State v. Central Expressway Sign Associates

• Citation: 302 S.W.3d 866
• Decision Date: 20 November 2009
• Docket Number: No. 08-0061.,08-0061.
• Parties: The STATE of Texas, Petitioner, v. CENTRAL EXPRESSWAY SIGN ASSOCIATES, et al., Respondents.
• Court: Texas Supreme Court

302 S.W.3d 866

The STATE of Texas, Petitioner, v. CENTRAL EXPRESSWAY SIGN ASSOCIATES, et al., Respondents.

No. 08-0061.

Supreme Court of Texas.

Argued January 13, 2009.

Decided November 20, 2009.

Greg W. Abbott, Atty. Gen., Kent C. Sullivan, Clarence Andrew Weber, First Asst. Atty's Gen., David S. Morales, Kristina Weber Silcocks, Susan Desmarais Bonnen, Lisa Marie McClain, Office of Atty. General, Jeffrey A. Blackwelder, Gregory Dion Miller, Asst. Atty's Gen., John L. Ritts, Austin, for Petitioner.

E. Lawrence Vincent Jr., Plano, Joe H. Staley Jr., Benjamin Tyler Milton, Law Office of Joe H. Staley, Jr., Donya C. Folco, J. Allen Smith, SettlePou, Dallas, Richard L. Rothfelder, Rothfelder & Falick, L.L.P., Sydney N. Floyd, Houston, for Respondents.

Craig Smyser, Smyser Kaplan & Veselka, L.L.P., Houston, for Amicus Curiae City of Burleson.

Julia F. Pendery, Dallas, for Amicus Curiae Roger H. Lawler.

Justice O'NEILL delivered the opinion of the Court.

We issued an opinion in this case on June 26, 2009. Today, we deny the motion for rehearing filed by respondent Central Expressway Sign Associates, withdraw our prior opinion, and substitute the following.

The Texas Constitution provides that "[n]o person's property shall be taken, damaged or destroyed for or applied to public use without adequate compensation being made, unless by the consent of such person." TEX. CONST. art. I, § 17. Adequate compensation does not include profits generated by a business located on condemned land. Herndon v. Hous. Auth., 261 S.W.2d 221, 222-23 (Tex.Civ. App.-Dallas 1953, writ ref'd). In this case, the State condemned an easement that was leased to an advertising company for the purpose of erecting a billboard and selling advertising space. The trial court struck the condemnor's expert witness as unreliable for failing to include in his estimate of fair market value the income the billboard generated from advertising sales. Because the State's expert applied an accepted methodology for valuing the condemned property, we conclude the trial court reversibly erred in excluding his testimony.

I. Background

The State filed a petition to condemn a 3,950-square foot parcel of land in Dallas that was needed to improve a highway interchange. Central Expressway Sign Associates (CESA) held an easement for the construction and operation of a billboard on an 1,801-square foot parcel, most of which was contained in the parcel to be condemned. The easement was leased to Viacom Outdoor, Inc., for the greater of $11,000 per year or twenty-five percent of billboard advertising revenues after paying limited agency commissions, with the base rent rising to $11,500 after one year and $12,000 after two. Viacom sold advertising space on a billboard that had been constructed on the property. At the time of condemnation, the billboard generated $168,000 per year in advertising revenue. After court-appointed special commissioners determined that the fair market value of the property to all of the interest holders was $2,012,300,¹ the State objected and demanded a jury trial. The State reached a settlement agreement with the underlying fee owner and another leaseholder, and the State acquired title to the fee interest. The State also settled its condemnation suit against Viacom by agreeing to pay relocation benefits, and Viacom relocated its billboard to a new location. Thus, this case does not involve the acquisition of a billboard structure and Viacom was able to place its billboard elsewhere. Viacom remained a party to the State's suit against CESA, however, because of a dispute arising out of the settlement agreement over interest and attorneys' fees, which dispute proceeded separately from the trial on the merits between the State and CESA. As a result, the trial court's final judgment included acquisition of both CESA's and Viacom's interests in the property.

