Property in the Course of Development

Since the urban real property market is very dynamic, one finds many properties in the process of being developed or renovated on condemnation.

Frequently an owner will be just about to begin efforts to build or in the process of same when a condemnor swoops in to take the parcel.

The law is clear that property taken whilst in the process of development, the owner is entitled to recover for the added value of the owner’s efforts.  We call this “entrepreneurial profit.”

As New York’s Appellate Division, Second Department stated in Matter of City of New York (664 Baltic Street Realty Corp.), 44 AD2d 599, 353 NYS2d 523 (1974), “Where, as here, condemnation interrupts preparation of the property for its contemplated use, the best criterion of market value is the price a purchaser would pay for the property in the state of exploitation existing at the time title vests in the condemnor (Matter of City of New York (Chestnut Prop. Co.), 39 AD2d 573, 332 NYS2d 19, (2d Dept, 1972) Aff’d 34 NY2d 800, 359 NYS2d 40 (1974)).  The indicia of value would thus include comparable sales, if any, and the recent purchase price paid by the claimant, plus perhaps some increment for whatever development enhancement or construction the claimant had contributed.”

More recently, New York’s Appellate Division, Second Department affirmed an award for property taken for a school site which included a land value based on a re-zoning (with no discount) of real estate taxes, mortgage interest, architect’s fees, legal fees and other fees expended in financing and entrepreneurial profit.  Matter of City of New York (Nelkin), 71 AD2d 1020, 420 NYS2d 501 (2d Dept 1979).  The facts in Nelkin are set forth in its dissent.  Nelkin was affirmed by the Court of Appeals at 51 NY2d 921, 434 NYS2d 981 (1980).

When a project is well underway with approved plans, building permits issued, and financing arranged, it is the equivalent of a rough diamond which is cut, polished, set and ready to be sold.  In Matter of City of New York (Jomar), 94 AD2d 724, 462 NYS2d 260 (2d Dept 1983), aff’d 61 NY2d 843, 473 NYS2d 963 (1984), the Second Department increased the trial court’s award from $946,191 to $2,453,691 holding the proposed use, a strip shopping mall, would have come to fruition had the cloud of condemnation not fallen upon this claimant.

In Levin v State of New York, 13 NY2d 87, 242 NYS2d 193 (1963), the Court of Appeals held that property condemned while in the process of development must be valued on the basis of everything that a sagacious and experienced prospective purchaser would have taken into consideration on the day of the taking.  This, of course, includes all costs for carrying the property and, in addition, entrepreneurial profit.  Matter of City of New York (Salvation Army), 43 NY2d 512, 402 NYS2d 804 (1978).

To the value of the land, one adds all the money spent on the project, and then calculates, in addition, an entrepreneurial profit.  A purchaser would step in and immediately construct the building that not only cost money, but took time and expertise.  This element must be valued separately and compensated.  Again, as the Court of Appeals stated in Levin v State of New York, supra, “What the purchaser would pay for the property would undoubtedly be influenced by the extent to which the property had been exploited.”

Posted in Condemnation, Development, Entrepreneurial, Profit, Valuation
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