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New Jersey Schools Construction Corp. v. Warminster Investments Corp.

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


October 16, 2009

NEW JERSEY SCHOOLS CONSTRUCTION CORPORATION, A SUBSIDIARY OF THE NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, A PUBLIC BODY CORPORATE AND POLITIC, PLAINTIFF-RESPONDENT,
v.
WARMINSTER INVESTMENTS CORPORATION, A/K/A WARMINSTER INVESTMENT CORPORATION, DEFENDANT-APPELLANT, AND STATE OF NEW JERSEY; LORR LABORATORIES; HAYK INC.; KAVITA TEXTILE, LLC; K-INC.; THOMAS MARTINES; PARK RIDGE FISHING INC.; PASH APPAREL INC.; SEW-INSTYLE CORP.; WEST NEW YORK FASHION INC.; NEXTEL COMMUNICATIONS, INC.; VERIZON WIRELESS (VAW) LLC; NORTH HUDSON SEWER AUTHORITY AND TOWN OF WEST NEW YORK, DEFENDANTS.

On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-3800-06.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued September 21, 2009

Before Judges Lisa, Baxter and Alvarez.

Defendant Warminster Investments Corporation (Warminster) appeals from a jury award of $5,689,869 as just compensation for the taking of Warminster's property in the Town of West New York by plaintiff New Jersey Schools Construction Corporation (NJSCC). Warminster maintains that the jury awarded significantly less than the property's actual value because the judge erroneously: permitted the jury to consider the cost of lead and asbestos removal; excluded evidence pertaining to the rental value of cellular phone towers and antennas located on the building's roof; and permitted NJSCC's expert to testify that Warminster would not have succeeded in obtaining a parking-space variance had the building been converted to residential use. Warminster also appeals from the judge's denial of its motion for a new trial.

I.

Before discussing the relevant testimony produced at trial, we provide some context. The jury's task was to determine the amount of just compensation to be paid to Warminster for the taking of its property; however, the amount of just compensation was not based on the property's then-current use or NJSCC's intended future use, but instead on the property's highest and best use at the time of the taking. NJSCC intended to erect a public school on the property, and therefore the parties' positions regarding the property's highest and best use were purely hypothetical and will never be realized.

At the time of the taking, Warminster's property was non-conforming, as it was an industrial building located in a residential zone. The property was comprised of a vacant and boarded-up, four-story, brick, L-shaped building and some small ancillary structures, including a small garage. Several cell phone towers and antennas were located on the roof of the main building, from which Warminster derived rental income.

We turn now to the testimony presented at trial. NJSCC presented Mark Karavolos, an expert in real estate appraisal, and Edward Mermelstein, an expert cost estimator. Karavolos testified that the highest and most reasonable use for the property was a conversion into a seventy-five unit residential development and that "anything above that would be speculative."

He valued the amount of just compensation for the highest and best use of the property as a seventy-five unit residential development at $4,650,000, with a value per residential unit of $62,000, and without including the $225,000 in value that he attributed to the building shell in an earlier appraisal.

Mermelstein calculated a cost estimate for converting the building shell into a residential use, including $1,106,230 for lead paint removal and asbestos remediation. He observed that when the other associated conversion costs were considered, the total cost for converting the building shell into a residential development was $3,680,072. Consequently, he ascribed a net negative value to the building shell in the amount of $1,608,973.

Robert Piscioneri, an architect, testified on behalf of Warminster. On direct examination, Piscioneri explained Warminster's proposed highest and best use of the property as a ninety unit residential development, which would require adding three floors to the existing building shell, the top two of which would be penthouses. A total of 110 parking spaces would be located in a garage that would be erected in a portion of the first two floors of the development, in the open space of the smaller section of the L-shaped building. Piscioneri also explained the differences between the construction of new structures and conversions of existing ones. He observed that conversions "have materials in [them]... that have to be dealt with in terms of their... current use," such as lead paint and asbestos, materials which are no longer permitted in buildings. On cross-examination, Piscioneri acknowledged that no calculations had been conducted to determine the costs for removing asbestos and lead paint from the building shell, and that he had not calculated the costs associated with converting the shell building to a residential structure.

