Shore Haven Apartments No. 6, Inc. v. Commissioner of Finance
| Decision Date | 18 April 1983 |
| Parties | SHORE HAVEN APARTMENTS NO. 6, INC., Appellant, v. The COMMISSIONER OF FINANCE et al., of the City of New York, Respondents. In the Matter of Fred C. TRUMP (Ocean Terrace), Appellant, v. The COMMISSIONER OF FINANCE et al., of the City of New York, Respondents. SOUTHAMPTON APARTMENTS, DIVISION OF SHORE HAVEN APARTMENTS NO. 3, INC., Appellant, v. The COMMISSIONER OF FINANCE et al., of the City of New York, Respondents. |
| Court | New York Supreme Court — Appellate Division |
Demov, Morris, Levin & Shein, New York City (Scott E. Mollen and Eugene J. Morris, New York City, of counsel), for appellants.
Frederick A.O. Schwarz, Jr., Corp. Counsel, New York City (Harvey I. Shiff and Leonard Olarsch, New York City, of counsel), for respondents.
Before DAMIANI, J.P., and LAZER, GIBBONS and GULOTTA, JJ.
In these consolidated tax certiorari proceedings covering three successive tax years commencing 1977-78, petitione seek review of the assessment of three apartment house properties which lie in comparable but different middle class areas of Brooklyn. Since the properties are of the income producing variety, the referee appropriately relied on the capitalization of income approach, but a pivotal focus of the appeals is the correctness of the capitalization rate he chose. Although that rate lies within the range of expert testimony, we believe it is too low.
Experts for both parties reached their conflicting net income figures by totaling the income and expenses for each property for the three years in issue, deducting the expenses from the income and then dividing the result by three. To the net incomes thus arrived at, each then applied a capitalization rate chosen as suitable. This technique resulted in each expert arriving at values which did not vary from year to year. In calculating income and expense for two of the properties, the petitioners used the 1976, 1977 and 1978 fiscal years, the first of which ended April 30, 1976, 1 nine months prior to the taxable status date of January 25th for the 1977-78 tax year. Petitioners' expert, John Worster, employed an overall capitalization rate of 12.34%, which included a rate of return of 10.1% plus 2.25% for depreciation adjusted from 2.5% to reflect the fact that building value was 90% of the total value. 2 The 10.1% rate of return was approximately 1.5 to 2.3 points higher than those of other investment yields analyzed by Worster who based the higher rate on the increased risk, lower liquidity and greater burden involved in managing real estate. His appraisal report included the following chart of comparable yields derived from the March, 1978 and 1979 editions of The Appraiser:
Worster also testified that the 10.1% rate reflected the demands of real estate investors in light of the risks involved and the inflation rate.
The city's expert, Stanley Siebert, averaged the gross income totals for the fiscal year ending April 30, 1977 through April 30, 1979, thereby utilizing figures that commenced and ended a year later than those of petitioners. Although Siebert applied a capitalization rate of 9.5% to the net income, his appraisal report failed to mention depreciation and no explanation was provided either in the report or from the witness box as to how the rate had been determined.
With these figures before him, the referee adopted a capitalization rate of 10.5% but he, too, seemed to omit depreciation as a factor, resulting in this court's remand of the case for further findings of fact (Shore Haven Apts. No. 6 v. Commissioner of Fin. of City of N.Y., 87 A.D.2d 608, 448 N.Y.S.2d 37). Following the remand, the referee rendered another decision declaring that his original capitalization rate had included a 2% allowance for depreciation. In his calculation of income, the referee attempted to convert the conflicting fiscal year approaches to a calendar year basis by using two-thirds of each fiscal year before the taxable status date and one-third of the fiscal year following the status date. His determinations of value and the original assessments for all three years are as follows:
Assessment Referee
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Shore Haven Apt. No. 6 $1,150,000 $1,115,500
Ocean Terrace $2,150,000 $2,072,000
Southampton Apartments $2,550,000 $2,458,000
We conclude that the referee's effort to conform the income periods to the taxable status date was reasonable under the circumstances (see 7 Nichols, Eminent Domain [3rd ed.], § 4.08[4][c]; New York City Charter, § 1507), and we also adopt his findings as to expenses. Net income is thus:
Shore Haven Apt. No. 6 - $214,719
Ocean Terrace - $378,818
Southampton Apartments - $473,127
Our agreement with the referee's conclusions as to net income does not dispose of the appeals, of course, since the critical question remains the propriety of his capitalization rate. The capitalization rate represents the return an investor would expect if the property were purchased (Lee & LeForestier, Review & Reduction of Real Property Assessments in New York [2d ed.], § 1.06) and it is a crucial variable since small differences in it are magnified when net income is converted to capital value (Shenkel, Modern Real Estate Appraisal, p. 206). What the capitalization rate should be is a factual issue (Diocese of Buffalo v. State of New York, 18 N.Y.2d 41, 271 N.Y.S.2d 670, 218 N.E.2d 544; People ex rel. Manhattan Railway Co. v. Woodbury, 203 N.Y. 231, 96 N.E. 420) which should not be derived solely from the subjective judgment of the court (...
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