Heron Realty Corp. v New York State Urban Dev. Corp.

[*1] Heron Realty Corp. v New York State Urban Dev. Corp. 2013 NY Slip Op 51003(U) Decided on June 21, 2013 Supreme Court, Kings County Saitta, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on June 21, 2013
Supreme Court, Kings County

Heron Realty Corp., (BLOCK 1121, LOT 42) Claimant,

against

New York State Urban Development Corporation, D/B/A EMPIRE STATE DEVELOPMENT CORPORATION, Condemnor.



1690/2012



Plaintiffs Attorney -

Goldstein, Rikon & Rikon, P.C.

80 Pine Street

New York, New York 10005

(212) 422-4000

Defendants Attorney -

Berger & Webb, LLP

7 Times Square, 27th Floor

New York, New York 10036

(212) 319-1900

Kenneth Applebaum, Esq.,

Wayne P. Saitta, J.

At issue in this condemnation proceeding is the just compensation to be awarded to Claimant HERON REALTY CORP, for the taking of the subject property, located at 514-522 Vanderbilt Avenue(a/k/a 836 Atlantic Avenue), Brooklyn New York (Block 1121 Lot 42). The Condemnor, NEW YORK STATE URBAN DEVELOPMENT

CORPORATION, D/B/A EMPIRE STATE DEVELOPMENT CORP., (hereinafter "ESDC"), took title on March 1, 2010 (the vesting date) in connection with the Atlantic Yards project. The court viewed the property on September 8, 2011, and a non jury trial was held September 7, 11, 12, and October 3, 10, 19, 2012.

On the date of vesting, the property was improved by a gas station with a one story [*2]building and six pumps. The land area of the property is 11,500 square feet. The property is also encumbered by a 3,506 square foot subterranean easement in favor of the Long Island Railroad (LIRR) , a subsidiary of the Metropolitan Transportation Authority (MTA).

The property is also encumbered by a deed restriction which limits development of the area over the easement to two stories.

Claimant contends that the highest and best use of the property is not the existing gas station, but is to be developed as a 12 story mixed use residential and commercial building. Claimant contends that there is a reasonable probability that the subject property would have been rezoned from M1-1 to C6-2A, absent the project. A C6-2A zone is a mixed commercial residential zone that allows and residential FAR of 6.02. Claimant's appraiser values the property rezoned to C6-2A, at $10,500,000.

Condemnor, contends that there is no reasonable probability that the property would be rezoned to C6-2A and that the existing use as a gas station is the highest and best use of the property. Its appraiser values the property used for its existing use at $4,300,000.

Normally the first area of inquiry would be whether Claimant has shown that there is a reasonable probability that the subject property would have been rezoned. However, in this case there is a question whether restrictions in the deed preclude development of the twelve story mixed used building proposed by Claimant, even if the property had been rezoned.

The highest and best use of a property is defined as the reasonably probable and legal use of vacant land or improved property which is physically possible, legally permissible, appropriately supported, financially feasible, and that results in the highest value.

In determining whether a use is legally possible, an appraiser must consider in addition to zoning and environmental regulations, any deed restrictions or easements.

The subject property is encumbered by an easement in favor of the LIRR for subterranean train tunnel. The 3,506 square foot easement is irregular in shape and runs the full 95 foot width of the property. The southern boundary is an arc running 48.53 feet south of Atlantic Avenue on the western lot line and 20.92 feet South of Atlantic Avenue on the eastern lot line. The northern boundary of the easement is the lot line on Atlantic Avenue.

In addition to the easement, the deed also contains a restriction limiting construction on the portion of the property over the easement to two stories. The deed further prohibits the construction of any foundation below the depth of the top of the tunnel. (Ex B).

The mixed use building proposed by Claimant as the highest and best use, contains 11 stories over the area of the easement. As such a building would violate the deed restriction, it is the Claimant's burden to show that there was a reasonable probability that the MTA would have waived the restriction in the deed

Ronald Ogur P.E. testifiedon behalf of claimant and prepared a report in which he analyzed what could be developed on the subject property if it were rezoned to C6-2A. While Ogur testified he was aware of the easement, he did not discuss the restriction on building more than two stories over the easement area in his report. (T 206)

Ogur testified that he would be able to get the MTA's approval to build the eleven story building because it would be cantilevered so that it did not impose any load on the existing railroad tunnel. (T 162, 201-2) He testified, referring to the restriction, "When there is an obstacle like this it is always overcome." (T 154) [*3]

However, Ogur's testimony that the MTA would allow development of more than two stories because the building could be built to impose no load on the tunnel, is speculative.

