Mayor of Baltimore v. Smulyan

Wilner, J., delivered the opinion of the Court. This is a condemnation case. It involves property in downtown Baltimore that is now part of the front lawn of the new Federal Courthouse, and, until Baltimore City condemned it in December, 1972, belonged to Harold Smulyan. The real issue in the case, of course, is how much Mr. Smulyan should be paid for his property: what was its fair market value on December 4, 1972?

The City’s appraisers testified that the fair market value on that date was between $400,000 and $420,000 — one said $400,000, the other said $420,000. Mr. Smulyan’s experts, not unexpectedly, thought the property was worth considerably more — one said $745,880, the other said $840,000. The jury topped them all; it set the value at $895,104 and returned a verdict upon inquisition in that amount. The City, appealing, claims that this grievous error occurred because the jury was permitted to hear evidence of what it termed a “re-use” appraisal made by one of the City’s experts — Leslie Wilson — that was irrelevant and prejudicial, and that the trial court erred both in allowing such evidence to be admitted and in failing to instruct the jury to disregard it.

The City frames the questions presented in its appeal in very broad terms — much broader than is necessary. What is really before us are these three questions, all of which are very closely interrelated: (1) Did the court err in admitting testimony and exhibits relating to a 1971 appraisal made by one of its expert witnesses — Leslie Wilson? ²⁰⁴ (2) Did the court err in its instructions to the jury with respect to that appraisal? (3) Was the evidence sufficient to support the jury’s verdict? The context in which these questions — particularly the first two — arose was a dispute between the City and Smulyan over what the “highest and best use” of the property was as of the date it was taken.

At that time, the property was being used as a parking lot. It was part of a square block consisting mostly of old multi-story loft buildings used for light manufacturing or wholesale trade enterprises. The City’s position, espoused through its expert, Mr. Wilson, was that the highest and best use of the property was its then current actual use — a parking lot. Smulyan, on the other hand, considered the City’s position to be somewhat myopic, and therefore unrealistic.

Through his appraisers, he looked around to the extensive redevelopment effort that had been going on in downtown Baltimore for some two decades, adjudged that his property and the block of which it was a part was next in line for major renewal and redevelopment, and thus believed that the highest and best use for the property was a high-rise office building. This dispute over “highest and best use”, so pivotal to the respective values placed upon the property, constituted the setting from which the legal issues arose. To comprehend that setting however, one must know as well some of the geography of downtown Baltimore, the nature and history of urban redevelopment in that part of the City, and how that redevelopment came to affect this property. We have attached as an appendix to this Opinion a copy of a map of downtown Baltimore that was admitted as an exhibit in the case, and have delineated and marked on it the relevant boundaries and landmarks.

It will serve as a convenient reference document for the descriptions that follow. There were three major urban renewal projects that had some bearing on the Smulyan property. These were: (1) Charles Center, involving a 33-acre tract bounded by Saratoga Street on the north, Charles Street on the east, ²⁰⁵ Lombard Street on the south, and Liberty Street and Hopkins Place on the west. This project — the earliest of the three — was planned in the 1950’s and built in the 1960’s and 1970’s, beginning at the northern end and moving south.

On the southernmost border — the north side of Lombard Street — is the new Federal Office Building (labeled by us “FOB” on the Appendix) and Charles Center South, a high-rise office building at the northwest corner of Charles and Lombard Streets. By the time of the taking here, most of Charles Center, including the Federal Office Building, had been completed. According to Martin Millspaugh, a witness for the City who was deeply involved in the planning and coordination of much of the overall redevelopment, Charles Center was intended “to lead the way ... and to stimulate additional development of the same kind in the downtown area”, and it clearly had that effect. Paralleling the development of Charles Center itself, there was extensive private redevelopment on its eastern fringe, resulting in the construction of at least five additional high-rise buildings just outside the perimeter of Charles Center. 1 (2) Inner Harbor One.

While Charles Center was yet in its infancy, a second, even more ambitious, project was on the drawing board — redevelopment of the City’s inner harbor area. This is a much larger area lying to the south and southeast of Charles Center, and plans for it were broken into two projects — Inner Harbor One and Inner Harbor West. The planning for Inner Harbor One started in earnest in the early and mid-1960’s. This project encompassed the land area east of Charles Street, south of Lombard Street, and north of Key Highway, thus enclosing the inner harbor basin located to the southeast of Charles Center.

