Court: Supreme Court of Kansas; January 3, 2013; Kansas; State Supreme Court
The court's opinion, delivered per curiam, addresses an eminent domain case involving the City of Wichita's condemnation of a tract of land owned by Kenneth Denton at the intersection of Kellogg and Rock Roads for highway purposes. Clear Channel Outdoor, Inc. leased approximately 500 square feet of this property for a double-sided, tri-vision billboard. The land was appraised at $1,075,600, but no compensation was provided for the billboard structure or the advertising income generated by Clear Channel's leasehold. Both the City and Denton accepted the appraisers’ award, leading Clear Channel to appeal under K.S.A. 26-508. The district court granted summary judgment for the City, affirming the award.
In 2002, the City filed a petition under the Kansas Eminent Domain Procedure Act to acquire the property, naming Denton and Clear Channel as defendants. Clear Channel had renewed its lease with Denton in November 2001 for an additional 20 years, which allowed for the erection of billboards and stipulated that in the event of condemnation, Clear Channel would be entitled to just compensation for the billboard and its leasehold interest. The lease term would automatically extend by 30 years if the property was condemned.
The billboard, installed by Clear Channel’s predecessor in 1985, was in nearly new condition at the time of the taking, featuring a steel monopole that supported two large back-to-back signs and was designed to withstand severe weather. Clear Channel valued its leasehold as a premier advertising location due to high traffic circulation and visibility, generating $84,128 in revenue in 2003 while paying Denton $13,860 annually for the lease. The district court appointed three appraisers to assess the compensation for the property interests involved in the eminent domain proceedings.
The court directed the appraisers to value the property as a whole, resulting in an award of $1,075,600 for the taking. Clear Channel appealed this award to the district court, seeking a jury trial to assess total damages, while Denton aligned with the City. In August 2003, the City filed for partial summary judgment, claiming that the billboard and related assets were personal property not subject to valuation under K.S.A. 26-508, arguing that it only acquired Clear Channel's leasehold interest and not its business assets. Clear Channel contended that the billboard was a fixture and its income should be considered in the valuation. The district court ruled in favor of the City on October 27, 2003, deeming the billboard personal property, which meant Clear Channel could not present evidence regarding its value or generated income at trial. Discovery began, leading to the City filing a motion to exclude Clear Channel's expert testimony, which was based on the billboard's income, asserting it violated the court's ruling. Clear Channel countered, seeking reconsideration of the summary judgment. An evidentiary hearing in January 2005 featured expert testimony from Clear Channel, including Rodolfo Aguilar, who argued that property value should account for both land and billboard income, linking the billboard's revenue to its location's traffic count.
Aguilar provided testimony using three valuation methods for Clear Channel's interest in the condemned property: the income-capitalization approach, the market-comparison approach, and the cost-depreciation method. He determined the income-capitalization value at $564,000 by subtracting operating expenses from the annual income of $42,300 and capitalizing it at 7.5%. The market-comparison approach valued the interest at $706,000, based on a gross-income multiplier derived from comparable sales in the Midwest. The cost-depreciation method estimated the property at $231,000, which Aguilar considered a base value. Reconciling these methods, he concluded a fair market value of $611,000 for Clear Channel's interest, excluding it from Denton’s estimated $1,100,000 interest, suggesting a total market value of $1,711,000 for the property.
Tingey, Clear Channel's CFO, testified that he typically used an income-capitalization approach for lease pricing, applying a 14% return on the annual after-tax revenue of $51,000 to arrive at a value of $711,000 for the Kellogg property. Mollhagen, the company's real estate manager, noted restrictions on billboard construction and the lack of suitable replacement locations, stating that most components would be destroyed upon removal, but some, like the tri-vision panels, would be salvaged. Clear Channel also submitted an affidavit from Ron Blue, stating the Kellogg location's value at $700,000 to $750,000 based on comparable leasehold transactions.
Contrarily, the City and Denton presented evidence from other appraisers asserting that the billboard's value should not be included in the property valuation, as it was a trade fixture contributing to Clear Channel’s business rather than the land's value. Appraiser Dwain Stoops advocated for a bonus-value method, which assesses the lessee's interest by comparing the contract and market rent, capitalizing any savings realized from below-market rent over the lease term.
Stoops' calculations indicated that Clear Channel's leasehold interest would not require an increase in the original appraisers’ award. The court, after reviewing expert testimonies, concluded that the key issue was the nature of the interests to be valued, affirming that the billboard was personal property and a removable trade fixture, thus not warranting compensation. The court excluded Clear Channel's expert testimony, as their valuations were based on elements deemed noncompensable. Clear Channel's motion for reconsideration was denied. Following discovery, the City and Denton sought summary judgment, asserting that Clear Channel failed to provide admissible evidence on the property's overall value. Clear Channel contended it deserved a jury trial to present its leasehold's contribution to the total tract's value. The district court ruled for the City and Denton, concluding that the original appraisers’ award of $1,075,600 represented just compensation for the entire property taking, leading to the current appeal. The legal framework for eminent domain in Kansas, as established by the EDPA and aligned with the Fifth Amendment, mandates just compensation based on fair market value, which is defined as the amount a well-informed buyer would pay and a seller would accept in an open market. The fair market value assessment should consider the property's most advantageous use, and the law recognizes compensable interests beyond ownership, including leaseholds.
