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Project Blight – Project Enhancement

It is not an unusual occurrence for controversy to surround the proposal to build a public improvement. It is usual that when there is controversy, it causes a delay in the project’s implementation or even its shelving. The current controversy over Westway and the Forty-Second Street redevelopment is somewhat reminiscent of the proposal to build the Lower Manhattan Expressway which, after perhaps twenty years of discussion and litigation, was killed at the last minute by Mayor Lindsay, just when it appeared the land necessary to build it was to be acquired. Westway has been delayed twelve or more years since it was proposed and Forty-Second Street is probably three or more years old since U.D.C. became involved in attempting to develop a plan.

Effect of Publicity

During the proposal and discussion process, especially in controversial projects, substantial publicity is given and the public becomes aware of that project. It is the effects of that publicity which has caused problems in the condemnation proceeding with respect to its effect on value.

That its effect is misunderstood is reflected in several telephone calls we received from clients when a lecturer in a real estate course reportedly advised his class that in the Forty-Second Street project the properties there would be valued t the level of value they reached when the project had first been announced a number of years ago. Needless to say, if that were indeed the fact, which it is not, they would be seriously affected, in view of the steep climb in real estate values in general in Manhattan since that announcement, and particularly in midtown Manhattan.

The announcement of a project, depending on its nature, usually has two effects. The first is to the properties within the project area which are proposed to be condemned. The other is to the abutting area.

Historically and predictably, properties proposed to be condemned are negatively affected. It starts with tenants concerned that they may not have sufficient time to relocate and seek to move right away. Or, if they choose to stay, they cease making repairs and improvements to their premises, believing they will not be thee long enough to enjoy them. Property owners do the same ting. If a boiler or an elevator needs replacement, instead of making the substantial investment it would require, more expedient measures are taken in the face of a pending condemnation. When a vacancy occurs, it is extremely difficult to get new tenants, certainly those who would put substantial fixtures or improvements into their new premises.

Assuming, there was an equal bargaining position between landlord and tenant before, the pendulum rapidly swings against the landlord who must make all kinds of concessions to keep his property from becoming or staying vacant. Instead of seeking rent increases he is happy to keep his rent roll intact. Mortgaging of the property becomes extremely difficult. The ability to sell becomes impaired, except to speculators. No one wishes to buy into litigation. If the project is in the proposal state long enough, the landlords’ problems multiply. It is not unusual to see decreasing rent rolls, vacancies and signs of deterioration, despite an otherwise thriving real estate market. The problem had become so common, with the proliferation of urban renewal in the 1960’s and 1970’s, that it acquired a name “condemnation blight.”

Case in Buffalo

As property, as a general rule, is to be valued in the condition it is in at the date it is condemned, a rule of law evolved in which the property owner was not to suffer the effect of the value depressing effects of a proposed condemnation proceeding. It was summed up in City of Buffalo v. J.W. Clement Co., 28 N.Y. 2d 241, 321 N.Y.S. 2d 345, where in refusing to declare a “de facto” taking as of an earlier date, because of the value depressing effects of the long planning process, the court stated: “Indeed, the 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 (Niagara Frontier Bldg. Corp. v. State of New York, 33 AD 2d 368, decided herewith). In such cases where true condemnation blight is present, the claimant may introduce evidence of value prior to the onslaught of the ‘affirmative value-depressing acts’ City of Buffalo v. George Irish Paper Co., 31 AD 2d 470, 476, 299 N.Y.S. 2d 8, 14) of the authority and compensation shall be based on the value of the property as it would have been at the time of de jure taking, but for the debilitating threat of condemnation (see, also, City of Detroit v. Cassese, 376 Mich. 311, 317 — 318, 136 NW 2d 896; City of Cleveland v. Carcione, 118 Ohio App. 525, 190 NE 252; 4 Nichols, Eminent Domain (3 ed.), Sec. 12,3151; Owen, Recover for Enhancement and Blight in California, 20 Hastings L.S. (Univ. of Cal.) 622, 643 — 649 (January 1969). This in turn, requires only that there be present some proof of affirmative acts causing a decrease in the value and difficulty in arriving at a value using traditional methods (City of Buffalo v. George Irish Paper Co., 31 AD 2d 470, 299 N.Y.S. 2d 8, aff’d. 20 N.Y. 2d 6869, 309, N.Y.S. 2d 606).”

