Opinion
No. CV 04-0489106 S
January 16, 2007
MEMORANDUM OF DECISION
In 2004 the plaintiff exercised its power of eminent domain under § 8-50 of the general statutes to acquire, after adopting of a resolution, real property with regard to the property which is the subject of this litigation. The necessary resolution was passed March 9, 2004.
The plaintiff housing authority, via eminent domain, took title to all units within the Glen Oaks Condominium in West Haven which it did not already have title to; the defendants were the owners of 63 condo units taken by the housing authority.
The housing authority in fact filed statements of compensation for 74 units in the same period in which the defendant's property was seized by eminent domain. Previously the City of West Haven had transferred the 16 units it owned to the plaintiff. The defendant housing authority thus acquired ownership of all 90 units in the Glen Oaks Condominium.
The housing authority filed statements of compensation as to all 74 units it seized by eminent domain including statements of compensation for each of the 63 units and for these units the plaintiff paid in to court $341,002. Pursuant to § 8-132 of the general statutes the defendants filed Applications for Review of the statements of compensation thereby appealing from the statements pursuant to § 8-132 of the general statutes.
Before directly discussing the issues raised on appeal it should be noted that § 8-40 provides that in every municipality like West Haven a "public body corporate is to be created known as the `housing authority.' " Under § 8-41 "the powers of each authority shall be vested in the commissioners thereof." Under the statute the mayor appoints the five commissioners. The commissioners appoint the executive director and employees of the housing authority.
Commissioners, after appointment, can be removed for cause by the city, § 8-43 but Gordon v. Bridgeport, 208 Conn. 161, 185 (1988) notes a housing authority under § 8-44 "is not granted the power to legally bind the city." That case went on to conclude that as a "matter of law" the chapter defining the establishment and operation of local housing authorities "does not establish an agency relationship between a municipality and a housing authority," id., page 186.
I
The question before the court is the appropriate valuation of the property seized by the plaintiff as of the date of the taking. The defendants have proposed two methods of valuation: (1) a straight market value determination and (2) a business plan valuation based on allegations "that plaintiff participated in the devaluation of the subject property." The court will first discuss the first market value determination by the defendant's expert Mr. Leary.
Before doing that it will set forth certain basic principles applicable to these condemnation cases and which it will try to apply in this case.
Justice Berdon in Northeast Ct. Econ. Alliance v. ATC Partnership, 256 Conn. 813, 827-29 (2001) sets forth the governing consideration that must be applied by trial courts:
"We begin our analysis of this claim by setting forth the general, well established principles that govern the taking of real property by eminent domain. The fifth amendment to the United States constitution, as applied to the states through the due process clause of the fourteenth amendment; . . . provides that: private property [shall not] be taken for public use, without just compensation." U.S. Const., amend. V. Article first, § 11, of the Connecticut constitution similarly provides that "[t]he property of no person shall be taken for public use, without just compensation therefore: This constitutional principle is well reflected throughout the General Statutes and our case law . . . (:[t]he owner of land taken by condemnation is entitled to be paid just 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: . . .
We have 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." The highest and best use concept chiefly employed as a starting point in estimating the value of real estate by appraisers, has to do with the use which will most likely produce the highest market value, greatest financial return, or the most profit from the use of a particular piece of real estate "In determining its highest and best use, the trial referee must consider whether there was a reasonable probability" that the subject property would be put to that use in the reasonably near future, and what effect such a prospective use may have had on the property's market value at the time of the taking ("[the questions of the highest and best use of property and to the reasonable probability of a [future change affecting value] . . . are questions of fact for the trier").
:[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.
More recent cases reflecting the foregoing positions are Commissioner of Transportation v. Rocky Mt., LLC, 277 Conn. 696, 711 (2006); West Haven v. Norback, 263 Conn. 155, 168 (2003); New London v. Picinich, 76 Conn.App. 678, 683 (2003). A good general discussion of the principles and methods of valuation to be applied in eminent domain cases is in 26 Am.Jur.2d at pp. 397 et seq., "Eminent Domain" at section E "Measure and Elements of Compensation," §§ 271 et seq., pp. 653 et seq.
It has also been said on several occasions by our court in one way or another that: "It is well established that (i)n an eminent domain proceeding a trial court may seek and in the testimony of experts, but must ultimately make its own independent determination of fair market value," West Haven v. Norback, supra, 263 Conn. at page 173, Commissioner of Transportation v. Rocky Mt., LLC, supra 277 Conn. at page 729 cf. Appeal of Cohen, 117 Conn. 75, 85 (1933), also see Northeast Ct. Econ. Alliance v. ATC Partnership, supra 256 Conn. at page 829.
It should also be noted in these general observations that under § 8-132 of the general statutes a trial court has a statutory obligation to view the property seized by eminent domain. The parties can waive their rights to have the court conduct a personal viewing, Northeast Alliance, supra 256 Conn. page 830, fn 11. Even in the absence of such a waiver where there was no viewing the court in New London v. Picinich, held this was not fatal. Here the court did do a viewing but as in Northeast Alliance and Picinich both sides seemed to agree at the viewing that "the subject property no longer existed in the same condition as it did at the time of the taking." Picinich at page 692. As the latter court said at p. 691 "The duty of the court under the statute is to make an independent determination of value. Viewing the property is only one of many means by which a court can determine the property's value."
