Volume 7 - Opinions of Counsel SBEA No. 81
Assessments, generally - methods of (valuation) (condominiums and cooperatives) (rental properties) - Real Property Law, § 339-y; Real Property Tax Law, §§ 580, 581:
Section 581 of the Real Property Tax Law limits the use of otherwise pertinent market data in the assessment of residential condominiums, cooperatives and conventional multiple dwellings. There is no conflict between section 339-y of the Real Property Law and section 581.
Section 581, added to the Real Property Tax Law by Chapter 1057 of the Laws of 1981, imposes limitations on the assessment of residential condominiums, cooperatives and conventional multiple dwellings (i.e., “rental property”). We have received several inquiries concerning the extent to which this section changes prior law on the subject of the methodology to be employed to assess these types of properties and, with reference to condominiums, whether section 581 is compatible with the assessment ceiling provisions of section 339-y of the Real Property Law.
It is our understanding that section 581 was written in response to a series of cases between 1977 and 1981, involving the assessment of these three categories of real property. Subdivision one of the new law, which limits the assessment of a condominium or a cooperative to “a sum not exceeding the assessment, which would be placed upon such parcel were the parcel not owned or leased by a cooperative corporation or on a condominium basis”, appears to codify a decision, on remand, involving condominiums (see, Marks v. Pelcher, N.Y.L.J., 6/14/78, p.l6, c.4, aff’d 49 N.Y.2d 954, 406 N.E.2d 802, 428 N.Y.S.2d 947 (1980)), and to reverse two cases concerning cooperative assessments (River-House Bronxville v. Hoffman, 101 Misc.2d 422, 421 N.Y.S.2d 161 (S.Ct., Westchester Co., 1979), rev’d and rem., 79 A.D.2d 990, 434 N.Y.S.2d 465 (2d Dept., 1981); and Matter of 200 Country Club Associates, 83 A.D.2d 637, 441 N.Y.S.2d 706 (2d Dept., 1981)). Subdivision two of the new law, which bars the assessor from considering the conversion value of conventional rental real property, was enacted in response to the so-called “bull market” case in which a New York County Supreme Court Justice overstated the importance of the conversion factor in assessing such property (Precision Dynamics Corp. v. Tax Comm., N.Y.L.J., 6/2/81, p.10, c.5, aff’d, 86 A.D.2d 799, 447 N.Y.S.2d 182 (1st Dept., 1982), aff’d 56 N.Y.2d 752, 437 N.E.2d 273, 452 N.Y.S.2d 14 (1982)).
Although the types of properties subject to the provisions of section 581 are all structures containing separate residential units, they differ in the form of ownership: conventional multiple dwellings are income producing properties owned for the generation of profit; cooperatives are multiple residences in which title to the building is in a nonprofit entity or corporation, the owners or shareholders of which have leases or occupancy agreements which entitle them to occupy particular units within the building; and condominiums are multiple residences subdivided into individual units, each unit being held in fee simple with the owner also holding an interest in the common areas in the project.
These distinctions in the form and nature of ownership have caused problems in the assessment of these properties for real property tax purposes; assessors have been uncertain as to which method (or combination of methods) of valuation should be used and whether different methods should be applied depending upon the nature of the ownership. These difficulties have been exacerbated by the increasing demand for the conversion of ordinary rental properties to cooperatives and condominiums. Finally, condominium assessment is further limited by the statutory provisions of section 339-y of the Real Property Law.
In reviewing the law prior to the enactment of section 581, reference must be made to former section 306 of the Real Property Tax Law and to section 339-y of the Real Property Law. Section 306 provided a standard of assessment requiring that all real property be assessed at its full value. Chapter 1057 of the Laws of 1981 repealed section 306 and substituted a “uniform percentage of value (fractional assessment)” as the standard of assessment (§ 305(2)). For purposes of this Opinion, we assume that case law construing “full value” is relevant to the assessment standard of section 305.
Section 339-y of the Real Property Law requires that each condominium unit together with its common interest be assessed as one parcel and provides that the sum of the assessments of the units cannot exceed the valuation which the condominium as a whole would have if it were assessed as a parcel.
Professional appraisers recognize three approaches to determining value: the comparative sales or market data approach, the income approach and the cost approach. (See, e.g., Property Assessment Valuation, International Association of Assessing Officials, p. 38 (Chicago 1977).) The courts have approved any valuation method realistically related to the type of property if the use of that method produces an equitable apportionment of the tax burden (Merrick Holding Corp. v. Board of Assessors, Nassau County, 45 N.Y.2d 538, 382 N.E.2d 1341, 410 N.Y.S.2d 565 (1978)). In determining value where there is a market, the courts have preferred the comparative-sales or market data approach. In the case of Great Atlantic and Pacific Tea Co. v. Kiernan, 42 N.Y.2d 236, 366 N.E.2d 808, 397 N.Y.S.2d 718 (1977), the Court of Appeals cited section 306 and declared that “generally, it is ‘market value’ which provides the most reliable valuation for assessment purposes” (42 N.Y.2d, at 239, 397 N.Y.S.2d, at 721). The Court added that:
[W]here there is no reliable market data, other methods are available such as the capitalization of income method which is utilized in valuing rental property [citations omitted] or the reproduction cost-less depreciation method which is utilized when the subject property may properly be categorized as a “speciality” [citation omitted]. (42 N.Y.2d, at 240, 397 N.Y.S.2d, at 721.)
