T.C. M em o . 2 0 2 0 -1 5 3

UNITED STATES TAX COURT

A NTHONY M
. KISSLING AND SUZANNE R. KISSLING, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 9 8 57 -1 0
. Fi l edNo vem b er 1 2 , 2 02 0
.

Ro b ertJ . Lan e, J r., St ep hen W . Kel k en b erg , J am es M . Ban do b l u , J r.,
an d W i l l iam

S. Tu rk o v i ch , fo r p et i t i o n ers . M arc L. Cai n e, Gen n ad y

Zi lb erm an , an dPeg g y

Gart en b au m , fo r
res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION
HOLM ES, J u d g e: In2 0 0 4 th e Ki s s l i n g In t eres t s , LLC co n tri b ut edfacad e
eas em en t s o n three co m

m erci al b u il d i n g s t o th e Nat i o n al Arch it ectu ral Tru s t . Th e b u i l d i n g s were i n a h i s to ri c p res erv at i o n d is tri ctth atu n d er l ocal l aw al read y- 2
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[* 2 ] res tri ct edwh atb u i l di n g o wn ers co u l dd o wi th th ei r p ro pert y . Th i s cas e t h u s p o s es a qu es t i o n o f i n t eres tt o d o no rs o f t h e s ubs eto f co n s erv at i o n eas em en t s th at p ro t ectfacad es o n o l d b u il d i n g s : Ho w d o es o n e g au g e t h e m arg i n al effect o f t h e
eas em en ti n l i g h t o f l o cal l aw? An th o n y Ki s s l i n g , a m em

b er o f Ki s s l i n g In teres t s , t o o kh i s d i s tri b u t i v e
s h are o f t h e as s o ci at edch ari t ab l e-co n tri b u t i o n d edu ct i o n th ath e an dh i s wi fe cl ai m edi n p artfo r 2 00 4 , wi th th e rem ai n d er carri edo v er t o 2 00 5 an d 2 00 6 . Th e Co m m i s s i o n er d i s al l o wedthe Ki s s l i n g s’ d edu ct i o n s i n fu ll b as edo n h i s b el i ef t h at th e eas em en t s h adn o effect o n th e v al u e o f t h e p ro p ert i es . He al s o n ow as s ert s g ro s s -v al u at i o n -m i s s t at em en tp en al ti es u n d er s ect i o n 6 66 2 (h ). 1 Th e Ki ss l i n g s d i s ag ree, an darg u e t h atth e eas em en t s redu cedth e p ro p ert i es ’ v al u es b y s m al l b u t d i s cern i bl e am o un t s . FINDINGS OF FACT Th e b u i l d i n g s th atl edt o th i s cas e are al l i n Bu ffal o , New Yo rk . Bu ffal o
was Am eri ca’ s ei g h th l arg es tci ty i n 1 9 0 0 --a p o s i t i o n h el db y San Di eg o t o d ay -- du ri n g th e l as tg reat i m

m i g rat i o n b o o m . It s p o p u l at i o n k ep tg ro wi ng fo r t h e fi rs t h al f o f t he t wen t i et h cen tu ry an dp eak ed atn earl y

6 0 0 ,0 0 0 i n th e 1 9 50 cen su s .

1 Al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ears i n i s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rt Ru l es o f Pract i ce an d Pro cedure, u n les s we s ay o th erwi s e.- 3
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[* 3 ] Th en , wi th th e o p en i n g of t h e St
. Lawren ce Seaway , the co l l ap s e o f g rai n
m i l l in g an ds t eel m ak in g , an dth e crat eri n g o f m u ch o f i t s b lu e-co l lar i n du s try , i t
s h ran kt o o n l y

2 6 0,0 0 0 p eo pl e t o d ay . Wh en Bu ffal o was g ro wi n g i n t o a g reat ci t y , i t at tract edth e at t en t io n o f g reat arch i t ect s an dg reat d es i gn ers --i t s l arg es t p ark
was d es i gn edb y

Fred eri ckOl m s t ed , i t s fi rs t s ky s crap er b y Lo u i s Su ll i van , an d wh atwas fo r a t i m e t h e l arg es to ffi ce b ui l d in g i n th e wo rl d b y D.H. Burn h am

