State v. Central Expressway Sign Associates
302 S.W.3d 866, 53 Tex. Sup. Ct. J. 134, 2009 Tex. LEXIS 967 (2009)
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Rule of Law:
In a condemnation proceeding, adequate compensation for taken property does not include profits generated by a business operating on that property. Under the income approach to valuation, fair market value must be based on the rental income the property generates, not the business revenue of a lessee.
Facts:
- The State of Texas initiated a condemnation proceeding for a parcel of land in Dallas to improve a highway interchange.
- Central Expressway Sign Associates (CESA) held an easement on a portion of this land for the purpose of constructing and operating a billboard.
- CESA leased its easement rights to Viacom Outdoor, Inc., for a base rent of $12,000 per year or twenty-five percent of billboard advertising revenues, whichever was greater.
- Viacom constructed and operated a billboard on the easement, selling advertising space to clients.
- At the time of the condemnation, the billboard generated $168,000 per year in advertising revenue for Viacom.
- The State reached a settlement with the underlying fee owner and also with Viacom, agreeing to pay relocation benefits for the billboard structure.
- The remaining legal dispute concerned the just compensation owed by the State to CESA for the taking of its easement.
Procedural Posture:
- The State of Texas filed a condemnation petition in a state trial court.
- Court-appointed special commissioners determined the fair market value of the property interests to be $2,012,300.
- The State objected to the commissioners' award and demanded a jury trial.
- At a pre-trial hearing, the trial court granted CESA's motion to exclude the testimony of the State's expert appraiser, Grant Wall, as unreliable.
- A jury trial was held, and based on testimony from CESA's principals, the jury found the fair market value to be $1,850,000.
- The trial court entered judgment for CESA in the amount determined by the jury.
- The State, as appellant, appealed to the Texas court of appeals, which affirmed the trial court's judgment.
- The State, as petitioner, sought and was granted review by the Supreme Court of Texas.
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Issue:
In a condemnation proceeding, is an expert appraiser's valuation of a condemned easement unreliable for failing to include profits generated by a business, such as billboard advertising, operating on the property?
Opinions:
Majority - Justice O’Neill
No. An expert appraiser's testimony is not unreliable for excluding business profits from a fair market value calculation; in fact, including such profits is improper. Texas law clearly distinguishes between the value of condemned real estate and the profits of a business operating upon it. The court's reasoning is that business profits are speculative and depend more on the business skill, capital, and market conditions than on the specific location of the property. Here, the $168,000 in advertising revenue was business profit earned by Viacom, not rental income derived from the intrinsic nature of the land itself. The significant difference between the easement rent ($12,000/year) and the advertising revenue ($168,000/year) demonstrates the value added by Viacom's business efforts, which are non-compensable. The State's expert, Grant Wall, correctly applied the income approach by capitalizing the rental income CESA received from Viacom, as this rent already reflects the easement's value for its highest and best use as a billboard location. Therefore, the trial court abused its discretion by excluding his reliable testimony.
Analysis:
This decision reinforces the traditional Texas rule that separates compensable property value from non-compensable business profits in eminent domain cases. It clarifies that even for location-dependent businesses like billboards, revenue generated from operations is considered business profit, not income from the intrinsic value of the land. The ruling provides a clear guideline for appraisers using the income approach: they must capitalize the rent paid for the use of the property, not the gross revenue of the tenant's business. This precedent helps contain condemnation costs for governmental entities by preventing property owners from claiming compensation based on a tenant's business success.
