Matter of City of New York (Fifth Amended Brooklyn Ctr. Urban Renewal Area, Phase 2)
Annotate this CaseDecided on September 8, 2017
Supreme Court, Kings County
In the Matter of the Application of the City of New York, relative to Acquiring title in fee simple to real property needed for the Fifth Amended Brooklyn Center Urban Renewal Area, Phase 2 within an area bounded by Fulton Street, Duffield Street, Willoughby Street, and Albee Square, located in the Borough of Brooklyn, City and State of New York.
EMAN REALTY CORP. (Block 146, Lots 34, 35, 36) [Damage Parcels 13, 14, 15];Claimant
against
THE CITY OF NEW YORK, Condemnor
33132/2008
City's Attorney —
City of New York Law Department
100 Church Street
New York, New York 10007
Adam Dembrow, Esq.
Claimants Attorney —
Firestone & Harris
32 Court Street
Brooklyn, New York 11201
(718) 522-5800
Alan Firestone, Esq.
Wayne P. Saitta, J.
At issue in this condemnation proceeding is the just compensation to be awarded to Claimant, EMAN REALTY CORP., for the taking of the subject properties, located at 402-406 Albee Square, Brooklyn. The Condemnor, THE CITY OF NEW YORK, (hereinafter "the CITY"), took title to the properties on January 27, 2009, (the vesting date), in connection with the creation of Willoughby Square. The Court viewed the properties on February 28, 2013, and a joint non-jury trial was held on May 17, 18, and 20, 2016.
The three properties are located in downtown Brooklyn on the block bounded by Willoughby Street on the north, Duffield Street on the west, Fulton Street on the south and Albee Square (Gold Street) on the east.
A preliminary issue decided by the Court at a framed issue hearing was whether the properties should be valued based on the zoning in place at the time of vesting. All three properties were zoned C6-4.5 as of the date of vesting. The properties had been previously zoned C6-1 and were rezoned as of May 9, 2004.
Claimant claimed that the properties should be valued based on the C6-4.5 zoning that had been in place for five years on the date of vesting. The CITY claimed that the upzoning to C6-4.5 was part of the project for which the property was taken and therefore could not be used to value the property pursuant to the project influence rule.
After a framed issue hearing held in March of 2013, the Court determined that the rezoning to C6-4.5 was part of the project for which the properties were condemned and pursuant to the project influence rule, the properties should be valued based on the prior C6-1 zoning.
The CITY has also argued that the increase in value of properties in the neighborhood was the result of the project and should be disregarded pursuant to the project influence rule.
In valuing a property for condemnation purposes, the property should be neither enhanced or diminished by the impact of the project on the value of the property. US v Miller, 317 US 369, 63 S. Ct. 276 (1943); US v Reynolds, 397 US 14, 90 S. Ct. 803 (1970).
The subject properties were part of the comprehensive plan that included the creation of Willoughby Square, as well as several other actions and rezonings that were part of the Downtown Brooklyn Plan. The purpose of the plan and associated land use actions was to encourage the development of office buildings in downtown Brooklyn.
The subject properties were condemned to create Willoughby Square, which was to be a public open space to serve as a corporate address or "place maker" that, together with an underground parking facility, were designed to induce private developers to construct large scale office buildings around the square. As the subject properties were slated to be condemned for over five years before they were actually taken, their value would not have increased but would have been depressed by the impending condemnation.
Further, the majority of the development that took place in the immediate vicinity since [*2]the rezonings in 2004, was for hotel and residential development, rather than office buildings. This development, therefore, was not a result of the project, which was designed to encourage office construction, but a result of the investment backed expectations of real estate investors who believed the area had a different highest and best use than that envisioned in the plan.
Development in the vicinity was also in part a result of the impact of other projects, such as MetroTech, Atlantic Yards and improvements to the BAM Cultural District. The impact of these other projects would not fall within the project influence rule.
The three lots are contiguous and have a combined frontage of 75 foot on Albee Square and a total area of 7,012.5 square feet. The lot at 402 Albee Square (lot 34) is 25 feet by 80 feet with an area of 2,000 square feet. The lot at 404 Albee Square (lot 35) is 25 feet by 100.25 feet with an area of 2,506.25 square feet. The lot at 406 Albee Square (lot 36) is 25 feet by 100.25 feet with an area of 2,506.25 square feet.
The lots are improved by 3 five story residential buildings containing 40 legal apartments and 25,195 square feet of floor area. Of the 40 apartments, 38 are rent stabilized, 1 is rent controlled and one is used as the superintendent's apartment. The average rent of the units at the time of vesting was approximately $800 month.
