Salvation Army, Inc. v. City of New York, 54 N.Y.2d 513 (1981)

In eminent domain proceedings, when using the reproduction cost less depreciation method to value a specialty property, financing costs that would have been expended in reproducing the building must be included in the award.

Summary

The Salvation Army was awarded compensation for property taken by New York City through eminent domain. The dispute centered on whether financing costs for reproducing the building should be included in the award, which was calculated using the reproduction cost less depreciation method. The New York Court of Appeals held that financing costs are a necessary component of reproduction costs, regardless of whether the owner actually rebuilds the property or uses its own capital. The court reasoned that just compensation requires including all reasonably expected expenditures for recreating a specialty structure, and financing costs are a real expense, whether through borrowed funds or foregone earnings on the owner’s capital.

Facts

The Salvation Army owned and occupied a five-story brick building in Manhattan. The building contained a gymnasium, chapel, offices, and living quarters designed for the Salvation Army’s community activities. The City of New York condemned the property. Both parties agreed the building was a specialty property with no ready market and should be valued using the reproduction cost less depreciation method.

Procedural History

The trial court awarded $607,000, including amounts for the land, fixtures, and building, but excluded reproduction financing costs. The Appellate Division modified the trial court’s decree, adding an allowance for financing costs, which it fixed at $27,146. The City of New York appealed to the Court of Appeals, challenging only the inclusion of financing costs.

Issue(s)

Whether, in an eminent domain proceeding for a specialty property valued using the reproduction cost less depreciation method, financing costs that would have been expended in the course of reproducing the building should be included in the compensation award.

Holding

Yes, because a fair and realistic appraisal of reproduction costs must embrace all expenditures that reasonably and necessarily are to be expected in the re-creation of a structure so idiosyncratic as to leave no alternative method by which to measure fair compensation.

Court’s Reasoning

The court reasoned that implementation of the summation method (reproduction cost less depreciation) requires inclusion of all charges reasonably expected in recreating the structure, including both direct (material, labor) and indirect (architect fees, contractor profits, interest and taxes during construction) costs. Financing costs are considered such an expenditure, akin to the cost of materials or labor. The court noted that whether the owner uses borrowed funds or their own capital, financing costs are a real expense that should be accounted for in determining just compensation. The court stated, “For a fair and realistic appraisal of reproduction costs must embrace in its reckoning all expenditures that reasonably and necessarily are to be expected in the re-creation of a structure so idiosyncratic as to leave no alternative method by which to measure fair compensation.”

The court distinguished Banner Milling Co. v. State of New York, clarifying that it did not prohibit the inclusion of financing charges in reproduction cost calculations. The court emphasized that the fact that the Salvation Army received an award before rebuilding was not a reason to depart from the rule. The court found that the City’s liability for interest to the date of actual payment of the award does not affect the claimant’s right to reproduction financing charges because interest on the award reflects the value of use of the award thereafter, while financing charges are ingredients of the value of the condemned structure as of the time it was taken.