ADDITIONAL CASES I.J. Litwak Realty Limited Partnership, (Fee Claimants for Damage Parcels 1 & 2 [Block 7918, Lots 114 and 126]), Claimant, v. The city of New York, Condemnor. DECISION At issue in this condemnation proceeding is the just compensation to be awarded to Claimant I.J. LITWAK REALTY LMITED PARTNERSHIP, for the taking of the subject property, located at 420 East 83rd Street Avenue, and 8601 Preston Court Brooklyn, New York (Block 7918, Lots 114 and 126). The Condemnor, THE CITY OF NEW YORK, took title on October 11, 2016 (the vesting date). The Court viewed the property on May 13, 2019, and a non-jury trial was held on, May 20, 21, 22, and 23, 2019. Claimant appeared by Goldstein, Rikon, Rikon, and Houghton PC, Jonathan Houghton Esq., and Ashley Levi Esq., of counsel, 381 Park Avenue South, New York, New York, 10016. The CITY appeared by the Corporation Counsel, Adam Dembrow Esq., Meagan Keenan Esq., and Rochelle Cohen Esq., of counsel, 100 Church Street, New York, New York 10007. The property is located at the corner of East 83rd Street and Preston Court in the Canarsie neighborhood of Brooklyn. It is across East 83rd Street from the Brooklyn Terminal Market. The combined lots contain 22,000 square feet and have 100 feet of frontage on East 83rd Street and 220 of frontage on Preston Court. The property is currently improved with a one story, 24,500 square foot garage that is used by the Fire Department of the CITY of NEW YORK to house EMS Station 58. The garage was built approximately in 1955 and renovated in 1989 and the battalion has occupied the property since pursuant to a lease since 1990. The building is of masonry construction with 6 drive through entrances with 21-foot clearance. The main portion of the building is garage area in which are located two fuel pumps. The building also contains 5,810 square feet of office area on the ground floor which includes locker rooms, a kitchen and lounge area, as well as 2,500 square feet of office area on a mezzanine level. The property is in a M1-1 zoning district in which industrial uses are permitted. Residential uses are not permitted in a M1-1 district. The district has an allowable Floor Area Ratio (FAR) of 1.0. Claimant’s appraiser William Picoli, MAI, CRE, FRICS, valued the property at $6,460,000. Picoli asserts that the highest and best use of the building is for a commercial/retail use complementary to the Brooklyn Terminal Market. The CITY’s appraiser David E. Fields, MAI, CRE, valued the property at $4,900,000. Fields asserts that the highest and best use of the property is as currently improved, and for continued use as an industrial building. The two appraisers’ differences in value did not result from their different highest and best use for the property, because the difference in use was not significant. Despite their different highest and best uses, both appraisers chose both industrial and warehouse buildings as comparables. The main difference between the appraisers as to highest and best use is whether a commercial use such as a retail or wholesale produce market was feasible. However, this difference of opinion in the feasibility of retail or wholesale use is not a significant factor in the difference values found by each appraiser. Both sides cited 402 East 83rd Street, which houses a retail and wholesale food market as the most appropriate comparable because of its similarity in size and its close proximity to the subject property. While, the CITY’s appraiser felt that retail use at 402 East 83rd Street was not a likely use for the subject property, he considered the property comparable and only made a downward 2.5 percent adjustment to the value of 402 East 83rd Street because of its retail use. Both appraisers valued the subject property using the income capital approach and the sales comparison approach. The Claimant’s appraiser valued the property at $6,615,000 using the sales comparison approach, while his value using the income capitalization approach was $6,300,000. The CITY’s appraiser valued the property at $4,900,000, using the sales comparison approach and at $4,700,000 using the income capitalization approach. The income capitalization approach consists of deriving a yearly net operating income from the difference between estimated revenues and expenses and then dividing that yearly income by a capitalization rate. The income capitalization approach is problematic in this case as the subject property is not currently used for commercial purposes and therefore estimates of income and expenditures most be estimated from other buildings or industry surveys. The most significant difference between the appraisers’ income approach is the estimated rental income of the building. Claimant’s appraiser estimates the potential rent at $18.50 a square foot, while the CITY appraiser estimates it at $15 a square foot. The Claimant’s appraiser considered five comparable rentals. Claimant’s rentals two and four had adjusted rents of $20.23 and $20.88 a square foot which were the result of positive adjustments of 35 percent. Adjustments that large undermine the reliability of the comparable rentals, particularly where the resulting rents of over $20 a square foot are significantly higher than the other three comparable rentals. Claimant’s other three comparable rental properties