Western Real Estate Business, January 2014.
Any investor wants to maximize his property’s value and income-producing potential, but many fail to take this concept seriously – until they realize what they could be missing out on.
Who cares about the highest and best use of a property? Well, appraisers certainly care, and when a property ends up in litigation, the judge cares. Understanding how these authorities determine value will make it clear that commercial property owners should care about highest and best use, too.
I learned the importance of highest and best use during my first year at the Department of Justice, in a small condemnation or government taking case. The property owner had a single-family home on a prime piece of commercial real estate, and a highway expansion was bringing traffic lanes to within 12 feet of the house. The property had been rezoned commercial and was surrounded by other commercial uses.
As a residential asset, the entire property before partial condemnation had appraised at $140,000, whereas the land as a commercial site was worth double that amount. Because the highest and best use of the property was redevelopment as a commercial site, the value for the land taken as right of way was worth more than the residential value of the entire, previously undivided property.
Not all analyses of highest and best use are so simple and obvious. This is particularly true in the context of appraising an industrial property for a property tax appeal. The standard test for determining highest and best use has four prongs, and each can be critical to the valuation of the property. That question is: What use is legally permissible, physically possible, financially feasible and maximally profitable?
The first prong, what is legally permissible, refers to zoning or other governmental restrictions, as well as the deed restrictions, and the uses that those parameters allow for the property. In a recent case, a 57-acre property was zoned industrial, which allowed for offices as an accessory use to the industrial use. Improvements included several older flex manufacturing buildings totaling close to 600,000 square feet. The condition and use of the flex buildings varied but the need to use the structures primarily for manufacturing no longer existed.
The Oregon Department of Revenue’s appraisal valued the majority of the 600,000 square feet as office use. This did not meet the test for what is legally permissible, because the zoning only allowed office as an accessory to an industrial use.
What is financially feasible? In this same case, the appraiser for the Department of Revenue also failed to address if it was cost effective to reconfigure several 80,000-squarefoot two-story flex manufacturing facilities for multitenant use. The government’s appraisal lacked any discussion of the basic demising costs to create smaller rentable spaces, including common areas for
hallways, lobbies, and relocation of elevators and restrooms.
What is physically possible? Many of the industrial buildings in this example were interconnected. They had shared utilities, were situated on a single tax lot and offered only limited access without dedicated parking for a given building. Separation of the buildings into viable stand-alone parcels may have been prohibited by the physical location of the utilities, the placement of the buildings on the lot, or by parking, ingress and egress to the site.
The fourth prong is often the simplest to address. Of the possible uses meeting the first three facets of the highest-and-best-use test, which offers the maximum profit for the owner?
An appraiser’s failure to do a highest- and-best-use analysis and appropriately support its conclusions can be fatal in a trial setting. In a 1990 decision, Freedom Federal Savings & Loan vs. Department of Revenue, the Oregon Supreme Court held that highest and best use of the property subject to evaluation is the first question that must be addressed in a credible appraisal. This set the critical framework for valuation, and determines what other comparable properties can be used to value the subject property.
These highest-and-best-use tests must be appropriately supported. In the context of an investment property, for example, would an investor deem the current use to be most productive from a financial or physical basis for the property, or would an alternative use be preferable?
If a careful highest-and-best-use analysis is done at the beginning, the appraiser can select credible comparable sales or leases for use in valuation. The property owner, in turn, will be treated fairly, whether in a tax assessment appeal or an eminent domain acquisition.
Brandt Revocable Trust v. United States, (United States Supreme Court, March 10, 2014) involved the allocation of property interests in a former railroad right-of-way when the railroad subsequently abandoned its use. Plaintiff trust succeeded to the interests of Melvin and Lulu Brandt, who purchased 83 acres of land in Wyoming by patent from the United States in 1976, subject to, among other things, an easement for railroad purposes. The successor to that railroad formally abandoned the right-of-way and tore up the tracks and ties in 2004. The United States claimed a reversionary interest in the former right-of-way in the form of an easement by virtue of a 1988 statute and settled with all landowners other than the Trust to convert that land to a public path, also known as rails to trails. The Trust claimed that any government claim to the land was extinguished when the easement was abandoned by the railroad.