Both appraisers agree that because of the large number of rent stabilized tenants in the building, it would not be feasible to vacate and demolish the buildings to redevelop the land. Both appraisers found the highest and best use of the buildings to be used as rental housing with the existing improvements. The CITY's appraiser valued the property as improved at $1,750,000, while Claimant's appraiser valued the property at $7,100,000.
Both appraisers valued the building on the property using both the income capitalization approach and the comparable sales approach. The values arrived at by each approach were not significantly different. The CITY's appraiser valued the building at $1,890,00 using the sales comparison approach, and $1,700,000 using the income capitalization approach. The Claimant's appraiser valued the building at $5,000,000 using both approaches.
Additionally, Claimant's appraiser included $2,100,000 for the sale of unused development rights on the property, while the CITY's appraiser included no value to the unused development rights. The unused development rights, known colloquially as transfer development rights or TDRs, will be discussed more fully below.
Both the income capitalization approach and sales comparison approach are appropriate to value an existing income producing residential building, particularly where the actual income and expenses of the property are known. Generally, the sales comparison approach can provide more accurate indication of value when dealing with rent stabilized buildings.
The subject buildings are rent stabilized properties and any increases in rent are limited by the rent stabilization law. The building's average rent of approximately $760 a month is significantly below the market levels for the area.
As pointed out by Claimant's appraiser, properties similar to the subject properties are not purchased for their current rental income alone but rather for the potential of realizing higher levels of income upon the turnover of statutory tenancies. This is particularly so for large rent stabilized buildings in gentrifying areas that have rents significantly below market.
A stabilized rent roll can be increased by aggressively evicting current statutory tenants to increase turnover. An owner can also make major capital improvements (MCI) at the building [*3]which allow the owner get additional rent increases. MCIs, while set at an amount which amortizes the cost over an 84 month period, are permanent increases so the investment to pay for such improvement continues to produce a return indefinitely after the cost has been recouped.
An owner can also increase stabilized rents by making improvements in individual apartments upon their becoming vacant. It is common to use individual apartment increases to raise stabilized rents to the current $2,700 a month threshold necessary to deregulate an apartment.
It is difficult to quantify the increment over the value of the existing rent roll that an investor would pay for the upside potential of significantly raising the rents or taking a building out of rent regulation. The advantage of the sales comparison approach is that it captures the amount that investors are willing to pay for the potential to significantly increase the rents of rent stabilized buildings, even though it does not separately breakout how much of the purchase price reflects that potential.
However, the Court cannot rely on the sales comparison analysis of either appraiser in this case because neither indicated which of the comparable sales were rent regulated. While the Court understands that this information is restricted by statute to the owners and tenants of a particular apartment, and thus not available to appraisers, without knowing which comparable sales are rent stabilized an income capitalization approach based on actual income provides a more accurate indication of value.
The two appraisers used slightly different estimates of potential gross income, with Claimant's appraiser using a figure of $377,034 and the CITY's appraiser using a figure of $369,400. The CITY's figure was based on a March 2009 rent roll to which a 3.25% adjustment was added to account for mid-year lease renewals in 2009.
The difference between the two appraisers' potential gross income is a result of the CITY's appraiser calculating no rent for apartments 16 and 24 which were vacant, and Claimant's appraiser attributing rents of $761.25 and $900 respectively for the units. However, these vacancies are accounted for by both appraisers by calculating a 5% deduction for vacancies to arrive at an effective gross income. To omit the rent for these two apartments in addition to deducting a 5% vacancy is not justified. Therefore, the Court adopts the Claimant's appraiser's potential gross income of $377,034. Applying a 5% vacancy and collection loss deduction results in a yearly effective gross income (EGI) of $358,182.
Claimant's appraiser calculated the buildings expenses at $239,962 while the CITY's appraiser estimated them at $204,500. The bulk of this difference is accounted for by different estimates for taxes, water and sewer, legal, and reserves. After deducting the expenses, Claimant's appraiser concluded a net operating income (NOI) of $118,220 and the CITY's appraiser found a NOI of $146,430, a difference of approximately $28,000.
More significantly, Claimant's appraiser capitalized the income by applying an effective gross income multiplier (EGIM) of 14, while the CITY's appraiser applied a capitalization rate of 6% to the NOI.
Both sides presented sales data for walk up apartment buildings for the second half of 2008 from Massey Knakal Realty Services that show that the average capitalization rate for walk ups in Brooklyn was 6.60% and the average gross income multiplier (GIM) was 10.5.
The CITY's appraiser calculated his capitalization rate of 6% through the Akerson [*4]Format, a formula which gives a weighted average of rates of return investors seek for the mortgaged and the equity portions of a real estate investment. In determining the equity yield rate to use in the formula, the CITY's appraiser also relied on the Korpacz Survey for non-institutional grade apartment buildings nationwide for the fourth quarter of 2008. However, he did not use the average internal rate of return ("IRR") of 9.97% cited in the Korpacz study for the yield rate, but used an IRR of 10.5% which is towards the higher end of the range reported in the Korpacz study. When this IRR was used in the Akerson format it resulted in a capitalization rate of 6%.