had moderate adjustments of between 5 percent and 15 percent and their adjusted rental values ranged from $16.32 to $16.68 with an average of $16.50 a square foot. Comparable rentals one, three and five should be considered and comparable rentals two and four rejected in determining an estimated adjusted rent. The CITY’s appraiser also considered five rentals but adopted an adjusted rental of $15.00 a square foot which was the average of his comparable rentals one, two and three. The rents of these first three comparable rentals were very close having adjusted rents of $15.06, $15 and $14.96 a square foot respectively. The CITY’s rental comparable four which was the closest in location to the subject property, had an abnormally long market time and was only a one-year lease which weakens its utility as a comparable. If one averages the adjusted rents of Claimant’s comparable rentals one, three and five, together with the CITY’s comparable rentals one, two and three, the average adjusted rent is $15.75 a square foot. This within the range of the comparable rentals adjusted only for time of sales. A rent of $15.75 a square foot results in a potential gross income (PGI) of $385,875 for the 24,500 square foot building at the subject property. The PGI must be adjusted to account for periodic vacancies and rent loss in order to determine the property’s effective gross income (EGI). To calculate the (EGI) Claimant used a vacancy rate of 6.5 percent while the CITY used 5 percent. The CITY’s appraiser attributed the difference in their vacancy rates to the fact that he had estimated a higher management fee than Claimant’s appraiser He believed the two were correlated in that a minimal management fee would result in less effective renting efforts and rent collection. The difference in reduction of PGI between the two vacancy rates is $5,788 which is almost totally offset by the difference in their estimated management fees . Using the CITY appraiser’s vacancy allowance of 5 percent results in an EGI of $366,581. The expenses necessary to operate the property must be deducted from the EGI to establish the Net Operating Income (NOI). The operating expenses estimated by both appraisers are fairly close differing by only $17,250. This difference comes from three items: insurance, management fees, and a replacement reserve. The Claimant’s appraiser based his estimate of $.40 a square foot for insurance on five expense comparables with a range of $0 to $.68. The CITY’s appraiser based his estimate of $.65 a square foot on the insurance expense of its comparable rental one and the rate of $.39 a square foot for its comparable sale three, as well as a general range of $.50 to $.75 property liability policies. In properties that are used as income producing properties, net leases typically require tenants to indemnify their landlords and procure insurance to cover the landlords. As a landlord’s insurance policy is usually secondary to the tenant’s policy Claimant’s value of $.40 a square foot, or $9,800, is more reliable. The second item of expenses where the appraisers differed, was management fees, where Claimant estimated $8,750 in management fees while the CITY’s appraiser estimated $14,000. As discussed above the difference in the vacancy allowances of each appraiser offsets the differences in management fees. Therefore, having adopted the CITY’s vacancy rate, the Court adopts the CITY’s estimated $14,000 for management fees. As to the third expense item difference, a replacement reserve, Claimant’s appraiser made no allowance for a replacement reserve, while the CITY’s appraiser estimated $6,000 for a replacement reserve. A replacement reserve is a necessary expense item and the CITY’s estimate of $.24 a square foot or $6,000 is reasonable. Adding $9,800 for insurance, $14,000 for management fees, and $6,000 for a replacement reserve to the other expense items that both appraisers agree on, results in total operating expenses of $134,785. When these expenses are subtracted from the EGI of $366,581, the resulting NOI is $231,796. A value for the property is calculated by dividing the net operating income by a capitalization rate which is derived from sales of comparable properties or classes of properties at the time of vesting. In this case Claimants used a capitalization rate of 4.75 percent while the CITY used a capitalization rate of 4.25 percent. The Claimant’s appraiser based its capitalization rate on two investor surveys from the 3rd quarter of 2016 and one from the 2nd quarter of 2016. The CITY utilized the Akerson format to derive its capitalization rate applying a mortgage interest rate of 4.15 percent and a yield rate of 8.5 percent. The Court adopts the capitalization rate used by the CITY, of 4.25 percent. Dividing the NOI of $231,796 by a capitalization rate of 4.25 percent results in a value for the property of $5,454,024. The CITY’s appraiser further deducted $200,000 from the value of the building to account for capital improvements needed to make the building marketable as an industrial/warehouse building. At the time of vesting, the property was fitted out for use as an EMS Station and had a large amount of finished office space, including a kitchen, locker room, and an underground diesel tank. However, these improvements were installed at the