Severance Damages: Projected versus Actual
By: J. David Ostlund and Robert J. Strachota
with: Bradley J. Gunn, guest contributor
One of the most difficult assignments an appraiser can undertake is to value the damage to a property owner in relation to a partial taking of the property. This generally occurs when the government exercises its right to acquire property through eminent domain. The expansion of roadways accounts for the majority of partial takings. In partial takings, as in cases when the entire property is condemned, the condemning authority owes the property owner the fair market value of the property taken. In addition, the owner is to receive the value of any damage to the remaining property, commonly called severance.
The difficulty in determining the appropriate amount of compensation for the severance damage due to the property owner is two-fold. First, it is very difficult to envision all the factors that will impact the property in the "after" condition. Second, and even more difficult, is that once the factors which will affect the remaining property in the after condition are identified, finding evidence and support in the market place in order to justify the damages calculated can be very difficult.
The scope of this article is not a general analysis of partial takings, rather it is a specific case study of the former Win Stephens Buick property in St. Louis Park, MN. In 1989, the Minnesota Department of Transportation (Mn/DOT), condemned part of the Win Stephens property for use in expanding Highway 100 as part of the Interstate 394 expansion project. Shenehon Company was retained, on behalf of Win Stephens, for the purpose of preparing a before and after appraisal of the property as well as an estimate of damages. The following article will track this property from the time of the taking to the present and will examine how this taking has affected the property over the last 15 years.
W.R. Stephens, Sr. founded the W.R. Stephens Company in 1930 after working in automotive sales and management for 28 years. The original W.R. Stephens Company sold Buick automobiles to a five-state area from its downtown Minneapolis location off Hennepin Avenue and Harmon Place. In 1958, W.R. Stephens became Chairman of the Board and Win Stephens, Jr. became the new president. In 1963, after 33 years in its downtown location, W.R. Stephens Company began operating in St. Louis Park, on the property that is the subject of this article. From 1963 until the time of the taking, Win Stephens Buick was a successful automobile dealership at the subject location. Several departments operated at this location including: sales and leasing of new and used automobiles; the service and repair of primarily Buick model automobile drive trains, bodies, and frames; and the sale of primarily Buick wholesale and retail automobile parts.
Before the taking, Win Stephens Buick operated at near capacity for its location while keeping the quality of service very high. Using the CSI (Customer Satisfaction Index), the primary measure of quality among GM dealers, Win Stephens Buick often scored higher than 90%. In the Twin Cities, at that time, the average among the 440 GM dealerships was 87%-88%. After the taking, the dealership saw sales volume drop and in 1993 the dealership was sold.
The Taking: August 23, 1989
The property is located on the south- west quadrant of the Highway 100/ Interstate 394 interchange and the taking was a result of the 394 Corridor expansion project. In this case, the condemnation proceeding included three primary types of taking. The first taking was a permanent fee simple acquisition of 6,098 square feet. The second taking was a temporary construction easement of 503 square feet extending along the eastern border of the subject site from August 23, 1989 through December 31, 1993. The final taking included the loss of visibility of the main building from Highway 100 South, the resulting lack of organized layout of the subject site for automobile sales and more difficult access due to the loss of the pre-existing direct turnoff for traffic from Highway 100 southbound.
Before the taking, the property was 309,122 square feet in size. After the taking, Win Stephens Buick was left with 303,024 square feet subject to a 6,534 square foot temporary easement. Although only a small percentage of the land was taken, there were more severe consequences to the property than just a loss of land. The three primary effects that provided the basis for damages were: loss of visibility of the main building, loss of a functional layout and design, and loss of reasonably convenient access.
Effects of the Taking: Loss of Visibility
Prior to the expansion of the highway, the subject property had many locational characteristics sought after by car dealerships, such as high traffic counts and excellent visibility. The elevation of the subject was approximately 10 feet below that of Highway 100, with clear sight lines from the high- way. As part of the expansion project, Highway 100 was elevated roughly five feet and a retaining wall was constructed. This 10 to 12 foot wall was constructed a mere 25 feet from the main showroom building. Because of increased road elevation and the construction of a retaining wall, the main showroom lost nearly all of its visibility from Highway 100. Car dealerships rely on high visibility from busy roads; this taking severely affected the use of this site as a successful car dealership.
Effects of the Taking: Loss of a Functional Layout and Design
Additionally, the taking created a loss of functional layout for Win Stephens Buick. Functional layout and design refer to the effectiveness with which the buildings and various improvements are arranged on a given site. This is essential for commercial developments such as restaurants, retail stores, automobile dealerships, and the like, because potential customers must be able to quickly identify what product the commercial real estate is selling. When there is ambiguity about the function of a given site, the typical customer tends to drive by. Successful businesses rely on the use of distinctive advertising clues to clearly communicate their products.
With regard to automobile dealerships, functional layout and design include the placement of a showroom in front of the improvements, facing the main roadway with an unobstructed view; available land facing the roadway to display new and used cars; good/fair access to the site; and a gen- erally logical layout so that customers can quickly determine where to enter the site and where to go for sales and/ or service.
Before the Mn/DOT taking, Win Stephens Buick's functional layout and design were very successful. The main building showroom faced Highway 100 South with unobstructed visibility from the passing traffic. The site had land available for display of both new and used cars. It had good/fair access and a generally logical layout for customers. After the Mn/DOT taking, Win Stephens Buick suffered a loss of visibility of the main building showroom great enough to create an unacceptable level of ambiguity with regard to the subject site's business. A front showroom is one trait common to all automobile dealerships. An automobile dealership that, in effect, has no visible front showroom building cannot be identified readily by potential customers as an automobile dealership. The presence of many cars provided some clue as to the use of the property as did the smaller used car building. At the time, however, potential customers may have interpreted these clues as indicative of a parking facility or, perhaps, a used car (lower quality) dealership.
