In The
Court of Appeals
Sixth Appellate District of Texas at Texarkana
______________________________
No. 06-09-00046-CV
______________________________
ENBRIDGE PIPELINE (EAST TEXAS) L.P., Appellant
V.
AVINGER TIMBER, L.L.C., Appellee
On Appeal from the 276th Judicial District Court
Marion County, Texas
Trial Court No. 0400066
Before Morriss, C.J., Carter and Moseley, JJ.
Opinion by Justice Carter
OPINION
I. INTRODUCTION
Is the value of a bare and undeveloped tract of rural real estate equivalent to the value of
rural real estate that (1) has been leased by the owner to several gas companies for over thirty years
as a gas processing plant, (2) has more than fifteen pipelines entering the property, and (3) has all
the proper permits for use as a gas processing plant? The condemnor, Enbridge Pipeline, argues
yes. We disagree. We do not believe the bare real estate tract is equivalent to the tract involved
here. From that conclusion, we find the appraiser for the landowner was properly allowed to
testify, and the appraiser for the gas company was properly excluded. We will affirm the
judgment of the trial court.
Enbridge Pipeline, L.P. (Pipeline) appeals a jury‘s $20,955,000.00 condemnation award to
Avinger Timber, L.L.C. (AV). Pipeline alleges the trial court erred in: (1) denying its
Daubert/Robinson1 motion against AV‘s valuation expert, David Bolton; (2) striking its expert,
Albert Allen; (3) denying its motion for directed verdict and motion for judgment notwithstanding
the verdict; and (4) failing to submit its proposed jury instructions. We determine the trial court
was within its discretion in admitting Bolton‘s testimony regarding fair market value of the
condemned property, while excluding Allen‘s testimony for his use of improper methodology.
1
Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993); E.I. duPont de Nemours & Co. v. Robinson, 923 S.W.2d
549, 556 (Tex. 1995).
2
Due to our determination of these dispositive issues, and Pipeline‘s failure to preserve any alleged
error in the jury charge, we affirm the trial court‘s judgment.
II. FACTUAL AND PROCEDURAL HISTORY
The main issue in this case is the fair market value of AV‘s land on the date it was
condemned by Pipeline. The history of this land is essential in understanding the experts‘
valuations. The condemned land has been owned by the Simpson family and their company, AV,
since the mid-1950s. In 1973, Roland Simpson leased 23.79 acres out of his 418-acre property to
Tonkawa Gas Processing Company2 for the purpose of building and operating gas processing
facilities. The first lease ―was a 10-year lease with a renewal after every 10 years for another 10
years‖ as a continuing option, which indefinitely postponed AV‘s right of reversion. Annual rent
for the land was $500.00.3 Tonkawa built a large natural gas processing plant atop the land in
1973. 4 Fifteen or sixteen separate natural gas pipelines owned by various companies were
connected to the plant over the years, and the site became a known processing hub.
Tonkawa renewed the lease in 1984, for fifteen years, on the same terms, except that rent
was increased to $4,000.00 per year. Evidence was presented that the Simpsons did not have a
2
Tonkawa was a private company without the power to condemn.
3
At the end of the term, Tonkawa and Roland could agree to the amount of rent for the next year term, and absent
agreement, would arbitrate the amount.
4
The parties stipulated that all improvements under the lease belonged to the lessee. This stipulation did not include
the pipelines built under easements granted to other companies.
3
complete understanding of what the land was worth at this time.5 Tonkawa sold the plant to Koch
Midstream Processing,6 successor of Tonkawa‘s lease interest, and AV took Roland‘s place as
successor lessor.
In 1998, these parties renewed the 1984 lease, but on different terms. First, the lease
became a short, three-year term, with the first term ending April 2, 2001, with another three-year
option. The annual rent increased to $22,265.00. A major difference from the earlier leases was
that Koch‘s right of never-ending lease renewals was removed, giving AV a valuable reversionary
interest in the land. According to industry expert Donald W. Niemiec, this major concession was
made with the understanding that ―[i]f [the amount of rent] went to arbitration . . . the rent would be
quite high,‖ approximately $2.5 million per year. He characterized the lease as ―unique in that it
expires. Most all processing plants own it or have a forever lease on it.‖ Upon expiration of the
three-year lease, the lessee had the option of renewing the lease, buying the land, or selling the
lease and/or removing the plant. The lease was renewed in 2001 with an April 2, 2004, expiration
date. Enbridge Processing (Processing) became the natural gas plant operator and successor to
Koch‘s interest in November 2001.7
5
According to Niemiec, the Simpsons believed the Tonkawa improvements would be valued at $1 million. In fact,
they were valued at $75 million.
6
Koch was also a private company without power of condemnation.
7
Enbridge Processing was a private company, whereas Enbridge Pipeline is a public company having the right of
eminent domain.
4
With the lease expiration date looming,8 Pipeline (not Processing) sent a March 10, 2004,
$35,685.00 offer to AV for purchase of the fee interest. The letter informed AV it had until
4:00 p.m. on March 12, 2004, to agree to the purchase price or face condemnation proceedings.
On March 11, 2004, Processing merged with Pipeline, a public utility company, and secured the
right to acquire the property through eminent domain. A petition for condemnation by Pipeline
was filed on March 18, 2004. Commissioners awarded AV $47,580.00 for the condemnation
after AV failed to appear at the valuation hearing. AV objected to the commissioners‘ default
award and went to trial on one issue—the fair market value of the condemned acreage.9
Daubert/Robinson challenges were made to both parties‘ experts, with the main question
being whether the expert was entitled to consider the gas processing plant in valuing the land
underneath it. The trial court answered the question in the affirmative. Because Pipeline‘s
expert valued the land as vacant rural residential property, the trial court struck his testimony,
finding his opinion unreliable and based upon improper methodology. The court also denied
Pipeline‘s motion to strike AV‘s expert and allowed him to testify because he considered all
existing factors in determining the land‘s fair market value. After hearing AV‘s expert testimony,
the jury found the surface interest of the condemned land was worth $20,955,000.00.
We first consider the trial court‘s Daubert/Robinson rulings.
8
It is alleged that Processing and AV could not agree on a price for rent when negotiating the lease renewal.
9
Except for challenges to experts, the record is clear that ―[b]oth parties have agreed to waive all other issues in this
case except for the value and damages caused by this condemnation,‖ including Pipeline‘s right to the taking.
5
III. THE DAUBERT/ROBINSON ANALYSIS
―[I]t is not permissible for the jury to consider mere speculative contingencies nor is
testimony which ascends to the realm of speculations and fancies that may occur to the minds of
optimistic witnesses concerning the future prospects of [condemned] property and its value
admissible.‖ McChristy v. Hall County, 140 S.W.2d 576, 578 (Tex. Civ. App.—Amarillo 1940,
no writ). The trial court must act as evidentiary gatekeeper to screen irrelevant and unreliable
expert evidence. Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 629 (Tex. 2002). It has broad
discretion with respect to this function. Id.; Gen. Elec. Co. v. Joiner, 522 U.S. 136 (1997); In re
Estate of Trawick, 170 S.W.3d 871, 874 (Tex. App.—Texarkana 2005, no pet.). In determining
whether an abuse of discretion occurred in the inclusion of Bolton‘s testimony and the exclusion of
Allen‘s, we look to see whether the trial court acted without reference to guiding principles or
rules. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241–42 (Tex. 1985). We
cannot conclude that a trial court abused its discretion merely because we would have ruled
differently. Id. at 242; Purina Mills, Inc. v. Odell, 948 S.W.2d 927, 932 (Tex. App.—Texarkana
1997, writ denied).
