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Volume 8 - Opinions of Counsel SBEA No. 100

Opinions of Counsel index

Assessments, generally (value) (purchase price - broker’s commission) - Real Property Tax Law, § 305:

In the absence of unusual or abnormal circumstances, purchase price, as a measure of value, includes any broker’s commission paid.

We have been asked whether the purchase price of real property should be reduced by the amount of any real estate broker’s commission when assessing the property for tax purposes.

Real Property Tax Law (RPTL), section 305(2), requires all real property in each assessing unit to be assessed at a “uniform percentage of value”.  Although there is no statutory definition of the term “value”, there are several recent court decisions which are helpful in determining its meaning. In 1985, the Court of Appeals stated that “value” in the context of section 305 means “market value” (Foss v. City of Rochester, 65 N.Y.2d 247, 480 N.E.2d 717, 491 N.Y.S.2d 128 (1985)). Market value is “the amount which one desiring but not compelled to purchase will pay under ordinary conditions to a seller who desires but is not compelled to sell” (W.T. Grant Company v. Srogi, 52 N.Y.2d 496, 420 N.E.2d 953, 438 N.Y.S.2d 761 at 767 (1981)). In this latter case, the Court also stated that “the purchase price set in the course of an arms-length transaction of recent vintage, if not explained away as abnormal in any fashion, is evidence of the ‘highest rank’ to determine the true value of the property at that time” (438 N.Y.S.2d at 768).

However, price and value are not necessarily synonymous (Plaza Hotel Associates v. Wellington Associates, Inc., 37 N.Y.2d 273, 333 N.E.2d 346, 372 N.Y.S.2d 35 (1975); see also, 5 Op.Counsel SBEA No. 28). The difference between price and value has been described as follows:

Price and value are not necessarily synonymous. Price is determined by short term factors and by the caprices of the market. Value on the other hand is dependent upon long term factors and is directly related to the intrinsic worth of the property that resists the impact of temporary and abnormal conditions. Neither price nor value can be determined by mathematical calculations, and value, even more than price, is a matter of judgment reached after a full consideration of all the relevant elements that may conceivable affect it. [citation omitted]

* * *

Sometimes a selling price may be the best determinant of market value and be entitled to great or overwhelming weight. But, before relying on the selling price, the court must examine the circumstances of the sale-whether the transaction was conducted at arm’s length, and whether the sale was an ordinary one and thus reflective of true value, or abnormal and unusual, and not reflective of actual value [citations omitted] (Plaza Hotel Associates v. Wellington Associates, Inc., 73 Misc.2d 6, 340 N.Y.S.2d 796, 800-801 (Sup. Ct., New York Co.).

Assessors are charged by law with the duty of determining the value of property (RPTL, §§ 305(2) and 102(2)). In making a determination of value, an assessor must necessarily exercise judgment. If in the assessor’s judgment, there are abnormal circumstances affecting a sale, the assessor may reasonably conclude that the purchase price of the property is not indicative of value.

A real estate broker’s commission is a transaction cost which is generally paid by the seller from the proceeds of the sale. While the presence or absence of a broker’s commission may affect the purchase price of real property, the commission should have no effect on the value of the property.

Our understanding is that the use of real estate brokers is a very common practice in this State. If so, it is difficult to see how, in most cases, the presence of a broker’s commission could be considered an abnormal circumstance which would justify disregarding or adjusting the purchase price.

Accordingly, in our opinion, in the absence of unusual circumstances, assessors should not reduce the purchase price of real property by the amount of any broker’s commission when assessing the property for tax purposes.

December 16, 1986