On July 8, the New Jersey Supreme Court weighed into the controversy raging between municipalities and beachfront property owners regarding the methodology for valuing property required for dune construction. Borough of Harvey Cedars v. Karan, 425 N.J. Super. 155 (App. Div. 2012), rev’d and rem’d, ___ N.J. ___ (2013). The dispute took on additional significance due to Superstorm Sandy, which confirmed that areas protected by dunes, both oceanfront and inland properties, fared much better than unprotected areas.

The court reversed a $375,000 condemnation award, clarified the rules for determining just compensation in partial taking cases, and remanded the case for a new trial. While local and other officials considered the decision to be very good news, the extent to which the newly defined procedure will affect future condemnation awards remains to be seen.

The Setting

The Karan property was no ordinary lot. Rather, it consisted of a highly prized oceanfront property in the Borough of Harvey Cedars on Long Beach Island (LBI). The dwelling’s design took maximum advantage of its location by including a glass wall facing the ocean and oceanfront decks that provided uninterrupted beach, shoreline and ocean views. It is beyond question that the private market places a significant premium on those attributes. As real estate professionals are apt to say: a major factor in determining value is “location, location, location.”

The borough condemned an easement along the oceanfront third of the Karan property for the construction of a 22-foot high dune, as part of the Army Corps of Engineers’ LBI project. As a result, the homeowners’ magnificent views were replaced with a wall of sand.

Karan did not challenge the borough’s authority to condemn the easement. The parties also did not dispute that the property’s “before” value was $1.9 million. What they sharply disagreed with was the amount of “just compensation” due for the taking. U.S. Const. Amend. V; N.J. Const. Art. I, ¶ 20; N.J. Const. Art. IV, § 6, ¶ 3. The borough’s expert, who had never gone into the Karans’ home to observe the conditions, testified that the loss of view was de minimus and worth only $300, while the Karans’ expert testified that the diminution in value was $500,000. The jury visited the property, observed the impact on the view and returned a verdict of $375,000.

General/Special Dichotomy

Prior to trial, Karan challenged the borough’s position that the property realized a special benefit from the dune construction. The trial court ruled that this was a legal issue and held a Rule 104 hearing to determine whether the borough’s evidence established a special or general benefit. General benefits were “those which affect the whole community or neighborhood,” while special benefits were “those which directly increase the value of the particular tract.” Sullivan v. North Hudson Railroad Co., 51 N.J.L. 518, 540 (E. & A. 1889).

At the hearing, the borough’s engineering expert testified that the dune substantially increased the expected period of storm damage protection for the Karan property, and that properties close to the beach received greater benefits than inland properties. But, on cross-examination, he conceded that the project included LBI’s entire oceanfront; that the dune constituted public property, protected the beach, provided public access, and its height was designed to maximize economic benefit to all of LBI’s communities; and that protection was provided to both beachfront and inland homes. On that basis, the trial judge concluded that the benefits to the Karans’ property did not qualify as special benefits or present a jury question.

The Appellate Division affirmed, noting that a project’s general benefit, which a condemnee enjoyed in common with other property owners, could not be considered to affect a compensation award. It also observed that a special benefit was one particular to the condemnee’s property and not the type of benefit that was the project’s object.

The appeals court concluded that the dune’s protection was a classic example of a general benefit. Although the Karan property might benefit to a somewhat greater degree than its inland neighbors, that did not constitute a special benefit for valuation purposes. The Appellate Division also commented on a practical just-compensation issue that will have to be addressed on remand and in future cases: “[the condemnor] did not present any expert testimony that a prospective buyer would be willing to pay the same price for a house with a largely-obstructed view of the ocean as for a house with a magnificent panoramic view, because the former house was safer from storm damage.”

The Court’s View

On May 13, the court heard oral argument. While it is always difficult to predict outcomes based on the colloquy, several of the justices appeared to be clearly unimpressed with the currency of the general/special benefits rule that had its origin in the nineteenth century. Thus, the court’s decision was not surprising.

The court found that the formula utilized below had essentially outlived its usefulness:

Today, the terms special and general benefits do more to obscure than illuminate the basic principles governing the computation of just compensation in eminent domain cases. The problem with the term “general benefits” is that it may mean different things to different courts …. We find that the Appellate Division’s use of the general-benefits doctrine in this case is at odds with contemporary principles of just-compensation jurisprudence …. The historical reasons that gave rise to the development of the doctrine of general and special benefits no longer have resonance today.

The problem with the lower courts’ reliance on the special/general benefits rule was that it permitted the jury to hear only one side of the just-compensation story. In valuing the property, the jury was not permitted to consider the borough’s testimony that the dune would reduce the likelihood that the Karans’ home would suffer storm damages or destruction.

In place of the former rule, the court instructed that in a partial taking case the jury should be allowed to assess both sides — the factors that decrease, as well as those that increase, the value of the remainder. But it cautioned that consideration should not be given to speculative or conjectural benefits. The court concluded that:

[W]hen a public project requires the partial taking of property, “just compensation” to the owner must be based on a consideration of all relevant, reasonably calculable, and non-conjectural factors that either decrease or increase the value of the remaining property. In a partial-takings case, homeowners are entitled to the fair market value of their loss, not to a windfall, not to a pay out that disregards the home’s enhanced value resulting from a public project. To calculate that loss, we must look to the difference between the fair market value of the property before the partial taking and after the taking. … Compensation in a partial-takings case must be “just” to both the landowner and the public. (Emphasis added.)

Reactions

Predictably, affected public officials were very pleased with the decision, which they claimed would markedly reduce compensation to be paid to reluctant homeowners. According to Harvey Cedars Mayor Jonathan Oldham: “Maybe now people will sign their easements, because if towns go into eminent domain proceedings, they’re not going to get that big payout.” TheSandpaper.net, July 8, 2013.

Those views were echoed by Gov. Chris Christie, who had made a point of “calling out” those unwilling to surrender their property rights without compensation. Christie, addressing the so-called “holdouts,” asserted: “If you were hoping to get some six-figure payment for the loss of your view, I think the Supreme Court put a stake in that today.” nj.com, July 9, 2013.

Anthony F. Della Pelle, of McKirdy & Riskin in Morristown, a prominent property rights attorney, had a more measured view of Karan’s impact. He noted that “the ‘benefits’ provided by a particular project are ordinarily speculative and notcapable of reasonable calculation. Without quantifiable market support, the holding in Karan would not appear to endorse admission of such evidence.”

While Karan may have rejected the use of the historic formula in partial taking cases, it did not and could not deprive condemnees of just compensation: the “[v]alue of entire parcel before taking — value of remainder area after taking.” With respect to dunes, it will simply not be enough for condemning authorities to claim, without admissible market data, that the beachfront owners realized a quantifiable benefit that reduces the condemnation award. Condemnors may find this more easily said than done. While it is abundantly clear that the private market places a premium on open views of the beach and surf, it is far from certain how it values, if at all, the additional protection afforded by dune construction that obstructs those attributes.•

Next Week…

Municipal Law