Trustees of Masonic Hall and Asylum Fund, In re

• Citation: 1 N.Y.2d 616,154 N.Y.S.2d 937
• Parties: , 136 N.E.2d 889 Matter of TRUSTEES OF the MASONIC HALL AND ASYLUM FUND, Appellant. Liggett Drug Company, Inc., Respondent.
• Decision Date: 11 July 1956
• Court: New York Court of Appeals

Page 937

154 N.Y.S.2d 937

1 N.Y.2d 616, 136 N.E.2d 889

Matter of TRUSTEES OF the MASONIC HALL AND ASYLUM FUND, Appellant.

Liggett Drug Company, Inc., Respondent.

Court of Appeals of New York.

July 11, 1956.

Mendel Lurie, Bernard H. Goldstein and Lawrence A. Cohen, New York City, for appellant-respondent.

William M. Kufeld and Herman N. Glassner, New York City, for respondent-appellant.

CONWAY, Chief Judge.

In this proceeding, the landlord sought to have the rent of the tenant increased from $52,000 to $96,000 per annum pursuant to subdivision 1 of section 4 of the Business Rent Law, L.1945, ch. 314, as amended McK.Unconsol.Laws, § 8554. The Supreme Court, New York County, after trial, dismissed the landlord's petition, and the Appellate Division, First Department, in unanimously reversing, ordered that the rent be increased to $74,125.67. In cross appeals to our court, the tenant appeals from the Appellate Division's reversal of the trial court's dismissal of the landlord's petition, and the landlord appeals from the Appellate Division's failure to increase the rent to $96,000, the amount demanded in the landlord's petition.

The trustees of the Masonic Hall and Asylum Fund (referred to herein as the 'landlord'), a fraternal corporation organized under the laws of the State of New York, is the owner of premises located at 23rd and 24th Streets at Sixth Avenue in the city of New York. The premises consist of two connected and jointly operated structures of 19 stories, each. The sole tenant involved in this proceeding Liggett Drug Company, Inc. (referred to herein as 'Liggett') occupies business space of approximately 39,800 square feet on the 12th, 13th, 14th and 15th floors of the structure which fronts on 23rd Street. The balance of space in the 23rd Street structure is occupied largely by commercial tenants, while most of the space in the 24th Street structure is used by the Masonic Order and its affiliates. Because the landlord applies its net income from such building exclusively for charitable and educational purposes, it enjoys an exemption from real estate taxes. See People ex rel. Trustees of Masonic Hall & Asylum Fund v. Miller, 279 N.Y. 137, 18 N.E.2d 8.

The pertinent portion of subdivision 1 of section 4 of the Business Rent Law under which the landlord sought to increase Liggett's rent provides: 'A rent, exceeding in amount the emergency rent, may * * * be fixed * * * by the supreme court. * * * (It) shall be a reasonable rent based on the fair rental value of the tenant's business space as of the date the application to the supreme court * * * is made * * *. In the determination of the amount of such reasonable rent: (a) due consideration shall be given to the cost of maintenance and operation of the entire property * * * including amount paid for taxes assessed against such property, and to the kind, quality and quantity of services furnished * * *. A net annual return of eight per centum on the fair value of the entire property including the land shall be presumed to be a reasonable return. The assessed valuation of the entire property * * * as shown by the latest completed assessment-roll * * * shall be presumed to be the fair value of the premises, but other lawful evidence of the fair value may be offered and received. * * * (T)he landlord * * * shall serve upon the tenant a verified bill of particulars, setting forth the gross income derived from the entire building * * * during the preceding year * * * the rental charged each tenant * * *; the assessed valuation of the property * * *; the cost of maintenance and operation of the building * * * during the preceding year, the kind, quality and quantity of services furnished during such year; and such other facts as the landlord claims affect the net income of the entire building * * * or the reasonableness of the rent to be charged.'

In accordance with that statute, the pivotal question with which we are here confronted is whether the landlord was earning a reasonable return on its investment.

The statute provides that a net annual return of 8% on the fair value of the entire property shall be presumed to be a reasonable return; and, in turn, it is provided that the assessed valuation of the entire property shall be presumed to be the fair value of such property.

