Rademann v. State Department of Transportation

BROWN, J.

¶ 40. (dissenting in part; concurring in part). I disagree that evidence of comparable sales was properly admitted into evidence in this case. As to that part of the majority opinion, I dissent. If the comparable sales evidence was properly admitted, I agree with the majority that Vivid, Inc. v. Fiedler, 219 Wis. 2d 764, 580 N.W.2d 644 (1998), is not authority for Rademann to contend that he should be able to submit evidence regarding the income approach even if evi*215dence of comparable sales is also admitted into evidence. But I disagree with the majority's reasoning of why this is so. Therefore, I write separately regarding the meaning of Vivid.

COMPARABLE SALES IN QUARRY OPERATIONS

¶ 41. The majority reasons that the trial court did not misuse its discretion in admitting evidence of comparable sales because the value of Rademann's properties as quarrying properties was determined by comparing it with the value of numerous other properties sold as quarrying properties. This was the same view held by the trial court. I want to spend some time with not only the facts adduced at trial and the trial court's analysis, but also with Rademann's arguments leading up to the trial court's decision because I think it nicely outlines the precise issue in this case.

¶ 42. The State had presented evidence of sales of quarrying properties in the vicinity of Rademann's property. As the majority opinion details, there were fourteen such properties. All fourteen buyers were known quarry operators. As pointed out by the majority, the prices paid for the properties were significantly above agricultural land prices, selling for between $1,489 and $10,251 per acre. Although five of the quarries were existing quarries when sold, four of the sellers of these properties were not the actual quarry operators. The sellers were farmers who had leased the property to quarry operators. In the fifth instance, the seller — a quarry operator — sold the land to his son. This can hardly be termed as an arm's-length transaction. Based solely on the prices per acre that these *216comparables sold for, the State's appraiser thus gave his opinion that the value of Rademann's property was $6000 per acre.

¶ 43. Rademann sought to explain to the trial court why it should discount the reliability of these fourteen sales. He argued that quarry property was unique in that its worth was entirely dependent upon the quality and quantity of the subsurface stone. In Rademann's view, the only way one can determine with absolute certainty the extent of any subsurface deposits is with soil borings. Rademann asserted that because there were no soil borings in the comparison properties, the other sales could not be considered true comparisons.

¶ 44. The trial court answered that, according to the evidence before the court, the fourteen properties were all in the same general geographic area as Rademann's property. Therefore, the court could infer that the quality of the stone was the same. The court also pointed to evidence that the custom of the area quarry operators, when acting as buyers, never included taking soil borings prior to purchasing quarrying properties. The court, in particular, mentioned that neither Dennis Buechel, a neighboring quarry operator who testified on Rademann's behalf, nor Rademann himself, ever had used soil borings pre-purchase. In the trial court's view, Rademann was arguing that the court "should hold itself to a higher standard than the standard that the quarry operators set for themselves when they make the purchases." The court observed that Buechel and Rademann had "been in the business forever. I mean, these guys know the business. They know what they're doing. They know how to make *217money in the business. They know how to purchase land. And neither one of them has ever paid anything remotely close to even the $44,000 per acre figure being requested. . . ." The court concluded that the "quarry owners set the market, and they do that based on their knowledge and experience, and what they pay is what they pay. To my way of thinking, that is the market."

¶ 45. Rademann responded that it would be wrong to use past history and custom in deciding whether the comparable sales showed the true market value of the neighboring quarry properties. He argued that to do so would fail to take into account the fact that the quarry operators were buying from farmers who had no idea of the real worth of the stone lying beneath the property. Thus, even though the operators paid more to the farmers for the property than the property would have sold for had it been sold for agricultural purposes, the fact of the matter was that the sellers were not knowledgeable and, therefore, the quarry operators were able to buy the property at prices far beneath the actual worth. As an offer of proof, Rade-mann offered both his testimony and that of his neighboring quarry operator, Buechel. Rademann pointed out that "just compensation" is the fair market value of the property. Rademann argued that fair market value is ordinarily measured as the price the property would bring in the market place in a voluntary sale to a willing and knowledgeable buyer from an equally willing and knowledgeable seller. Rademann asserted that had the sellers in the comparables been knowledgeable quarry operators, the price of the comparables would have been much higher. Rademann attempted to place a *218stock sale of a neighboring quarry operator in evidence as support for his proposition.1

¶ 46. The trial court rebuffed Rademann's contention. It said:

[TJhere's nothing in the record specifically to indicate that the sellers are not knowledgeable generally about what may be below their land subsurface. If I'm being asked to infer that because somebody is a farmer or retiree or work at Merc that they have absolutely no knowledge of what may be below the surface, especially if their property's adjacent to other quarriable properties, I'm not willing to make that inference.

