State of Texas v. Cottonwood Holdings, Ltd., a Texas Limited Partnership

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-04-00152-CV
State of Texas, Appellant
v.
Cottonwood Holdings, Ltd., A Texas Limited Partnership, Appellee
FROM THE PROBATE COURT NO. 1 OF TRAVIS COUNTY
NO. 2393, HONORABLE ORLINDA NARANJO, JUDGE PRESIDING
MEMORANDUM OPINION
The State of Texas (State) appeals from a jury verdict awarding damages to
Cottonwood Holdings, Ltd. (Cottonwood) for a parcel of land taken by condemnation and for
damage to the remaining land as a result of the taking. The State contends that the trial court erred
in restricting appraisal testimony to an economic unit of 39 acres or less and in excluding the use of
Cottonwood’s initial purchase of the land as a comparable sale for appraisal purposes. We affirm
the judgment of the trial court.
BACKGROUND
This is a condemnation case in which the State took 9.107 acres of a 109-acre piece
of property owned by Cottonwood to make improvements to F.M. Road 973, which intersects with
state highway 290 east of Austin. The condemnation occurred in June 2002. Cottonwood bought
the 109-acre property and several other tracts of land three years before the condemnation with the
purpose of creating a master-planned community called “Shadowglen,” which included commercial,
residential, multi-family, and retail uses. A 70-acre portion of the 109 acres was subject to an option
contract that gave Shadowglen Residential Community the exclusive right to purchase the 70-acre
tract at a set price until the year 2021. The part taken by the State was a portion of the 39-acre tract
of land not subject to the option contract.
After Cottonwood objected to the special commissioners’ condemnation award, the
case was set for trial. At a pre-trial hearing, the court ruled that the largest economic unit the parties
could use for appraisal purposes was 39 acres, the remaining portion of the 109 acres that was not
subject to the option contract. At the conclusion of trial, the jury awarded Cottonwood $250,862 as
compensation for the part taken and $105,138 as damages to the remaining 30 acres. The trial court
rendered judgment in accordance with the verdict.1
DISCUSSION
The State appeals the trial court’s judgment, arguing that the trial court erred in
restricting the economic unit to a maximum of 39 acres and in excluding evidence of the initial sale
of the 109-acre tract to Cottonwood in 1999. The State contends that the trial court’s rulings resulted
in an erroneous jury verdict regarding the amount of compensation due for the taking of
Cottonwood’s land. Compensation for land taken by eminent domain is measured by the fair-market
value of the land at the time of taking. Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 627 (Tex.
1
The State deposited $91,070, the amount of the special commissioners’ award, into the
registry of the court on June 14, 2002, for the use and benefit of Cottonwood. Cottonwood withdrew
this amount by order of the court. The judgment deducted the $91,070 from the total amount
awarded by the jury for a net award of $264,930 plus pre-judgment and post-judgment interest and
costs of court.
2
2002); City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 182 (Tex. 2001). Determination
of fair-market value requires measuring the difference between the value of the land immediately
before and immediately after the taking. Exxon Pipeline, 88 S.W.3d at 627; Callejo v. Brazos Elec.
Power Coop., Inc., 755 S.W.2d 73, 76 (Tex. 1988). Market value 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. State v. Windham, 837 S.W.2d 73, 77
(Tex. 1992). In determining market value, the jury may consider all uses to which the property is
reasonably adaptable and for which it is (or in all reasonable probability will become) available
within the foreseeable future. Id.
When only part of the land is taken, the landowner is entitled to (1) the market value
of the part taken and (2) the damage to the remainder as a result of the taking. Id. at 75-76. When
the part taken can be considered an independent economic unit, the market value can be determined
without reference to the remainder. Id. at 76. However, if the part taken cannot be considered an
independent economic unit reflecting the highest and best use of the property, the market value must
be determined by adding some portion or all of the remainder to construct an economic unit. Id.
Admissibility of 109-acre tract as economic unit
We first address the State’s argument that the trial court erred in concluding as a
matter of law that no more than 39 acres of the 109-acre tract could be used as an economic unit for
determining market value. We review the trial court’s conclusions of law de novo. State v. Heal,
917 S.W.2d 6, 9 (Tex. 1996). Under de novo review, we exercise our own judgment, redetermine
3
each legal issue, and accord no deference to the trial court’s conclusion. Quick v. City of Austin, 7
S.W.3d 109, 116 (Tex. 1998).
At a pre-trial hearing in this case, the trial court concluded that an economic unit of
more than 39 acres of the 109-acre tract was inappropriate because the 70 acres subject to an option
contract were not solely owned and controlled by Cottonwood. The State argues that the trial court
erred because an optionee does not acquire any rights to the property until the option is exercised.
However, at the time the option contract was formed, the optionee obtained an equitable interest with
which it could legally prevent Cottonwood from selling the land. See Goswami v. Metropolitan Sav.
