This paper presents a novel observer design method that combines the Linear Quadratic (LQ) and ultra-local model-based approaches. Firstly, the LQ observer design is performed, which uses the nominal model of the system. Then, the ultra-local model-based solution is introduced. The results of the LQ observer are augmented with the ultra-local model, which aims to increase the accuracy of the estimation process even for systems with high nonlinearities. During the implementation process, in the nominal observer, the parameter uncertainties are not taken into account. These effects are also considered with the application of the ultra-local model. The design process is carried out for an automated vehicle-related observation problem, the lateral velocity estimation. Finally, the whole observer algorithm is implemented in high-fidelity vehicle dynamics simulation software to show its effectiveness.