Both lower federal courts sided with the federal government, but in an 8-1 opinion authored by Chief Justice John Roberts, the Supreme Court reversed. Chief Justice Roberts traced the historical relationship of railroads to settlement of the West, noting that from 1860-1971, when there was a need to build a transcontinental railroad and very little money available (mostly due to the Civil War), the federal government granted lands to railroads outright to encourage transcontinental service. This was the practice when the “O&C Lands” were granted from 1866 to 1872 under the Oregon and California Railroad Act and related legislation.
The practice of granting fee title to lands to railroads ceased by 1875, when Congress enacted the General Railroad Right of Way Act and adopted a new practice to grant right-of-way easements for railroads (although those easements frequently did not deal with what happened if the easements were no longer used for railroads). This was the type of easement granted for the subject lands. The Trust claimed that to the extent any easement existed, the easement was extinguished by abandonment, while the United States claimed a reversionary interest that it grant to other public agencies, among other things, for hiking and bike trails.
Chief Justice Roberts’ opinion relies on a case previously decided in 1942 by the Supreme Court in Great Northern Railway Co. v. United States in which the federal government defeated a private claim to oil rights under a railroad right-of-way by claiming the railroad’s interest was merely an easement and did not entitle it to mineral rights under the tracks. When the United States granted title by patent to the Brandts in 1976, the land was “subject to those rights for railroad purposes” to a predecessor railroad and the court found that, when the beneficiary railroad abandons the right-of-way, the easement disappears and the landowner has an unencumbered interest in the land. Chief Justice Roberts characterized the federal government’s position in the present case as suggesting that the Great Northern opinion did not really mean what it said, calling its arguments based on the 1875 Act an “improbable (and self-serving) reading” of that legislation.
The court noted that Congress again changed its policy in 1922 to grant all property interests in forfeited or abandoned railroad rights-of-way to the municipality or private person who owned the underlying land. But in 1988, Congress declared that title to abandoned or forfeited railroad rights-of-way would vest in the United States. The court said that the nature of the property interests in the former railroad right-of-way turned on the date of the original grant of that interest, rather than subsequently enacted legislation. Thus, if all the railroad had was an easement, the federal government could not acquire a greater interest by changing the rules after the fact. The Brandt Trust owned the property subject to the easement and when the easement was abandoned, that interest simply went away.
This is not to say there may be other ways to acquire easements over these former rights-of-way for pedestrian or bicycle trails – by purchase, gift, or condemnation for example. Perhaps there are cases to be made that title has been lost by adverse possession. Nevertheless, those owning lands crossed by now-abandoned railroad rights-of-way now have something to talk about to public agencies asserting that those owners have no legal interest in that land.
Is it worth the time and expense to find out?
Seemingly simple disputes over roadways and driveways between neighboring property owners can often explode into complicated (and expensive) legal battles that require the courts to blend the laws relating to easements, adverse possession, the creation of subdivisions, and the power of a county or city to accept or vacate the dedication of a roadway. The resulting litigation often results in the litigants incurring expenses far in excess of the value of the underlying property. Moreover, the litigation can tie up the subject properties for years, depriving the property owners of the ability to convey or develop those properties. This was almost certainly the case in the recent decision in Howe v. Greenleaf, 2014 WL 324562 (Or App 2014), in which the Court of Appeals was asked to decide who owned Skyland Drive in Lake Oswego after Clackamas County vacated the road dedication.