Piscioneri also acknowledged that, in 2004, he had drawn plans for Warminster for a seventy-five unit residential development on the property, conceding that although the plan for seventy-five units was "not up to the maximum that the [property] could yield," seventy-five units "seemed to fit the [property]." Piscioneri also acknowledged that the 2004 plans satisfied all of the Town's zoning requirements, other than maximum "lot coverage" for a "two-story parking structure," for which a variance was needed.

On cross-examination, Piscioneri also conceded that: (1) no traffic study had been prepared for the ninety unit development; (2) the feasibility of adding three floors to the building shell, which was necessary for the ninety unit proposal, was speculative, as no structural engineering studies had been conducted; (3) no seismic studies had been done; (4) no hazardous materials study of the property had been conducted, although such a study was needed in determining the cost of construction; and (5) no soil study had been conducted to determine whether the soil would support the parking structure and the three additional floors. According to Piscioneri, the 110 parking spots Warminster planned to allocate for its proposed ninety unit development were insufficient, because 174 parking spaces were needed.

Edward Kolling presented expert testimony on Warminster's behalf on the subject of land use and planning. Kolling testified there was a reasonable probability that the property could be developed into a ninety unit residential dwelling. In particular, he opined that the Town's Planning Board was likely to grant the required variances: parking, floor area ratios, lot coverage, and front, side and rear yard setbacks. He observed that a "rehab[ilitation] of the existing building would be a better approach to development for the community than would be a new construction on the site." On cross-examination, Kolling acknowledged that there was a greater likelihood of obtaining variances for a seventy-five unit development, as opposed to a ninety unit development, because a ninety unit development required those six variances.

Kolling also discussed parking requirements, noting that pursuant to State requirements, 178 parking spaces were required; however, pursuant to the local requirements, which could supersede State standards if a waiver were to be granted, 134 spaces were needed.

Louis Izenberg testified on Warminster's behalf as an expert in real estate appraisal and valuation, opining that the per unit value for the ninety unit residential development was $70,000, resulting in a value of $6,300,000, excluding the value of the building shell, to which he ascribed a value of $2,178,016. After accounting for a demolition cost of $225,000, Izenberg opined that the ultimate value of the property on the date of the taking, August 3, 2007, was $8,245,000.

On cross-examination, Izenberg acknowledged that in 2007, another appraiser appraised the property on Warminster's behalf and concluded that seventy-five residential units was the highest and best use. Izenberg also admitted that, in arriving at his calculations regarding the value of the property, he failed to consider the costs of lead paint removal, asbestos abatement, demolishing portions of the building shell, the additional work required to make the building shell useful, and overhead and profit.

On rebuttal, Joel Ives, a licensed architect and planner, testified on NJSCC's behalf, asserting that in light of the three stories that would have to be added to accomplish a ninety unit structure and the need to renovate the other portion of the L-shaped building to accommodate the parking garage, reusing the existing structure was not logical. The more "prudent" course entailed demolishing the building and starting over.

Ives also offered testimony on the number of parking spaces required for a ninety unit development, noting that Town Planner David Spatz had criticized Warminster's much smaller seventy-five unit 2004 application for its failure to comply with parking requirements. Ives observed that in addition to the parking variance, Warminster would need setback variances and floor area ratio variances, which would be considered major variances before any planning or zoning board. He opined that all of the variances combined would be viewed by the Town's planning board as an excessive use and over-development of the property.

Anthony Pagnotta also testified in rebuttal on behalf of NJSCC, offering expert opinion in the field of structural engineering. He opined that numerous structural improvements would be required to renovate the building shell and convert it to a ninety unit residential development, including additional steel framing to support the new stairways and the elevator shafts.

Karavolos was recalled by NJSCC on rebuttal. He testified that numerous variances were required for Warminster's proposed ninety unit residential development. After Warminster objected to Karavolos's testimony, the judge conducted a N.J.R.E. 104(a) hearing, and agreed to limit Karavolos's testimony to whether there existed a reasonable likelihood that Warminster would be able to obtain the parking space variance needed to build a ninety unit structure. Karavolos opined that obtaining such a variance was not reasonably probable, and, if the parking variance was not granted, Warminster would be forced to reduce the number of units, which would cause the total value of the property to decrease.

