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Volume 7 - Opinions of Counsel SBEA No. 125

Opinions of Counsel index

Assessments, generally - methods of valuation (reservoirs) - Real Property Tax Law, §§ 305, 566:

A reservoir should not be considered a “specialty” for real property valuation purposes, unless its conversion to a use such as recreational purposes is impracticable or prohibitively expensive in a particular case.

Whether the reservoir should be valued on the basis of current use or highest and best use must be decided on a case-by-case basis.

We have been asked to explain the proper method(s) of valuation to be applied to reservoirs and associated buildings and improvements and, more particularly, whether any of these properties may be categorized as a “specialty”.

Preliminarily, we note the existence of section 566 of the Real Property Tax Law, headed “Dams and reservoirs”, and its subdivision (3) which removes municipal water supply systems from the section’s provisions. Rather than being concerned with methodology, however, section 566 is addressed to the questions of “to whom” and “in which assessing unit” should such property be assessed. Accordingly, we conclude that this statute has no bearing upon this inquiry.

Generally, there are three distinct methods which may be used in the valuation of real property. {*}  The Court of Appeals, in Great Atlantic & Pacific Tea Co. v. Kiernan, 42 N.Y.2d 236, 366 N.E.2d 808, 397 N.Y.S.2d 718 (1977), described these methods and their appropriate applications, as follows:

market value” which provides the most reliable valuation for assessment purposes [citations omitted]. . . . However, where 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 “specialty” [citations omitted] (id., at 239-40, 397 N.Y.S.2d, at 721 (emphasis added)).

Concerning the proper valuation method for the property in question, income capitalization can immediately be ruled out, since it is unlikely that reservoirs would have value as rental property. (The buildings and improvements will be discussed later.) Remaining, then, are the market value and reproduction cost-less depreciation (RCLD) methods. As noted above, application of the latter is appropriate if the reservoirs can be categorized as specialty.

While various attempts at defining specialty have been advanced, in the A & P case the Court of Appeals proffered what it characterized as the “best” definition: “a structure which is uniquely adapted to the business conducted upon it or use made of it and cannot be converted to other uses without the expenditure of substantial sums of money [citations omitted]” (id., at 240, 397 N.Y.S.2d, at 721 (emphasis in original)). Thus, dual criteria are involved: structural uniqueness and substantial conversion costs.

In the A & P case, the property was a large food processing plant. The Court held that structural features which supported the suitability of the property to the owner’s use, such as utility tunnels, employee walkways, truck loading docks, interior railroad sidings and refrigeration facilities did not render the property a specialty incapable of valuation according to the ordinary market value method since they were “not truly unique to his business but, in fact, made the property adaptable for general industrial use” (42 N.Y.2d, at 240, 397 N.Y.S.2d, at 721). Furthermore, the Court held that even where the property could be described as unique, it would not be considered a specialty “if no great expense would be entailed in converting the property from the present owner’s use to other business and industrial uses and if a market value may be ascertained” (id.).

It is our opinion that the reservoirs do not qualify under either of the criteria, both of which must be satisfied if the property is to be assessed as a “specialty”. Notwithstanding a passing reference by Bonbright to such sites as unique (1 The Valuation of Property, at 169 (1937)), reservoirs may be reasonably adapted to uses other than those for which they are principally known; recreational purposes, for example. In fact, reservoirs often serve these dual functions simultaneously, the Great Sacandaga Lake being an example.

The potential for recreational use would preclude specialty designation for reservoirs unless such a use would be either impracticable or prohibitively expensive in a particular instance. Of course, if a reservoir is already used for recreation, no conversion or expense would be required.

Since neither the income approach nor the RCLD method is appropriate, the value of the land adjacent to and under the water of the reservoirs should be appraised using a market value method. After reviewing the matter with members of our valuation staff, we have concluded that this may be done in either of two ways.

First, the land may be valued at its highest and best use as though the flooding had never occurred. Thus, vacant land sales of similar types of property would be used. In the alternative, the value of the land beneath the water may be ignored, and the total value of water-front property (which derives its value from the body of water) may be estimated and ascribed to the reservoir and the land below.

