STATE OF NEW JERSEY, by the COMMISSIONER OF TRANSPORTATION V. FREDERICO R. CAOILI
Case Date: 03/22/1994
Docket No: SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
STATE OF NEW JERSEY, by the COMMISSIONER OF TRANSPORTATION V. FREDERICO R. CAOILI, ET AL.
(A-62)
Argued November 30, 1993 -- Decided March 22, 1994
HANDLER, J., writing for a unanimous Court.
Estrella and Frederico Caoili owned approximately one acre of land located near a highway in
Dover Township. On July 15, 1989, the State of New Jersey, Commissioner of Transportation (State), 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 and two single-family homes were located
on the property. The State determined that $232,500 was just compensation for the property and it
deposited that amount into court. The owner disputed that determination and a panel of commissioners
was appointed to appraise the property. The commissioners determined that the "highest and best use"
of the property was to divide it into three residential lots. They found the fair market value of the property
to be $278,000. The commissioners declined to consider the possibility that a use variance might have
been obtained for the property, finding such a variance too speculative.
The State appealed from the commissioners' finding. A jury trial was held to determine the fair
market value of the property at the time of the taking. During the trial, the owners submitted evidence
through experts, of the existence of a reasonable probability that the property would receive a zoning
variance for commercial development. At the conclusion of trial, a jury awarded the owner's $351,000 as
just compensation. As part of its deliberations and verdict, the jury responded affirmatively to a special
interrogatory asking: "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 disposition of the evidence
relating to potential zoning and subdivision changes and the valuation methodology were correct, and
affirmed the judgment. The Supreme Court granted certification.
HELD: In determining the fair market value of condemned property as a basis for just compensation,
the jury may consider a potential zoning change affecting the use of the property provided the
court is satisfied that the evidence is sufficient to warrant a determination that such a change
is reasonably probable. If the evidence meets that level of proof, it may be considered in
fixing just compensation in light of the weight and effect that reasonable buyers and sellers
would give to such evidence in their determination of the fair market value of the property.
1. In a condemnation proceeding, all reasonable uses of the property bear on its fair market value.
Most relevant in ascertaining that value is the property's highest and best use. The reasonableness of a
use of condemned property, including its highest and best use, must be considered in light of any zoning
restrictions that apply to the property. (pp. 8-9) 2. In State v. Gorga, the Court imposed a two-step standard governing the consideration of evidence of zoning changes affecting the future use of property. It established one standard for the admissibility and another for the substantive consideration of such evidence. The Gorga Court stated that if, as of the date of the taking, there is a reasonable probability of a change in a zoning ordinance in the near future, the influence of that circumstance on the market value as of that date may be shown, but that before allowing a jury to consider the issue, a trial court should first decide whether the record contains sufficient evidence
of a probability of a zoning change to warrant consideration by the jury. To avoid unbridled speculation,
the determination of the property's fair market value should be based on more cogent evidence indicating
beyond a mere possibility that the change of use is likely and, further, that such a change would be an
important factor in the valuation of the property. The important inquiry is the reasonable belief of a buyer
and a seller engaged in voluntary negotiations over the fair market value of property that a change may
occur and will have an impact on the value of the property, regardless of the degree of probability. (pp.
9-14)
3. No prejudicial error occurred with respect to the disposition of the evidence relating to the potential
zoning changes in light of the applicable standard of proof. Although the jury should not have been
allowed to consider a potential variance without a prior finding that sufficient evidence existed to show that
the variance was reasonably probable, such a finding is implicit in the trial court's admissibility ruling when
measured against the evidence presented. As long as the evidence actually considered by the jury
enabled it to conclude that a zoning change was reasonably probable, the effect of that evidence in light
of the weight that a buyer and a seller would give that factor in determining the fair market value of the
property was for the jury to assess. Moreover, any possible error with respect to the admissibility of the
evidence relating to the potential variance was mitigated by the disposition of the evidence relating to the
potential subdivision. Furthermore, if the jury answered "yes" to the special interrogatory, it must have
concluded that the variance change for commercial use was reasonably probable. The court's
determination of admissibility and its instruction concerning the evidence of a potential zoning change did
not appear to have confused or misled the jury to the prejudice of the State. (pp. 14-17)
4. The admissibility of evidence of a potential subdivision of condemned property is conceptually no
different from the Gorga principles regarding the admissibility of evidence of a potential zoning change.
