Arlen of Nanuet, Inc. v. State

• Decision Date: 16 April 1970
• Docket Number: Nos. 39972,40099,s. 39972
• Citation: 258 N.E.2d 890,310 N.Y.S.2d 465,26 N.Y.2d 346
• Parties: , 258 N.E.2d 890 ARLEN OF NANUET, INC., Respondent-Appellant, et al., Claimant, v. STATE of New York, Appellant-Respondent. Bernard S. SIEGEL et al., Respondents, v. STATE of New York, Appellant. Claim
• Court: New York Court of Appeals Court of Appeals

Page 465

310 N.Y.S.2d 465

26 N.Y.2d 346, 258 N.E.2d 890

ARLEN OF NANUET, INC., Respondent-Appellant, et al., Claimant, v. STATE of New York, Appellant-Respondent.

Bernard S. SIEGEL et al., Respondents, v. STATE of New York, Appellant.

Claim Nos. 39972, 40099.

Court of Appeals of New York.

April 16, 1970.

Louis J. Lefkowitz, Atty. Gen. (Julius Sackman, and Ruth Kessler Toch, Albany, of counsel), for appellant-respondent.

Bernard L. Bermant, and Carl J. Moskowitz, New York City, for respondent-appellant.

David Marcus, Graham Barham and William S. Gray, New York City, for respondents.

FULD, Chief Judge.

The principal question posed--an important one in the field of condemnation--is whether it is permissible to fix the market value of land, completely bare when condemned, solely on the basis of capitalization of income expected to be realized from buildings and other extensive improvements not yet financed, on which no work had even been begun on the day of taking.

The State on May 10, 1961, appropriated slightly over 16 acres of vacant land--part of a larger 26.78-acre parcel--for highway purposes. The property fronted on a main highway in Rockland County and was well situated for development as a shopping center. The claimant fee owners (Siegel et al.) had completed their assemblage of the entire 26-acre parcel several months before the condemnation at a cost of $247,800 and had leased it to the claimant tenant (Banner Holding Corp., the assignor of Arlen of Nanuet) only four months before the taking for an annual rent, after the first year, of $61,250, for a 25-year term, with options in the tenant to renew or purchase. This ground lease expressly envisaged that the tenant would sublet the parcel to E. J. Korvette, Inc., a discount department store chain. Subleases were thereafter executed which obligated the tenant to erect, at its own expense, a large retail store building, a supermarket building, a patio shop and a parking area. Upon completion of this construction--an enterprise involving the investment of several million dollars by the ground tenant--the obligation of the subtenant, Korvette, was to become effective. It was to pay an annual rent of $285,000 to its sublessor, the tenant Banner. Although these leases had all been entered into before the condemnation, not a shovel had been turned, no work whatsoever done, on the site. In a word, the plot consisted of vacant, raw land.

For the 16 acres taken by the State, the Court of Claims awarded $702,610 to the fee owners and $875,000 to the tenant (50 Misc.2d 934, 272 N.Y.S.2d 565). A divided Appellate Division affirmed the award (of $702,610) to the fee owners but modified the tenant's award by reducing it to $525,000 (31 A.D.2d 221, 296 N.Y.S.2d 117). ¹ In determining the value of the land, the courts below adopted a capitalization of income method--that is, they capitalized the rent expected to be realized from the buildings to be constructed on the parcel--and this, as indicated above, gives rise to the question with which we are primarily concerned.

The question is not a new one. (See Levin v. State of New York, 13 N.Y.2d 87, 242 N.Y.S.2d 193, 192 N.E.2d 155; see, also, Salzberg v. State of New York, 24 A.D.2d 664, 665, 261 N.Y.S.2d 212, 215, affd. 18 N.Y.2d 965, 278 N.Y.S.2d 205, 224 N.E.2d 715; Levitin v. State of New York, 12 A.D.2d 6, 207 N.Y.S.2d 798, mot. for rearg. den. 13 A.D.2d 611, 24 N.Y.S.2d 712.) Indeed, in Levin v. State of New York 13 N.Y.2d 87, 242 N.Y.S.2d 193, 192 N.E.2d 155, Supra, we dealt with the problem of valuing vacant land which, on the day of taking, had been leased to financially responsible people for development. In the Levin case, the State argued that the Court of Claims had fallen into the error of basing its valuation of the vacant land there involved on a capitalization of income from the land as if it had been improved by buildings which were not constructed at the time title vested in the State. We agreed with the State's position that such a method was impermissible but decided that the record did not support such a hypothesis. More specifically, although we held that executory leases and agreements--relating to land vacant on the day of the taking--may be given some weight as enhancing the value of the vacant parcels, we pointedly declared that it would be error to expand the weight of such evidence by treating those leases and contracts as if they represented an income flow already in being.

