Opinion
No. 72-361
Decided January 29, 1974. Rehearing denied February 20, 1974. Certiorari granted April 8, 1974.
As a basis for valuation of sporting goods store in eminent domain proceeding, evidence of gross sales of the store was admitted. Condemning authority appealed. Affirmed
1. EMINENT DOMAIN — Owner — Entitled — Compensation — Land and Buildings — Value of Business — Not a Factor — Evidence of Profits — Inadmissible. In condemnation proceedings the owner is entitled to compensation only for the value of land and improvements taken, and the value of any business conducted thereon is not a factor to be considered in determining fair market value of the property; thus, evidence of profits derived from a business located on condemned property is inadmissible as a criterion of market value.
2. Gross Sales — Percentage Leases — Customary — Common Use — Determine Rental Value — May Be Used — Property Valuation — Condemnation Proceedings. Because of the customary use of percentage leases based upon gross sales in the rental of business property, and because this method is commonly used by landowners in arriving at a rental value which will yield a reasonable return on their investment, evidence of gross sales is a sufficiently reliable measure of such rental value to be used as a basis for property valuation in eminent domain proceedings.
Appeal from the District Court of the City and County of Denver, Honorable Mitchel B. Johns, Judge.
Berge, Martin Clark, Burce D. Pringle, for petitioner-appellant.
Zarlengo Kirshbaum, Anthony F. Zarlengo, for respondents-appellees.
The Denver Urban Renewal Authority (DURA), pursuant to the power of eminent domain granted to it, sought to acquire certain property located at 1601 Larimer Street in Denver.
Because the subject property is composed of two separate parcels, two individual action were commenced which were treated as one case in the trial court and are before this court in the same fashion. All of the parties direct their arguments to the portion of the combined cases dealing with the retail store parcel. Our opinion will likewise relate to that particular portion of the land only.
The subject property and the improvements located thereon were owned by Jane Cook, Herbert Cook, and Richard Cook. It was leased to a family-owned corporation, Dave Cook's Sporting Goods Company, which operated a retail sporting goods store at this location. A commission, appointed pursuant to statute, determined the value of the land and improvements to be $467,000, and entered its certificate of ascertainment and assessment accordingly. A rule and order awarding compensation in that amount was subsequently entered by the court. In its appeal from that award, DURA asserts, as its sole ground for reversal, that the commission was permitted to consider improper evidence which significantly influenced its decision as to the fair market value of the land and improvements taken. We disagree and affirm.
Expert valuation witnesses for both parties agreed at the hearing that insufficient comparable sales data was available to permit a realistic valuation using the market data approach, and consequently, in determining fair market value, both DURA and the owners relied primarily on the capitalization of, or rental value approach. This method of valuation is based upon the theory that the fair market value of income-producing property is best reflected by the amount of money which represents a reasonable return on the owner's investment. Thus, in order to arrive at a fair market value, it is first necessary to determine the amount of net rental income that an owner of the subject property could reasonably expect to receive. Then, the net rental income is capitalized at an appropriate rate to arrive at the return or yield a prudent investor-owner could expect to receive on his investment. The capitalization of income method of valuation has achieved widespread judicial recognition as an appropriate means of valuation, see, e.g., County of Maricopa v. Shell Oil Co., 84 Ariz. 325, 327 P.2d 1005; State v. Bare, 141 Mont. 288, 377 P.2d 357; Salt Lake County v. Kazura, 22 Utah 2d 313, 452 P.2d 869, and neither party questions the application of this method in the present case.
The controversy centers around the method by which the reasonable rental value of the property was determined. Valuation witnesses for both parties agreed that the actual rent of $2500 per month paid by Dave Cook's Sporting Goods Company to the owners was significantly below the reasonable rental value of the property.
DURA's appraisal witnesses testified as to dollar rental amounts being paid by other business establishments in the general area and interpolated these figures on a square footage basis to the floor space in the improvements on the subject property. By capitalization of the resulting rental value, they arrived at fair market values ranging between $285,000 and $288,000 for the subject property. Over DURA's objections, Cook's appraisers arrived at reasonable rental value by calculating 3% of the company's gross sales. They then applied to the resultant rental essentially the same capitalization rate as had the DURA witnesses, arriving at a fair market value of the land and improvements of between $484,650 and $618,062. It is the use of gross sales figures as a determinant of rental value to which DURA objects.
[1] In condemnation proceedings the owner is entitled to compensation only for the value of land and improvements taken, and the value of any business conducted thereon is not a factor to be considered in determining fair market value of the property. Auraria Businessmen Against Confiscation, Inc. v. Denver Urban Renewal Authority, 186 Colo. 30, 525 P.2d 435; City County of Denver v. Hinsey, 177 Colo. 178, 493 P.2d 348. Thus, evidence of profits derived from a business located on condemned property is generally inadmissible as a criterion of market value because profits are dependent to a substantial degree upon the acumen and efficiency of the business enterprise. They are, therefore, more determinative of the value of the business than of the land upon which the business is located. See City County of Denver v. Quick, 108 Colo. 111, 113 P.2d 999.
While profits, either gross or net, may be a fair indicator of the value of a business, gross sales or volume of business are more directly related to the value of the property where the business is located. In contrast to profits, gross sales are more significantly influenced by factors such as location, physical layout, nature of the business, and market conditions, all proper considerations in property valuation.
This relationship between gross sales and property value is recognized in 5 P. Nichols, Eminent Domain § 19.3[1](rev 3rd ed. J. Sackman):
"Evidence of the volume of business may properly be admitted for consideration on the issue of fair market value and rental value of the premises condemned where, by accepted standards and criteria in the trade or business, rentals and values of such property are based thereon."
The Maryland Supreme Court in a condemnation case has observed that:
"With the increasing vogue of leases of business property reserving rentals computed on a percentage of the volume of business transacted by tenant, it would be artificial and illusory to reject an expert opinion of rental value that takes into account the volume of business which experience has shown a particular piece of property is capable of producing. . . ."
State Roads Commission v. Novosel, 203 Md. 619, 102 A.2d 563.
We find ample support in the record for the conclusion that rentals paid on retail establishments in the Denver area are customarily based upon a percentage of gross sales. The commercial world recognizes and relies upon the application of a percentage of gross sales as an accurate means of deriving a rental figure which will provide a fair return on investment property. Of particular significance in this case, is the fact, disclosed by the record, that the actual rentals on Cook's Sporting Goods Company's other retail stores in the Denver area are based upon 3% of gross sales and that the rent on a competitive sporting goods store located in the same block as the subject property and having comparable annual gross sales is also based upon 3% of those sales.
[2] If the end to be achieved in eminent domain proceedings is "just compensation" then judicial philosophy must take cognizance of the philosophy upon which the business community operates. See State Roads Commission v. Novosel, supra; St. Louis Housing Authority v. Bainter, 297 S.W.2d 529 (Mo.). Because of the customary use of percentage leases in Denver, and because this method is commonly used by landowners in arriving at a rental value which will yield a reasonable return on their investment, evidence of such rental amounts is sufficiently reliable to be used as a basis for property valuation in eminent domain proceedings. We find no error in the admission or consideration of the evidence in question.
Judgment affirmed.
CHIEF JUDGE SILVERSTEIN concurs.
JUDGE RULAND dissents.