By 1972, according to Mr. Millspaugh, most of the redevelopment sites in this area had been sold to developers, and demolition of existing structures on those sites was about 75% complete. One large ²⁰⁶ new structure — the U.S.F. & G. Building — had been “topped off”, and plans were under way for the new IBM Building. (3) Inner Harbor West — the second phase of the overall inner harbor redevelopment — was officially authorized in March, 1971. It encompassed the area directly west of Inner Harbor One and directly south of Charles Center, being bounded on the north by Lombard Street, on the east by Charles Street, on the south by Hughes Street, and on the west by Sharp Street and Hopkins Place.

The Smulyan property lay within the Inner Harbor West area. It was part of a square block (which we shall call the “Courthouse block”) bounded by Lombard Street on the north, Hanover Street on the east, Pratt Street on the south, and Sharp Street on the west. The Smulyan property itself consisted of three contiguous lots known as 106-114 South Hanover Street. It fronted for 126 feet on the west side of Hanover Street, commencing about 60 feet south of Lombard Street, and extended westerly for a depth of 148 feet to an alley known as Sutton Street.

Altogether the property comprised 18,648 square feet. Most of the evidence pertaining to the overall redevelopment effort in downtown Baltimore came from Mr. Millspaugh, the City’s lead-off witness. The essence of it, as indicated above, was that, by 1972, extensive redevelopment — both in terms of official urban renewal projects as well as private activity on the fringes of these projects — had either been completed or was well under way to the north and the east of the Smulyan property, some of it coming within a block or two. 2 In the course of his testimony, Mr. Millspaugh identified and discussed a number of urban renewal plans — official, semi-official, and non-official — that had been proposed over the years for Baltimore’s central business district, and that ²⁰⁷ encompassed as well the Smulyan property and the area immediately surrounding it. 3 Each of these plans or proposals projected or recommended that the “Courthouse block” in general, or the Smulyan property in particular, would or should be developed for high-rise office use. Mr. Millspaugh concluded this part of his testimony by acknowledging that he knew of no proposal made by any public or private consultant during the preceding one or two decade period “that recommended anything other than high-rise development” for that block.

As noted, the Smulyan property lay within the bounds of the Inner Harbor West development project, and the City’s plans did not call for a Federal Courthouse there. In April, 1969, however, the City learned that a Congressional Committee had authorized construction of a new Federal courthouse in the City, and that the General Services Administration (GSA) would soon begin searching for a suitable site. Working with some City officials, a GSA evaluation team examined 22 potential sites, and ultimately picked the “Courthouse block.” On November 16, 1970, the Mayor concurred in that choice, and advised GSA that “we stand ready to assist you in any way we can (including the use of our local condemnation powers, if necessary) in acquiring the recommended site.” GSA, initially, showed no interest in having the City involved in the acquisition, but rather proceeded on its own. As soon as the necessary appropriation was forthcoming from Congress, GSA began contacting the various property owners in the block.

On January 8, 1971 Smulyan received a letter from GSA advising him that “a portion” of the ²⁰⁸ “Courthouse block” had been selected as the site for a new Federal courthouse, subject to satisfactory subsoil tests. The owner was asked to sign a “Right of Entry” form giving GSA permission to enter the property for purposes of “subsoil tests, appraisal and survey”, and was advised that “[w]e would expect the appraisal to be completed within approximately 60 days, after which time you will be contacted by a representative of this office in order to discuss the purchase of your property.” Notwithstanding that, at the time, the City had no condemnation authority over this area — the ordinance granting such authority (No. 1007) not being enacted until March 15, 1971 — the City nevertheless attempted to persuade GSA to permit the City to acquire the property on its behalf rather than for GSA to make the acquisition directly. 4 The City’s first two proposals in this regard were rejected by GSA, but on May 10, 1971, the City put forth a third proposal — to acquire the entire block and sell GSA what it needed for the courthouse at “fair market value.” In connection with this proposal, Millspaugh authorized the employment of Leslie S. Wilson, Jr., and Charles F. Seymour, both M.A.I. appraisers, to prepare a report on the “fair value” of Development Area 4-A (see Footnote 4). Mr. Wilson’s understanding was that the appraisal report was to be made “under development allowed by the Baltimore City Zoning Ordinance and Building Codes without any renewal or development Standards and Controls.” (Emphasis supplied.) He said, in his letter accepting the employment, “We are sure you must realize the great latitude this allows relative to highest and best use. This necessitates our analyzing the complete downtown Baltimore Market in order to arrive at a conclusion ²⁰⁹ regarding highest and best use.

