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Volume 5 - Opinions of Counsel SBEA No. 62

Opinions of Counsel index

Assessments, generally (easements) (long-term leases) - Real Property Tax Law, § 306:

Under the method of assessment in New York, where there are easement interests, the value of the dominant estate is increased by virtue of having the benefit of the easement while the value of the servient estate is accordingly diminished. Thus, residential property having an indefeasible right to use a nearby beach would in all probability have a higher market value than comparable residential property not having such a right. In the absence of sales data, it would be reasonable for the assessor to assume that the value of the easements appurtenant to the lots approximates the market value of the beach property as if unencumbered and that the value of each individual lot has been increased by an amount which is pro rata this value.

It is not mandatory for an assessor to consider the effect of a long-term lease on the market value of property. Thus, where there is an outstanding long-term lease at an unrealistically low rental, the assessor need not take cognizance of the lease in determining the actual value of the property.

We have received an inquiry as to the proper mode of assessing two parcels of real property.

One parcel is a beach located on a lake and the other parcel consists of two tennis courts, a parking lot and a recreational building. A developer is the fee owner of both parcels. It leased both parcels to an incorporated community association (hereinafter called the “Association”) for a period of 99 years at a nominal rental of $1.00 per year. Each of the individual lot deeds given by the developer to property in the development contains a covenant under which the individual property owner agrees to become a member of the Association and to pay a proportionate share of the cost (with maximums of from $35 to $50 per annum) of maintaining the common facilities managed and operated by the Association. Each deed conveys “an easement or right of way to the use, in common with others, for bathing and boating conveniences only, of that portion of the lake front of the lake known as Lake . . .” as shown on the development map as “East Plot” together with “the right of ingress and egress, including the right of way to said lake, into and upon such road or roads as appear upon the map.” All benefits, easements, covenants and conditions, according to another provision in the deed, are to run with the land and eventually expire except the easement to use the lake front and the right of ingress and egress thereto, which is to continue forever.

At present, there are approximately 31 property owners in the development. Both parcels have been assessed without regard to the easements or 99 year lease. Also, according to our information no element of value attributable to the easements has been included in the assessments of the 31 individually owned parcels in the development.

The attorney for the association contends that both parcels have only a nominal value because they are burdened by the easements and 99 year lease. Under New York law, easements are treated differently from other types of encumbrances in valuing property for taxation purposes.

As respects easements, the Court of Appeals, in Tax Lien Co. v. Schultze, 213 N.Y. 9, 106 N.E. 751, stated the law to be as follows (p. 11):

When an easement is carved out of one property for the benefit of another the market value of the servient estate is thereby lessened, and that of the dominant increased practically by just the value of the easement; the respective tenements should therefore be assessed accordingly.

In the two cases relied on by the Association, People ex rel. Poor v. O’Donnel, 139 App. Div. 83, 124 N.Y.S. 36, affirming on opinion of Special Term, aff’d, 200 N.Y. 518, 93 N.E. 1129, and Crane-Berkley Co. v. Lavis, 238 App. Div. 124, 263 N.Y.S. 556, property encumbered by easements in favor of adjacent lot owners to use and enjoy the property for park purposes was held to have only a nominal value for taxation purposes. The theory was that the property had no market value since a purchaser would acquire no beneficial interest - his title would simply be a naked one with none of the usual advantages attendant upon the ownership of real property. This same theory was applied in People ex rel. Larchmont Manor Park Society v. Smith, 294 N.Y. 920, 63 N.E.2d 116, where the title to a beach was in an association similar to the association involved here and lot owners in the development had easements to use and enjoy the beach.

There appears to be no question under the law of these cases that the beach property herein has only a nominal value. The easement language in the deeds is very similar to that involved in the Larchmont Manor Park case, supra. It also resembles the easements considered in Matter of City of New York (Public Beach), 269 N.Y. 64, 199 N.E. 5, which were construed to create a private beach for the enjoyment of lot owners only, from which the rest of the world would be excluded. Under the construction used in these cases, a purchaser of the beach property in this case would be unable to make any use of the property, and, therefore, the assumption is that it could not be sold for any sum.

