Matter of Prospect Owners Corp. v Tax Commn. of City of N.Y.
Annotate this CaseDecided on May 19, 2006
Supreme Court, New York County
In the Matter of Prospect Owners Corp., Petitioner,
against
The Tax Commission and the Commissioner of Finance of the City of New York, Respondents,
210941/00
Martin Schoenfeld, J.
Petitioner, Prospect Owners Corp. moves to reject, and respondents, The Tax Commission and the Commissioner of Finance of the City of New York, cross-move to confirm the report of a Judicial Hearing Officer ("JHO"). For the reasons stated below, the motion is denied, the cross-motion is granted, the JHO's report is confirmed, and the instant consolidated petition is dismissed.
Background
Petitioner is a cooperative corporation that owns the land and building known as 45 Tudor City Place. The property, identified as block 1335, lot 22, is located in Manhattan. The building is directly north of East 42nd Street, with its easterly frontage above First Avenue overlooking the United Nations and the East River below. The building was constructed as a hotel in 1927, was converted to rental apartments in 1951, and was converted to cooperative ownership in 1987. It consists of 403 residential units and 3 commercial units. It is in good to average condition and free of violations. See Cross-Moving Aff. ¶30. By all accounts, the building is in a desirable location in a desirable part of town. See Cross-Moving Aff. ¶24.
Petitioner commenced the instant Real Property Tax Law Article 7 Assessment Review proceeding to challenge respondents' assessment of the property for the nine years from 1994/1995 through and including 2002/2003. The parties agree that despite the building's cooperative status, its market value should be calculated as no more then if it were a rental building, as required by law. Real Property Tax Law §581; See In Re River House-Bronxville v. Gallaway, 100 AD2d 970 (2d Dept. 1984). Further, they agree that the rental status be determined as of 1986, the year prior to conversion to cooperative ownership. Also, both parties appraisers acknowledge that all of the apartments, prior to conversion, were subject to rent stabilization guidelines. Finally, the parties agree that the appropriate method of valuation is the [*2]"income capitalization method." (Although, the sales comparison approach was also used by respondents "as a check or test of reasonableness to confirm the income approach").
The income capitalization method is a valuation technique which measures real estate value in terms of the property's income producing ability. As noted in The Appraisal of Real Estate: "Anticipation is fundamental to the income capitalization approach. All income capitalization methods, techniques, and procedures attempt to consider anticipated future benefits and estimate their present value." Appraisal Institute, The Appraisal of Real Estate, p. 471 (12th ed. 2001) (emphasis added).
Beyond this point the agreement ends because, as indicated by the parties submissions (Moving Aff. ¶2; Cross-Moving Aff. ¶ 57), their appraisal experts assess the building quite differently. Their conclusions, at 45% of full market value (equalization rate), are as follows:
Appraisal DatePetitionerRespondents
Assessed Value
1/5/94$3,510,000$8,984,000$5,895,000
34703$3,330,000$8,188,000$6,120,000
35068
$4,299,750$9,367,0000$5,940,000
35434$5,089,500$10,605,000$6,210,000
35799$5,505,750$11,838,000$7,290,000
36164$5,825,250$12,943,000$7,695,000
36529$5,962,500$13,610,000$8,055,000
36895$7,524,000$14,926,000$8,910,000
37260$8,651,250$15,494,000$9,945,000
This Court referred the instant matter to JHO Beverly S. Cohen to hear and report on the proper assessments. After conducting such hearings, the JHO rendered a written report finding petitioner's various reasons for tax reductions to be without merit, and concluding, at page 2, that :[p] roper application of the collected residential rent figure alone establishes that the assessments are correct."
The JHO's Findings
At the hearing below, petitioner first argued that the assessed values should have been reduced by the estimated cost of replacing windows (aluminum for steel) and pipes (copper for steel and brass). The JHO essentially found that the cost of any replacement would be offset by an increase in rental income. She based this finding on her determination that rental income had been artificially depressed by the application of New York's pervasive system of rent regulation, and that the cost of replacing windows and pipes would be offset by the building's entitlement to "virtually certain" major capital improvement ("MCI") rent increases. Indeed, the JHO found that the value of the building would be enhanced by more than the cost of the replacement ("increasing collectible rents far beyond the cost").
Petitioner next argued that the assessed value of the building should have been reduced [*3]by the estimated cost of asbestos abatement. However, the JHO found that petitioner had failed to demonstrate that any "asbestos containing material" ("asbestos") would have to be removed; and, in any event, had failed to establish "how much asbestos there was, where it might be located and what costs were likely to [be] incurred." She apparently accepted respondents' expert's testimony that without an inspection, which was not done, determining where asbestos was located was impossible. Furthermore, she found that as petitioner was considering the installation of a completely different system of water distribution throughout the building, this could be done without the need for any asbestos removal.
Finally, in the base year, 1986, the building collected $2,094,597 in rent. Petitioner divided this figure by 403 apartments and concluded that the correct figure for the rental from each apartment was $5,198. However, only 370 of the 403 apartments were occupied and contributing to the rent roll. Petitioner assumed that this 8.2% vacancy rate was "normal." The JHO found this to be abnormal, i.e. the result of the alleged, and commonly presumed, practice of landlords "warehousing" apartments (keeping them vacant) prior to converting them to cooperative ownership. Given the aforesaid scheme of rent regulation, a vacant apartment will command a much higher sale price on the open market than will an occupied apartment. The JHO concluded that a proper assessment of value should assume full occupancy, and that the average rental per apartment should have been $5,661 (the $2,094.597 actually received divided by the 370 apartments actually contributing rent).
As noted above, petitioner now moves to reject the report and for judgment as requested in the petition. Respondents now cross-move to confirm the report and for judgment dismissing the petition.
