Opinion
No. 4001956
February 24, 2009
MEMORANDUM OF DECISION
Throughout most of the twentieth century, the Wiacek family operated a farm on a 45.95-acre parcel in Shelton, Connecticut. At all times relevant to these proceedings, the defendant, Wiacek Farms, LLC, has been the owner of that parcel. On March 9, 2004, the Shelton planning zoning commission approved the defendant's plan to subdivide the parcel into twenty-four lots on the condition that the defendant convey to the plaintiff city 4.26 acres of the parcel for use as open space and reserve two conservation areas of 1.5642 acres and .5989-acre, respectively. On July 22, 2004, the defendant complied with those conditions and posted a subdivision bond.
The subdivision plan called for the construction of three roads. On September 21, 2004, the defendant entered into a contract with S.P. Pruzinsky Sons, Inc. (Pruzinsky) for road construction. Pruzinsky commenced preliminary site work for the construction of one of those roads.
Exercising its powers of eminent domain, the city condemned 35.99 acres of the parcel and filed a statement of compensation with this court, declaring that it had determined that the owners of the condemned property were entitled to damages of $2,500,000, which it deposited with the clerk of the court. On April 4, 2005, the clerk issued a certificate of taking. The defendant has appealed from the assessment of damages by the city. The case was tried to the court, which heard from the parties' respective appraisers and other expert and lay witnesses. The court examined documentary evidence, including the appraisers' reports, and, at the request of the parties, viewed the property.
I
The court finds the following facts. The parcel is shaped as an irregular rectangle with a protrusion at the southwest corner of the property. The property is situated in an R-1 residential zone. The topography is generally level or rolling and consists primarily of hayfields, hedgerows, trees and meadows with several sporadic wetlands. The city concedes that the topography is "excellent." Soils are generally suitable to residential development. The parcel is bounded on its northeasterly side by Meadow Street, a public street. On the southeasterly side, the parcel is bounded by Shelton High School. To the west, the protrusion borders Constitution Boulevard while the rest of the parcel borders private residential property. Constitution Boulevard is a two-lane public Street running in a generally north-south direction. The street is paved and well maintained by the city. There are Street lights and catch basins, but no sidewalks. Meadow Street is similarly improved. The parcel has excellent frontage on both Constitution Boulevard and Meadow Street.
Public water, sanitary sewers, gas, electricity and telephone land lines are available off of Meadow Street and Constitution Boulevard. These utilities were to be extended underneath three new roads that were contemplated by the subdivision plan: Wiacek Farm Road off of Constitution Boulevard North, Cecelia Lane off of Wiacek Farm Road, and Chalk Hill Road off of Meadow Street.
The parcel is bisected by high tension electric lines, and there are three high tension towers on the parcel. In addition, the property is impacted by conservation, sanitary sewer and drainage easements.
The 5.6914 acres that were not taken by the city, herein referred to as the remainder, consist of building lots 6, 7 and 8 and small portions of other lots. The remainder includes some wetlands and the .5989 acre conservation easement.
The city of Shelton is situated in the northeasterly end of Fairfield County in southwestern Connecticut. It is bounded to the west by the town of Trumbull, to the northwest by Monroe, to the south by Stratford and to the east and northeast by the Housatonic River, which divides Fairfield and New Haven counties. The New Haven county towns of Derby, Seymour, Milford and Orange lie along the eastern bank of the Housatonic River. While it is not as desirable as such surrounding eastern Fairfield County towns as Trumbull and Monroe, Shelton real estate is generally considered superior to that of its New Haven county neighbors, Derby and Seymour.
Shelton encompasses 31.4 square miles and has a population of approximately 40,000. Between the early 1970s and the early twenty-first century, it experienced dynamic growth in all respects, owing to its geographic location and ready access to Route 8 which, in turn, connects to the Merritt Parkway and to Interstate 95, both of which afford access to lower Fairfield County.
Housing in Shelton is composed predominantly of single-family units on large lots. In Shelton in April 2005, vacant land for development was becoming scarce. The housing market was strong and was three years away from the bursting of the housing bubble. Housing costs were distinctly below those of lower Fairfield County, but higher than those in Derby and Seymour. Growth was continuing and interest rates were at then-historic low levels.
II
"The Fifth Amendment to the Constitution, made applicable to the States by the Fourteenth Amendment, provides that `private property [shall not] be taken for public use, without just compensation.'" Kelo v. New London, 545 U.S. 469, 496, 125 S.Ct. 2655, 162 L.Ed.2d 439 (2005). Article first, § 11, of the constitution of the state of Connecticut similarly provides: "The property of no person shall be taken for public use, without just compensation therefore." The city's statement of compensation states that it deposited compensation with the clerk of the court pursuant to General Statutes § 8-130 of chapter 130 of the General Statutes. General Statutes § 8-132(c), which is within the same chapter, provides in relevant part that in an appeal from such a statement of compensation, "the court . . . shall hear the applicant and the redevelopment agency and take such testimony as the court deems material, may view the subject property, and shall make a finding regarding the statement of compensation."
"[T]he question of what is just compensation is an equitable one rather than a strictly legal or technical one. The paramount law intends that the condemnee shall be put in as good condition pecuniarily by just compensation as he would have been in had the property not been taken . . . [The Connecticut Supreme Court has] stated repeatedly that [t]he amount that constitutes just compensation is the market value of the condemned property when put to its highest and best use at the time of the taking . . . In determining market value, it is proper to consider all those elements which an owner or a prospective purchaser could reasonably urge as affecting the fair price of the land . . . The fair market value is the price that a willing buyer would pay a willing seller based on the highest and best possible use of the land assuming, of course, that a market exists for such optimum use . . . [B]ecause each parcel of real property is in some ways unique, trial courts must be afforded substantial discretion in choosing the most appropriate method of determining the value of a taken property . . . It is well established that [i]n an eminent domain proceeding, a trial court may seek aid in the testimony of experts, but must ultimately make its own independent determination of fair compensation . . . on the basis of all the circumstances bearing upon value . . . Fair market value . . . involves a question of fact . . ." (Citations omitted; internal quotation marks omitted.) Commissioner of Transportation v. Rocky Mountain, LLC, 277 Conn. 696, 728-29, 894 A.2d 259 (2006).