II (a)
The court will now discuss the first estimate of valuation, market valuation, as advanced in IIIA of the defendant's brief.
The defendants relied on the appraisal services of John Leary, president, appropriately enough of Leary Counseling and Valuation, Inc. Mr. Leary has a very impressive and lengthy resume which is attached to Exhibit E and which the court will only highlight. He has been involved in the valuation of real estate since 1970, directed an appraisal division for Billings Co., Inc./Advest, was the chief Appraisal Officer for Shawmut National Corporation. He has done appraisals of many types of property including apartments, single and multi-family dwellings and condominiums. He has been associated with several appraisal institutes, boards, and has been certified by the State of Connecticut as a General Real Estate Appraiser.
In his report submitted at trial Mr. Leary, Exhibit E, understood his assignment to be the determination of the fair market value of the subject property. To do this he used the so-called "income capitalization approach." As he said "this capitalization method simulates the rights of an investor to an annual cash flow and to the resale of the property by quantifying the income and expenses of the holding over a five year period to (cash flow) and calculating a reversion (resale valued) at the end of the fifth year based (on) dividing the sixth year operating income (NOI) by a terminal capitalization rate."
In Sun Valley Camping Cooperative v. Town of Stratford, 94 Conn.App. 696, 702 (2006), the court said, quoting from an earlier case: "There are three accepted methods of valuation which may be used for the assessment of real property. They are the comparable sales approach, the income (capitalization) approach (and) the . . . cost approach . . ." Four Ds, Inc. v. Mattera, 25 Conn.App. 308, 315 (1991). See New Haven Savings v. West Haven Sound Development, 190 Conn. 60 (1983) where "income approach" for valuation of property approved id., p. 70 and court said under this method net rental value of subject property had to be determined through comparison with other rental properties and their capitalization rate must be determined which is divided into the net rental value to determine market value, id., p. 65. Also see United Technologies Corp. v. East Windsor, 262 Conn. 11 (2002) where trial court's reliance on appraiser's use of income capitalization report was upheld. In commenting on that approach in footnote 16 the court said: CT Page 1193
"[fn 16] The income capitalization approach of Kerin and Glendinning used a discounted cash flow analysis to create a present value indication from the property's expected future income. The trial court noted that they considered discounted cash flow analysis "most reflective of the valuation process a typical buyer utilizes when contemplating the purchase of an income-generating investment property." They determined that the contract rent was in line with the rent charged for what they deemed to be the only comparable property in Connecticut, namely, the Allied Signal facility in Cheshire. The trial court stated that it was particularly impressed with this approach because it reflected the "arms length" bargaining that occurs between two knowledgeable and sophisticated parties, like the plaintiff and Beckenstein."
Courts in other jurisdictions use the income capitalization method to determine the market value of real estate. In 41 Kew Gardens Rd Assoc. v. Tyberski, 70 NY.2d 325, 331 (1987). The New York Court of Appeals said "the income capitalization approach is generally regarded as the preferred method for determining the value of income producing property"; Matter of City of Albany, 136 A.D. 818 (N.Y.App.Div., 1988) (used to value rental property and cites Shorefront High School v. Rudnick, 25 N.Y.2d 146, 148 (1977) which said income capitalization approach "is utilized in valuing rental property"); see generally 26 Am.Jur.2d "Eminent Domain," § 305 at pp. 690-92.
In Sun Valley Camping Cooperative, supra the court in footnote 9, 94 Conn.App. at p. 702, set forth the methodology of the income capitalization approach and referred to J. Eaton, Real Estate Valuation in Litigation (2d ed., 1995):
9 The income capitalization approach consists of the following seven steps: (1) estimate gross income; (2) estimate vacancy and collection loss; (3) calculate effective gross income (i.e., deduct vacancy and collection loss from estimated gross income); (4) estimate fixed and operating expenses and reserves for replacement of short-lived items; (5) estimate net income (i.e., deduct expenses from effective gross income); (6) select an applicable capitalization rate; and (7) apply the capitalization rate to net income to arrive at an indication of the market value of the property being appraised. J. Eaton, supra, p. 194. The process is based on the principle that the amount of net income a property can produce is related to its market value. Id. This approach only has utility where the property under appraisal is income producing in nature. Id.
cf. footnote 9 in New Haven Savings v. West Haven Sound Development, supra, 190 Conn. at page 66.
The cases say, however, that the income capitalization method "can be effective only with thorough data including accurate actual income . . .," Matter of City of Albany, supra 136 AD.2d at page 819. The Am.Jur.2d section referred to above has the following explicit comments and referencing several cases:
Caution: The capitalization-of-income method should be carefully scrutinized even where appropriate; therefore, while it may be the only usable method under certain circumstances, its use must be based on a foundation which minimizes conjecture and uncertainty.
For example, evidence of a hypothetical income stream from structures yet to be built has not been given the same weight as evidence of rentals received from improvements in place.
The actual income generated by the property in question is generally the surest indicator of the income-producing value of the property.