Thus, if property is of a type which does not readily sell in the open market but is income producing, the income approach to valuation (capitalization of income) is generally used to determine value for taxation purposes (1 Bonbright, Valuation of Property, p.216). This approach estimates the value of the property on the basis of what a knowledgeable business person would invest in property in order to receive a reasonable return upon his investment (see, e.g., People ex rel. Parklin Operating Corp. v. Miller, 287 N.Y. 126, 38 N.E.2d 465 (1941)).
In any case, the valuation derived by means of either comparable sales or income capitalization may not exceed the reproduction cost of the building new, less depreciation (RCNLD), since RCNLD is the maximum value which may be placed upon real property for purposes of real property taxation (People ex rel. Manhattan Square Beresford, Inc. v. Sexton, 284 N.Y. 145, 29 N.E.2d 654 (1940)). While recently the courts have placed less emphasis on the importance of the cost approach as a measurement of value (see, e.g., G.R.F., Inc. v. Bd. of Assessors of Nassau County, 41 N.Y.2d 512, 362 N.E.2d 597, 393 N.Y.S.2d 965 (1977)), the cost of construction of a new building remains a highly significant indicator of value for purposes of taxation (see, Resort HFA v. Finance Admn., 81 A.D.2d 617, 437 N.Y.S.2d 703 (2d Dept., 1981); see also, Joseph E. Seagram and Sons, Inc. v. Tax Commission, 14 N.Y.2d 314, 200 N.E.2d 447, 251 N.Y.S.2d 460 (1964)).
A. Rental properties
The valuation of conventional multiple dwellings (rental properties) presents few problems in terms of the proper methodology. As income producing properties held for the generation of profit, capitalization of income provides an acceptable valuation methodology. However, as indicated above, the income approach is secondary to the sales approach in those cases where a market does exist (see, e.g., People ex rel. Parklin Operating Corp. v. Miller, supra).
Valuation problems developed where conventional apartment houses were purchased for conversion to condominiums or cooperatives and the prices paid (in anticipation of the profit to be garnered by such conversions) greatly exceeded the value calculated by capitalizing the building’s actual rent rolls. For example, it has been held that in computing maximum allowable rents under the Emergency Housing Rent Control Law (L.1946, c.274, as amended), the sales price of an apartment house to an unsuccessful cooperative promoter was indicative of value absent special circumstances affecting the sale:
It thus follows that because the buyer contemplated converting the property into a cooperative it did not mean that there was reason why he should pay more for it than he must. It would only explain why he might be willing to pay a higher price but not more than he must-the true market price. (Payson v. Caputa, 9 A.D.2d 226, 193 N.Y.S.2d 166, at 171 (1st Dept., 1959)).
The Court of Appeals has recently considered the question of the weight to be given potential for conversion to condominium or cooperative ownership in assessing an apartment house subject to rent control (Precision Dynamics Corp. v. Tax Commission, supra). The trial court had confirmed a New York City Tax Commission determination, based in part upon sales of comparable buildings to promoters, the court taking notice of the “bull market” which existed for such buildings.
The Appellate Division affirmed, but stressed that possibility of conversion, while a proper element for consideration by the court, “is but one element and far from the most important, at that” (447 N.Y.S.2d, at 183). The Court of Appeals affirmed, declaring that “any legal error that may have been made by the trial court in considering cooperative conversion potential as the sole indicator of value was corrected by the Appellate Division which accorded such potential little, if any, weight in its determination of valuation” (56 N.Y.2d, at 753, 452 N.Y.S.2d, at 14). The Court noted that the “newly enacted section 581 . . . foreclosing consideration of conversion potential” was inapplicable to the proceeding before it (id).
B. Cooperatives
Despite the general use of income capitalization methodology, market data has not been totally ignored in valuing cooperatives. For example, in 5 East 71st St., Inc. v. Boyland, 7 N.Y.2d 859,164 N.E.2d 866, 196 N.Y.S.2d 994 (1959), the Court of Appeals affirmed a referee’s determination of value based primarily on the sales price of the subject building to a cooperative promoter. The Court added a caveat that the affirmance only meant there was sufficient evidence to support the assessed value.