He offered no testimony that he had discussed waiver of the deed restriction with the MTA, nor did he cite any comparable examples where the MTA waived similar restrictions. Further, the issue is not simply building over an easement. The deed in this case contains not only an easement for the tunnel, but also, a specific prohibition on building more than two stories over the easement.

Claimant offered no evidence that the MTA would waive the deed restriction on development of more the two stories, or under what conditions or at what price they might be willing to do so. Claimant produced no policies regarding waiving such restrictions, nor evidence of any buildings where the MTA actually waived such deed restrictions.

Having failed to offer evidence that the building proposed by Ogur was legally possible despite the deed restriction, Claimant failed to demonstrate that such a building was the highest and best use to which the property could be put.

Additionally, the evidence presented demonstrated that the building proposed by Ogur could not be built on the site.

First, it must be recognized that Ogur report was merely an analysis of what was permissible to develop on the site under the zoning resolution if the site were rezoned C6-2A. Neither Ogur's report nor his drawings dealt with the foundation of the building or whether the building would be cantilevered or not. It only dealt with what the zoning would allow.

While both Ogur and Edward Hiney, Claimant's cost estimator, testified that they were aware of the easement it is unclear whether they were aware of the deed restriction.

While they testified that the building would be cantilevered over the easement area, neither of their reports contain any indication that the building would be cantilevered.

Hiney's cost estimate included replacing the concrete slab over the railroad tunnel, as well as a pile foundation to support a building spanning LIRR tracks, which is inconsistent with a design to cantilever over the tunnel. Further, Hiney's estimate does not include the cost for the trusses needed to cantilever over the easement.It appears, from the absence of a discussion of cantilevering in the reports, that the idea of cantilevering the building over the easement was something of an after thought. Whether it was an afterthought or not, what is significant is that a building of the size proposed by Ogur can not be cantilevered over the easement, even if the site was rezoned C6-2A.

While it is not impossible or technically difficult to cantilever a building, the 11 story building proposed by Ogur could not be constructed as a cantilevered building. Specifically, Ogur proposes a building of 11 stories with a commercial first floor 13 feet high and ten residential floors that a 9 feet high for a total building height of 120 feet. Harold Tepper, P.E. , Condemnor's engineering expert, testified that the depth of the trusses needed to support an 11 story building would be at least 7 to 8 feet deep. (T 771-2) He testified that one could not fit the trusses and all of the stories proposed by Ogur within the 120 foot maximum height allowed in a C6-2A district. Neither Ogur or Hiney estimated the height of the trusses.

Additionally, Tepper stated in his report that the shallow foundation assumed by Hiney would not be structurally sufficient and that a deep foundation system would be needed for such [*4]a building. (ex X p 9)

Tepper further testified that the trusses sketched by Hiney on the first floor plan on Ogur's drawings were inadequate to support the building. (T 773) Tepper defined a cantilever as "a horizontal element that extends beyond a support and is not supported at the one end. It is free at one end". (T 809) The purpose of cantilevering the trusses is so the building would impose no load on the easement area, by having the portion of the building that is over the easement supported by the trusses, with no columns in the easement area. (T 270-272)

The trusses drawn by Hiney were only sixty feet long (T 260) and would have a projecting arm of 48 feet at the western lot line . (T 273)

Tepper explained that a cantilevered truss consists of a projecting arm, a fulcrum and a balancing arm, and that the balancing arm has to be at least equal to the projecting arm. (T 774-5) He testified that 60 foot trusses would be too short where the projecting arm of the trusses would be 48 feet. (T 775, 820) and that the trusses would have to be 85 feet long (T 820 ) .

