Saratoga Harness Racing Inc. v. Williams

• Decision Date: 09 June 1998
• Citation: 697 N.E.2d 164,674 N.Y.S.2d 263,91 N.Y.2d 639
• Parties: , 697 N.E.2d 164, 1998 N.Y. Slip Op. 5435 In the Matter of SARATOGA HARNESS RACING INC., Appellant, v. Joseph WILLIAMS, as Assessor of the City of Saratoga Springs, et al., Respondents. (And Another Related Proceeding.)
• Court: New York Court of Appeals Court of Appeals

Page 263

674 N.Y.S.2d 263

91 N.Y.2d 639, 697 N.E.2d 164, 1998

N.Y. Slip Op. 5435

In the Matter of SARATOGA HARNESS RACING INC., Appellant, v. Joseph WILLIAMS, as Assessor of the City of Saratoga Springs, et al., Respondents. (And Another Related Proceeding.)

Court of Appeals of New York.

June 9, 1998.

Cleary, Gottlieb, Steen & Hamilton, New York City (Evan A. Davis, of counsel), and Fernandez & Burstein, P.C., for appellant.

Bond, Schoeneck & King, L.L.P., Albany (Carl Rosenbloom and Patrick L. Seely, Jr., of counsel), for respondents.

OPINION OF THE COURT

BELLACOSA, Judge.

This tax certiorari case involves the real property assessment of the Saratoga Harness Track in the City of Saratoga Springs. The principal question is whether the comparable lease income method of valuation utilized by the taxpayer's expert is an impermissible method of valuation for owner-occupied property, as the Appellate Division found. In conjunction with the consideration of that issue, the courts below also reviewed whether the subject property constitutes a "specialty."

Saratoga Harness owns 161.3 acres of land in the City of Saratoga Springs, on which it operates a racetrack. Improvements include a one-half mile oval track, a grandstand, a clubhouse, barns, stables, veterinary facilities, and administrative and maintenance buildings. The City's assessments were predicated on a full property value of close to $19 million dollars. Its Assessor found the property to be a "specialty," and calculated its value using the reproduction cost less depreciation method. This approach is based on "[t]he current cost of reproducing * * * the improvements, minus the loss in value from depreciation, plus site value" (Appraisal Inst., The Appraisal of Real Estate 81 [11th ed.] ).

Saratoga Harness filed written protests with the City's Board of Assessment Review prior to the finalization of the assessment roll for each year. The protests were rejected and separate proceedings were initiated to annul and correct the 1993 and 1994 assessments. Supreme Court conducted a bench trial and granted partial relief to the taxpayer, by reducing the assessments for the respective years to $519,300 and $516,600, from $1,085,000. The Appellate Division reversed and dismissed the proceedings. This Court granted leave to appeal to the taxpayer, and we now reverse and remit to the Appellate Division.

At trial, the taxpayer's expert testified to respective $4.3 and $3.8 million values for 1993 and 1994, based upon the comparable lease income method of valuation. The taxpayer also offered into evidence the expert's appraisal report supplementing and documenting the testimony. At the close of the evidence, the City rested without presenting any counter proof or theory of value. It relied on the presumption of validity that attaches to real property tax assessments, and its belief that Saratoga Harness failed to meet its burden to prove overvaluation.

Supreme Court held that the subject property is not a "specialty" because it was "established as fact, uncontroverted, that there is a market for racetrack property and that there are sales of racetrack properties for such use." The court then rejected the City's assertion of the reproduction cost method to value the subject property. It found that the comparable lease income method employed by the taxpayer's expert sufficiently rebutted the presumption of correctness. The court then also disallowed the value tendered by the taxpayer's expert as too low. Instead, it set the value for both 1993 and 1994 at $9 million--the amount that Saratoga Harness paid for the property in a stock transfer transaction in 1987, an issue and rationale not reached by the Appellate Division because of the nature of its decision.