In Kansas, tenants under a lease are considered "owners" for the purpose of condemnation statutes and are entitled to compensation if their leasehold estate is damaged by eminent domain. When there is a total taking of leased premises, the lessee's right to compensation vests at the time of taking unless specified otherwise in the lease. In cases of property ownership by multiple entities, including fee ownership and leasehold interests, the Eminent Domain Procedure Act (EDPA) outlines a two-stage compensation process: valuation and apportionment.
During the valuation stage, court-appointed appraisers assess the total value of the property taken, disregarding individual ownership interests. After determining the total value, the apportionment stage follows, where the court divides the award between the lessor and lessee based on their respective interests. The condemner's obligation ends with the payment of the total award into court and has no role in the apportionment.
In the current appeal, the focus is on whether the district court correctly assessed the appraisers’ award for the entire tract taken, rather than on compensation owed to specific parties. The court ruled that the billboard structure was noncompensable and excluded evidence related to it and its income. Clear Channel contested this ruling, arguing that the sign structure should be considered a leasehold improvement and that its value was relevant to the overall property value due to lost rental income and its enhancement of the property’s value. Ultimately, the district court's rulings were affirmed.
An appellate court's role is to assess whether a trial court's factual findings are backed by substantial competent evidence and whether those findings justify the court's legal conclusions. The review of legal conclusions by appellate courts is unrestricted. This standard applies equally in eminent domain appeals, which are treated as new civil actions as per K.S.A. 2011 Supp. 26-508(a). For summary judgment, it is necessary that no genuine material fact issues exist, and the moving party is entitled to judgment as a matter of law. The trial court must interpret facts in favor of the opposing party, who must present evidence to demonstrate a factual dispute. If reasonable minds could differ based on the evidence, summary judgment should be denied.
In this case, the district court's partial summary judgment allowed the City to exclude Clear Channel’s appraisal experts, ruling that their testimony regarding the billboard structure and advertising income was not compensable in the eminent domain context. An order in limine serves to ensure a fair trial by excluding inadmissible or prejudicial evidence and is granted if the evidence would not be admissible at trial and its introduction would likely prejudice the jury. The appellate court must apply the appropriate standard for reviewing evidence admission or exclusion in eminent domain cases, where any competent evidence related to market value is generally admissible. The trial court holds significant discretion in determining the admissibility of value evidence and allowing collateral facts to support value estimates.
The district court's discretion in admitting or excluding evidence in eminent domain proceedings stems from judicial interpretation rather than explicit statutory guidelines in the EDPA. Appellate courts evaluate a district court's evidentiary rulings in eminent domain cases similarly to other appeals. K.S.A. 60-402 establishes that evidentiary rules apply to all court proceedings, and the trial court has broad discretion regarding evidence admissibility, focusing on relevance as the primary criterion. Relevant evidence is defined as having any tendency to prove a material fact, with the general rule being that all relevant evidence is admissible, including competent evidence regarding market value in eminent domain cases.
While evidentiary rulings are typically reviewed for abuse of discretion, the appellate court may also consider them as matters of law, particularly when assessing the legal basis for the district court's decisions, which is reviewed de novo. The law favors evidence admission, but compensable rights in eminent domain are determined by courts; evidence based on noncompensable items may be stricken.
In this case, the district court determined that a billboard was classified as personal property and not compensable under eminent domain. Clear Channel contests this classification, asserting that billboards should be treated as fixtures enhancing real property value, and thus included in property appraisals. Personal property is only compensable if it is affixed to real estate in a manner that qualifies it as an improvement. The court has previously indicated that personal property affixed to real estate is considered part of the real estate for valuation purposes.
Improvements referred to as "fixtures" are distinguished from "trade fixtures" to avoid confusion. Kansas courts assess whether personal property is a permanent improvement to real estate based on three criteria: (1) the degree of permanency of attachment to the realty, (2) the adaptation of the property for the realty's purpose, and (3) the owner's intention to make it a permanent addition. Generally, items affixed to real property are considered part of it, but trade fixtures allow a tenant to retain ownership and remove them upon lease termination. Clear Channel asserts that during condemnation valuation, the distinction between lessor and lessee ownership of affixed property is irrelevant. However, this distinction is crucial during the apportionment phase. The value of property to be taken cannot be assessed without determining ownership of the billboard. In this case, the billboard was affixed with a concrete foundation for 20 years, and both parties anticipated a long-term lease for commercial use. Clear Channel's understanding that the billboard was to remain its personal property, with the right to remove it after the lease, is undisputed and significant. Personal property is not subject to condemnation, as noted in relevant case law.
Clear Channel's real estate manager indicated that the company planned to reuse the billboard's removable tri-vision panels, despite some structural components being destroyed upon removal. If the City accepted Clear Channel's position, it would effectively be forced to condemn any potential ownership rights Clear Channel had in the billboard, even without intending to exercise eminent domain. Such a requirement contradicts the principle that a condemning authority can only take what is necessary for its public purpose, as the City did not need the billboard for street improvements. The district court rightly determined that the sign structure was personal property or a trade fixture, supported by case law indicating that billboards owned by lessees are not considered real estate. Clear Channel acknowledged this classification, paying personal property taxes and retaining the right to remove the billboard after the lease expired.
