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Owner may have takings claim for lost access

Bablitch

“The essential inquiry is whether a change in access is ‘reasonable.’ Thus, the fact that National Auto has access to Highway 12 via a frontage road does not resolve whether that access is reasonable. Rather, this is a question for a jury.”

Justice William A. Bablitch Wisconsin Supreme Court

When a property owner loses direct access to a highway, replaced with indirect access via a frontage road, the owner is entitled to damages, but only if the resulting frontage road access is unreasonable, the Wisconsin Supreme Court held on July 8. The state’s high court overruled a published decision of the court of appeals, National Auto Truckstops v. DOT, 2003 WI App 14, 259 Wis.2d 745, 656 N.W.2d 798.

The court also held that it is a factual question for the jury whether the new access is reasonable.

Finally, the court held that, if there was a taking, where evidence of comparable properties is available, evidence based on the “income approach” for valuing the taken property is inadmissible.

According to the decision, National Auto Truckstops, Inc. owns a truckstop near the intersection of U.S. Highway 12 and Interstate 94 near Hudson, Wisconsin. National Auto leases the truckstop to Twin City East, which operates and manages the facility.

In 1996, the Department of Transportation (DOT) condemned a portion (.27 acres) of National Auto’s land along Highway 12, as part of a planned reconstruction of the intersection. The project involved widening Highway 12 to four lanes and building a frontage road on the condemned property. The DOT also acquired a temporary easement for use during the construction.

Under the award of damages, in which National Auto was compensated for the partial taking, the DOT did not explicitly purport to take National Auto’s right of access to Highway 12.

Prior to the reconstruction, the truckstop had two points of direct access on Highway 12 — one intended for trucks and the other for automobiles. After the reconstruction, all vehicles must enter the truckstop via a new frontage road off of Highway 12, which can only be accessed at an intersection north of the property.

National Auto appealed under sec. 32.05(11), seeking an increased amount of compensation, and retained two appraisers, who evaluated the condemnation damages at approximately $1 million.

The State moved to exclude these appraisals because they, in part, (1) took into account damages for the truckstop’s change in access and (2) were partly based on the “income approach” to valuation. St. Croix Circuit Court Judge Eric J. Lundell agreed and granted the State’s motion.

The appraisers then submitted new appraisals, excluding the income approach, and valued the property at $350,000 and $12,550, respectively. The higher appraisal took into account the on-site impact of the reconstruction project, whereas the lower appraisal only considered the value of the land taken.

Sykes

“The state conceded that Highway 12 is not a controlled access highway, and the majority properly holds that this project was not otherwise undertaken pursuant to the state’s police power. … While the state has provided a form of alternative access … the question of whether there has been a compensable taking does not depend upon a determination of the reasonableness of this alternative access. There has been a ‘deprivation or restriction of existing right of access’”

Justice Diane S. Sykes
in dissent

At trial, the circuit court prevented National Auto from introducing any evidence based on the “income approach” to valuation, because there was evidence of comparable sales. The court also excluded any evidence of damages regarding the reduction in access to the highway, concluding that the change in access does not qualify as a partial taking.

The jury awarded National Auto $275,000, and National Auto appealed, but the court of appeals affirmed.

The Wisconsin Supreme Court accepted review, and, in a decision by Justice William A. Bablitch, affirmed the exclusion of evidence based on the “income approach,” but reversed the exclusion of evidence for damages based on the change in access.

Chief Justice Shirley S. Abrahamson wrote an opinion, concurring in the judgment only, and Justice Diane S. Sykes wrote an opinion, concurring in part and dissenting in part, joined by Justices David T. Prosser and Jon P. Wilcox.

Change in Access

The court held that the existence of access via the frontage road did not necessarily foreclose damages for loss of access.

The court quoted extensively from the decision in Hastings Realty Corp. v. Texas Co., 28 Wis. 2d 305, 312, 137 N.W.2d 79 (1965), in which the court held, “the Wisconsin statutes specifically provide that compensation shall be paid when there is a partial taking of premises, such as access rights under the power of eminent domain.”

The court acknowledged that Hastings involved a complete loss of access, but held the reasoning applicable nevertheless. Quoting from Narloch v. DOT, 115 Wis.2d 419, 430, 340 N.W.2d 542 (1983), the court iterated, “a person who owns property abutting a public street has a right of access, or right of ingress or egress, to and from the street. Although this right is subject to reasonable regulations in the public interest, it is a property right, the taking of which requires compensation.”

The court distinguished the case of Schneider v. State, 51 Wis.2d 458, 187 N.W.2d 172 (1971), in which it was undisputed that the change from direct access to access via a frontage road was adequate and therefore reasonable. The court stated, “A frontage road might not always constitute ‘reasonable’ access, even though it may in some cases, such as Schneider. Therefore, whether there is reasonable access depends on the specific facts in a case.”