Moreover, it is not material or fatal that the owners failed to take any steps toward subdivision approval at
the time of the taking. The trial court correctly admitted the evidence of the subdivision under the
reasonable probability standard as expressed in its cautionary instruction. The subdivision involved only
a single lot and was clearly authorized by the current land-use regulations. Moreover, there was evidence
demonstrating, as a threshold matter, that a potential variance for the commercial use of that lot was also
reasonably probable. There was no error in the introduction of that evidence. (pp. 18-22)
5. There are three valuation methodologies that may be used in appraising condemned property with
a reasonable probability of a zoning change. Plaintiffs' experts used the comparable sales approach in
their property appraisal. So long as the method used yields a current value rather than future value, it
makes no difference whether the appraiser starts with the value as currently zoned and adjusts upward,
assigning a "premium" to reflect the likelihood of a zoning change, or starts with the value of the property
as it is likely to be zoned in the future, assigning a "discount" of that value to account for the likelihood of
such a zoning change. The Court does not read or apply any of the observations in Gorga to mandate that
in the valuation process experts must use addition instead of subtraction. Here, the methodology used by
the owners' experts was reasonable. (pp. 22-26)
Judgment of the Appellate Division is AFFIRMED.
JUSTICES CLIFFORD, POLLOCK, O'HERN, GARIBALDI and STEIN join in JUSTICE HANDLER'S
opinion. CHIEF JUSTICE WILENTZ did not participate.
SUPREME COURT OF NEW JERSEY
STATE OF NEW JERSEY, by the
Plaintiff-Appellant,
v.
FREDERICO R. CAOILI and
Defendants-Respondents,
and
HUDSON CITY SAVINGS BANK, a Banking
Defendants.
Argued November 30, 1993 -- Decided March 22, 1994
On certification to the Superior Court,
Appellate Division.
Lorinda Lasus, Deputy Attorney General, argued
the cause for appellant (Fred DeVesa, Attorney
General of New Jersey, attorney; Joseph L.
Yannotti, Assistant Attorney General, of
counsel).
Peter H. Wegener 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.
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.
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. 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.
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. 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.
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."
that the property could be subdivided into three lots. It gave the
jury a cautionary instruction to that effect.
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:
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?"
When the State exercises its power to take private property under the Eminent Domain Act, N.J.S.A. 20:3-1 to -50, the State must pay the property owner just compensation for the property taken. N.J. Const. art. I, ¶ 20. Just compensation is "the fair market value of the property as of the date of the taking, determined by what a willing buyer and a willing seller would agree to, neither being under any compulsion to act." State v. Silver, 92 N.J. 507, 513 (1983). It is the "value that would be assigned to the acquired property by knowledgeable parties freely negotiating for its sale under normal market conditions based on all surrounding circumstances at the time of the taking." Id. at 514. In a condemnation proceeding, all reasonable uses of the property bear on its fair market value. However, most relevant in ascertaining fair market value is the property's highest and best use. State v. Hope Road Assocs., 266 N.J. Super. 633, 641 (App. Div. 1993), certif. granted, __ N.J. __ (1994); State v. Mehlman, 118 N.J. Super. 587, 590 (App. Div. 1972); Julius L. Sackman & Patrick J. Rohan, 4 Nicholas on Eminent Domain §12.02[1], at 12-75 (1993) (hereinafter Eminent Domain). The reasonableness of a use of condemned property, including its highest and best use, must be considered in light of any zoning restrictions that apply to the property. Hence, the zoning restrictions that govern the use of the property are material factors in determining its fair market value. State v. Inhabitants of Phillipsburg, 240 N.J. Super. 529,
541 (App. Div. 1990); John C. Schneider, Note, The Admissibility of
Zoning Ordinances as Evidence of Fair Market Value in Eminent
Domain Proceedings,
12 Syracuse L. Rev. 352 (1961). Because the
inquiry into the uses of property is usually wide-ranging, "courts
in this state have shown considerable liberality in admitting
evidence of market value, particularly in terms of the highest and
best use of the subject property." Silver, supra, 92 N.J. at 515.
That evidence encompasses all "relevant facts at the time of the
taking[, which] may include those that have a bearing on an
available future use of the property." Ibid.
relevant evidence because it demonstrated that at the time of the
taking a zoning amendment was a reasonable probability. Id. at
421-22.
1975); State v. Market Assocs.,
134 N.J. Super. 282, 285 (App. Div.
1975); see Hoechst Celanese Corp. v. Bridgewater Township,
12 N.J.
Tax 532, 539 (Tax 1992) (indicating that for tax assessment
purposes Gorga requires that a zoning change or variance must be
probable rather than merely possible before such evidence is
admissible); Romulus Dev. Corp. v. Town of West New York,
7 N.J.
Tax 305, 318 (Tax 1985) (same), aff'd sub nom. Romulus Dev. Corp.
v. Weehawken Tp.,
9 N.J. Tax 90 (App. Div. 1987); Linwood
Properties, Inc. v. Fort Lee,
7 N.J. Tax 320, 335 (Tax 1985)
(same).
admissibility of evidence of rezoning) (citing Lombard Park Dist.,
supra) (hereinafter Eaton).