"The concept of highest and best use, chiefly employed by appraisers as a starting point in estimating the value of real estate, concerns the use that will most likely produce the highest market value, greatest financial return, or the most profit from use of that property." South Farms Associates Ltd. Partnership v. Burns, 35 Conn.App. 9, 16, 644 A.2d 940, cert. denied, 231 Conn. 912, 648 A.2d 157 (1994). The question of the highest and best use of property is a question of fact for the trier, Greene v. Burns, 221 Conn. 736, 748, 607 A.2d 402 (1992).
"In determination of the fair market value, the trial court in a condemnation appeal hears the matter de novo . . . and makes an independent determination of value and fair compensation in light of all the circumstances, the evidence, the trial court's general knowledge and the court's viewing of the premises . . . The trial court may accept opinions of witnesses as to valuation, but it is not bound to do so as a matter of law . . . [A]n award in such a matter need not be within the parameters as set by testimony of experts . . . The trial court has the right to accept as much of the testimony of the experts and the recognized appraisal methods employed by them as it finds applicable . . ." (Citations omitted.) South Farms Associates Limited Partnership v. Burns, supra, 35 Conn.App. 17.
In cases such as this, the burden of production and persuasion on the issue of valuation generally rests upon the property owner. See Levine v. Stamford, 174 Conn. 234, 235, 386 A.2d 216 (1978); Edwin Moss Sons, Inc. v. Argraves, 148 Conn. 734, 735, 134 A.2d 505 (1961). If the taking is a partial taking, the usual measure of damages is the difference between the market value of the whole tract with its improvements before the taking and the market value of what remained of it thereafter. Gontarz v. Berlin, 154 Conn. 695, 697, 229 A.2d 29 (1967); Morgan v. Hill, 139 Conn. 159, 161, 90 A.2d 641 (1952); see also Cappiello v. Commissioner of Transportation, 203 Conn. 675, 679, 525 A.2d 1348 (1987); D'Addario v. Commissioner of Transportation, 180 Conn. 355, 365, 429 A.2d 890 (1980); Lefebvre v. Cox, 129 Conn. 262, 265, 28 A.2d 5 (1942).
It is agreed between the parties that the highest and best use of the property before the taking was as a twenty-four-lot residential subdivision. The highest and best use of the remainder is a residential subdivision marketed directly to ultimate purchases. It is further agreed by the parties that the appropriate methodology for the resolution of this appeal is to determine the fair market value of the twenty-four-lot subdivision as of the date of the taking, to determine the fair market value of the remainder after the taking, and to subtract the latter from the former. Finally, both of the appraisers who testified developed their values using the same two methods of valuation, the sales comparison approach and the subdivision analysis, or income capitalization, approach. Both agreed that the cost approach to value was not applicable.
III
Fair Market Value of the Twenty-Four Lot Subdivision Before the Taking
A. Sales Comparison Approach
The plaintiff's appraiser was Donald R. Sheehy, Jr. The defendant's appraiser was Patrick Wellspeak. Both appraisers were well qualified. Both are MAI members, MAI being the acronym for Member of the Appraisal Institute, a trade organization that monitors appraisers and holds them to a higher standard than appraisers who are merely licensed and do not belong to such an organization.
Both appraisers used the direct sales comparison approach to arrive at the value of the twenty-four-lot subdivision at the time of the taking. The sales comparison approach, also known as the market data approach or the comparable sales approach, "`is a process of analyzing sales of similar recently sold properties in order to derive an indication of the most probable sales price of the property being appraised. The reliability of this technique is dependent upon (a) the availability of comparable sales data, (b) the verification of the sales data, (c) the degree of comparability or extent of adjustment necessary for time differences, and (d) the absence of non-typical conditions affecting the sales price.' American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers, Real Estate Appraisal Terminology (Rev. Ed. 1981) p. 160. After identifying comparable sales, the appraiser makes adjustments to the sales prices `based on elements of comparison.' The Dictionary of Real Estate Appraisal (3d Ed. 1993) p. 318." Sun Valley Camping Cooperative, Inc. v. Stafford, 94 Conn.App. 696, 702 n. 8, 894 A.2d 349 (2006).
1. Wellspeak's Direct Sales Comparison Analysis
Patrick Wellspeak presented four comparable sales. His first comparable sale was a 16.46-acre approved subdivision in a DRR Design Recreational District in Monroe that included eleven building lots and a paper street that sold for $2,800,000. This equated to about $170,000 per acre or $255,000 per lot. Although the property was in Monroe, it was situated close to the Shelton city line. Nonetheless, Monroe is a preferable location and a sixteen-acre, eleven-lot subdivision entails less risk than the subject property. For these reasons, Wellspeak adjusted the price per lot downward by 30 percent to $180,000.
The court takes judicial notice of Quintilano v. Monroe Planning Zoning Commission, Superior Court, judicial district of Fairfield, Docket No. CV 04 4000732 (March 2, 2005, Owens, J.), for the general nature and identification of Monroe's zone designation acronym DRR. Quintilano was an appeal from the granting of an application for a change of zone and special permit for the tract that included this very comparable.
Wellspeak's second comparable sale was a 51.93-acre tract in an R-1 zone in Shelton that sold for $4,120,000. This is the same zone and the same municipality as the subject property. The topography was also comparable. The sales price resulted in a price per acre of $79,338 and a price per potential lot in a theoretical thirty-seven-lot subdivision of $111,351. Wellspeak deemed this parcel superior in location to the subject, which is adjacent to a high school. However, this circumstance would not affect all lots equally in the Wiacek subdivision and might be offset somewhat by the phenomenon that some potential buyers with children could consider proximity to the high school less disadvantageous than other potential buyers. Far outweighing any disadvantage created by the proximity of this comparable to the high school, the court finds, is that this comparable was not an approved subdivision, and the sales price was the product of a contract executed in 2003. Between 2003 and 2005 the real estate market in south central Connecticut was escalating. According to Wellspeak, this militated adjustments resulting in a unit price of $165,000 to $170,000 per lot.
