Peter E. Flynn is an attorney based in Saugus.
What happens when you arrive as successor defense counsel late in an eminent domain case with an expert valuation consultant, also new to the case, and together you determine that your client may have paid the plaintiff property owner substantially less than it paid for other parcels acquired for the same purpose? A difficult story to explain to a jury.
This is a synopsis of a dreaded well site, aquifer case in which a landowner is claiming that the “highest and best use” of his land is the exact use for which the town of Bridgewater took it – a municipal water source. After almost ten years of testing by reputable hydrogeologists, it was determined that the property owner’s well location could yield potentially 300 to 400 gallons per minute, but at the time of the taking it was only permitted by the Department of Environmental Protection for 110 GPM.
History
A history of the property would lead you to believe that there was not much value in this 20.22 acre parcel of vacant, unimproved land. It was bought for $39,900 in 1972 when the only improvements were an old farmhouse and a couple of low-value wood storage facilities. Subsequently, the landowner subdivided one frontage lot out of 21.22 acres, leaving the remaining 20.22 acres vacant, unimproved and, unfortunately for him, with only 25 feet of access frontage. Since the town requires at least 30 feet of access frontage for the development of even one single-family residence, zoning relief would be required to develop the rear portion of the property.
After selling the residential frontage parcel for $31,000 in 1977, the owner did not further develop the property for the next 22 years up to the taking in March of 1999. The only significant activity was the town’s requested permission to test the back acreage for potential water production. With this testing, we are off to the races.
One of the problems with this case was the well testing by reputable hydrogeologic companies working with the town for many years. This testing served as an expectation and distraction to the relatively low underlying value of the subject property. While neighborhood lots with already existing street frontage were being developed, there was little demand for the subject property as a whole. Market forces were simply not driven to this site, but town-wide exploration for water was active and began at this property in 1990. The hydrogeologists were initially attracted by geologic formations and the contours of the land – not by property lines that create legal constraints. Identifying parcels of sufficient size to satisfy the Department of Environmental Protection’s 400-foot radius requirement is critical. Although the town had ample vacant land, this 20-plus acre parcel (if otherwise suitable in terms of yield and quality) would be quite attractive.
Initial testing in 1992, seven years before the taking, precipitated encouraging correspondence from water consultants to DEP. The optimistic correspondence indicated that the property might have a potential of as much as 400 GPM based on a single four-hour pump test. With minimal initial testing showing at least some promising results, the water consultants sought DEP approval. However, the initial optimism was tempered by further testing, and DEP approved a mere 110 GPM. Thus, even pumping at an unlikely 24 hours per day would yield only 158,400 gallons – not a good investment for public or private use. However, additional testing with additional wells to establish a two or three location well site, or even a field, was not out of the question. A shallow, vacuum system well field requiring only a 250-foot radius, although considered, was more problematical and further complicated by regulatory and yield problems specific to this site.
As we proceed from 1993, with DEP approval of only 110 gallons per minute, we see no development of the property by the owner. Also, he had not received much of the information concerning the testing results on his property despite allowing the testing. The town’s Order of Taking is then recorded at the Registry of Deeds acquiring the property for a “municipal water resource.” We then go off to Superior Court, jury included, with an eminent domain proceeding.
Objective vs. Subjective
It would seem to make sense to many, including the jury, that if you take it for water, that must be its highest and best use and highest value. The issues that now flow into the trial are complicated, but fascinating: objective value versus subjective value. Eminent domain law dictates that the amount to be paid is not the value to the owner, nor the value to the taking authority, but rather value in a free and open market. The question posed is, “Who is your market for this site and does the town itself become a participant in the purely free and open market as we eminent domain lawyers and appraisers understand it?” The town needs water, and as a result, their acquisitions and negotiations suggest their situation as buyers or takers could be considered compulsory. Also, the exigent circumstances of many towns’ need for a public water supply is well known and must be satisfied. Why would the town take a marginal, at best, yield aquifer area? A cheap emergency backup source for the future? Further testing the field? Protection of the larger town wide aquifer?
The matter at hand is how much to pay the landowner for undeveloped land that required a variance and special permit for even a single lot. The notion of buying another lot as an alternative to provide additional frontage was not even on the table. (Although, the owner claimed it was at the time of the taking in March of 1999.) The landowner clearly has a problem with his residential use case, and as a result, the plaintiff drifted in the most attractive direction to obtain the most money – a water valuation theory. Based upon the approved yield, it is a difficult case.
However, all is not lost for the landowner. The town, recognizing that a well at this site is not overly promising, began testing an alternative, larger site of approximately 55 acres consisting of two contiguous parcels under the same ownership. The Town negotiated and acquired this site, known as Audrey, fourteen months after the taking of the subject. The total Audrey purchase involved the acquisition of both lots. The first, approximately 20 acres in size (same as the subject), was purchase by the town for $1 million. The second, purchased at the same time, involved a conservation purpose to protect open space and also cost the town $1 million, establishing a $2 million total acquisition price.
There were many interesting factors in the Audrey transactions. The owner was allowed to keep his five frontage lots, untouched by the town. In addition, the state infused $250,000 for the conservation portion. The town had expectations of a 500-700 GPM yielding well on this site, as well as $1 million in sand and gravel deposits. The town also maintained 40 feet of frontage to the Audrey parcels. There was also an existing permit for 90,000 gallons per day water withdrawal for a potential cranberry bog operation on a portion of the property. Moreover, it was well known that the owner had been planning a 40 to 60 lot residential subdivision, and the property enjoyed a special 61A agricultural tax classification, which rendered additional benefits to the combined parcels.
