Matter of City of New York (Eman Realty Corp.) – Whatever Happened to the Rule of Highest and Best Use?

The City of New York condemned a multifamily building in Brooklyn.  The property was subject to rent stabilization and both experts found the highest and best use was for continued use as a multifamily dwelling complex.  Both appraisers used the sales comparison (market) approach to valuation.  Then the valuation process went screwy.  The City made a massive deduction for alleged critical repairs on the subject property and applied an Akerson format capitalization formula which accounts for both the cost and availability of mortgage financing.  An approach never used in valuing urban property and apparently only used by one City appraiser.  The City’s appraiser found a value of the property of $1,750,000.

The property owner’s appraiser found a value of $5,000,000 by using an effective gross income multiplier and reconciling that value with his market data approach.

The claimant’s expert then found that the property had transferrable development rights (TDR).  By using sales of underdeveloped land and separate TDR sales, the claimant’s appraiser determined that the subject’s TDRs had a value of approximately $2,100,000 resulting in a final value of $7,100,000 for the subject property.

Alas, the case went up on appeal to the Second Department which exists to reduce awards.  It found, “However, the claimant’s expert’s assertion that, absent the project, it was likely that these receptor sites and the subject property’s TDRs would have been purchased for development was speculative.  The claimant did not present any evidence which showed that, at any time prior to condemnation, any steps were taken to form an assemblage with the adjacent properties or to sell the subject property’s TDRs (see Matter of New York State Urban Dev. Corp. [RRNT Assoc.], 308 AD2d at 414; cf. Matter of City of Long Beach v Sun NLF Ltd. Partnership, 124 AD3d at 652-653).  Moreover, the claimant’s expert acknowledged that there was no evidence that the owners of these adjacent lots had interest in purchasing the subject property’s TDRs.  While the claimant’s expert stated, in a conclusory fashion, that there was one potential sale of the subject property that did not go through, he did not specify who the purchaser was or when the potential sale would have occurred.

Accordingly, we modify the order, judgment, and fifth separate and partial final decree by subtracting from the claimant’s award the sum of $1,590,000, representing the Supreme Court’s determination as to the value of the subject property’s TDRs, thereby reducing the final award from the principal sum of $5,549,000 to the principal sum of $3,959,000.”  Matter of City of New York, ____ AD3d ____, (2d Dept 2021).

In making this decision, the Second Department ignored the well-established law regarding “highest and best use.”  It is not an empty phrase; it is the rule when property taken in eminent domain is to be valued.

As the same court stated in Matter of 730 Equity Corp. v New York State Urban Dev. Corp., 142 AD3d 1087, at 1088-1089 (2016), “The measure of damages in a condemnation case ‘must reflect the fair market value of the property in its highest and best use on the date of the taking, regardless of whether the property is being put to such use at the time.”  (Chester Indus. Park Assoc., LLP v State of New York, 65 AD3d 513, 514, 884 NYS2d 243 (2009), quoting Chemical Corp. v Town of East Hampton, 298 AD2d 419, 420, 748 NYS2d 606 [2002]).  The determination of highest and best use must be based upon evidence of a use which reasonably could or would be made of the property in the near future (see Matter of City of New York [Broadway Cary Corp.], 34 NY2d 535, 536, 309 NE2d 870, 354 NYS2d 100 [1974]; Matter of Queens W. Dev. Corp. [Nixbot Realty Assoc.], 139 AD3d 863, 33 NYS3d 274  [2016]; Yaphank Dev. Co. v County of Suffolk, 203 AD2d 280, 281, 609 NYS2d 346 [1994]; Matter of Consolidated Edison Co. of N.Y. v Neptune Assoc.,190 AD2d 669, 593 NYS2d 259 [1993]).  ‘The potential uses the court may consider in determining the value are ordinarily limited to those uses permitted by the zoning regulations at the time of taking’ (Matter of Town of Islip [Mascioli], 49 NY2d 354, 360, 402 NE2d 1123, 426 NYS2d 220, [1980]).  However, when there is a reasonable probability of rezoning, some adjustment must be made to the value of the property to reflect that fact (see id. at 360-361; Matter of Town of Oyster Bay [BPJ Mar. Corp.],139 AD3d 741, 30 NYS3d 699 [2016]).”

The highest and best use rule must be applied “irrespective” of whether the property is being so used.  Keator v State of New York, 23 NY2d 337, 339 (1968).  It is also clear that the property owner need not take any steps to further such use.  There need not be an anti litem plan for the site use.  Matter of City of New York (Broadway Carey Corp.), 34 NY2d 535 (1974).

The Trial Court, Hon. Wayne P. Saitta, got it absolutely correct.  The Court held: “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, 309 N.E.2d 870, 354 NYS2d 100 (1974); City of Long Beach v Sun NLF LP, 124 AD3d 651, 1 NYS3d 270 (2d Dept 2015).  This is true for the value of TDRs as well.  Matter of Metropolitan Tr. Auth. v, 85 AD3d 314, 927 NYS2d 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 of purchase of TDRs.”

Justice Saitta further found, “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 Corp., 34 NY2d 535, 309 NE2d 870, 354 NYS2d 100 (1974); City of Long Beach v Sun NLF LP, 124 AD3d 651, 1 NYS3d 270 (2d 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.”  Matter of City of New York (Eman Realty Corp.), 56 Misc3d 1222(A), 2017 N.Y. Misc. LEXIS 3356 (Sup. Ct. Kings Co. 2017).

All we can say is good luck in trying to go to the Court of Appeals.

Posted in Highest and Best Use, Measure of Damages, Reasonable Probability of Use
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