The third comparable was an eleven-acre approved ten-lot residential subdivision on Daniels Farm Road in Trumbull that sold for $2,750,000 on October 12, 2004. This equated to a sale price per acre of $247,227 and a price per lot of $275,000. According to Wellspeak: "The lots range in size from .80-acre to .91-acre and there is 1.696-acre set aside as open space. Although finished lots are not being separately marketed it is estimated that they would sell for $450,000." Wellspeak applied a 30 percent downward adjustment for this parcel's superior location in Trumbull and a 10 percent downward adjustment for the smaller size of the subdivision. He made a slight upward adjustment for some improvement in market conditions between October 2004 and the taking date of April 4, 2005 to arrive at an adjusted unit price range of $170,000 to $180,000 per lot for the subject.
Wellspeak's fourth comparable was a 17.9-acre tract on Porters Hill Road in Trumbull that sold for $2,700,000 on August 19, 2004, based on a contract entered into earlier that year. This equated to a price per acre of $150,485 and a price per potential lot of $207,692. The property was situated in a one-acre residence district and was being developed as a thirteen-lot subdivision. Wellspeak made upward adjustments for the improving market conditions between early 2004 and April 2005, and also because this comparable was sold without subdivision approval. He made downward adjustments for the superior location of the property and the smaller size of the development, arriving at an adjusted price of $175,000 per lot for the subject.
From these four comparables, Wellspeak arrived at a valuation range for the subject parcel as of the taking date between $170,000 and $180,000. He tended toward the higher end of this range because the subject was pre-approved as a subdivision and because, he opined, its previous use as farmland boded well for development costs. With twenty-four lots selling at an average of $180,000 per lot he arrived at a valuation of $4,325,000 as of the taking date. Wellspeak defended his opinion well under penetrating cross-examination.
Wellspeak also examined nine recent sales of lots in Shelton to estimate what the gross sellout, or amount of retail sales, would have been had the subject property been marketed. The purpose of this examination was to create "base information for a discounted cash flow analysis later on." Exhibit F (Wellspeak Report), p. 33. Most of the lots Wellspeak listed sold for $300,000 or more. One lot, in an older neighborhood, sold for $210,000. Another lot, on a corner, sold for $285,000. Lots in a five-lot subdivision sold for $265,000. Because of the subject's proximity to Shelton High School and the presence of high-tension power lines and towers impacting lots 1, 5, 6, 8 and 21, Wellspeak concluded that lots in the subject parcel would have sold at retail between $295,000 and $260,000, depending on their location, with an average lot price of $278,542. He opined that the gross sellout would have been $6,685,000.
2 Sheehy's Direct Sales Comparison Analysis
Donald Sheehy's first comparable was Heritage Pointe, an 18.13-acre tract in Shelton that sold for $1,400,000. This equated to $35,000 per lot. However, this property was zoned industrial with a PDD (Planned Development District) overlay that significantly increased permitted density beyond the one-acre R-1 zone in which the subject property is situated. Lots at Heritage Pointe averaged only 12,000 square feet. Also, the topography of this comparable was inferior to the subject, and the development design had a more elderly adult orientation. Finally, although this development sold in 2004, the contract was signed in 2002.
Sheehy's second comparable was a 14.9-acre parcel approved for thirty lots that sold for $1,550,000. Although zoned R-1, this property, like Sheehy's first comparable, had a PDD overlay which increased permissible density. Thirty lots were allowed on this parcel. As a result, the $1.55 million sale price equated to $51,667 per lot. It also was either age-restricted or elderly oriented. Its topography was inferior to the subject parcel.
The third comparable presented by Sheehy was a 1.96-acre tract in an R3 zone that sold for $392,500 in March 2004. The parcel had subdivision approval for five lots ranging from .28- to .43-acre. The sale price of the parcel equated to $78,500 per lot.
Comparable four was an assemblage of two parcels. One parcel was 5.4 acres and sold for $600,000; the other was 6.45 acres and sold for $325,000. The parcels were in an R-1 zone in Shelton, as is the subject, but were of inferior topography and were acquired without approvals. Although it ultimately developed as a ten-unit PDD, the developer was required to present a conventional subdivision plan. As presented, the plan contained eight lots. This resulted in a price per lot of $114,625. The assemblage would also have supported a ten-lot subdivision, which would have resulted in a price per lot of $92,500.
Sheehy's fifth comparable was a 32.93-acre parcel in an R-1 zone in Shelton that sold for $2,500,000. The developer first submitted a PDD plan which the zoning commission denied. The developer then submitted a plan pursuant to the conservation residential district regulations which permits reduced lot size and reduced lineal feet of road. According to Sheehy's appraisal report: "At closing 16 lots were approved and 6 lots had received conceptual approval only." At sixteen lots, the sale price per lot was $113, 636.
Sheehy's final comparable was Wellspeak's second comparable, discussed supra. Although both appraisers reported a sale price of $4,120,000, Sheehy's report states that the acreage sold was 33.94 acres whereas Wellspeak reported the parcel size to be 51.9 acres. Although both reports state that a thirty-seven-lot subdivision is proposed, Sheehy states further that the grantor would be retaining six of these lots, with the grantee of the remaining lots enjoying a right of first refusal. Assuming that the grantee would be developing thirty-one lots, Sheehy computed the price per lot to be $132,903 and a benchmark value of $250,000.
Sheehy's report explains that "[b]enchmark value is the appraiser's judgment as to the value of the typical approved lot in the respective subdivision on the effective date of sale."
Based on these six comparables, Sheehy arrived at a price per lot range between $99,000 and $160,000. He concluded: "All factors considered, the market value indicated by the sales comparison approach is toward the upper end of the range at $150,000 per lot. Therefore, 24 lots @ $150,000 = $3,600,000."
