The Appellate Division, Third Department, upheld a lower court's dismissal of Colonie Center's applications to reduce tax assessments for the years 2017, 2018, and 2019. The property in question, an enclosed shopping mall in Colonie, had assessed values of $65,000,000 each year, despite market valuations of $96,296,296, $97,744,361, and $101,167,315. Colonie Center's expert appraiser argued for lower market values of $72,200,000, $68,000,000, and $64,000,000, while the Town's expert appraiser provided higher valuations of $98,564,000, $100,087,000, and $101,894,000.
The Supreme Court partially granted a motion to strike portions of the Town's appraisal due to noncompliance with relevant regulations but ultimately ruled that Colonie Center did not prove that the property was overvalued. The court emphasized the need to weigh the entire record to determine if the property assessments exceeded its true value. It established that the goal of tax assessment is to reach the "full value," equated with market value, relying on recent sales as the best evidence of value. Notably, Colonie Center's expert discounted a prior arm's length sale of the property for $106,574,600 in April 2013.
The Supreme Court affirmed that the transaction in question was temporally relevant, and it criticized Williams for not presenting evidence to support his lower property valuations. Williams overlooked compelling evidence regarding the property's fair market value, which weakened his assessments. Both Williams and the Town's appraiser, Kenneth Gardner, employed the income capitalization approach, recognized as the preferred method for valuing income-producing properties like shopping malls. This approach involves estimating market rent, accounting for vacancy and credit loss, projecting fixed and operating expenses, and applying a suitable capitalization rate.
Initially, both appraisers classified Colonie Center as a "B" mall, influenced by its competitive landscape and physical attributes. Williams labeled it a "B to B" mall, noting competition with Crossgates Mall and the presence of similar anchor stores. However, he acknowledged significant renovations, the presence of traffic-driving tenants like Whole Foods and the Cheesecake Factory, and unique stores like L.L. Bean and Nordstrom Rack. Gardner classified Colonie Center as a "B" mall with attributes approaching "A," recognizing the risks but highlighting the mall's improved aesthetics, increasing sales, high occupancy rates, new leasing activity, and a growing local population that supports a successful mall.
Actual income serves as a primary indicator of property value in the income capitalization approach, though adjustments may be necessary if it doesn't reflect full value. Two experts disagreed on estimating market rents, which influence the probable rental income in the open market. The effective gross income for the property over three years was reported as approximately $18.4 million, $19.3 million, and $19.5 million. One expert, Williams, estimated a potential gross revenue of $14.4 million, ignoring actual rents in favor of averages from recent leases in a defined submarket, which included data from 42 tenancies covering about 184,000 square feet. Williams’ methodology was criticized for not adhering to regulations regarding comparable properties and for selectively excluding higher market rents that contradicted his estimates. In contrast, Gardner argued that averages of new leases do not accurately reflect overall property value due to various factors, including location desirability and tenant retention strategies. The evidence indicated that total rents collected increased during the tax years in question. The experts also differed on tenant concessions, with Williams viewing them as indicative of depressed market rents, while Gardner argued they should be considered as part of operational expenses that enhance mall traffic. The court found Gardner's approach more valid and rejected claims that his analysis constituted a leased fee valuation, emphasizing that reliance on actual rents can distort fee simple valuations.
Gardner conducted a thorough analysis of occupancy costs rather than simply accepting existing lease values, employing an occupancy cost ratio that assesses total occupancy expenses as a percentage of retail sales, a standard method for shopping mall valuation. The court agreed with Gardner's methodology, rejecting claims that his analysis was flawed due to alleged double counting of rental income. Gardner distinguished between "specialty rent/other" and market rent, clarifying that he did not double count income from temporary tenants and excluded certain income sources from his calculations.
In evaluating mall occupancy, Gardner's findings reflected actual occupancy rates of 97.4%, 94.9%, and over 99% during the relevant years, contrasting with Williams' disputed estimate of 84.15%, which lacked clear justification and relied on unidentified comparables, some of which were inferior to Colonie Center. Gardner conservatively estimated a stabilized vacancy rate of 10% for mall shops and 5% for major stores, which led to differing net operating income projections. Gardner's actual net operating incomes were significantly higher than Williams’ estimate of $8,118,180 per tax year.
The experts also discussed capitalization rates, which link net income to property value. Gardner's approach accounted for market conditions specific to Colonie Center, while Williams used national trends without considering local variables, making his capitalization rate selection unreliable. The court noted that small variations in capitalization rates can substantially impact property value assessments.
Gardner's analysis indicated that malls in the Capital District were outperforming national averages, supported by factors such as quality tenants, rising rents, low occupancy costs, low vacancy rates, and stable tenant sales, leading him to determine an 8.5% capitalization rate. The petitioner's challenge to the factual basis of this rate was rejected. Although the Supreme Court partially granted the petitioner's posttrial motion by striking a table from Gardner's report for lacking underlying sources, Gardner clarified that the table was primarily to illustrate the necessity of recognizing mall grading in determining capitalization rates. Gardner's rate was derived through two mortgage-equity calculations and an analysis of an April 2013 sale, supplemented by published data, ultimately selecting the highest rate to account for market risk. The claim that Gardner's rate was speculative was also dismissed, as his market analysis, using 2014 net operating income, corroborated a 7.9% capitalization rate. Consequently, the Supreme Court's dismissal of Williams' appraisal and the overall proceedings was upheld. The judgment was affirmed without costs. Additional details included the land size and leasable area of Colonie Center, valuation dates with stipulated equalization rates, the intervention of the South Colonie Central School District, and the effective gross income calculations by both experts, which showed increasing income trends. Gardner differentiated between gross leasable areas based on size.