& Co . Su ch ach i ev em en t s are t h e h ap p y l eg acy o f a p ro sp ero u s eco n o m

y . Ci t i es th atk eep b o o m in g co m p l ai n ab o u tth e p ro bl em s o f g ro wth an dfi n di t h ardt o p ro t ectth e b es tp ark s an db u i l d i n g s o f t h ei r p as tfro m th e p res s u re t o red i rect l an dt o a n ew h i g h er an db es tu se. Ci t i es th atare s h ri n k i n g en vy th em --
m ai n t ai n i n g t h e i n fras tru ctu re fo r a l arg er p o p ul at io n th ath as v an i sh edcan l eada l o cal g o v ern m en tt o h ard ch o i ces o f n eg l ect o r th e i m p o s i t i o n o f t ax an dreg u l at o ry b u rd en s th ei r s m al l er p o p u l at i on s can n o t eas i l y b ear. An dth e eco n o m i c o u t l o o k fo r Bu ffal o i n th e earl y

2 0 0 0 s s h o wedh o w g ri m th es e ch o ices co ul db e. In2 0 0 3 th en -Go v ern o r Geo rg e Pat ak i p l aced th e Ci ty u n d er t h e co n tro l o f t h e Bu ffal o Fi s cal St ab i l i ty

Au th o ri ty

t o p uti to n a p ath t o fi s cal reco v ery an d res p on s ib i l i t y . See Bu ffal o Fi s cal St ab i l i ty Au th o ri ty

Act , N.Y. Pub . Au th . Law s ecs . 3 8 5 0 -3 8 7 3 (M cKi n n ey

2 0 0 6 ); Bu ffal o Teach ers Fed ’ n v . To b e, 4 6 4 F.3 d3 6 2 , 3 6 6 (2 dCi r.- 4
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[* 4 ] 2 0 0 6 ). Th at m ean tb u d g et ary res trai n t s , 2 an d t h e Ci ty ’ s p res erv at i o n ag en ci es
weren ’ ti m

m u n e. I. Bu ffal o ’ s Bu i l d in g Co de En fo rcem en tan dHi s t o ri c Pres erv at i o n Bu i l di n g -co d e en fo rcem en tan dh i s t o ri c p res erv at io n i n Bu ffal o i s a
m u lt i t i ereds y s t em . Th e fi rs tt i er i s th e Bu ffal o Pres erv at i o n Bo ardes t ab li sh ed
u n d er ch ap t er 3 3 7 o f t h e Ch art er an dCo d e o f t h e Ci ty o f Bu ffal o (Ci ty

Co d e). Ci ty Co de s ect io n 3 3 7 -3 creat es a Pres erv at i o n Bo ard o f el ev enm em b ers --t h o u g h two s eat s h av e rem ai n edem p ty fo r m an y y ears --n i n e o f wh i ch are ap po i n t edb y th e Ci ty ’ s Co m

m on Co u n ci l an dth e M ay o r, an dtwo o f wh i ch are rep res en t at i v es
o f t h e Bu ffal o an dEri e Co u n ty Hi s t ori cal So ci et y

an d th e Lan d m arkSo ci et y o f Ni ag ara Fro n t i er. Th e Pres erv at i o n Bo ardi s ch arg edwi th , am on g o th er t h i n g s ,

2 Th e Act fo rcedth e Ci ty o f Bu ffal o t o s ub m i tfi n an ci al p l an s t o t h e Bu ffal o Fi s cal Au th o ri ty

fo r ap p ro v al fo r atl eas tfo u r y ears aft er i tb ecam e l aw. See N.Y. Pub . Au th . Law s ecs . 3 8 5 6 an d3 8 57 (M cKi n n ey 2 0 06 ); Bu ffal o Teach ers Fed ’ n , 4 6 4 F.3 dat3 6 6 . Th e Actal s o i m p o seds ev eral fi nan ci al l i m i t at io ns o n th e Ci t y : Ag g reg at e o perat i n g ex p en s es co u l dn ’ t ex ceed o p erat i n g rev en u e, s ee N.Y. Pub
. Au th. Law s ec. 3 8 5 7 (1 ); m ajo r o p erat i n g fu n d s h adt o b e b al an ced , i d . s ec. 3 8 5 7 (2 ); an di f es ti m at ed ex p en s es o r rev en ue ch an g ed , the m ay or h adt o s ub m i t an up d at edb ud g et , s ee i d. s ec. 3 8 5 7 (2 )(f).- 5
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[* 5 ] ap p ro v i n g al l cert i fi cat es o f ap p ro p ri at en es s , 3 n o effect , 4 an dex cep ti o n 5 “ fo r th e erect io n , al t erat i o n , res t orat i o n , ren o v at i o n , rel o cat i o n , d em o l i ti o n o r s i t e i m p ro v em en to f an y