The caveat was explained in a case decided the following year as meaning that sales price to the promoter was a more reliable indicator of value than the price to the cooperative corporation or the sum of the prices of shares. In 860 Fifth Ave. Corp. v. Tax Commission, 8 N.Y.2d 29, 167 N.E.2d 455, 200 N.Y.S.2d 817 (1960), the Court declared:
The fact that these cooperative apartments were transferred to tenant owners at prices high enough to secure a profit to the promoters after defraying costs of land and building, indicates that the promoters’ capital was not wasted, and that the land and building were adapted to the site and worth what they cost when they were acquired and constructed. (8 N.Y.2d, at 32, 200 N.Y.S.2d, at 819).
The First Department extended this approach to include the sales price from the promoter to the cooperative corporation as convincing evidence of value. “It is familiar learning that sales price of the instant property is, barring extraordinary facts, one of the most reliable guides to value that is obtainable” (Fifth Ave. & 59th St. Corp. v. Tax Commission, 19 A.D.2d 525, 240 N.Y.S.2d 93, at 94 (1st Dept., 1963), aff’d, 4 N.Y.2d 800, 200 N.E.2d 214, 251 N.Y.S.2d 34 (1964)). (It should be pointed out that in this case, as in 5 East 71st St., supra, the Court was affirming New York City Tax Commission determinations far below the appraisal values introduced by New York City.)
Capitalization of actual or comparable rents in valuing a property not under cooperative ownership which was not intended to produce income has been subject to judicial criticism:
[Since] the owner did not build for commercial rental-income purposes alone, and, as a consequence, capitalization of such income without adjustments produces a false result . . . one must not confuse investment for commercial rental income with investment for some other form of rental value unrelated to the receipt of commercial rental income. (Joseph E. Seagram & Sons v. Tax Commission, supra, 251 N.Y.S.2d, at 462-463, quoting with approval, the opinion of the Appellate Division, First Department in the same case 18 A.D.2d 109, 238 N.Y.S.2d 228.)
Similarly, the actual cost of constructing a cooperative has been preferred to income capitalization where such construction was close in time to the tax years in question (see, Stewart Tenants Corp. v. Tax Commission, 25 A.D.2d 623, 267 N.Y.S.2d 762 (1st Dept., 1966)).
The adjustments necessary to capitalize actual maintenance or comparable rents in a tax certiorari involving a cooperative have been criticized by courts as unreliable indicators of value due to the extreme speculation involved (see, e.g., One Lexington Ave., Inc., v. Tax Commission, N.Y.L.J., 3/30/79, p. 6, c.6 (S. Ct., New York Co.)). It was this concern with speculation which was dispositive in the case of River House-Bronxville Inc. v. Hoffman, supra (see also, Matter of 200 Country Club Associates, supra). In River House-Bronxville, the trial court calculated the assessment of a cooperative apartment building by analyzing sales of stock in the cooperative, projecting those prices throughout the building, totaling them, and reducing the result by a developer’s discount; the result was a hypothetical sales price for the complex. On appeal, the Second Department remanded for a hearing on the cost less depreciation of the building, (to ensure that the method adopted by the trial court was not producing a value in excess of that figure) and for the “submission of evidence bearing on the proper discount rate” from the gross sales prices to be employed (434 N.Y.S.2d, at 466).
Prior to the decision on remand, section 581 was enacted. In his opinion on remand {*} Justice Sullivan declared:
Under the new statute . . . condominiums and cooperative apartment buildings are to be assessed as if they were conventional apartment houses, the occupants of which are rent paying tenants. It has long been the law in New York that the preferred method of valuing such income producing properties is the income approach [citations omitted]. Thus it appears that the effect of the new statute is to reinstate the income approach as the preferred method of valuing cooperatives for assessment review purposes and to effectively overcome this Court’s reliance upon the market data approach in this case (emphasis added).
C. Condominiums
We are aware of only one reported case in which the question of the proper methodology for the assessment of condominiums has been before the New York courts. In its initial decision the trial court adopted a methodology somewhat similar to the discounted market value of shares approach subsequently applied to cooperatives in River House-Bronxville Inc. v. Hoffman, supra (Rothman v. Pelcher, 89 Misc.2d 560, 392 N.Y.S.2d 536 (S. Ct., Nassau Co., 1977), rev’d sub nom., Marks v. Pelcher, 58 A.D.2d 812, 396 N.Y.S.2d 267 (2d Dept., 1978), aff’d 49 N.Y.2d 954, 406 N.E.2d 802, 428 N.Y.S.2d 947 (1980)). On appeal, the Second Department reversed, holding that section 339-y of the Real Property Law prevented such an assessment. The court interpreted the Legislature’s intent in enacting section 339-y to be equal treatment of cooperatives and condominiums, apparently meaning capitalization of actual maintenance or comparable rent.