Claimant's appraiser challenged this capitalization rate as too high. Claimant's appraiser calculated the actual capitalization rates for the CITY's comparable building sales and found that they ranged from 1.99% to 3.77%, which is significantly lower than the national average in the Massey Knakal survey, and lower than the 6% used by the CITY. Claimant's appraiser testified that the capitalization rate for multifamily buildings in Brooklyn was extremely low, because of the upside potential to increase rental income.
Claimant's appraiser also argued that capitalizing the effective gross income (EGI) by an income multiplier is a better method than dividing the net operating income (NOI) by a capitalization rate. He testified that typical investors looking to buy apartment buildings, similar to the subject buildings, do not decide how much they are willing to pay based on capitalizing income after expenses but by an income multiplier. He testified that this is because the income figures on residential properties are less susceptible to manipulation than expenses and because an income multiplier is easier to work with for relatively simple buildings.
For these reasons, and the fact that the capitalization rates for the Condemnor's comparable buildings sales appear to be significantly lower than the national average, the Court finds that for the subject buildings, the gross income multiplier (GIM) is a more accurate method of capitalizing their income.
However, Claimant's appraiser does not provide sufficient support for his effective gross income multiplier (EGIM) of 14.
Claimant's appraiser stated that he based his EGIM of 14 on the fact that properties similar to the subject are not purchased for their current rents but for the potential for achieving higher rents, and thus sell for higher EGIMs. However, it is unclear what portion of the buildings used to calculate the Massey Knakal average included rent stabilized buildings whose price had included an increment for upside potential.
Claimant's appraiser also cites two of his comparable buildings sales, sale 6 and sale 7, as having an EGIM of 18.98 and 12.16 respectively. However, it is unclear how accurate those EGIMs are. The CITY introduced data from a CoStar study relating to sale 6 which indicated a EGIM of 14.6 rather than 18.98 cited by Claimant. Sale 7 appeared to be part of a portfolio sale with several properties covered by one mortgage, so the purchase price may have been affected by consideration paid for other properties in the portfolio.
On the other hand, the CITY's comparable sales, which Claimant's appraiser cited for their low capitalization rates, had EGIM's which ranged from 8.78 to 12.86 and averaged 10.30.
Further, as the CITY's appraiser pointed out in his testimony, using a EGIM of 14 and assuming a loan to value ratio of 70%, the debt service on the mortgage would exceed 200% of the NOI.
The Massey Knakal average GIM for multifamily housing for the second half of 2008 of 10.5 demonstrates that investors were paying on average 10.5 times the rent roll for multifamily properties in Brooklyn. This average shows that the purchase prices for such properties included an increment over the value of the current rent roll, reflecting the expected upside of the potential of increasing the rent roll. This average of 10.5 is the most appropriate multiplier for the subject buildings' income.
The Massey Knakal GIM, is a multiplier for potential gross income rather than effective gross income, therefore one must multiply by the potential gross income of $377,034 rather than the effective gross income, by the GIM of 10.5. This results in a capitalized value for the building of $3,958,857.
The CITY argues that a building value of $3,958,857, results in an unrealistically low capitalization rate of 2.4%. However, a value of $3,958,857 (from an NOI of $118,200) results in a capitalization rate of 2.98%. This is within the range of the actual capitalization rates of 1.99% to 3.77% of the CITY's appraiser's comparable apartment building sales.
Another difference between the two appraisers is that the CITY's appraiser made a deduction of $746,000 from the capitalized value of the building's income for the estimated cost of building wide capital repairs that were recommended by employees of the New York City Department of Housing Preservation and Development(HPD). Claimant's appraiser did not make any deductions for capital repairs. The report of suggested repairs was produced for the CITY shortly after it took title to the subject property.
Although the Court admitted testimony concerning the HPD's memorandum which contained the recommendations as an admissible part of the appraiser's report, it is not entitled to great weight.
The HPD memo does not contain violations but only recommendations from HPD's Bureau of Design and Review. These were suggested repairs and improvements that the CITY might make to the building, although it is unclear in light of its plans to turn the site into open space whether it would in fact undertake such work. More importantly, a listed of suggested repairs and improvements by a CITY employee addressed to the CITY is not indicative of what work a private investor would undertake.
From this memo, the CITY's appraiser has included eight items that he says require immediate attention which total $426,000. These items include replacing the entire roof, including the plywood sheathing, at a cost of $60,000, replacing all windows at a cost of $105,000, pointing and raking all of the exterior walls at a cost of $156,000, providing complete new steel stairs at a cost of $81,000.