The court continued, “The essential inquiry is whether a change in access is ‘reasonable.’ Thus, the fact that National Auto has access to Highway 12 via a frontage road does not resolve whether that access is reasonable. Rather, this is a question for a jury (cites omitted).”

The court cited an Iowa Supreme Court case, and a court of appeals case, Seefeldt v. DOT, 113 Wis.2d 212, 220-221, 336 N.W.2d 182 (Ct.App.1983), for the proposition that whether access is reasonable is a jury question, rather than a question of law for the court to decide.

What the court held

Case: National Auto Truckstops, Inc., v. DOT, No. 02-1384.

Issue: When the State eliminates direct access to a highway and replaces it with access via a frontage road, can the property owner present evidence of damages from lost access?

Is the question whether the resulting access is reasonable one of law for the court, or one of fact for the jury?

When evidence of comparable sales is available, was it error for the trial court to exclude evidence under the “income approach”?

Holding: Yes. Indirect access via a frontage road does not foreclose the possibility that a compensable taking occurred?

The jury should determine whether the resulting access is reasonable.

No. Evidence under the “income approach” is always inadmissible if comparable sales are available.

Counsel: For Petitioner: Diane P. Gerth, Bradley J. Gunn, Minneapolis, Minnesota For Respondent: Pamela Magee, Peggy A. Lautenschlager, Madison

Accordingly, the court issued the following instructions on remand: “If the jury finds that the changed access is reasonable, then no compensation is to be awarded to National Auto due to the change in access. However, if the jury finds that the changed access is not reasonable, then National Auto is entitled to just compensation for the deprivation or restriction of its right of access.”

“Income Approach”

The court then affirmed the circuit court’s exclusion of evidence of the property’s value using the “income approach.”

There are three primary methods for appraising the value of commercial property — the “income approach,&#14
8; the “comparable sales approach,” and the “cost approach.” In essence, the “income approach” focuses on the income generated by a property, the “comparable sales approach” compares the sales price of comparable properties, and the “cost approach” involves the cost of replacement.

Generally, “income approach” evidence is inadmissible, because business income depends on too many variables, such as an owner’s skill and talent, and is therefore not reliable as a guide to fair market value. Leathem Smith Lodge, Inc., v. State, 94 Wis. 2d 406, 413, 288 N.W.2d 808 (1980).

The exceptions to the rule are: (1) when the character or the property is such that profits are produced without the labor and skill of the owner; (2) when profits reflect the property’s chief source of value; and (3) when the property is so unique that comparable sales are unavailable. Leathem, 94 Wis. 2d at 413.

However, “income evidence is never admissible where there is evidence of comparable sales.” Id.

National Auto argued that income evidence should be allowed, because it is based on non-speculative evidence — rental income. Because the property is not owner-managed, the income does not come from the owner’s skill, but from the real estate itself.

The court rejected the argument, however, concluding it is bound by prior case law that income evidence is never admissible when there is evidence of comparable sales. Accordingly, the court affirmed this aspect of the court of appeals’ decision.

The Concurrences

Justice Sykes wrote separately, concurring in part, and dissenting in part, in an opinion joined by Justices Prosser and Wilcox. The dissent rejected that portion of the decision concluding that whether there has been a partial taking depends on whether the change in access is reasonable.

Links

Wisconsin Supreme Court

Related Article

Case Analysis

The dissent made a different distinction between Schneider and Narloch than the majority, finding the cases distinguishable because Schneider involved a controlled access highway, access to which the State can take through its police powers and thus, not effect a taking.

By contrast, in Narloch, and the case at bar, the highways at issue were not controlled access highways. In Narloch, the Wisconsin Supreme Court held that all property owners whose access rights to the highway were taken were entitled to compensation, even those whose access was at the time undeveloped and unpermitted, without any consideration as to reasonableness.

Applying Narloch, Sykes wrote, “the state conceded that Highway 12 is not a controlled access highway, and the majority properly holds that this project was not otherwise undertaken pursuant to the state’s police power. National Auto’s right of access to Highway 12 was fully developed and properly permitted at the time of the taking, and there is no dispute that its two driveways onto Highway 12 were completely eliminated as a result of this highway reconstruction. While the state has provided a form of alternative access — first to a frontage road, then to Brakke Road, and only then to Highway 12 — the question of whether there has been a compensable taking does not depend upon a determination of the reasonableness of this alternative access. There has been a ‘deprivation or restriction of existing right of access’ under Wis. Stat. sec. 32.09(6)(b); the reasonableness or unreasonableness of the alternative access is relevant only perhaps to the amount of damages, not to the right to compensation in the first place.”

Chief Justice Abrahamson also wrote separately, stating only, “I join only the conclusions set forth in par. 28 [the final paragraph setting forth the decision of the court] of Justice Bablitch’s opinion.”

Click here for Case Analysis.

David Ziemer can be reached by email.

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