Clear Channel also contested the district court's exclusion of advertising income evidence from the eminent domain proceedings, arguing it was relevant for valuing its interest. The district court ruled the income irrelevant, aligning with its classification of the billboard as noncompensable personal property. Clear Channel maintained that the income was tied to the billboard's location rather than the structure itself, while the City argued that such income constituted business profit, which is not factored into eminent domain compensation. Kansas law stipulates just compensation based on the fair market value of condemned property interests, defined as the amount a well-informed buyer would pay and a seller would accept in a competitive market, which includes industry valuation standards.
The EDPA was amended in 1999 to equalize the three main methods of valuing real estate: (1) the cost approach, which calculates reproduction costs minus depreciation; (2) the market data approach, based on recent sales of comparable properties; and (3) the income approach, which capitalizes net income from the property. The income approach is particularly relevant for properties that generate income. Prior to the amendment, there was a preference for the market data approach, but the 1999 changes allowed for all three methods, including the income approach, even when comparable sales are available.
In Kansas, profits from a business conducted on a property are generally not compensable in condemnation actions, as they depend on various factors unrelated to the property's inherent value. However, an exception exists for rental income derived from the property itself, which can be considered in valuation. Courts differentiate between business income and rental income, noting that the latter is more likely to persist after a property sale. Expert testimony is often required to separate rental income from business profits, with experts expected to account for uncertainties and contingencies in their assessments.
The Michigan Court of Appeals established that rental income can be admissible as evidence of a property's value in eminent domain cases. It highlighted that buyers and sellers of income-producing real estate must consider the property's income-generating potential. The distinction between rental income and business profits is significant, as rental income is deemed intrinsically linked to the land, while business profits are not. For instance, rental income from leases is admissible, but profits from retail operations are not. The crux of the issue is whether the income from a billboard is classified as rental income or business profits. Courts have previously acknowledged that income must be generated primarily by the realty itself rather than the business operations on it. Additionally, any admissible income must be based on concrete figures and not speculative estimates, as mere gross income statements are too uncertain for valuation purposes.
The tire income approach is considered the most effective method for determining property value when income is known and comparable sales are unavailable. In this case, the annual rent of $13,860 paid to Denton is essential for valuation. However, the advertising income from Clear Channel’s billboard is deemed irrelevant for condemnation valuation, as it does not derive directly from the land. Clear Channel's profitability is influenced by various business factors beyond location, such as pricing strategies, maintenance of the billboard, client management, and operational efficiency. The location may contribute to business success, but it alone does not generate income. Citing previous cases, the document asserts that profits do not adequately reflect property value, emphasizing that an undercapitalized billboard owner might fail even in prime locations. While acknowledging opposing views from other jurisdictions that consider advertising income relevant in specific contexts, the excerpt maintains that intrinsic property value should not hinge solely on business profits.
Rental income can be a valid consideration in property valuation, particularly for unique billboard locations where relocation is not feasible. Case law, including *City of Scottsdale v. Eller Outdoor Advertising*, *Lamar Advantage Holding Co. Inc. v. Arkansas State Highway Commission*, and *DURA v. Berglund-Cherne*, supports the notion that the uniqueness of a billboard's location justifies using rental income for valuation purposes. However, compensation for lost business profits in condemnation actions is generally not permitted for billboard businesses, as it would create an unfair advantage compared to other businesses. Moreover, it distorts the income method of real estate appraisal by shifting focus from land-generated rents to profits derived from business operations. This principle is reinforced by cases such as *City of Newport Mun. H. Com’n v. Turner Advertising* and *State, Mo. Hwy. Transp. Com’n v. Quiko*, which affirm that the taking of a billboard does not equate to the appropriation of a business.
The district court ruled correctly in deeming Clear Channel's advertising income irrelevant for just compensation purposes. The unit rule mandates that valuation evidence pertains to the property as a whole rather than individual components, aiming to reflect the total market value an informed buyer would pay. The court found that Clear Channel did not present material evidence challenging the appraisers' award. While Clear Channel claimed it should introduce evidence regarding its leasehold's impact on the overall property value, the court clarified that under the unit rule, income-capitalization valuation could allow expert testimony focused on specific income-generating aspects of the land without necessarily considering the entire property’s fair market value.
The court affirmed the district court's decisions regarding the valuation of property in an eminent domain proceeding. The unit rule for valuation was upheld, as the ultimate compensation was not itemized. Evidence related to the sign structure was excluded, deemed personal property and a noncompensable trade fixture, rather than a compensable improvement. Additionally, evidence of advertising income from the billboard was excluded, as it constituted business profits instead of rental income related to the property. Clear Channel failed to provide admissible evidence regarding the leasehold or overall property value, justifying the grant of summary judgment. The district court's rulings on the City’s motions for partial summary judgment and in limine were upheld as correct.
