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Fact vs. Theory
By M. Robert Goldstein & Michael J. Goldstein
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.
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