IN THE SUPREME COURT OF TEXAS
════════════
No. 07-0896
════════════
The State of Texas, Petitioner,
v.
Bristol Hotel Asset Co.,
Respondent
════════════════════════════════════════════════════
On Petition for Review from the
Court of Appeals for the Fourth District of Texas
════════════════════════════════════════════════════
PER CURIAM
In this condemnation case, the State
of Texas
challenges the damages awarded to Bristol Hotel Asset Company. Because
the trial court admitted evidence of noncompensable
damages, we remand the case for a new trial.
In order to widen part of Loop 410
in San Antonio, the State condemned 0.107 acres
of a 5.003-acre hotel property owned by Bristol
near the airport. Before the taking, the hotel had three entrance
driveways: an eastern driveway with a very steep grade, a center main driveway
that was also fairly steep and led to the hotel’s porte
cochere, and a western driveway with a flat, two-way
drive. The State’s taking shortened the length of the eastern and center
driveways, making them so steep as to be unusable.
Two engineers testified regarding
modification projects required to restore the hotel’s driveways to functioning
condition. While the eastern driveway could be regraded
and cured, the center driveway, the hotel’s primary entry point, was
permanently lost. Therefore, the engineers’ plan was to convert the
western driveway into the hotel’s primary driveway entrance. The hotel
also had two service drives at the rear of the hotel that would remain
unchanged.
The engineers estimated that the
driveway reconstruction project would take six months. During the
four-month western driveway phase, eighty of the hotel’s 380 parking spaces
would be unavailable. During the two-month eastern driveway phase,
forty-three spaces would be unavailable.
David Bolton testified as the
hotel’s valuation expert. Using an income method of valuation, he
calculated that the difference in market value between the entire hotel
property before the taking and the remainder property after the taking was
$1.26 million. He also testified that Bristol sustained $509,211 in damages as the
cost to make necessary driveway modifications to the remainder property.
Bolton’s testimony and his summary appraisal report, admitted into evidence,
also noted that Bristol had suffered $723,492 in
“temporary damages,” which Bolton described to
the jury as “temporary damages for the parking spaces being out of
service.” The State objected to Bolton’s
valuation of the remainder property, and also to the $723,492 in temporary
damages. The jury found a $1.26 million difference in value between the
property before the taking and the remainder property after the taking.
The trial court rendered judgment for Bristol
on the jury’s verdict, and the court of appeals affirmed. __ S.W.3d __.
First, the State challenges Bolton’s testimony regarding temporary damages. We
agree that this testimony was flawed. The Property Code instructs that a condemnation proceeding should consider
“the effect of the condemnation on the value of the property owner’s remaining
property.” Tex. Prop. Code § 21.042(c).
However, when a taking occurs, all damages associated with the taking are not
necessarily compensable, County of Bexar v. Santikos,
144 S.W.3d 455, 459 (Tex. 2004), and “diminished value is compensable only when
it derives from a constitutionally cognizable injury,” State v. Dawmar Partners, Ltd., 267 S.W.3d 875, 878 (Tex. 2008)
(per curiam). Compensability for a
particular type of condemnation damage is a question of law the Court reviews
de novo. Santikos, 144
S.W.3d at 459.
Remainder property damages “are
generally calculated by the difference between the market value of the
remainder property immediately before and after the condemnation, considering
the nature of any improvements and the use of the land taken.” Id. While
various methods can be used to determine the market value of a remainder
property, the income approach is especially appropriate when, as with the hotel
here, property would be valued on the open market according to the amount of
income it already generates. City of Harlingen v. Estate of Sharboneau,
48 S.W.3d 177, 183 (Tex.
2001). The income approach consists of estimating the net
operating income stream of a property and applying a capitalization rate to
determine the property’s present value. Id.
Using the income approach, Bolton arrived at a fair market value of the remainder
tract. But his testimony and his apprisal
report also included the $723,492 he calculated as temporary damages for loss
of use of some parking spaces. To reach this figure, Bolton
assigned a net income to each space by taking the total hotel revenue,
deducting certain expenses, and calculating the net income per space per
month. Using this figure he calculated damages for the temporary loss of
forty-three spaces during the eastern driveway phase of the reconstruction and
eighty spaces during the western driveway phase. Bristol’s
own brief describes Bolton’s calculation as a
loss of “net income” attributable to the loss of parking spaces during the
reconstruction. Bristol,
therefore, offered evidence of lost profits to establish its claimed temporary
damages.
We have held that lost profits or
injury to a business are not compensable over and above the value of the land
taken and the diminution in the value of the remainder tract. State v. Travis, 722 S.W.2d 698, 698-99 (Tex.
1987) (per curiam); City of Dallas v. Priolo, 242 S.W.2d 176, 179 (Tex. 1951). To the extent the
temporary loss of parking spaces resulted in a temporary loss of business
revenues or profits, those losses are not compensable.
Further, to the extent that the
taking affected access to the remainder property, we have held that a partial,
temporary disruption of access is not sufficiently “material and substantial”
to constitute a compensable taking. City of Austin v. The Avenue Corp., 704 S.W.2d 11, 13
(Tex. 1986).
We have also held that “disruption of use due to construction activities” of
the condemning authority during a roadway expansion project are
not compensable. State v. Schmidt, 867 S.W.2d
769, 777 (Tex.
1993). We similarly hold today that the partial, temporary loss of
some parking spaces on Bristol’s
remainder property was not sufficiently material and substantial to qualify as
compensable condemnation damages. Bristol
never came close to losing all use of the remainder property, as occurred in City
of Austin v. Teague, a case on which Bristol
relies. 570 S.W.2d 389, 394 (Tex. 1978) (recognizing loss of rentals as
appropriate measure of temporary damages where “plaintiffs lost all use of
their land” and city had in effect acquired a scenic easement on plaintiffs’
land at no cost).