The jury determined that Warminster was entitled as just compensation, to $4,725,000 for the land, and $964,869 for the building, for a total of $5,689,869. On appeal, Warminster challenges three of Judge Mary Costello's pretrial rulings on Warminster's in limine motions.

II.

In Point I, Warminster asserts that the judge erred when she denied Warminster's motion to bar NJSCC from presenting testimony concerning the cost of asbestos and lead removal that Warminster would face in renovating the building for residential use. Relying on Housing Authority of New Brunswick v. Suydam Investors, LLC, 177 N.J. 2, 23-24 (2003), Warminster asserted that lead and asbestos removal costs should not be admissible on behalf of a condemning authority such as NJSCC because, for purposes of a fair value proceeding, the property must be valued as if the needed remediation had already occurred.

In Suydam, the Court held that "contaminated property that is the subject of condemnation is to be valued as if it has been remediated and... the condemnor may seek an order requiring a portion of the award to be set aside to satisfy the condemnee's clean-up and transfer obligations." Id. at 7. The Court emphasized that its holding hinged on whether the contamination made the condemnee liable in a secondary proceeding pursuant to environmental statutes, such as the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.A. § 9601 to -96seventy-five (CERCLA); the Industrial Site Recovery Act, N.J.S.A. 13:1K -6 to -14 (ISRA); and the New Jersey Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 to -23.50 (Spill Act). Suydam, supra, 177 N.J. at 17, 23.

The Court explained that its objective was to avoid forcing a "double-take" upon the condemnee, where the subject "property is devalued for contamination in condemnation," causing the condemnee to "first receive discounted compensation in the condemnation proceeding," and then later, pursuant to liability under an environmental statute, pay for "the full cleanup costs...." Ibid. (quoting Jeffrey Dorwin, Comment, Doing a Double Take: Environmental Damage Suits and Eminent Domain, 1996 Det. C. L. Rev. 687, 689-92 (1996)). This process was described by the Court as being "fundamentally unfair" because it enables "the condemnor [to] receive[] a windfall by... obtaining the property in a remediated state at the condemnee's cost, yet paying a discounted price due to the contamination." Ibid.

Because it found the Spill Act to be "archetypical of many environmental statutes," the Court analyzed the Spill Act's legislative scheme and purpose, explaining that a prior owner is liable only if it "'discharged,... or is in any way responsible' for the discharge of any hazardous substance" on the property. Id. at 17-18 (quoting N.J.S.A. 58:10-23.11g(c)(1)). The Spill Act defines a discharge as "any intentional or unintentional action or omission resulting in the releasing, spilling, leaking, pumping, pouring, emitting, emptying or dumping of hazardous substances into the waters or onto the lands of the State...." N.J.S.A. 58:10-23.11b.

Warminster's insistence that the judge erred when she permitted NJSCC to introduce evidence of abatement costs is premised upon the argument that lead and asbestos are contaminants that must be removed, and that, in accordance with Suydam, those costs should not be considered. Warminster reads Suydam too broadly. For purposes of a fair value proceeding, contamination in a building -- which is the situation here -- is not the equivalent of discharging a contaminant into the environment.

Contamination does not by itself make a condemnee liable under the Spill Act because "'the Legislature did not intend... that contamination be considered a discharge.... [A] discharge is some action resulting in an environmental effect caused by an interaction with the environment. Contamination is not such an action but it is the result.'" White Oak Funding, Inc. v. Winning, 341 N.J. Super. 294, 299 (App. Div.) (quoting Atlantic City Mun. Utils. Auth. v. Hunt, 210 N.J. Super. 76, 99-100 (App. Div. 1986)), certif. denied, 170 N.J. 209 (2001). Therefore, the "[i]mposition of Spill Act liability as a discharger requires some act or omission of human conduct which causes a hazardous material not previously present to enter the waters or land." Ibid.