The court finds that Wellspeak's comparables are, in fact, more comparable to the subject property than those used by Sheehy. For the most part, Wellspeak presented comparables that were conventional residential subdivisions in the vicinity of the subject. The nature and amounts of his adjustments made sense. In contrast, five of Sheehy's six comparables were zoned for or developed as much smaller sized lots compared to the subject. One of these was either age-restricted or elderly oriented, another was elderly oriented. The court finds that the direct sales approach to value results in a fair market value range for the subject twenty-four-acre parcel as of the date of taking between $170,000 and $180,000 per lot.
B. Subdivision Development Method
Both appraisers opined that the subdivision development method approach to value was superior than the direct sales comparison approach in this case. As stated in Sheehy's report, the subdivision development method is a hybrid of the three accepted approaches to value and is "a method of estimating land value when subdivision and development are the highest and best use of the parcel of land being appraised. All direct and indirect costs and entrepreneurial profit are deducted from an estimate of anticipated gross sales price of the finished lots; the resultant net sales proceeds are then discounted to present value at a market-driven rate over the development and absorption period to indicate the value of the raw land." See also In re Condemnation of 23.015 Acres More or Less, 895 A.2d 76, 80 n. 2 (Pa.Commw. 2006), appeal denied, 590 Pa. 670, 912 A.2d 839 (2006).
"The subdivision development method is also called the income capitalization method; Santini v. Ellington, Superior Court, judicial district of Tolland, Docket No. CV 94 0055090 (December 20, 2000, Klaczak, J.); and is referred to as such in Wellspeak's report.
In reaching their opinions as to market value using the income capitalization approach, the two appraisers first estimated the gross retail, or "gross sellout," value of the twenty-four-lot subdivision as of the taking date. As Wellspeak states in his report, "[g]ross retail value represents the total cumulative price that could be achieved if all of the lots were sold individually as of the date of valuation and assumes that all appropriate development costs have already been incurred. Gross retail value does not represent market value for the subject property."
Relying on the same four comparables he used in his direct sales comparison analysis, Wellspeak estimated that the gross sellout value was $6,685,000, or an average lot price of $278,542. He estimated that one of the lots would sell for $260,000; four lots would sell for $265,000 each; three lots would sell for $270,000 each; four lots would sell for $275,000; seven lots would sell for $285,000 each; three lots would sell for $290,000 each, and two lots would sell for $295,000 each. The difference in the prices that he assigned to the lots was primarily a function of their location and the extent to which they were impacted by the high tension wires and the towers that transversed a portion of the subdivision. Wellspeak further assumed that lot prices would inflate by two percent per year.
Sheehy employed five new comparables in Shelton and reached an estimated gross sellout that was higher than Wellspeak's — $7,025,000. The first sale he examined was of five lots that sold for a total of $1,325,000 on January 6, 2005, from which Sheehy opined an adjusted sale price per lot of $275,000. The second sale was of a single lot that sold for $285,000 on November 5, 2004. Sheehy adjusted this price down by $5,000 to $280,000 because of its superior location. The third sale was of three lots that sold for $900,000, or $300,000 per lot, on August 10, 2005. Sheehy opined that no adjustment was required. His fourth comparable was of a single lot that sold for $305,000 on March 31, 2005. Because of its superior location, Sheehy adjusted this price down by $5,000 to $300,000. His final comparable was of another single lot that sold for $325,000 on October 25, 2004. Because of its superior location, Sheehy adjusted this price down by $25,000 to $300,000.
Based on these sales, Sheehy estimated that seventeen lots in the subject subdivision would sell for $300,000 each and that seven lots would sell for $275,000. He further assumed an increase in lot value of five percent after the first twelve months.
The court finds that Sheehy's opinion that seventeen lots in the subject subdivision would sell for $300,000 each is unduly optimistic. In addition, it tends to understate the extent to which high tension wires would impact several lots. Neither appraiser mentions the affect that the relatively rapid availability of an additional twenty-four building lots in the same vicinity would have on market value. The court finds that Wellspeak's gross sellout value of $6,685,000 is closer to the mark.
Both appraisers estimated an absorption period of twenty-four months, to which Wellspeak added three months for the completion of improvements.
With respect to the direct costs of development, the appraisers differed significantly over the cost to construct roads. As Sheehy relates in his report, the subject twenty-four-lot subdivision "includes about 2,960 lineal feet of 26-foot [wide] road. In addition, the development contains 71,900 cubic feet of storm water detention and three wetland mitigation basins totaling 18,050 square feet. Public water and sewer are located in both Constitution Boulevard and Meadow Street and both will be extended the full length of the new roads. Based on the Wiacek Farm subdivision approval, all of these required improvements are contained within the area marked for acquisition; none are on the remainder parcel."
Sheehy estimated road costs to be $1,184,000. Wellspeak estimated such costs to be $815,000. Sheehy's estimate was based on his experience as a developer and an informal survey of areas developers who had experience with other subdivisions. Notably, by all accounts, the subject property enjoyed "superior" or "excellent" topography. It was open farmland and flat or gently rolling.
Wellspeak relied on the actual bid of $815,000 that the Wiaceks had obtained on July 30, 2004 from Pruzinsky for road construction, Sheehy had not seen the Pruzinsky contract when he rendered his appraisal, and indicated that it would have been desirable for him to have done so. Absent some showing that this was not a bona fide arms length bid, the court finds that it trumps Sheehy's personal experience and informal survey of area developers.
Sheehy's report states: "An estimate of hard costs was not provided the appraiser."
The court notes that some engineering work that Sheehy factored in as costs were in fact performed prior to the taking.
