North Adams Apartments Ltd. P'ship v. City of North Adams.1

78 Mass.App.Ct. 602

940 N.E.2d 494

NORTH ADAMS APARTMENTS LIMITED PARTNERSHIP

v.CITY OF NORTH ADAMS.1

No. 09–P–1677.

Appeals Court of Massachusetts, Berkshire.

Argued May 10, 2010.Decided Jan. 18, 2011.

Wendy H. Sibbison, Greenfield (Richard J. O'Brien, Pittsfield, with her) for the plaintiff.Richard M. Dohoney for the defendant.Present: McHUGH, SMITH, & SIKORA, JJ.SMITH, J.

The plaintiff, North Adams Apartments Limited Partnership, brought an action in the Superior Court against the city of North Adams (city), claiming fair compensation for the city's taking by eminent domain of the plaintiff's private sewer system. After a jury-waived trial, a judge entered a verdict in favor of the city, concluding that the plaintiff was not owed any damages for the taking of its private sewer system for public use. On appeal, the plaintiff claims that the judge erred in his valuation of the property taken, particularly with respect to his rejection of the plaintiff's proposed method of valuation.

1. Background. We summarize the facts found by the judge, supplemented with additional undisputed facts. The plaintiff is the owner of two parcels of land on West Shaft Road, a public way in the city. In 1989, the plaintiff began planning to construct an apartment complex on one parcel and a residential subdivision on the other parcel. The plaintiff's property, however, did not have any access to the city's sewer system because the nearest sewer line ended about 1,800 feet south of the plaintiff's property. Therefore, the plaintiff entered into negotiations with the city to determine if the city would allow the plaintiff to use the city's sewer system.

As a result of the negotiations, the plaintiff obtained an easement from the city in 1991 to construct a sewer system under West Shaft Road that would link the development to the municipal sewer system. According to the terms of the easement, in exchange for one dollar the plaintiff was given the right to “construct and maintain a sanitary sewer system ... consisting of a six and an eight inch PVC pipe together with a duplex lift station and emergency standby power station running northerly under [West Shaft Road], with the right to connect said pipe to the sanitary sewer pipe of the City of North Adams lying under [West Shaft Road].” Under the agreement, the plaintiff also bore all construction, maintenance, and replacement costs associated with the new sewer system and agreed to keep it in good working order. The easement agreement also provided that the “sewer system shall remain property of North Adams Apartments Limited Partnership, its successors or assigns.” The plaintiff completed construction of the sewer line extension, including the pumping station, in 1992 at a total cost of $136,540. With the sewer issue resolved, the plaintiff constructed an apartment development, known as Tunnel Brook Townhouses, on part of one parcel; the other parcel is to become a subdivision of single-family homes called Deep Woods.

On December 13, 2005, the North Adams city council voted to take the easement and sewer system by eminent domain. The order of taking provided for a pro tanto payment of $10,000 (which the city contends was only a nuisance figure, the property taken having no value). Unsatisfied with the pro tanto award, the plaintiff filed a complaint in Superior Court on August 23, 2007, seeking additional compensation for the taking of the easement and the sewer system.

a. The trial. A bench trial was held in April of 2009, at which the parties presented expert testimony as to the damages owed for the taking of the sewer system.² To begin, both parties' experts agreed that the first step in valuing any property is to determine its highest and best use. It is undisputed that the property taken here, a sewer system, was “adapted to a single use and its value depended entirely upon a continuance of that use.” Newton Girl Scout Council, Inc. v. Massachusetts Turnpike Authy., 335 Mass. 189, 197, 138 N.E.2d 769 (1956), quoting from Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 65, 34 N.E.2d 623 (1941). Therefore, the sole issue at trial was the value of the sewer system as a sewer system.