The complicated facts can be summarized as follows. In 1950, the Smiths subdivided a portion of their 36 acres of land in Lake Oswego. The subdivision plat included the dedication of Skyland Drive to Clackamas County and used the roadway as the boundary between the subdivision and the remainder of the Smiths’ property. The remainder of Smiths’ property was divided into two lots located to the north and east of Skyland Drive. In 1969, Clackamas County vacated the southern portion of Skyland Drive. In 1982, Clackamas County vacated the remainder of the Skyland Drive. Also in 1982, the then owners of the various parcels of the land entered into an easement agreement to create reciprocal rights to use Skyland Drive for utility and roadway purposes. The easement included a recital indicating that the vacation of the roadway would result in the ownership of Skyland Drive reverting to the parties of the easement agreement with the centerline of Skyland Drive serving as the property line. The litigation did not arise until 2008 when one of the property owners within the subdivision sought to claim ownership of the entirety of Skyland Drive as part of his attempt to further subdivide his lot.
The case quickly became a complicated morass of legal claims and issues. The plaintiffs, owners of the properties outside the subdivision, filed a lawsuit against the owners inside the subdivision, seeking to quiet title in one-half of Skyland Drive based on the statutes governing interpretation of conveyances and vesting rules applicable upon vacation of public property (ORS 93.310 and 368.366, respectively). The plaintiffs also sought to estop the Defendants from claiming ownership of the entire road based on the recital that contained the 1982 easement agreement. In addition, the plaintiffs sought to enjoin the Defendants from any future interference with their easement rights to Skyland Drive. One of the plaintiffs also sought to claim the southern portion of Skyland Drive through adverse possession. Defendants argued that the original subdivision plat reflected that the Smiths (the original owners of all the property) intended that ownership to the entirety of Skyland Drive would revert only to property owners within the subdivision and sought declaratory relief to that effect. Defendants claimed that the recital in the 1982 easement agreement was immaterial and was insufficient to convey title to plaintiffs. The case was decided in favor of defendants on all claims after a bench trial. The defendants were awarded a portion of their attorney fees pursuant to the easement agreement. The plaintiffs appealed.
After five years of litigation, the Court of Appeals reversed the trial court’s decision on plaintiffs’ quiet title claim finding that plaintiffs became the owners of one-half of Skyland Drive after the County vacated the road and that the property line between the properties was at the road’s centerline. The trial court's decision in favor of the defendants on the adverse possession and easement claims, including the award of attorney fees, was affirmed. The most interesting portion of the holding, the reversal on plaintiffs’ claim to quiet title, was primarily based on the Court’s application of the statutory presumptions for conveyances of property contained in 93.310(4) and ORS 368.366(1)(d). In a situation where a road serves as the boundary between two properties, ORS 93.310(4) creates a presumption that the centerline of the roadway is the property line and that the grantor conveys his or her rights up to the centerline. The presumption continues through subsequent conveyances. ORS 368.366(1)(d) presumes that title to a vacated county road vests in the abutting property owners to the centerline of the road. The only exceptions to these presumptions occur (1) when, at the time of conveyance of the abutting property, the road is owned by someone other than the grantor, or (2) when the grantor expressly provides in the conveyance that he or she does not intend to convey title to the centerline of the road. The Court found that the statutory presumptions applied because the original subdivision plat and subsequent deeds conveying the properties were essentially silent with respect to the ownership of the Skyland Drive. Thus, the Court reversed the trial court’s ruling on plaintiffs’ quiet title claim finding that title to one-half of Skyland Drive vested in the plaintiffs when the county vacated the road (which also rendered the adverse possession claim moot).
At the end of the day, neither the plaintiffs nor the defendants in this case appear to be winners. Their properties have been sitting under the cloud of litigation for over five years. Both sides must have incurred substantial attorney fees during the course of litigation. These fees likely exceed the land value of Skyland Drive. Moreover, the end result appears to leave the parties in almost the same position they were in at the time the litigation started with both sides having easement rights to use Skyland Drive for roadway and utility purposes. No doubt there is more to the story that explains what motivated the parties to litigate the case so vigorously and for so long. However, this case, perhaps more than others, is a prime example of why real estate practitioners should actively encourage their clients to seek a reasonable and early settlement of these seemingly simple land disputes. The cost in time and money of finding out who is right in real estate litigation will too often exceed the value of the property in dispute.
