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Highest & Best Use: Economic Feasibility

It is an axiom in condemnation proceedings that property must be valued for its “highest and best use.” Highest and best use has been defined as “the most profitable likely use to which a property can be put.” It has also been defined as “the use of land which may reasonable be expected to produce the greatest net return to land over a given period of time, and “that legal use which will yield to land the highest present value.” (American Institute of Real Estate Appraisers, Appraisal Terminology and Handbook (Fourth Edition), page 92.)

What is clear is that whether by lack of knowledge, lack of capital, change of circumstance or plain indifference or any other reason, not all real estate is put to its most productive or highest and best use and that actual use is not the determinant of the value of the property. Since fair market value presupposes a price between not only a willing buyer and seller, but knowledgeable ones, and at the highest price obtainable in the market, that price must reflect the most profitable use of the property, its highest and best use.

It is not unexpected then that condemnees, looking to maximize their recovery, have been given to project more valuable uses for their property than its actual use and that condemnees, looking to minimize their exposure, should look at the property much more conservatively and with a jaundiced eye. It also should not be surprising that there should be a wide variance in appraised values between condemnors’ and condemnees’ appraisers, despite the competing appraisers being reasonable and honest, when the underlying assumptions of each as to most profitable use are different.

In dealing with the issues raised in this context, the appellate courts have reacted to various fact patterns. While their decisions, of necessity, have sounded like black letter rules, and in some instances have been treated as such by lower courts, they have, for the most part, been a recognition that the rule merely reflects the action of the market place and must have a common sense application.

‘Proof of Facts’

Thus, a use projected far enough into the future that any benefit from it would be so discounted by the market so as to yield no appreciable present value could not be considered. The rule stated by the Court, was “that a speculative use of this character must be substantiated by proof of facts that indicate a likelihood that the property would be put to such a use within the reasonably close future.” (Matter of City of New York (Wilson), 21 AD 2d 652, 653, 249 NYS 2d 811, aff’d. 16 NY 2d 814, 263 NYS 9.)

Further, a use base on nothing in reality, substantiated by no facts and being merely the product of the claimant’s imagination and hypothetical, cannot be the basis of an award (Matter of City of New York Shorefront High School-Rudnick, 25 NY 2d 146, 303 NYS 2d 47). Thus, in Triple Cities Shopping Center, Inc. v. State of New York, 26 AD 2d 744, 272 NYS 2d 207, aff’d. 22 NY 2d 683, 291 NYS 2d 801, an owner, who claimed that the purpose for which he bought the taken property was to build a gas station and motel on the property, but who could not show any activity on his part at that direction and who, as the court stated, could not show any commercial activity at all in the immediate vicinity of the taking was denied a valuation on that basis. The same was said as of the early 1960’s as to the potential for a high rise apartment development at Ninety-third Street and First Avenue in the Matter of City of New York (Wilson), supra. (Our father tells us of the condemnation judge who pooh-poohed the possibility of apartment house development in Kew Gardens and adjacent Forest Hills during the trial for the building of Grand Central Parkway in the 1930’s).

It is the lack of activity in the adjacent area that is really the key to the problem in most instances. When does the challenge to a proposed best use arise? Usually when there is a vacant piece of land with a use claimed for it consistent with nothing in the vicinity or where a use is claimed different than the use it is actually being put to and again there is nothing in the vicinity used similarly, or even worse, the uses in the vicinity are inconsistent with such a use.

Some Issues Clear

It is clear, from those same facts, that not every vacant piece of land or differently used property gives rise to a contest on the issue of highest and best use. Who would argue that a parking lot on Park or Fifth Avenues in the vicinity of Fifty-seventh Street has a highest and best use for a high rise residential or commercial building? Why? Because the extrinsic facts of the surrounding uses makes quite clear what the best use is.