l an d m ark* * * o r o f an y b u il d in g , s tru ctu re o r s i t e wi th i n a[] h i s t o ri c d i s tri ctwh en th e ex t eri o r o f s u ch p ro p ert y wo u l db e affect ed
. ” Ci ty Co de
s ec. 3 3 7-5 (F). In m ak i n g s u ch d et erm i n at io n s th e Pres erv at i o n Bo ardi s g u i d edb y b o th th e s t an d ard s i n Ci ty Co d e s ect i on 3 3 7 an dth e Secret ary o f t h e In t eri or’ s St an d ard s fo r Reh ab il i tat i o n an dGu i d el i n es fo r Reh ab i li t at in g Hi s t o ri c Bu i l d i n g s . Ci ty Co de s ec. 3 3 7-2 0. Th e Pres erv at i o n Bo ard , h o wev er, d o es n o t h av e an y i n d ep en d en t
en fo rcem en tp o w ers --t h at ’ s wh ere Bu ffal o ’ s Dep art m en t o f Perm i t s an dIn s p ect i o n Serv i ces (DPI) co m es i n , atl eas ts om et i m es . Acco rd i n g t o t h e cu rren t Co m m i s s i o n er, J am es Co m erfo rd , th e DPI “ o v ers ee[s ] al l th e b ui l di n g co d e

3 A cert i fi cat e o f ap p ro p ri at en es s i s a “ cert i fi cat e i s su edb y th e Pres erv at i o n Bo ard* * * ap p ro v i ng p l an s fo r al t erat i o n , co n st ru ct i o n , rel o cat i o n , rem o v al o r d em o l it i o n o f * * * a s tru ctu re wi th i n a[] h i st o ri c d i s tri ct .” Ci ty Co de s ec. 3 3 7 -2
. 4 A cert i fi cat e o f n o effect i s a “ cert i fi cat e i ss u ed b y th e Pres erv at io n Bo ard * * * i nd i cat i n g th atp ro po s edp l an s h av [e] n o effect o n th e ex t eri o r o f * * * a s tru ctu re wi th i n a[] h i s t o ri c d i s tri ctan d th ata cert ifi cat e o f ap p ro p ri at en es s i s n o t req u i red .” Ci ty Co d e s ec. 3 3 7 -2
.

5 A cert i fi cat i o n o f ex cep t i o n i s a “ cert i fi cat e i s s uedb y th e Pres erv at i o n Bo ard* * * ap p ro v i ng p l an s fo r al t erat i o n , co n st ru ct i o n , rem ov al o r d em ol i t i o n o f * * * a s tru ctu re i n a[] h i s to ri c d i s tri ctwh ere t hes e p l an s d o n o tm eetth e s t an d ard s fo r a cert i fi cat e o f ap p ro p ri at en es s .” Ci ty Co d e s ec. 3 3 7 -2
.- 6
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[* 6 ] en fo rcem en ti n th e Ci ty o f Bu ffal o ,” wh ich i n cl u d es the s t an d ard s en act edb y th e Pres erv at i o n Bo ard . Th e DPI i s s u es l i cen s es , p erfo rm s d em o l it i o n s , i n s p ect s p ro p ert i es fo r req u i red p erm i t s , an dreact s t o co m p lai n ts fro m th e p ub li c ab o u t p ro p ert i es th atd o n o t co m p l y wi t h th e b ui l d i n g co d e. Ital s o i s s u es cert i fi cat es o f
o ccupan cy