Other Court Rulings

Similarly, other courts in the State applied the same principle, that if value depreciated because of planned condemnation, the value as it would have been but for it was to be awarded (City of Rochester v. Lanni, 33 AD 2d 888, 307 N.Y.S. 2d 596 (4th Dept., 1969);Mobil Oil Corp. v. State of New York, 55 A.D 2d 821, 390 NYS 2d 297 94th Dept., 1976); City of Buffalo v. Manguso, 42 AD 2d 673, 344 NYS 2d 248 (4th Dept., 1973); Kessler v. State of New York, 21 AD 2d 568, 251 NYS 2d 487 (3d Dept., 1964); 76 Crown Street Corporation v. City of New York, 35 AD 2d 1005, 317 NYS 2d 978 (2d Dept., 1970); In re 572 Warren Street, 58 Misc. 2d 1073, 298 NYS 2d 429 (sup. Ct., Kings Co.). This includes disregarding lowered or stagnant rents in an otherwise upward market, deteriorated property, lower sales prices, etc.

While the value of property within the footprint of the project undoubtedly suffers, the same is not necessarily true of the property surrounding the project. While some projects may depress surrounding property values (an egregious example would be a garbage dump) many projects increase them. This is more than an academic observation in a condemnation setting.

To begin with, the same principle applies. Value, in a condemnation sense, may not be affected by being either increased or decreased solely by reason of the planned project (United States v. Miller, 317 US 369). Thus, land may not be considered more valuable as available for the use for which the project is designed, if not otherwise available for that use. Nor may the enhanced value of surrounding land, caused by the anticipation of the coming project, as reflected by sales and leases, be used to prove the value of the land condemned. That, however, is a subject easier stated than dealt with on a practical level, particularly in a sharply rising real estate market, such as we have been enjoying in New York the last number of years. The most appropriate sales and leases are those closest to the site, but those are the most likely to be affected by any value enhancement of the project, particularly if the planning process has been at all lengthy. (Sometimes it has been so lengthy and so controversial that the market discounts it as a possibility and it ceases to affect the value of adjacent property). To eliminate them may be to eliminate the only practical proof of value. Certainly, if lands adjacent have been affected, those within the project’s footprint, for the reasons stated, will almost certainly be. Then in a sharply rising market, the value increases may really be by reason of that fact, rather than by reason of project enhancement. Most often, it will be a mixture of both.

View Not Unanimous

This, incidentally, is not a unanimous view in all jurisdictions. New York is one of those which do not permit value enhancement by reason of the proposed project (In re Addition to Lincoln Square Urban Renewal Project, 22 Misc. 2d 619, 198 NYS 2d 248; Fitzgerald v. State of New York, 9 AD 2d 486, 194 NYS 2d 569). Some states permit it in whole or part (City of Valdez v. 18.99 Acres (Alaska),686 P. 2d 682; DOT of State of Florida v. Nolven, 455 SO. 2d 301; Baylin v. States Roads Comm’n (Md.), 475 A. 2d 1155.

The New York rule is set forth in United States v. Miller (317 U.S. at pages 376377): “If a distinct tract is condemned, in whole or in part, other lands in the neighborhood may increase in market value due to the proximity of the public improvement erected on the land taken. Should the government, at a later date, determine to take those lands, it must pay their market value as enhanced by the factor of proximity. If, however, the public project, from the beginning, included the taking of certain tracts but only one of them is taken in the first instance, the owner of the other tracts should not be allowed an increased value for his lands which are ultimately to be taken any more than the owners of the tract first condemned is entitled to be allowed an increased market value because adjacent lands not immediately taken, increased in value due to the projected improvement.

“The question then is whether the respondents’ lands were probably within the scope of the project from that time the government was committed to it. If they were not, but were merely adjacent lands, the subsequent enlargement of the project to include them ought not deprive the respondents of the value added in the meantime by the proximity of the improvement. If, on the other hand, they were, the government ought not to pay any increase in value arising from the known fact that the lands probably would be condemned. The owners ought not to gain by speculating on probably increase in value due to the government’s activities.”

Question Raised

The language itself raises questions. The more obvious ones are when is a condemnor “committed” to a project, and does the rule continue to apply even though many years have passed since there was a “commitment” to the project? Does just the passage of substantial time bespeak a noncommitment? Does commitment connote approval of a finished plan rather than the preliminary steps which precede it? There is a difference of opinion in varying jurisdictions. We suspect as an aftermath of Westway and Forty-Second Street redevelopment, we are going to get more answers to these questions in New York.

Reprinted with permission from the February 20, 1985 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.