“Something Much Simpler” in Texas Condemnation – The Separate Economic Unit

Posted On December 18, 2015

“Something Much Simpler” in Texas Condemnation – The Separate Economic Unit

 Value of the property is usually the paramount issue in a condemnation case.  Two recurrent factors which often influence land values are highest and best use and size of a parcel. Property utilized for commercial pad sites in a developed subdivision is likely to have a higher value per square foot than raw land put to agricultural use.

 No Subdivision Development Valuation.

 The Texas Supreme Court made clear that evidence that the highest and best use of a smaller tract taken from larger acreage is as a subdivision tract is not admissible when, at the time of taking, there is no subdivision or development of the larger acreage. State v. Willey, 360 S.W.2d 524 (Tex. 1962); City of Harlingen v. Sharboneau, 48 S.W.3d 177, 182 (Tex. 2001).

 The Sharboneau subdivision development method of appraisal, in which an undeveloped tract is valued by calculating what a developer could expect to realize from sales of pad sites, taking into account the costs of development and discounting future revenues, was held to be too complicated, complex and speculative. Sharboneau, 48 S.W.3d at 180-81. It required a comparison of types of properties that just were not comparable. Id. at 182-84.

 Separate Economic Unit Valuation Embraced.

 However, the Texas Supreme Court distinguished Willey, Sharboneau and other subdivision cases, in which landowners sought damages as if, before the taking, their properties were already located within developed subdivisions in In re: State, 355 S.W.3d 611, 616 (Tex. 2011).

 The State condemned 39 acres out of a 185 acre property. Id. Prior to the date of value, the landowner subdivided 51 of the 185 acres into 8 separate lots, with each of the 8 lots containing a portion of the 39 acres taken. Id. Each of the 8 lots had highway frontage. Id. The 8 lots were then appraised as separate economic units with the highest and best use of each lot being highway frontage commercial property. Id.

 The Court affirmed the appraisal opinion as the landowners were:

. . . not seeking valuation on the basis of the residential
subdivision of their undeveloped property. They seek
something much simpler. The property
. . . is primarily highway frontage, and their appraiser
testified that the highest and best use was as several
individual tracts that could be sold as highway frontage
commercial property. This was based on their belief that
similar property in the area was sold not in bulk but, rather,
in somewhat smaller, commercial-sized parcels.

Id.

 The seminal case of State v. Chana, 464 S.W.3d 769, 783 (Tex. App.—Houston [1st Dist.] 2015, no pet.) affirms the separate economic unit methodology, despite there being no prior partition of tracts. In Chana, the State condemned 2.072 acres out of 7.765 acres. Chana, 464 S.W.3d at 782. The landowner determined that the highest and best use of the 7.765 acres was dividing it into 3 separate self-sufficient tracts, each to be used for commercial development. Id. The condemned 2.072 acres was a part of one separate economic unit consisting of 2.385 acres. Id.

 In appraising the 2.385 acre unit, the landowner’s appraiser explained that it was self-sufficient and independent from the remaining acreage because the unit had a driveway on the highway for direct access. Id. Cross-access, however, was only over the other 2 economic units. Id. at 783. A sanitary sewer line would have to be extended 550’ to the unit, but other infrastructure was available. Id. These conditions were typical in the market area. Id.

The landowner’s appraiser testified that the sales in the market area showed that smaller tracts were being sold from larger tracts to be used for commercial development. Id. at 784. In upholding the appraisal opinion, the Court held:

the Chanas offered evidence showing that similarly sized
and situated parcels of land, comparable to the economic
unit . . . were being purchased in the vicinity for commercial                                             development. Thus, it was not speculative for the Chanas to
offer valuation evidence based on the premise that the
appraised economic unit was a separate, self-sufficient unit.

Id. at 785.

Lessons Learned.

Texas courts invariably resolve condemnation valuation issues by reference to the market area. Know your market and be sure your appraiser knows it too.
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This article appears in the Texas City Attorney Association’s December, 2015 Newsletter.  Please click here to see the article.

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