City of New York v. Salvation Army, Inc.

• Decision Date: 09 February 1978
• Citation: 373 N.E.2d 984,43 N.Y.2d 512,402 N.Y.S.2d 804
• Parties: , 373 N.E.2d 984 In the Matter of the CITY OF NEW YORK, Appellant, relative to acquiring Title to Real Property for a Project known as Harlem-East Neighborhood Development Area, Bounded by East 106th Street and other Streets in the Borough of Manhattan, SALVATION ARMY, INC., Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 804

402 N.Y.S.2d 804

43 N.Y.2d 512, 373 N.E.2d 984

In the Matter of the CITY OF NEW YORK, Appellant, relative to acquiring Title to Real Property for a Project known as Harlem-East Neighborhood Development Area, Bounded by East 106th Street and other Streets in the Borough of Manhattan SALVATION ARMY, INC., Respondent.

Court of Appeals of New York.

Feb. 9, 1978.

W. Bernard Richland, Corporation Counsel, New York City (Morris Einhorn and L. Kevin Sheridan, New York City, of counsel), for appellant.

Michael J. Greco and Robert S. Gottlieb, New York City, for respondent.

OPINION OF THE COURT

FUCHSBERG, Judge.

In this eminent domain proceeding, the sole question before us is whether financing costs that would have had to be expended in the course of reproducing a building situated on a taken parcel are to be included in an award properly calculated in accordance with the summation method (reproduction cost less functional and physical depreciation). We hold that they are.

The property, in the Borough of Manhattan, consists of a land area on which is located a five-story brick structure. It was originally erected, later renovated and, at all times until its condemnation, owned and occupied by respondent the Salvation Army. During trial, it and the City of New York, here the appellant, were in agreement that the building, into whose structure had been incorporated a gymnasium, a chapel, offices, in-house staff living quarters and other facilities uniquely designed to serve as the focal point for the respondent's community activities, was one appropriately to be regarded as a specialty not readily convertible to other uses or capable of valuation by comparison with available market prices. Therefore, though the parties contended for widely divergent amounts as the correct valuation, the figures presented on behalf of each were computed, insofar as the building was concerned, solely in conformity with accepted cost of reproduction less depreciation standards. (See Keator v. State of New York, 23 N.Y.2d 337, 296 N.Y.S.2d 767, 244 N.E.2d 248; cf. Matter of Great Atlantic & Pacific Tea Co. v. Kiernan, 42 N.Y.2d 236, 240-241, 397 N.Y.S.2d 718, 721-722, 366 N.E.2d 808, 811-812.)

Resolving the differences in amount, the trial court awarded a total of $607,000, allocating $41,425 for the land, $7,000 for fixtures and $558,575 for the building. The court excluded reproduction financing costs when it arrived at the last figure. In doing so, it pointed out that the Salvation Army had not "chosen to proceed to rebuild prior to receipt of the final award", that it was still occupying the premises (under a rental agreement with the city) and that it had been paid interest on the award by the city to cover the interval between the taking and payment.

Modifying the Trial Judge's decree, the Appellate Division ruled that an allowance should have been made for financing costs, which it fixed at $27,146. The city, whose own appraiser, after taking into account the contemporary condition of the money market, had estimated the financing item, if allowable, at $27,000, does not now challenge the quantum of either Special Term's award for the building sans financing costs or of the allowance added by the Appellate Division to include them. It presses essentially one issue: the allowability of financing costs. For the reasons we now articulate, we agree with the Appellate Division's disposition.

Implementation of the summation method requires the inclusion not only of payments for material, equipment, labor and other obvious physical ingredients which go directly into construction, but also of those charges which may be termed indirect or less direct, such as architects' fees contractors' profits, interest and taxes on land value during the period of construction, cost of procuring necessary licenses and the miscellany of other essential overhead or incidental expenses. For a fair and realistic appraisal of reproduction costs must embrace in its reckoning all expenditur 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 (Richards "Of Course" v. State of New York, 36 A.D.2d 572, 573, 317 N.Y.S.2d 827; 5 Nichols, Eminent Domain, par. 20.2, subd. (3); 2 Orgel, Valuation Under Eminent Domain (2d ed.), §§ 193, 194).

Financing costs are such an expenditure (see Kahn, Case, Schimmel, Real Estate Appraisal and Investment (1963 ed.), pp. 158-159). Commonly, an owner will make payments to a contractor from the proceeds of a loan it will have secured for financing the work; clearly the lender's charges will be just as real an expense to the borrower as the dollars it pays to its contractor. Such costs will be no less real when an owner employs its own capital; it thereby foregoes its earning power by turning it into an equity investment which rarely will produce income during construction. In principle, the situation may be likened to that of an owner-carpenter or owner-bricklayer who contributes his services in kind. Thus, whether an owner uses its own or borrowed funds, the calculation of true cost would, either way, require inclusion of the costs of financing.

Banner Milling Co. v. State of New York, 240 N.Y. 533, 148 N.E. 668, cert. den. 269 U.S. 582, 46 S.Ct. 107, 70 L.Ed. 423, relied upon by the city, does not point to the...