Also as a predicate to application of the foregoing valuation approach the following must be kept in mind "fair (market) value (which this exercise is all about), of necessity, regardless of the method of valuation, takes into account the highest and best value of the land . . . The highest and best use concept, chiefly employed as a starting point in estimating the value of real estate by appraisers, has to do with the use that will most likely produce the highest market value, greatest financial return, or the most profit from the use of a particular piece of real estate," Carol Management Corp. v. Bd. Of Tax Review, 228 Conn. 23, 34 (1993), quoted in Metropolitan District v. Burlington, CT Page 1195 241 Conn. 382, 390 (1997). In Matter of Town of Riverhead v. Saffals Assoc., 145 AD.2d 423 (N.Y. 1988) involving condemnation of land in part containing efficiency apartment the court said "It is settled that if the highest and best use to which a property can be put is the one that the property presently serves and that use is income producing, the proper valuation method is the income or capitalization approach" — this shows the connection between the latter approach and the best use concept. The Dictionary of Real Estate Appraisal, (3d Ed, 1993) defines "highest and best use" as "the reasonably probable and legal use of vacant (and or an improved property which is physically possible, appropriately supported, financially feasible, and that results in the highest value." The court in United Technologies Corp. v. East Windsor, 262 Conn. 11 (2002) at footnote 20 said this is "virtually identical to the highest and best use standard utilized by our courts," referring to Metropolitan District v. Burlington, supra.
(b) (i)
The court will now examine Mr. Leary's report and try to apply the foregoing principles to evaluate his income capitalization approach. Leary uses an acceptable definition of market value; he quotes from The Appraisal of Real Estate (American Institute of Real Estate Appraisers), 12th ed, 2001, page 22. Therein it says market value is "the most probable price, as of a specified date, in cash . . . for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self interest and assuming neither is under duress." This is similar to the definition of "fair market value" in New London v. Picinich, supra, 76 Conn.App at p. 684 where the court said it is "the price that would probably result from fair negotiations between a willing seller and a willing buyer, taking into account all the factors, including the highest and best use or most advantageous use, weighing and evaluating the circumstances, the evidence, the opinions, expressed by the witnesses and the use to which the premises have been devoted and which may have enhanced its value."
As the foregoing indicates as well as the previous general introductory discussion, highest and best shows use for a property must be determined on as a prerequisite for determining fair market value no matter what valuation method is used and certainly if the income capitalization approach is relied upon. How else can you determine what the hypothetical purchaser would pay in an economic system which assumes the seller is only interested in maximizing profits?
The court agrees with Mr. Leary's conclusion that the highest and best use for the units owned by the defendants was for continued operation as a rental investment. Andrew Whitley controlled the entities that owned the 63 units that were part of the 90-unit condominium block. The original plan was to acquire all the units and renovate the Glen Oaks complex for sale to individual owners. Mr. Whitley testified that the financing could never be secured to permit the necessary renovation because the banks balked at extending loans since a municipality owned of the remaining 27 units and the city would not sell its units to the defendant.
Also many of the units were boarded up especially obvious, since it was at a primary entrance, was building 254 which the city controlled and was in a rundown condition. This would make it difficult to pursue a plan to sell to individual users.
Renovation efforts, necessary to foster sale of the individual units, was also hampered because of unpaid condo changes for the units owned by the city and 11 units owned by others so self, non-bank financing was not an option for the defendants.
Also, the conclusion that the 63 subject units could be continued to be managed as rentals was not some after the fact conjecture. Mr. Whitley testified that Glen Oaks had a history as a rental income property and the city of West Haven was itself 45% rental. At the time that Leary prepared his report Whitley testified he had 90% occupancy of the defendant's units on a rental basis.
Based on the foregoing the court concludes that Mr. Leary was correct in concluding that at the time he prepared his report the highest and best use was continued operation of the subject units as rental properties.
(ii)
As mentioned, Leary used the income capitalization approach and in light of the fact that the subject units were producing a rental income stream this would be the preferred method to determine fair market value according to case law previously mentioned by the court. In this section the court will discuss the specific application of that method to this case.
The court will quote from Mr. Leary's report which it finds was not contradicted by anything in other testimony or evidence. He described the income capitalization approach he was using in the following terms:
The value of the 63 units as a rental investment holding as of mid-year 2004 is estimated using a five-year discounted cash flow analysis. This capitalization method simulates the rights of an investor to an annual cash flow and to the resale of the property by quantifying the income and expense of the holding over a five-year period (cash flow) and calculating a reversion (resale value) at the end of the fifth year based dividing the sixth year net operating income (NOI) by a terminal capitalization rate.
Two income projections are made to bracket market expectations: one with higher vacancy, repairs and maintenance, and management expenses and one with lower vacancy, repairs and maintenance, and management expenses. Each year of the income projection is then discounted to a present value at a yield rate commensurate with the risk inherent in the income stream. The sum of the present values under each income projection represents the value range of the 63 units as of mid-year 2004.
A discounted cash flow analysis was performed to reduce value projections to "present value" — here the value at the time of the taking.
There appears to be no dispute in the cases on the propriety of using the income capitalization method in properly providing rental income and the defendant Housing Authority does not dispute use of this approach as such. But as discussed in Matter of City of Albany, supra and § 304 of the 26 Am.Jur.2d article under "caution" . . . "this method should be carefully scrutinized even where appropriate; therefore while it may be the only usable method under certain circumstances, its use must be based on a foundation which minimizes conjecture and uncertainty" (emphasis by this court), see also State v. Bare, 377 P.2d 357, 363 (Mont., 1962); Dodge, Commissioner of Public Works v. Estate of Hiscock, 378 N.Y.S.2d 202, 203 (N.Y.App.Div., 1976 (in condemnation case finding reversed where rental value based merely on appraiser's statement where court found "the record does not contain evidence to support that item.)"
