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Harvey Cedars Decision Impacts Real Estate Valuation
January 15, 2014

In a case decided this summer the Supreme Court changed the way in which real property is valued when part of a property is taken for a public purpose.

In a case decided this summer the Supreme Court changed the way in which real property is valued when part of a property is taken for a public purpose.   The Court held, in Borough of Harvey Cedars v. Karan, 214 N.J. 384 (2013), that the protection provided by a dune project should be considered to determine the compensation paid to a property owner whose land is taken to construct the dune.  The Court abandoned the general benefit/special benefit analysis and held that the consideration of the property’s fair market value will include non-speculative benefits from the project being undertaken regardless of whether other property owners benefit from the project.

Harvey and Phyllis Karan own oceanfront property in the Borough of Harvey Cedars (the “Borough”).  The Karans’ property consists of a three story single family home with panoramic ocean views.  The federal, state and local governments initiated a beach and storm protection project on Long Beach Island that included the construction of dunes that are higher and wider than the existing dunes.  The existing dune was 16 feet high, allowing the Karans to see the beach and the ocean from their upper floors.  The new dune is 22 feet and blocks the Karans’ view of the beach and ocean.

The Borough sought easements from the oceanfront property owners to allow construction of the dunes. The Karans refused to convey an easement over part of their property that was necessary for the dune project. The Borough used eminent domain to acquire an easement over the Karans’ property, and the matter proceeded to court to establish the compensation due to the Karans for the taking.

The taking of part of a property will diminish the value of the balance of the property.  The Constitution requires compensation for the loss of value.  The Karans also sought compensation for the loss of the beach and ocean views.  Additionally, prior to the trial, the Karans sought to prevent the Borough from presenting evidence that the property received a benefit from the construction of the dune – protection against a storm – that would offset, to some extent, the loss in value due to the taking.  The Karans argued that the storm protection provided by the dune was a general benefit shared by all property owners on the island.  The trial court agreed and specifically prohibited the jury from considering the storm protection benefits the property received from the construction of the dune when determining the compensation due to the Karans.  The jury awarded the Karans $350,000 for the partial taking.  The Borough appealed.  The Appellate Division upheld the trial Court.  The Supreme Court disagreed.

The Supreme Court identified two types of benefits resulting from a public project, general benefits and special benefits.  General benefits are enjoyed by the subject property, and the public at large.  Traditionally in New Jersey, general benefits are not used to offset the compensation paid to the property owner for taking part of the property.  Special benefits are the benefits to a property that are different from those of any other property owner and increase the value of the property taken.  Special benefits have been considered when setting the compensation for a partial taking.  Courts have differed over whether the degree of benefit can result in a special benefit.  The Court recognized that the distinction between general and special benefits is frequently difficult to make and can obscure the basic principles of just compensation.

The Court held that the value considerations in a partial-takings case should be no different than those in a complete takings case; what would a willing buyer and seller consider in reaching an agreement as to the price?  In making that determination, the jury should be able to consider quantifiable, non-speculative, benefits to the remainder parcel.  The Court stated that “benefits that both a willing buyer and willing seller would agree enhance the value of the property should be considered.”

As to the Karans, the Court held that the evidence presented by the Borough showed that although the benefits provided by the dunes extended to property owners further from the shoreline, the property most vulnerable to dramatic ocean surges and larger storms, would receive a greater benefit from the population at large.  The Borough showed that the likelihood of damage to the Karans’ property from a storm within the next 30 years was fairly high, but that with the new dunes the property would likely be spared damage for the next 200 years.  The Court stated that a willing buyer would consider the proximity to the ocean and the view in determining the value, but would also likely consider the additional protection from total or partial destruction provided by the dunes.  Such protection is one part of the equation that should be considered by a jury to determine the just compensation.

The Court reversed the lower court and remanded.  The calculation of just compensation will be based on fair market value prior to the taking and immediately thereafter, taking into account both the damage done to the property because of the taking and the benefit provided by the dune project.

The Harvey Cedars decision was put into effect recently by the Appellate Division in Petrozzi v. Ocean City, Docket No. A-1633-11T4, decided October 28, 2013 (approved for publication).  In Petrozzi several beachfront property owners had claimed that Ocean City’s failure to maintain dunes at a height of three feet was a breach of contract which caused the value of their property to be diminished by the loss of view.  The trial court had denied the claims of property owners who granted easements to the City prior to a CAFRA rule amendment and permitted the claims of those who granted easements after the CAFRA amendment.  For the claims the trial court allowed, it had reviewed the damage claims and made an award.  The Appellate Division found that the pre-CAFRA amendment claims were valid and remanded for a trial on damages.  For the post-CAFRA amendment claims, the Appellate Division remanded for review of the damages awarded.  Although not a condemnation case, in each instance, the Appellate Division stated that the trial court must consider the plaintiffs’ loss, offset by the potential gains conferred by the dune project, citing to Harvey Cedars.

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