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Saratoga Harness Racing, Inc. v. Williams, 1998 N.Y. Int. 0070 (June 9, 1998).

TAXATION - REAL PROPERTY ASSESSMENT - METHODS OF VALUATION

Comparable lease income method is appropriate valuation method for owner-owed property.

[SUMMARY] | [ISSUE & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY]

SUMMARY

The City of Saratoga Springs (the "City") assessed the Saratoga Harness racetrack using the replacement cost less depreciation method of valuation. The City used this method of valuation based on its determination that the property is a "specialty." Saratoga Harness argued that the comparable lease income formula was the appropriate method of valuation, and protested the City's method of valuation with the Board of Assessment Review (the "Board"). The Board rejected these protests and Saratoga Harness initiated judicial proceedings to challenge the City's assessments.

The Supreme Court found that there is a market for racetrack property and therefore that a racetrack such as the one at issue does not qualify as a "specialty." In addition, the court concluded that the comparable lease income method is valid and appropriate. On appeal, the Appellate Division determined that the property is a specialty, rejected Saratoga Harness's use of the comparable lease income formula, and reversed.

ISSUE & DISPOSITION

Issues

1) Whether the comparable lease income method of valuation is a permissible method of valuation for owner occupied property.

2) Whether racetrack property qualifies as "specialty" property.

Disposition

1) Yes. The comparable lease income method, generally used to determine the "market rent" component of the income capitalization formula to real property valuation, is an appropriate valuation method for owner occupied property given that "market rent" assumes either the non-existence of a subject property lease or the inaccuracy of an actual lease in reflecting the true market value.

2) No. Racetracks are disqualified from the "specialty" property category because sales of over thirty racetracks in the United States between 1984 and 1992 prevent racetrack property from meeting the prerequisite that there be no market for the type of property at issue and no sales of property for uses such as those at issue.

AUTHORITIES CITED

Cases Cited by the Court

Other Sources Cited by the Court

  • Appraisal Inst., The Appraisal of Real Estate 81 (11th Ed.).

RELATED SOURCES

  • Redevelopment Agency of Long Beach v. First Christian Church of Long Beach, 189 Cal.Rptr 749 (Cal. 1983).
  • Illini Country Club v. Property Tax Appeal Bd., 263 Ill.App.3d 410 (Ill. 1994).
  • Carson v. County of Hennepin, 576 N.W.2d 445 (Minn. Sup. Ct. 1998).
  • RAS Dev. Corp. v. Fayette County Bd., 704 A.2d 1130 (Pa. 1997).
  • Rite Hite v Bd. of Review, 575 N.W.2d 721 (Wis. Ct. App. 1997).

COMMENTARY

State of the Law Before Saratoga Harness Racing

In a real property valuation "any fair and nondiscriminatory method that will achieve [property value] is acceptable." Matter of Allied Corp. v. Town of Camillus, 80 N.Y.2d. 351, 356 (N.Y. 1992). A recent sale of the subject property is the best evidence of value. Id. Absent that evidence, courts have traditionally accepted three approaches: comparable sales, capitalization of income, or reproduction cost less depreciation. Id. When data for a comparable sale valuation is insufficient, the court will generally prefer the income capitalization method over the reproduction cost less depreciation method. Id.

The income capitalization approach involves determining the property's "market rent" and capitalizing this amount. In determining "market rent," the field of real property appraisal accepts the comparable lease income method in which market rents are based on comparable properties. The comparable lease income method is typically used by assessors with regard to properties that are being rented and not with regard to owner occupied properties.

The replacement cost less depreciation method is based on "[t]he current cost of reproducing or replacing the improvements, minus the loss in value from depreciation, plus site value." Appraisal Inst., The Appraisal of Real Estate 81 [11th ed.]. Courts limit the application of this method to "specialty" property because it tends to result in overvaluation. Four criteria have been developed to determine whether a property qualifies as a "specialty." Matter of Allied Corp. v. Town of Camillus, 90 N.Y.2d. 351, 356 (N.Y. 1992). Notably, one criterion is that there must be no market for the type of property and no sales of property for such use.

