Opinion
401097/03
6-26-2009
IN THE MATTER OF the Application of NEW YORK STATE URBAN DEVELOPMENT CORPORATION, D/B/A EMPIRE STATE DEVELOPMENT CORPORATION, Petitioner, To Acquire by Exercise of its Powers of Eminent Domain Title in Fee Simple to Certain Real Property for use in a Land use Improvement Project Known as the 42nd Street Development Project—Site 8 South.
Claimant was represented by Michael Rikon, Esq. of Goldstein Goldstein & Rikon, PC, New York, NY. NYS Urban Development Corp was represented by John Casolaro, Esq., of Carter, Ledyard & Milburn, New York, NY.
This is a proceeding under Article 7 of the Eminent Domain Procedure Law for a determination of the compensation to be awarded to 230 West 41st Street Associates, LLC (Claimant), fee owner of the captioned property, of which a portion was taken in condemnation.
The property is mid-block, just west of the new New York Times Building. The Times Building is across the street from the Port Authority Bus Terminal, on the east side of Eighth Avenue between West Fortieth and West Forty-first Streets. On West Fortieth Street, the Times Building abuts a small 5 story loft building (hereinafter referred to as "the loft building"). The loft building was taken in condemnation on August 19, 2002 for the very purpose of facilitating construction of the New York Times Building, part of the 42nd Street redevelopment project. At the time, there were two retail tenants on the ground floor; the vacant upper floors functioned as a conduit for air for an adjoining 7-story building. Mechanical equipment, servicing the needs of the loft building, the 7-story building and another adjoining 20-story office building, was in the basement. The upper floors not only were vacant but were raw and in serious disrepair. The three buildings comprise Claimant's property, the valuation of which is in dispute.
The 7-story building is the old New York Herald Tribune Building and has retail and office uses; at its rear, it is connected to the larger office building, formerly the Herald Tribune Annex, which fronts the south side of West Forty-First Street. Together, these two are referred to as the "big building".
Because the buildings are interconnected and only the loft building is taken, there was a "partial taking". "The law is well settled that when there is a partial taking of land, the court, as a general rule, must measure damages by finding the difference between the fair market value before the taking and the fair market value of the remainder after the taking" (Acme Theaters, Inc. v State of New York, 26 NY2d 385, 388 [1970][citations omitted]).
Each side presented expert testimony and written reports from qualified real estate experts. Consistent with the practice in this field, there was an exchange of written appraisals and then each side issued a written challenge, or rebuttal, to the opinions and underlying assumptions and data of the other's expert. Both on its direct case and in rebuttal, Claimant relied upon Robert von Ancken of Grubb & Ellis Consulting Company, Inc. On its direct case, Condemnor presented Marilyn Kramer Weitzman of The Weitzman Group, Inc., and then, in rebuttal, Jerome Haims, of Jerome Haims Realty, Inc.
DIRECT DAMAGES
Von Ancken's opinion is that the appropriate method of appraisal is to value the big building by the income capitalization method for both the "before" and "after" components of his valuation, inasmuch as the big building is operational and income producing (von Ancken appraisal, Exhibit C in evidence, 42). Because most of the loft building is not income-producing, he considers income capitalization inappropriate for determining the value it contributes to the whole (id.). Rather, he concludes that it should be viewed separately as a vacant shell available for sale. Accordingly, he uses a sales comparison approach to determine its value, and adds that amount to the income capitalized value of the big building in arriving at a "before" value of the entire parcel (id., 44). His "after" value is the income capitalized value of the big building after deduction, not only of the direct damages measured by the sales value of the loft building, but also an amount attributable to consequential damages suffered by the big building from the loss of the loft building.
Von Ancken fixed the value of the loft building at $4.8 million, based on $200 per square foot for 24,000 square feet. He valued the big building at $67.5 million, finding a gross "before" value of $72.3 million for the entire property. By virtue of a possible income reduction of $800,000 to the big building attributable to a loss of some light in its interior, his "after" value for it is reduced to $66.7 million, leading to his opinion that Claimant's loss is $5.6 million ($4.8 million for the loft building plus $800,000 consequential damage to the big building).
