Port Authority Trans-Hudson Corp., Application of

• Citation: 265 N.Y.S.2d 925,48 Misc.2d 485
• Decision Date: 10 December 1965
• Docket Number: TRANS-HUDSON
• Parties: Application of the PORT AUTHORITYCORPORATION to acquire title to certain property in the State of New York and the State of New Jersey for Hudson Tubes purposes. (Condemnation)
• Court: New York Supreme Court

Page 925

265 N.Y.S.2d 925

48 Misc.2d 485

Application of the PORT AUTHORITY TRANS-HUDSON CORPORATION

to acquire title to certain property in the State

of New York and the State of New Jersey

for Hudson Tubes purposes.

Supreme Court, Special Term, New York County, Part VI

(Condemnation).

Dec. 10, 1965.

Sullivan & Cromwell, New York City, for claimants Hudson & Manhattan Corp. and Hudson Rapid Tubes Corp.; David W. Peck, Theodore N. Tarlau, L. Robert Driver, Jr., John C. Jaqua, Jr., Michael A. Cooper, New York City, of counsel.

Sidney Goldstein, Milton H. Pachter, Robert S. Tobin, Simpson, Thacher & Bartlett, New York City, for Port Authority Trans-Hudson Corp.; Whitney North Seymour, John A. Guzzetta, James J. Hagan, Nancy L. Michelmore, New York City, of counsel.

CHARLES A. LORETO, Justice.

This condemnation proceeding has been initiated by petition and order of this court vesting title in petitioner Port Authority Trans-Hudson Corporation (PATH), a wholly owned subsidiary of the Port of New York Authority (Port Authority).

The 53 damage parcels are located in the States of New York and New Jersey. They include the interstate rapid transit electric railway owned by Hudson Rapid Tubes Corporation (HRT), which operates between terminals at 33rd Street and Cortlandt Street in Manhattan and terminals in Hoboken and Jersey City, New Jersey, with through service to Newark, and the land with two 22 story office buildings at 30 and 50 Church Street, Manhattan, owned by Hudson and Manhattan Corporation (H & M).

Damage Parcels 1 through 4 are respectively the land with two 22 story office buildings and annexes and the two inter-connecting bridges located at 30 and 50 Church Street. Damage Parcels 5 through 53 consist of all the properties in both States owned and used by the claimants for railroad purposes prior to condemnation. Leaseholds, fixtures, easements and other rights, claims and charges also are involved.

The proceeding was instituted pursuant to statutes enacted by the Legislatures of New York (L.1962, ch. 209, McK.Unconsol.Laws, § 6601 et seq.) and New Jersey (L.1962, ch. 8, N.J.S.A. 32:1-35.50 et seq.), which granted jurisdiction over it to the Supreme Court of the State of New York, New York County, and provide that the property in each State shall be valued in accordance with the laws of that State.

On September 1, 1962, title to these properties vested in the petitioner pursuant to court order. The trial, involving their valuation, has required the presentation of extensive testimony and much documentary evidence over the course of many months.

Prior to the title vesting date both the railroad system and the buildings 30 Church Street and 50 Church Street were owned and operated under the name of Hudson & Manhattan Railroad Company. Because it had been operating at a loss over a number of years and was unable to meet the interest due on the funded debt, an involuntary petition under Chapter X of the Bankruptcy Law (U.S.Code, tit. 11, ch. 10) was filed by three of its bondholders on December 14, 1954. The District Court appointed Herman T. Stichman Trustee for the debtor authorizing him to carry on its business.

On December 31, 1961, the reorganization was terminated under a plan whereby H & M has continued its corporate existence under the new name. It continues to own and operate the realty--as of January 1, 1962, the property at 30 and 50 Church Street. Its subsidiary, Hudson Rapid Tubes Corporation (HRTC) took over the ownership and operation of the railroad.

Therefore, necessarily treated as separate legal units and considered as separate economic units, proof on valuation was received at the trial separately for properties of the railway and the property of the realty corporations. Howerver, this condemnation proceeding is and remains one and insofar as the evidence is interrelated, it will be so considered in the overall analysis of the proceeding.

The property at 30 and 50 Church Street

This realty will be considered first. On behalf of petitioners two realty appraisal experts testified, S. Edwin Kazdin and William Morris. And as such, on behalf of claimants, Paul T. O'Keefe and William MacRossie, testified. All of them presented adequate qualifications and declared their familiarity with the subject buildings and downtown New York real estate. The appraisals of Kazdin and Morris have but minimal differences. And the appraisals of O'Keefe and MacRossie also do not substantially differ.