The recommendations appear in some cases to be more comprehensive than the conditions strictly required to be undertaken immediately and are more in the nature of capital improvements than repairs. For example, the finding as to the roof is only that the capsheet is in poor condition and that there is water leaking from the roof. There is no indication that the plywood sheathing was inspected. Also, the memorandum recommends replacing all of the windows in the building even though it only cites the condition of the hallway windows.
The CITY's appraiser also deducts $320,000 for rewiring all three buildings based on a one page memorandum from a staff member of HPD who stated that the electrical service in 402 and 404 Albee is old, rusted with exposed wiring, and that the apartments need to be rewired. [*5]The memo also stated that the electric service in 406 Albee Square is new but that the apartments need to be rewired. There is no indication that the wiring within the apartments is rusted or exposed or why the apartments need to be entirely rewired.
It appears that these memos outline worn or substandard conditions and recommend building wide improvements that would bring the building up to a good, modern condition. While the Court does not doubt the advisability of making such improvements, the question is whether a potential purchaser would make such improvement and factor in the costs of making such extensive improvements in determining a purchase price, given the rent stabilized status of the buildings and their below market rents. In fact, the CITY's appraiser notes in his appraisal "that an owner of this type of property may not elect to do all the repairs and/or have a different time horizon to perform repairs."
The most likely reason an owner of the subject properties would undertake the improvements suggested by the CITY's appraiser, is to qualify for Major Capital Improvement (MCI) increases in order to raise the existing stabilized rents.
MCI increases are one of the most common legal methods by which owners realize the upside potential of rent stabilized buildings. Pursuant to the rent stabilization regulations, an owner of a building is entitled to an increase in rents over and above the normal renewal and vacancy increases, for the costs of any building wide capital improvements. The items cited by the CITY's appraiser such a new roof, new windows, pointing exterior walls, parapet work, and rewiring would be considered capital improvements and would qualify for MCI rent increases. 9 NYCRR 2522.4(a)(3). An owner is entitled to an MCI increase regardless of whether the improvement corrects an outstanding violation or not.
The increase is calculated at 1/84 of the cost of the improvements which is divided among the tenants and added to their monthly rent. 9 NYCRR 2522.4(a)(4). This is the equivalent of raising the yearly rent roll of the entire building by 1/7, and amortizing the cost of the improvements in seven years. Although the actual increase is phased in at no more than 6% a year, the increase is permanent and continues even after the cost of the improvements have been recouped.
The provisions for MCIs is designed to provide an owner a significant profit for amounts spent on the improvements, in order to encourage owners of stabilized units to make improvements, despite the relatively low rent rolls of stabilized buildings.
MCI's, along with Individual Apartment Improvements, have become a common mechanism for owners to raise rent stabilized rents above the $2,700, ($2,000 on the date of vesting), threshold upon which an apartment may be deregulated. New York City Administrative Code §26-504.2.
If a purchaser of the subject property spent $726,000 to make the improvements suggested by the CITY's appraiser, they would be entitled to raise the total yearly building rent roll by $103,714. This increase, which once it is phased in is permanent, would be an increase of 70% of the CITY's estimated NOI.
However, the CITY's appraiser included no offset to the $726,000 for MCI rent increases that would be received for the improvements.
Money spent on MCIs should be considered as a separate investment an owner undertakes to achieve otherwise unavailable rent increases, rather than as a cost to be deducted [*6]from the value of the building.
For these reasons, the Court declines to deduct any amount from the capitalized value of the building to account for any building wide repairs or capital improvements that a potential investor might have chosen to undertake.
Another major difference between to two sides' estimation of value, is that Claimant values properties' transfer development rights (TDRs) at $2,100,000 and the CITY's appraiser states that the TDRs have no value because there was no available financing for development at the time of vesting and therefore no market for the TDRs.
The CITY disputes whether on the date of vesting there was a likely receptor site for the TDRs. With limited exceptions that do not apply here, TDRs can be sold only to an adjacent lot that shares a contiguous boundary of at least ten linear feet. Thus, the market for the TDRs of a given property is a limited one.
The Claimant identifies the lots on either side of the subject property, lot 29 and lot 37, as potential receptor sites. Both lots are larger than standard lots, with lot 29 being 8,000 square feet and lot 37 being 8,739 square feet.
The CITY concedes that lots 29 and 37 have the required common boundary to be eligible receptor sites. The CITY also concedes that there were no obstacles to the lots being receptor sites, as they were undeveloped and used as outdoor parking lots, at the time of vesting.