Condemnor makes three points in disputing von Ancken's opinion: First, that his analysis is improper in that the loft building should not be valued on a basis different from the big building; second, that he makes a glaring error in failing to deduct the costs of converting the functioning loft building into a true shell; and third, it argues that the shell properties he used for comparison are too dissimilar for his opinion to be convincing.
None of the decisions called to the court's attention indicate any disapproval of the sales comparison approach as an improper component of a "before and after" analysis (McDonald v State of New York, 42 NY2d 900 [1977]; Acme Theaters, Inc. v State, 26 NY2d 385, 388 [1970]; Diocese of Buffalo v State, 24 NY2d 320 [1966]). Nor do they suggest that it is inappropriate for a court to apply to one portion of a parcel an appraisal analysis that is different from that applied to another portion. Indeed, the unique circumstances of the buildings on Claimant's property justify this approach. Condemnor's cases are distinguishable from the instant matter. Diocese of Buffalo concerned the valuation of cemetery property, based on the sale value of the land, as opposed to treating it as an income producing property, from which income can be derived as plots are sold (24 NY2d 320). Here, the greater portion of the loft building, while serving a purpose, was not income producing at the time of taking. In McDonald v State, supra, the issue was whether or not the condemned property was improperly valued as a specialty, which has no relation to the instant matter. Acme Theatres, Inc. v State, supra, concerned the propriety of appraising land in "bands" or segments.
The value of property taken in a condemnation proceeding is a question of fact (Acme Theatres, Inc., 26 NY2d at 388). In the absence of a limiting rule of law, the issue turns on the factual persuasiveness of the parties' respective expert witnesses. The court concludes that where there is a standing, largely vacant building, and the highest and best use is commercial development, that building may be valued as a shell, provided persuasive evidence of comparable sales is offered and is subject to such adjustments as reconcile its actual condition and use with the appraisal technique.
Agreeing that the loft building could be separately developed does not automatically lead to agreement with the opinion offered. Condemnor's other criticisms must be addressed. Importantly, separate development of the loft building requires that it be separated from the big building, with consideration given to the costs of making it suitable for development.
The principal of the Claimant who testified admitted that Claimant received $985,000 for reimbursement of expenses for the conversion of the fresh air intake functions that the loft building provided to the big building, and that the sum paid by the Condemnor to relocate electrical equipment present in the loft building to service the big building was "approximately two and a half million dollars." These expenditures, aggregating $ 3.485 million, are further supported by Exhibits 7 and 8 in evidence, and are unrefuted. Because there is no other available measure in the record, they must be deducted from the gross value attributed to the loft building as a marketable shell (5 Nichols, Eminent Domain § 20.04[2] [3d ed.]). On this subject, Claimant offered no evidence to counter Condemnor's reliance on the actaul costs as the basis for the necessary reduction. When this deduction is taken into account, Claimant's appraised value of $4.8 million is reduced to $1.315 million.
Just as Claimant ignored these conversion costs, because of its fundamental disagreement about the propriety of viewing the loft building as a shell, Condemnor failed to introduce any conflicting evidence of arguably comparable sales of vacant or "shell" buildings, leaving the court to evaluate claimant's expert's opinion in light only of Condemnor's challenges to the sales relied upon by von Ancken.
Von Ancken described five properties which he deemed comparable for valuation purposes. For a variety of reasons appropriate to the exercise, he adjusted values for all but one: Comparable number 1 was valued at $229 per square foot, based on a net upward adjustment of five percent; Comparable number 2 was valued at $197 per square foot based on a net downward adjustment of thirty percent; Comparable number 3 was valued at $171 per square foot without any adjustment factor; Comparable number 4 was valued at $243 per square foot based on a net downward adjustment of ten percent, and Comparable number 5 was valued at $161 per square foot, based on a net downward adjustment of five percent (Exhibit C, 65).