[Eminent Domain, supra, § 12B.
That two-step approach was expressed in United States v.
341.45 Acres of Land, 633 F.2d 108 (8th Cir. 1980), cert. denied
sub nom. Bassett v. United States,
451 U.S. 938,
101 S. Ct. 2017,
68 L. Ed.2d 324 (1981):
[633 F.
2d at 111 (quoting United
States v. 341.45 Acres of Land, 605
F.2d 762, 817 (5th Cir. 1979)).]
The Appellate Division here did not construe Gorga as imposing
a threshold requirement for the admissibility of such evidence,
namely, that the evidence must demonstrate a reasonable probability
that such a zoning change would occur. It interpreted "reasonable
probability of a change" as used in Gorga to require only "that a
reasonable buyer and seller would consider the likelihood of a
change to be a factor affecting the price, though the change is not
more likely than not." 262 N.J. Super. at 596.
possibility of change. That risk can be reduced substantially if
the determination of fair market value is based on more cogent
evidence indicating beyond a mere possibility that a change of use
is likely and, further, that such a change would be an important
factor in the valuation of the property. The court can accomplish
that reduction in risk by performing, in effect, a gatekeeping
function by screening out potentially unreliable evidence and
admitting only evidence that would warrant or support a finding
that a zoning change is probable.
the court is satisfied that the evidence is sufficient to warrant
a determination that such a change is reasonably probable. If
evidence meets that level of proof, it may be considered in fixing
just compensation in light of the weight and effect that reasonable
buyers and sellers would give to such evidence in their
determination of the fair market value of the property.
implicit in the trial court's admissibility ruling when measured
against the evidence that was actually presented. We may assume
the admissibility ruling would have been the same if the court had
consciously attempted to conform and express its finding on
admissibility under the correct standard.
subdivision of the property to utilize part thereof for commercial
use?" In the context of the evidence, the reference in the special
interrogatory to the use of the property for "commercial purposes"
could relate only to a change of use by variance from residential
to commercial. To answer that question affirmatively, as the jury
did, it must have concluded that the variance change for commercial
use was reasonably probable. That interpretation of the jury's
determination is consistent with and supported by the testimony of
the State's expert, Henbest, who testified that if the subdivision
were granted, a "better than 50/50 chance [existed] that a variance
would also be granted." The State argues, further, that unlike evidence of a zoning change consisting of a use variance, the threshold for evidence of a subdivision is much greater than even reasonable probability and that the evidence of a subdivision was insufficient to permit the jury to consider its valuation of the property. We disagree. The admissibility of evidence of a potential subdivision of condemned property is "conceptually no different" from the Gorga principles regarding the admissibility of evidence of a potential zoning change. Hope Road Assocs., supra, 266 N.J. Super. at 643; see, e.g., 341.45 Acres of Land, supra, 633 F. 2d at 108; United States v. 47.3096 Acres, 583 F.2d 270, 272 (6th Cir. 1978); Inhabitants of Phillipsburg, supra, 240 N.J. Super. at 541-42. Many decisions express the standard of admissibility of evidence of a potential subdivision as evidence that the subdivision is not a remote or speculative event. See J.D. Perovich, Annotation, Admissibility of Evidence of Proposed or Possible Subdivision or Platting of Condemned Land on Issue of Value in Eminent Domain Proceedings, 26 A.L.R.3d 780 (1969 & Supp. 1993). Whether the standard is couched in terms of probability or remoteness, courts usually find relevant under that standard whether the property owner has taken steps to effectuate a subdivision. Id. at 786 ("[W]here the condemnee has sought to enhance the value of the condemned land by introducing evidence that the land was adaptable or suitable for subdivision purposes, and where, from the evidence, it appeared that the landowner had
taken no tangible steps toward the development of the land into a
subdivision, such . . . evidence has been held to be
inadmissible."). Some of our own cases reflect that understanding.
