APPEAL from the Circuit Court of Cook County; the Hon. ARTHUR
L. DUNNE, Judge, presiding.
MR. JUSTICE WILSON DELIVERED THE OPINION OF THE COURT:
This appeal arises from a declaratory judgment action brought by a lessor against its lessee to construe portions of a lease; particularly, the amount of rent to be paid under the lease's renewal clause. The lessee appeals from the trial court's determination that the leased property's value is $1,875,000, contending that this amount is against the manifest weight of the evidence. The lessor cross-appeals from the trial court's finding that it is liable for the real estate taxes on the property. We affirm. The pertinent facts follow.
On February 1, 1957, Manor Real Estate Company leased 18 acres of land to Overseas Shipping, Incorporated. The land is located on the Calumet River at Lake Calumet, north of 130th Street at Stony Island Avenue in Chicago. The land has a deep sea dock that can accommodate ocean-going ships and is accessible via the Calumet Expressway. The initial duration of the lease was 20 years, but a renewal clause enables the lessee to extend the lease for up to four periods of five years each.
In 1975, Manor sold 38 acres of land, which included the 18-acre parcel of the leased property, to Scrap Corporation of America for $1,000,000. Scrap conveyed this property to a trust at Chicago City Bank (plaintiff). Scrap acts as the bank's agent in matters pertaining to the lease and for convenience is referred to as "lessor." Defendant Ceres Terminals, Inc., succeeded to Oversea's interest in the lease through a merger and is referred to as "lessee."
Lessee exercised its renewal option for the period of February 1, 1977, to January 31, 1982. The lease provides that rent for the renewal period is to be determined in the following manner:
"If the Lessor and the Lessee are unable to agree upon the rental for any extended five (5) year period, the value of the premises hereby leased shall be appraised and valued in the following manner:
By one appraiser selected by the Lessor and one appraiser selected by the Lessee, and in the event that the two appraisers do not agree on a valuation of the demised premises, then, and in that event, the said two (2) appraisers shall select a third appraiser or arbitrator, or if they cannot agree upon a third appraiser or arbitrator, then, and in that event, either the Lessor or the Lessee may apply, upon due notice to the other party, to the Circuit Court of Cook County, Illinois for the appointment of such third appraiser, and the valuation agreed upon by either two of three said appraisers shall be considered the valuation of the demised premises and the amount of the rental to be paid by the Lessee for the extended term shall be based on a five (5%) percent net return on such valuation."
Both parties selected appraisers. Lessor employed Jules H. Marling, Jr., who concluded that the value of the full 38 acres was $3,371,000 and the value of the 18-acre leased portion was $2,750,000. Lessee's appraiser, James J. Schroeder, valued the 18-acre leasehold at $925,000. The two appraisers met to discuss their opinions but failed to agree on the value of the property. In accordance with the lease provision, they agreed on a list of possible third appraisers. However, they could not agree as to the procedure that the third appraiser should follow and consequently lessor filed for a declaratory judgment.
The trial court appointed a third appraiser, Theodore R. Kowalski, who assessed the property's value as $1,900,000. The court directed all three appraisers to seek an agreement as to the property's value, and provided that if they could not agree the court would determine the value. Both lessee and lessor agreed to this procedure.
When the three appraisers met, Kowalski suggested a range of $1,600,000 to $1,700,000. However, Marling refused to agree to any amount less than $2,100,000 and Schroeder would not go above $1,280,000. Because of the appraisers' failure to agree, the trial judge set the case for a hearing.
At the hearing, lessee submitted a memorandum which summarized the three appraisals as follows:
MARLING SCHROEDER KOWALSKI
Land Value $ 941,000 $ 690,000 $ 916,000 ($1.20/sq.ft.) ($.80-.90/sq.ft.) ($1.25/sq.ft.)
Other Improvements Dock $ 990,000 Included in $ 640,000 Land Value ____________ ____________ ___________ Sub-Total $1,931,000 $ 690,000 $1,556,000
The common objective of the three appraisers was to determine the leased property's fair market value. All three considered this question from the cost approach, the income approach, and the market data approach. Under the cost approach the estimated depreciated replacement cost of improvements is added to an estimate of the land's value. The income approach involves analysis of the property in terms of its ability to generate a net annual income in dollars, which is then capitalized. Under the market data approach, the particular property is compared with other similar properties which have been sold or are listed for sale. This market data approach was used by all three appraisers to determine the land value component of the total property value.
Although the three appraisers used similar approaches, their estimates of the total land value varied substantially, as the above summary memorandum reflects. It is lessee's ultimate contention on appeal that the trial court adopted an appraisal that did not actually reflect the property's fair market value. To better analyze the ...