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Figuring Fair Market Value in Tennessee Condemnation Cases: Expert Witnesses Cannot Use Highest and Best Use Approach to Valuation

In condemnation cases, it is understandable that a landowner would want a jury to be able to consider the value of the landowner’s property based on its highest and best use. For example, if the landowner’s property is uniquely situated such that a party wanting to construct a hotel on it would likely pay significantly more for it than any other buyer, the landowner would probably do better at trial if an expert appraiser was able to base his or her valuation on the amount that a buyer wanting to construct a hotel on it would pay for the property.  While such an approach to valuation would certainly favor a landowner in many cases, under Tennessee condemnation law, such an approach is not allowed. That has long been the rule in Tennessee eminent domain cases.

To see how this rule can play out to the detriment of a landowner, consider the recent case of Ocoee Utility District of Bradley and Polk Counties v. The Wildwood Company, Inc. (Sept. 2016).  Here are the key facts:

  • The Landowners owned land with springs which could provide a water source for the condemning authority, the Utility District
  • The Utility District’s appraiser had appraised the property being taken at $21,500
  • The Utility District offered to buy the property for $35,000
  • The Landowners retained, as an expert witness, a commercial appraiser who valued the property at $417,000
  • To arrive at the $417,000 figure, the appraiser testified, in his deposition, that the highest and best use of the property was for the sale of water and that his valuation involved an analysis of the income which could be generated from the sale of water from the property
  • The expert appraiser testified that he based his valuation of fair market value on the rental income that the Landowners could generate by leasing the water rights and acknowledged that his “rental rate is based on water.”
  • The appraiser also testified that his value was based on what rate the Utility District was willing to pay for the water rights
  • The jury returned a verdict for the Landowners in the amount of $417,000

The Court of Appeals of Tennessee set aside the jury verdict. It held that the testimony of the Landowners’ appraiser should have been excluded at trial.

Under Tennessee law, the court pointed out, a landowner is entitled to be paid for the fair market value of his or her property “in view of its value for all available uses as distinguished from its value for the best use.” The point of that rule is to prevent landowners from making the real measure of value for the property the value of the property to the condemning authority for the particular purpose for which the condemning authority intends to use the property.

To carry out the above rules, as explained by the court, an expert may not offer testimony of fair market value which is based on the use of the land for a specific purpose when it could also be used for other purposes. In a Tennessee condemnation case, an expert appraiser, as part of his or her determination of fair market value and explanation of valuation, may consider the value of a property being taken considering all of its possible uses.  However, in the case before it, the court concluded that the Landowners’ expert had crossed over the line into a valuation opinion which overemphasized a particular use for the land.