The Condemnor’s Burden to Demonstrate “But For” To Apply The Project Influence Rule

The Third Department got it right in Matter of State of New York v KKS Properties, LLC, 119 AD3d 1033, (July 3, 2014).  KKS Properties, LLC is one of those 1033decisions that make you cringe.  An award on an appropriation claim in the Court of Claims which is lower than the advance payment resulting in a judgment in favor of the State is an outrageous outcome for a compulsory taking of one’s property.  We have often advocated that there must be a minimum of “just compensation.”  A condemnor is required to appraise property before a taking based on its highest and best use and make an offer in the amount which is 100% of its highest approved appraisal.  If the offer is not accepted as payment in full, the condemnee can accept same without prejudice as an advance payment.  This amount should be deemed the minimum amount of just compensation.

The Court of Claims in KKS Properties, LLC misconstrued the “Project Influence Rule.”  A rule of valuation applied to avoid increases or decreases in property values which result from a proposed project.  The rule came about as the result of the Supreme Court decision, United States v Miller, 317 US 369 (1943).

The Court of Claims failed to value the appropriated property on the basis of a comprehensive rezoning which predated the taking.  The lower court found that claimant’s property would not have been rezoned absent the bypass extension.  The Third Department held that the State failed to demonstrate that “but for” the bypass extension, claimant’s property would not have been rezoned.  Rather, the Appellate Court noted, the change in zoning “notably occurred prior to the taking – was part of a comprehensive rezoning of the entire Town ***.”

          United States v Miller, 317 US 369 (1943), is the most misunderstood condemnation case ever decided.  The facts of the case were fairly simple; the United States condemned a strip across property owners’ land for tracks of a railroad that had to be relocated because of prospective flooding of the old right-of-way.  The project had been recommended in 1934 with funding authorized in 1937.  The property owners had purchased and subdivided the property in question in 1936 and 1937.  After the condemnation in 1938, claimants sought direct and severance damages.  The court held that:

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 these other lands, it must pay their market value as enhanced by this factor of proximity. . . . The question then is whether the respondent’s lands were probably within the scope of the project from the time the government was committed to it.  If they were not, but merely adjacent lands, the subsequent enlargement of the project to include them ought not to 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 Supreme Court subsequently affirmed the scope of the project influence rule in U.S. v Reynolds:

[T]he development of a public project may also lead to enhancement in the market value of neighboring land that is not covered by the project itself. If that land is later condemned, whether for an extension of the existing project, or for some other public purpose, the general rule of just compensation requires that such enhancement in value be wholly taken into account, since fair market value is generally to be determined with due consideration of all available economic uses of the property at the time of the taking.

Basically, the Miller Rule holds that when determining the value of the property taken, a condemnee may not receive an enhanced value for its property where the enhancement is solely due to the property’s inclusion within the very public improvement for which it was condemned, i.e., the value cannot be predicated upon a use made only possible by the use of the power of eminent domain.  As stated in New York v Sage, 239 US 57, 61, “the City is not to be made to pay for any part of what it added to the land by this uniting it with other lots if that union would not have been practicable or have been attempted, except by the intervention of eminent domain.”  As is stated in Nichols on Eminent Domain (3d ed), Sec 12B-17(1) at page 202: “The general rule is that any enhancement in value that is brought about in anticipation of and by reason of a proposed public improvement, is to be excluded in determining the market value of the land.” (emphasis added).

Having a highest and best use which is the same as the purpose of the taking does not violate the Miller Rule.  The leading case on the subject is Monogahela Navigation Co v United States, 148 US 312 (1893), although the case is most often cited for its ruling that “the Constitution has declared that just compensation shall be paid, and the ascertainment of that is a judicial inquiry, not a legislative question.”  But the Monogahela Navigation case also stands for the proposition that there is every right to use the government’s purpose for the condemnation as the owner’s highest and best use of the property taken.  In Monogahela Navigation that purpose was for a lock and dam.  There are other examples, Matter of City of New York (New General Hospital), 280 App Div 196 (1st Dept 1952) aff’d 305 NY 835, involved the taking of a dwelling for a hospital.  The dwelling was to be used as a residence for one of the medical superintendents.  The court held that if the special adaptability of the land would increase its value in the open market, apart from the needs of the particular taker, the owner may be entitled to such increase as part of its market value.  Another example is Matter of Town of Esopus (Gordon), 162 AD2d 829 (3d Dept 1990) lv den 77 NY2d 801, where the Court found the highest and best use was as a landfill, the purpose for which it was condemned.  The land had been leased to the Town before the condemnation and used by the Town as a landfill.

It is the axiomatic rule that all property taken in eminent domain proceedings must be valued on its highest and best use regardless of actual use at the time of the taking.  Matter of City of New York (Clearview Expressway), 9 NY2d 439 (1961); Matter of City of New York (Minkin), 34 AD2d 782 (2d Dept 1970).

Another example similar to the Third Department’s correct application of the “Project Influence Rule” in KKS Properties, LLC is the Second Department’s holding in Matter of Village of Port Chester (Bologna), 95 AD3d 895 (2d Dept 2012), where the Court stated, at page 897,

The Village is correct that, in rendering the award, the Supreme Court was precluded from taking into account any enhancement in value caused by the condemned properties’ inclusion in the Village’s redevelopment project (see United States v Reynolds, 397 US 14, 90 S Ct 803, 25 L Ed 2d 12 [1970]; United States v Miller, 317 US 369, 63 S Ct 276, 87 L Ed 336 [1943]; Latham Holding Co. v State of New York, 16 NY2d 41, 209 NE2d 542, 261 NYS2d 880 [1965]; Matter of Queens W. Dev. Corp., 289 AD2d 335, 336, 734 NYS2d 208 [2001]; Matter of Village of Johnson City [Waldo’s, Inc.], 215 AD2d 917, 626 NYS2d 869 [1995]; Fitzgerald v State of New York, 9 AD2d 486, 194 NYS2d 569 [1959]).

In another Second Department decision, the Court affirmed a determination that project zoning may not be used to obtain an enhanced value for its land.  M.O. Assoc. L.P. v Queens West Development Corp., 289 AD2d 335 (2d Dept 2001).  But it should be noted that this does not mean that a former owner is precluded from showing that independent from the project zoning, the property had a reasonable probability of rezoning.

In 815 Associates v State of New York, 271 AD2d 398 (2d Dept 2000), the Second Department ruled that the rule was improperly applied by the Court of Claims.

Recently, the First Department in Matter of City of New York (Zahav LLC), 106 AD3d 418 (1st Dept 2013) applied the doctrine and held that the rezoning would not have occurred but for the project, citing the Court of Appeals’ decision in Latham Holding Co. v State of New York, 16 NY2d 41.

KKS Properties, LLC is an excellent decision.

     The Third Department has never been inconsistent in its interpretation of the Project Influence Rule.  Fitzgerald v State of New York, 9 AD2d 486 (3d Dept 1959) cf. Village of Johnson City v Waldo, 215 AD2d 917 (3d Dept 1995).

Recently, Justice Wayne Saitta rendered a decision which indicates the trial courts have shown full capability to understand and apply the rule.  See Matter of City of New York (Fifth Amended Brooklyn Center U.R.A., Phase 2), 41 Misc3d 1212(A) (Sup. Ct. Kings County 2013).

The Project Influence Rule is often argued by condemnors, but its application is determined on purely factual issues. As the Third Department pointed out in KKS Properties, LLC, the burden is on the condemnor to demonstrate that “but for” the project, claimant’s property would not have been rezoned.


Posted in Condemnation, Project Influence Rule, Severance Damages
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