Addressing itself to the State's claim of error, we wrote that the trial court 'did not fall into (that) error of valuing the property by capitalizing the net rental income as might have been proper if the building had been completed and rent had commenced' (13 N.Y.2d, at p. 91, 242 N.Y.S.2d at p. 195, 192 N.E.2d at p. 156). ² As I have already indicated, to give the anticipated rentals an annuity-like significance, as the courts below have done, is a distortion of the realities of the situation, of the condition of the property still vacant and unimproved. As we observed in the Levin case, one cannot 'expect the prospective purchaser to pay for the vacant land in suit an amount equal to the worth of the conjectured net rental income * * * for, then, he would be paying an amount which would preclude any profit' (13 N.Y.2d, at p. 91, 242 N.Y.S.2d at p. 195, 192 N.E.2d at p. 156). We might have added, what is implicit in the opinion, that, if one paid before construction an amount equal to the value of the conjectured net income, he would not only have been precluding any possibility of profit but, indeed, might be letting himself in for a loss if the conjectured net income did not later materialize. Moreover, we went on to say, an experienced prospective purchaser, in determining the price he would be willing to pay, would be most directly concerned with 'what other properties were selling for' and with what other 'competitive alternatives'--fees or leaseholds-- 'were available' to him (13 N.Y.2d, at p. 91, 242 N.Y.S.2d at p. 195, 192 N.E.2d at p. 156).

These settled principles and guidelines, the indicia of value most frequently relied upon by businessmen as well as courts, are not to be deemed irrelevant merely because the vacant land appropriated was leased to a developer. However, both the Court of Claims and the Appellate Division were of the opinion that they could properly disregard such settled principles and the accepted indicia of value and, instead, rely on a capitalization of rents from structures not yet begun to be built because they believed that there were special circumstances present.

With this in mind, let us consider the circumstances. In April of 1961, about a month before the taking, it was still not clear whether the projected highway improvement would go through the subject property or around it. Undoubtedly to guard against the eventuality of condemnation, the tenant, on April 13, 1961, obtained a ground lease of an adjacent 26-acre parcel--for the lower annual rental of $52,500--and, after the taking of the subject property, transferred its Korvette subleases to that adjoining parcel. It was on this new site that a shopping center was subsequently erected; somewhat larger than the one planned for the subject property, it was completed and in operation long after the taking but before the trial.

The conclusion of the courts below--that the rental income actually being earned by these buildings was not presumed or hypothetical and was, therefore, properly used as the basis for income capitalization of the sublease rentals of the subject property--was egregious error. So, too, was the treatment accorded the ground lease, for the courts below not only capitalized the rentals for its first 10 years but proceeded to treat all the other terms of that lease as self-executing. For example, the courts assumed that the ground tenant would exercise an option in the lease to purchase the land at the end of 10 years and, having made that assumption, they then simply added the present worth of the supposed purchase price to the present value of a 10-year flow of rent in order to determine the award to be made to the fee owner.

Such a use of the experience of the project on the adjacent site, a project on which construction had not been commenced on the day of the taking, was in violation of the principle that, to determine the market value of land appropriated, we must look to the situation existing on the day of the taking. It matters not that, in the case before us, the project had in fact been developed on adjacent property Prior to the trial. The significant fact is that it was not begun until After the appropriation. 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 N.Y.2d 87, 242 N.Y.S.2d 193, 192 N.E.2d 155, 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.

Additional error was committed by the rejection below of the settled procedure followed in valuing real property in which a tenant may have a leasehold interest that survives the taking. Such procedure is, first, to value the unencumbered fee--thereby determining the value of all the interests taken ³--and, then, to determine the value of the tenant's interest, if any--such value being dependent upon whether the rental value of the land is greater or less than the rent reserved in the ground lease. If there is an excess rental value, the worth of that excess is the amount to be awarded to the tenant. That amount is carved out of the amount of the total award--the value of all the interests in the land taken--and the balance is the sum to be awarded to the owner of the fee. (See, e.g., Great Atlantic & Pacific Tea Co. v. State of New York...