Appeals,

Div. II.

Aug. 30, 1984.

Rehearing Denied Sept. 27, 1984.

Certiorari Granted March 18, 1985.

Appeal dismissed May 1, 1985.

Duane Woodard, Atty. Gen., Charles B. Howe, Deputy Atty. Gen., Richard Forman, Sol. Gen., Thomas W. Gibb, Asst. Atty. Gen., Denver, for petitioner-appellant.

Gorsuch, Kirgis, Campbell, Walker & Grover, Joseph M. Montano, Denver, Williams, Turner & Holmes, J.D. Snodgrass, Grand Junction, for respondents-appellees.

SMITH, Judge.

In this eminent domain proceeding pursuant to § 38-1-101, C.R.S., et seq. (1982 Repl.Vol. 16A) petitioner, State Department of Highways (department) appeals the $168,500 award of a commission of freeholders to the respondent landowners as compensation for the taking for highway construction purposes of approximately 143 acres near the town of Debeque in Mesa County.

The department asserts as grounds for reversal: (1) that evidence of property value offered by landowners' experts was based on "hypothetical income" and on assumptions not supported by evidence in the record; (2) that the trial court erred in denying the department's proffered instruction concerning the calculation of reasonable market value; (3) that it was error for the trial court to refuse to permit the department to impeach the landowners' expert appraiser; (4) that the department was denied a fair trial because one of the commissioners on the panel owned property he knew was going to be condemned and knew he would therefore have to negotiate in the future with the department for compensation. We reject each of these contentions and, thus, affirm.

I. Evidence

Upon the department's motion, the trial court held an in limine hearing to determine whether certain evidence and opinions of value based on the capitalization of net income derived from the extraction of gravel deposits on the property taken could be considered in ascertaining the fair market value. The court ruled that such evidence would be admissible if a proper foundation with respect to the quantity of gravel and its commercial feasibility could be established.

At trial before the commission, such foundation evidence was presented and the opinion evidence was received. The department argues here that it was error to admit evidence concerning income which could be derived from the gravel, asserting that the property was zoned agricultural-transitional use, has always been used for agricultural purposes, and was non-income producing for the purpose of extracting gravel on the date of the taking. It argues, therefore, that fair market value could not be based on the net income from gravel extraction because such evidence would be too speculative.

Testimony elicited revealed that the property taken contained certain quantities of commercially salable gravel. A consultant engineer, one Armstrong, testified to his estimation of the amount of recoverable gravel and testified that there was a demand for such gravel in the area.

A manager for a construction company testified that a market existed for the gravel and he estimated its extraction could be accomplished in as few as 10 years, with 80,000 yards being extracted per year.

Next, a professional real estate appraiser was called by the landowners to render an opinion on the fair market value of the property. He explained in detail that he had used both the comparable sales and the capitalization of income methods in determining the fair market value of the property.

He testified that in applying the capitalization method, he considered lease rentals which could be generated by potential future leases or royalties from the gravel deposits on the subject property. He theorized, in essence, that the annual net return derived from lessor-extractors of the gravel would represent a reasonable return on the value of the landowner's investment in the land over the economic life span of the gravel. He analogized this annual capitalized net income to an annuity derived from standard annuity tables and paid out accordingly.

This expert then gave his opinion as to potential income royalties from the gravel based on evidence from payment provisions included in various lease agreements for similar gravel bearing properties in the area. He also considered the evidence elicited from the engineer and manager as to the market and costs of extracting gravel. In his opinion, thirty-five cents a yard was an average and appropriate value for the estimated 80,000 yards of extractable gravel per year. In his calculation, the gross income per year from the property would therefore equal $28,000 (35 cents X 80,000 yards). The yearly net operating income, after an estimated $890 in expenses were deducted, was calculated to be $27,110. He multiplied this annual net income figure by 5.65 which represented a 12% capitalization factor over a ten year period. The appraiser thus arrived at his opinion that the value for the 40 acres of gravel bearing property was $153,000. His final opinion for total just compensation of the entire 143 acres, including the 40 acres of potentially extractable gravel was $249,725.

Real estate appraisers commonly utilize three methods of property valuation: (1) Market data or comparable sales; (2) cost of construction or reproduction costs less depreciation; and (3) capitalization of income. Depending on the location and type of property involved, the appraiser may use any one, two, or all three methods to evaluate the fair market value of the property. In this instance, since the property was essentially vacant and contained income producing gravel deposits, the appraiser chose to base his opinion on the comparable sales approach for the non-gravel bearing property and the income capitalization method for the gravel bearing portion of the property.

The Colorado Supreme Court has accepted all three of these methods of valuation and has specifically recognized, in appropriate cases, the capitalization of income approach. See Denver Urban Renewal Authority v. Berglund-Cherne Co., 193 Colo. 562, 568 P.2d 478 (1977).

Thus, the threshold question does not concern the validity of a particular method, but rather is whether the capitalization of income method of appraisal is applicable to a gravel rich property which is not income producing on the date of taking but has such income potential. Under the facts presented here, we believe it is.

The capitalized income method recognized in Berglund-Cherne is utilized to establish a value that reflects the net income generated by the property during its productive life. Thus, it is most often applied in cases where the property is income producing at the time of taking such as where the owner has leased the property or receives royalties from a particular use of the land. See e.g., Denver Urban Renewal Authority v. Berglund-Cherne, supra; State ex rel State Highway Commission v. Moore, 565 S.W.2d 810 (Mo.App.1978); Iske v. Omaha Public Power District, 185 Neb. 724, 178 N.W.2d 633 (1970). In such cases, there are established figures upon which to derive an opinion of value using the capitalized income approach.

In this instance, the property contained large quantities of gravel in place which had not been commercially extracted as of the date of the taking. The department contends that the landowners' appraiser based his appraisal on assumptions that the gravel was commercially extractable and then appraised the property as if it were income producing on the date it was taken. It argues that such an evaluation contravenes the rule set forth in State Department of Highways v. Schulhoff, 167 Colo. 72, 445 P.2d 402 (1968). However, even in Schulhoff, the Supreme Court recognized that it is proper to show that a particular tract is suitable, available and valuable for that future use and purpose.

It is true that at the time the department took possession, there was no commercially established gravel operation on the land, nor had the landowners taken any preliminary steps toward gravel production such as obtaining permits. However, in condemnation cases, evidence of a reasonable future use is admissible to determine the present fair market value of property, City & County of Denver v. Quick, 108 Colo. 111, 113 P.2d 999 (1941); Wassenich v. City and County of Denver, 67 Colo. 456, 186 P. 533 (1920); C.J.I. 33:6 (2d. ed. 1980), and compensation is not limited to the value of property for the uses to which it is devoted at the time of the taking. City & County of Denver v. Minshall...