The unreported decision of the Nassau County Supreme Court on remand criticized the methodologies available as a result of the Appellate Division’s determination (id., N.Y.L.J., 6/14/78, p. 16, c.4). The court analyzed five possible methods of valuing an entire condominium project, finding fault with all, including the developer’s discounted sales analysis (later used in River House-Bronxville, supra), which necessarily involves consideration of a hypothetical sale to a hypothetical buyer. The Court of Appeals affirmed the decision on remand. (The eventual values found by the trial court on remand and affirmed by the Court of Appeals were derived by means of capitalizing comparable rents.)
The effects of Section 581
Section 581 does not disturb the traditional income approach in the valuation for taxation purposes of conventional apartment houses, or multi-family “real property occupied for residential purposes on a rental basis”, nor does it prohibit use of the cost method. Thus, income and cost remain allowable where appropriate. However, subdivision 2 of section 581 effectively prohibits even consideration of sales of comparable buildings to cooperative promoters to establish the value of conventional apartment houses, a factor previously sanctioned by the courts as at least an element to be considered in valuation of such property (see, Payson v. Caputa, supra; Precision Dynamics Corp. v. Tax Commission, supra)).
Subdivision 1 of section 581 requires that condominiums and cooperatives be assessed without regard to their unique form of ownership. This subdivision is almost identical to Senate Bill 9024-A of 1980, which was vetoed by Governor Carey on July 1, 1980 (Veto Message #102). The primary change is the addition of condominiums. It was the express purpose of the sponsors of S.9024-A to overturn the result of River House-Bronxville, supra, which approved the valuation of a cooperative apartment complex by a developer’s discounted market method (see memorandum in support, in Governor’s Bill Jacket, 1980 Veto Message #102). Presumably, this same purpose underlies subdivision 1 of section 581.
In valuing a cooperative complex, the assessor, by virtue of subdivision 1 of section 581, must now treat the complex as if it were not under cooperative ownership; that is, elements of value unique to cooperatives, such as the market for shares in the corporation, may not be considered. However, the restrictions on market data imposed by subdivision 2 of section 581 on non-cooperatives are also, indirectly, applicable to cooperatives.
That is, in part, subdivision 2 prevents a paradox. Cooperatives would receive no benefit if their assessments were based upon comparable non-cooperatives, the values of which were based upon their potential for cooperative conversion. Thus, subdivision 2 prevents the indirect use of the prevailing prices of cooperative shares in valuing cooperatives and conventional rental properties, where subdivision 1 prevents the direct use of such prices.
As to condominiums, the apparent intent of section 581 is that condominiums and cooperatives be valued in a manner similar to cooperatives and conventional rental properties, codifying the result (on remand) of Marks v. Pelcher, supra. Thus, capitalization of actual maintenance or comparable rent, rather than sales prices of individual units, is the preferred method for valuing condominiums.
However, since the new section requires condominiums to be treated as if not condominiums for valuation purposes, the law might be construed as meaning that the ceiling provisions of section 339-y should be ignored. However, to reach this conclusion it would be necessary to read section 581 as an implied repeal of section 339-y. But rather than implying repeal, we believe a court would be more likely to attempt to reconcile the two sections. “It is a familiar and salutary canon of construction that courts, in construing apparently conflicting statutory provisions, must try to harmonize them” (Burger King, Inc. v. State Tax Commission, 51 N.Y.2d 614, at 620-621, 416 N.E.2d 1024, 435 N.Y.S.2d 689, at 691 (1980)). Repeal by implication is rarely applied as a rule of statutory construction (see, e.g., Naramore v. State, 285 N.Y. 80, at 84, 32 N.E.2d 800 (1941)). “Such repeals will not be discovered unless the conclusion is unavoidable as when repugnancy between the two statutes is plain” (Cimo v. State, 306 N.Y. 143, at 148, 116 N.E.2d 290 (1953)).
The two provisions may be reconciled by assuming that section 581 limits the method of valuation, while section 339-y imposes a maximum on the assessment of each condominium unit. That is, the assessor must value the entire complex, using a methodology which does not include the sales price of individual units. Once this value is determined, it is apportioned among the units. While this interpretation is not without doubt, it avoids the problem of repeal by implication.
Accordingly, the provisions of section 581 may be summarized as follows. Where a comparable sales approach is used to assess conventional apartment houses, any value attributable to possible conversion to cooperative or condominium ownership must be excluded. A cooperative may not be valued based upon the market value of shares in the cooperative, nor may a condominium be valued based upon a totaling of sales prices of individual condominium units. The ceiling provisions of section 339-y of the Real Property Law are still applicable to condominiums. Where the sales of comparable conventional apartment houses are used in valuing cooperatives or condominiums, value due to possible conversion must be factored out.
July 26, 1982
{*} Index Nos. 7908/76, 6664/77, 6428/78, decision dated April 30, 1982; copy available at the office of the State Board in Albany.