¶ 47. In a nutshell, what the trial court was saying is that the comparable sales data showed the sale price of quarried property or property capable of being quarried in the area of the subject sale and that these sales were conducted by knowledgeable sellers and buyers without the benefit of soil borings.

¶ 48. At the outset, I realize that the question of whether comparable sales are to be admitted is within the discretion of the trial court. Leathem Smith Lodge, Inc. v. State, 94 Wis. 2d 406, 415, 288 N.W.2d 808 (1980). A trial court's determination of the acceptability of comparable sales will not be reversed in the absence of clear error. Id. Accepting as I must this standard of review, I believe there was clear error.

¶ 49. The law regarding comparable sales is best defined in the context of assessment law. In assessing property, the "best information" is the sale of the property itself or if there has been no such sale, then sales of reasonably comparable property. State ex rel. *219Geipel v. City of Milwaukee, 68 Wis. 2d 726, 733, 229 N.W.2d 585 (1975). To be considered as a reasonably comparable property, that property must have been sold for its fair market value. Fair market value is consistently defined as "the amount it will sell for upon arms-length negotiation in the open market, between an owner willing but not obliged to sell, and a buyer willing but not obliged to buy." Darcel, Inc. v. City of Manitowoc Bd. of Review, 137 Wis. 2d 623, 628, 405 N.W.2d 344 (1987) (citation omitted). Five conditions are necessary for a property to be considered a proper comparable:

1. It must have been exposed to the open market for a period, of time typical of the turnover time for the type of property involved.
2. It presumes that both buyer and seller are knowledgeable about the real estate market.
3. It presumes buyer and seller are knowledgeable about the uses, present and potential, of the property.
4. It requires a willing buyer and a willing seller, with neither party compelled to act.
5. Payment for the property is in cash, or typical of normal financing and payment arrangements prevalent in the market for the type of property involved.

Id. at 629 (citation omitted).

¶ 50. As we can see from this list of conditions, knowledge of the seller is an important ingredient in determining whether the sale is for fair market value.

¶ 51. I think the trial court could fairly draw the inference that the farmers in the surrounding area *220were knowledgeable about the real estate market. And I also think that the farmers were knowledgeable about the use of their land for quarrying. What I think is speculative is for the trial court to assume that the farmers could know the potential worth of thé minerals in the subsoil. There is no evidence whatsoever that the farmers in these supposedly comparable sales knew the quantity or quality of the stone on their property. All they knew was that there was stone and that some entity wanted that stone to quarry. They also knew that the entity would pay more for the land than it would normally sell for if it were going to be farmed.

¶ 52. Eminent domain cases involving mineral deposits are more difficult and complex than the more mundane takings of real property. See, e.g., Tug Valley Recovery Ctr., Inc. v. Mingo County Comm'n, 261 S.E.2d 165 (W. Va. 1979). The courts are divided as to what the proper approach to value should be — a sales comparison approach, an income approach or a cost approach or some combination. Joseph M. Montano, Valuation of Lands with Mineral Deposits, C791 ALI-ABA 269, 273 (1993). I accept that, pursuant to Leathern Smith, Wisconsin aligns itself with those jurisdictions favoring the sales comparison approach if available.

¶ 53. But I cite Montano for the following proposition:

Where comparable sales are available, the process is less complicated. However, adjustment must be made for the differences that exist between the comparable properties and the property being condemned. In addition to the usual adjustments for time and location, etc., adjustment must be made for any difference in the quality and quantity of the minerals. This may require expert testimony.

