New York Law Review

Tag: income capitalization

  • 860 Fifth Ave. Corp. v. Board of Assessors, 55 N.Y.2d 851 (1981): Determining Property Value Using Sublease Rents

    860 Fifth Ave. Corp. v. Board of Assessors, 55 N.Y.2d 851 (1981)

    When valuing property for tax assessment purposes using income capitalization, sublease rents can be considered to determine the fair rental income, which includes both fixed rent and overage, especially when the original lease lacks an escalation clause; a leasehold bonus may be added to account for favorable lease terms.

    Summary

    This case concerns the proper valuation of a property leased to K-Mart for tax assessment purposes. The central issue is whether the Appellate Division correctly increased the property’s “full value” by incorporating the excess rents K-Mart received from sublessees over what K-Mart paid to the property owners. The Court of Appeals affirmed the Appellate Division’s decision, holding that it was appropriate to consider sublease rents in determining the property’s full value, particularly since the original lease lacked an escalation clause. The court emphasized that while income capitalization is based on rental income, not business sales, sublease rents could factor into calculating a leasehold bonus.

    Facts

    860 Fifth Avenue Corp. leased property to K-Mart in 1947. The lease required K-Mart to include in the overage base the gross rent received from subtenants. The lease lacked an escalation clause, meaning the rent remained fixed over time. The Board of Assessors sought to increase the property’s assessed value based on the higher rents K-Mart was receiving from its sublessees.

    Procedural History

    Special Term initially calculated the property’s value using income capitalization but did not include a leasehold bonus. The Appellate Division increased the “full value” of the property to reflect the excess of the rents paid to K-Mart by its sublessees over the rents paid by K-Mart to the petitioner. The case then went to the New York Court of Appeals.

    Issue(s)

    Whether the Appellate Division erred in increasing the “full value” of the property by including the excess of rents paid by K-Mart’s sublessees over the rents paid by K-Mart to the petitioners, to reflect a leasehold bonus.

    Holding

    Yes, because the inclusion of sublease rents is appropriate to determine the property’s full value, especially when the original lease lacks an escalation clause, and a leasehold bonus may be added to account for favorable lease terms. The burden to prove overvaluation rests on the petitioner, and in the absence of evidence to the contrary, the Appellate Division’s determination was not an error of law.

    Court’s Reasoning

    The court reasoned that income capitalization, the method used to compute full value, considers the property’s rental income, not sales from business operations. However, rental income includes both fixed rent and any overage. Since the lease required K-Mart to include sublease rents in the overage base, it was appropriate to consider those rents. The court also noted that Matter of Merrick Holding Corp. v Board of Assessors of County of Nassau, 45 NY2d 538, established that full value requires considering the interests of both landlord and tenant, potentially adding a leasehold bonus to the owner’s rental income. Given the absence of an escalation clause in the 1947 K-Mart lease, the court found it appropriate to add a leasehold bonus. The court emphasized that the petitioner failed to provide evidence demonstrating that the property was overvalued or what an appropriate bonus would be. The court stated, “Whether as a matter of real estate appraisal the proper bonus to be added in valuing petitioners’ property is the entire excess of the sublease rentals over the rents for the same space paid petitioners by K-Mart is not the issue before us.” Ultimately, because the petitioner bore the burden of proving overvaluation and failed to do so, the Appellate Division’s decision to include the excess rent was not deemed an error of law. The court concluded, “We cannot say, on the record before us, that it was an error of law for the Appellate Division to have concluded, as it did, that the excess rent for the subleased space was an appropriate measure of the addition necessary to arrive at full value of the property.”

  • 41 Kew Gardens Road Associates v. Tyburski, 52 N.Y.2d 565 (1981): Market Value as a Question of Fact in Property Tax Assessment

    41 Kew Gardens Road Associates v. Tyburski, 52 N.Y.2d 565 (1981)

    The determination of market value in property tax assessment cases is essentially a question of fact, and the method of capitalization of net income used to reflect market value is also a factual question.

    Summary

    This case addresses the factual nature of market value determination in the context of real property tax assessment. The Court of Appeals reversed the Appellate Division’s decision, holding that the trial court’s determination of value was not erroneous as a matter of law. The court emphasized that market value and related methods of income capitalization are questions of fact, and the Appellate Division should have determined the facts before overturning the trial court’s valuation.

    Facts

    The case involved a dispute over the assessed value of certain real property for tax purposes. The central issue was the method used to determine the market value of the properties. The taxpayer argued that the capitalization of net income premised upon a single tenant basis more accurately reflected the market value of the buildings.

