Long Island Lighting Co. v. Assessor and Bd. of Assessment Review for Town of Brookhaven

• Decision Date: 13 July 1998
• Citation: 246 A.D.2d 156,675 N.Y.S.2d 615
• Parties: , 1998 N.Y. Slip Op. 7014 In the Matter of LONG ISLAND LIGHTING COMPANY, Petitioner-Respondent, Long Island Power Authority, Intervenor-Petitioner-Respondent, v. ASSESSOR AND the BOARD OF ASSESSMENT REVIEW FOR the TOWN OF BROOKHAVEN, Appellant, Shoreham-Wading River Central School District, et al., Intervenors-Appellants.
• Court: New York Supreme Court — Appellate Division

Page 615

675 N.Y.S.2d 615

246 A.D.2d 156, 1998 N.Y. Slip Op. 7014

In the Matter of LONG ISLAND LIGHTING COMPANY, Petitioner-Respondent Long Island Power Authority, Intervenor-Petitioner-Respondent, v. ASSESSOR AND the BOARD OF ASSESSMENT REVIEW FOR the TOWN OF BROOKHAVEN, Appellant, Shoreham-Wading River Central School District, et al Intervenors-Appellants.

Supreme Court, Appellate Division Second Department.

July 13, 1998.

Fried, Frank, Harris, Shriver & Jacobson, New York City (Gregory P. Joseph and Peter L. Simmons, of counsel), for appellants Assessor and the Board of Assessment Review for the Town of Brookhaven and County of Suffolk.

Murphy, Bartol & O'Brien, LLP, Mineola (Ernest T. Bartol, of counsel) and Emily Pines, Town Attorney, Medford, for appellant Assessor and the Board of Assessment Review for the Town of Brookhaven

Robert J. Cimino, County Attorney, Hauppauge (Robert L. Garfinkle, of counsel), for intervenor-appellant County of Suffolk (one brief filed).

Lewis & Greer, P.C., Poughkeepsie (Michael Englert and Lou Lewis, of counsel), for intervenor-appellant Shoreham-Wading River Central School District.

LeBoeuf, Lamb, Greene & MacRae, LLP, New York City (Michael Lesch and John G. Nicolich, of counsel) and Leonard P. Novello, Hicksville (Ronald J. Macklin, of counsel), for petitioner-respondent Long Island Lighting Company (one brief filed).

O'BRIEN, J.P., and SULLIVAN, PIZZUTO and JOY, JJ.

PER CURIAM.

In these eight consolidated tax certiorari proceedings, we review real property tax assessments levied upon the Shoreham Nuclear Power Plant (hereinafter the Shoreham plant), which, during the tax years at issue, 1984-1985 through 1991-1992, was owned by the petitioner, the Long Island Lighting Company (hereinafter LILCO). We previously visited this troubled project in Matter of Long Is. Light. Co. v. Assessor for the Town of Brookhaven, 202 A.D.2d 32, 616 N.Y.S.2d 375, where we affirmed the Supreme Court's reduction of the assessments on the Shoreham parcel for the seven tax years from 1976-1977 through 1983-1984 (known as the "Phase I" tax years). In the instant appeal, which deals with the "Phase II" tax years, the Supreme Court again reduced the tax assessments on the Shoreham parcel. The Assessor and the Board of Assessment Review of the Town of Brookhaven, and the intervenors Shoreham-Wading River Central School District and the County of Suffolk have appealed. We affirm.

I

In both Phase I and Phase II, the parcel under review consisted of 113.79 acres of land, a nuclear power station (composed of 15 principal structures) designed to generate 809 megawatts of electricity, a 69,000 volt switchyard, and a 139,000 volt switchyard. As Phase I dealt with the tax assessments on the plant while it was being constructed, Phase II deals with the assessments on the plant during the eight tax years after the plant was substantially completed. During that time, the plant was irradiated and low-level power testing was performed. However, there was substantial public opposition to the opening of the plant, and it was eventually purchased by the Long Island Power Authority (hereinafter LIPA) for $1 (see generally, Matter of Long Is. Light. Co. v. Assessor for Town of Brookhaven, supra, at 35-36, 616 N.Y.S.2d 375; see also, Long Is. Power Auth. v. Shoreham-Wading Riv. Cent. School Dist., 88 N.Y.2d 503, 508-510, 647 N.Y.S.2d 135, 670 N.E.2d 419).

In Phase I, the Shoreham plant was evaluated as "specialty" property (see, Matter of Long Is. Light. Co. v. Assessor for Town of Brookhaven, supra, at 36-37, 616 N.Y.S.2d 375). As we noted, a property is a specialty when four criteria are met:

" '(a) the improvement must be unique and must be specially built for the specific purpose for which it is designed; (b) there must be a special use for which the improvement is designed and the improvement must be so specially used; (c) there must be no market for the type of property and no sales of property for such use; and (d) the improvement must be an appropriate improvement * * * and its use must be economically feasible and reasonably expected to be replaced' " (Matter of Long Is. Light. Co. v. Assessor for Town of Brookhaven, supra, at 37, 616 N.Y.S.2d 375, quoting Matter of Allied Corp. v. Town of Camillus, 80 N.Y.2d 351, 357, 590 N.Y.S.2d 417, 604 N.E.2d 1348).