Effects of the Taking: Loss of Reasonably Convenient Access
Another problem created by the expansion of the roadway was that it became difficult to access this site from the highway. Prior to the taking, traffic traveling south on Highway 100 had excellent access to Win Stephens Buick simply by turning right onto 24th Street West, which bisected the subject property. Northbound traffic could enter the site by taking the frontage road exit at 26th Street, continuing north, crossing under Highway 100, and looping south to the 24th Street West entrance. Before the taking, access was excellent for southbound traffic and fair for northbound traffic.
Access to the site after the taking was more limited. Southbound traffic exited Highway 100 considerably south of the subject site onto Minnetonka Boulevard to northbound Highway 100 to the east frontage road, and then north to the subject. The other option for southbound traffic was to access the collector distributor before Interstate 394. Northbound traffic exited Highway 100 just north of Parkwood Road and proceeded north under High- way 100 and south to the subject. It was our conclusion that access was inconvenient, primarily due to the loss of the direct turn off of Highway 100 onto 24th Street West for southbound traffic. This made the site much less appealing to the walk-in customer and turned the dealership into more of a destination site for people who had already decided that they wanted to buy from this car dealer. In Shenehon Company's 1991 appraisal, using August 23, 1989 as the date of value, we concluded a before the taking value of $3,400,000. After considering the damages listed above, we concluded an after the taking value of $1,700,000.
| |
| Before Value | $3,400,000 |
| After Value | $1,700,000 |
| Difference | $1,700,000 |
| Plus Temporary Easement Damages | $ 11,600 |
| Damages Resulting From Taking | $1,711,600 |
The State's appraisal valued the subject before the taking at $3,000,000 and at $2,800,000 after the taking, claiming effective damage to the property of $200,000. Many of the damages identified in Shenehon's appraisal were unusual for takings of this type and were not commonly compensable (or generally accepted by the state) in cases of eminent domain at the time of our report. The significant disparity in damage estimates between the two appraisals stems, in large part, from the uniqueness of this taking. At the end of the trial, the Minnesota Department of Transportation compensated Win Stephens $644,000 plus interest for a total amount of $730,000.
Even though the settlement fell between the damage estimates of the two sides, and it may have seemed reasonable at the time, there has been compelling market evidence since then to suggest that the actual damages were far greater than the State anticipated.
November 16, 1993 (Date of Sale)
The first indication that Win Stephens Buick was damaged in excess of the compensation awarded was when another Twin Cities car dealer purchased the property for $1,500,000 in late 1993. This amount was $200,000 lower than the Shenehon 1989 after- the-taking value estimate of $1,700,000. All of the major automobile dealers in the area (the potential market for this property), had a chance to bid for the purchase of the Win Stephens property. This was an open market transaction, and it was considered an "arm's-length" transaction by most real estate experts.
2000-Present
Over the last several years, this site has undergone some dramatic changes because the property has functioned poorly since the new owners purchased it in 1993. Many of these modifications are being done in an effort to, once again, make the site functional as an automobile dealership. The original main showroom building of nearly 54,000 square feet was demolished to make way for a new one. The new structure houses the showroom as well as the parts and repair facilities. It is slightly smaller, at approximately 51,000 square feet, and is comprised of two stories. With the construction of a second story showroom, the site has regained some of the visibility that was lost in the taking. Another remedy to the visibility problem is a new sign, higher in elevation than the retaining walls along Highway 100, identifying the business.
The replacement building is now set back even further from the retaining wall on Highway 100 than the former Win Stephens showroom was. The increased visibility of the building, its new layout, and its smaller size help to partially restore functional layout and design to the site.
All of the customer and employee parking areas have been moved to the far west end of the site where there is little visibility. An employee parking ramp was constructed in the southwest corner of the property which has added parking density to the site, and ensures that the front lots are available for car display purposes. The current owners maximize the visibility of the new automobiles by designating the east side of the site for display parking.
Shenehon's damage estimate, as of August of 1989, was $1,711,600. Our conclusion was based on the amount of money that would have to be spent in order for the site to function as successfully as an auto mobile dealership after the taking as it did prior to the taking. Adjusted at 4% annually for inflation, the amount necessary to ameliorate these damages, in the year 2003, would be $2,963,937. In order to estimate what the new owners of the property have spent to restore the site, we used cost estimates from building permits filed with the city of St. Louis Park.
Shenehon determined, from these estimates, that the current owners have spent in excess of $4,000,000 in demolition, re-construction, and functional corrections to the site. It is evident from current pictures of the site that many of these changes were done in an effort to restore the visibility and functional layout as much as possible. The retaining wall along Highway 100 still blocks sight lines to some of the inventory display parking areas, and the accessibility issues that arose after the taking still exist.
Given that not all of the damages have been corrected and that the amount spent thus far has exceeded Shenehon Company's original damage estimates, it is clear that the damages to this site exceeded what anyone anticipated at the time of the taking. Furthermore, it shows that partial takings are very difficult to measure, depending on the property in question. It is important for a property owner, whose land is the subject of a taking, to be cognizant that there are many ways in which a property can be damaged. The owner should be justly compensated for all the damages that arise in the marketplace.
Back To Top