The CITY argues that Claimant has not shown that either potential receptor site had a need for TDRs as there were no plans to develop either lot prior to vesting, and that market conditions at the time of vesting would not have supported the sale of the TDRs.
The mere existence of TDR's does not mean that they automatically have a measurable value at a point in time.
Nonetheless, market conditions in the area at the time of vesting did support the marketability of the subject properties TDRs. Even after September 2008, there was ongoing development in the area, separate and apart from the project, resulting in part from Atlantic Yards and Metrotech. While there were projects that had stalled, some dozen projects, mostly residential buildings and hotels, were being developed or constructed in the area at the time of vesting. There was significant new development of residential condominiums and hotels at the time of vesting.
Claimant's appraiser cited four sales of TDR's as sales comparisons which were within a few blocks of the subject property and which occurred from May of 2006 to September of 2008. Putting aside whatever adjustments must be made to the sales, the sales are evidence that TDR's were marketable in the immediate vicinity.
Because of the limited number of sites to which TDRs can be transferred, in addition to showing that there was a market for TDR's in the vicinity, Claimant must also show that the potential receptor lots had an interest in the TDR's.
The fact that there were no plans to develop lots 29 or 37 prior to vesting is not dispositive on this point because these two lots were part of the project for which the subject property was condemned. The CITY took title to lot 29 as part of the same vesting by which it took the subject property and purchased lot 37 in lieu of condemnation as part of the same project.
The project was announced in 2004, several years before vesting, and thus the lack of [*7]plans to develop these lots, while other development was occurring around them, was a result of the planned condemnation and must be disregarded, pursuant to the project influence rule. US v Miller, 317 US 369, 63 S. Ct. 276 (1943).
Both potential receptor lots were undeveloped and underutilized as parking lots and there is little doubt that, absent the project, the lots would have been developed in a manner similar to the surrounding blocks.
Where the highest and best use of a property is as part of an assemblage, it is not necessary to show that the property had been put to that use on the date of vesting but that on the date of vesting there was a reasonable probability that in the reasonably near future it would have been put to such use. Broadway Cary Corp., 34 NY2d 535, 354 NYS2d 100 (1974); City of Long Beach v Sun NLF LP, 124 AD3d 651, 1 NYS3d 270 (2nd Dept 2015). This is true for the value of TDRs as well. MTA v Collegiate Church Corp., 86 AD3d 314, 927 N.Y.S.2d 67 (1st Dept 2011)
Claimant's appraiser testified he had advised the owners of lot 37 in relation to various development scenarios but that the pending condemnation impeded any development plans or purchase of TDRs.
Claimant testified that he had appraised lot 29, which was condemned by the CITY as part of an earlier eminent domain proceeding, and found that the highest and best use for the lot was as a development site.
The existing tenancies on the subject properties prevented the owners of either lot 29 or 37 from joining the subject properties into a larger assemblage. Only the TDRs were available to increase the amount of floor area available to the owners of either lot. The fact that there were two probable development sites adjacent to the subject property increased the likelihood of a sale of the TDRs, because the possible sale was not limited to a single purchaser.
Another factor in determining whether TDRs are marketable is whether the amount of floor area available as TDRs would be significant given the size of the potential receptor lot.
As discussed more fully below, the subject property has 20,390 square feet of available TDRs. This amount must be measured against the total available FAR for lot 29 or 37 based on the assumption of the lots being zoned as C6-1. This is so for the same reason that the subject property must be valued as if it were zoned C6-1. The lots were upzoned to C6-4.5 as part of the project and therefore the change in zoning must be disregarded pursuant to the project influence rule. With the C6-1 zone's FAR of 6.5, lot 29 at 8,000 square feet could be built to 52,000 square feet, and lot 37 at 8,739 square feet could be built to 56,804 square feet. The subject property's 20,390 0f TDRs would allow for a 39% increase in the allowable square footage for development of lot 29, and a 35% increase for lot 37. These are significant increases in allowable FAR that could have enhanced the potential feasibility of a development on either lot, had the vesting for the project not occurred.
Also, the purchase of the TDRs would ensure that no taller structure would be built on the subject properties. This would protect the views, light and air of any floors developed above the height of the existing building, and thus increase the value of such extra stories.
Claimant has demonstrated that but for the impending condemnation there was a reasonable probability that within the reasonably near future, the receptor sites would have been developed and the TDRs of the subject properties would have been purchased. Broadway Cary [*8]Corp., 34 NY2d 535, 354 NYS2d 100 (1974); City of Long Beach v Sun NLF LP, 124 AD3d 651, 1 NYS3d 270 (2nd Dept 2015).
Based on the above, the Court finds that the subject properties' TDRs had value on the date of the taking and should be considered in valuing the property for condemnation purposes.