The appropriate valuation methodology for specialty property is the Reproduction Cost New Less Depreciation method (hereinafter the RCNLD), the application of which generally requires the creation of a cost model which " 'must embrace in its reckoning all expenditures that reasonably and necessarily are to be expected in the re-creation of [the] structure' * * * These expenditures include direct costs, such as materials and labor expended to construct the structure to be assessed, and indirect costs, which include various incidental or overhead expenses attributable to that construction" (Matter of Long Is. Light. Co. v. Assessor for Town of Brookhaven, supra, at 38, 616 N.Y.S.2d 375, quoting Matter of City of New York [Salvation Army], 43 N.Y.2d 512, 516, 402 N.Y.S.2d 804, 373 N.E.2d 984). Also added to the cost model are financing costs (technically referred to as Allowance for Funds Used During Construction or AFUDC) as these constitute " 'expenditures that reasonably and necessarily are to be expected in the re-creation of a structure' " (Matter of Long Is. Light. Co. v. Assessor of Town of Brookhaven, supra, at 41, 616 N.Y.S.2d 375, quoting Matter of City of New York [Salvation Army], supra). Finally, under the RCNLD method, elements of depreciation are deducted from the cost model. These include amounts attributable to physical depreciation, functional depreciation, and economic obsolescence (see, Matter of Brooklyn Union Gas Co. v. State Bd. of Equalization & Assessment, 65 N.Y.2d 472, 486, 492 N.Y.S.2d 598, 482 N.E.2d 77, cert. denied 475 U.S. 1082, 106 S.Ct. 1461, 89 L.Ed.2d 718; G.R.F. Inc. v. Board of Assessors of County of Nassau, 41 N.Y.2d 512, 514, 393 N.Y.S.2d 965, 362 N.E.2d 597; see also, Matter of Allied Corp. v. Town of Camillus, supra, at 356, 590 N.Y.S.2d 417, 604 N.E.2d 1348; Matter of Onondaga County Water Dist. v. Board of Assessors of Town of Minetto, 39 N.Y.2d 601, 605, 385 N.Y.S.2d 13, 350 N.E.2d 390; Matter of Tenneco, Inc.--Tennessee Gas Pipeline Div. v. Town of Cazenovia, 104 A.D.2d 511, 513, 479 N.Y.S.2d 587).

The parties do not seriously dispute that the Shoreham plant should be evaluated as a specialty, as it was in Phase I, and we conclude that the Supreme Court properly relied on the RCNLD as the appropriate method of assessing the property (see, Matter of Allied Corp. v. Town of Camillus, supra, at 357, 590 N.Y.S.2d 417, 604 N.E.2d 1348; see also, RPTL 305[2]; Matter of County of Suffolk [C.J. Van Bourgondien, Inc.], 47 N.Y.2d 507, 511-512, 419 N.Y.S.2d 52, 392 N.E.2d 1236; see also, Matter of Saratoga Harness Racing v. Williams, 91 N.Y.2d 639, 674 N.Y.S.2d 263, 697 N.E.2d 164; cf., Matter of Niagara Mohawk Power Corp. v. Assessor of Town of Geddes, 92 N.Y.2d 192, 677 N.Y.S.2d 275, 699 N.E.2d ---- [July 7, 1998] ). The dispute between the parties focuses on various specifics employed by the Supreme Court in its calculation of its RCNLD model, particularly those related to functional depreciation and economic obsolescence. It is to those issues that we now turn.

II

During the Phase II trial, an expert for LILCO, Paul L. Gioia, testified as to the probabilities that the plant would achieve commercial operation as of each relevant tax status date (hereinafter RTSD) under review. Gioia, a former chairman of the New York State Public Service Commission, based his conclusions on pertinent aspects of the controversy surrounding the construction of the Shoreham plant. These included opposition to the plant demonstrated by New York State government officials, both in the executive and the legislative branches, and local opposition, including opposition by officials of both Nassau and Suffolk Counties. Also among the various factors considered by Gioia in his evaluation of the probabilities that the Shoreham plant would not achieve commercial operation were the regulatory hurdles that LILCO faced in obtaining an operating license, including the impact of the refusal of the State of New York and the County of Suffolk to participate in emergency evacuation planning. Gioia's testimony addressed the issue of the degree to which the plant was either functionally depreciated or economically obsolete on each RTSD. Largely as a result of his testimony, the 809 megawatt power station was found by the Supreme Court to have no value during the last four tax years under review. The appellants challenge both the relevance and reliability of Gioia's testimony.

In Matter of Long Is. Light. Co. v. Assessor of Town of Brookhaven (supra), this court observed that "[f]unctional depreciation (also referred to as functional obsolescence) has been defined as a 'disutility diminishing in some way the value of the property' * * * 'It is loss of utility and failure to function due to inadequacies of design and deficiencies in the property' * * * Functional depreciation is equated with inadequacy of design or construction, 'but overbuilding or excess capacity may also be a proper consideration in estimating functional loss' * * * Economic obsolescence has been defined as 'loss of value brought about by conditions that environ a structure, such as declining location or the downgrading of a neighborhood resulting in reduced business volume' * * * 'Economic obsolescence reflects a reduction in the value of property caused by factors extraneous to the property itself, such as changes in population characteristics and economic trends, excessive taxes and governmental restrictions * * * determining the existence and extent of economic obsolescence is an integral part of any proper application of the cost approach' " (Matter of Long Is....