To illustrate when liability attaches under the Spill Act, we explained that "'[t]he pouring of hazardous waste on the ground was a discharge,'" but the "'placement of the waste stored in containers was not a discharge because there was and has been no interaction with the environment.'" Id. at 300 (quoting Atlantic City Mun. Utils. Auth., supra, 210 N.J. Super. at 96). Applying that logic here, the lead paint and asbestos, which are in a fixed position and have not been discharged into the environment, are the equivalent of "'waste stored in containers,'" which is not a "'discharge because there has been no interaction with the environment.'" Ibid.

We view the asbestos and lead that are present in Warminster's building as no different from stacks of tires, rusted cars, paint cans, batteries or other environmentally-offensive items that have not created run-off or discharge, but which nonetheless must be removed from a property prior to sale. Just as the removal cost of those items would be properly considered by a jury in determining fair value, the costs of lead and asbestos abatement should likewise be admissible. What differentiates Warminster's position from that of the condemee in Suydam is "the reality of a condemnee's liability under the Spill Act and like statutory initiatives," and the Court's focus on the potential for a "double-take" whenever cost-recovery proceedings under environmental statutes are likely to ensue. Suydam, supra, 117 N.J. at 17-20, 23.

The absence of these factors here demonstrates that NJSCC was properly allowed to introduce testimony concerning the lead paint and asbestos abatement costs. Indeed, if the jury had not been allowed to consider these costs, Warminster would receive a windfall because the asbestos and lead paint abatement costs are not, and cannot be, the subject of a separate cost-recovery action. We therefore conclude that Judge Costello properly determined that evidence of lead and asbestos removal costs was admissible to determine the actual value of the property.

III.

Next, Warminster asserts that the trial court erred in barring all evidence concerning the value of the cell tower leases, which existed on the property at the time of the taking. NJSCC contends that the evidence was properly excluded because Warminster failed to demonstrate that the grant of a variance, permitting the towers to remain, was reasonably probable.

Some background is in order. The zoning ordinance of West New York, Article XVII, § 414-102H(6), specifies that "[n]o towers or antennas shall be permitted as conditional uses in residential districts unless located upon property owned by the Town of West New York...." The ordinance further provides that an applicant seeking "the reconstruction of an existing tower or the placement of an antenna on an existing tower/site" must obtain a "conditional use permit or variance." Id. at § 414-102H(1). Furthermore, cell towers not located on municipal property are considered principal, not accessory, uses. Id. at § 414-100A. However, the ordinance recognizes that some non-conforming cell towers are situated on lands not owned by the municipality. Rather than require the removal of these pre-existing non-conforming towers, the ordinance exempts them from compliance with the ordinance's site and variance requirements "absent any enlargement or structural modification or the addition of any structures...."

Even though Warminster was unaware of the ordinance and had no expert to address the reasonable probability of obtaining cell tower variances, Warminster asserted that, because the non-conforming use was pre-existing, and the cell towers were present on the day of the taking, there was no need to obtain a use variance and therefore no reason for the experts to opine whether a use variance was necessary under either the Town's ordinance or the Municipal Land Use Law, N.J.S.A. 40:55D-68.*fn1

Judge Costello disagreed. She found that Warminster's expert planner, Kolling, lacked any knowledge pertaining to the cell tower ordinance and therefore had no factual basis to testify as to the likelihood of a cell tower variance being granted. Therefore, she barred Kolling from providing such testimony. Relying on N.J.S.A. 40:55D-68, the judge determined that due to the planned conversion of the building shell from an industrial use to a residential use, the non-conforming cell towers could not be maintained.

The judge also barred Warminster's expert appraiser, Izenberg, from testifying to the value of the cell tower leases, because Izenberg's opinion relied on Kolling's assumption that cell towers were a permitted use. The judge reasoned that the leases involved with the property's industrial use at the time of the taking were irrelevant and could not be considered, because they were not a part of "the future use, the highest and best use."

In his expert report, Warminster's appraiser, Izenberg, attributed to the property a value of $1,255,000 in just compensation from three cell tower leases that were located on the property at the time of the taking, However, neither Izenberg nor Warminster's planner, Kolling, were aware of this ordinance. The record demonstrates that Izenberg's opinion on the value of the leases presupposed that the cell towers could be maintained if the building were to be converted to residential use. He relied on Kolling for all variance issues; however, Kolling failed to address whether the cell towers could be relocated on the property after it was converted to a residential development. Kolling's planning reports failed to address or consider the cell tower ordinance and the reasonable probability that a variance was required. Furthermore, Kolling acknowledged that he was not involved with the cell tower values for the property and was not involved with the cell tower approval processes for the property.

