Goldstein, Rikon, Rikon & Levi, P.C.


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Fact Versus Theory

While the theory of valuation in condemnation and tax certiorari proceedings relates to what is fair and reasonable and what is the market, with no single transaction bespeaking the market, the fact of the matter is that an actual transaction relating to the subject property and otherwise unexplained is evidence of the first rank as to what that transaction stands for. As the cases make clear, the fact of a transaction does not make it conclusive, but shifts the burden of proof to the side contending differently. We see it applied in situation after situation.

Thus, it has been held that the cost of construction of a building “well suited to its site is some evidence of value, at least as to the tax years after construction ” (Joseph E. Seagram & Sons, Ltd. v. Tax Commission, 14 N.Y.2d 314, 251 N.Y.S.2d 460 (1964); Dune Alpin Farm Corp. v. Assessor of Town of East Hampton, 25 A.D.2d 672, 509 N.Y.S.2d 861 (2d Dept., 1987) and cased cited therein. So, also, the recent cost of an alteration is deemed strong evidence of added value for a changed use (In re Madison Houses, 17 A.D.2d 317, 234 N.Y.S.2d 799 (1st Dept., 1962); In re P.S. 79, Manhattan, 19 A.D.2d 239, 241 N.Y.S.2d 575 (1st Dept., 1963). Costs expended for a variety of planning and carrying costs in a building in the course of development is strong evidence of the value added to the land (In re P.S. No. 223, City of N.Y. (Nelkin), 71 A.D.2d 1021, 420 N.Y.S.2d 501, afff’d. 51 N.Y.2d 921, 434 N.Y.S.2d 981 (1980). In the same vein, actual recent leases of the subject premises are strong evidence of rental value (Matter of the City of N.Y. Clinton Urban Renewal (Franklin Record center, Inc.), 59 N.Y. 2d 57, 463 N.Y.S.2d 168 (1983); Rosbroc Associates v. Assesssor, et. al. of the City of New Rochelle N.Y.L.J., 11/3/76, Sup. Ct. Westch. Co., Slifkin J; Hicks Realty Assoc. v. State of N.Y., 34 A.D.2d 866, 310 N.Y.S.2d 825 (2d Dept. 1970), A history of no vacancies in the property is sufficient to disallow a vacancy allowance in the capitalization process (City of Niagara Falls v. Zak, 40 A.D.2d 755, 337 N.Y.S.2d 548 (4th Dept., 1972); Wolnstein v. State of N.Y. 33 A.D.2d 990, 307 N.Y.S.2d 402 (4th Dept., 1970); actual gallonage sold in a gas station is strong evidence on which to compute its rental value (Kozecke v. State of N.Y., 34 A.D.2d 599, 308 N.Y.S.2d 488 (1970); the existing use is presumed as its highest and best use (Rochester Urban Renewal Agency v. Lee, 83 A.D.2d 770, 443 N.Y.S.2d 479 (4th Dept., 1981); Matter of the City of N.Y. (Broadway Carey Corp.), 34 N.Y.2d 535, 536, 354 N.Y.S.2d 100, 101 (1974); the work done towards creating a use is strong evidence of that which is to be created is its highest and best use (Matter of the City of New York (Jomar Real Estate Corp.), 61 N.Y.2d 843, 473 N.Y.S.2d 963 (1984).

Then we come to the proposition, applied in varying forms, that evidence of an arms length sale “if unexplained, was evidence of the highest rank to determine the true value of the property at that time “Matter of Woolworth Co. v. Tax Commission of the City of New York, 20 N.Y.2d 561, 565. In 309 Veeder Avenue Inc. v. State of N.Y., 26 A.D.2d 749, 272 N.Y.S.2d 177 (3rd Dept., 1966) the court held as to a valuation fixed on the capitalization of income method it was error to rely solely upon that method, in that consideration should have been given to the price paid for the property three years before. In Matter of the City of New York (Nassau Expressway-Peter Grimm et. al., 98 A.D.2d 166, 421 N.Y.S.2d 105 (2d Dept., 1983) the court averaged the prices paid in assembling a large site over a number of years to find a value, in disregard of adjacent recent sales. In Matter of the City of New York (Atlantic Improvement Corp.), 28 N.Y.2d 465, 372 N.Y.S.2d 708 the court reversed the lower court’s award when measuring it against the price paid for the property rejecting the proferred comparable sales as being too dissimilar. In Matter of City of N.Y., (N. Central Brooklyn H.S. (Chestnut Properties Co.), 39 A.D.2d 73, 332 N.Y.S.2d 19, aff’d. 34 N.Y.2d 800, 359 N.Y.S.2d 40 (1974) the court used as the test of value the most recent sale to the owner plus the monies spent by the owner in development enhancement in preparing it for its contemplated use. In Amsterdam Urban Renewal Agency v. Barnett, 63 A.D.2d 755, 404 N.Y.S.2d 892 (3rd Dept., 1978) where the property was purchased for $25,000.00 and in a commissioner trial an award was made of $86,000.00, the award was reversed solely on the basis that the disparity between the two “shocked the conscience of the court.” In Hardele Realty Corp. v. State of N.Y., 125 A.D.2d 543, 509 N.Y.S.2d 621 (3rd Dept., 1986) the court increased a $45,000.00 award to $60,000.00 where the property had been purchased in two parts, six and eight years before, for $110,000.00, with evidence of deterioration of the property, since the trial court did not give sufficient weight to the purchase price. There are many other variations on the theme.