A question also posed is whether the reservoirs are to be valued based upon current use of the land or at their highest and best use, assuming the property is not specialty. In condemnation proceedings, it is well-settled that the basis upon which property is valued is the highest and best use, regardless of whether it is being so used (Matter of Town of Islip [Hamlet of Sayville], 49 N.Y.2d 354, 402 N.E.2d 1123, 426 N.Y.S.2d 220 (1980); Matter of County of Suffolk [Firester], 37 N.Y.2d 649, 339 N.E.2d 154, 376 N.Y.S.2d 458 (1975); Keator v. State of New York, 23 N.Y.2d 337, 244 N.E.2d 248, 296 N.Y.S.2d 767 (1968)). In the case of property tax assessment, however, the role of highest and best use is subject to some conflict of opinion. In the case of North Hempstead Turnpike, Nassau County, 47 Misc.2d 593, 263 N.Y.S.2d 129 (S.Ct., Nassau Co., 1963), the Court stated that:

[f]or taxation purposes, however, these [condemnation] rules do not apply. The assessors may not give substantial weight to the fact that this property could produce an even greater income if devoted to another use. They are required to value it as it existed and was being used. . . . If the use or the improvement of land is reasonable and is adequate, then it should be assessed accordingly (263 N.Y.S.2d, at 150).

(See also, BCA-White Plains Lanes, Inc. v. Glaser, N.Y.L.J., Dec. 17, 1982, at 13, col. 3; Addis Co. v. Srogi, 79 A.D.2d 856, 434 N.Y.S.2d 489 (4th Dept., 1980); Kalski v. Fitzgerald, 26 A.D.2d 573, 266 N.Y.S.2d 600 (3d Dept., 1966); Pepsi-Cola Co. v. Tax Commission of City of New York, 19 A.D.2d 56, 240 N.Y.S.2d 770 (1st Dept., 1963)).

This is in conflict with the statement in In re Lincoln Square Slum Clearance Project, 15 A.D.2d 153, 222 N.Y.S.2d 786 (1st Dept., 1961), that it “has been hailed in some quarters . . . that there is one value for condemnation and another for taxation. The genesis of such a contention is apparent - it is by Sophistry out of Greed. Value is the same regardless of the nature of the proceeding” (222 N.Y.S.2d, at 795-796 (emphasis added); see also, Pollak v. Board of Assessors of Nassau County, 62 A.D.2d 1019, 403 N.Y.S.2d 762 (2d Dept., 1978)).

Seemingly, there is a distinction on the one hand between a highest and best use for land inconsistent with the continuation of the improvements on the land and, on the other, a use which, while not the highest and best use, is nonetheless an adequate one. “If the use is adequate the land and improvement are to be assessed as used” (Goldstein and Goldstein, Condemnation, Tax Certiorari, “Highest and Best Use,” N.Y.L.J., April 6, 1976, at 4, col. 2). Thus, the question appears to be one to be resolved on a case-by-case basis.

As to the buildings and improvements associated with the reservoirs, the above analysis is equally applicable and should assist in classifying and assessing such properties. In the event that they are deemed specialty, then the RCLD method of valuation would be applied. In the alternative, a determination of the highest and best use of the buildings and improvements should be made. Should their primary use be as rental property, the income capitalization method of valuation would be appropriate. Otherwise, the market value method is the proper measure for assessment purposes.

Finally, it must be noted that any application of “highest and best use” must be made subject to a consideration of any zoning limitations. For example, in the case of a water supply reservoir, use of the shoreline is generally limited. A conversion of the reservoir to its highest and best use might require the removal of such restrictions, thus, prohibiting the use of the property for anything other than water supply.

December 22, 1982

{*}  These methods were acceptable under the former standard of assessment of “full value” (RPTL, § 306, repealed by L.1981, c.1057). As of December 3, 1981, that standard was replaced by a “uniform percentage of value” (§ 305(2)). Subdivision 1 of this same section of law (§ 305(1)) gave legislative sanction to “the existing assessing methods in effect”. At least one court has construed this latter provision as being an endorsement of the three previously accepted methods of valuation discussed in this Opinion (Stemmer v. Town of Pompey, index #811-4558, Tenney, J., dated December 28, 1982). We agree and therefore, have assumed, for the purposes of this Opinion, that the methodology case law which antedates the fractional standard of section 305 remains good law.