A. Standard of Review
In addition to demonstrating that an expert witness is qualified, the expert‘s testimony must
be relevant to the issues in the case and based upon a reliable foundation. TEX. R. EVID. 401;
Cooper Tire & Rubber Co. v. Mendez, 204 S.W.3d 797, 800 (Tex. 2006); Zwahr, 88 S.W.3d at
6
628; Robinson, 923 S.W.2d at 556 (citing Daubert, 509 U.S. 579). The parties do not dispute the
qualifications of either witness. Thus, we look to relevance and reliability.
Rule 702 of the Texas Rules of Evidence states that if ―technical, or other specialized
knowledge will assist the trier of fact to understand the evidence to determine a fact in issue, a
witness qualified as an expert by knowledge, skill, experience, training, or education may testify
thereto in the form of an opinion or otherwise.‖ TEX. R. EVID. 702. In Kumho Tire Co. v.
Carmichael, the United States Supreme Court suggested that the Daubert standard is flexible and
that the trial court should ―make certain that an expert, whether basing testimony upon
professional studies or personal experience, employs in the courtroom the same level of
intellectual rigor that characterizes the practice of an expert in the relevant field.‖ 526 U.S. 137,
152 (1999). Expert testimony is unreliable if it is not grounded in ―the methods and procedures of
science,‖ and is no more than ―subjective belief or unsupported speculation,‖ or there is too great
an ―analytical gap‖ between the data and the expert opinion offered. Robinson, 923 S.W.2d at
557; Zwahr, 88 S.W.3d at 629; see Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 712
(Tex. 1997). In reviewing the reliability of expert testimony, a trial court does not determine
whether the expert‘s conclusions are correct; rather, the court should determine only whether the
analysis used to reach those conclusions is reliable. Zwahr, 88 S.W.3d at 629; City of Sugarland
v. Home & Hearth Sugarland, L.P., 215 S.W.3d 503, 510–11 (Tex. App.—Eastland 2007, pet.
denied).
7
―Reliability is determined by looking at numerous factors including those set forth in
Robinson and Daubert.‖ Havner, 953 S.W.2d at 712. These include:
(1) the extent to which the theory has been or can be tested; (2) the extent to which
the technique relies upon the subjective interpretation of the expert; (3) whether the
theory has been subjected to peer review and publication; (4) the technique‘s
potential rate of error; (5) whether the underlying theory or technique has been
generally accepted as valid by the relevant scientific community; and (6) the
non-judicial uses that have been made of the theory or technique.
Id. at 714 (citing Robinson, 923 S.W.2d at 557).
A certified or licensed real estate appraiser is required to comply with the Uniform
Standard of Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation, or other similarly strict standards must be used. TEX. OCC. CODE ANN.
§ 1103.405 (Vernon Supp. 2010). Additionally, the appraiser should use an appraisal method
which passes Daubert/Robinson muster. Texas courts have recognized that the comparable sales,
income capitalization, and replacement cost methods meet these standards, as they have been
tested, proven to require objective analysis, widely publicized, subjected to peer review, generally
accepted by appraisers, and utilized in appraisals outside of the courtroom. In re Marriage of
Rice, 96 S.W.3d 642, 647 (Tex. App.—Texarkana 2003, no pet.). These methods are discussed in
detail below.
If an appraiser utilizes improper methodology or misapplies established rules and
principles, resulting testimony is unreliable, irrelevant, and must be excluded. Zwahr, 88 S.W.3d
at 631 (trial court erred in allowing testimony of appraiser who improperly applied project
8
enhancement rule); City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 188–89 (Tex.
2001) (Baker, J., concurring) (trial court erred in admitting appraisal of expert who improperly
utilized subdivision development analysis method of appraisal). Further, ―unless an appraisal
gives a value based on the land‘s condition at the time of condemnation -- taking into account all
relevant factors that affect its valuation, including the market for its possible future use -- it is not
relevant to the issue of market value.‖ Id. at 185.
B. The Law of Condemnation and Permissible Methods of Appraisal10
―Eminent domain has been described as ‗one of the inalienable rights of sovereignty. It is
the power to take private property for public use.‘‖ State v. Ware, 86 S.W.3d 817, 821–22 (Tex.
App.—Austin 2002, no pet.) (citing Fort Worth & D.C. Ry. v. Ammons, 215 S.W.2d 407, 409
(Tex. Civ. App.—Amarillo 1948, writ ref‘d n.r.e.)). ―[I]t is axiomatic that government cannot
take a citizen‘s property without payment of the property‘s fair value.‖ Id. at 822. Thus, both
the United States and Texas Constitutions require governments to compensate landowners for
takings of their property. U.S. CONST. amend. V (requiring ―just compensation‖); TEX. CONST.
art. I, § 17 (―No person‘s property shall be taken, damaged, or destroyed for or applied to public
use without adequate compensation being made.‖). When a government condemns real property,
the normal measure of damages is the land‘s market value. TEX. PROP. CODE ANN. § 21.042(b)
(Vernon Supp. 2010). Where a condemnor‘s offer for the price of land is refused, ―the objective
10
Pipeline accuses Texas courts of ―conflating‖ the rules involving valuation of fair market value in condemnation
cases and states the Texas Supreme Court ―confus[ed] the issues involved.‖
9
of the judicial process under the constitution and statutes is to make the landowner whole.‖ City
of Fort Worth v. Corbin, 504 S.W.2d 828, 831 (Tex. 1974); Zwahr, 88 S.W.3d at 628. ―The
general rule for determining fair-market value is the before-and-after rule, which requires
measuring the difference in the value of the land immediately before and immediately after the
taking.‖ Zwahr, 88 S.W.3d at 627.
The question of market value is ―peculiarly one for the fact finding body.‖ Tex. Elec.
Serv. Co. v. Graves, 488 S.W.2d 135, 139 (Tex. Civ. App.—El Paso 1972, writ ref‘d n.r.e.); City of
Sherman v. Wayne, 266 S.W.3d 34, 46 (Tex. App.—Dallas 2008, no pet.). It is ―defined as the
price the property would bring when offered for sale by one who desires to sell but is not obliged to
do so and bought by one who desires to buy but is under no necessity to do so.‖ Home & Hearth
Sugarland, 215 S.W.3d at 511 (citing Sharboneau, 48 S.W.3d at 182, 189). This is called the
―willing seller -- willing buyer test,‖ which necessarily takes into consideration all factors ―that
would reasonably be given weight in negotiations between a seller and buyer.‖ Id. at 512 (citing
City of Austin v. Cannizzo, 153 Tex. 324, 267 S.W.2d 808, 814 (1954)). Where appropriate, lost
profits to the condemnee as a result of the taking may also be considered. Wayne, 266 S.W.3d at
45.
Because a jury can consider ―all uses for which the property is reasonably adaptable and
for which it is (or in all reasonable probability will become) available within the foreseeable
future‖ in determining market value, a condemnee is entitled to present the property‘s highest and
10
best use. Home & Hearth Sugarland, 215 S.W.3d at 511 (emphasis added); Bauer v.