The Pruzinsky bid did not include installation of a water line, but called for the water main to be "installed by others." Wellspeak accounted for this by adding $100,000 to his estimate. The defendant, in fact, entered into a contract with Pruzinsky on August 25, 2004 for a portion of the road construction, that included installation of 365 feet of water main for $21,320. This included "time, labor and material." In his report, Wellspeak states that another cost would be the expense of demolishing the existing house and barn on the remainder, which he estimates to be $20,000. He factors in income of $12 per yard from the sale of topsoil during the development of the subdivision, totaling $80,000, and also deducts the approximately $20,000 the Wiaceks incurred prior to the taking for the preliminary work toward the development of Chalk Hill Road. Wellspeak arrives at a net cost of road development of $835,000.
The court finds that road construction costs are $815,000, plus $25,000 to account for extras as well as inflation to the date of the taking, for a net total road construction cost as of the date of taking of $840,000.
The appraisers do not materially differ on other costs and expenses.
The principle point of contention between the appraisers was over entrepreneurial profit, a key component of the discount rate. "Determining the appropriate discount rate is a question of fact for the court." Long Island Savings Bank, FSB v. United States, 67 Fed. Cl. 616, 648 (2005), rev'd on other grounds, 503 F.3d 1234 (Fed. Cir. 2007), cert. denied, 129 S.Ct. 38, 172 L.Ed.2d 19 (2008); accord, Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 46 (2nd Cir. 1991); see also Bridas S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347, 364 (5th Cir. 2003), cert. denied, 541 U.S. 937, 124 S.Ct. 1660, 158 L.Ed.2d 357 (2004); Energy Capital Corp. v. United States, 302 F.3d 1314, 1332 (Fed. Cir. 2002); W.L. Scott, Inc. v. Madras Aerotech, Inc., 103 Idaho 736, 743, 653 P.2d 791 (1982).
In his report, Sheehy states:
Entrepreneurial Profit Based on interviews with area developers, entrepreneurial profit is estimated at 20% of gross sales.
It is imperative to recognize that most small subdivisions similar to the subject are acquired by developers that plan to develop the land and build the houses. The primary incentive for these developers is twofold: to acquire inventory to operate their businesses, and to profit from their business (contractor's profit). Under these scenarios, the entrepreneurial profit is reduced. It is also important to note that the provision for developer's profit, in this instance, includes project overhead, maintenance and other administrative charges.
Discount Rate
The discount rate is equivalent to the mortgage rate with a small premium for added risk. In this case a discount rate of 8.75% is employed. Based on discussion with area commercial mortgage bankers, similar subdivisions are securing financing on the basis of prime + 1%. On the effective date of appraisal, the prevailing prime rate was 5.75%. A 5.75% plus 1% equals 6.75% and with a 2% risk factor added equates to 8.75%.
(Emphasis in original.)
Wellspeak did not set forth a separate item for such profit but, rather, incorporated it into the fifteen percent discount rate he used. In his report he writes:
Annual Discount Rate:
An equity discount rate of 15% would be used to discount the net cash flows into a present value amount. The discount rate incorporates such considerations as the time value of money, risk inherent within this development, risk within the national economy, inflation risk, and the tax consequences of the investment. The equity discount rate used within this appraisal is primarily established by comparing yields from institutional grade real estate and from the capital markets. Sources of data include discussions with local developers as well as institutional surveys such as those published by PriceWaterhouseCoopers.
Developers Profit:
By definition, profit is the residual end share of project revenue that remains after expenses have been paid and the mortgage and equity positions have been satisfied. Typically, profit is realized near the end of the sellout. However, the market for residential lots statewide has narrowed dramatically. The majority of developers who buy bulk land subdivide the land and instead of selling the lots individually as retail, the developers improve the lots themselves and market the finished homes. Discussions with prominent area builders have suggested that basically all of the developer's profit is realized through the sale of the lots as improved, and a negligible developer's profit is realized through the retail sale of unimproved building lots. Therefore, we have included no developer's profit in this analysis.
(Emphasis in original.) Wellspeak testified that within his fifteen percent equity discount rate, he ascribed seven percent to entrepreneurial profit. He based the modesty of this figure on the strengthening of the real estate market in the second quarter of 2005 and the location of the subject property in Fairfield County, a highly desirable part of the state.
Through Wellspeak, Wiacek introduced into evidence the Korpacz Real Estate Investor Survey for the Second Quarter of 2005. This is a nationally recognized survey of up-to-date capitalization and discount rates published by a subsidiary of PriceWaterhouseCoopers that is commonly used by appraisers. Under "National Development Land Market," the Korpacz study addresses such matters as construction costs, and retail, office, industrial and single-family residential real estate, as well as other species of residential real estate.
In pertinent part, the Korpacz survey stated: "[T]he U.S. Real Estate Industry continues to show signs of sustained recovery . . .
"While single-family residential development is expected to decline from its peak during the next couple of years, growth is still anticipated. According to Construction, published by Reed Business Information, residential housing starts are expected to increase 4.0% in 2005, down from 10.0% in 2004. The decline in growth is due to the expected rise in interest rates, which will deter borrowers as well as the appreciation in single-home prices. In addition, high land prices will deter some builders."
Other aspects of the real estate industry are not directly applicable but, because no sector of that industry exists in complete isolation from others, they are briefly mentioned here. Under "Construction Costs," Korpacz stated: "Due to the rising cost of construction materials — particularly steel — and high oil and gas prices, some nonresidential construction may be delayed and/or downsized in the months ahead." Under "Retail Property," Korpacz observed: The retail sector continues to maintain a healthy balance between supply and demand."
Korpacz stated that "[t]he office sector continues to show steady signs of recovery due to increases in employment and limited additions to supply." Under "Industrial," it noted: "While the availability rate for the national market stood at 10.9% . . . many individual markets posted vacancy rates that were well above that one."
As for apartments, Korpacz observed that "[c]onstruction activity overall was down quite a bit in the apartment sector on a quarterly basis at the start of 2005 . . . Due to positive demographic trends, such as increasing levels of immigration, rising number of single-person households, and aging echo-boomers, as well as high home prices, rental construction is expected to remain strong . . . Most of the new construction will likely occur in those apartment markets currently experiencing extremely low vacancy rates, such as . . . Fairfield County . . ."
