New York Law Review

Tag: Reproduction Cost

  • 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.

  • Salvation Army, Inc. v. City of New York, 54 N.Y.2d 513 (1981): Reproduction Cost & Eminent Domain

    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.