While the length of the trusses could be adjusted in the final plans, Hiney did not include the costs of properly sized trusses in his estimate. Tepper testified that a cantilevered system has been used on properties that adjoin subways or subterranean easements, but that it is very rarely done because "it is so darn expensive." (T 814)

Ogur's plan dealt only with what could be built in a C6-2A zoning district it did not consider the structural design of the building. Hiney's estimate based on Ogur's plan did not estimate the costs of cantilevering the building. The Court has no reliable estimate of what it would cost to cantilever a 120 foot building over the easement area or whether such a building is financially feasible.

While it is generally not necessary to include detailed drawings and engineering specifications to establish highest and best use, where a site presents unusual engineering problems or extraordinary costs, the appraisal must account for those difficulties and costs.

As Claimant has failed to demonstrate that the proposed mixed use building is legally permissible, physically possible or financially feasible, it has failed to demonstrate that it is the highest and best use for the property and the Court must reject the appraisal based on such use.

Having rejected the Claimant's appraiser's evaluation, the Court is bound to accept the Condemnor's evaluation or explain the basis for any departure. Gyrondyne Co. Of Am. Inc., v State, 89 AD3d 988, 933 NYS2d 375 (2nd Dept 2011), see Matter of City of New York [Reiss], 55 NY2d 885, 886, 449 N.Y.S.2d 18 (1982); Matter of City of New York v. Estate of Levine, 196 AD2d 654, 601 N.Y.S.2d 620 (2nd Dept 1993); Matter of City of New York, 94 AD2d 724, 462 N.Y.S.2d 260 (2nd Dept 1983), affd. 61 NY2d 843, 473 N.Y.S.2d 963 (1984).

When, as in this case, the expert opinion of one of the parties is rejected as inadequate to support the Court's finding, then no range of testimony exists and consequently the award made by the trial court and every element thereof, if at variance with the remaining expert opinion, must be supported by other evidence and a sufficient explanation provided by the Court. (Matter of City of New York [A. & W. Realty Corp.], 1 NY2d 428 154 NYS2d 1 (1956); Evans v. State of New York, 31 AD2d 565, 294 NYS2d 349 (3d Dept 1968); Fredenburgh v. State of New York, 26 AD2d 966, 274 NYS2d 708 (3rd Dept. 1966) ; Spyros v. State of NY, 25 AD2d 696, 268 NYS2d 283 (3rd Dept 1966).Condemnor's appraiser, Robert Von Ancken, found the highest and [*5]best use of the site was its current use as a gas station. He testified that the subject property which was on a corner location, and on Atlantic Avenue, a major commercial thoroughfare, was an excellent location for a gas station. (T 478-9) He noted that the station pumps three times the national average of gasoline. (T 480), Given, the restrictions on building more than two stories over the easement, and the particularly suitability of the location for use as a gas station, the Court finds that the highest and best use of the site is as a gas station.

Von Ancken used both the income capitalization approach and sales comparison approach to value the property for use as a gas station. Von Ancken testified he had difficulty to find comparable recent sales of gas stations, and that he had to adjust the three sales by 60-70%. As has been sagely noted, the greater the adjustment, the less reliable the sale. Adjustments of the magnitude here undermine the reliability of the valuation based on these comparable sales. In fact Von Ancken chose to reconcile the values arrived at through the income capitalization approach and the sales comparison approach by adopting the income capitalization approach value of $4,300,000 . Von Ancken testified that the value of a gas station is based on its profitability. (T 480)

The income capitalization approach in valuing a property determines the value of a property based on its expected future return. He utilized the direct capitalization approach and calculated the net operating income for a single year and divided that figure by an overall capitalization rate.

Von Ancken did not obtain income and expense information from the gas station operating on the subject property, but he did obtain data on how many gallons the station on the site sold a year. Based on figures from the years 2006 through 2009 Von Ancken estimated that the station sold approximately 3,200, 000 gallons a year. (T 479, ex P, p 30) This amount is three times the national average. (T 480)

Von Ancken then estimated gross income by multiplying 3,200,000 gallons by a profit margin of 20 cents. Von Ancken derived this margin from data published by the Oil Price Information Service (OPIS) compiled from a voluntary survey of gas stations in the same zip code as the subject property. (ex P, p 29) There are four gas stations in the zip code but not all four reported data for each date surveyed. (ex Q).