An "echo-boomer" has been defined as someone who was born between the late 1970s and the early 1990s. See e.g., World Wide Words at http://www.worldwidewords.org.
With specific reference to single-family real estate, the Korpacz study stated: "Due to minimal increases in interest rates, demand for new homes, vacation properties, and investment homes remains extremely strong. Even though new housing starts dropped a bit in March 2005, residential construction accelerated in April 2005 . . .
"On a regional basis, single-family housing starts were up from a year ago in both the West and South, but down in the Northeast and Midwest . . .
"In certain parts of the country, residential developers have been the main procurer of land."
As for discount rates, the Korpacz survey reported: "Free and clear discount rates including developers profit range from 11.00% to 25% and average 18.05% this quarter . . . The rates are unchanged from the fourth quarter of 2004 and assume that entitlements are in place. Discount rates for projects that lack entitlements are typically increased between 300 and 600 basis points; the average increase is 425 basis points. This range and average are up slightly from our last report on this market segment. An insufficient number of responses prevented us from reporting discount rates subject to financing this quarter." (Emphasis added.)
Sheehy claims that Wellspeak's fifteen percent discount rate, which incorporates entrepreneurial profit of only seven percent, is much too low. The court agrees. Despite the strength of the housing market in April 2005, there were far less arduous, less risky means to earn seven percent on money than building a twenty-four-lot residential subdivision. Although the planning zoning commission had granted subdivision approval, the real estate market is inherently laden with risks. Development, even residential development, is not for the faint of heart. While Shelton may be situated in Fairfield County, it is at the end of Fairfield County abutting New Haven County. Although the residential housing market was strong in the second quarter of 2005, some clouds were on the horizon in the form of serious and legitimate concerns over rising interest rates and the eventual saturation of the housing market. Moreover, much could happen during a twenty-four-month absorption period. Given the time, money and risk entailed in developing this large, twenty-four-lot subdivision, a commensurately larger profit was appropriate.
On the other hand, Sheehy's percentage for entrepreneurial profit is outside the upper limit of the Korpacz range. Since the court is confronted with dueling appraisers, considerable weight is afforded the Korpacz survey, albeit with recognition that it is a national survey that speaks in terms of averages. The court is not satisfied that Sheehy adequately factors into his estimate that the subject property has full subdivision approval in a desirable town at a time when the residential real estate market was relatively healthy. Since Sheehy based his opinion largely on his conversations with area developers, it also bears mention that the operative discount rate is not one that reflects the maximum possible aggrandizement of the developer but, rather, what a reasonable developer could reasonably expect to realize as profit.
"It is important to be mindful . . . that the purpose [and effect] of averaging is to eliminate peaks and valleys. Soo Line R. Co. v. Dept. of Revenue, 89 Wis.2d 331, 366, 278 N.W.2d 487 (Wis.Ct.App. 1979), aff'd, 97 Wis.2d 56, 292 N.W.2d 869 (1980)." Waste Conversion Technologies, Inc. v. Midstate Recovery, LLC, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 04 4000948 (December 3, 2008).
Considering all of the evidence, the court finds that the entrepreneurial profit component of the discount rate in April 2005 in the subject area was approximately fourteen percent and that the overall discount rate was 20.75 percent. The court further finds that the subdivision development approach yields a fair market value of the twenty-four-lot subdivision of approximately $4,256,199 or an average of $177,341 per lot.
Considering the direct sales approach and the subdivision development approach, as well as the court's view of the property and the immediate vicinity, and all the evidence, the court finds that the fair market value of the entire twenty-four-lot subdivision was $4,225,000 as of the date of the taking.
IV
The court turns to the value of the 5.69-acre remainder. The remainder consisted of three lots, two of which (lots 6 and 8) bordered on Meadow Street and a third (lot 7) which was an interior lot accessed by a thirty-foot-wide access way off of Meadow Street. Lot 6 was especially impacted by the high tension wires and tower. Wellspeak valued lot 6 at $265,000, lot 7 at $285,000, and lot 8 at $260,000. Sheehy estimates the value of each lot at $265,000, but assumes that the remainder could be reconfigured into four building lots.
A preliminary issue is whether the three lots in the remainder remained approved building lots after the taking. This question arises because Richard Schultz, administrator of the planning zoning commission, told Walter Wiacek after the taking that the three lots required renewed planning zoning commission subdivision approval. Schultz and Anthony Panico, a consultant to the commission, also expressed this opinion in a pre-trial deposition, opinions that they recanted at trial. Wellspeak rendered two opinions as to the value of the remainder, one that the fair market value of the remainder was $700,000 if the taking had negated subdivision approval, and $800,000 if it had not.
The court disagrees with the claim that the city's taking deprived the lots in the remainder of their status as approved building lots. These three lots remained fully in tact after the taking, and were not dependent, from a regulatory standpoint, on anything — such as a road — in, from or to the parcel that was taken. That being so, the lots are valid for five years. See General Statutes § 8-26c.
The principal issue separating the parties with respect to the remainder arises from the city's contention that the remainder may be resubdivided, or reassembled, into four building lots. Based on this assumption, Sheehy, in his report, estimates that the fair market value of the remainder is $1,035,000. He amended this estimate at trial to $990,000 based on additional information. The defendant questions whether the city has proved that the remainder may profitably be reconstituted into four lots. The court agrees with the city that the remainder may be profitably reassembled.
The factual basis for the city's claim that the remainder may be resubdivided into four lots was presented by Anthony Panico. Panico holds undergraduate and graduate engineering degrees from Yale University, which were awarded in 1953 and 1957 respectively. He has been a planning consultant to various Connecticut municipalities. In that capacity he has drafted numerous land use regulatory schemes, plans and studies. At the time of trial he had been a consultant to the planning zoning commission of the town of Wolcott for twenty years and a consultant to the planning zoning commission of the city of Shelton for forty-five years. He was one of the original authors of the both the zoning regulations and the subdivision regulations of the city of Shelton. Panico has authored a series of amendments to the zoning regulations. He also has authored some amendments to the revised subdivision regulations. He regularly consults with Schultz and is present for commission meetings.