Effect of Saratoga Harness Racing on Current Law

The Court of Appeals held that where actual rental income is unavailable, as it is for owner occupied property, the comparable lease income formula may be used to calculate an imputed market rent for property valuation under the income capitalization method. See In re Saratoga Harness Racing at para. 13. The court stated that the use of "market rent" in the income capitalization formula is not contingent on a lease of the property; rather, it assumes the nonexistence or inaccuracy of a lease. See id.

The court also held that the property was not a "specialty." See id. at para. 14. It stated that there existed a market for the type of property in question, citing 33 sales of horse racetracks in the United States between 1984 and 1992, including three in New York State. See id. at para. 15.

Unanswered Questions

In holding that Saratoga Harness is not a "specialty" property, the Court of Appeals failed to provide guidance for future parties evaluating whether or not a particular piece of property meets the four "specialty" criteria. While finding that evidence of 33 sales of horse racetracks in the United States between 1984 and 1992, including three in New York State, disqualifies racetrack property from one of the "specialty" criteria, there is no indication of the appropriate analysis to be used in subsequent cases. For example, the Court of Appeals does not indicate the relevant time frame that should be considered when determining whether a market exists for this type of property. In this case, the court evaluated an eight year time span; however, it remains unclear whether this time frame might be lengthened or shortened under different circumstances. In addition, the Court of Appeals failed to provide guidance regarding the appropriate geographic boundaries of a particular market. Questions remain whether the appropriate geographic boundaries are national, state-wide, regional, or perhaps determined according to the particular facts of each case. Finally, with regard to the particulars of evaluating whether a piece of property qualifies as a "specialty," it is unclear whether the specific parameters used for this determination are to be within the trial court's discretion.

Survey of the Law in Other Jurisdictions

California, Illinois, and Pennsylvania courts approach the property valuation issue in much the same manner as the New York Court of Appeals. For example, Illinois defines the "fair market value" concept as "the amount the property would bring at a voluntary sale where the owner is ready, willing, and able to sell; the buyer is ready, willing, and able to buy; and neither is under a compulsion to do so." Illini Country Club v. Property Tax Appeal Board, 263 Ill.App.3d 410 (Ill. 1994) (citing In re Application of Rosewell, 120 Ill.App.3d 369 (Ill. 1983)).

The weight accorded different valuation methods is defined by statute in some jurisdictions. For example, the Pennsylvania Assessment Law requires that the reproduction or replacement less depreciation, comparable sales, and income-based approaches be considered together in determining a property's actual value. In RAS Development Corp. v. Fayette County Board, 704 A.2d 1130 (Pa. 1997), the Commonwealth Court of Pennsylvania held that it is within the trial court's discretion to reject inapplicable or non-probative evidence concerning any of the three methods. In California "fair market value" is preferred for eminent domain valuation, but where no market exists any "just and equitable" method is acceptable. See Redevelopment Agency of Long Beach v. First Christian Church of Long Beach, 189 Cal.Rptr 749 (Cal. 1983).

The Minnesota Supreme Court assessed the validity of the lease income method of valuation for owner occupied property in Carson Pirie Scott & Co. v. County of Hennepin, 576 N.W.2d 445 (Minn. Sup. Ct. 1998). The court, after carefully considering alternative methods of valuation, the nature of the property, and the reliability of the data, concluded that the lease income valuation approach was the proper method of valuation. In contrast, the Court of Appeals of Wisconsin determined in Rite Hite v Board of Review, 575 N.W.2d 721 (Wis. Ct. App. 1997), that rental income was not a useful or appropriate measure of the property's value since the property owner controlled the property lessee, and thus, the rent that a "lessee" would have paid to the owner would not have constituted an arm's length transaction.

Prepared By:

  • Micah Acoba, '99
  • Jeffrey Berman '00
  • Norman Bishara, '99
  • Benjamin Blaugrund, '00
  • Rafael Lazaro '00
  • Karen E. Pawlick, '99
  • Patricia Russell, 00