o n al l m u l t i p l e-d wel l i n g -u n i tb u i l di n g s ev ery th ree y ears , wh i ch are
s up p os edt o i n cl u d e a co m p l et e i n t eri o r an dex t eri o r i n sp ect i o n fo r co m p l i an ce wi th s t at e an dl ocal co des
. Wh en i tfi n ds a b u i l di n g i n v i o lat i o n , th e DPI m ay wi th h o l dp erm i t s an dl i cen s es o r i s s ue l et t ers o f v i o lat i o n . Ev en wi th th es e l eg al p o wers , th e DPI s t i l l d ep en d s i n l arg e p arto n
v o l u n t ary co m p l i an ce. If a b ui l d i n g o wn er d i s reg ard s a l et t er o f v i o l at i o n , th e DPI
m ay “ wri t e up ” a l aws u i tag ai n s tthe o wn er t o b e fi l edi n Bu ffal o Ho u s i n g Co u rt . Wh et h er t o p ro ceed wi th th e cas e, h o wev er, i s l eftup t o th e d i s cret i o n o f y et
an o th er p art o f Bu ffal o ’ s g ov ern m en t , th e Co rp o rat io n Co u n s el
. If t h e Co rp o rat i o n Co u n s el b ri n gs th e cas e an dwi n s, th e Ho u s in g Co u rtm ay fi n e o r
ev en im pri s o n th e v i o l at o r. Ci ty

Co d e s ec. 3 3 7 -3 2
. Du ri n g Bu ffal o ’ s fi s cal cri s i s i n th e earl y 2 0 0 0s , th i s en fo rcem en t m ach i n ery b ecam e s trai n ed
. Lo u is Pet ru cci g av e u s v al u ab le an d cred i b l e i n s ig h ti n t o t h e Ci ty ’ s p res erv at i o n effo rt s at th att i m e. Pet ru cci h as wo rk edfo r th e Ci ty o f Bu ffal o al m o s tco nt i n u o u sl y s i n ce 1 9 8 9 . Duri n g 2 0 0 4 an d2 0 0 5 h e was th e- 7
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[* 7 ] Di rect o r o f Ho us i ng , an di n 2 0 06 an d2 0 0 7 h e was a b u il d i n g i ns p ect o r wi t h th e DPI. He cred i b l y

ex p lai n edth atth e Bu ffal o Fi scal St ab i l i ty Au tho ri ty p u t
s ev ere b u d g etres trai n ts o n th e DPI b et ween 2 0 0 4 an d2 0 0 6 . He al s o ex p lai n ed th atth e real -es t at e m ark et i n Bu ffal o was s o d ep res sedi n th e earl y 2 0 0 0 s th at p eo pl e were b u y i ng p ro p ert i es i n h i st o ri c d is tri ct s s i m p l y t o s p ecu l at e o n th e
m ark et , wh i ch m ean t th ey wo u l d“ s i to n th em

fo rev er an dev er, h o p i n g th atth i n g s
wo u l dch an g e, [an d ] th atth ere’ db e s o m e g ran d eco n om i c d ev el o pm en t .” Bu t wh en th atd i dn’ to ccu r, a g reat n u m b er o f p ro p ert i es fel l i n t o d i s rep ai r as th ei r
o wn ers l etth em

g o u nm ai n t ai n ed
. Th e Pres erv at i o n Bo ards aw t h i s p ro b l em an dp u tt o g ether a l i s to f