In a recent decision involving lot 16 on the same block as the subject properties, this Court found that the TDRs of that property were not marketable at the time of vesting. However even though the property in that case was on the same block as the subject properties here and was condemned on the same date, there are differences between that property and the subject properties here that justify a different conclusion as to the marketability of each properties TDRs.
The property in the prior case, 225 Duffield Street, (Block 146 lot 16), bordered on four other properties, two on either side of it on Duffield Street, and two bordering its rear lot line.
The two lots on either side of lot 16 were interior lots of roughly 20' x 100', similar in size to lot 16. The City's appraiser in that case testified that a 20 foot by 100 foot lot is too small to be a viable standalone development site that could utilize the TDRs. The excessive percentage of each floor taken up by hallways, elevators and stairs would render the resulting buildings too inefficient to be marketable.
The rear lot line of lot 16 was adjacent to two lots, lot 37, and lot 41. The acquisition map of the block indicates that the southern boundary of lot 37 is 237.2 feet south of Willoughby Street, while the northern boundary of lot 16 is 229 feet south of Willoughby. Therefore, the boundary shared by lot 37 and lot 16 is 8.2 feet, less than ten feet necessary for lot 37 to be a potential receptor site of lot 16's TDRs.
Lots 41 and 42 were merged with lot 43 in 2007 to preserve the TDRs before lots 41 and 42 were condemned by the CITY. Lot 41 shares a boundary of at least 10 feet with the rear lot line of lot 16, so the combined lot could legally acquire lot 16's TDRs.
The merged lot 41-43 was the only possible receptor site for lot 16's TDRs. The Court gave great weight to the fact that the owner of lot 43 did not purchase or apparently negotiate for the purchase of the lot 16's TDRs when it transferred the TDRs from lots 41 and 42 to lot 43 as part of its assemblage. As with the TDRs of lots 41 and 42, the impending condemnation of lot 16 would not have prevented the purchase of its TDRs nor dissuaded the owner of lot 43, which was not being condemned, from purchasing them before the condemnation, if it had an interest in them.
Lot 16, had only one potential receptor site, and the owner of that site did not seek to acquire the TDRs when it was acquiring other TDRs on the block. Its situation is distinguishable from that of the subject properties.
There was also a disagreement between the appraisers as to the total amount of floor area that could be transferred from the site to a potential receptor site.
It is not contested that the lot area of the subject property is 7,013 square feet and the gross area of the building is 25,195 square feet. The CITY argues that the unused amount of FAR should be based on an FAR of 6 because the subject property contains no community facility use. The Claimant argues that the amount of unused FAR should be based on an FAR of 6.5 because the receptor site could be used to developed a mixed residential, commercial and community facility building.
Under a C6-1 zoning, a property normally has an allowable FAR of 6. However, where a [*9]building is a mixed-use building, the zoning allows a maximum of 6 FAR for commercial use, a maximum 3.44 FAR for residential use, and an FAR bonus of .5 for community facility space. That is, the commercial portion cannot exceed an FAR of 6, and the residential portion cannot exceed an FAR of 3.44, and the total cannot exceed an FAR of 6 unless part of the building is used for community facility use, in which case, the total FAR cannot exceed an FAR of 6.5.
When determining the amount of unused FAR available for transfer, the donor site is not considered alone. The donor site and the receptor site are merged into one lot for zoning purposes and the FAR is measured by the allowable zoning for the combined lots.
Since a developer of either lot 29 or 37 would most likely include some nominal community facility use to obtain the .5 FAR bonus, the receptor site could be built to an FAR of 6.5 times the combined square footage of the subject properties and the receptor lot, minus the 25,195 square feet of the existing building.
At an FAR of 6.5, the subject properties have an allowable floor area of 45,585 square feet. Thus, the subject property has unused floor area of 20,390 square feet that can be added to the FAR of either adjacent lot.
The entire .5 FAR bonus for community facility use does not have to be used for community facilities to qualify for the bonus. Section 33-123 of the NYC Zoning Resolution provides that buildings used for both commercial and community facility uses in C6-1 districts are allowed an FAR of 6.5. While section 33-123 limits the maximum amount of a commercial use in such a mixed-use building to an FAR of 6, it does not impose a minimum amount of FAR that must be devoted to community facility use.
If a building had only commercial and community facility uses, then because the commercial portion is limited to an FAR of 6, by necessity that community facility portion would have to be .5 in order to utilize the maximum FAR of 6.5. However, if the building had commercial, community and residential uses, then the community facility use could be a nominal amount, as long as the commercial portion did not exceed an FAR of 6 and the residential portion did not exceed an FAR of 3.44. As an example, a building could have a commercial portion with an FAR of 5, a residential portion with an FAR of 1.49 and a community facility portion with an FAR of 0.01. To get the .5 FAR bonus, a developer only has to devote a nominal portion of the building to a community facility use, which can include a doctor's or medical office.