"The best comparable(s), from both an appraisal standpoint and legal standpoint, are those that are most similar. To the appraiser this meant the properties requiring the fewest adjustments to equalize them to the property under appraisal" (J.D. Eaton, Real Estate Valuations in Litigation, 204 [2nd ed. Appraisal Institute, 1995]). Comparable evidence "should be rejected if the purported comparables are not sufficiently similar in structure, locations, and as many other features as possible." (Henry O.Lee and Wilford A. LeForestier, Review and Reduction of Real Property Assessments in New York § 1.08 at 28 [3d ed, New York State Bar Association, 1988], citing Manno v. Finance Administrator, 92 AD2d 896 [2d Dept 1983]). "In reviewing an appraiser's adjustment factors, one should be alert for any large adjustment, since the greater the adjustment, the less reliable the (comparable)" (Michael Rikon, What's It Worth — Who Wants to Know? — The Valuation of Real Property In Litigation, published in Condemnation Law and Procedures in New York at 165 [Jon Santemma, ed.,New York State Bar Association, 2005]). In Bialystock & Bloom v. Gleason, 290 AD2d 607, 610 (3d Dept 2002), the court indicated that when real estate comparables "required extensive adjustment" their "evidentiary value was diminished."
Mindful of the foregoing, notwithstanding the criticism in the rebuttal reports and testimony, there is no persuasive reason to disregard von Ancken's opinion. This is because the circumstances here are sui generis. There cannot be too many "shells" in Manhattan which have for decades been largely vacant while serving a valuable economic purpose to its owner. For this reason, von Ancken's efforts to make suitable adjustments is impressive.
The next step in the analysis of this dispute is to examine the valuation evidence offered by the Condemnor. Its analysis was presented through Weitzman. She examined comparable retail rents for the two retail stores on the ground floor of the loft building, and comparable retail and office rents for the big building (see Weitzman appraisal, Exhibit 3 in evidence). Then she determined market rate expenses, developed from her analysis of rents and expenses of comparable properties. She selected and applied a vacancy and collection reduction of seven percent, and applied an 8% capitalization rate, leading to an effective gross income for her "before" value of $44.3 million. For her "after" value, she deducted the income attributable to the loft building component, reduced her expenses accordingly and derived a lower net operating income. Again using an 8% capitalization rate, she arrived at $43 million for the value of the property without the loft building. Accordingly, after subtracting the one from the other, her opinion was that Claimant's direct damages are $ 1.3 million, i.e., almost precisely the same valuation urged by von Ancken after the unrefuted conversion costs are accounted for. In other words, whether the income of the big building is low as presented by Weitzman, or high as presented by von Ancken (once his consequential damages are excluded), their direct damages opinions agree because the spread between their before and after valuations, the relevant question here, are nearly the same.
In rebutting Weitzman, Von Ancken challenged her income analysis of the big building, as to office and retail rental income, and as to the expenses she attributed to the building's operation (Exhibit C, 44). His aggregate potential gross income of $9,250,333 was reduced by a vacancy deduction of 7.5% for an effective gross income of $8,556,558 (id.). After determining, and then deducting, net operating expenses of $2,816,774, he arrived at a net operating income of $5,739,784.00. Capitalized at 8.5%, his rounded value for the big building is $67.5 million. This presentation is the same he offered as validation of his direct evidence of value.
Von Ancken never offered an opinion of the rental income the loft building would generate other than by reference to the big building. He states in his rebuttal report that Weitzman ". . . neglected entirely, without explanation, to attribute any value to the non-income-producing, five-story shell building, the very portion of the subject property that was condemned" (Exhibit D, 15). He stood fast, notwithstanding that at the time of the taking, and since sometime in the 1960s, revenue was generated by the two stores on the ground floor, and Weitzman explains her opinion about their rental value (Exhibit 3, table 11). What von Ancken apparently meant is that no "rental" value was placed on the upper floors. This, however, is appropriate to Weitzman's approach; they had no market value of their own. Rather, their contribution enhanced the parcel as a whole, and Claimant has been compensated for the relocation of the benefit.