It will then be necessary for us to determine in our opinion the intensity of this probable development as indicated by the market. From this we will be able to estimate the value of the subject site based upon the usual appraisal processes including comparable sales and an income check.” (Emphasis supplied.) On June 22, 1971, Wilson and Seymour delivered their “preliminary estimate” to the City. Reciting again that the value is to reflect “an open market sale of this site” with development restricted only by building and zoning codes, they concluded that the “highest and best private use” of this site would be for the construction of “speculative office space, automobile garage parking and related facilities”, that in view of the size of the property (102,250 square feet) development would “have to be staged”, and that “a reasonable price for the sale of this property at this time would be not less than $3,100,000 nor more than $3,275,000.” On July 1, 1971, the City sent a proposed “Letter of Understanding” to GSA. This letter called for the City to acquire Area 4-A, clear it, and then to convey the property to the Government “at its fair market value which is estimated to be no less than $3,100,000 and no more than $3,275,000.” (Emphasis supplied.) The letter made clear that the actual “fair market value”, and thus the ultimate price, “will be based on an independent appraisal prepared by a member or members of the Appraisal Institute” subject to the approval of GSA and the City.

This proposal was initially rejected by GSA, but the snag that apparently led to that rejection was soon resolved. On August 11,1971, Millspaugh authorized Wilson and Seymour to “proceed with the preparation of your final report on the fair value of Development Area -4a ...” and, on August 16, the City renewed its offer to acquire Area 4-A and sell it to the Government “for an estimated $3.1 million”, noting again that this was a preliminary estimate of “fair market value” and that the “final determination of value” would be incorporated in the appraisal report of the “team of ²¹⁰ independent real estate appraisers” that had made the preliminary estimate. On August 27, 1971, the final appraisal — the document that generated the issues raised in this appeal — was delivered. It valued the land in Area 4-A, for its highest and best use as of August 24, 1971, at $3,238,000, or $31.65 per square foot.

Wilson and Seymour stated that the “highest and best use” for Area 4-A was office building construction which, because Baltimore had not been plagued with “overbuilding” like some other cities, was a use that “is reasonable and can be achieved.” However, because of the large size of the total area, they believed that the market would not be able to absorb the immediate full development of the entire 102,250 square feet; so they divided the area into three equal-sized parcels — A, B, and C — each containing 34,083 square feet, and valued each parcel separately. The purpose of the appraisal, they said, was to estimate “the fair value” of Area 4-A, “as if cleared of buildings and available for use under certain conditions and assumptions as of the current date.” The term “fair value”, as used in the report, was defined as “the price which a well informed buyer acting intelligently, voluntarily and without necessity would be warranted in paying and a well informed seller acting intelligently, voluntarily and without necessity would be warranted in accepting for the property.” Also in explanation of the “purpose” of the appraisal, they noted: “The only restrictions regarding the use of Area No. 4-A are those imposed by Zoning Ordinance and Building Codes of Baltimore City. [5] We have been advised that this is the only lot within the Inner Harbor West Project which will not be limited by redevelopment Standards and Controls. All lots in Charles Center were subject to Urban Renewal type restrictions as will those contained in the Inner Harbor I Project.” ²¹¹ As stated in their letter accepting the employment, Wilson and Seymour used both a “comparable sale” and a “land residual or income check” approach in determining the fair value. They rejected sales within the confines of Charles Center or Inner Harbor One because of the urban renewal restrictions on those sites, which made the land sale prices too low to be comparable. 6 Instead, they considered six other sales, all for private high-rise development, which they deemed “significant”.

Wilson and Seymour made no attempt in the appraisal report to locate the boundaries of their hypothetical Parcels A, B, and C within the perimeter of Area 4-A, although in his deposition, which he affirmed from the witness stand, Wilson described Parcel A as beginning at the corner of Lombard and Hanover, and extending 211 feet on Hanover Street and 161 feet on Lombard Street. It thus included the Smulyan property, which comprised about 55% of the total area of Parcel A. The highest and best use of Parcel A, the appraisers said, “[a]s of the effective date of this appraisal”, was as “the site for the construction of a multi-tenant high-rise office building comprising a net rentable area of 350,000 square feet and an above ground automobile parking garage to accommodate 150 automobiles.” Parcel B was considered for the “same development” as Parcel A, but five years hence. Parcel C, they said, would be developed in 10 years in a similar way but with a smaller structure — 150,000 square feet of office space and parking for 75 cars. During the interim, Parcels B and C could be used for parking lots.

Because the development of these parcels had to be “staged”, each was given a different value. Parcel A was valued at $1,622,250, which worked out to $48/square foot. Parcel B was valued at $1,007,255, which worked out to $29.55/square foot, and Parcel C was valued at $269,850, or ²¹² $7.92/square foot. Additional values of $129,208 and $209,440 were added to Parcels B and C, respectively, to take account of interim uses pending development; and that brought the grand total to $3,238,000, or $31.65 per square foot.