    Procedural History

    The trial court determined the property’s value. The Appellate Division reversed the trial court’s decision. The Court of Appeals then reversed the Appellate Division’s order and remitted the case back to the Appellate Division for determination of the facts.

    Issue(s)

    Whether the determination of market value in a real property tax assessment case is a question of fact or a question of law.

    Holding

    Yes, because “the determination of market value essentially is a question of fact” (Grant v Srogi, 52 NY2d 496, 510). Further, whether the capitalization of net income premised upon a single rather than a multiple tenant basis more accurately reflected the market value of the buildings is also a question of fact.

    Court’s Reasoning

    The Court of Appeals held that the Appellate Division erred in reversing the trial court’s determination of value because the determination of market value is a question of fact. The court cited Grant v. Srogi, 52 N.Y.2d 496, 510, stating, “The determination of market value essentially is a question of fact.” This means the trial court’s determination should be upheld unless it is erroneous as a matter of law. The Court also noted the subsidiary question of whether capitalizing net income based on a single tenant versus multiple tenants is also a factual question. The Court emphasized that the Appellate Division should have determined the facts before reversing the lower court’s valuation. The court noted that while it is preferable for lower courts to comply with section 720(2) of the Real Property Tax Law, the Appellate Division’s decision not to remand the case was acceptable due to the completeness of the record.

  • Korvettes, Inc. v. Tax Commission of the City of New York, 45 N.Y.2d 840 (1978): Valuing Non-Specialty Buildings Using Income Approach

    Korvettes, Inc. v. Tax Commission of the City of New York, 45 N.Y.2d 840 (1978)

    When valuing a non-specialty building for tax assessment purposes, the income capitalization approach is appropriate, and the reproduction cost less depreciation method should only be used as a ceiling, not to adjust the value upwards unless there is a demonstrated economic basis for such an adjustment.

    Summary

    This case concerns the proper valuation method for a department store in White Plains for tax assessment. The Tax Commission argued that the reproduction cost less depreciation method should be used to increase the value derived from the income approach (based on 3% of gross sales). The Court of Appeals affirmed the lower court’s decision, holding that since the building was not a specialty and the city failed to demonstrate a legitimate economic theory for upward adjustment based on reproduction cost, the income approach was properly used with reproduction cost serving only as a maximum valuation limit. The court distinguished this case from situations involving “flagship” stores.

    Facts

    Korvettes operated a freestanding department store in downtown White Plains. The Tax Commission assessed the property’s value for tax purposes. Korvettes challenged the assessment, arguing it was too high. The primary dispute centered on the appropriate valuation method.

    Procedural History

    Special Term determined the building was not a specialty property and used an income approach to valuation, capped by the depreciated reproduction cost. The Appellate Division affirmed this decision, finding substantial evidence to support the determination that the building was not a specialty. The City of New York appealed to the Court of Appeals, arguing that the cost approach should have been used to adjust the value upwards.

    Issue(s)

    Whether the Tax Commission erred in its valuation method by not adjusting the value upwards based on reproduction cost less depreciation, despite using an income approach and the building not being a specialty.

    Holding

    No, because the building was not a specialty, and the city did not demonstrate a legitimate economic theory to justify upward adjustment of the value based on reproduction cost.

    Court’s Reasoning

    The Court of Appeals held that the Appellate Division’s affirmation of Special Term’s finding that the building was not a specialty was supported by substantial evidence, and therefore, it could not be reversed. The court acknowledged the city’s argument that reproduction cost should adjust the value upwards, citing G.R.F., Inc. v Board of Assessors of County of Nassau. However, the court distinguished this case because it did not involve a “flagship” store, but rather a freestanding department store. More importantly, the city failed to demonstrate a legitimate economic theory justifying the adjustment for which it contended. The court emphasized that the cost approach could influence valuation by setting a maximum, but not necessarily by increasing the value derived from the income approach unless a clear economic justification exists. As the court noted, the city didn’t provide sufficient evidence to support the upward adjustment: “Moreover, the city did not demonstrate the legitimacy as a matter of economic theory of the adjustment for which it contends”. The absence of such a demonstration led the court to uphold the use of the income approach, constrained by the depreciated reproduction cost as an upper limit.

  • Merrick Holding Corp. v. Board of Assessors, 45 N.Y.2d 518 (1978): Assessing Property Value Despite Below-Market Leases

    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.