*221Montano, supra, at 273. Montano went on to describe the problem that may result if the trial court relies only upon the unit price per acre of the comparison properties, as was done here. Id. He cautioned that it may not be a proper comparison. He wrote:

For example, if a property deemed to be comparable sells for $5,000 an acre, it would appear that the subject property is worth $5,000 per acre. But, if upon critical comparison it is determined the quantity of the minerals in the subject are greater on a per acre basis than the comparable, a per acre price comparison leads to an improper result. The proper comparison is to determine the quantity of the minerals and make the adjustment based upon a comparison of quantity. For example, if the comparable property which sold for $5,000 per acre has an estimated quantity of 20,000 tons of sand and gravel per acre and the subject has 50,000 tons per acre, a $5,000 per acre value of the subject would undervalue it. Converting the price to units of tons per acre, i.e. 25,000/$5000 or $.20 per ton, the proper comparison would be to multiply that unit price of $.20 times 50,000, resulting in a value of $10,000 per acre for the subject. Also, the quality of the deposits should be analyzed to determine similarity. Without such an analysis, the properties may not be deemed to be comparable. United States v. 103.38 Acres of Land, 660 F.2d 208 (6th Cir. 1981). In any event, expert testimony as hereinafter described, in addition to an expert real estate appraiser would be required if the testimony is to meet the standard required by the courts.

Montano, supra, at 273-74.

¶ 54. In Vivid, the court was unanimous in its agreement that the value of the location of the outdoor advertising signs was unique in character. I am convinced that the value of land holding mineral deposits is *222likewise unique. I would hold as a matter of law that, before comparable sales can be used in a valuation of land with mineral deposits, there must be evidence of the quantity and quality of the mineral deposits in those other sales. I would go further. I am satisfied that only expert testimony will suffice to give the trial court this information.

¶ 55. Other jurisdictions have held likewise. A case cited by Rademann, State of Louisiana Department of Transportation & Development v. Tynes, 433 So. 2d 809 (La. Ct. App. 1983), is a case in point. There, the appellate court pointed out that there are the usual adjustments made when using comparable sales such as the circumstances of the sale, the proximity of the comparison sale to the subject sale, the size of the parcels and the physical characteristics of the land. Id. at 813. The trial court in the instant case considered those factors. But the Louisiana court said that there were additional variables that must be considered when evaluating land where extraction of minerals is the best use. The court wrote:

When comparisons of tracts of sand land are made, additional variables are involved such as the size of the deposit, depth of overburden, types of sand and their respective proportion of volume, shape of angle of repose and market advantage.

Id.

¶ 56. Here, the trial court held the comparison data to no such standard. Neither does the majority. I would. I reject the idea that the price paid by area quarry operators to farmers in this case was the fair market value. Sure, it was the market value; there is no denying that. But the sales were quite possibly undervalued. I do not fault the quarry operators for not *223having conducted soil borings before purchasing the properties. If they can get the property for less, it stands to reason that they do not need to spend the money to get a soil boring. But I venture to say that if one quarry operator were selling to another quarry operator, we would see two knowledgeable people bargaining about the worth of the property. Then I think we would see the true market value of the property.

¶ 57. I do not mean to suggest that the trial court should have adopted Rademann's income approach instead. Frankly, in my opinion, his offer of proof on that score shows only what the business was worth, not what another quarry operator would have paid for that portion of the property being condemned. I limit my dissent to arguing that evidence of comparable sales in land used for mineral extraction must include data regarding the quantity and quality of the minerals on those lands as a condition precedent to admission into evidence. It is not a question of weight of the evidence as the majority believes, but a question of admissibility. And although I have grave reservations about Rademann's income evidence, I realize that its admissibility is not my call to make in the first instance, especially since this is a dissent. Therefore, I would reverse and remand to the trial court with directions that it decide whether Rademann's income evidence is admissible, ordering further testimony if necessary.

LEATHEM SMITH AND VIVID

¶ 58. Next, I consider the majority's treatment of Vivid. According to the majority, the Vivid court upheld the admissibility of both market and income evidence in a situation confined to its unique facts — the court was dealing with billboard signs. In my view, there was no *224evidence of comparable sales of real estate in the Vivid case. Therefore, that case cannot stand for the proposition that one can have evidence of both comparable sales of real estate and an income approach in the same case.