It appears here that the appraiser, Mr. Leary, did a thorough job of minimizing conjecture and speculation.
As just indicated, deciding on the appropriate net operating income is a prerequisite to application of the income capitalization approach. This is so because market value for a prospective purchaser is determined by dividing that figure by a capitalization rate with a further calculation to determine present value of multi-year projections are used.
How is the net operating income decided upon? First the gross income (here retail income) is arrived at with a deduction in rental properties for vacancies and credit loss to arrive at effective gross income. Then expenses are calculated which are deducted from effective gross income to produce the net operating income.
To determine rental income, Mr. Leary took several steps. He inspected 55 of the 63 units in question which rated each unit from poor to fair to average to good and very good with intermediate steps between each category where necessary. He examined the rental history of the 63 units appraised against the investigatory background to determine market rent for the units which is necessary in a highest and best use analysis. If anything his estimates of market rent for each apartment was conservative; in the great majority of cases the market rent was the same as the actual rent being charged for each unit (which he listed) in May 2004. The point is that the basis of his rental income analysis he examined actual rents cf. Gray Gregory v. CTE South, Inc., 540 SE.2d 498, 500-01 (Va.Sup.Ct. 2001). He also did a comparative analysis of other rentals in the area of the subject property and found these rents ranged between $100 and $150 a month higher. This was consistent with the relatively poor condition of the Glen Oaks property.
But merely determining rental income for the year property was seized with a deducting for vacancy/credit loss to arrive at effective gross income then determining actual operating expenses to arrive at net operating income will not suffice. Effective gross income and expense figures must be projected over a period of five years to arrive at net operating figures.
Mr. Leary said that to reach a more accurate estimate of resale value of rental income property it was necessary to calculate the right of resale and the value thereof based on a five-year projection because as Mr. Leary said "it's the normal holding period that has been associated with most real estate investments" and "most cash flow analysis that you see in real estate are either five years or ten years." This would appear to make sense in a real world market since prospective buyers would be concerned not just with the last year or two years or even few years of property providing an income stream — they want themselves to calculate net income into the future which is the hypothetical period when they would hopefully be earning income from their contemplated purchase.
Projections have to be made for rental income over the 5-year period which, worked out to a 6% increase per year based on performance for a few years before 2004. Also the percentage increase for the vacancy/credit loss deduction to arrive at effective gross income must be made. The latter percentage increase will be discussed in the expense section not because it is an expense but just to show the method of calculations.
The same need to arrive at projections applies to the expense calculations. The analysis requires one to then turn to expenses and any projected increase over the years.
Therefore Mr. Leary examined expenses for Ankeny Homes, LLC for the calendar years 2001, 2002 and 2003. Exhibit 1 was put into evidence; it is a profit and loss statement for 2003 and Leary said this provided "the basis for the expense structure in the cash flow analysis."
He then did a "lower end income projection" and a "higher end income projection." For each projection the following categories appeared:
Income Growth Rates
Vacancy and Credit Loss
Repairs and Replacements
Management
Expense Growth Rate
Real Estate Tax Growth Rate
Year 1 Expenses Per Unit
How did he arrive at the percentage projections? In his appraisal report Leary said his "selection of a terminal capitalization rate for the two income projections was based in part on the Real Estate Research Corporation (RERC) Real Estate reports for Spring 2004 and Summer 2004. RERC defines Third Tier Investment Properties as: Older properties with functional inadequacies and/or marginal locations."
For the expense side of the five-year projections of income and expenses with the aim of determining net operating income he posited the actual real estate taxes for Year 1 and the condo charges which together constituted over 40% of all expenses under each projection. For that year he used percentage projections suggested for third tier properties in the reference works mentioned to calculate other expenses and the vacancy/credit loss figure.
For every year after the first year he projected the same 6% rental increase for the low end and high end income projections with the same expense growth rate and real estate tax growth rate for each of the next four-year projections — these figures could not be different in each projection at the risk of making his estimates speculative.
What is different in each of the two projections?
There are different percentage growth rates for various items in the lower end income projection as compared to the upper end income projection. The source of these differences are the previously referred to RERC reports for the spring and summer of 2004. As to the lower end income projection, Leary calculated vacancy/credit loss would be 10% of potential gross income — this being applied to gross income which was to increase at 6% per year of the five-year projection period. As noted, this is deducted from gross income to arrive at effective gross income. As to expenses on the low end projection, repairs and replacements were calculated at 12.5% of effective gross income with management expense at 10% of effective gross income.
As to the upper end projection, there were the following comparative differences: (1) vacancy/credit loss was calculated at 7.5% of potential, which would yield a higher effective gross income over the years as compared to effective gross income for the lower end projection. As to expense projections on the upper end projection, repairs and replacements were to be 10% of effective gross income and management expense 7.5% of that figure. When all the expenses are deducted from the effective gross income for each year of the five-year projections, based on the foregoing, the net operating income for the lower and upper end projections would be different.