Discussion
In seeking to reject the JHO's report, petitioner contends that an anticipated rent increase based on a "major capital improvement" is not a "specific right," which is central to determining value in the "income capitalization approach." Petitioner notes (Moving Aff. P. 3, line 68) that the law allowing MCI increases, and other factors, "are susceptible to change." However, the "specific right" here is the right to collect rent from the subject apartments. Furthermore, everything in law, as in life, and particularly real estate, is "susceptible to change." The purpose of an assessment is to estimate value at a point in time. The real estate market, the city, state, and national economies, the city's demographics, all are subject to change. In years hence, MCI increases could just as likely be larger or doubled as be smaller or eliminated. Certainly, were petitioner (or any owner) to sell the building to a willing buyer at market price, the prospect of MCI rent increases would act as an offset to the prospect of money spent on capital improvements. Petitioner's contention that respondents would receive "double dipping" tax increases is unavailing because respondents will only receive taxes based on the property's assessed value.
In its memorandum of law, petitioner argues (at page 5), that "potential income" should [*4]not be included in value. However, "potential income" is no less real than "potential expenses." For example, if petitioner had decided to build a roof garden or gymnasium in the hopes of increasing rental income, the anticipated increased rents would be as worthy of consideration as the anticipated increased costs. Indeed, those increased rents would be subject to market forces; whereas, the JHO relied on legally mandated increases.
In stating its position that it was inappropriate to disregard the cost to cure based on a potential increase in rental income, petitioner cites to In Re Bass v. Tax Commission of the City of NY, 179 AD2d 387 (1st Dept 1992). However, there, unlike the present case, it was noted that the trial judge specifically found "significant physical and functional impairments," and that decrepitude caused clearly by asbestos, absolutely required removal, thus decreasing that building's value. More significantly, there was no reason to discuss MCI increases in that case because, apparently, it involved a commercial office building with long term leases, and not a residential building with one - year and two - year leases. Therefore, it was not a candidate for MCI or other mandated rent stabilized increases.
In fact, this Court is attempting to follow the Appellate Division's lead by taking a "pragmatic" approach to the subject building's "economic realities." 179 AD2d at 387. The "economic reality" here is that MCIs will result in MCI rent increases (petitioner does not claim that the window and pipe replacements would not be MCIs). As argued by respondents, upgrading real estate extends its life and reduces its expenses. Furthermore, there was testimony that any maintenance problems in the building were being addressed on an ad hoc basis by building service personnel, (Cross-Moving Aff. ¶ 38). In the final analysis, the JHO was entitled to conclude, as a matter of fact, that any future expenditure for windows and water pipes would be offset by future MCI rent increases. Stated another way, that these costs, proposed to be invested in the future, could be removed by the JHO from the full market value calculations. In any event, the fact is that future expenditures, however high, were, arguably, already built into both experts' final assessment of the property's value (See Cross-Moving Aff. ¶ 81).
Petitioner's next contention that the JHO erred in concluding that asbestos could remain in place, is essentially based on the report of its appraiser, Jerome Haims Realty, Inc., which assumed that its expert, Howard Bader, was correct in differing in part from the report of the building's engineers, Messrs. Lawless and Mangione. They had concluded (See Moving Aff. p.7, lines 223 - 225) "that fourteen risers, located behind walls, in closets or close to a closet, should be abandoned in place where possible.'" Howard Bader, however, concluded that "all the [asbestos] required removal" (id. p.7, line 227). This simply created an issue of fact, which the JHO reasonably resolved. There is ample evidence in the record that asbestos was minimal or non-existent, See Cross-Moving Aff. ¶¶ 46-48, citing Hearing Transcript pgs. 68, etc., or did not need to be removed (even assuming it existed), id., ¶ 50, citing Hearing Transcript p. 34.
Petitioner also contends that the assessments were inflated because the building should be viewed as fully occupied. Essentially, Petitioner argues (Moving Aff. p. 9, lines 264-267) as follows: "Mr. Haims concluded that although there may have been thirty-three vacant apartments, rent was received for each of those apartments or, in the alternative, there was an error in the "Sponsor's Offering Plan." Clearly, the JHO could have concluded, as a matter of fact, that the "Sponsor's Offering Plan" was not in error, and as a matter of common sense and [*5]common experience, that rent was not received from vacant apartments.
Petitioner further argues (Moving Aff. p. 9, lines 269-272) as follows: "The Sponsor purchased the Building in 1985. If there were vacancies which were not income producing in 1985 or 1986, the rental income on the certified statements would have declined by the loss of income from the thirty-three apartments. This did not happen." However, the mere fact that the total rent for the building may have been increasing for those years is not probative as to whether apartments were vacant, because there is no showing as to when they became vacant, and because regulated rents rise as a matter of law. There was no showing of rent from phantom tenants, no showing of full occupancy at the time the building converted, and no showing that full occupancy was thereafter impossible, or even unlikely.
Conclusion
This Court, having reviewed the appraisal reports, the hearing transcripts and the motion papers finds that petitioner has failed to demonstrate, by a preponderance of the credible evidence, that respondents' assessment of the subject property was overvalued. See In Re FMC Corp. v. Unmack, 92 NY2d 179 (1998); See In Re Fistraw - Del Holding Corp. v. Assessor for the Town of Colonie, 235 AD2d 660 (3d Dept. 1997).
Thus, for the reasons set forth herein, petitioner's motion is denied, respondents' cross-motion is granted, the JHO's report is confirmed, and the clerk is directed to enter judgment dismissing the instant consolidated petition.
This opinion constitutes the decision and order of the Court.
D
ated: May 19, 2006
J.S.C.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