Some time thereafter, the subdivision regulations were re-written by a regional planning agency.
At trial, Panico presented two plans by which the remainder, which included the three approved lots as well as the rear portions of lots 4 and 5, most of which were taken by the city, could be reassembled or resubdivided into four lots. The first plan requires the construction of a cul-de-sac. Lot 1 on this plan has a conservation easement running through it, though the easement is not depicted on the plan. Panico testified that any house that was built on this lot would have to be situated between the conservation easement and the set back from the road. Panico did mistakenly state that the required setback from the road was thirty feet, whereas Schedule B to the zoning regulations states that in an R-l zone, the setback is forty feet. However, on close examination, the additional ten feet of setback would not defeat the plan.
In earlier plan conceived by Panico and prepared by the engineering department, which was substantially similar to Exhibit 1, depicted one lot as having insufficient street frontage.
A similar plan was included in Sheehy's report. In his report, Sheehy states: "This appraisal assumes that the remainder parcel will support the development of a 4-lot residential subdivision." (p. 11.) "All things considered, this is a reasonable assumption. The City of Shelton has guaranteed that the remainder parcel will develop four residential lots. A preliminary subdivision plan has been prepared by the City of Shelton and is included as Exhibit No. 2 in the Addenda of this report." (Emphasis added.) Id., 20.
Sheehy identified the sources of the "guarantee" as the mayor and the assistant corporation counsel. At trial, he aggressively retreated from the term "guarantee," confessing that he had chosen that word poorly. Under the Shelton subdivision regulations the authority to grant subdivision or re-subdivision approval is exclusively vested in the joint planning zoning commission of the city of Shelton. Pursuant to General Statutes § 8-19, its members may not hold a salaried municipal office. See also General Statutes § 8-4a (making the provisions of § 8-19 applicable to joint planning and zoning commissions); Murach v. Planning Zoning Commission, 196 Conn. 192, 196, 491 A.2d 1058 (1985). Neither the mayor nor the assistant corporation counsel sit on the planning and zoning commission, and, although when the commission acts on an application for subdivision approval, it acts in an administrative capacity; JM Realty Co. v. Norwalk, 156 Conn. 185, 190, 239 A.2d 534 (1968); no individual can "guarantee" subdivision approval.
Moreover, the preliminary subdivision plan contained in the addendum to Sheehy's report subdividing the remainder into four building lots was flawed. It misstated the acreage in the remainder to be 4.9 acres and two of the four lots depicted required variances for failure to meet the minimum square foot requirement of the zoning regulations. "[T]he authority of a zoning board of appeals to grant a variance under General Statutes § 8-6(3) requires the fulfillment of two conditions: (1) the variance must be shown not to affect substantially the comprehensive zoning plan, and (2) adherence to the strict letter of the zoning ordinance must be shown to cause unusual hardship unnecessary to the carrying out of the general purpose of the zoning plan.' (Internal quotation marks omitted.) Rural Water Co. v. Zoning Board of Appeals, 287 Conn. 282, 295, 947 A.2d 944 (2008). There was no showing that an applicant could satisfy either requirement. The court finds that the sketch included in the Sheehy addendum cannot be the basis of a finding that the remainder may be resubdivided into four lots.
Panico opined that lot 1 had more than "ample room to accommodate a generous-sized ranch house." While this may be so, the lot valuations of the two appraisers suggest that they envisioned "higher-end homes," to use Wiacek's characterization, and not ranch houses, however generously sized.
Wiacek argues that any reconfiguration of the remainder would have to provide for open space. The subdivision regulations of the city of Shelton contain detailed requirements with respect to the setting aside of open space in connection with the subdivision of land. See Subdivision Regulations of the City of Shelton § 4-19 et seq. The regulations define "subdivision" to include "re-subdivision." Id., § 1-3 and Appendix. Section 4-19-12 of those regulations expressly provides that open space requirements "shall not apply if . . . C. The subdivision is the result of an assembly of lots or parcels for which Open Space was previously set aside and which assembly is now subdivided into a new configuration of lots." Based on this regulation, the court concludes that a four-lot reconfiguration of the remainder would not have to provide for open space.
Panico also prepared an alternate four-lot plan for the remainder. This alternate plan did not require the construction of the road but provided for three interior lots with accessways. This plan is inferior not only to Panico's four-lot plan with a cul-de-sac but to the three-lot subdivision extant after the taking. It is not reasonably probable that any owner would have made an application to the commission for such a resubdivision. On the other hand, the court finds that Panico's four-lot resubdivision, or reassemblage, with the cul-de-sac is a viable, profitable alternative to the existing three lots in the remainder.
Indeed at trial, Wiacek testified that after the taking the defendant did not attempt to resubdivide the remainder because "we were still going through the process of this . . . the condemnation process."
Having considered the evidence, the court turns to the valuation of the Panico's four-lot plan with a cul-de-sac. The court finds that lot #1, which will accommodate a "generous-sized ranch house," has a value of $260,000. Lot #2, which has some wetlands, has a value of $275,000. Lot #3 which is oversized, has wetlands and overhead power lines, is valued at $275,000. Lot #4, which borders Meadow Street and has overhead power lines and a high tension tower in one of its corners, has a value of $260,000. The court finds that the cost to construct the cul-de-sac in 2005 would have been $176,000 and the cost to remove the existing house and barn on the remainder would have been $25,000. The court, therefore, finds that the fair market value of the remainder, as reconfigured with a cul-de-sac, is 869,000. This is nearly $70,000 more than the combined value of the existing three lots. Subtracting the fair market value of the remainder, $869,000, from the fair market value of the entire parcel, $4,225,000, the court finds that the fair market value of the parcel taken by the city on April 4, 2005 was $3,356,000. As observed supra, prior to the taking, the city deposited $2,500,000 with the court. Therefore, damages to Wiacek consists of $856,000 plus interest.
