Merrick Holding Corp. v. Board of Assessors, 45 N.Y.2d 518 (1978)
Assessors can consider the difference between actual rent and fair market rent when valuing property, especially in cases of long-term, below-market leases, to ensure accurate assessment of full value for tax purposes.
Summary
Merrick Holding Corp. challenged the property tax assessment on its shopping center, arguing that the county improperly added “leasehold bonuses” to increase the assessed value. These bonuses represented the difference between the actual rent paid by major tenants under long-term leases and the higher market rental value. The New York Court of Appeals held that assessors are not limited to actual rental income and can consider fair market rent to accurately assess the property’s full value, even if the property is burdened by below-market leases. The goal is to ensure that all properties contribute equitably to the public fisc, and reliance on contract rents alone may yield distorted valuations.
Facts
Merrick Holding Corp. owned a shopping center in Nassau County. For tax years 1968-1975, the county’s board of assessors valued the property using the income capitalization method. However, the board increased the actual rental income by adding “leasehold bonuses” for three major tenants. These tenants had long-term leases with rents below the current market rate. Merrick argued that the bonuses were an improper addition to the assessed value.
Procedural History
Special Term upheld the application of leasehold bonuses. The Appellate Division reversed, finding that the bonuses were improper without proof that the original leases were improvident. On remand, Special Term granted summary judgment to Merrick, eliminating the bonuses. The Court of Appeals reversed the Appellate Division’s order and remitted the matter for factual review, holding that the leasehold bonuses were appropriate for calculating fair assessment value.
Issue(s)
Whether a board of assessors can consider the difference between actual rental income and fair market rental value when assessing property value, especially when long-term leases result in below-market rents.
Holding
Yes, because assessors are obligated to assess property at its full value. When fair market rents exceed actual rental income due to below-market leases, assessors may adjust the income figures to reflect the true value of the property.
Court’s Reasoning
The court reasoned that Section 306 of the Real Property Tax Law requires property to be assessed at full value, but does not prescribe a rigid valuation method. While sales prices of comparable properties are preferred, income capitalization is appropriate for income-producing properties. However, assessors must ensure the income used for capitalization reflects true value. The court emphasized a flexible approach to valuation, stating that “[p]ragmatism * * * requires adjustment when the economic realities prevent placing the properties in neat logical valuation boxes.”
The court acknowledged that actual income is often the best indicator of value but that when fair market rents exceed rental income, the latter may be adjusted. Assessors may consider below-market rents resulting from arm’s-length bargaining but can also apply measures to adjust income figures to reliably reflect full value. The court stated, “Courts recognize, however, that reliance on contract rents, particularly those involving property subject to below market long-term leases, may yield distorted valuations and that an assessor, therefore, may apply compensatory measures calculated to adjust such income figures to a point at which they become reliable indicators of full value.”
The court also noted that Merrick may have granted bargain leases to attract major tenants. However, the county should not suffer because of the landlord’s choices, and the county tax authorities do not need to rely on the managerial results of the landlord. The court emphasized that the ultimate goal of valuation is to ensure that each property owner bears an equitable share of the tax burden based on the fair value of their property.
The court concluded that while leasehold bonuses were appropriate, any above-market rents from other tenants should offset the below-market rents from the major tenants. The case was remitted to determine if such an offset was warranted.