Lavaca-Navidad River Auth., 704 S.W.2d 107, 109, 112 (Tex. App.––Corpus Christi 1985, writ
ref‘d n.r.e.) (on property containing established pipeline corridor, highest and best possible use of
severed condemned land was for sale of pipeline easements). Consideration of the highest and
best use ―cannot be given to uses which are purely speculative and unavailable.‖ Home & Hearth
Sugarland, 215 S.W.3d at 511 (citing Cannizzo, 267 S.W.2d at 814). Thus, factors used in the
analysis include legal permissibility, physical possibility, financial feasibility, and maximum
productivity. Id. ―The existing use of the land . . . is its presumed highest and best use, but the
landowner can rebut this presumption by showing‖: ―1. That the property is adaptable to the
other use. 2. That the other use is reasonably probable within the immediate future, or within a
reasonable time.‖ and ―3. That the market value of the land has been enhanced thereby.‖ Zwahr,
88 S.W.3d at 628; Cannizzo, 267 S.W.2d at 814.
―Texas law permits landowners to introduce testimony that the condemned land is a
self-sufficient separate economic unit, independent from the remainder of the parent tract with a
different highest and best use and different value from the remaining land.‖ Zwahr, 88 S.W.3d at
628 (citing Bauer, 704 S.W.2d at 109); see also Cannizzo, 267 S.W.2d at 814. When this occurs,
the fair market value of the severed land can be independently assessed without consideration of
the remainder. Zwahr, 88 S.W.3d at 628.
11
Once determined, the highest and best use of the property is then taken into consideration
when conducting the appraisal. Texas courts have approved three methods of appraisal. The
first, and most preferred, is the comparable sales method. Home & Hearth Sugarland, 215
S.W.3d at 512 (citing Sharboneau, 48 S.W.3d at 182). This method compares the values of
similar properties in nearby locations. Rice, 96 S.W.3d at 647. It is typically ―the most
applicable method of valuing single-family houses, townhouses and condominiums.‖ Id.
Courts look to the replacement cost and income approach when comparable sales are not available.
Home & Hearth Sugarland, 215 S.W.3d at 515; see also Cherokee Water Co. v. Gregg Co.
Appraisal Dist., 773 S.W.2d 949, 955 (Tex. App.—Tyler 1989), aff’d, 801 S.W.2d 872 (Tex.
1990).
Where ―improved property . . . is unique in character and not frequently exchanged in the
marketplace,‖ appraisers can utilize the cost approach, which determines the current cost of
replacing the improved property. Home & Hearth Sugarland, 215 S.W.3d at 515; Rice, 96
S.W.3d at 647. ―After estimating the cost of building the structures on a property, and deducting
an amount for depreciation, the appraiser adds the estimated value of the land and arrives at an
indication of value.‖ Rice, 96 S.W.3d at 647. This type of appraisal is normally conducted when
valuing a building and the land on which it sits.
Where ―the property, in the open market, would be priced according to the income it
already generates,‖ the income approach is appropriate. Home & Hearth Sugarland, 215 S.W.3d
12
at 515 (citing Sharboneau, 48 S.W.3d at 183). ―By estimating this future income and applying a
capitalization rate, the income approach allows the appraiser to arrive at a present value for the
income-producing property.‖ Sharboneau, 48 S.W.3d at 183. This valuation method is ideal for
rental properties. ―No matter which appraisal method an expert uses, the goal is always to find
the fair market value of the condemned property.‖ Home & Hearth Sugarland, 215 S.W.3d at
515.
Certain principles apply to all methods of valuation. Because value is determined at the
time of the taking, ―[t]he fact that previous improvements have been made by the condemnor or
others is a factor which it is proper to consider.‖ McChristy, 140 S.W.2d at 577; Ware, 86 S.W.3d
at 822–23 (―[W]here the property is under a lease to a third party, the valuation of the various
estates or leasehold interest is usually determined by ascertaining the market value of the property
with the improvements thereon as though owned exclusively by one party.‖). This ensures the
condemnee receives the current value of the property.
However, with respect only to the condemned land, the project enhancement rule generally
―provides that the factfinder may not consider any enhancement to the value of the landowner‘s
property that results from the taking itself,‖ to avoid placing the landowner ―in a better position
than he would have enjoyed had there been no condemnation.‖ Zwahr, 88 S.W.3d at 627–28
(citing Corbin, 504 S.W.2d at 830–31). This rule is in accordance with the concept that ―[v]alue
13
to the taker is not the proper guide‖ and avoids a windfall to the condemnee. Id. at 631 (citing
Graves, 488 S.W.2d at 138).
An exception to the project enhancement rule applies where a condemnor does not
manifest intent to condemn a strip of land, but condemns nearby properties and improves them.
City of Dallas v. Shackelford, 145 Tex. 528, 199 S.W.2d 503, 505–06 (1947); see also Corbin, 504
S.W.2d at 832. In such a case, by the time the condemnor decides to condemn the strip of land, its
value may have potentially increased due to the improvements made by the condemnor on nearby
properties. See Shackelford, 199 S.W.2d at 505–06; Uehlinger v. State, 387 S.W.2d 427, 432
(Tex. Civ. App.—Corpus Christi 1965, writ ref‘d n.r.e.). Because, at the time of the taking, the
price paid by a willing buyer would take into account the nearby improvements, a landowner
would have to be compensated by the condemnor for the increased value of his or her property. In
other words, the ―project‖ in this scenario was the new, previously unannounced project, not the
old, previously existing, ongoing projects. Thus, because the rule prohibits project enhancement,
only consideration of the new ―project‖ is prohibited.
The basic rules can be summarized in the following fashion:
1) the fair-market value of the land is measured at the time of taking;
2) the goal is to assess what value a knowledgeable willing seller-willing buyer would
place on the property;
3) the highest and best use must be a use for which the property is reasonably
adaptable and for which it is (or in all reasonable probability will become) available
within the foreseeable future;
4) previous improvements, not a part of the ―project‖ can be considered if they would
be considered by a willing buyer or willing seller;
14
5) any enhancement to the value of the landowner‘s property that results from the
taking itself, i.e., the ―project‖ cannot be considered; and
6) the property must be valued using an accepted valuation method.
With these concepts in mind, we review the experts‘ testimony.
C. Bolton’s Opinions
1. Bolton Considered Niemiec’s Opinions
AV presented two expert witnesses, Niemiec and Bolton. Niemiec had expertise in the
natural gas processing industry, having been president of Union Pacific Fuels, which owned
seventeen processing plants. His experience included analyzing the economics associated with
natural gas processing plants. Bolton was a real estate appraiser. Pipeline moved to exclude
their testimony as unreliable and irrelevant under the Daubert/Robinson standard; the trial court
overruled the motion.11 Although Pipeline does not complain of the trial court‘s ruling with
regard to Niemiec on appeal, Bolton relied upon Niemiec‘s testimony in rendering his expert
opinion. Therefore, an understanding of Niemiec‘s opinions is necessary in order to comprehend
Bolton‘s valuation of the land.