Warminster relies on New Jersey Highway Authority v. J. & F. Holding Company, 40 N.J. Super. 309 (App. Div. 1956), in support of its argument that the value of a leasehold must be considered in determining just compensation in a condemnation proceeding. However, that case does not address the method of calculating the total amount of just compensation for a taking, but instead addresses a tenant's right, and the limitations thereon, to "assert[] the value of his lease in the apportionment of the [condemnation] award." Id. at 315. Warminster's reliance on that case is misplaced.

As NJSCC correctly argues, and Judge Costello properly held, a use, such as a leasehold, cannot be considered unless such use is: "'1) legally permissible, 2) physically possible, 3) financially feasible, and 4) maximally productive.'" Suydam, supra, 177 N.J. at 20 (quoting County of Monmouth v. Hilton, 334 N.J. Super. 582, 588 (App. Div. 2000), certif. denied, 167 N.J. 633 (2001)). In this case, Warminster's expert testimony was barred because Warminster failed to satisfy its burden to show that, once the property was converted to a ninety unit residential development, the continued existence of the cell towers, and the leases associated with them, was legally permissible.

The Court addressed the relationship between zoning restrictions and fair market value in Commissioner of Transportation v. Caoili, 135 N.J. 252, 260 (1994), explaining that the reasonableness of a condemned property's highest and best use "must be considered in light of any zoning restrictions that apply to the property." Such restrictions are "material factors in determining... fair market value." Ibid. In Caoili, the Court reaffirmed a two-pronged test for determining the admissibility of valuation evidence in condemnation cases:

[T]he jury may consider a potential zoning change affecting the use of the property provided the court is satisfied that the evidence is sufficient to warrant a determination that such change is reasonably probable. If evidence meets that level of proof, it may be considered in fixing just compensation in light of the weight and effect that reasonable buyers and sellers would give to such evidence in their determination of the fair market value of the property. [Id. at 265 (emphasis added).]

The trial judge serves a "gatekeeping function" and is responsible for "screening out potentially unreliable evidence and admitting only evidence that would... support a finding that a zoning change is [reasonably] probable." Id. at 264. The Court warned that "[t]he risk of unsound and speculative determinations concerning fair market value is real when that determination is based on evidence of a future change that is inherently vague or tenuous because it suggests no more than the possibility of change." Ibid.

Warminster failed to "come forward with reliable evidence that the 'feasibility, suitability and practicability' of its proposal,... make it reasonably probable that the [zoning] handicaps will be overcome and the requisite approvals will be secured." Jersey City Redev. Agency v. Mack Props. Co., 280 N.J. Super. 553, 566 (App. Div. 1995) (quoting Caoili, supra, 135 N.J. at 269). Neither expert was able to offer an opinion on the reasonable probability of the variance being granted. As such, pursuant to N.J.R.E. 703, both experts' opinions were properly excluded as net opinions because they amounted to bare conclusions unsupported by factual evidence or other data. Vuocolo v. Diamond Shamrock Chems. Co., 240 N.J. Super. 289, 300 (App. Div.), certif. denied, 122 N.J. 333 (1990).

Furthermore, upon conversion, as the zoning ordinance makes clear, Warminster no longer had the right to be exempt from the Town's zoning ordinance, and the continued existence of the cell towers was prohibited, absent a variance.*fn2 Because Warminster's use of the non-conforming cell towers on the building shell was pre-existing, the towers were exempt from the ordinance requirements only in the absence of any "enlargement or structural modification or the addition of any structures...." Zoning Ordinance of West New York, supra, §§ 414-98, 414-99C. However, Warminster's plan entailed enlargement in the addition of three levels onto the building shell to convert the shell into a ninety unit residential development and significant structural modifications. Therefore, with the property's changed use, the cell towers on the property would no longer be considered pre-existing, and a variance would be required. Id. at § 414-102H(6).