“ d i st res s ed ” h i s to ri c b u i l d i n g s d eem edt o b e “ atri s k ,” wh i ch i tg av e t o th e DPI t o h el p fo cu s i t s i ns p ect i o n s . Th e p ro bl em wi th t h i s m et h o dwas th atth e DPI “ d i dn ’ t real ly h av e a s t an d ardo f wh at‘ atri s k ’ was . ” Wh en th e DPI d is co v ereda
v i o l at i o n , i td i dtry t o s t artact i o n s ag ai n s t th e o wn ers i n h o u s i n g co urt . Bu twh en i t di ds o , th e DPI “ recei v ed m i x edres u l t s .” Pet ru cci d es cri b edth e DPI’ s “ fai r
am ou n to f fru s trat i o n ” wi th th e h o u si n g co u rtb ecau s e i t “ d i dn ’ tal w ay s g etwh at [i t] wan ted ”--n am el y , h av i n g th e co u rt “ fo rce [p ro p ert y o wn ers ] t o fi x up th e b u i l d i n g s .” As h e ex p l ai n ed , “ o ft en t i m es th e o p p o s i n g co u n s el wo u l d m ak e [a]
co n vi n ci n g arg u m en t ” fo r wh y a b u i l d i n g s h o ul db e d em o l i s h ed , an da h o us i n g- 8
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[* 8 ] co u rtju d g e m i gh tag ree an do rd er t he b u i l di n gs t o “ co m e d o wn [,] an dth ey
cam e d o wn .” Th i s was al l p arto f t h e l arg er p ro bl em kn o wnas “ dem ol i t i o n-b y n eg lect ,” 6 wh i ch Pet ru cci ackn o wl ed g edwas p rev al en ti n th e earl y 2 0 0 0 s du e i n
n o s m al l p artt o th e fact th atu n d er t h e b u d getres trai n t s i m p o s edb y the Bu ffal o Fi s cal St ab i l i ty

Au th o ri ty

“ [t ] h ere was a b u d g etfo r d em o l i t i o n , [b u t ] n o t fo r
em erg en cy

rep ai rs o n th e p ro p ert i es o r s tru ctu res .” Bu d get res trai n t s al so affect edth e Ci ty ’ s ab il i ty t o co ndu cti ns p ect i o n s . In 2 0 0 4 Pet ru cci es t i m at ed th at th e Ci ty h ado n l y 5 3 t o 5 5 b u i l d i ng i n s p ect o rs , wh o were each ch arg edwi th p erfo rm i n g 2 , 0 0 0 t o 3 ,0 0 0 i n s pect i o n s p er y ear. In s p ect o rs wo u ld u n d ers t an d ab l y g i v e p ri o ri ty t o i n s p ect i o ns o f n ew co ns tru ct i o n th atai m edt o p ro t ectp ub l i c s afet y , an di n s p ect io n s ai m ed atp res erv i n g the
ex t eri o r co n di ti o n o f h i s t o ri c b u i l d i n g s b ecam e “p ri m ari l y co m p lai n tdri v en .” Pet ru cci cred i b l y

t es t i fi edas wel l th atth e i n s p ect o rs wh o were l eftweren ’ t

“ s p eci fi cal l y

trai n edi n [Bu ffal o ’ s ] p res erv at i o n s tan d ard s ” an dweren ’ t atal l

“ trai n edu n d er t h e Secret ary o f In t eri o r s t an d ard s .” Th e Ci ty al s o fai l ed t o m ak e
an d k eep g oo dreco rd s o f t h e b as el i n e co n d i t i o n s o f h i s t o ri c p ro p ert i es , wh i ch

6 Ti m Ti el m an , a m em

ber o f t h e Pres erv at i on Bo ard , d efi ned “ dem o l i t i o n b y -n eg l ect ” as th e p ro ces s b y wh i ch “ s tru ctures d et eri o rat e t o th e p o i n t wh ere t h e arg u m en ti s m ad e t h atth ey o u gh tt o b e d em ol i sh eds i m pl y b ecau s e [th e] co s t[i s ] t o o m u ch t o reh ab i l i t at e i to r i t ’ s a d an g er t o th e p ub l i c.”- 9
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[* 9 ] m ad e i tev en m o re d i ffi cu l tfo r i n s p ect o rs wh o tri edt o d et ect ch an g es i n p ro t ect edb u i l d i n gs fro m

y ear t o y ear. 7 Th e res u l t was a s y s t em o f cri s is
m an ag em en t . Th es e d i ffi cu l tt im es b eg an t o eas e aft er t h e t ax y ears h ere. In 2 01 2 th e Fi s cal St ab i l i ty