Niemiec emphasized that the property was unique due to the gas processing plant, the
characteristics of the land, and the type of lease that existed prior to the taking. A gas processing
plant cannot feasibly operate if it is built on a tract of land without access to pipelines to distribute
11
AV argues that Pipeline waived the point of error that Bolton‘s testimony was unreliable and irrelevant by failing to
object to his testimony. ―To preserve a complaint that scientific evidence is unreliable and thus, no evidence, a party
must object to the evidence before trial or when the evidence is offered.‖ Mar. Overseas Corp. v. Ellis, 971 S.W.2d
402, 409 (Tex. 1998). Because Pipeline objected to Bolton‘s testimony before trial through a Daubert/Robinson
motion to strike his testimony, and the trial court denied its motion, Pipeline‘s point of error was preserved.
15
the gas, proper permitting to authorize the operation, reasonably nearby gas production anticipated
for a lengthy duration, and the proper amount of electrical supply. The subject tract of land has all
of the necessary infrastructure and characteristics as a result of the operation of a gas processing
plant on this property for more than thirty years, which enhances the value of this tract and
distinguishes it from another nearby vacant tract of rural real estate.
Niemiec testified that buyers and sellers for this tract of land need to know the details about
the prospect for gas production in the area, the details about the pipelines entering it, whether the
site was permitted, and whether it had outlets for its product. A knowledgeable landowner would
need to know all of the factors associated with the lease, the costs to move, the expiration
conditions of the lease, and other parties that might be interested in leasing or buying the land. He
then discussed many of those factors—in particular, the history of this lease and the unusual
content of the most recent lease which allowed a reversion of the real estate to the landowners
without an option to renew the lease. Niemiec explained that because this lease expired prior to
the taking, the tenant (Processing) had the option to shut down the plant and acquire another site,
move or build another plant, sell to another party, or continue to negotiate with the landowner.
As an expert in the gas processing industry, Niemiec testified that he evaluated the cost of
moving and building a new plant to be $52 million without considering land costs and permits.
The old plant could be sold for salvage for $14 million, leaving a net cost of moving at $38 million.
Instead of moving, the tenant could build a temporary plant which would partially process the gas
16
and allow it to meet pipeline specifications. This would involve disassembling the old plant and
moving to the other site at a net cost of $29 million. If the property had the improvements
removed, which Pipeline had a right to do, and we do not speculate as to what action it would take,
Niemiec testified that other companies would be interested in this real estate, and for
approximately $74 million ($22 million for the land and $52 million for the plant) it would own a
property and improvements that were valued at between $165 and $231 million and would
generate income of $16.5 million per year. Thus, many buyers would be interested in this site.12
Niemiec testified that a willing investor would pay from $18 to $22 million for the land, knowing
the lease had expired and what would have to be done to move the plant.
2. Fair Market Value at the Time of Taking
Bolton stated that he measured the fair market value of the land as of the date of the taking,
which both parties stipulated was April 7, 2004. On that date, the lease had expired, the property
was already improved by the gas processing plant, had a permit to operate, and was benefitted by
fifteen or sixteen pipelines, each with its own easement.13
12
Niemiec testified the Texas Railroad Commission has record of sixty pipeline companies in the area, all of which
could be considered potential buyers.
13
While Processing (a private company) made $13 million worth of improvements to the property, the plant was built
by Tonkawa in 1973 and the pipelines were not owned by Processing. In other words, the condemnor did not make
any enhancements on the property. This fact distinguishes many of the cases relied on by Pipeline.
17
3. Willing Buyer-Willing Seller
Bolton utilized Neimiec‘s research in addressing the willing buyer-willing seller test.
Bolton began with attempting to find comparable sales and agreed that the tract was unique.
Bolton also appraised the property using two income analysis approaches. He testified that to
find land to substitute or be equivalent to this site would require an expenditure of $38 million,
plus the cost of the land. Bolton stated that the land provided a cost savings to a willing buyer
since going to a new site would involve finding one with pipelines entering, obtaining permits, and
doing title work. ―Then you would have to build a plant that -- of $52 million.‖ Bolton shared
Neimiec‘s opinion that this location was unique because it was already permitted, had 138 KB
power provided, was in the middle of a gas field, had fifteen or sixteen pipelines attached, and the
market was not declining. If the plant was removed by the tenant, and the purchase of the land by
a new buyer did not include the plant, the buyer would still save a lot of money because the land
housed the pipelines that would allow the site to control most of the natural gas processing
business. On the other hand, if the tenant decided not to remove the plant because building a new
site would cost more than $50 million, and sold the existing plant for salvage value, the buyer
would save $38 million since buying the salvage of the existing plant would cost $14 million.
4. Highest and Best Use Took Into Consideration Previous Improvements
Bolton determined that the land‘s highest and best use was for an industrial gas processing
plant and that the active market included gas processors. Because the land had been adapted and
18
used in that manner for over thirty years, this highest and best use was foreseeable. In
establishing the highest and best use of the property and appraising the real estate, Bolton took into
consideration the fact that a gas processing plant had been established for many years and that
fifteen or sixteen pipelines were connected to the property. Pipeline‘s expert agreed the land was
a good site for a gas processing plant.
5. Methodology
Bolton first appraised the real estate using the comparable sales approach. There was not
much dispute that the attributes of this real estate caused it to be one of a kind. Because of this
uniqueness, the use of traditional comparable sales comparisons procedure was a challenging task.
Bolton used the traditional approach in attempting to find other industrial real estate sites. Bolton
testified that he reviewed the differences in the uses, locations, and market conditions between the
subject property and comparable tracts, and adjusted for the unique feature of this tract ―having the
pipelines, the lease and the tenant improvements and the unique location of the 23.79 acres.‖
Based on the comparable sales approach, Bolton appraised the 23.79 acres at $20,955,000.00.
Pipeline‘s expert appraiser, Donnie Sherwood, said he had no criticisms about Bolton‘s
methodology and possessed no information to dispute the figures.
Considering Niemiec‘s findings, Bolton also used the income approach to ―analyze[] what
a prudent and knowledgeable investor would pay for the leased land, which includes the terms of
19
the Lease Agreement, considering the gas processing facility must be removed and the land
restored, within a six month period.‖ Bolton explained:
[W]e take or analyze the amount of income the property can produce, subtract the
expenses that are necessary to produce that income, and then we do a calculation
called capitalization, and this is, we use a typical rate of return for that type of
property to convert it to value . . . analyz[ing] such comparable rental data as are
available.
This discounted cash flow analysis considered a three-year hypothetical lease, with nominal
annual rents paid at the beginning of each year, followed by a reversion of the land at the end of the
third year. The rental amounts for years one through three were discounted to present value
(based on the date of taking), with the value of the discounted reversions added. The reversionary
interest in this instance was the major value. Using this analysis, Bolton found the market value
of the subject tract as $18.9 million.
A third method of appraisal by Bolton was the direct capitalization approach, which is
based on one year‘s estimated net operating income derived from a market land lease rate. The
annual lease payment would be based on the cost savings to be realized by the plant owner if a
long-term lease could be entered. Those costs range from $20 million, plus business disruption to
$29 million to $38 million to avoid much of the business disruption. Land lease rates of return for
industrial sites range from 4.8 percent to 10.63 percent. Based on these rates, a reasonable market
rental rate of $1.8 million per year to $2.3 million per year would be yielded. Capitalizing the
20
annual net operating income using a capitalization rate of 8.0 percent results in a value to the
economic unit including the lease agreement terms as of April 7, 2004, of $22,275,000.00.