Just as Haims challenged von Ancken's sales comparables, von Ancken views Weitzman's comparables as altogether ill-chosen. In his rebuttal to her appraisal and in his testimony, he described her comparable rental properties as flawed because she failed to consider the property's proximity to the Port Authority Bus Terminal with the enhancement in value to retailers that the pedestrian traffic generates (Exhibit D at 2-3) and she excluded more comparable properties which were closer to the subject on the theory that their rental values are unreasonably enhanced by their inclusion in the 42nd Street Project, whereas he believes inclusion in the project actually has a negative impact (id., 3-4). The court concludes that it is impossible on this record to determine whose opinion, if either of them, is correct in respect of the impact of the 42nd Street project.
The court is responsible for determining just compensation to the claimant. Where, as here, the opinions of the parties, when properly examined, are substantially identical, it is difficult to justify any adjustment. Accordingly, Claimaint is entitled to $1.315 million for the direct damages it suffered as a result of the taking of the loft building.
CONSEQUENTIAL DAMAGES
Finally, discussion must be had of the dispute over the consequences to the big building from the taking of the loft building.Von Ancken opines that the development of the subject property at its highest and best use would block exterior light and air for the tenants in the 6th and 7th floors of the 7 story portion of the big building, with a resulting $75,000 loss from a 25% reduction in yearly rent (Exhibit C, 69). When capitalized, this reduces his valuation of the big building by $800,000. As of the valuation date, August 19, 2002, the five story loft building was flush against the seven story portion of the big building (see Exhibit C, photographs at top of page 6 and bottom of page 7). Von Ancken's entire argument in support of the consequential damages claim is contained in one paragraph:
In addition to the direct damages of the taking, i.e., the shell value of the five-story vacant loft building, the subject property suffered consequential damages caused by the loss of light and air on the six and seventh floor of the 7-story portion of the subject office building, because the open window exposure of the sixth and seventh floors will no longer be protected by the adjacent five-story loft building. The 7-story portion of the property will lose light and air because it will be blocked by the new proposed building on the westerly side.
(Exhibit C, 69)
The evidence shows that there is just one office on the sixth and seventh floors facing the loft building, and its dimensions were 9.8 feet x 15 feet, or 147 square feet (see Haims rebuttal report, Exhibit 1 in evidence, 54-55). Any award of consequential damages would be limited to a 25% reduction in rent attributable to the single 147 square foot office, pursuant to von Ancken's opinion. The remaining space on those floors consists of an elevator shaft, a stairwell, and mechanical and utility rooms, all of which are not rentable, and for which Claimant could not obtain consequential damages for reduced rent due to blocked exterior light and air.
Von Ancken's opinion is supported by the shell sale analysis, which presumes a new structure will use the site of the loft building. Accepting that analysis for valuation of direct damages is not equivalent to a conclusion that the eventual development of the loft building can be predicted as of the vesting date so as to accept Claimant's argument regarding the economic consequence to the big building. As a result, the court cannot assume that windows on the sixth and seventh floors of the 7 story building would be obstructed. An award may not be based on a use which is merely hypothetical or speculative (In Re Estate of Edward Maynes, 278 AD2d 823, 825 [4th Dept 2000], lv app den 96 NY2d 712 [2001]). Weitzman's failure to expressly value the consequential damages, or to have included same in her $1.3 million valuation opinion, does not prejudice Claimant.
Accordingly, 230 West 41st Street Associates, LLC is awarded the sum of $1.315 million in direct damages. The claim for consequential damages is denied.
Settle judgment on 10 days notice.