Relying on the industry source reference, (RERC) Leary then said, "The risk associated with the lower end income projection for the subject holding is reflected in a terminal capitalization rate of 10.5% and a discount yield rate of 12%." Applied to the net operating income projections, a cumulative present value of $1,750,000 is reached on the low end income projection.
The upper end income projection provided for a terminal capitalization rate of 11.5% and a discount (yield) rate of 13%. Applied to the upper end income projection for net operating income, this would yield a market value of $1,900,000 for the subject units.
This equates with a unit value range of $27,778 to $30,159 per dwelling unit with an average unit value of $29,016. Leary then allocated the income capitalization approach value range to each of the 63 units and offered a final market value opinion as to each unit. This came to a value of $1,828,000 for all the 63 units.
As the plaintiff notes in his final brief, the "Court need not find a value for each of the sixty-three (63) units; rather, the valuation found for each of the six representative units should be extrapolated to the remainder of the units in each of the representative groups." The six representative units agreed to by counsel are:
1. 63 Glade Street, Unit C-4 is the representative unit for "Group A," which consists of eleven (11) units. 63 Glade Street, Unit C-4 is a one-bedroom, 845 square foot unit.
2. 55 Glade Street, Unit A-7 is the representative unit for "Group B," a group consisting of twenty (20) units. 55 Glade Street, Unit A7 is a 728 square foot, one-bedroom unit.
3. 59 Glade Street, Unit C-1 is the representative unit for "Group C," a group consisting of eight (8) units. 59 Glade Street, Unit C-1 is a 900 square foot, one-bedroom (plus den) unit.
4. 59 Glade Street, Unit A-2 is the representative unit for "Group D," a group consisting of five (5) units, 59 Glade Street, Unit A-2 is a 827 square foot, two-bedroom unit.
5. 55 Glade Street, Unit A-2 is the representative unit for "Group E," a group consisting of two (2) units. 55 Glade Street Unit A-2 is a 480 square foot efficiency unit.
6. 59 Glade Street, Unit C-2 is the representative unit for "Group F," a group consisting of seventeen (17) units. 59 Glade Street, Unit C-2 is a 915 square foot, two-bedroom unit.
As previously mentioned, Mr. Leary inspected 55 units and based on this inspection and the condition he assigned to each dwelling unit, he assigned a final market value as to each unit and as to the representative units.
The values for the representative units, as found by Leary, are as follows:
Group Unit Final Market Value Group A 63 Glade Street, Unit C-4 $ 29,000.00 Group B 55 Glade Street, Unit A-7 $ 32,500.00 Group C 59 Glade Street, Unit C-1 $ 32,500.00 Group D 59 Glade Street, Unit A-2 $ 32,000.00 Group E 55 Glade Street, Unit A-2 $ 22,500.00 Group F 59 Glade Street, Unit C-2 $ 32,500.00
In accordance with the procedure set forth in the stipulation, market value for the 63 units would be calculated as follows:
Value of Number of Aggregate Value Group Representative Unit Units in Group for Group A $29,000 11 $ 319,000 B $32,500 20 $ 650,000 C $32,500 8 $ 260,000 D $32,000 5 $ 160,000 E $22,500 2 $ 45,000 F $32,500 17 $ 552,500 TOTAL 63 $1,986,600
The plaintiff Housing Authority did not rely on an expert of its own. In the posture adopted at trial, the Housing Authority did not appear to object to the use of the income capitalization method adopted by Mr. Leary or other elements of his methodology such as the use of a lower end income projection and an upper end income projection.
But the plaintiff has several objections to the valuation arrived at by Mr. Leary. It notes that he did not "base expenses on historic costs and expenses" which "seriously distorted" the first year net operating income which resulted in the value of the units being "artificially inflated." The 2003 profit and loss sheet for Ankeny Homes, which owned 44 units 2003, was introduced into evidence. That year was the base year for Mr. Leary's five-year projection of net operating income. But the plaintiff points out that in that year the profit and loss sheet reflects that property taxes in excess of $64,000 were not paid. Not including them in expenses would distort any calculation of net operating income by necessary inflating it. But the point is that in his projections, Mr. Leary did include the figure for property taxes and over the years projected their increase which would be the critical factor for any prospective buyer who might hypothetically have access to Mr. Leary's appraisal report.
Turning to the base year for the projections, 2003, and the profit and loss sheet for that year, the plaintiff makes the related argument that:
In determining the price that a willing buyer would pay for the units, it is not logical to assume that the investor purchaser of these units would utilize an income capitalization methodology based on a (net operating income) which is over two times any demonstrated earning capacity of the property. Mr. Leary would have the court view as reasonable a valuation based on first year (net operating income's) approximately twice the demonstrated historical net operating income of the complex.
In this regard the plaintiff relies in part on the profit and loss record of Ankeny Homes for 2003 which discloses an income figure of $282,552. But as a small aside this was the income figure for only 44 units, not 63. Furthermore, it seems to the court that the driving force for this income capitalization approach is the income projection and rate of income increase over a projection period. At the time of the taking, the defendants had stabilized the properties they owned by repairs and renovations. Mr. Leary, on pages A-17 and A-18 of his appraisal report, examined past rent and determined market rent in a fairly conservative manner — that is, the basis for the $455,100 figure for gross rental income.