D. Pipeline’s Complaints
Pipeline argues that Bolton‘s appraisal improperly: (1) included value of improvements
to the property; (2) analyzed the land‘s value to Pipeline; (3) included project influence;
(4) violated the undivided fee rule; (5) improperly considered Processing‘s business revenues; and
(6) improperly relied on incomparable sales data.
1. Value of Improvements Until Time of Taking Can Be Considered
The record and caselaw demonstrate that AV was entitled to consider the effect of
improvements when determining the fair market value of the condemned land. Contrary to
Pipeline‘s assertions, the experts clarified they did not consider value to Pipeline, but that
knowledge of the value of the unique nature of the property was taken into consideration in
determining the fair market value between a willing seller and willing buyer, which in this case
would most likely be another natural gas pipeline company. Rule 1-2(e) of USPAP rules
provides:
In developing a real property appraisal, an appraiser must: . . . (e) identify the
characteristics of the property that are relevant to the type and definition of value
and intended use of the appraisal, including: (i) its location and physical, legal,
and economic attributes; . . . (iii) any personal property, trade fixtures, or intangible
items that are not real property but are included in the appraisal; (iv) any known
easements, restrictions, encumbrances, leases . . . .
21
http://www.uspap.org/2010USPAP/USPAP/stds/sr1_2.htm. Also, Rule 1-4(g) makes clear,
―When personal property, trade fixtures, or intangible items are included in the appraisal, the
appraiser must analyze the effect on value of such non-real property items.‖
http://www.uspap.org/2010USPAP/USPAP/stds/sr1_4.htm.
To assess what effect the improvements had on the land value, Bolton relied upon
Niemiec‘s calculations recited above. Niemiec‘s focus was on potential buyers who would be
interested in the cost savings provided by the unique situation of the expiration of the lease which
occurred prior to the date of the taking. Niemiec reasoned:
Someone coming in, looking at the situation with the lease expired would look at
this and say, ―It‘s a great site; I could purchase the lease from the landlord,‖ and
then the tenant, any tenant, or in this case, [Processing], would have a choice to
either negotiate now with the new owner of the lease, . . . or they would simply
continue on and move their -- remove their site, remove their improvements, their
plant from this site per the lease.
―The pipelines out of the plant are pipelines that would be able to be utilized by any third party.
And the gathering system contracts would allow the producer to move the gas to the plant site.‖
The savings advantage to the potential buyer could also be used to negotiate a higher rent from
AV‘s standpoint. According to Niemiec, ―knowing what I know about the site and the lease, . . .
[a potential buyer] would be willing to put up a minimum of $18 million for the‖ surface land
because ―the pipeline is coming in; the pipeline is going out; the air permits; the electrical power
that‘s there; the customers are all still there.‖ He also testified the land was worth that much
because it ―has been prepared, and it has the infrastructure to handle all of these incoming and
22
outgoing pipes.‖ Even if the investors paid $22 million for the real estate, a new plant could be
built on this site that is already permitted and has the incoming pipelines for $50 million, resulting
in a total investment of $72 million to acquire a plant worth between $165 million and $231
million.
We find that to properly appraise this real estate, one cannot ignore the fact that a gas
processing plant is and has been established on it for more than thirty years. It is true that this is
an extremely unusual situation (that a major processing plant is built on real estate on which the
lease has expired with no option to renew), but the appraisers and this Court must acknowledge the
existing facts; it is not improper to consider any effect the improvements and the expiring lease
have on the value of the underlying real estate.
2. Bolton Did Not Use Value to the Taker
Bolton testified that he did not assess value to Pipeline and that if he had, AV would have
asked for more since the plant and land together were valued between $165 million and $231
million.
Pipeline complains ―Bolton plays upon the land‘s special value to Enbridge by asserting
there would be a ‗free-market‘ to buy the surface of land and resell it to Enbridge at a hold–up
price.‖ We find nothing in the record to support the notion that Bolton‘s analysis envisions
attempting to resell the land to Pipeline.
23
Next, Pipeline argues that Bolton‘s testimony violated the ―first‖ kind of project influence
by considering the special value of AV‘s land to Pipeline‘s public project. In doing so, Pipeline
argues that Bolton considered Pipeline‘s costs and profits in operating the plant and speculated
about its business decisions. Pipeline also argues that AV is attempting to recover the costs to
Pipeline, rather than the fair market value through Bolton‘s reliance on possible costs to move the
plant to another location. Pipeline complains Bolton erroneously includes testimony of ―cost
savings‖ or what Pipeline refers to as ―opportunity cost.‖ This is an argument that Bolton
assessed value to the taker.
In support of its argument, Pipeline cites Northwest Pipeline Corp. v. 95.02 Acres of Land,
more or less, in Power County, Idaho, No. CV-01-628-E-BLW, 2003 WL 25768634 (D. Idaho
Dec. 19, 2003) (mem. op. & order). Even if this case (an unpublished federal district court ruling
on a motion in limine) had precedential value, it is far different from the case at hand. In
Northwest Pipeline, the pipeline company condemned property on an Indian reservation which
already had an easement. The offer of proof was the alternative cost of rerouting the pipeline
hundreds of miles completely off the reservation. The district court properly found that such
alternative cost was not a measure of the market value of the real estate.
In Northwest Pipeline, the evidence of the cost of placing a pipeline completely off the
Indian reservation had no relation or bearing on the market value of the property. By contrast, the
evidence of cost here related to a determination of the market value of the real estate upon which a
24
gas processing plant has been operational for many years. Both Bolton and Niemiec testified to
costs of moving and building a new plant, but we understand that evidence was presented in an
effort to display what a willing, knowledgeable buyer would pay for the land. Such testimony is
relevant in considering the financial feasibility of a property, the highest and best use of the
property, as well as an appraisal of what a knowledgeable buyer would pay. The experts
identified more than sixteen other potential buyers in this market, including many other gas
companies that have direct ties to the East Texas oil field, as well over sixty gas pipeline
companies.
Pipeline urges it is unfair that a condemnor be required to pay the enhanced price which its
demand alone has created. It complains that AV is attempting to obtain a special value to the
condemnor as distinguished from others who may or may not have the power of eminent domain.
United States v. Cors, 337 U.S. 325 (1949). Pipeline cites cases in which the same government
entity condemning the property was asked to pay for a leasehold, easement, or other right which it
owned prior to condemnation, on the basis that the continued revenue was expected. However, in
these cases, there was no evidence that there was a market which would be available to purchase to
the interest. Rather, the condemnor either created demand for the property or was the sole market
for the property. Thus, these cases did not allow evidence of the owner‘s special need in the
property. Id. at 333 (government should not have to pay enhanced value for tug boat in time of
war where market prices were inflated for war vessels due to government‘s need for them during
25
war time); United States v. Weyerhaeuser Co., 538 F.2d 1363, 1366 (9th Cir. 1976) (company not
entitled to payments for use of road owned by private company leading to federal timberland
where government had exclusive licenses to use road prior to condemnation); see also Graves, 488
S.W.2d at 136–38 (condemnor‘s cost to construct future transmission line irrelevant to fair market
value of easement for electrical transmission line on date of taking).
Here, the action of Pipeline in condemning this property did not create a special need
demand for the real estate; that market had been created by years of use of the real estate as a gas
processing plant. For thirty years, other companies constructed the improvements and used this
property for gas processing. The evidence shows there is a large demand for natural gas which
must be processed before entering the pipelines for delivery to consumers. Many companies are
profitably conducting such business. While the unique circumstances of this lease expiration may
have presented a rare opportunity for competing companies to attempt to acquire this real estate,
the value of the real estate is not a result of the condemnation and does not depend on Pipeline
either continuing operation or removing its property.
