Habern Realty Co. v. Tax Commission

Citations: 102 A.D.2d 302; 478 N.Y.S.2d 868; 1984 N.Y. App. Div. LEXIS 18342

Court: Appellate Division of the Supreme Court of the State of New York; June 19, 1984; New York; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

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In the consolidated tax certiorari proceedings regarding the assessment of the petitioner’s real property at 855 Sixth Avenue, Manhattan, for tax years 1973/74 through 1981/82, the petitioner appeals a final judgment from the Supreme Court, New York County, confirming the total assessments as of June 28, 1982. The property is situated in a mixed commercial area with an irregular configuration and comprises a six-story office and store building constructed in 1949, alongside a public parking lot. 

Both the city’s and petitioner’s appraisers agreed that income capitalization was the most suitable method for evaluating the property’s value, despite significant differences in their total appraised values, primarily due to varied capitalization rates and disagreements on expenses and rentals. Each expert apportioned the total property value between land and building using sales data from the vicinity, but they employed different methodologies, leading to contrasting land value assessments.

The Special Term confirmed the city’s expert’s land values, deeming them correct, and rejected the petitioner’s expert’s conclusions due to perceived incompatibility with the land values, without identifying errors in the income capitalization analysis. The court expresses disagreement with the Special Term's conclusion, arguing that even if the city’s land value were more substantiated, it should not have been determinative given the perceived inadequacy of the method used to establish total value.

Secondary valuation methods may assist courts in resolving disputes arising from conflicting expert testimonies, even if they are less reliable. When the valuation from a secondary method significantly differs from that determined by a preferred method, it warrants careful examination of the expert's data and methodology. This scenario is distinct from cases where a comparable sale, such as a bona fide transaction involving the same property, is presented, which should be given significant consideration, albeit not as conclusive evidence of value. The valuation must consider various factors, including the timing and conditions of the sale.

In the case discussed, both experts agreed that without a truly comparable sale, the income capitalization method was superior, using the comparable sales method solely to allocate assessed values to land. However, the assessment of land value is often approximate and not precise. Therefore, it was erroneous for the Special Term to assign decisive importance to the land value derived from an unreliable procedure. The petitioner’s expert's land value assessment aligns more convincingly with the record, while the respondent’s expert failed to substantiate his land value calculations, lacking explanations for his processes and adjustments, particularly regarding location and comparables. This inconsistency undermines the credibility of the respondent's valuation approach.

The city’s expert failed to apply necessary adjustments to property sales used for evaluating the subject property, violating established appraisal principles as outlined in Latham Holding Co. v State of New York. He assigned a value of $50 per square foot to the 30th Street portion of the property based on four sales from side streets, three of which were valued below $50 per square foot. The expert did not clarify how he adjusted these values or why he disregarded location-based adjustments, despite both experts acknowledging that land values decreased south of 30th Street and increased northward. The sole comparable sale on 30th Street yielded a value of $34.21 per square foot, yet no rationale was provided for how this sale was weighted in the valuation process.

Additionally, the expert's use of Sixth Avenue sales was flawed, as he failed to adjust for the superior locations of two properties significantly north of the subject property. Discrepancies between the two Sixth Avenue sales, which had per square foot values of $215.84 and $96.57, were not explained, nor was there a justification for applying adjustments to the subject property while not doing so for comparable sales. The land values accepted by the Special Term, based on the city’s expert’s analysis, lacked sufficient explanation and did not adhere to standard adjustment practices. Citing relevant case law, it was noted that an expert opinion lacking factual support has minimal value. Conversely, the petitioner’s expert provided well-supported land values that aligned closely with those determined by the tax assessor, indicating greater reliability. The petitioner’s expert also established the appropriate capitalization rate based on returns from U.S. Government long-term bonds, adhering to accepted methodologies.

In determining capitalization rates for various periods from 1973 to 1982, increments were added for risk, nonliquidity, portfolio management, and capital recovery, resulting in rates of 10.25% (1973/74 - 1976/77), 12% (1977/78 - 1980/81), and 15% (1981/82). The methodology used by the petitioner’s expert is deemed acceptable and parallels approaches approved in recent cases, although such approvals do not guarantee similar outcomes in every case. The capitalization rate should reflect market demands based on the property’s characteristics. The significance of different factors may vary based on the specific facts presented in each case, with the ultimate goal being to approximate true property value. 

The respondent’s expert provided an unconvincing rebuttal, proposing lower rates of 8.2% for 1973-1978 and 7.2% for 1979-1981, justified only by a general assertion of expected property appreciation without substantial supporting evidence. The testimony did not effectively explain the lower rates, especially given the economic conditions of the mid-1970s and the discrepancy with returns on long-term bonds. While the petitioner’s methodology is sound and the increments reasonable, applying the same formula starting in 1979 poses challenges, as the real estate market was recovering from a prolonged depression, suggesting potential impacts on capitalization rates that were not adequately analyzed or quantified in the record.

Modification of the petitioner’s expert’s capitalization rate is warranted for the tax years 1979/80, 1980/81, and 1981/82, necessitating a reduction by 1. A remand for a new trial was deemed unnecessary due to the petitioner’s agreement to accept aspects of the city’s position to avoid costs and delays. The issue regarding claimed expenses was resolved by accepting the audit of the petitioner’s records, which excluded non-operating and non-recurring expenses. Additionally, the petitioner agreed to adjust net income by adding increments related to two disputed rentals to align with market rates. The court supported an allowance of 3.5% for management, leasing, legal, and accounting expenses. Consequently, the Supreme Court of New York County's judgment from June 28, 1982, was modified to reduce assessments based on the expert's capitalization rates, with the specified reductions for the specified years, while assigning land values as per the expert's testimony and adjusting net income accordingly. The decision was unanimous among the justices.