On Monday March 3, 2014, a Multnomah County Circuit judge agreed with the Multnomah County Elections Director and brought a new hotel at the Oregon Convention Center one step closer to fruition. A Convention Center Hotel has long been desired by a variety of tourism and economic development interests who argue that such hotel will allow Portland to host larger events at the Convention Center. As long as those supporters have been around, so too have opponents of such a hotel, who argue that the economic benefits of such a hotel are overstated and may also harm their economic interests and should not qualify for public subsidies. In 2013, Metro and other local jurisdictions seemed to be coalescing around a plan that would bring the hotel to the Convention Center, but one aspect of the plan ran into a snag and ended up in court.
In December of 2013, Multnomah County amended its code to allow tourism tax revenue to be expended in support of “the construction of a hotel proximate to the Oregon Convention Center.” Opponents of the hotel sought to refer that change to an election, but the County Elections Division denied certification of the referendum petition because, in the view of the County elections Division, the code amendment was an “executive or administrate” matter. That classification is important, because under a long line of Oregon Supreme Court cases, only “legislative” matters are subject to referral and administrative or executive matters are not subject to a vote.
The hotel opponents challenged that denial, arguing that the code amendment was legislative. On March 3, 2014, Judge Eric Bloch sided with the County and found, among other things, that the matter was administrative and not subject to referral to the voters. It is unlikely that this is the last word on the hotel, but at least one hurdle has been cleared.
Brown v. Town of Cary, 2013 WL 221978 (4th Cir.) was an appeal from the judgment of a federal trial court invalidating defendant’s sign code, a part of its Land Development Ordinance (LDO). The LDO allowed up to two residential signs of not more than 42 feet in height and five sq. ft. per sign in area, but exempted holiday decorations and public art, as defined in the ordinance. Bowden, a Cary residential property owner who was frustrated by the treatment received to his damage claim from a municipal road-paving project, wrote “Screwed by the Town of Cary” on a 15-foot swath 14-25 inches high across his house in fluorescent orange. Bowden was prosecuted by the Town for two LDO violations – one of which alleged he had a non-complying wall sign, rather than a residential sign – a wall sign was limited to two feet under the LDO. Secondly, the Town alleged that the sign was made with high intensity color. Neither allegation involved the content of the sign. Bowden then brought a Section 1983 action in federal court challenging the two exemptions under the sign ordinance as content-based. The trial court agreed, enjoined the ordinance, gave plaintiff $1.00 in damages, and awarded $36,197 in attorney fees and costs.
Bowden died during the pendency of this appeal and plaintiff succeeded him. Applying North Carolina law, the Fourth Circuit said that Bowden’s claim survived his death even though the damages were nominal. Moreover, the case involved the legitimacy of the exemption so the Fourth Circuit agreed that Bowden’s successors had standing to litigate the free speech issues.
In approaching the merits, the court reviewed the trial court’s grant of summary judgment to plaintiff on a de novo basis, finding that the case turned on whether the challenged ordinance was content-neutral. Defendant contended it could differentiate messages based on content so long as its reasons for doing so were not based on the message itself. The Fourth Circuit said it would reject:
“. . . any absolutist reading of content-neutrality, and instead orient our inquiry toward why – not whether – the Town has distinguished content in its regulation. Viewed in that light we are satisfied that the Sign Ordinance is content-neutral. Applying the intermediate scrutiny required for content-neutral restrictions on speech, we hold that the Sign Ordinance does not violate the First Amendment.”