In reversing and dismissing the petitions outright, the Appellate Division agreed with the City's Assessor that the subject property is a "specialty" (241 A.D.2d 655, 655-658, 659 N.Y.S.2d 938, 939-940). The court disagreed with the taxpayer's use of the comparable lease formula and concluded that this methodology was improperly based on key facts not in evidence: "first, that there was a rental lease agreement between petitioner and a tenant-operator of the subject property and, second, that rental money was paid from the tenant to petitioner" (id., at 658, 659 N.Y.S.2d at 940).

This appeal turns on whether the comparable lease income method of valuation is proper in these particular circumstances. As this Court recognized in Matter of Allied Corp. v. Town of Camillus, 80 N.Y.2d 351, 590 N.Y.S.2d 417, 604 N.E.2d 1348, "while property must be assessed at market value, there is no fixed method for determining that value" (id., at 356, 590 N.Y.S.2d 417, 604 N.E.2d 1348). "The ultimate purpose of valuation, whether in eminent domain or tax certiorari proceedings, is to arrive at a fair and realistic value of the property involved so that all property owners contribute equitably to the public fisc" (id.). The Court explained that "[a]ny fair and nondiscriminatory method that will achieve that result is acceptable" (id.).

With regard to the various methods for valuation, the Court stated that "[t]he best evidence of value, of course, is a recent sale of the subject property between a seller under no compulsion to sell and a buyer under no compulsion to buy" (id.). "Absent that evidence, however, the courts have traditionally valued property by one of three methods: comparable sales, capitalization of income or reproduction cost less depreciation" (id.). The Court stated that "[e]vidence of comparable sales is generally the preferred measure of a property's value for assessment, but where there is insufficient relevant data, value may be determined by other methods" (id.).

Importantly, the Court has emphasized that "even when alternative theories must be used, the courts have been cautious about applying the reproduction cost less depreciation method [the method utilized here by the City of Saratoga Springs and imposed by the reversal at the Appellate Division] because it is most likely to result in overvaluation" (id., at 356-357, 590 N.Y.S.2d 417, 604 N.E.2d 1348). The rationale for that careful limitation on the reproduction formula is that it "ascribe[s] too little weight to such factors as rising construction costs and diminishing value by functional obsolescence" (id., at 357, 590 N.Y.S.2d 417, 604 N.E.2d 1348). Generally, then, the Court has eschewed the use of that method except for properties qualifying as "specialties" (id.).

The comparable lease income method proffered at trial by Saratoga Harness, on the other hand, is generally used as a component of the income capitalization approach to real property valuation (i.e., "[t]he value of a property's earning power based on the capitalization of its income") (Appraisal Inst., The Appraisal of Real Estate, supra, at 81 [11th ed.] ). The technique generally involves two-steps: (1) the appraiser determines the "market rent" of the property in question, and (2) capitalizes (or converts to present value) that rent to determine the proper value of the subject property (see, e.g., Appraisal Inst., The Appraisal of Real Estate, supra, at [11th ed.] )

This methodology is accepted as valid within the field of real property appraisal (see, Appraisal Inst., The Appraisal of Real Estate, supra, at 471-489 [11th ed.]; see also, 1 Bonbright, The Valuation of Property, at 169, 216-232). In addition, this Court implicitly recognized and countenanced this formula in W.T. Grant Co. v. Srogi (52 N.Y.2d 496, 508, 512, 438 N.Y.S.2d 761, 420 N.E.2d 953 [upholding an appraisal of leased premises based on "the rent which a national chain store would agree to pay on a percentage lease"] ).

Most relevantly here, when this method is utilized for owner-occupied space, it "is usually estimated at market rent levels" (Appraisal Inst., The Appraisal of Real Estate, supra, at 489 [11th ed.] ). The rubric is that "market rent is the rental income that a property would most probably command in the open market" (Appraisal Inst., The Appraisal of Real Estate, supra, at 478-479 [11th ed.] [emphasis omitted] ). Estimated annual rent, or market...