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N.J. Eminent Domain: Determining Fair Market Value


The Constitutions of both the United States and New Jersey provide that private property shall not “be taken for public use, without just compensation.”

In its recent decision in Saddle River v. 66 East Allendale LLC, the N.J. Supreme Court issued an opinion that will have a significant impact on the way in which courts determine just compensation in this state.

When the state or one of its municipalities takes private property, New Jersey’s law of eminent domain requires that just compensation, or the fair market value of the property as of the date of taking, be paid to the property owner. Fair market value under New Jersey law is determined by the price to which a willing and knowledgeable buyer and willing and knowledgeable seller would agree, neither being under any compulsion to act. When considering the question of fair market value, the property’s “highest and best use” or the use that produces the highest value—provided it can be legally and physically achieved—is taken into account. Under certain circumstances, the highest and best use asserted by a landowner may be premised on a prospective zoning change, but only if there is a reasonable probability that such zoning change could be achieved.

In State v. Caoili, 135 N.J. 252 (1994), the state condemned an acre of land adjacent to a highway in order to construct a jug-handle turn. At the time of taking, the property was zoned for residential use and improved with two single-family homes, however, the trial court considered whether an eventual zoning change that would permit commercial use for the property should be taken into account in valuing the property as of the time of the taking. While such a change had not occurred, the court considered whether a willing buyer and willing seller, neither under any compulsion to act, would factor into their consideration as to the value of the property, a possible zoning change. The court distinguished “probable” and “remotely possible” zoning changes and warned that while both arguably could affect the price to which a hypothetical buyer and seller would agree, allowing consideration of remotely or merely possible zoning changes to inform valuation in condemnation would lead to “unbridled speculation.” The court thus limited consideration of future zoning changes affecting the value of condemned land to only those changes that are shown to be “reasonably probable.”

The Caoili court imposed a two-step process governing the consideration of evidence of prospective zoning changes affecting the value of property for condemnation purposes. Under such a process, the court first considers the admissibility of evidence supporting the probability of a zoning change, and once such evidence is deemed admissible, it then permits the jury to substantively weigh such evidence. Thus, the trial court must make a threshold determination that the record contains adequate evidence to establish the reasonable probability of a zoning change to warrant consideration by the jury. Only when the court makes a preliminary determination that a zoning change is reasonably probable, outside the presence of the jury, either by way of a motion in limine or prior to trial in an N.J.R.E. 104 hearing, may the jury then consider the impact of such a change on the value of the property. Trial judges are thus charged with first screening evidence concerning potential uses to decide whether the landowner has produced credible evidence that a potential use is reasonably probable and, therefore, may be presented to the jury.

The Caoili court held that the risk that speculative evidence would reach the jury could be diminished by “screening out” unreliable evidence and admitting only evidence warranting a finding that the zoning change is reasonably probable. Moreover, such a determination of reasonable probability must be made expressly, in advance of trial and in the absence of the jury. Only when the court has discharged its threshold gatekeeping duty and determined that the possible imminent zoning change presented by the property owner could be achieved with reasonable probability, can the court then permit the jury to hear and weigh such evidence.

At trial in Caoili, the state moved to exclude the owners’ expert appraisal report. The state contended that such evidence was insufficient to support a conclusion that a reasonable probability existed that the property would receive a zoning variance for commercial development. The trial court denied the state’s motion finding that “there are sufficient facts and circumstances spread upon the record which would justify the prospective purchaser as of the date of taking in concluding there may be a zoning change.”

Notwithstanding the court’s instruction that the admission of inadequate evidence of a prospective zoning change could lead to unreliable speculation as to the value of condemned property, the N.J. Supreme Court nevertheless deemed that the trial court’s admission of such evidence, without an express finding of sufficiency, was harmless. The N.J. Supreme Court found that implicit in the trial court’s ruling as to the admission of the evidence was a finding that achieving the zoning variance was reasonably probable. Under the circumstances, the trial court’s failure to make such express findings, however, was not reversible error given, as the N.J. Supreme Court held, “the admissibility ruling would have been the same if the court had consciously attempted to conform and express its finding on admissibility under the correct standard.”