request of the CITY to make the space usable as an EMS Station, the very use for which the CITY took the property. In valuing a property for condemnation purposes, the property should be neither enhanced or diminished by the impact of the project on the value of the property. US v. Reynolds, 397 US 14, 90 S.Ct.803 (1970); US v. Miller, 317 US 369, 63 S.Ct. 276 (1943). Therefore, the costs associated with removing these fixtures and improvements to return the building to raw marketable condition should be disregarded pursuant to the project influence rule. In addition to the income capitalization approach, both appraisers also valued the subject property using the sales comparison approach. Using the sales comparable approach, the Claimant’s appraiser valued it at $6,615,000 and the CITY’s appraiser at $4,900,000. Each appraiser looked at six comparable sales, and both included 402 East 83rd Street and 9411 Ditmas Avenue in their comparable sales. The fact that both appraisers used these sales attests to their probative value as comparable sales. In many ways 402 East 83rd Street is an excellent fit as a comparable sale. It is next door to the subject property, both are zoned M1-1, and the square footage of the land is the same. Further, both are one story buildings of similar size and 21-foot high ceilings. Partial mezzanine office space makes up 34 percent of the space of the subject property and 22.4 percent of 402 East 83rd Street. Both are corner properties with drive in loading docks. The sale of 402 East 83rd Street was within 9 months of the vesting date. Claimant herein owned 402 East 83rd Street and sold it to 402 East 83rd Realty LLC. In what both sides agreed was an arms-length transaction. However, the terms of the sale of 402 East 83rd are such that significant adjustments must be made to the sales price. Even though the sale took place in 2016, the sales price of $5,000,000 was set in June of 2012. A lease between the parties included an option to buy the property in January 2016 for $5,000,000 with the buyer paying the recording taxes of $151,000 for a total of $5,150,000. The Claimant and the CITY disagree whether the purchase price represents the fair market value of the property as of the date of the lease or the value as of the scheduled closing date 3 1/2 years later. Article 42 of the lease entitled Option to Buy, states that the tenant has the right to purchase the property for five million dollars on January 3, 2016, provided it is not in default of any terms of the lease. The article also provides that the tenant will pay all closing costs and taxes. Claimant argues that the purchase price reflects the value as of the date the lease was signed, so it must be adjusted for market conditions from the time the lease was signed to the date of vesting. Using an adjustment factor of 4 percent a year the Claimant’s appraiser adjusts the purchase price upward by 14 percent for the 3 ½ years between the signing of the lease and the vesting date. The CITY’s appraiser contends that the price reflects what the parties to the lease believed the property would be worth in January 2016, the date the option to purchase could be exercised, and that the price should only be adjusted at 3.5 percent a year from January 2016 to the day of vesting. While the terms of the lease do not explicitly state whether the purchase price reflected the value of the property at the time the lease was entered into or the closing date, Claimant produced evidence demonstrating the buyer’s belief that the price reflected the value of the building in 2012. Claimant produced Orin Tucker a member of the LLC that purchased 402 East 83rd Street, who testified that the purchase price reflected the value of the property in 2012. He testified that he had originally leased the portion of the building which fronted East 83rd Street in 2002. Tucker further testified that in 2012 he entered into two leases which together covered the entire building. One of the two leases commencing July 1, 2012 contained the option to purchase the entire building. Tucker testified that the purchase price set in the lease reflected the value of the building in 2012 without the value of the improvements that Tucker had made to the building. Tucker testified that the seller, Irving Litwak, suggested the price of $5 million, and he did not negotiate over the purchase price. However, he also testified that he had done his own research into comparable buildings in the vicinity and they were “basically, worth just about the same price that I was offered by Mr. Litwak”. No factual evidence was introduced to contradict Tucker’s testimony. Irving Litwak is dead and Harris Litwak, his son who is a principal of the Claimant herein, testified that he had no personal knowledge about the sale of 402 East 83rd Street. In light of the testimony of Tucker, the actual purchaser, the Court finds that the $5,000,000 purchase price set forth in the lease reflects the value of the building as of July 2012 and should be adjusted from that date to the date of vesting. Additionally, the CITY claims that the sales price of 402 East 83rd Street should be adjusted downward 10 percent because of what it contends was favorable financing of the sale and tax benefits that applied to the sale. The option to buy provided that the seller