Both parties' experts further agreed that, once a property's highest and best use has been determined, there are three primary methods of appraising property. The Supreme Judicial Court in Matter of the Valuation of MCI WorldCom Network Servs., Inc., 454 Mass. 635, 638–639, 912 N.E.2d 920 (2009), has summarized those approaches as follows:

“The two preferred methods for conducting valuations of property are the ‘market study method,’ which compares the property at issue to similar, recently sold property, and the ‘income capitalization method,’ which calculates the present value of the income that property will produce.... However, those methods may be unavailing ‘where the special character of the property makes it substantially impossible to arrive at value on the basis of capitalized net earnings or on the basis of comparable sales.’ ... In such circumstances, ... a third method [may be used]: ‘depreciated reproduction cost’ (DRC), defined as ‘[t]he current cost of reproducing a property less depreciation from deterioration and functional and economic obsolescence.’ ” (Citations omitted.)

The plaintiff presented the testimony of Roger Durkin, a certified general appraiser and valuation consultant. He testified that the plaintiff's sewer system was special use property, which he defined as property that seldom trades in the open market and for which there are typically no comparable sales. Durkin primarily used the DRC method in calculating the value of the sewer system. Using the DRC method, Durkin analyzed the costs associated with excavation and materials for each component of the sewer system, subtracted an amount for depreciation based on its age, and came to a figure of $271,370.

Durkin also offered a secondary opinion about the value of the sewer system using the income capitalization method. Under that approach, Durkin opined that at the time of the taking, the net income generating value of the property over the next five years (discounted to present value) was $235,000, which would accrue through sewer tie-in fees paid by neighboring properties that would switch from their failing septic systems to the municipal sewer system. Durkin arrived at that figure by multiplying the number of neighboring properties (twenty-two) by a tie-in fee of $20,000 per property, and subtracting for inflation and the cost to perform the work. According to Durkin, the hypothetical $20,000 fee was based on market value principles. In sum, Durkin characterized the value he reached as a “forecast based on demand and the number of properties in that area.”

Michael Deep, a general partner of the plaintiff, also testified. Deep described the acquisition of the easement from the city, the construction of the sewer system, and its cost to build. Deep further testified that when the city took the sewer system it was in excellent condition, and that at that time no neighboring residents had tied into the system.

The city presented the testimony of James Fisher, a certified general appraiser experienced in commercial real estate appraisals. Fisher first explained that the foundation of his appraisal rested on his finding that the plaintiff built the sewer system to increase the market value of its two developments, Tunnel Brook Townhouses and Deep Woods. Such an increase would occur because a connection to a municipal sewer system eliminates the need for a private septic system, which requires costly replacement in the future. Because of this net benefit, according to Fisher, developers such as the plaintiff are more than willing to build a connecting sewer system; however, they typically deed it to the city for one dollar after the development is constructed, in order to avoid the liabilities of owning and maintaining the system. Fisher based his knowledge on having valued over one hundred subdivisions, where, “[i]n virtually all of those analyses, [the sewers built] were deeded back to the town.” Fisher thus opined that the “highest and best use” of the sewer system here would be to deed it to the city for no consideration or one dollar.

When asked about Durkin's appraisal, Fisher agreed that the market study approach was not viable, but disagreed with his use of the DRC method. Fisher opined that the DRC method was misused in this case because Durkin overinflated the cost to recreate the system in 2005, and failed to take into account other economic factors that would have affected the value under that method. Essentially, Fisher noted that the DRC method is “a less reliable indicator of value, when there's not an active market or income approach to back things up.”

The city also presented the testimony of Leo Senecal, a special project coordinator for the city, and Bruce Collingwood, the commissioner of public works and utilities for the city of Pittsfield. Senecal testified that the sewer system's pumps and circuits required maintenance once or twice per month by individuals who were not city staff. He also noted that, at the time of trial, four homes were served by the sewer main, and that another fourteen to sixteen could hook up to the system for a fee of $2,000. One individual, Giroux, had also connected to the system, but was charged a larger fee because the line had to be extended 250 feet from the main to his property. After reaching an agreement with the city, Giroux paid $10,000, one-half of the total $20,000 cost to extend the line to his property, and the city paid the remainder. Collingwood testified about two occasions where a developer built a sewer system which it later conveyed to the city of Pittsfield for no consideration.

b. The judge's decision. In his memorandum of decision, the judge ruled that the fair market value of the sewer system at the time of...