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Shore Haven Apartments No. 6, Inc. v. Commissioner of Finance
Citations: 93 A.D.2d 233; 461 N.Y.S.2d 885; 1983 N.Y. App. Div. LEXIS 17108
Court: Appellate Division of the Supreme Court of the State of New York; April 17, 1983; New York; State Appellate Court
In these consolidated tax certiorari proceedings for the tax years 1977-1978, petitioners challenge the property assessments of three income-producing apartment buildings in Brooklyn. The referee used a capitalization of income approach, with a significant dispute centering on the selected capitalization rate. Although the chosen rate falls within the range of expert testimony, the court concludes it is too low. Both parties' experts calculated net income by summing up income and expenses over the three years, dividing the result by three, and applying their respective capitalization rates. Petitioners' expert, John Worster, proposed a capitalization rate of 12.34%, which included a 10.1% return rate attributed to higher risks associated with real estate management. He referenced comparable investment yields, showing industry averages ranging from 6.78% to 11.75%. In contrast, the city's expert, Stanley Siebert, used a lower 9.5% capitalization rate without addressing depreciation in his report. The referee initially adopted a 10.5% capitalization rate but later claimed it included a 2% depreciation allowance after the case was remanded for further findings. He adjusted the fiscal year income figures to align with the taxable status date, arriving at assessments of $1,115,500 for Shore Haven Apt. No. 6, $2,072,000 for Ocean Terrace, and $2,550,000 for Southampton Apartments. The net incomes calculated were $214,719, $378,818, and $473,127, respectively. While the court agrees with the referee's net income calculations and the reasonable adjustments made to align income periods with the taxable status date, the critical issue of the appropriateness of the capitalization rate remains unresolved. The capitalization rate is the expected return for an investor purchasing property and significantly influences the conversion of net income to capital value. Determining the appropriate capitalization rate is a factual issue that should rely on evidence rather than subjective court judgment. Findings must align with expert testimony and be well-supported. In the case at hand, the referee's conclusions favored the city's appraiser, who inadequately addressed depreciation and the rationale for the selected capitalization rate. An expert's opinion lacking factual support is deemed to have minimal probative value. Conversely, the petitioner's expert's appraisal, which is detailed and analytically sound, is given substantial weight. A capitalization rate of 11.5%, derived from a return of 9.25% plus 2.25% for depreciation, is adopted over the referee's 10.5%. This rate corresponds with previous findings for similar properties. The modified judgments reflect adjusted values for multiple properties, indicating total values for Shore Haven Apt. No. 6 at $1,060,300, Ocean Terrace at $1,870,700, and Southampton Apartments at $2,336,400. The judgments are affirmed, with the noted adjustments, without additional costs.