Our conclusion was supported many years ago, when the Supreme Court of the United
States addressed an analogous situation in Boom Co. v. Patterson, 98 U.S. 403 (1878). In earlier
days, the rivers, especially the Mississippi River, served as major transportation avenues for
commercial goods. Logging was an industry that apparently relied on the Mississippi River for
transportation to the market. Patterson owned three islands located in the Mississippi River,
26
enabling him to construct a boom (a series of chains or cables, or timbers to confine floating
timber) attached to the west bank of the river capable of holding over twenty million feet of logs.
This added great value to the three islands. Id. at 408. The condemning authority also planned to
use the three islands as a boom; it argued that the adaptability of this land for use as a boom should
not be considered since only the Boom Company was authorized to receive and manage timber on
the Mississippi River. The Supreme Court found that such authority did not apply to timbers of
parties ―choosing to keep the control and management of them in their own hands.‖ Id. at 409.
Consequently, the three islands were valuable for use as a boom, not only to the condemning
authority, but also to other parties; therefore, the property could properly be evaluated to include
that enhanced value.
While we recognize the difference in this case is that AV owns only the real estate and not
the improvements, the reasoning of the Boom Co. case concerning the value to the taker argument
is applicable. The value of this real estate as a gas processing plant site is not exclusive to
Pipeline. Therefore, Bolton‘s assessment was of the fair market value, not the value to the taker.
3. Bolton Did Not Violate the Project Influence Rule
Bolton testified he did not take into consideration the effect of the condemnation
proceeding, negating Pipeline‘s application of the project influence rule. Pipeline did not
manifest intention to condemn the property until the March 10 letter. Therefore, because there
was no further Pipeline ―project,‖ Bolton concluded the project enhancement rule did not apply,
27
and he took into consideration, in accordance with Rule 1-2(e), the fact that the land housed a
multi-million dollar plant and was subject to the pipeline easements. He assumed, because it
would be financially unfeasible for Pipeline to remove the gas processing plant,14 that it would
renew the lease, or that another company would lease the site. He based his opinion on what the
annual market rent lease payment would be, taking into account cost savings that a potential plant
owner would realize on a long-term lease. Bolton appraised the surface interest in the 23.79 acres
as $20,955,000.00. Bolton made clear that while the improvements were taken into
consideration, he did not actually appraise them; rather, he considered the improvement values to
aid his conclusion in determining the fair market value of the surface land underneath them.
a. Pipeline Built No Improvements; Therefore, Consideration of the
Processing Facility Does Not Violate Project Enhancement Rule
Pipeline cites many cases, both federal and state, with respect to the issue of project
influence. Some of the cases are distinguishable because they involve fact patterns in which the
condemnor built projects in surrounding areas while indicating intent to condemn the subject
property. Corbin, 504 S.W.2d at 831 (―enhancement is allowed up to the time that the condemnor
manifests a definite purpose to take the particular land‖). Here, the landowners could only
include previously built projects when assessing the fair market value of their property on the date
of the taking if they existed before the condemnor manifested desire to condemn. Shackelford,
199 S.W.2d at 505–06 (concluding ―it was entirely proper for the jury to take into consideration
14
Bolton and Niemiec testified it might cost $38 million to move the plant and up to $52 million if business disruption
was taken into account.
28
[the property‘s] enhanced value [from existing public marketplace project]‖ ―in view of the fact
that there was no definite purpose manifested by the City to take [the subject property]‖ until later).
Here, the condemnor, Pipeline, did not build any improvements. Therefore, these cases are not
controlling.
b. AV Is Not Seeking Value of Processing Facility: This Is Not a Fixtures
Case
Other cited cases all contained a common, distinguishable fact pattern where a condemnor,
under a lease or otherwise, built improvements for which the landowner sought compensation.
Etalook v. Exxon Pipeline Co., 831 F.2d 1440 (9th Cir. 1987); United States v. Delaware, L. &
W.R. Co., 264 F.2d 112 (3rd Cir. 1959); Anderson-Tully Co. v. United States, 189 F.2d 192 (5th
Cir. 1951); Old Dominion Land Co. v. United States, 296 F. 20 (4th Cir. 1924).
i. Anderson-Tully
Pipeline relies most on Anderson-Tully, but the analysis of that case distinguishes all the
above-cited cases. In Anderson-Tully, the government leased property and built a piling structure
thereon. The lease required improvements to be removed at the end of the lease term. Id. at
194–95. After expiration of the lease, the government decided to condemn the property.
However, in Anderson-Tully, the landowner claimed that the law of fixtures and contract
converted the piling structure to realty which should have been included in the award for just
compensation. Id. at 196. The landowner sought to introduce evidence of the cost of replacing
the condemned area. The court in Anderson-Tully pointed out that
29
the character of the evidence sought to be adduced was not ―reproduction‖
evidence in the usual sense, that is relating to the cost of reproducing structures or
other improvements to the land, but was evidence as to the estimated cost which
would be incurred if someone wished to fill and otherwise improve an adjacent
tract of land in order to make it physically identical to the land taken.
Id. at 195. Here, AV never sought to introduce evidence of the cost to obtain easements and
install pipelines, proper power lines, etc., to make another tract physically identical, but since the
highest and best use of the property was for a gas processing plant, evidence of the cost of the plant
to a third party that might buy the real estate was relevant and altogether different from the type of
evidence sought to be presented in Anderson-Tully.
ii. United States v. Delaware, L. & W.R. Co.
Pipeline relies heavily on United States v. Delaware, L. & W.R. Co., 264 F.2d 112. There,
the railway company owned land that was leased to Hoffman Machinery for fifteen months during
the Korean War, which was used to manufacture large caliber shells. Hoffman had a contract
with the government that included reimbursement for improvements placed on the property which
enhanced its value by $250,000.00 to $300,000.00. All improvements were paid for by the
government. The government began condemnation proceedings in August 1954. Delaware
L.W.R. argued that it should receive the enhanced value of the property. In other words, the
government would be required to pay the railway for the enhanced value of the property after it
had paid for the installation of the improvements giving rise to the enhancement. The lease
between Hoffman and the railway allowed it to remove all improvements at the lease expiration.
30
First, the court held that whether the lessee would have actually removed the improvements was
not relevant; rather, the issue was what the reversioner was entitled to at the end of the term. The
court further held that the government was placed in the position of the lessee by reason of its
contract to indemnify Hoffman for the costs of improvements. Even if the improvements were
considered fixtures attached to the realty, special considerations in a condemnation case are
present when the government caused the improvements to be made originally. The court held that
the fixtures law has no application in such a situation.
The most obvious differences with Delaware, L. & W.R. are: (1) the landowner was
asking the government to pay the enhanced value even though the government had originally
installed all improvements, whereas here the enhancement was from prior private tenants as well
as third parties adding the adjacent pipelines which fed gas to the plant; and (2) the issue of fixtures
is not involved in this case.
We agree with the Delaware, L. & W.R. opinion that the relevant issue is not the cost that
might be incurred by Pipeline by removing the entire structure or taking other measures. The
issue is the value of the real estate that reverts to AV after Pipeline either removes all the property
or attempts some other measures.