Bristol argues that the temporary damages
were “properly considered in estimating the damages sustained by the landowner
in a temporary or partial taking to arrive at the ultimate issue of diminution
in the market value of the remainder.” Bolton
offered some testimony that the temporary damages were integrated into the
calculation of the diminution in market value of the remainder property.
For example, he agreed that in “the surreal world of condemnation,” the
temporary loss of parking spaces would affect what a buyer would pay for the
property. But his testimony and report also treated the loss of parking
spaces as a separate item of lost net income. Whether treated as a
separate item of temporary lost business revenues or profits, or as part of the
calculation of fair market value of the remainder property, Bristol asked the jury to include in its
assessment of damages the partial, temporary loss of parking spaces, a loss
that is not compensable as a matter of law.
Second, the state challenges Bolton’s testimony regarding permanent damages. We
agree that this testimony was flawed, too, as Bolton’s
permanent-damages testimony was based on diminished access to the remainder
property that is not compensable. In determining the permanent diminution
in value to the remainder hotel property as compared to the pre-condemnation
property, Bolton testified that assuming the revenue stream to the hotel was
the same before and after the taking, the discount or capitalization rate used
in the present value calculation under the income approach should be increased
to reflect a higher degree of risk that potential investors would perceive as a
result of the condemnation. In other words, Bolton
believed that investors would view the remainder tract as a riskier investment
than the original hotel property. Assigning a higher capitalization rate
to reflect this higher risk led Bolton to
calculate a value for the remainder tract that was lower than the value of the
original tract, even though the net revenue stream to the property remained the
same.
In explaining why he applied a
higher capitalization rate to the remainder property than to the original
property, Bolton testified that he increased
it primarily because of the loss of the center driveway. He pointed out
that patrons would now have to make a ninety-degree turn from one of the
remaining driveways to enter the new porte cochere, that there would be some interruption in “traffic
patterns,” and that new “site circulation characteristics” of the hotel would
be atypical. Bolton’s summary
appraisal report likewise assigned a higher risk to the property in part
because of diminished access resulting from the loss of the center
driveway. Although the hotel lost one driveway, it remained reasonably
accessible because it retained two other driveways fronting the hotel and
modified to provide adequate access for patrons, as well as two service
driveways in the rear. Bolton’s
appraisal summary assumed that net income to the hotel before and after the
taking would be the same, further confirming that reasonable access to the
property would remain after the driveway modifications were completed.
This testimony was improper because,
in picking a capitalization rate, Bolton
primarily considered the diminished ease of access to the property, a loss that
is not compensable. We have held in analogous circumstances that
diminished access to a landowner’s remaining property is not compensable so
long as reasonable access to the property remains. See Santikos, 144 S.W.3d at 460-61 (stating that
diminished access to remainder property, including loss of access resulting in
lost driveways or requiring “increased circuity of
travel” is not compensable so long as reasonable access to the remainder
property remains); Archenhold Auto. Supply Co. v. City of Waco, 396 S.W.2d 111, 114 (Tex. 1965).
Generally, “a landowner is entitled to compensation when a public improvement
destroys all reasonable access” to his property, but “no right to compensation
extends to a property owner who has reasonable access to property after the
construction of the public improvement.” State v. Heal, 917 S.W.2d 6, 9-10 (Tex.
1996). In this case, the hotel lost its center driveway but four
driveways remained, as described above. In Interstate Northborough
Partnership v. State, we held as a matter of law that a commercial
property’s loss of one driveway while four other driveways remained was not a
sufficiently material and substantial impairment of access to be a compensable
loss. 66 S.W.3d 213, 224 (Tex. 2001).
“It is well settled that damages to
a condemnee’s business which result merely from
traffic being required to travel a more circuitous route to reach a condemnee’s property are not compensable.” State
v. Wood Oil Distrib., Inc., 751 S.W.2d 863, 865 (Tex. 1988). The same rule applies
where the alleged decline in market value is due to a more circuitous route
within the remainder property, from the access road to the condemnee’s
front door. See Santikos, 144 S.W.3d at
460 (“circuity of travel within a particular
property is [no] more compensable than circuity of
travel around it”) (emphasis in original). “[A]ccess
is not materially and substantially impaired merely because other access points
are significantly less convenient.” Dawmar
Partners, 267 S.W.3d at 880.
Although couching his testimony in
terms of the effect on “risk” and the capitalization rate from an investor
standpoint, Bolton considered the diminished
ease of access to the remainder property, a factor that is not
compensable. If the alleged damage to the property is based on a partial
loss of access, the landowner cannot transform such a noncompensable
loss into a compensable one by recasting it as a change in the capitalization
rate. See Dawmar Partners, 267 S.W.3d at
879-80 (holding that landowner cannot recover
for loss of access by framing it as a change in the “highest and best use”);
Santikos, 144 S.W.3d at 462 (expert testimony
couching loss in terms of “diminished market perception” does not make loss
compensable when investor perception is based on noncompensable
losses such as diminished access or diminished visibility).
In condemnation cases, the trial
court must first determine if claimed damages are compensable, and admit
evidence accordingly. Interstate Northborough, 66
S.W.3d at 220. If the damage award “is based on evidence of both
compensable and noncompensable injuries, the harmed
party is entitled to a new trial.” Id.
The jury in this case heard inadmissible evidence of temporary and permanent
damages. Accordingly, and without hearing oral argument, we reverse the
court of appeals’ judgment and remand the case to the trial court for a new
trial on condemnation damages. See Tex. R. App. P. 59.1.
OPINION DELIVERED:
May 15, 2009