V
The defendant seeks interest at the rate of 10 percent, the maximum prejudgment interest rate allowed in civil actions pursuant to General Statutes § 37-3a. The defendant recognizes however, that courts have often awarded a lesser rate of interest. The plaintiff requests that the court limit interest to an annual rate equal to the weekly average one-year constant maturity yield of United States Treasury securities, as published by the Board of Governors of the Federal Reserve System.
At the time of taking, General Statutes § 37-3c provided in relevant part: "The judgment of compensation for a taking of property by eminent domain shall include interest at a rate that is reasonable and just on the amount of the compensation awarded. In determining what rate of interest is "reasonable and just" the court has broad discretion. Cf. Sears, Roebuck Co. v. Board of Tax Review, 241 Conn. 749, 765-66, 699 A.2d 81 (1997). The Connecticut Supreme Court has recognized that "[t]he right to award interest in eminent domain actions does not depend upon statutory authority . . . The determination of just compensation under the fifth amendment is exclusively a judicial function. United States v. New River Collieries Co., 262 U.S. 341, 343-44, 43 S.Ct. 354, 67 L.Ed. 1014 (1923). In condemnation cases, even in the absence of a provision for interest in the statute, the constitution requires just compensation, and its ascertainment is a judicial function. Seaboard Air Line Ry. Co. v. United States, [ supra, 261 U.S. 304]." (Citation omitted.) Leverty Hurley Co. v. Commissioner of Transportation, 192 Conn. 377, 380, 471 A.2d 958 (1984).
The balance of General Statutes § 37-3c provided: "If a court does not set a rate of interest on the amount of compensation awarded, the interest shall be calculated as follows: (1) If the period for which interest is owed does not exceed one year, interest shall be calculated from the date of taking at an annual rate equal to the weekly average one-year constant maturity yield of United States Treasury securities, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of taking; and (2) if the period for which interest is owed exceeds one year, interest for the first year shall be calculated pursuant to the provisions of subdivision (1) of this section and interest for each additional year shall be calculated on the combined amount of principal, which is the amount by which the compensation award exceeds the original condemnation deposit, plus accrued interest at an annual rate equal to the weekly average one-year constant maturity yield of United States Treasury securities, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the beginning of each year for which interest is owed. Such judgment shall not include interest on any funds deposited by the condemnor as compensation for the taking for the period after such deposited funds become available for withdrawal by the condemnee. The interest shall accrue from the date of taking to the date of payment." Since the court here is setting the rate of interest, this portion of § 37-3c is inapplicable.
This court's determination of a "reasonable and just" rate of interest is informed by a decision of the Ninth Circuit Court of Appeals, in which the court stated that "[t]o determine the appropriate rate of interest when payment of just compensation is delayed, the district court must examine what a reasonably prudent person investing funds so as to produce a reasonable return while maintaining safety of principal would receive . . . The district court should apply an interest rate based on evidence of the rate that would be generated by investment in a diverse group of securities, including treasury bills." Schneider v. County of San Diego, 285 F.3d 784, 793 (9th Cir. 2002); see Leverty Hurley Co. v. Commissioner of Transportation, supra, 192 Conn. 382 (court acknowledged reasonably prudent investor criteria, but noted that trial court "was not compelled to award that rate"); West Haven Housing Authority v. CB Alexander Real Estate, LLC, Superior Court, judicial district of New Haven, Docket No. CV 04 0489106 (October 29, 2008, Corradino, J.) (46 Conn. L. Rptr. 583, 584) ("[A] reasonable rate of interest posits an actor striving to achieve it which would be a reasonably prudent investor."). In times of protracted low or negative growth, however, a reasonable and just annual rate of interest for a condemnee whose funds are being involuntarily withheld by the government under the power of eminent domain is at least equal to the weekly average one-year constant maturity yield of United States Treasury securities.
Insofar as the court in West Haven Housing Authority v. CB Alexander Real Estate, LLC, supra, 46 Conn. L. Rptr. 584, states that 10 percent interest ought to be used because "10% interest . . . is also the rate of interest for civil actions generally," this court disagrees. General Statutes § 37-3a provides in relevant part: "(a) Except as provided in sections 37-3b, 37-3c and 52-192a, interest at the rate of ten per cent a year, and no more, may be recovered and allowed in civil actions or arbitration proceedings under chapter 909, including actions to recover money loaned at a greater rate, as damages for the detention of money after it becomes payable." Under this statute, 10 percent is the statutory maximum that the court may award; the court has broad discretion to award interest below that rate. Sears, Roebuck Co. v. Board of Tax Review, supra, 241 Conn. 765-66; see Stuart v. Stuart, 112 Conn.App. 160, 180-81, 962 A.2d 842 (2009). Moreover, the legislative history to No. 95-343 of the 1995 Public Acts, which amended General Statutes § 37-3c, reflects that the legislature intended that the courts would not automatically default to a 10 percent interest rate in eminent domain proceedings. See 38 H.R. Proc., Pt. 21, 1995 Sess., p. 7484; Conn. Joint Standing Committee Hearings, Transportation, Pt. 4, 1995 Sess., pp. 1267-71 (remarks of Dave Gilbert of the department of transportation) and p. 1343.
The defendant is entitled to interest on the amount of $856,000 from April 4, 2005 to the date of this judgment. The court determines that a reasonable and fair interest rate for 2005 was 6 percent, and that interest for that portion of the year after the taking is $38,520; that a reasonable and fair interest rate for 2006 is 10 percent, and that interest for that year is $85,600; that a reasonable and fair interest rate for 2007 is 7.5 percent, and that interest for that year is $64,200; and that a reasonable and fair interest rate for 2008 to the date of this judgment is 2 percent, and that interest for that period is $19,973.33.
Judgment shall enter for the defendant in the amount of $856,000 plus interest in the amount of $208,293.33 for total damages of $1,064,293.33 plus taxable costs.