Since the building on the subject property exceeds the allowable residential FAR of 3.44 by 1,070 square feet, none of the TDRs could be used for residential purposes on the receptor lot, and in fact the transfer of the TDRs would reduce the allowable residential floor area that could be built on the receptor site by 1,070 square feet. However, the FAR of 6 for commercial use includes hotel use, a use that has accounted for much of the development in the surrounding blocks. So, the 1,070 square feet of residential floor area that would be lost by a zoning lot merger could be made up with hotel floor area or retail use.
Claimant's appraiser valued the TDRs based on four comparable sales of TDRs in the immediate vicinity. The four sales ranged in time from May of 2006 to September 8, 2008 and had an average price of $104 a square foot.
Claimant's appraiser made no adjustment for market conditions, except adjusting the 2006 sale upward by 6%. He made no downward adjustment for the other three sales stating that the market data showed that the prices of properties Brooklyn did not decline from 2008 to 2009.
The CITY's appraiser criticizes Claimant's appraiser for not making market adjustments to any of the comparable TDR sales. He notes that the comparable TDR sales cited by Claimant's appraiser occurred before the Lehman collapse in September of 2008 and pointed to the general economic conditions of the post Lehman recession and states that there was a lack of available financing for development at the time of vesting.
The CITY's appraiser stated that the prices for apartment properties in downtown Brooklyn increased 12% a year from September 2006 to June 2007, and then remained flat through the rest of 2007. He estimated that from January 2008 to October 2008 prices decreased 12% on annual basis and an additional 20% from October 2008 until January 2009. He does not, however, provide evidence that the price of either land or TDRs in downtown Brooklyn declined from the second half of 2008 to 2009.
The question before the Court is not whether there was a drop in the volume of sales due to the financial conditions following the Lehman collapse, but whether that drop in volume resulted in or was accompanied by a drop in sales prices.
Claimant's appraiser cited figures from the 2010 NYC Investment Sales Study by CPEX Real Estate Services, which showed that the average price per square foot of multifamily buildings in Brooklyn increased from 2006 to 2007, declined from 2007 to 2008 but were still slightly above their 2006 level, and were stable from 2008 to 2009. The CPEX statistics show average values rose from $192 in 2006 to $208 in 2007, dropped to $196 in 2008 and then stayed relatively level at $197 in 2009.
The CITY argues that the nine comparable land sales used by Claimant's appraiser undermine his contention that market conditions remained stable from 2007 to 2009. If one compares all nine of Claimant's appraiser's adjusted comparable land sales, they show that the prices fluctuated widely from 2007 to the date of vesting. However, this fluctuation is caused by the inclusion of comparable land sales 3, 5, and 7 which are all located on Flatbush Avenue Extension. These three sales have adjusted prices per buildable floor area of $181, $203, and $177 per square foot, far in excess of the other comparable land sales. The fluctuation cited by the CITY does not reflect a fluctuation over time, but rather reflects the difference in value between properties located on Block 146 and properties located on Flatbush Avenue Extension.
The buildings are on Flatbush Avenue Extension near Tillary Street, bordering the Dumbo neighborhood, which is a distinctly different location from the subject properties. Flatbush Avenue Extension is a major thoroughfare by the entrance to the Manhattan Bridge, with convenient access to the BQE.
When the Flatbush Avenue Extension sales are removed, then the prices of the Claimant's remaining comparable land sales are basically flat from 2007 to the date of vesting.
Further, three of the Claimant's comparable land sales demonstrate that the price for land in downtown Brooklyn did not decline from 2007 to 2009. The three sales, 237 Duffield Street, 231 Duffield Street and 229 Duffield Street, were of properties located on the same block as the subject property.
The contract of sale for 237 Duffield Street was entered into on February 21, 2007, and the unadjusted price per square foot of buildable floor area was $106. The contract of sale for 231 Duffield Street was entered into on June 2, 2008, and the unadjusted price per square foot of buildable floor area was $107. The contract of sale for 229 Duffield Street was entered into on [*10]February 11, 2009, and the unadjusted price per square foot of buildable floor area was $115.
A comparison of the price of the sales in 2007 to the price in 2008, before the Lehman collapse, demonstrates that land prices in that part of Brooklyn were flat but were not declining. The contract for the sale of 229 Duffield Street took place approximately two weeks after the date of vesting, and six months after the collapse of Lehman Brothers.
The economic trends in terms of employment, drop in volume of sales and decline in home sales are indirect evidence of the trends that could affect the price of real estate in downtown Brooklyn. However, the average price of multifamily properties in downtown Brooklyn, and the actual sales of the three lots for development on Duffield Street over time, is direct evidence of actual sales prices and better evidence of market conditions in the immediate vicinity of the subject properties.