At the outeset, it will be desirable and helpful to take a look at how the experts generally arrived at their valuation figures. Since MacRossie's appraisal does not significantly differ from O'Keefe's, nor Morris' from Kazdin's, it will be sufficient for illustration and further analysis to focus upon the appraisals of O'Keefe and Kazdin, who incidentally were more deeply examined during the trial.

Conceptus of O'Keefe's (Claimants') appraisal

O'Keefe appraises this property at $23,000,000. (It might be well to note here that MacRossie's valuation is $23,500,000.) O'Keefe's valuation is predicated upon a rehabilitation of the buildings, which in his opinion would be 'consistent with the highest and best use of the property.' He believes that its maximum income potential could be realized only with complete rehabilitation of a character similar to the treatment of the federal government rented space. To an estimated cost of $6,500,000 for completing the rehabilitation program, he adds $3,000,000 for estimated loss of rent during three years that it would take to do the work.

In his appraisal, he uses an applied rent for office space on whole floor basis of $4,879,000, takes the actual rent for the stores and miscellaneous of $247,928.99, and a slightly higher rent than the actual for the railway terminal to be based on the anticipated real estate tax, to wit, $217,000--giving a total rental of $5,705,428.99.

In arriving at these rentals, O'Keefe uses a five percent vacancy rate for office space and the same rate for stores.

From the gross income, he deducts, (1) Operating expenses of $1,718,000 having considered actual operating charges and estimates by engineers in his firm; (2) $285,271 for vacancies and bad debts, and $855,000 estimated real estate taxes on a projected assessment of $19,000,000.

This would leave a net income of $2,847,158, which he capitalizes at eight and three quarter percent, arriving at a figure of $32,500,000. From this figure, he deducts the $6,500,000 to be spent for rehabilitation and $3,000,000 for loss of income during rehabilitation, resulting in a value of $23,000,000 for the properties.

He arrives at a land valuation of $8,600,000, using an overall per square foot rate of $100. Of the net income, he states $516,000 is attributable to the land, capitalized at six percent, and that the balance of the income, to wit, $2,300,000, can be attributed to the buildings.

Considerations which in his opinion favor complete rehabilitation are both external and internal. External proof of success in such modernization he finds in a large number of downtown office buildings. Internal evidence of its desirability and practicality, he finds in the expenditure by the Trustee in the years between 1957 and 1962 of more than $6,000,000 in the modernization of the buildings. In his opinion, an investor would incur a greater risk in undertaking partial rehabilitation rather than complete rehabilitation because if he did only the former, the difficulties encountered by the Trustee with partial modernization would be continued. Also, he believes that the 37 percent vacancy of the buildings is a plus and very favorable factor for carrying out his program.

Conceptus of Kazdin's (PATH) appraisal

Dazdin's first appraisal gives a valuation of $13,200,000 for the property and his supplemental appraisal, $14,500,000. (It may be well here to note Morris' first appraisal is $12,540,000 and his supplemental, $13,795,000.) The latter is premised upon the assumption of the operation of the railroad. Bith Kazdin's and Morris' appraisals are based on partial rehabilitation of the buildings, i. e., of the public corridors and only vacant office space.

Kazdin contemplates an expenditure of $2,750,000 for such rehabilitation. In his opinion, it would not be good judgment for a prospective buyer to contemplate spending $6,500,000 except on negotiated leases.

He arrives at total rentals of $4,008,000, using actual rentals for the stores and office space and an assigned rental for the vacant office space to be rehabilitated.

He uses $1,884,000 as potential operating costs after renovations and rehabilitation with 90 percent occupancy of office space and 95 percent occupancy of stores. He justifies his figure for operating costs, having considered the buildings' actual operating costs and his firm's experience. He uses $644,000 for real estate taxes, using assessed valuation of 1962-1963 of $15,111,000. These two expense items add up to $2,528,000, which deducted from estimated total effective income of $4,008,000, leave $1,148,000 as estimated net income.

Using a nine percent capitalization rate to the net income figure, he gets a valuation of $16,444,000 (rounded) for the property. From this figure, he deducts a total of $3,300,000, which he divides into $2,750,000 for rehabilitation and $515,000 for losses to reflect the development of the tenancies to 90 percent occupancy by the third and final year of modernization. This leaves a figure of $13,114,000, which Kazdin rounded out to $13,200,000 as his valuation for land and buildings.

In arriving at land value, he uses the unit lot approach and arrives at a land value of $3,963,000 for 30 Church Street and $2,055,000 for 50 Church Street, or a total of $6,018,000. Therefore, the net applicable to buildings would be $7,200,000.

Kazdin's appraisal with railroad operating gives a value of $14,520,000 for the property. It differs from the...