New York Appellate Court: Make a Strong Case When Arguing for a “Highest and Best Use!”
Earlier this year, the Supreme Court of New York, Appellate Division, reviewed a lower court’s decision that disregarded a property owner’s proposed “highest and best use” to support a valuation claim in a condemnation matter. The primary issue on appeal was whether the lower court erred in finding that the property owner failed to substantiate the proposed highest and best use of the subject property. The full decision in J. Nazzaro Partnership, L.P. v. State of New York can be found here.
At the outset, the government is constitutionally required to pay “just compensation” to a property owner when taking property using the power of eminent domain. Just compensation is determined by the property’s market value at the time of the taking, that is, “the price a willing buyer would have paid a willing seller for the property.” The property must be valued based on its highest and best use on the effective date of the taking, irrespective of whether it is being put to that use. The potential uses that a court may consider in determining value are limited to those uses permitted by the applicable zoning regulations at the time of taking unless the property owner can demonstrate that there is “a reasonable probability of rezoning.”
In the J. Nazzaro matter, the property at issue consisted of two tax lots, which were split-zoned. The property had portions zoned for neighborhood business and a portion zoned for residential areas. However, certain deed restrictions impacted the residential portion and prohibited it from being improved with a home or other uses for 50 years (until 2060) due to the property being previously used as a gas station. When the government sought to condemn a portion of the subject property, it was improved with a bank and contained parking spaces in the residential-zoned area pursuant to a special exception granted by the municipality. The property owner asserted that the highest and best use of the property was a two-story commercial building with expanded parking on the residential portion of the property. The State argued that the highest and best use was a one-story building on the commercial portion of the property and residential development on the residential portion in 2060. The New York Court of Claims ultimately determined that the property owner failed to substantiate the highest and best use and, therefore, used an impermissible valuation methodology.
On appeal, the Court affirmed the lower court’s judgment because the property owner failed to show that it could satisfy the requirements for a use variance or that a variance was likely to be granted. In determining the potential highest and best use of a property, a court may consider potential uses in determining value only if those uses are permitted by zoning regulations at the time of taking or if the claimant can demonstrate that there is a reasonable probability of rezoning. Here, while the property owner had a limited special exception for parking on the residential portion of the property, further expansion of such parking would require a use variance. The property owner failed to submit any evidence to demonstrate that it could satisfy the use variance requirements or that a variance would likely to be granted. Therefore, as the two-story building was dependent on the expanded parking, the property owner failed to meet its burden of demonstrating that its proposed highest and best use was physically or economically feasible.
Much like the general rule in New York, New Jersey also requires a property owner to demonstrate that a zoning change is “reasonably probable” when arguing for a proposed highest and best use that differs from the current use of a condemned parcel. In many cases, this is a very high hurdle for property owners and can potentially be detrimental to a proposed valuation theory. Consulting with experienced counsel is the single best way to vet your options when confronted with a governmental taking. If you need guidance regarding the proper procedure to follow, please contact McKirdy, Riskin, Olson & DellaPelle, P.C. to speak with an experienced condemnation attorney.