The plaintiff also pressed Mr. Leary on, as the defendants note, "whether he factored in (on expenses) `the increased maintenance costs for the fact that the deferred maintenance was not being performed.' " The defendants in their brief had three responses to this argument which the court agrees with and which Mr. Leary testified to: (1) deferred maintenance, is reflected in the reduced rents compared to prevailing area rents and (2) higher expense for deferred maintenance was reflected in the fact that expenses in this complex amounted 59 65% of income whereas "a normal apartment complex would probably have expenses of about 35% and income of about 65%. Also as to deferred maintenance, consideration should be given to the fact that his income capitalization rate and discount (yield) rate were specifically addressed to so-called "third tier properties" with presumably all the problems such property has — and also a low end income projection was used.
Besides all the mathematical calculations, there is, at least for the court, other verification of the unit values and average unit value of $29,016 per unit Mr. Leary arrived at. Mr. Leary looked into neighborhood condominium price ranges from January 2003 to mid-year 2004. Terrace Heights "is the closest of the neighborhood complexes to Glen Oaks in character and location," according to Mr. Leary; it had 8 sales with a price range of from $29,500 to $60,000. Other condos in the neighborhood representing four different complexes had 45 sales with price ranges from $45,000 to $113,000. Mr. Leary felt the value estimates he gave for the subject 63 units displayed a sufficient discount from these prices given "the distressed conditions at Glen Oaks."
Finally, the defendants refer to Mr. Leary's report and include a very interesting chart in their brief. On October 1, 2000, the Grand List for the subject property shows the market value and assessed value that was the last real property valuation conducted by the City of West Haven. The following valuations were given for the above mentioned representative units:
City of West Haven Representative October 1, 2000 Amount Paid Into Court Unit Market Value by Plaintiff
55 Glade St. $ 22,100 $1.00 (As per the Statement
Unit A-2 of Compensation filed April 21, 2004)
55 Glade St. $ 27,000 $1,000 (As per the Statement
Unit A-7 of Compensation filed August 4, 2004)
59 Glade St. $ 29,200 $6,000 (As per the Statement
Unit A-2 of Compensation filed May 4, 2004)
59 Glade St. $ 30,700 $11,000 (As per the Statement
Unit C-1 Compensation filed May 4, 2004)
59 Glade St. $ 31,000 $6,000 (As per the Statement
Unit C-2 Compensation filed May 4, 2004)
63 Glade St. $ 29,300 $4,500 (As per the Statement
Unit C-4 Compensation filed July 16, 2004)
This translates into a market valuation of $1,819,000.
For the foregoing reasons, the court accepts the defendants' analysis and ascribes a value of $1,986,500 to the units.
III (a)
The defendants also claim to be entitled to compensation based upon Mr. Leary's business plan valuation. Mr. Leary appraised the value of 56 of the 63 units as of July 21, 2001. These units were owned by entitles controlled by Andrew Whitley on the date of the taking. The defendants' brief goes on to say the valuation date of July 1, 2001 was chosen by Leary because Ankey Homes Business Plan "was to be implemented in 2000 with renovation and occupancy of the units under leases with an option to purchase to be completed by mid 2001."
The basic argument to support this position is that the Housing Authority and the city of West Haven "devalued" the properly. They only managed the property for rental income because, though no fault of their own the business plan could not be put into effect. The defendants rely on Judge Satter's opinion in City of Bristol v. Tilcon Minerals, Inc., 2004 Ct.Sup. 8961, 37 Conn. L. Rptr. 239. In that opinion Judge Satter notes that a land owner whose property has been taken is entitled to fair compensation — the landowner must be put in as good a pecuniary position as if the property had not been taken; "Because the standard is fair compensation, the counts have recognized that the rule of valuation of the property at the taking date will not be strictly adhered to if it results in compensation that is more or less than just." He cites several cases standing for the proposition that "fairness requires that the land be valued for compensation purposes either before the acts that depreciated the land, or as if the land had not been depreciate." Cases cited are Becos v. Mosheta, 238 NE.2d 548 (Oh., 1968) where county began acquiring land and doing demolition five years before plaintiff's property was taken; City of Buffalo v. Clement Co., 269 NE.2d 895 (N.Y. 1971) held that . . . "an aggrieved property owner has a remedy where it would suffer severely diminished compensation because of acts by the condemning authority decreasing the value of the property"; Klopping v. City of Whittier, 8 Cal.3d 39, 52 (1972) held "a condemnee must be provided with an opportunity to demonstrate that (1) the public authority acted improperly either by unreasonably delaying eminent domain action following an announcement of intent to condemn or by other unreasonable conduct prior to condemnation; (2) as a result of such action the property in question, suffered diminution in market value"; Slavitt v. Ives, 163 Conn. 198 (1972) held the "taking" for valuation purposes took place before certificate of taking filed when state had condemned sole right of access over another's land to the subject landlocked property, id., p. 205., cf. Stock v. Cox, 125 Conn. 405 (1939).
