We sometimes assume that everyone gets that the point of an eminent domain valuation trial is to try to establish the price the real-world market of buyers and sellers would have arrived on for the property being taken had the transaction been voluntary. We know it is all hypothetical because this market didn't actually exist, and the taking itself isn't a market transaction. In fact, a taking is pretty much the opposite of a market transaction. In other words, you're trying to recreate a market that did not in fact exist.
To do so, you try to step into the shoes of a potential buyer of the property. What would they look at when trying to come up with a price? Would they limit themselves to the property's present use? Maybe. But depending on the circumstances, they also might think its worth paying more than the present use for the property because it is being underused, and there's a good chance that the buyer would buy it to make a more intense use. Why we look at the highest and best use of the property, and not just its current use. That vacant piece of industrially-zoned land would look awfully good with a 40-story building on it, and there's a good chance I could get the zoning changed to apartment. You old hands get what we're saying.
So it makes us scratch our head when a party tries to exclude evidence about the property's potential for rezoning, on the basis that opinion testimony is "hypothetical," and as a consequence is not admissible. Yeah, man, it's all hypothetical. It bothers us even more when courts go along with that rationale.
Thankfully, in Helmick Family Farm, LLC v. Comm'r of Highways, No. 1180691 (Aug. 29, 2019), the Virginia Supreme Court avoided that. All seven justices agreed that, generally speaking, evidence of a reasonable probability of rezoning may be admissible. Where the court split 4-3 was on whether the situation on the ground (so to speak) merited the jury hearing about it. The majority concluded that the owner of a vacant plot of agriculturally-zoned land was wrongfully denied the ability to present to the jury evidence that there was a reasonable probability the property could be rezoned to a more intense use.
Quick facts: Helmick Family Farm is 168 acres. The highway department needed about 2 acres for an interchange plus associated easements. Offered $20k. The farm thought that was too little, and declined. Condemnation followed.
The farm wanted to have a local planner testify. His report opined that the parcels were planned for commercial or industrial development, even though the existing zoning was agricultural. He also was prepared to testify that an application for a zonig change to Light Industry would likely be approved. Indeed, the Board of Supervisors "had approved nearly every application for such rezonings between 2006 and 2015." Slip op. at 2. An appraiser was also prepared to testify that the highest and best use of the land would be to rezone it for commercial or light industrial, as the county's comprehensive plan envisioned.
The trial court, however, agreed with the condemnor, which argued in a motion in limine that evidence about "a hypothetical rezoning of the subject property from Agricultural (A-1) to Light Industrial or Commercial before the take on August 20, 2014" was inadmissible. Slip op. at 3. "The court agreed, reasoning that such evidence is too speculative and remote. The court ruled that 'all testimony and evidence regarding hypothetical rezoning of the subject property is excluded from trial.'" Id.
We mostly assumed that that the general rule about the admissibility of this type of evidence was a settled matter in Virginia. Apparently not. Maybe that is a good thing, because now it is. The majority held (slip op. at 7) and the dissenters agreed (slip op. at 20) that, as the dissent put it, "the reasonable probability of rezoning of property taken through condemnation may be relevant to the property's fair market value and that nothing in our prior cases forecloses the admissiblity of such evidence." Slip op. at 20. The court held that under Virginia law, "fair market value" is the measure of compensation, that the hypothetical market price is the key element, that "everything which affects the market value is to be taken into consideration" is potentially admissible. "[C]onsideration is given to the property's adaptability and suitability for any legitimate purpose in light of conditions and circumstances that exist at the time of the take or that reasonably may be expected in the near future." Slip op. at 7.
The court noted USPAP, The Appraisal of Real Estate manual and an "avalanche of authority from other jurisdictions" that "make clear that such evidence is widely permitted." Slip op. at 8 (footnote omitted)..The reason for allowing the factfinder to hear such evidence is obvious: a willing buyer will pay more for property that presents a fair prospect for more favorable zoning than a property that offers no such prospect. In an arms-length transaction, “the parties can be expected to bargain toward a price that can be viewed as the value of the property with the more valuable zoning classification, discounted by some amount.”Slip op. at 8 (quoting William B. Knipe, Valuing the Probability of Rezoning, 56 Appraisal J. 217, 220 (1988)). "In short," the majority concluded, "the reasonable prospect of a favorable rezoning has an effect on the market value of the property and is, therefore, relevant." Slip op. at 9.
And yes, this is all hypothetical. Id. ("The entire enterprise of assessing the market value of land hinges of proof concerning acts of a hypothetical third party, namely, a person who would purchase the land.").
The majority then walked through the property owner's evidence, and concluded that it was sufficiently concrete to warrant submission to the jury. The trial court still has a relatively minor gatekeeping role, to ensure that there is "sufficient evidence" of a reasonable probability of rezoning. To do so, the court looks at a bunch of factors (see slip op. at 14 for the list), all of which make sense when you think about it. Things like nearby properties being rezoned, the local plan, use patterns in the area, the physical characteristics of the property. And so on. In other words, things that a potential buyer would look at.
As noted above the three dissenters agreed with both the general rule (such evidence is not automatically excluded simply because it is, by its nature, hypothetical, and highest and best use is the measure of compensation), and with the factors which the trial court looks at to determine "sufficient evidence." Where the dissenters disagreed was whether the farm's witnesses met that standard.
See pages 21 and 22 for the dissenters' reasons why they concluded the evidence just wasn't sufficient. In sum, they thought the county's comprehensive plan was "not binding" (oh really? tell that to the County Board of Supervisors next time you try and do a development that isn't in conformity with the plan), the property owner had not actually submitted an amendments to the plan or the zoning (again, why is that dispositive? It's the reasonable probability of rezoning that matters, not whether the owners actually tried it; of course, if the owners had actually done so, maybe the discount would be less, and the property even more). The dissenters also believed that the fact the owners had not vested into a plan or zone change was fatal. Slip op. at 22-23. To us, that is simply another way of saying what they said earlier. Of course, if the owner had vested, it might have received an even higher price in the hypothetical market (because a vested right is a separate property right). But just because it has not actually vested doesn't mean that a hypothetical buyer might not still reasonably believe that an upzone is likely in the near future, and be willing to pay more. To us, that goes to the amount of the discount, if any, to be applied, not to admissibility.
To us, this type of analysis should turn on the old 401/403 rules of relevance vs. undue prejudice. Trial judges shouldn't be in the business of weighing evidence, only determining whether it is relevant under 401, and if so whether it is unduly prejudicial under 403. If not, the jury should consider it, and make the call whether it adds up to a reasonable probability given the circumstances: how the hypothetical buyer would measure the probability of a more intense use, and the risk that it would not come to fruition. That's what juries do.
Helmick Family Farm, LLC v. Comm'r of Highways, No. 1180691 (Va. Aug. 29, 2019)