Au th o ri ty

m o v edi n t o an ad v is o ry

ro le, s ee An n u al Rep orto f t h e Bu ffal o Fi s cal St ab i li ty

Au th o ri ty : Fi s cal Year En ded J un e 3 0 , 2 0 1 2 , at 2 (Sep t . 2 4 , 2 0 1 2 ); Bu ffal o Fi s cal St ab i l i t y Au th o ri ty , M eet i n g M i n u tes (M ay 2 9 , 2 0 1 2 ),
an d s om e o f t h e b ud g etp res s u res th at h adaffect edp res erv at i o n eas edas wel l
. Al read y i n 2 0 0 7 , Co m erfo rd , wh o h adm o v ed t o th e p ri vat e s ect o r, retu rn edt o g o v ern m en tas d ep u ty

co m m is s i o n er o f t h e DPI an dth en co m m i s s i o ner i n 2 0 1 0
. 8 By 2 01 5 th e DPI h adex p an d edi t s wo rk fo rce t o 7 0 i n s pect o rs , each o f wh o m p erfo rm ed“ o n l y ” aro u n d 1 ,0 00 i n s pect io n s p er y ear. Th e DPI was al so ab l e t o
as s i g n each h i s t ori c d i s tri cta d ed i cat edi n s p ect o r wh o “ co n cen trat es o n * * * al l

7 Th e Ci ty

d i dap p ear t o h av e m ai n t ai n eds o m ethi n g cal l ed“b l u e s heet s ,” wh i ch i tfi l es wh en i t d es i g n at es a p ro p ert y as h i s to ri c. W e h av e o n e i n th e reco rd
. It is a o n e-p ag e d ocu m en t , wi th a s i n g l e g rai n y 4 -1 / 2 - b y 3 -i n ch p h ot og rap h , wi t h a l in e o n wh ich s o m eo n e can cl as s i fy th e p ro p erty ’ s co n di t i o n as ei th er ex cel l en t , g o o d , fai r, o r d et eri o rat ed . Th ere i s n o ev i d en ce t h atth e Ci ty up d at es th es e reco rd s aft er t hei r creat i o n.

8 Co m erfo rd ad m i t t edth ath e was co m pl et el y u n fam i li ar wi th th e DPI’ s i n s p ect i on act i v i t ies befo re h i s retu rn . To th e ex t en t th e Co m m i s s i on er u s es h i s t es t i m o ny as ev i d en ce o f t h e Ci ty ’ s en fo rcem en teffo rt s atth e t i m e o f t h e eas em en t s ’ d o n at i o n s i n 2 0 0 4, we g i v e h i s t es t i m o n y n o wei g ht
.- 1 0 -

[* 1 0 ] ex teri o r p ro p ert y

m ai n t en an ce v i o lat i o n s ” an d “ i s co g n i zan to f t h e p res erv at i o n i s su es ,” p art i cu l arl y as th ey rel at e t o “ h i s t o ri c b u i l d i n g s an dfacad es .” Th e DPI h as al s o s t art edt o m o re s y s t em at i cal ly as s es s h i s t o ri c p ro p ert i es ’
co n di t i o n s an dt o i m

p ro v e rep o rt i n g o f n o nco m p l ian ts tru ctu res . Aro u n d2 0 0 6 , Bu ffal o creat ed th e “ 3 1 1 s y s tem ,” wh i ch al l o ws the p ub l i c t o rep o rtp o ten t ial b u i l d i n g -co d e v i o l at i o n s . By 2 0 1 5 th e DPI was recei v i n g o v er 2 0 ,0 0 0 co m p l ai n ts th ro u g h th i s s y s t em

al o n e. In 2 0 1 0 Co m erfo rdco m m i s s i o nedo ne o f h i s t op i n s p ect o rs t o s u rv ey “ al l th e p res erv at i o n wo rt h y b u i l d i n g s i n th e ci ty ” an d“ wr[i ] te
up an yth in g th atwas n ’ tup t o co d e” aft er a n u m b er o f h i s t o ri c b u i ld i n g s co l l ap s ed du e t o neg lect . Th ats u rv ey was fi n i s h edaro un d 2 0 1 2 , an dwas th e fi rs ts u ch l i s t
co m p i ledb y th e Ci ty --al th o u g h th e Ci ty s t i l l d i dn o th av e a “ bas e o f al l th e h i s t o ri c b u i l d i n g s .” Th e Ci ty

al s o creat edth e “ H an s en s y s t em ,” wh i ch “ i ns p ect o rs u s e o n a d ai l y b as i s [t o ] trackth ei r d ai l y i n s p ect i o n s, t o trackp erm i t s , [an d ] t o track l i cen ses . ” Un t i l a p erm i to r l icen s e i s ap p ro v ed , o r u n t i l a n o n co m p l i an tp ro p ert y b eco m es co m