To paraphrase a quote from Klopping cited in the City of Bristol case a condemning authority cannot be permitted to depress the market value of property by the mere filing of condemnation proceedings, delay between the announcement of intent to condemn and the taking, or some oppressive act, see Klopping, id., at page 51. For a general discussion on related issues see Nichols On Eminent Domain, 3d ed, Vol 8A, Chapter 18, "Condemnation Blight" which the author describes as "a reduction in the value of condemned property that results due to the prospect of eminent domain and occurs between the time that the property is first considered for public acquisition and prior to the date of the actual taking," page 18-1. The point of all this is that according to City of Bristol's observations the landowner's award, at least under some circumstances should not be limited to the value of the property at the time of condemnation, also see Cleveland v. Carcione, 190 NE.2d 52, 118 Oh.App 525 at p. 532 (1963).
The court will now try to apply these general principles to determine whether in this case there should be a valuation based on the business plan (Ex. B F).
(b)
The plaintiff housing authority is the entity that acquires the property in situations such as the one before the court, § 8-50 CGSA. The latter section also provides that no property belonging to the municipality may be acquired without its consent. As noted earlier Gordon v. Bridgeport Housing Authority, 208 Conn. 187 (1988) cited with approval a quotation from McQuillin to the effect that a municipal authority like a housing authority "has been regarded as a corporate agency of the state and not a creature, agent or representative of the municipality organizing it." Gordon cited Rhode Island case, Housing Authority v. Fetzik, 289 A.2d 658 (1972) to the effect that a housing authority created "an autonomous body" — such authorities "are not instruments of the government created for its own uses or subject to its control." Apart from any independent rights it might have against the city for the actions here alleged, in this proceeding it would seem any reliance on the business plan and its valuation can be based only upon a theory that the plaintiff housing authority conspired with the city to devalue the property to in effect reduce the cost of the taking for the plaintiff.
Before trying to apply the foregoing principles to the present claim of the defendants it is necessary to give a brief factual context at the time of the taking there were 90 units in Glen Oaks. Of these, 55 were owned by entities controlled by Mr. Whitley. One of these entities and a third party owned one unit and seven units were owned by others but managed by one of the Whitley entities. Glen Oaks was developed in 1970 for rentals and there was a conversion to condominium ownership in 1987 which was not entirely successful. A block of units remained under apartment investment ownership.
The Whitley entities took over these units in January 2001 and they had a business plan developed in 2000 to acquire all 90 units which entailed renovating the complex for eventual resale to individual unit owners under lease purchase arrangements.
When the remaining units could not be acquired the Whitley entities managed their units and other units in the complex as a rental investment. It was in this context that Mr. Leary, the defendants' appraiser concluded that the highest and best use of the 63 units at the time of taking was "for continued operation as a rental investment." (The foregoing history and background paraphrases and quotes from pages 1 and 2 of Mr. Leary's appraisal report.)
The basic claim of the defendants is that the City of West Haven acting in concert with the plaintiff Housing Authority thwarted the achievement of the goals set forth in the business plan and the actual valuation for the taking should be based on the resulting loss.
Frankly the court has difficulty in accepting the defendants' argument under this theory although it accepts the rationale and fairness of the theory. One of Mr. Whitley's greatest complaints in trying to effectuate what in effect was a lease purchase program was the difficulties he had in charging higher rents which presumably would attract tenants capable of entering lease arrangements leading to purchase due to the boarded up condition of units owned by the City of West Haven. Building 254, which the court noted at the viewing was observable from all parts of the complex and fronted on an entrance way to the complex. The court agrees that in a boarded up state this building and any boarded up units were an eyesore which would make it difficult for Whitley entities to secure higher rents or enter into lease purchase arrangements.
But the city had boarded up building 254 since the late '90s, Whitley entities did not even consider Glen Oaks as an investment until 1999-2000 and the business plan was formulated in mid 2000. The first units were not purchased until 2001. True the units remained boarded up and in deplorable condition after 2003 when the city transferred the units to the plaintiff Housing Authority but there is no indication the plaintiff had the where-with-all at that time or until the time of the taking to do the necessary renovation. Also there was testimony from Mr. Siwek, the Executive Director of the plaintiff, that the city contacted him in 1997 about taking over the complex in 1997, again several years before Whitley entities acquired any units. Mr. Siwek said the Housing Authority was not willing to pay anything more than a nominal sum, but query whether they had the monies to do anything else. The Housing Authority did not undertake to do any work on them until they got bank financing to do renovations. The Housing Authority also appeared before the city council to approve a community development block grant in April 2005 long after the taking.
Both the city and the plaintiff did not pay common charges to the complex management company which made it difficult to implement their business plan because it "hinder(ed) the Defendant's ability to fund exterior maintenance and repairs by limiting the cash flow of the condominium association." But at the time of the transfer of the city's units to the plaintiff in late 2003 the common charges owed was approximately $500,000 — presumably reflecting failure to pay long preceding Whitley entities entry into the Glen Oaks picture. As highly intelligent and experienced investors, Mr. Whitley and his associates knew or should have known of all of these physical and financial conditions before the business plan was formulated and before they purchased any units.
The business plan itself in describing the "history of the Glen Oaks Project" refers to the serious mismanagement of the complex including failure to collect condo fees and even rents or to pay city taxes. As noted the housing authority fared no better in the condition in which it maintained the units it acquired and its responsibility for common charges. All of this of course made it difficult for Whitley to secure financing.