Under the method of assessment applicable in New York, where there are easement interests, the value of the dominant estate is increased by virtue of having the benefit of the easement, Tax Lien Co. v. Schultze, supra. With regard to the lots in the development, the problem is to determine the extent to which their market value has been increased. Bonbright suggests that the proper addition to the value of the dominant estate is “determined largely by the opinion of real-estate experts, aided by occasional selling prices, since easements are sometimes the subject of separate sales” (Bonbright, Valuation of Property, p. 497). Recent sales of property in the development could possibly give some indication of the value since such sales should reflect the easement value. In other words, development property would in all probability bring a higher price on the market than comparable residential property in the neighborhood which does not have an indefeasible right to use a beach. In the absence of sales, it would seem reasonable to assume that the value of the easements appurtenant to the lots approximates the market value of the beach as if unencumbered and that the value of each individual lot has been increased by an amount which is pro rata this value. In any event, the ultimate object is to assess the individual lots equitably at their market value as reduced to the level of assessment of all other property on the town assessment roll.

The attorney for the association argues that the value of a second parcel consisting of the tennis courts, a parking lot and recreational building, is negligible for market purposes since it is encumbered by a 99 year lease.  (This property is not burdened by easements.) It is not mandatory that an assessor consider the effect of a long-term lease on the market value of real property, as he must do when easements exist. The court in People ex rel. Gale v. Tax Commission, 17 App. Div.2d 225, 233 N.Y.S.2d 501, considered this question in the context of the nature of the New York State real property tax. We quote at some length pertinent parts of this decision. Justice Eager there said as follows (pp. 504-507):

Except in case of easement interests * [footnote deleted], a division of ownership or the independent holding of separate legal interests in taxable property will not affect the mode of assessment. For instance, mortgagor and mortgagee interests, vendor and vendee interests, landlord and tenant interests, life tenant and remainder interests and co-tenant interests are not separately assessed. It was well settled at common law, unchanged by statute pertinent here, that the mortgagor, the vendee in possession, the lessor, the life tenant, or the co-tenants jointly, were bound to pay the entire tax on the property as if there were no mortgage, contract of sale, lease, remainder or co-tenant interests (See Bonbright, Valuation of Property, Vol.l,p. 496; 84 C.J.S. Taxation §§ 95, 96, 98, 104; 59 C.J.S. Mortgages § 324; 92 C.J.S. Vendor & Purchaser § 290; 51 C.J.S. Landlord & Tenant § 359; 31 C.J.S. Estates § 47; 86 C.J.S. Tenancy in Common § 67. See, also, Wilson & Co. v. City of New York, McNally, J. Sup., 73 N.Y.S. 2d 206, affd. 276 App. Div. 755, 92 N.Y.S. 2d 918). Thus, in any case, a single assessment of the property, at its full value, as if not subject to a mortgage, a vendor interest, a lease, a remainder or co-tenancy, is all that is required. “Whether these methods of assessment are to be explained on historical or on other grounds, is immaterial on the principles of valuation. They can be justified practically on the ground that the number of assessments is reduced to a fraction of what they would otherwise be, and also that difficult problems of allocation of values are avoided.” (Bonbright, Valuation of Property, p. 497; 34 Col.L. Rev. 1436 (1934))


Of course, an outstanding bona fide lease and the rental income established thereby are matters to be considered in determining “the full value” of the whole property, land and improvements. Value arrived at by capitalization of the fair rental value is, in ordinary cases, the surest guide to a sound appraisal. In that connection, the actual rent realized is significant as an important factor in determining what the fair rental value is. (See People ex rel. Parklin Operating Corp. v. Miller, supra, 287 N.Y. pp. 129, 130, 38 N.E.2d 466, 467; People ex rel. Manhattan Square Beresford v. Sexton, 284 N.Y. 145, 149, 29 N.E. 2d 654, 655; People ex rel. Luce v. Lewis, 257 App. Div. 724, 15 N.Y.S.2d 180.) But when there is evidence that factors such as long-term leases made under distress or boom conditions affect the actual rent, the weight to be given to the actual rent must be discounted accordingly. (See People ex rel. 379 Madison Ave. v. Boyland, 281 App. Div. 588, 121 N.Y.S. 2d 238, supra; Matter of Dunn Garden Apartments, Inc., 11 A.D. 2d 879, 203 N.Y.S. 2d 375; cf. Ettlinger v. Weil, 184 N.Y. 179, 183, 77 N.E. 31, 32.)

So, the existence of an outstanding lease at an unrealistically low rental for a long term, not representing the fair rental value of the property, is not to be used as a basis for calculating actual value. Thus, the true value of the property for assessment purposes is to be ascertained as if unencumbered by such a lease.

It seems to us that this is one of those instances in which the assessor should value the property without regard to the lease or the rent payable under it. Obviously the lease was negotiated under special circumstances at a rental which does not represent its fair rental value.

June 13, 1967