p l i an t , th e Han s en s y s t em p l aces a redl i n e o v er t he p ro p ert y , p ro v id i n g i n s p ect o rs a qu ickway t o ch ecko n th e s t atu s o f p ro p ert i es . W e d o n o t e, h o wev er, t h atth e s y s tem

p ro v id es l i m i tedi n fo rm at io n ab o u th i st o ri c facad es --i t h as n o i nfo rm at i o n ab ou tthe co n d i t i o n , m at eri al s u s ed , o r d i s t i n ct iv e feat u res o f th e facad es o f b u i l di ng s wi th i n h i s to ri c d i st ri ct s.- 1 1 -

[* 1 1 ] Th es e ch an g es l edCo m erfo rdt o co n cl u de t h atth e DPI’ s en fo rcem en to f t he b u i l d i n g co d e an dp res erv at i o n s t an d ard s i s b et t er n o wthan wh en h e jo i n edth e d ep art m en ti n 2 0 0 7 . Bu ffal o ’ s h o u s i n g m ark eth as al s o reco v ered , wh i ch h as ai d edth e DPI’ s en fo rcem en teffo rt s , th ou g h ev enwi th th es e ch an g es d em o l i t i o n b y -n eg l ectrem ai n s a s ubs t an ti al p ro b lem
. II. Ki s s li n g In t eres t s ’ Bu ffal o Real Es t at e Pu rch as es An th o n y Ki s s l i n g i s a real -es t at e d ev el o p er fro m New Yo rk

Ci ty . As wi t h al l d ev el o p ers , Ki s s l in g s earch es fo r i n v es tm en t s th atcan m ak e h i m a p ro fi t ab l e retu rn . Bu tNew Yo rk

Ci ty ’ s real -es t at e m ark etwas v ery s tro ng i n th e l at e ‘ 9 0 s,
an d Ki s s l i n g s eth is s i gh t s o n Bu ffal o i n the h o p e o f “ fi nd [i n g] s o m e p ret ty g o o d b arg ai n s .” In 1 9 9 9 Ki s s l i n g In t eres t s --o f wh i ch Ki s s li n g duri n g al l rel ev an tt i m es h el da 9 0% s hare o f p ro fi t , l o s s, an d cap i tal --i n v es t edi n i t s fi rs t Bu ffal o p ro p ert y . Ki s s l i n g reco u nt edh i s s ob eri n g v i ews o n th e Bu ffal o real -es t at e m ark etatth at t i m e, wh i ch fo rm edth e b as i s o f h i s i n v es tm en ts trat eg y : Bu ffal o was qu i t e a d eadci ty . Th ere was n ot h in g g o i n g o n . Th e p ri ces d id n ’ tg o h ig h er o r l o wer. Th ere were a l o tm o re ap art m en t s th an p eo p l e. Ev ery

b u il d i n g h ada l o t o f v acan ci es . No b u i ld i n g s were i n g o o dp h y s i cal s h ap e. Th e k i t ch en s were o l d , fl o o rs were o l d
. Th e d o o rs d i dn ’ tfi t. So I b eg an t o l oo kfo r g o o d l o cat io n s wi th t h e i d ea t h atI’ dfi x th es e b u i l d i n g up an dren t them o u t. Ev en i f I d id n ’ t g etm o re i n ren t , atl eas t [I’ d ] h av e a fu l ly ren t ed b ui l d in g th atwen t [s i c] fo r t h e wh o l e m ark ett o i m p ro v e.- 1 2 -