In Steinberg v. Forest Hills Golf Range, 303 N.Y. 577, 585, 105 N.E.2d 93, 96, we said: 'The legislature, by providing that 'A net annual return of eight per centum on the fair value of the entire property including the land shall be presumed to be a reasonable return,' * * * has declared its finding as to the return to which a landlord is normally entitled. But that statute, merely creating a presumption, is not a mandate to employ an 8% factor in every case. Obviously, the owner of an unimproved parcel of land found to be valuable because of its availability for development cannot expect to receive the same rate of return upon its value as he would if it were appropriately improved.' (Emphasis added.) The trial court, in the present action, found that the subject premises constituted a sufficiently adequate improvement to warrant the employment of the presumptive 8% factor. This finding was not disturbed by the Appellate Division, and we likewise should not disturb it.

The assessed valuation of the subject premises was $2,050,000, and the statute provided that such valuation shall be presumed to be the fair value of such property. In conformity with the statute, however, that 'other lawful evidence of the fair value may be offered and received', the landlord's real estate expert adjudged the value of the subject property to be $2,920,000, and Liggett's expert estimated the value at $1,325,000 (before conversion of the landlord's heating and electricity plant) and at $1,775,000 (after such conversion). The trial court, nevertheless, as it had a right to do under the statute, adopted the assessed valuation of $2,050,000 as the fair value of the subject property, and the Appellate Division, in agreeing, stated (1 App.Div.2d 220, 149 N.Y.S.2d 27): 'That is the value presumed by statute to be the value of the premises in a proceeding such as this and there is no reason to disturb the finding of the (trial) court in that respect.' Thus was such finding of fair value assented to by the Appellate Division, and we may not disturb it.

We shall now treat of the amount of expenses with which the landlord should be credited. The landlord's petition, dated February 2, 1953, was filed on February 3, 1953. Its bill of particulars bears the date, March 18, 1953, and its further bill of particulars is dated May 18, 1953. The trial took place in December, 1954. In its bill of particulars, the landlord set forth, inter alia, the costs of maintenance and operation of the subject premises for the year 1952 (the year immediately preceding the date of filing of the landlord's petition). In addition, it stated that such landlord was then in the process of abandoning the coal-fired high-pressure steam and D.C. electricity generating plant then in use and converting to public utility alternating electric current and fuel oil-fired boilers for heating the premises. It was conceded by the landlord's attorney at the trial that such changeover was completed on May 8, 1954. After that date, the landlord no longer generated its own electricity, but purchased the same from a public utility. An officer of the managing agent of the landlord's premises testified that, on the basis of his study, the above-described changeover would prove to be beneficial and more economical to the landlord. It was shown that it was in fact less expensive per kilowatt hour for the landlord to purchase electricity from a public utility than to generate its own. Liggett's real estate expert estimated that, as a result of the conversion, the landlord would enjoy an overall saving of well over $100,000, we presume, annually.

Controversy exists, however, to the extent that the landlord asserts that the court may consider only those expenses which were actually incurred during the year before the date of filing of the petition, while Liggett contends that savings in expenses which accrue after the date of filing of the petition but prior to the time of trial may nevertheless be taken into consideration by the court.

The trial court and the Appellate Division, in ruling that cognizance should be taken of such savings in expenses, fixed the expenses of operation as of the time of trial rather than as of the date of filing of the petition. With that determination we are in agreement. The Appellate Division, in that respect, relied upon Matter of Alibel Corp. (Compo Shoe), 285 App.Div. 140, at page 143, 136 N.Y.S.2d 344, at page 347, wherein the court stated: '* * * (W)e view the statute ( § 4, subd. 1) as requiring the fixing of the fair rental value as of the date of the application, in the process of which the most relevant factors are the items of income and expenses embraced in the landlord's bill of particulars supplied for the preceding year. (However,) Changes in circumstances having prospective effect but fixed in amount and determined as to obligation or liability prior to the filing of the petition would also be relevant and material. This permits substantial equities to be satisfied * * *.' The latter statement of the foregoing-quoted matter finds support in the statute itself. Among other enumerated items which the landlord must include in its bill of particulars are 'such other facts as the landlord claims affect the net income of the entire building * * * or the reasonableness of the rent to be charged.' The decrease in expense because of the conversion most certainly is a consideration which affects the reasonableness of the rent to be charged. The landlord stated in its bill of particulars that it was in the process of conversion March 18, 1953. Such bill of particulars, of course, speaks as of the...