The judge was correct in ruling that, pursuant to N.J.S.A. 40:55D-68, once the property's non-conforming principal industrial use is changed to a conforming residential use, then the "grandfathering" provisions of N.J.S.A. 40:55D-68 cease to apply. Although a property owner may continue a prior non-conforming use, and perform necessary maintenance, "enlargement or material modification are prohibited." Shire Inn, Inc. v. Borough of Avon-By-The-Sea, 321 N.J. Super. 462, 468-69 (App. Div.) (internal citation omitted), certif. denied, 162 N.J. 132 (1999). Thus, because a variance would have been required and Warminster's experts, Kolling and Izenberg, failed to base their conclusions regarding the reasonable probability of a variance being granted on any facts, studies or information, the trial judge correctly held that Warminster should be prohibited from introducing evidence of the value of the cell tower leases.

IV.

In Point III, Warminster asserts that the trial judge erred in denying its motion for a new trial because it was a miscarriage of justice*fn3 for the jury to disregard the testimony of Kolling, who was the only licensed professional planner presented by either side. NJSCC argues that the jury was not obliged to accept Kolling's expert opinion, and there was sufficient credible evidence to support the jury's verdict. We agree.

First, Warminster's own expert architect, Piscioneri, testified to the numerous studies that would be required to determine whether it was possible to add three stories to the building shell. Piscioneri also testified that additional required studies had not been done. Second, Piscioneri acknowledged that at least five variances would be required to convert the property into a ninety unit residential development, while Kolling admitted that six variances were required and that there was a greater likelihood of obtaining variances for a seventy-five unit plan. Both Piscioneri and Kolling acknowledged that Warminster's 2004 application for a seventy-five unit residential development was criticized by Town officials for violating applicable parking space requirements, and that, despite this, the new ninety unit proposal would use the same number of spaces.

Third, none of Warminster's experts considered the costs of asbestos and lead paint abatement in valuing the building shell. Fourth, Izenberg, who testified on Warminster's behalf as an expert appraiser, acknowledged that in 2007 Warminster had commissioned another appraisal, in which the appraiser determined that seventy-five units was the highest and best use for the property. Izenberg also acknowledged that, in valuing the building shell, he failed to account for any of the building shell's demolition costs, the additional worked required to make the shell useful and the overhead and profit costs associated with the conversion. Fifth and finally, numerous witnesses also testified to Warminster's prior 2004 application that sought to change the property to a seventy-five unit residential development, which was the same highest and best use that NJSCC asserted at trial.

Consequently, the jury was entitled to conclude that Warminster's conversion to the ninety unit plan was speculative and unproven, and that NJSCC's proposed valuation based on seventy-five units was comparatively more probable and feasible. The jury was not required to render a verdict consistent with Kolling's expert opinion simply because he was the only expert to testify in the field of planning. Indeed, "[i]n determining valuation the jury is under no obligation to accept an expert's opinion; it may accept such testimony as appears reasonable, reject all of it or accept all of it." State v. Interpace Corp., 130 N.J. Super. 322, 332 (App. Div. 1974); see also State v. Vacation Land, Inc., 92 N.J. Super. 471, 478 (App. Div. 1966). Judge Costello correctly determined that there was sufficient credible evidence to support the jury's verdict, and that no miscarriage of justice had occurred. We affirm the denial of Warminster's motion for a new trial.

In Point III, Warminster also asserts that the judge erred in admitting Karavolos's testimony concerning the improbability of Warminster obtaining a parking variance. Karavolos's opinion was grounded in his review of: the Town's parking space ordinances; Warminster's earlier application for a seventy-five residential unit conversion, which contained the same number of parking spaces as the proposed larger ninety unit development; and Spatz's letter that reviewed the prior application and found that the parking for the lesser conversion was not in conformity with local requirements.

We therefore agree with Judge Costello's conclusion that because Karavolos's opinion was based upon information and data upon which such experts would normally rely, his opinion was supported by sufficient facts to satisfy the requirements of N.J.R.E. 703. Her refusal to bar his testimony was therefore correct.

Affirmed.


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