But in the last analysis the court has difficulty in accepting the predictions of a business plan formulated quite sometime after the conditions predictive of its non-feasibility were in existence — all due to the actions or failures to act of government entities — and then using that non-feasibility as a theoretical platform to make large claims against these same entities.
All of this presents problems for the court even without considering whether the city and the housing authority acted in concert to devalue the defendants' property or better phrased that the condemnor, here the housing authority, knowingly acted with the city to cause such devaluation. The city's failure to respond to Whitley's offer to pay tax liens, its boarding up of buildings it could presumably have profitably renovated and rented as Whitley entities did, its failure to pay common charges can hardly be laid upon the plaintiff. And as noted the acts of devaluation just mentioned started in the '90s several years before Whitley entered the picture an odd and languishing conspiracy which the Whitley entities somehow must be plugged into to make the City of Bristol analogy viable.
(b)
Even if the court has erred in deciding not to accept the defendant's business plan approach to valuation, the court cannot accept the valuation of $2,240,000 arrived at that by that valuation method. It is simply too speculative.
In accepting the income capitalization approach in the first part of this opinion, the court noted there was a history of rental income at Glen Oaks. Each unit was inspected and rated and the final value placed on each unit was compared to sales at a condominium which was said to be comparable to Glen Oaks.
On the other hand the lease purchase program proposed here is based on completely speculative presumptions which is underlined by a comparison of the appraisal report (Ex. E) used on the income capitalization approach assuming that rental would be the highest and best use with Exhibit B (business plan) and F (Mr. Leary's report on the business plan).
References in the latter exhibits refer to generalizations about a 96% success rate using the lease purchase plan in New Haven County. The business plan, says the "lease purchase program allows individuals, who might not otherwise (be) qualified for conventional financing, to lease the unit for a period of time prior to purchase ('tenant/buyer')." It states the "median home price in West Haven is over $110,000. Due to the lacking of necessary resources, a vast majority of the tenants (over 45% of the community's residents) are unable to afford a home offered even at the median sale price. Additionally, there exists a very limited supply of homes available in West Haven at or below the median sale price." None of the reports submitted nor Mr. Leary's testimony gives any basis for these figures. New Haven County where Mr. Whitley had previous success is comprised of towns with very different degrees of average income and median home prices. Did Whitley have lease purchase experience in towns similar to West Haven in income terms or in regards to the availability of affordable housing? How can the court assume even at the reduced projected purchase price the income structure of West Haven would allow a sufficient pool of people who would be interested or able to use the program or that a pool of such buyers existed even in New Haven County given the fact that the program itself envisaged paying higher rents? A broad statement is made about the lack of affordable housing but in Mr. Leary's income capitalization approach he referred to condo sales at a comparable complex, Terrace Heights, to conform some of his conclusions. Would the Glen Oaks business plan be in competition with that complex — how many units are available there? They would apparently sell at $11,000 less than the $40,000 under the Glen Oaks business plan.
Interestingly in computing rental rates in exhibit 5 which later translate into a projected $40,000 sales price for the Glen Oaks condos under the lease to purchase plan Mr. Leary performed a square footage analysis. But he used the Mallard Crossing complex which he never identified as being comparable to Glen Oaks. In his income capitalization report (Ex. E) on page A9 he reviewed sales activity at Mallard Crossing — there were 26 sales at a $45,000 to $68,000 price range. But in Exhibit F he cites five sales from Mallard Crossing that averaged between $41,000 to $52,000. Admittedly the sales in the former case may have occurred in mid-2001 as opposed to January 2000 to mid-2004 for the later figures. But that fluctuation only raises another concern — there is no market analysis presented to show possible prospective sale price and availability of a market at the time the purchase of these Glen Oaks units would present itself as an option under the Glen Oaks lease purchase plan.
Furthermore the defendants based their plan on being able to secure $2,500,000 in financing. Only vague testimony was presented that financing could not be secured given the condition of the non-Whitley units and the failure to pay common changes etc. But query whether any lender would have been willing to extend the monies mentioned to finance this particular plan.
To approach the problem from another perspective, it could be asked what a prospective buyer of the Glen Oaks complex would have been willing to pay in light of the business plan and factoring out those conditions which the defendants claim devalued the property. The defendants relying on Mr. Whitley's and Mr. Leary's testimony and the exhibits mentioned would answer $2,240,000. In a somewhat different context Nichols, supra at Vol. 4, § 12B.14(2), pp. 12B-182—12B-183 says:
While an owner is entitled to show, as bearing upon the question of value, any fact which the owner would naturally and properly bring to the attention of a buyer with whom he was negotiating a sale, care must be exercised that the mere hope of the owner that the property might be used for some special purpose is not substituted for reality. In order to merit consideration, the potential uses must be so reasonably probable as to motivate a prospective purchaser in his desire to acquire the property. Purely imaginative or speculative values are excluded. Unsubstantiated prophecy as to the future needs of a community cannot be made the basis of a determination of the present value of property. It has been held, however, that testimony concerning sales of comparable properly after valuation date can be considered.
For the foregoing reasons reject the valuation of $2,240,000 under the business plan with an aggregate value of $220,500 for units not part of the 56 units owned by the Whitley entities.
However, the court does, as indicated, find that the value of the subject property to be $1,986,600 (applying the parties' stipulation as to representative units).