We understand where the courts are coming from on this subject but, at least as to rental value and fair market value, it causes us an intellectual problem. We know that it is the norm that if one takes a look at more than the single transaction we will get a range of prices and rentals. Why, because it is the subject property, should a single transaction assume a preeminent and thus exaggerated position as against a demonstrated market, particularly, when we know that not all buyers and sellers and lessors and lessees are equal, whether in knowledge or bargaining position? Different people hold different views as to the value of property. They make different offers and accept different prices. The reason to look at a broader segment of the market than a single transaction is to minimize the impact of those factors.

We are drawn, in this context, to the statement of Judge Steuer in his decision in re Lincoln Square Slum Clearance Project, 15 A.D.2d 153 222 N.Y.S.2d 786, 794 (1st Dept., 1961), aff’d. 16 N.Y.2d 497, 260 N.Y.S.2d 439 (1965):

“Reliance is put upon sales of comparable property or even the same property. These sales, though genuine, are by themselves far from conclusive as guides to value. In fact, in several instances where properties were shown to be comparable, the sales of these properties realized different amounts and the average used varied widely from the consideration of each individual sale. In any event, sales are made in accord with the theoretical standard of a willing buyer and a willing seller. Buyers are naturally prone to seeking bargains – opportunities to buy at a price that would give an unusually high return – and sellers to await the purchaser whom necessity compels to acquire property at somewhat more than it would otherwise realize. The concept of a fluid market, such as that existing in regard to corporate securities where one sale can indicate the value at the time, is just not true with respect to real estate.

“As regards the sale of the instant property, differences in time must first be considered. If the sale is the purchase by the present owners and is very close in time to the taking in condemnation, a total disregard of the sale as evidenced by a gross difference between the estimate and the sale price may well lead to the conclusion of a dishonest estimate of value (Matter of City of N.Y. (Valley Stream, etc.), 15 App. Div. 422, 137 N.Y.S. 329). And utter disregard of such a sale is error (Matter of City of N.Y. (Marshall) 8 A.D.2d 365, 187 N.Y.S.2d 606). But a failure to make such a sale the absolute standard of value is not the equivalent of disregard.”

To which we add that the usual nature of the proof regarding comparable sales make them virtually useless as criterion of value in income producing property in any event. The reason is that what is being sold is almost always different than what is being valued in a condemnation proceeding. The sale of an income producing property is not the sale of an entire fee but only of the fee owner’s interest subject to other outstanding interests in the property including that of any lessee. A condemnation proceeding values all of the interests in the property, including that of the tenant(s) and leaves it to the parties to apportion those interests between them. Thus, the reason for the condemnation clause. To the degree that the tenant has a lease at less than market rent, with a period of time yet to go on the lease, the tenant owns a valuable interest in the property, his leasehold. The sale of the property is exclusive of that interest, it remaining with the tenant. However, the value paid in condemnation must include the interest in the property of the tenants. Thus, for a sale to have any relevancy, the facts of that leasing must be known, including any difference between the rent reserved in the lease versus rental value as well as the length of the remaining term. The greater the number of tenants, the less likely that sale has any relevance. These raise subsidiary issues requiring virtually separate trials as to each comparable sale, beyond the capabilities of proof in a condemnation or tax certiorari trial. In such a milieu, the relevance of such sales is questionable.

In a similar vein to Judge Steuer’s statement is the statement of Judge Benza in Goldmark 35 Associates v. State of N.Y. (Claim No. 78376, Court of Claims, decision dated July 6, 1992); “While actual rent may be the best indicator of value, it is merely a factor to be considered in determining income value, and another figure may be adopted if the actual rent is shown to be too low (Mostiff v. State of N.Y., 32 A.D.2d 729, aff’d. 26 N.Y.2d 692; Kommit v. State of N.Y., 50 A.D.2d 945, Matter of the City of New York (First Elephant Estates – La Hermosa Church), 17 A.D.2d 317”.

Since value is fixed as of a date certain, title vesting date, and leases are rarely made on that date, merely to state the rental in effect equates to fair rental value ignores not only the realities of the market place as to the bargaining position and knowledgeability of the parties but the differences in the market between when the lease was negotiated and the valuation date. In multi tenanted buildings, we find many leases at different rentals per square foot.even when made at the same time. Why then should the lease of a single tenanted building be accorded any stronger position. The description by Judge Steuer as how to sales come about equally applies to leases.

But despite the theory, when a court wants an easy handle, it reverts to the recent sale or lease of the subject property as prime evidence of value, putting the burden on he who would oppose it to explain it away. While it is easier, the better considered opinions do not give such a conclusive effect to these sales and leases.

Reprinted with permission from the October 22, 1992 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.