E.g., Hope Road Assocs., supra, 266 N.J. Super. at 633 (finding
evidence on prospect of subdivision approval of condemned site as
"within the discretion of the court, [which] . . . ordinarily
depends upon the adaptability and availability of the site for the
proposed subdivision, and evidence that the developer has taken
some steps toward obtaining the subdivision"); Beech Forest Hills,
Inc. v. Morris Plains,
127 N.J. Super. 574, 584 (App. Div. 1974)
(allowing valuation of subject property as subdivided lots;
however, property owner had already obtained subdivision approval
when taking occurred); see In re Proceedings to Acquire Lands,
107 N.J.L. 110 (E. & A. 1930) (holding that property owner in
condemnation proceeding was precluded from introducing into
evidence maps made after taking because they were too speculative).
As stated by the Appellate Division in Inhabitants of Phillipsburg,
supra:
The State stresses that the owners here had not taken any steps toward obtaining subdivision approval at the time of the
taking. The State argues that because the appropriate threshold
was not met, the testimony regarding a potential subdivision was
inadmissible.
from a tract with two lots. Those lots are already developed with
existing improvements and infrastructure. Moreover, the proposed
subdivision was fully authorized by current local land-use
regulations. Further, the record contains testimony about the
subdivision as an aspect of the proposed variance. Thus, in
context, the subdivision was considered in conjunction with the
variance, and its likelihood appeared even less problematic than
that of the variance.
three lots. That instruction imposes a greater burden of proof
with respect to a jury's consideration of evidence of the future
subdivision than does the parallel instruction relating to evidence
of a future variance. However, we do not address whether that
aspect of the jury instruction was correct in light of this record.
The owners in this case do not challenge that instruction.
Moreover, the State's primary argument relates to the sufficiency
of the evidence of the subdivision, not to the standard governing
the jury's consideration of that evidence.
The State also disputes the valuation methodology used by the owners' experts and considered by the jury. Three valuation methodologies may be used in appraising condemned property with a reasonable probability of a zoning change: the reproduction cost, the capitalization cost, and the comparable value. American Institute of Real Estate Appraisers, The Appraisal of Real Estate 51-53 (1983); see Eminent Domain, supra, § 12C.01[3][a]-[c], at 12C-24 to -38. Our courts have consistently refrained from mandating that a specific methodology be used in appraising condemned property. For example, in Mehlman, supra, 118 N.J. Super. at 587, the court declined to designate which method of appraisal should have been used, stating that an appellate court should determine only whether the method used at trial was reasonable. Id. at 591; see County of Middlesex v. Clearwater Village, Inc., 163 N.J. Super. 166, 173 (App. Div.
1978). "[T]here is no precise and inflexible rule for the
assessment of just compensation. The Constitution does not contain
any fixed standard of fairness by which it must be measured.
Courts have been careful not to reduce the concept to a formula."
Jersey City Redevelopment Agency v. Kugler,
58 N.J. 374, 387-89
(1971).
In support of his opinion of the then market
value, an expert may advert to the value the
property would have if rezoned, but only by
way of explaining his opinion of the existing
market value.
The purpose of any methodology is to arrive at an appraisal
that reflects the current value of the property and not the value
of the property at a future date. Thus, so long as the method used
yields a current value rather than a future value, whether the
appraiser starts with the value as currently zoned and adjusts
upward, assigning a "premium" to reflect the likelihood of a zoning
change, or starts with the value of the property as it is likely to
be zoned in the future, assigning a "discount" of that value to
account for the likelihood of such a zoning change, would not
appear significant.
discount factor to allow for the uncertainty." Eminent Domain,
supra, § 12C.03[2], at 12C-89; see also William B. Knipe, Valuing
the Probability of Rezoning,
56 Appraisal J. 217, 220 (1988)
("[T]he parties can be expected to bargain toward a price that can
be viewed as the value of the property with the more valuable
zoning classification, discounted by some amount."). E.g., State
ex rel. State Highway Comm'n v. Modern Tractor & Supply Co.,
839 S.W.2d 642, 650-51 (Mo. Ct. App. 1992); State ex rel. State Highway
Comm'n v. Carlson,
463 S.W.2d 80, 81-82 (Mo. Ct. App. 1970); City
of New York v. Nelkin,
415 N.E.2d 970, 971 (N.Y. 1980); Speach v.
Smith,
386 N.Y.S.2d 149, 150-51 (App. Div. 1976); Jones v. State,
357 N.Y.S.2d 554 (App. Div. 1974).
residentially-zoned comparison properties were used in valuing
residentially-zoned property; ruling that weight to be accorded
allegedly comparable sales is for jury to decide, but not mandating
only "premium" comparable sales approach).
The judgment below is affirmed. Justices Clifford, Pollock, O'Hern, Garibaldi, and Stein join in this opinion. Chief Justice Wilentz did not participate.
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