For these reasons the Court adopts the conclusions of Claimant's appraiser, that no adjustment for market conditions is warranted from 2007 to the date of vesting.
Additionally, the CITY's appraiser testified that the value of the TDRs should be discounted over 5 years at a rate of 25% to account for the fact that the TDRs will most probably not be purchased for development for five years because of the lack of development activity and financing due to the 2008 recession. However, as discussed above, while there was a general slow down in development activity, there was still much development in downtown Brooklyn, particularly in the blocks surrounding the subject property. Also, the drop in volume of sales did not result in a drop in prices in Brooklyn.
The CITY's appraiser also argued that the TDRs sales used by the Claimant's appraiser are not truly comparable because those sales involved a significantly greater amount of TDRs, and thus had a more significant impact on the feasibility of developing the receptor site.
TDR sale 1 and 2 were sales to the same receptor site which, was a 20,095 square foot lot. TDR sale 1 was for 15,380 square feet and TDR sale 2 was for 89,928 square feet, totaling 105,30 8 square feet. The developer of the receptor lot filed plans to construct a 461,933 square foot residential building. The combined TDRs from sale 1 and 2 represented 23% of the total development.
TDR sale 3 was of 77,595 square feet transferred to a receptor site that was assembled from other lots on the block and developed residentially. Contrary to claims by the CITY, the Claimant's appraiser accurately identified it as a sale of TDRs from Block 2049 lot 8 to a newly configured lot 2. There is no information on what percentage of the total development the TDRs represented, however the amount of TDRs were significantly greater than that possessed by the subject property.
TDR sale 4 was of 45,450 square feet to a receptor site consisting of 16,476 square feet, which was purchased to develop residentially. The site had an allowable developable square footage of 164,760 square feet, and the TDRs represented 22% of the total development and an increase of 28% developable area.
As discussed above, the subject properties' 20,390 0f TDRs would allow for a 39% increase in allowable square footage for development of lot 29, and a 35% increase for lot 37. The TDRs would constitute 28% of the total potential development on lot 29 and 26% of the total potential development on lot 37.
The subject properties' TDRs are within the range of both the percent increase of [*11]developable area and percentage of total developable area of the comparable TDR sales, even though the subject property has a significantly smaller amount of TDRs.
Based on the record before the Court, there appears to be no basis to adjust the price of the comparable sales downward to account for the amount of TDRs transferred.
The CITY's appraiser also points out that the TDRs in this case could not be used for residential development. The reason this is so is because the buildings on the subject property already exceed the maximum residential FAR of 3.44 by 1,070 square feet. If either receptor site purchased the subject properties' TDRs, the amount of residential TDRs that could built on the receptor site would be reduced by 1,070 square feet. However, the receptor site could still be developed to a maximum FAR of 6.5 with up to a commercial FAR of 6. A hotel is a commercial use under the zoning resolution. Thus, the receptor site could use all of the subject properties' TDRs for a hotel.
While the fact that the TDRs could not be used residentially does not mean they were not marketable, it does raise a question as to whether the four TDR sales used by Claimant's appraiser, which were all for residential development, should be adjusted to account for this fact.
There has been significant hotel development in the immediate vicinity of the subject property which continued though the second half of 2008. In fact, of the nine land sales considered by the Claimant's appraiser, all were purchased for hotel development except for sale 2, which was purchased by the CITY in lieu of condemnation, and sale 6 at 19 Flatbush Avenue, which was purchased for residential development.
The record before the Court lacks any comparison of the prices for TDRs bought for hotel development as opposed to residential development, or for land bought for hotel development as opposed to residential development.
While the four comparable TDRs are the best evidence in the record for the value of the subject properties' TDRs, it is evident that TDRs that cannot be used for residential use because of the existing building on the donor site, are less valuable than the comparable TDRs that did not carry these restrictions.
Additionally, a downward adjustment must be made for the fact that a transfer of TDRs to either site would reduce the allowable residential FAR by 1,070 square feet.
In light of the limitations of use of the subject property's TDRs, and the fact that they would reduce the allowable residential FAR on either potential receptor site, a downward adjustment of 25% is appropriate. Such an adjustment would reduce the average price per square foot of comparable TDRs from $104 to $78 a square foot. This would result in a value of $1,590,420 for the subject property's 20,390 square feet of TDRs.
By reason of the foregoing, the Court finds that on the date of vesting, the value of the properties' TDRs was $1,590,420, the value of the building was $3,958,857 and the total value of the subject property was $5,549,277 or $5,549,000 rounded.
Settle order on notice.
Dated: September 8, 2017
Brooklyn, New York
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