Before trial, the State challenged CESA's appraisal expert, claiming that he had improperly included in his appraisal business profits that Viacom's billboard generated and had mischaracterized the billboard structure as realty rather than personalty. The trial court struck CESA's expert for mischaracterizing the billboard structure, and neither Viacom nor CESA challenge that ruling here. The trial court also granted CESA's challenge to the State's expert appraiser, Grant Wall. Wall used the income approach to valuing property, which estimates future rental income generated by the property and applies a capitalization rate to arrive at a present value. Wall capitalized the income Viacom paid CESA in rent for the easement, and estimated the fair market value to be $359,817. At a pretrial hearing, the trial court excluded Wall's testimony as unreliable because he did not include billboard advertising revenues in his appraisal. As a result, CESA's two principals, George Allen and Randolph Perry, offered the only estimates of the property's value. They both estimated the property was worth $2,500,000. The jury found the fair market value of the property to be $1,850,000, and the trial court entered a judgment for that amount. The court of appeals affirmed. 238 S.W.3d 800. We granted the State's petition for review to consider the reliability of its expert's methodology in estimating the fair market value of the condemned property.

II. Standard of Review

An expert's opinion, to be admissible, must be relevant and reliable. Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 628 (Tex.2002). To be relevant, the expert's opinion must be based on the facts; to be reliable, the opinion must be based on sound reasoning and methodology. Id. at 629; Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 714 (Tex.1997). We review a trial court's determination that a witness's testimony is unreliable for an abuse of discretion. Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 499 (Tex.2001). A trial court abuses its discretion in excluding expert testimony if the testimony is relevant to the issues in the case and is based on a reliable foundation. Zwahr, 88 S.W.3d at 628; Helena Chem. Co., 47 S.W.3d at 499.

For the exclusion of evidence to constitute reversible error, the complaining party must show that (1) the trial court committed error and (2) the error probably caused the rendition of an improper judgment. McCraw v. Maris, 828 S.W.2d 756, 757 (Tex.1992); Gee v. Liberty Mut. Fire Ins. Co., 765 S.W.2d 394, 396 (Tex. 1989). We have recognized the impossibility of prescribing a specific test to determine whether a particular error is harmful, and entrust that determination to the sound discretion of the reviewing court. McCraw, 828 S.W.2d at 757-58; Lorusso v. Members Mut. Ins. Co., 603 S.W.2d 818, 821 (Tex.1980). In making this determination, the court must review the entire record. Gee, 765 S.W.2d at 396; Lorusso, 603 S.W.2d at 821. "[I]t is not necessary for the complaining party to prove that `but for' the exclusion of evidence, a different judgment would necessarily have resulted." McCraw, 828 S.W.2d at 758. The complaining party must only show "that the exclusion of evidence probably resulted in the rendition of an improper judgment." Id. The role that excluded evidence plays in the context of the trial is also important. Thus, the exclusion or admission is likely harmless if the evidence was cumulative, or the rest of the evidence was so one-sided that the error likely made no difference in the judgment. Reliance Steel & Aluminum Co. v. Sevcik, 267 S.W.3d 867, 873 (Tex.2008). But if erroneously admitted or excluded evidence was crucial to a key issue, the error is likely harmful. Id.

III. Exclusion of Grant Wall's Testimony

The State argues that it is entitled to a new trial because the trial court erred in excluding expert appraiser Grant Wall's testimony. The trial court found that Wall's testimony was unreliable because he did not include billboard advertising revenues in his estimate of the easement's value. Texas recognizes three approaches to determining the market value of condemned property: the comparable sales method, the cost method, and the income method. City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 182 (Tex.2001). The comparable sales method is the favored approach, but when comparable sales figures are not available, courts will accept testimony based on the other two methods. Id. at 182-83. The cost approach looks to the cost of replacing the condemned property minus depreciation. Id. at 183 (citing Religious of the Sacred Heart v. City of Houston, 836 S.W.2d 606, 615-16 (Tex.1992)). The income approach is appropriate when the property would be priced according to the rental income it generates. Sharboneau, 48 S.W.3d at 183 (citing Polk County v. Tenneco, Inc., 554 S.W.2d 918, 921 (Tex. 1977)). All three methods are designed to approximate the amount a willing buyer would pay a willing seller for the property. Id.

Texas law allows income from a business operated on the property to be considered in a condemnation proceeding in two situations: (1) when the taking, damaging, or destruction of property causes a material and substantial interference with access to one's property, see City of Austin v. The Avenue Corp., 704 S.W.2d 11, 13 (Tex.1986); and (2) when only a part of the land has been taken, so that lost profits may demonstrate the effect on the market value of the remaining land and improvements, see City of Dallas v. Priolo, 150 Tex. 423, 242 S.W.2d 176, 179 (1951). Absent one of these two situations, income from a business operated on the property is not recoverable and should not be included in a condemnation award. Courts have applied this rule for two reasons: first, because profits from a business are speculative and often depend more upon the capital invested, general market conditions, and the business skill of the person conducting it than it does on the business's location; and second, because only the real estate and not the business has been taken and...