would take back a purchase money mortgage for the entire $5 million dollar purchase price. The mortgage was for 36 years and at a rate of 5 percent interest a year. The financing of 100 percent of the contract price is more favorable than the standard 65 to 35 loan to value percentage. However, the interest rate of 5 percent a year was approximately 22 basis points above the rate for a 30-year treasury note at the time the option was entered into. Tucker indicated that his willingness to pay a slightly higher interest rate to the fact that he would not have to make a down payment. Also, while 36 years is longer than the standard 30-year mortgage for these types of properties, it also results in increased interest payment over the life of the mortgage. The seller financing of the entire purchase price was favorable to the buyer however, this was partially offset by the above market interest. Thus, a downward adjustment of 5 percent rather the 10 percent for financing is appropriate. The CITY’s adjuster also cited Industrial Development Agency tax benefits granted to the buyer. However, evidence produced at trial was that these benefits were not considered by the parties at the time the lease was entered into and the purchase price was set, and therefore do not justify a downward adjustment of the purchase price of this sale to make it comparable to the subject property. Using the stipulated building size of 24,500 square feet, the unadjusted price per square foot for the sale of 402 East 83rd Street is $199.66. If the sale price is adjusted by 3.5 percent a year for the 4.25 years from the date of the lease of July 1, 2012, until the vesting date, the price adjusted for market conditions becomes $229.60 a square foot. A 5 percent downward adjustment for the 100 percent financing brings the price to $218.13 a square foot. Each appraiser made only one other adjustment to the sale. The Claimant’s appraiser made a 10 percent upward adjustment for the fact that 402 East 83rd Street has only one drive in door as compared to the subject property’s six. The CITY’s appraiser took a 2.5 percent downward adjustment for the combined retail/wholesale use of the property. The adjustments are credible, although the 10 percent adjustment door number of drive in doors is too high. While more than one drive in door is an advantage in a warehouse operation, the advantage is offset by a loss of interior storage space. In some situations, a drive in door may not as advantageous as a tailboard loading dock. However, it appears that none of the comparable sales had tailboard loading docks. The CITY’s appraiser testified that the optimum number of drive in doors for a warehouse was in the range of one for 10,000 to 15,000 square feet. Having six doors for 24,500 square feet does not necessarily add more value than having two or three. An upward 5 percent adjustment for the subject property’s six doors is more appropriate than 10 percent. Making both a 5 percent upward adjustment for drive in doors and a 2.5 percent downward adjustment for the retail use, to the $218.13 a square foot, the adjusted price per square foot for the sale of 402 East 83rd Street becomes $223.58. The other comparable sale that was used by both sides was 9411 Ditmas Avenue, a one-story warehouse building within a mile of the subject property, that is a very similar to the subject property. The price per square foot of the sale, adjusted for market conditions was $274.52. The appraisers differed on several adjustments made to account for differences between 9411 Ditmas Ave and the subject property. The Claimant’s appraiser made positive 5 percent adjustment for differences in the locations of the properties while the CITY’s appraiser made a negative 10 percent adjustment for location. However, the CITY’s appraiser made a positive 5 percent location adjustment to his sixth comparable sale, 309 East 89th Street, which is located, only 5 blocks from 9411 Ditmas. Further, the site visit by the Court corroborated the fact that 9411 Ditmas Avenue is an inferior location to the subject property and should be adjusted upwards by 5 percent. Both appraisers took a negative adjustment to account for the fact that the building at 4911 Ditmas Ave is only 9,775 square feet while the building at the subject property is 24,500 square feet. The CITY’s appraiser made a negative 10 percent while the Claimant’s appraiser made a 5 percent downward adjustment for size. The magnitude of the difference in size of the two buildings justifies a negative 10 percent adjustment. Similarly, both the appraisers made different adjustments to account for the condition of the building at 9411 Ditmas Avenue compared to the subject building. The CITY’s appraiser made a positive 5 percent adjustment, while the Claimants appraiser made a positive 10 percent adjustment. Aside from the finished office space in the subject building, both buildings are basic warehouse structures. The subject building was rehabilitated in 1989 and the Ditmas Avenue building was constructed in 1970. Based on the nature of structures and the conditions disclosed by the Court’s site visit, a positive 5 percent adjustment is appropriate. The CITY’s appraiser made a negative 5 percent adjustment for superior access to 9411 Ditmas as compared to the subject property. The