And it is also quite clear that no other proof of highest and best use is required much less that such use is economically as well as physically feasible. (Matter of City of New York (Broadway Cary Corp.), 34 NY 2d 535, 354 NYS 2d 100; Rochester Urban Renewal Agency v. Lee, 83 AD 2d 770, 443 NYS 2d 479 (4th Dept.).) It is equally clear that proof would be needed of a potential for such a use if the same claim were made for land in rural New York State or in some other undeveloped area or even while the surrounding area does not make clear that such a development is reasonable probable. Matter of City of New York (Broadway Cary Corp.), supra; Matter of City of New York (Jomar Real Estate Corp.) 94 AD 2d 724, 462 NYS 2d 260, aff’d. 61 NY 2d 843, 473 NYS 2d 963; Larig v. State of New York, 58 AD 2d 734, 396 NYS 2d 122 (4th Dept.).

In the Matter of City of New York (Broadway Cary Corp.), supra, the Court reversed the findings of the trial court that a vacant piece of land “situated in an area zoned for light manufacturing” had a highest and best use as a shopping center since the claimants failed to substantiate their contention by proof of “the economic feasibility of the proposed venture.” The Court noted that in Shorefront High School-Rudnick, 25 NY 2d 146, at p 149, 303 NYS 2d 47 that it “is likely that the expert would consider the availability of financing, costs of construction, taxes, possible profits and the like in arriving at his conclusion concerning the highest and best use of the land.” At first blush, without reading the record for the facts of the case and without consideration of the facts in Matter of City of New York (Jomar Real Estate Corp.), supra, one might believe that another level of proof was now to be required in all of these cases, that of an economic feasibility report requiring another level of expensive expert witness testimony.

Common Sense Approach

But common sense dictates otherwise. Vacant land, parking lots or old brownstone or townhouse buildings at or near the corner of Fifth Avenue and Fifty-seventh Street do not require and economic feasibility report to demonstrate that more of the same of what has been built around it is its highest and best use. If that can be accepted as a fact, and it seems unquestionable that it should be, then we know that such a report is not required in all cases. What is it then that Broadway-Cary was talking about and what is it that Jomar decided in its name. The plot of land in Broadway-Cary Corp. was located in Staten Island in a manufacturing area across the street from a low rent housing project. There did not appear to be a residential base of sufficient purchasing power to support a shopping center. While the zoning was M-1, that by itself had no meaning as it permitted shopping centers of right. Its real significance was that the area was developed as light manufacturing, and plain common sense raised warning lights against making assumptions that such a development could be economically successful. It was against that background that the Court called for proof of economic feasibility.

The facts in Jomar had some points similarity but were on the whole different.

Again the property was zoned M-1, it was in Staten Island and it was vacant land. But unlike the facts in Broadway-Cary it was situated directly across the street from a newly developed residential area with no existing shopping facilities for about a mile, except for an isolated store here and there. At the time the property was condemned and in connection with a variance to permit the construction of a shopping area within the targeted residential area the City Planning Commission, based upon a study, made findings of the need for much more square feet of store space in the area than would be provided for in the condemned property. The icing on the cake was that the owners had not only prepared plans for a shopping center prior to any projected condemnation and had been prevented from filing same by reason of the proposed condemnation, but had done work on preparing the land itself including its grading, putting in of street improvements and sewers and acquired sewer hookup rights for the shopping center. This was deemed sufficient proof of highest and best use without a “formal feasibility study.” (An informal study had been testified to by the claimant’s appraiser).

Thus, it seems to us, we are back to square one. Common sense rules the day. There are no absolute criteria in establishing what a market is and what it does. There are no black letter rules of what constitutes proof of highest and best use. There is no absolute criterion of an economic feasibility study to justify a proposed use. It is not an appraisers’ full employment rule. While proof is required to justify a use different than the way the property is actually being used or different than is consistent with the surrounding area or even different than plain common sense seems to indicate it appears that there is no absolute requirement of what that proof is. And we believe that is how it should be.

Reprinted with permission from the April 17, 1985 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.