31
iii. Pipeline’s Other Cited Cases Do Not Apply
The last category of cited cases does not apply.15 United States ex rel. and for Use of
Tenn. Valley Auth. v. Powelson, 319 U.S. 266 (1943) (landowner cannot recover consequential
damages of lost business earnings as result of condemnation); Tex. Elec. Serv. Co. v. Lineberry,
162 Tex. 570, 349 S.W.2d 105 (1961) (expert improperly used capitalization appraisal approach to
value sale of easement where there was no evidence it was previously an income-generating
property); Tex. & New Orleans Ry. Co. v. Sutor, 56 Tex. 496 (1882) (trespass to try title suit
finding landowner who permits railroad company to build roads on land without charge on
condition that ditches be constructed to carry off water cannot declare right-of-way forfeited for
failure to meet conditions after seventeen years); McAshan v. Delhi Gas Pipeline Corp., 739
S.W.2d 130 (Tex. App.—San Antonio 1987, no writ) (where land‘s current use was for ranchland
at time of taking, evidence that property would be ideal for compressor site, and valuation thereon
was irrelevant).
In this case, AV agrees that the processing plant belongs to Pipeline and is not seeking
compensation for this improvement. Here, the cost testimony related to the amount a purchaser
of the real estate would expect to spend to build another gas plant if Pipeline removed it. The
15
Pipeline also cites extensively to Zwahr, 88 S.W.3d 623. In that case, error stemmed from the fact that the expert
looked only to the part taken to determine that the highest and best use of the property was for a pipeline easement.
Id. at 626. However, unlike this case, the property taken in Zwahr was not a separate economic unit. Id. Because
the economic unit‘s highest and best use was farmland or rural-residential, and the expert failed to evaluate the whole
economic unit, his opinion was unreliable. Id. at 626–27; Bulanek v. Westtex 66 Pipeline Co., 209 S.W.3d 98,
99–100 (Tex. 2006). In this case, the part taken is a freestanding economic unit, as demonstrated by its usage. 23.79
acres had been used for the gas processing plant for years and the additional 4.5 acres were needed for access. Zwahr,
88 S.W.3d at 626–27.
32
relevance of this testimony was to show that another gas processor could spend $52 million to
rebuild a new plant on the property, buy the real estate for $22 million which already had all the
infrastructure needed for gas processing, and result in a savings to the potential purchaser, who
would then own an entire gas processing facility worth $165 to $231 million. Because Bolton did
not take into consideration the effect of the condemnation proceeding, he did not violate the
project influence rule.
4. The Undivided Fee Rule Does Not Apply
Pipeline claims Bolton‘s testimony violated the undivided fee rule. The rule is simple:
Where there is more than one interest in a property, i.e., a fee interest and a leasehold, both the fee
holder and leaseholder are entitled to compensation. The fair market value of the property as a
whole with improvements must first be assessed and then divided according to the respective
interests. In other words, the value given to both the fee holder and interest holder when
aggregated cannot exceed the fair market value of the property. Ware, 86 S.W.3d at 822–23.16
Again, this rule ensures no party receives a windfall. At the time this property was taken, the
lease had expired and the lessee‘s remaining right or duty was to remove the improvements within
16
―Where there are different estates in the property or where the property is under a lease to a third party, the valuation
of the various estates or leasehold interest is usually determined by ascertaining the market value of the property with
the improvements thereon as though owned exclusively by one party, and, in the absence of damages to other property
not taken, this ordinarily determines the extent of the liability of the party condemning the property.‖ Ware, 86
S.W.3d at 822–23.
33
six months. We find that the undivided fee rule does not apply.17 The only party entitled to
compensation was AV, as Processing‘s right to use the property had expired prior to
condemnation.
5. Bolton Did Not Consider Pipeline’s Business Revenues
Pipeline next argues that Bolton‘s decision to value the property‘s highest best use as a
natural gas processing plant, taking into consideration Pipeline‘s business revenues, violated the
value to the taker rule. Pipeline relies on State v. Central Expressway Sign Associates, in which
the State condemned Central‘s billboard easement leased to a third party. 302 S.W.3d 866, 869
(Tex. 2009). There, the trial court excluded the expert‘s valuation testimony since he did not take
the lessee‘s business revenue into consideration. The Texas Supreme Court found that to be
error. Id. In Central Expressway Sign, the State had settled its condemnation suit against the
lessee by paying just compensation in the form of relocation benefits. Id. In other words,
because the only interest that had to be valued was the lessor‘s interest, and the lessor did not have
any interest in the lessee‘s lost profits, evidence of the lessee‘s business revenues was irrelevant.
Here, there is no evidence in the record that Bolton relied on Pipeline‘s business revenues.
Instead, Bolton estimated cost savings to a potential purchaser of the land in order to calculate the
financial feasibility factor to determine the property‘s highest and best use in evaluating fair
17
The jury correctly assessed fair market value of the condemned property as a whole.
34
market value. Pipeline‘s expert Sherwood agreed that an appraiser may adjust for cost savings to
a potential buyer when considering land value.
6. Bolton’s Comparable Sales Data
Finally, Pipeline contends Bolton improperly relied on incomparable sales data. Bolton
examined land sales of industrial sites in several Texas counties between September 2002 and
April 2006. In his expert report, Bolton lists six comparable sales transactions involving
industrial tracts. The sales prices were in a range from $5,500.00 to $21,905.00 per acre. There
was evidence that for any company to build an equivalent plant, it would incur a cost of $52
million. However, a plant cannot feasibly operate if it is built on a tract of land without access to
pipelines to distribute the gas, proper permitting to authorize the operation, reasonably nearby gas
production anticipated for a lengthy duration, and the proper amount of electrical supply. The
subject tract of land has all of the necessary infrastructure and characteristics as a result of the
operation of a gas processing plant on this property for more than thirty years, which enhances the
value of this tract and distinguishes it from another nearby vacant tract of rural real estate.
Niemiec‘s testimony was that a willing buyer, understanding these facts, would invest $18 to $22
million for this real estate. If the property had the improvements removed, which Pipeline had a
duty to do, and we do not speculate as to what action it would take, Niemiec testified that other
companies would be interested in this real estate, and for approximately $74 million ($22 million
for the land and $52 million for the plant) it would own a property and improvements that were
35
valued at between $165 and $231 million and would generate income of $16.5 million per year.
We believe it was proper to consider this evidence and make adjustments in appraising the real
estate.
7. Trial Court Did Not Err in Denying Pipeline’s Motion to Strike Bolton’s
Testimony
In summary, Bolton assessed the fair-market value of the land based on the willing
seller-willing buyer test as of the stipulated date of the taking. His assessment of the land‘s
highest and best use as a gas processing facility was the reasonable and foreseeable presumed
highest and best use. Because the gas processing facility, pipeline easements, and other
improvements were in place prior to the date of the taking, Bolton determined their impact on the
fair market value of the land, since such assessments would be considered by a willing buyer.
There were no enhancements in value resulting from the actual condemnation, and value to the
taker was not utilized. Finally, Bolton utilized the accepted income approach valuation method,
yielding a figure using a methodology unchallenged by Pipeline‘s experts. Based on the record
and precedent before us, we conclude that the trial court did not abuse its discretion in finding
Bolton‘s testimony regarding market value relevant, reliable, and thus, admissible. Pipeline‘s
first point of error is overruled.