¶ 59. I start with Leathern Smith. There, our supreme court expressed its strong view that the income approach was not favored in the law. It began its discussion by reviewing case law holding that evidence of net income is ordinarily inadmissible for purposes of establishing property values in condemnation cases involving commercial enterprises because business income is dependent upon too many variables to serve as a reliable guide for determining fair market value. Leathem Smith, 94 Wis. 2d at 413. The court noted three exceptions. Income evidence was admissible when (1) the character of the property is such that the profits are produced without the labor and skill of the owner, (2) profits reflect the property's chief source of value, and (3) the property is so unique that comparable sales are unavailable. Id. But the court said, in no uncertain terms, that "Wisconsin law holds that income evidence is never admissible where there is evidence of comparable sales." Id. (emphasis added). Because evidence of comparable sales had been admitted in that case, the supreme court affirmed the trial court's refusal to allow evidence using the income approach. Id. at 414.

¶ 60. Vivid was decided eighteen years later. Vivid is an outdoor sign company. It leases land from owners along highways and puts up billboards. In the case before the court, it had two such billboards along 1-90. The State removed the billboards as part of a road improvement project and Vivid sought just compensation. The State argued that billboards did not come under the just compensation law. The supreme court *225nixed that notion, holding that, in valuing outdoor advertising, the location has a value in and of itself. Vivid, 219 Wis. 2d at 781. Having determined that the State must compensate Vivid for the location loss, it then considered the valuation methods for determining such just compensation. Id. Vivid offered testimony regarding both the market and income approaches. Id. at 784. The State offered the cost approach. The market approach offered by Vivid used what was called a GIM. Id. Before the trial court, Rademann's attorney offered this explanation of Vivid.

So we have a situation in Vivid where there was evidence of comparable sales admitted... and the income approach was also admitted. So I... respectfully submit that Vivid did amend ... the inconsistent statements ... in Leathern Smith. And now the rule is under Vivid that there can be admitted ... both on the one hand comparable sales and on the other hand income approach evidence in the same case.

¶ 61. The majority apparently agrees with Rade-mann that the Vivid court gave its imprimatur to allowing evidence of both comparable sales and an income analysis, but it limits the imprimatur to billboard cases. I disagree. First of all, the lead opinion in Vivid was not the opinion of the court because only three justices signed onto it. Rather, the concurrence, with four justices signing, is the opinion of the court. Id. at 797 n.l. Second, while a three-member minority of the court accepted the GIM used by Vivid, the majority of the court declined to adopt that position. Therefore, even if it were correct that a GIM is simply one method of showing comparable sales of real property, the GIM was not accepted by a majority of the court. Therefore, I think the majority and Rademann are wrong to say *226that the supreme court adopted the view that income evidence may be admitted in addition to the admission of comparable sales data.

¶ 62. Third, I do not accept the argument that the GIM used in Vivid can be described as a method of showing comparable sales of real property. The concurrence in Vivid explained that the GIM is a comparison of the value of similar businesses using multipliers. The concurrence further observed that the GIM is determined by dividing the sales price of a group of signs by the annual gross rental income generated by the signs. The concurring opinion had the following problem with the GIM: "[I]n many cases, the application of the GIM will result in compensation for loss of business profits and for the value of expectation of lease renewal. Compensation for such items is specifically prohibited by our prior cases." Id. at 797. It is an earnings-dependent valuation technique. Id. at 798.

¶ 63. I am convinced that although the GIM can be described as a "market approach," it is not the same as a comparison of allegedly similar sales of real estate. This is because the value is at least partially based on earnings of the business. Pure real estate comparisons do not compare earnings value. I conclude that even had a majority of the Vivid court upheld the admission of the GIM into evidence, there would still have been a lack of any evidence of comparable sales of real estate. Therefore, Vivid cannot stand as proof that Wisconsin allows evidence of comparable sales of real estate and evidence using the income approach to be admitted in the same case. To the extent that the majority believes otherwise, I disagree. I do agree that Vivid may not be used as the vehicle by which Rademann can drive his *227income approach into the case if the comparable sales data is already parked there. But I agree for different reasons.

¶ 64. Therefore, I respectfully dissent in part and concur in part.

The trial court would not permit this evidence. It agreed with the stock buyer that details of the stock transaction were a trade secret and granted a protective order.