While signs are a form of protected expression, they may be regulated by their physical characteristics such as height, area and the like. Their content cannot be regulated as easily but reasonable time, place and matter restrictions may be imposed. In those cases the principal issue is whether such regulation is imposed because of disagreement with the content. The trial court did not have before it the Fourth Circuit’s case of Wag More Dogs, LLC vs. Cozart, 680 F3d 359 (4th Cir., 2012) where the court took a more pragmatic approach used by the U.S. Supreme Court in Hill vs. Colorado, 530 U.S. 703 (2000), finding the content neutrality rule purpose was to prevent the Government from supervising the marketplace of ideas by choosing topics of public debate. If so, the equation of content distinction and content neutrality is incorrect. Content neutrality has only those distinctions imposed with a censorial intent, i.e., to value some forms of speech over others so as to restrict public debate or simply because one or more members of the public find the underlying ideas disagreeable. The court noted that some of its sister circuits had embraced an absolutist notion of content neutrality the way the trial court had decided its case. However, the Fourth Circuit said that such an approach imputed a censorial purpose to such content distinctions which did not imperil free speech, noting a Ninth Circuit view that, pushed to its logical conclusion, would allow for no sign except the blank sign.
The court applied the Wag More Dogs test:
“A regulation is not a content-based regulation of speech if (1) the regulation is not a regulation of speech, but rather a regulation of the places where some speech may occur; (2) the regulation was not adopted because of disagreement with the message the speech conveys; or (3) the government’s interests in the regulation are unrelated to the content of the affected speech.”
Here, the court saw a distinction between on and off-premises signs which was unrelated to its content and served other aims (such as traffic safety and aesthetics) unrelated to the content of the speech. The principal case cited by plaintiffs was Metromedia, Inc. vs. City of San Diego, 459 US 490 (1981); however, the court found that this case was not on point because it turned on the preference of commercial over non-commercial messages which was inconsistent with the values of the Constitution that could not be justified in a content-neutral way. Thus, if the Town could justify a content-based regulation, it might show a “reasonable fit” between its legitimate interests in traffic safety and aesthetics and its exemptions for holiday decorations and public art. Those regulations could pass muster under the First Amendment. The court said it separated the issue of content distinction from that of content discrimination based on content and found the question to be whether that distinction bore a reasonable relationship to the asserted content-neutral format for these regulations.
Thus, while the challenged ordinance distinguished content, the court said the case was over whether those distinctions were justified independent of content. Both exceptions enhanced, rather than diminished aesthetic values. Moreover, the holiday art was temporary and not much of a strain on traffic. While it is true that individual exempted signs might have some adverse effects on these goals, the court found the standard to be whether they had a reasonable, rather than an optimal, impact on those goals – a job more properly assigned to the legislative branch. In this case, the Town used reasonable time, place and manner sign restrictions based on its recognized goals and policies which were unrelated to the suppression of speech. The court found the regulations to be content-neutral under its intermediate scrutiny analysis (i.e., it furthered the City’s legitimate interests in traffic safety and aesthetics, was narrowly tailored to further those interests, and left open ample alternative channels of communication.) The size, color and positioning restrictions do no more than eliminate the exact evils sought to be remedied. The permitted signs gave ample alternative channels of communication. Finally, the ordinance was not vague as to the differences between the exempted signs and others, and the language used does not lend itself to mathematical precision but does provide sufficient guidance for citizens to understand the reach of its prohibitions. In any event, the sign at issue does not qualify under the exemptions. The court concluded:
“Unlike oral speech, signs take up space and may obstruct views, distract motorists, displace alternative uses for land, and pose other problems that legitimately call for regulation.” * * * The content neutrality doctrine of the First Amendment does not impose an all-or-nothing ultimatum upon municipalities that confront these problems. What it requires is that any content distinction a government makes must have a reasonable relation to a content-neutral purpose. What it forbids are content distinctions that jeopardize our most venerated First Amendment principles by regulating public opinion under the guise of public welfare.”
Given the absolutist nature of Oregon’s free speech inquiry under Article I, Section 8 of the State Constitution, the question of this alternative analysis will not arise soon in this state. Still, the debate over absolutism vs. pragmatism will continue to be controversial.
Brown v. Town of Cary, 2013 WL 221978 (4th Cir.)
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