& Loan Ass’n, 751 S.W.2d 487, 489 (Tex. 1988) (option contract gave optionee equitable interest
in property and standing to contest validity of foreclosure sale); Hitchcock Props., Inc. v. Levering,
776 S.W.2d 236, 238 (Tex. App.—Houston [1st Dist.] 1989, writ denied) (sale of option to purchase
real estate constitutes sale of interest in land under Real Estate License Act because option gives
optionee equitable interest in land). Because Cottonwood would have to obtain consent from the
optionee in order to sell the entire 109-acre tract, Cottonwood could not be considered a willing
seller for purposes of determining market value. Thus, the trial court properly restricted the
economic unit to 39 acres or less.
The State contends that the trial court’s determination of the size of the maximum
economic unit violates the principles set forth by the supreme court in Windham. However, the facts
in this case are distinguishable from those in Windham, and our ruling is consistent with that case.
The dispute in Windham arose when the State and landowner disagreed as to the amount of
remaining land to be added to the part taken in order to form an appropriate economic unit. While
the landowner proposed a total of 3.84 acres in support of his theory that the highest and best use was
4
commercial development, the State sought to use the entire 19-acre parcel to support its contention
that the highest and best use was to hold the land for investment purposes. The trial court restricted
the appraisers’ testimony to a 3.84-acre economic unit, thus preventing the State from presenting
evidence in support of its theory of highest and best use. On appeal, the supreme court reversed the
trial court and held that when the highest and best use of the land is disputed, a trial court must allow
both parties to present evidence to the jury regarding their theory of highest and best use.
Windham is readily distinguishable from this case. Although the landowners there
had ownership and control of the entire 19-acre tract, they asserted that they had a legal right to
unilaterally carve out a 3.84-acre strip of land adjacent to a highway in order to support their
proposed highest and best use, commercial development. Unlike the landowners in Windham,
Cottonwood did not unilaterally designate a parcel of its land for use as an economic unit in order
to suit its theory of highest and best use. Rather, the trial court made a legal determination that 70
acres of the 109-acre tract were not suitable for inclusion in an economic unit because they were not
owned and controlled solely by Cottonwood. As a result, the trial court restricted the economic unit
to a maximum of 39 acres, the entire remaining portion of land not burdened by the option contract.
If Cottonwood had then argued that it had the right to designate the economic unit as only 12 of the
39 acres, this case would fall squarely within the realm of Windham. However, no such unilateral
designation is present here. Rather, the trial court properly found that the size of the economic unit
must be within the 39 acres controlled by Cottonwood.
This case is further distinguishable because Windham dealt specifically with the
admissibility of both parties’ economic units when the highest and best use of the land was disputed;
the parties here advance the same theory of highest and best use for the 109-acre tract or the 39-acre
5
tract. In Windham, the parties disputed whether the highest and best use was to hold the land for
investment or to use it for commercial development. In order to argue their respective theories, the
parties each needed to use a different economic unit—19 acres for the State and 3.84 acres for the
landowner. If the trial court restricted the economic unit to the size proposed by one party or the
other, the opposing party would be forced to forfeit its theory of highest and best use. As a result,
the supreme court held that both theories of highest and best use, and thus both proposed economic
units, should be submitted to the jury.
However, in this case both parties agree that the highest and best use of the property
is to hold it for real estate investment. The State’s appraiser, David Oberrender, testified that the
highest and best use of both the 109-acre and 39-acre parcels was to hold them as a real estate
investment for future development of single-family homes, with potential commercial capabilities
in the area facing F.M. 973. Similarly, Cottonwood felt that the highest and best use of the land was
to hold it for investment, as evidenced by its purchase of the land to be included in a master-planned
community containing single-family homes, apartments, retail facilities, a school, and a golf course.
At the time of condemnation, Cottonwood had obtained approval of its plan from the City of Manor,
had begun construction on the golf course and roads, and was in the process of obtaining agreements
to receive utilities. Furthermore, the option contract on the 70-acre tract is evidence that Cottonwood
purchased the land for investment purposes and that it actively sought developers to buy the land.
Nevertheless, the parties contend that they dispute highest and best use because they
disagree as to how long it will take to develop real estate on the 39-acre tract and as to the feasibility
of building multi-family as opposed to single-family homes. However, disputes about what type of
residential facilities will eventually be built as one part of an expansive development and about the
6
approximate time-line in which that will occur do not constitute conflicting theories of highest and
best use. Regardless of whether the property becomes apartment buildings, single-family homes,
or a school, both the State and Cottonwood agree that the highest and best use, whatever the size of
the economic unit, is to hold the property for real estate investment.
Further, this case is consistent with Windham because both parties were permitted to
present their original theories of highest and best use to the jury. Unlike the circumstances in
Windham, the trial court’s restriction of the economic unit to no more than 39 acres in this case did
not deprive the State of the opportunity to present its theory to the jury. Indeed, Oberrender testified
for the State that his theory of highest and best use would be the same for the 39-acre and 109-acre
tracts. For both tracts, Oberrender stated that the property should be held as a real estate investment
for future development of single-family homes and for potential commercial use of the area facing
F.M. 973. Thus, the trial court’s ruling did not offend the principle set forth in Windham that the
jury should decide between the parties’ competing theories of highest and best use.