E. Application to Pipeline’s Expert, Albert Allen
Allen determined that the condemned land‘s highest and best use was for rural residential
purposes. He stated in his deposition that he did not analyze any other use. Further, Allen
36
admitted that he did not take into consideration any pipelines, easements, permits, etc., because he
was told to value the land as vacant. Allen‘s fair market value for the property was $47,940.00.
AV objected to the inclusion of Allen‘s testimony on the grounds, among others, that he:
(1) used an incorrect highest and best use for the property; (2) failed to analyze the income
approach; (3) assumed the property was barren, and did not take into consideration the effect of
improvements listed under USPAP Rules 1-2 and 1-4. Essentially, AV complained that Allen
valued the property as it existed in 1973.
―The existing use of the land . . . is its presumed highest and best use.‖ Zwahr, 88 S.W.3d
at 628. Pipeline argues that a jury may decide between two highest and best uses. While true, in
order to be considered as a relevant highest and best use, use of the property as rural residential
must be reasonably adaptable within the foreseeable future. Wayne, 266 S.W.3d at 45; Bauer,
704 S.W.2d at 109, 112 (on property containing established pipeline corridor, highest and best
possible use of severed condemned land was for sale of pipeline easements). Pipeline was
required to meet the burden to defeat the presumption that the current use was the best use by
showing it was legally permitted, physically possible, and financially feasible for the property to
be considered rural residential and that such classification would yield maximum productivity.
Zwahr, 88 S.W.3d at 628.
The property has been granted permits to operate as a natural gas facility. There is no
evidence indicating that the 23.79 acres would be classified as residential property in the
37
foreseeable future. Bolton testified that residential properties could not be built where the
pipelines existed due to the pipeline easements. Use of property for residential purposes would
likely not be legally permitted. Nevertheless, Allen‘s ―conclusions assume[d] that a zoning
change would be likely.‖18 In order to prepare the site for residential use, the existing gas plant
would have to be torn down and the property prepared for multiple housing. Allen did not explain
why the existing use of the property would not continue as the highest and best use, did not explain
why he overlooked the thirty-year history of that use, and did not consider the effects of the
easements or how building residential units was financially feasible. The trial court found
Allen‘s opinion attempted to ―create [a] total fiction, appraisal in a vacuum.‖ While use as
residential property could theoretically be physically possible, it would not be financially feasible.
Consideration of the highest and best use ―cannot be given to uses which are purely speculative
and unavailable.‖ Home & Hearth Sugarland, 215 S.W.3d at 511 (citing Cannizzo, 267 S.W.2d
at 814).
―Unless an appraisal gives a value based on the land‘s condition at the time of
condemnation -- taking into account all relevant factors that affect its valuation, including the
market for its possible future use -- it is not relevant to the issue of market value.‖ Sharboneau,
48 S.W.3d at 185. Not only did Allen fail to explain why the existing use of the property would
not be presumed as the highest and best use, his opinion did not offer fair market value of the land
18
It is unlikely that zoning is involved as the property is located in a rural area and does not appear to be within the
jurisdiction of any municipality.
38
based on its condition at the time of the condemnation and did not account for all relevant factors
affecting valuation. The trial court was within its discretion to conclude Allen‘s opinion was
unreliable. Zwahr, 88 S.W.3d at 631. We overrule Pipeline‘s second point of error.
IV. PIPELINE WAS NOT ENTITLED TO DIRECTED VERDICT AND JNOV
Pipeline‘s arguments with respect to directed verdict and judgment notwithstanding the
verdict are both based on the premise that Bolton‘s testimony should have been excluded. It
argues that absent Bolton‘s testimony, there was no basis for the jury award of $20,955,000.00.
Thus, Pipeline claims that the trial court should have directed verdict in AV‘s favor only in the
amount of $300,000.00. We have already determined that the trial court did not err in admitting
Bolton‘s testimony.
The standard of review for both judgment notwithstanding the verdict and the denial of a
directed verdict is a legal sufficiency or ―no evidence‖ standard of review. Mauricio v. Castro,
287 S.W.3d 476, 478 (Tex. App.—Dallas 2009, no pet.); Home & Hearth Sugarland, 215 S.W.3d
at 516 (citing Sherman v. First Nat’l Bank in Center, Tex., 760 S.W.2d 240, 242 (Tex. 1988)). In
this case, a directed verdict or judgment notwithstanding the verdict for Pipeline would only be
proper if AV failed to present any evidence raising a fact issue entitling it to recover the fair market
value as assessed. Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29 S.W.3d 74, 77 (Tex.
2000). We will review the evidence in the light most favorable to the jury‘s finding, crediting
favorable evidence if reasonable persons could, and disregarding contrary evidence unless
39
reasonable persons could not. City of Keller v. Wilson, 168 S.W.3d 802, 807 (Tex. 2005); Home
& Hearth Sugarland, 215 S.W.3d at 515.
Aside from Bolton‘s valuation testimony, the jury heard from another industry expert.
Niemiec had been involved in the oil and gas industry since the 1970s. He graduated from
Princeton, attended the advanced management program at Harvard Business School and Cornell
University, worked for Exxon and then Union Pacific Fuels, eventually becoming the president of
that company. Niemiec‘s responsibilities included project approvals and oversight of seventeen
processing plant sales, in which he acquired the skills to understand the ―microeconomics of
processing plants.‖ He possessed unique skills in evaluating what a potential natural gas
company would consider when purchasing property. Niemiec‘s testimony, which was not
challenged on appeal, was that a willing buyer would pay between $18 million and $22 million for
the land only. Thus, the trial court did not err in overruling Pipeline‘s motions for directed verdict
and judgment notwithstanding the verdict, given this record. Pipeline‘s third point of error is
overruled.
V. FAILURE TO PRESERVE ERROR REGARDING JURY INSTRUCTIONS
The entirety of Pipeline‘s argument with respect to this point of error states:
Because the trial court improperly allowed Mr. Bolton‘s conclusions of value over
proper objections, the court should have allowed the jury to be properly instructed
on the foregoing legal principles. The requested and refused instructions were
submitted to the court prior to the ultimate preparation of the jury charge and
argument to the jury. These instructions, reflecting the principles set out above,
are part of the record at CR 7:547-568; App. Ex. 4.
40
Rule 38.1(i) of the Texas Rules of Appellate Procedure requires that a brief contain ―a clear
and concise argument for the contentions made, with appropriate citations to authorities and to the
record.‖ TEX. R. APP. P. 38.1(i). Bare assertions of error, without argument or authority, waive
error. Bufkin v. Bufkin, 259 S.W.3d 343, 354 (Tex. App.—Dallas 2008, pet. denied); see
Fredonia State Bank v. Gen. Am. Life Ins. Co., 881 S.W.2d 279, 284–85 (Tex. 1994) (discussing
―long-standing rule‖ that point may be waived due to inadequate briefing). Pipeline fails to cite
any authority for this point of error in its brief. It does not discuss why each particular instruction
was necessary and proper. Thus, we conclude Pipeline‘s brief is inadequate with respect to this
point of error and presents nothing for review. We overrule its last point of error.
VI. CONCLUSION
We affirm the judgment of the trial court.
Jack Carter
Justice
Date Submitted: June 30, 2010
Date Decided: October 27, 2010
41