Claimant’s appraiser made no adjustment for access, but he did make a positive 5 percent adjustment for drive in doors, which is in part a proxy for access. The building at 9411 Ditmas has two drive in doors on Ditmas Avenue which is a two-way street with a travel lane and parking lane in each direction. Also, Ditmas Avenue is wider than the streets in front of the subject property, which gives easier access to tractor trailers. Similarly, there are two lanes of travel and perpendicular parking spaces on East 83rd Street in front of the subject property. The subject property also fronts on Preston Court a two-way street with a parking lane in one direction. Trucks can enter the subject property from either East 83rd Street or Preston Court. While Ditmas Avenue is somewhat wider than the streets in front of the subject property, this comparative advantage is offset by the subject property’s additional drive in doors and access from two streets. Therefore, there should be no adjustment for either access or the number of drive in doors. After adjusting upwards 5 percent for location, downward 10 percent for size, upwards 5 percent for condition and taking no adjustment for access or number of drive in doors, the net adjustment is zero. Thus, after the adjustments for market conditions and financing, and in a final adjusted value of 9411 Ditmas Avenue is $ 274.52 a square foot. The other comparable sales used by the appraisers were not as appropriate as indicators of value as the comparable sales used by both appraisers. Claimant’s comparable sale one, located at 645 Berriman Street, took place after the date of vesting and is not very similar to the subject property. It is a much smaller midblock building of only 6,000 square feet, with one drive in door. It is also located in East New York, far from the subject property. Claimant’s appraiser made positive adjustments of 40 percent, 30 percent and 45 percent to comparable sales 2, 5, and 6 respectively. Sales with adjustments of the magnitude should not be relied as comparable, particularly where there are two sales, relied on by both appraisers that are very similar to the subject property. The CITY’s comparable sales 1 and 2 are over two miles from the subject property, close to Broadway Junction and are also zoned M1-4 which allows double the floor area ratio as the M1-1 zone of the subject property. The CITY’s appraiser made a negative 30 percent adjustment to his comparable sale five which call into question its comparability. The value for sale five, adjusted only for market conditions, was $305.07 a square foot, far above the other comparable sales. The CITY’s appraiser made a 25 percent adjustment to comparable sale six, including a 20 percent adjustment for condition even though he did not inspect the interior of the building. Further, the building is “L” shaped and located on a dead-end side street. The Court finds that 402 East 83rd Street and 9411 Ditmas Avenue, the two sales used by both appraisers, are the most reliable sales comparable to the subject property. The sale of 402 East 83rd Street at$223.58 a square foot should be given more weight than 9411 Ditmas Avenue at $274.52, because it is most similar to the subject property and it is next door to it directly across from the Brooklyn Terminal Market. The Court finds that taken together, the two comparable sales demonstrate a value for the subject property of $240 a square foot. Applying the value of $240 a square foot to 24,500 square feet results in a value for the subject property of $5,880,000. In reconciling the results of sales comparison approach and the income capitalization approach, the CITY’s appraiser indicated he adopted the value he found though the sales comparison approach because an owner/operator of a warehouse building like the subject property will pay a premium over a renter, and because the income approach was anticipatory in nature and based on the potential to lease. The Claimant’s appraiser agreed that owner/users will be pay a premium over a buyer looking to lease the building but reconciled the values from the two approaches roughly in the middle. The value found through the income approach is significantly lower than that of the sales comparison approach. As such it is appropriate to rely on the more reliable of the two approaches rather than reconciling them by choosing a value in between the two. As the subject property in this case was and is used as an EMS Station and not for commercial purposes, the income capitalization analyses by necessity were based not on actual income and expenses but estimates based on comparables or square foot averages from various surveys. The use of estimated revenue and costs, however necessary for want of better data, introduces a troublesome degree of imprecision into income capitalization analysis. Additionally, an owner occupier is likely to pay a premium for a warehouse of this size. For these reasons the income capitalization is a less reliable indicator of value of the subject property than the sales comparison approach. The Court adopts the value determined through the sales comparison approach as the value of the subject property and finds the value of the subject property is $5,880,000. Settle order and judgment on notice. Dated: January 15, 2020 Brooklyn, New York
