26 N.Y.2d 346 (1970)

In eminent domain proceedings, the market value of vacant land should not be based solely on the capitalization of income expected from buildings and improvements that have not yet been financed or constructed on the date of taking.

Summary

This case addresses the proper method for valuing vacant land in an eminent domain proceeding when the land is subject to a lease contemplating future development. The Court of Appeals held that it was improper to determine the value of vacant land based solely on the capitalization of income expected from buildings not yet constructed. While executory leases and agreements may be considered, they should not be treated as an income flow already in existence. The court emphasized that valuation must be based on the situation existing on the day of the taking, considering comparable sales and ground rentals in the area.

Facts

The State appropriated 16 acres of vacant land, which was part of a 26.78-acre parcel suitable for a shopping center. The fee owners had leased the land to a tenant who intended to sublease it to E.J. Korvette, Inc., for the construction of a retail store, supermarket, and parking area. Subleases were in place. However, no construction had begun on the property as of the date of the taking. The tenant had secured a lease for adjacent property as a contingency.

Procedural History

The Court of Claims awarded $702,610 to the fee owners and $875,000 to the tenant, valuing the land based on a capitalization of income method, i.e., the potential rent from the planned buildings. The Appellate Division affirmed the award to the fee owners but reduced the tenant’s award to $525,000. The State appealed, arguing that the valuation method was improper.

Issue(s)

1. Whether it is permissible to fix the market value of vacant land, solely on the basis of capitalization of income expected to be realized from buildings and other extensive improvements not yet financed or begun.
2. Whether the courts below followed the settled procedure in valuing real property in which a tenant may have a leasehold interest that survives the taking.

Holding

1. No, because valuing vacant land based solely on the capitalization of future, unrealized income from planned but unbuilt structures is speculative and does not reflect the property’s actual condition on the date of the taking.
2. No, because the courts did not first value the unencumbered fee and then determine the tenant’s interest based on the difference between the rental value and the ground rent.

Court’s Reasoning

The Court of Appeals reversed, holding that valuing the land based on the capitalization of rents from structures not yet begun was erroneous. The court emphasized that the value must be determined as of the day of the taking, and the potential income from future construction is too speculative. The court cited Levin v. State of New York, emphasizing that while executory leases can be given some weight, it is incorrect to treat them as representing an existing income stream.

The court also noted the lower court erred in valuing the tenant’s leasehold interest. It reiterated the established procedure of first valuing the unencumbered fee and then determining the tenant’s interest based on whether the rental value of the land exceeds the rent reserved in the ground lease. Capitalizing the rent from the subleases to Korvette was improper because it reflected the tenant’s speculative investment and did not accurately reflect the value of the vacant land.

The court stated, “To sanction the capitalization of income method adopted below would be to overturn the long-established and wise rule, reflected in our Levin decision (13 Y 2d 87, supra). It would be a serious departure from principle, and most unsound, to announce that fair compensation is to be determined not as of the day of taking but, instead, as of the time of trial, whenever that might happen to be.”

The dissenting opinion, while agreeing the tenant’s award was excessive, argued that the near certainty of the project proceeding should allow for consideration of the income potential, but also acknowledged that the tenant’s entrepreneurial efforts should be factored out of the valuation.