The defense of the case rested largely upon an explanation of the Audrey package at $2 million and its relation to the $1 million price on this parcel, which was also targeted for water but had numerous other elements of substantial value. Comparing his property to the Audrey package at $2 million the plaintiff asserted a demand of $1.5 million. With the town maintaining that the plaintiff’s property was only worth $125,000, what next?
Show Me the Money
With arguable evidence that the safe yield of the subject could approach that of Audrey, the landowner is yelling in the courtroom, “I want to be paid like Audrey.” However, his property does not have many known, substantial market attractions possessed by Audrey.
As defense counsel, at this juncture you feel like you are on the beach waiting for the wave to hit. You then announce to the jury that the subject property taken is only worth $125,000, yet Audrey (when acquired by the very same people) was paid a package deal of $2 million. It is clearly explained that the Audrey parcel, targeted for a well site and for which the town paid $1 million, enjoyed the additional benefits of having a 400-foot Zone I radius already in place, whereas the subject taken required the assembling of parcels beyond the property owned or controlled by the landowner in order to achieve that radius. Clearly distinguishable, but how do you explain the town’s substantial payment to Audrey compared to its payment to this owner? With both acquisitions being for a public water supply, the plaintiff landowner plays this issue like a fiddle.
The defense situation is made more onerous by an excellent valuation witness, an inexperienced but otherwise affable hydrogeologist consultant, and a cost expert that costs out the project fairly accurately (assuming an investor would ever contemplate such an endeavor.) The landowner’s hydrogeologist and cost expert were, however, burdened by the fact that they had never performed a single project or well site test in this town. In fact, they had only been to the property once and based their entire analysis on the ten-year testing program of the Town’s experts. A thrust of the plaintiff’s case was that the collective experience of the defense hydrogeologist and well site developers was, in the end, too conservative. Their optimistic correspondence of yield projections of 300 GPM could have been more like 400 GPM.
As you read this article, don’t ask why weren’t more tests mutually agreed upon to resolve yield and quality issues. Remember, we are before a Superior Court judge and jury with no time for anything. All bets are off. Next stop, a verdict, like it or not.
The defendant’s primary valuation expert, Allan Foster of Leominster, skillfully and successfully distinguished the subject property from Audrey. The associated costs and capitalization rates as played out in this trial would take an article that would extend beyond the length of any reasonable article intended for a general real estate audience. It would be fair to say that in a trial of these cases, as you start to substitute different cost amounts and capitalization rates into the analysis of the experts, you naturally come up with different values. Experts would say that is simply mathematical and inappropriate. However, the lawyers would say that the experts’ numbers are simply opinion and have neither basis nor support in the actual facts. In either case, the lawyers don’t like the opinions they are hearing, particularly cap. rates, and the experts don’t like the lawyers’ mathematical insertions into their income analysis to show vastly different values.
The DEP permitted yield at 110 GPM was certainly a constant which was arguably an objective snapshot of the capability of this property prior to its taking. Presumably, DEP has no ax to grind on the issue of safe yield, but the opinions of potential safe yield and sales comparisons were for the jury.
Comparable sales analysis added another interesting feature to the case. What was learned from this analysis, at least in this case, was that it appeared that cities and towns in their acquisition of well sites were willing to pay landowners the highest price based upon the property’s value for the most reasonable marketable uses that could be identified in the owner’s bundle of rights. Cities and towns acquiring well sites would consider the highest and best use in the market to the owner, and to a great extent, give the benefit of doubt to the owner on demand, marketability and highest and best use considerations. In that context, if a site were marketable for subdivision purposes, or for mixed uses, the taking authorities would generally pay that amount despite intending to purchase for its subjective water value.
The constant friction between subjective and objective valuation is readily apparent. One question posed is, what happens when you have a monster aquifer (although not in this case) on a site with all of the good features of yield, size and safety that is capable of producing of over 1,200 GPM? In that case, we would see the enormous value to the town, and, more than likely, the value to the landowner is hypothetically its value as a water resource for lease or sale to the town. Simply put, the water capability of the parcel may be so outstanding that it drives its value beyond a residential or any other use expectation. If the land is taken by eminent domain, the face-off in the courtroom does not become the alternative residential or commercial use that the landowner had. Rather, the valuation issue narrows so that both the town and the landowner agree that the highest value is in fact the mineral deposit in the form of water. Yield, quality, control, cost and distribution capability become crucial and intertwined issues.
Win-Win
In the end, after five full days of trial and as the jury was deliberating, the parties settled the case at 34 percent of the plaintiff’s damage claim. Both parties were satisfied. The town avoided enormous exposure of almost $1 million if the jury adopted the well site valuation theory. The landowner made significantly more money than the original payment and recognized that the jury may well have ultimately issued a verdict consistent with the defendant’s position that the highest market price was substantially lower than the plaintiff’s water valuation claim.
When the judge announced to the jury, after three hours of deliberation, that the case was settled, the cheers and clapping could be heard through the walls. As one juror stated, it was going to be a “long deliberation with many issues.” It is unusual that a case settles while a jury is deliberating. This jury was glad they did not have to make the final decision of “how much?”