Because Cottonwood did not possess sole ownership and control of 70 acres of the
109-acre tract and because both parties advanced the same theory of highest and best use and were
permitted to present their theories to the jury, we find that the trial court properly concluded as a
matter of law that the 39-acre tract not subject to the option contract was the maximum economic
unit the parties could use to determine market value.
Admissibility of 1999 sale price
The State also argues that the trial court erred in excluding evidence of the sale of the
109-acre tract to Cottonwood in 1999. We apply an abuse of discretion standard in reviewing a trial
7
court’s decision to exclude evidence. National Liab. and Fire Ins. Co. v. Allen, 15 S.W.3d 525, 527-
28 (Tex. 2000); Travis Cent. Appraisal Dist. v. Signature Flight Support Corp., 140 S.W.3d 833,
843 (Tex. App.—Austin 2004, no pet.). A trial court abuses its discretion when it acts in an
unreasonable or arbitrary manner or without regard for any guiding rules or principles. Owens-
Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35, 43 (Tex. 1998); Beaumont Bank, N.A. v. Buller,
806 S.W.2d 223, 226 (Tex. 1991). A trial court’s evidentiary ruling should be upheld if there is any
legitimate basis for the ruling. Owens-Corning, 972 S.W.2d at 43. The party seeking reversal of a
judgment based on a claimed error in excluding evidence must show that the error probably resulted
in an improper judgment. Interstate Northborough P’ship v. State, 66 S.W.3d 213, 220 (Tex. 2001).
We review the entire record when determining whether the claimed error probably resulted in an
improper judgment. Id. A successful challenge to a trial court’s exclusion of evidence typically
requires the complaining party to show that the judgment turns on the excluded evidence. Id.
The State specifically contends that the 1999 sale of the 109-acre tract was relevant
and probative to support Oberrender’s testimony as to the market value of the property. Oberrender
used the comparable sales method when determining his proposed market value of the land. When
an appraiser uses a comparable sales analysis, he collects data for sales of property similar to the
subject property and then makes upward or downward adjustments to the sale prices based on
differences in the subject property. Sharboneau, 48 S.W.3d at 182. Comparable sales must (1) be
voluntary, (2) take place near in time and place to the subject property, and (3) involve land with
similar characteristics to the subject property. Id. The comparable sales method fails when the
comparison is made to sales that are not actually comparable to the land condemned. Guadalupe-
Blanco River Auth. v. Kraft, 77 S.W.3d 805, 808 (Tex. 2002). Determination of the degree of
8
similarity between the subject property and the land claimed to be a comparable sale is left largely
to the discretion of the trial court. State v. Childress, 331 S.W.2d 230, 235 (Tex. Civ.
App.—Eastland 1960, writ denied); Board of Regents of Univ. of Tex. Sys. v. Puett, 519 S.W.2d 667,
672 (Tex. Civ. App.—Austin 1975, writ denied). If the comparison between the subject property
and another sale is so attenuated that the appraiser and the fact-finder cannot make valid adjustments
for the differences, the sale should not be admitted as a comparable sale. Sharboneau, 48 S.W.3d
at 182.
Because Oberrender used the comparable sales approach to determine his proposed
market value of the property, the 1999 sale is relevant to his testimony only if it is comparable to a
sale of the same property at the time of the condemnation in 2002. However, Oberrender did not use
the initial sale as a comparable sale in his market value analysis. He testified that he chose not to
use the initial sale because Cottonwood had made many improvements to the property since its
purchase in 1999. Considering that Oberrender deemed the sale too different from that of the current
property to include it as a comparable sale, the trial court did not abuse its discretion in failing to
admit the 1999 sales price.
Further, the record shows that Oberrender was not mistaken in finding that the land
had changed considerably in the three years since its initial purchase. In 1999, the 109-acre tract was
farmland, but by 2002 Cottonwood had obtained approval of its master-planned community from
the City of Manor, arranged for utilities to be provided to the site, and had begun construction on the
golf course and roads. Cottonwood’s developer testified that approximately $35 million had been
invested in the master-planned community at the time of trial, including approximately $12 million
spent on the first phase of the project for roads and utilities necessary for lot development. In
9
addition, the purchase price of the property in 1999 was only $2,886 per acre, whereas Oberrender
testified that his proposed market value for the part taken at the time of condemnation was $12,000
per acre using the 109-acre economic unit and $13,500 per acre using the 39-acre economic unit.
Thus, according to Oberrender, the value of the 39-acre tract at the time of condemnation was more
than four times the value of the property at the time of Cottonwood’s initial purchase.
Considering the clear differences between the 1999 sale to Cottonwood and the status
of the property at the time of condemnation, as well as the fact that Oberrender did not use the initial
sale in his comparable sales analysis, we find that the trial court acted within its discretion in
excluding evidence of the 1999 sale.
CONCLUSION
Because the trial court properly disregarded land under an option contract in
determining the maximum appropriate economic unit and did not abuse its discretion in excluding
evidence of the 1999 sale of the property, we affirm the judgment.
Bea Ann Smith, Justice
Before Chief Justice Law, Justices B. A. Smith and Puryear
Affirmed
Filed: April 21, 2005
10
11