In Saddle River, the property owner proffered two expert planning reports and a site plan in support of an application for a 10,000-square-foot bank building on a 2.13-acre lot that it valued at $5.25 million. In sharp contrast, the borough proffered a bank site plan that required fewer variances, measured 3,312 sq. ft. and was valued at $1,325,000. The property owner’s bank site plan had been withdrawn in 2004 in response to board criticism and public opposition. Even though the property owner’s bank site plan exceeded the lot coverage limitation by 40 percent, required myriad other variances and had been rebuffed by the borough zoning board, the property owner’s experts nevertheless opined at trial that obtaining the necessary variances was reasonably probable.

In response to the property owner’s plan, the borough moved, in limine, seeking to strike the property owner’s expert planning reports and bar corresponding testimony concerning the likelihood of the grant of a bulk variance or, in the alternative, for a plenary pretrial hearing pursuant to N.J.R.E. 104 to determine the admissibility of such evidence. The borough contended that the property owner’s planning reports should be stricken because the opinions were mere net opinion that could not support a finding by the trial court that the critical lot coverage bulk variance was reasonably probable. The trial court denied the borough’s motion citing N.J.R.E. 611 and holding that, in the interest of efficiency, the court need not vet the issue of the admissibility of such evidence outside the presence of the jury, but rather could satisfy its gatekeeping function during the course of the trial.

The trial court in Saddle River further ruled that it had the option to conduct the first step of the Caoili two-step process, over the course of the trial, as well as in the presence of the jury. The trial judge ruled that because the N.J. Supreme Court in Caoili had deemed the trial court’s admission of such evidence without an express finding of reasonable probability to be harmless error, that the court in Saddle River could admit such evidence as long as the court remained vigilant as to whether such an “evidential” proffer satisfied the Caoili requisites during the course of the trial. The trial court further held that it could voir dire witnesses in front of the jury, conduct N.J.R.E. 104 hearings either in or out of the presence of the jury, and/or instruct the jury to disregard testimony that failed to satisfy the standard set forth in Caoili, if and when necessary, when performing the court’s gatekeeping function. Accordingly, the trial court held that a plenary hearing prior to trial would not be essential to the discharge of its gatekeeping function.

Through its decision, the N.J. Supreme Court in Saddle River sought to resolve the apparent confusion with regard to how and when a trial court properly exercises its gatekeeping function. Rather than make a determination of reasonable probability prior to the jury’s deliberation, the court held that the determination must be made out of the presence of the jury and before the jury ever hears such evidence. In that way, the jury will be precluded from any exposure to “unsound and speculative determinations concerning fair market value.” Under the decision, a court’s pretrial consideration must weigh the quality of such evidence to determine that an adequate record exists upon which the jury could find, as a matter of law, that a premium for the reasonable probability of a zoning change is warranted. Moreover, in Saddle River the N.J. Supreme Court held that courts must apply the corresponding standard of review for the particular zoning change that the property owner asserts, and explicitly render determinations of reasonable probability under such a standard permitting appellate review of such a determination.

While the decision in Saddle River may present a steeper hurdle to condemnees by effectively requiring them to present their development applications to the court at the outset of trial, the decision’s clear directives will improve certainty in the process. Parties will now know prior to trial whether a development plan is viable, and juries will have more concrete guidance from courts. Indeed, rather than thrust juries into the role of hypothetical planning or zoning boards armed only with confusing jury instructions, the process will now require juries to weigh one appraisal report if no zoning change is deemed reasonably probable. If the court preliminarily deems that a zoning change is reasonably probable, under clear guidance from the decision in Saddle River, juries will be presented with “before and after” appraisal reports and will be charged with weighing the premium the hypothetical development would add to the value of the property. Under this process, the courts rather than juries will be tasked with deciding the threshold question of reasonable probability as a matter of law.

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