The margin varied considerably from day to day but the average margin for the data for the year from March 2009, to March 2010 was 20 cents. (T 644 ex P 30). This margin was based on the sale of regular gas only. There were no figures for premium gas. Von Ancken testified that premium gas is in fact less profitable because of its higher production costs and because little is sold due to its higher cost.(T 548) He testified the stations carry it despite its lower margin because they are required to do so. (T 548-9)

Although it is counter intuitive that a higher priced gas would have less of a profit margin, Von Ancken testified credibly on this point and no evidence was offered to rebut it.

Von Ancken calculated yearly, gross profit by multiplying 3,200,000 gallons by .20 for result of $640,000. He did not include any income derived from incidentals such as sales of oil, or sales from the vending machines, or air pumps. Von Ancken testified that because the property did not have a convenience store, income from these incidentals were minimal and could be considered as part of the 20 cent margin. (T 643-644) However, Von Ancken also testified that the 20 cent average margin was calculated from the OPIS survey data (ex Q) [*6]without adjustment for incidentals. (T 644) He estimated that the income from such incidentals could be, around $10,000. (T 644)

From the potential gross profit Von Ancken then subtracted 18.4% for shrinkage and various operating expenses, 2% to account for income attributed to fixtures, and 20% for intangibles and business expenses , to arrive at Net Operating Income(NOI) of $407,506.

These deductions are rationally related to the expenses of a gas station such as the one at the subject property, which has minimal expenses outside the costs of the gasoline.

However, $10,000 should be added to the yearly potential gross profit to account for income from incidentals. If one did so and took the same percentage deductions Von Ancken did, one would arrive at a NOI of $416,636.

Von Ancken divided an NOI of $407,506 by an overall capitalization rate of 9.5% to arrive at a value of $4,289,537 or $4,300,000 rounded.

Determining an appropriate cap rate that is not derived from actual sales is always somewhat subjective. In this case Von Ancken determined the cap rate of 9.5% through adjustment to a national overall cap rate for strip malls. He then considered the band of investment model to support the 9.5% capitalization rate derived from the national strip mall data. (ex P, p 38).

Von Ancken said that he used data for the national strip mall market because it is a similar use, and the subject property could be used for retail. (T 633)

The data for the national overall cap rate for strip malls came from a Korpacz Real Estate Investor Survey for the first quarter of 2010 ( ex 38). Table three from that survey, gives a range for overall cap rates for the national strip mall market of between 7.25%- 11.40%. (T 636, ex 38) It listed the average overall cap rate as 8.49%. (ex 38)

Von Ancken said he used a cap rate of 9.5% which is higher than the national average because gas stations are more risky than stip malls. However, he produced no data on cap rates for gas stations to substantiate that.

The evidence in this case is that a gas station at this location is less risky than the average gas station. As Von Ancken noted, the site is a very fine location for a gas station being located on Atlantic Avenue, a high traffic street with three lanes of traffic in each direction. (T 478) Also the site was particularly accessible because it was on a right hand turn corner and there was a traffic light so cars heading west on Atlantic Avenue could also turn in to the station. (T 478-9)

The station pumped over three million gallons of gasoline a year for the past several years, more than three times the national average. (T 479-80) In light of its superior performance as a gas station, the evidence does not support adding a premium to the strip mall cap rate for the risk of operating the property as a gas station. The average overall cap rate of 8.49% is a more appropriate cap rate.

Additionally, Von Ancken acknowledged that the New York City has a lower cap rate than the national average. (T 636) The first quarter 2010 cap rate for Manhattan office buildings was 6.25% and it is generally 1 ½ to 2 points lower than the national cap rate. (T 637, ex 38 table 2) Von Ancken testified that the New York City cap rate for retail properties its not much lower than the national average, but he did not quantify how much lower. (T 636)

The average national overall cap rate for strip malls should be discounted by [*7]approximately .25% to account for the slightly lower retail cap rates for New York City. This results in a cap rate of 8.25%.

Dividing an NOI of $415,636 (which includes $10,000 income from incidentals) by a cap rate of 8.25% results in a value of $5,038,012.

Wherefore, the court finds that the value of the subject property for condemnation purposes on the date of vesting was $5,000,000.

Settle judgment and order on notice.

Dated: Brooklyn, New York

June 21, 2013