Copies of this appraisal report were sent to GSA on October 8, 1971. 7 GSA responded that it needed additional data with respect to total acquisition costs of the “Courthouse block”, which the City asked Wilson to provide. On December 13, 1971, Wilson responded with his estimate that the cost to GSA, if it decided to assemble the block itself, would be $3,793,410, of which $3,169,675 would be for “Site Acquisition”, $248,735 for site clearance, $350,000 for relocation expenses, and $25,000 for appraisal and title reports. On top of this, Wilson added 5% for “probable jury awards over appraised values” and court costs, making a gross estimated cost of $3,983,080. Even this gross figure did not include, he said, additional costs sure to be added if GSA, which either did not have or would not exercise “quick take” powers, had to wait any appreciable time to complete the acquisition.

The site acquisition cost, Wilson noted, was based upon an appraisal he had made of the block in February, 1970, at which time he estimated the acquisition cost to be $2,881,525. To this, he added an inflation factor of 10%, or $288,150, to make the $3,169,175. Following this, by letter of January 24, 1972, the City formally offered to sell Area 4-A to GSA for the appraised value of $3,238,000. GSA thus had before it the City’s firm offer to sell the land, cleared for construction, for $3,238,000 and Wilson’s estimate that if GSA proceeded on its own to acquire the properties, the cost would likely be at least $760,000 more.

A month later, GSA accepted the City’s offer. This was the background of the City’s condemnation of Mr. Smulyan’s property in December, 1972. By the time of trial, ²¹³ the whole of Area 4-A had, of course, been sold to the Government at the agreed price of $3,238,000. 8 The chief appraisal witness for the City in the condemnation case was the same Leslie Wilson. He stated that he was commissioned by the City to appraise the Smulyan property in January, 1970.

At that time, the property consisted of a parking lot and was surrounded by older four and five story buildings. The appraisal that he made in 1970, he said, was based upon a comparison with “other lands in the neighborhood that had sold” and a capitalization of his estimate of “the rental I thought the property should receive from a parking structure.” In 1972, he brought the 1970 appraisal “up to date”. In both instances, Wilson said, the highest and best use for the property was for a parking lot. In making this determination, he said that he ignored completely anything pertaining to the Inner Harbor West project, and looked only at the uses to which the property, and the property immediately surrounding it, were then put.

To ascertain value, Wilson said that he examined “as many properties that had sold in the, I say reasonable past, in the vicinity of the subject property.” He considered the location and characteristics of these other properties in relation to the Smulyan property “in order to arrive at the answer, of what I felt the answer would be for the value of the subject property based on these other sales that took place.” Mr. Wilson thereupon listed seven sales which he deemed to be comparable, and which he considered in estimating the fair market value of the Smulyan property in 1970 and 1972. None of the six “significant” sales referred to in the 1971 appraisal was considered as “comparable” for purposes of the 1970/72 appraisal, and only one of the seven sales that were considered involved land purchased for high-rise development. The rest were either much smaller lots than Smulyan’s or were lots located several blocks to the west, in the retail shopping district where there was little or no high-rise office development. ²¹⁴ Based upon the seven “comparable” sales, and allowing for inflation since they occurred, Wilson estimated the value of the Smulyan property as $21/square foot, or $391,508, which he rounded off to $400,000. Having concluded, for purposes of this appraisal, that the highest and best use of the property was as a parking lot, Wilson’s “income approach” to valuation was to estimate “the rental I thought the property should receive from a parking structure.” He figured that the lot should produce a return of $1.80/square foot, or $33,566 annually.

Deducting 5% for vacancies, the net return, he said, would be $31,800 which, capitalized at 8%, produced a value of $398,600. Again, he rounded this off to $400,000 which was his final estimate of value. The City noted its first objection to evidence pertaining to the 1971 appraisal during the testimony of Mr. Millspaugh. It then asked for a “blanket” objection to “any mention” of what it termed “the re-use appraisal” on the basis that Millspaugh was not an appraiser (and thus presumably incompetent to testify as to the appraisal) and because “it’s improper to be using this particular re-use appraisal in a case on acquisition.” At that point, Smulyan proffered to the court that the 1971 appraisal was admissible both for purposes of cross-examining Mr. Wilson when he testified, in that it contained statements and conclusions inconsistent with what his trial testimony would be, and also as substantive evidence upon the theory that the City had “adopted” the appraisal in its dealings with GSA, thus making it an “admission” by the City as to value.

After some discussion, the court, in effect, sustained the City’s objection to the point of not allowing