[* 1 2 ] So o n aft er i t s fi rs tp u rch as e Ki s s l i n g In t eres ts b o u g h t th e t h ree p ro p ert i es th atare t h e fo cu s o f th i s cas e. Each i s i n th e Al l en t o wnHi s to ri c Di st ri ct . Th ey are ! 1 65 No rt h St reet (t h e M an si on );
! 1 75 No rt h St reet (t h e Am b as s ad o r); an d
! 1 31 Al l en St reet . Ki s s li n g In t eres t s b o u gh t1 3 1 Al len St reet i n Oct o ber 1 99 9 . Th e p ro p ert y i s a t hree-s to ry

ap art m en t b u i l d in g , ecl ect i c i n s ty l e, b u i l ti n th e earl y 2 0 th cen tu ry . It has a b ri ckfacad e wi th co n tras t i ng s t o n e feat u res . Th e fro n tfacad e i s el ev en b ay s wi d e an di s arran g eds ym m et ri cal l y , wi th th e m ai n en tran ce cen t eredan ds et
s l ig h t ly fo rward i n an en cl o s edp orch . Th e p o rch h as a s t ag gered ro o fl i n e,
em ph as i zedb y

a t h i ck s to n e t ri m

b an d , an d qu o i n s . 9 Th e en try d o o r i s wo o d

p an el ed w i th s m al l g l as s i n s ert s an di s fl an k ed b y s i ng l e-p an e s i del i gh t s. A th i ck
s t on e b an dwrap s th e b as e o f th e facad e, an d l i k e t h e p o rch , th e b u i l d i n g h as qu o i n s an da s t ag gered ro o fl i n e, wh i ch i s rai s edat the co rn ers an di n th e cen t er, wh ere a ci rcu l ar s t o n e s h i el d draws th e ey e.

9 “ Q u o i n s ” are co rn ers o f a b u i l d i n g th atare t y pi cal l y m ad e o f s t on e, o r an o th er m at eri al m ean t t o i m it at e s t o n e, dres s edo r arran g eds o as t o fo rm a d eco rat i ve co n tras twi th th e ad jo i n i n g wal l s . Qu o i n , Am eri can Heri t ag e Di ct i o n ary

(5 th ed . 2 0 2 0 ). So m e qu o i n s are q u i t e el ab o rat e an dad dt o a b u i l d i n g ’ s b eau ty .- 1 3 -

[* 1 3 ] Th i s was s o m et h i n g o f a d i s tres s s al e. Ki s s l i n g In t eres t s b o u gh t th e p ro p erty fro m th e m o rt g ag ee. M &T Ban kh ad b een u n wi ll i ng t o fo recl o s e o n th e p ro p erty ev en th o ug h th e p rev i o u s o wn er h add i sap p eared an dth e t en an ts weren ’ t p ay i n g ren t , s o Ki ss l i n g In t eres t s b o u g h tth e m o rt g ag e ata d is co u nt , fi n i sh edth e fo recl o s ure, an dg o tth e b u il d i n g v acan t . Itth en b eg an s ub st an t i al ren o v at i o n s --i t

“p u ti n n ew wi n do ws , red i d t h e ro o f, red idth e h al l way s , p u t i n n ew k i t ch en s an d d i ds o m e wo rki n t h e b at h ro o m s t o al l 1 7 ap art m en t s ”--wh i ch i tco m pl et edb y l at e No v em b er 2 0 00
. Th e ren o v at io n s en ab l edKi s s l i n g In t eres t s t o ren tal m o s tal l o f th e ap art m en ts i n th e b u il di n g . Ki s s li n g In t eres t s n ex t b o u g htth e No rth St reetp ro p ert i es i n Feb ru ary 2 0 0 0
. 1 6 5 No rt h 1 0 i s a t h ree-s t ory ap art m en tb u i l d i ng , b ui lti n the earl y 2 0 th cen tu ry

as a
s i ng l e-fam i l y

h o m e. Iti s i n th e It al i an Ren ai ss an ce s ty l e wi th a m ai n en tran ce t hat i s reach edb y

a wi d e, ci rcu l ar s t o o p s eti n t h e cen t er o f t he g ro u n d fl o o r wi th i n a wi d e en try

p o rt i co . Th e p o rt i co h as a fl atci rcu l ar ro o f an dg ro o vedt erra-co t t a
co l u m ns at o p ch i sel ed s qu are b as es . Th e wi n d o w s acro ss th e facad e are el ab o rat el y

d et ai l edan dt op p edb y

h eav y p ed i m en t s th atare s trai g hto n th e g ro u n d

1 0 Wh i l e b o th p art i es s t i p u l at edth atth i s b u i ld i n g “ o ccup i es th e t ract o f l an d g en eral l y kn o wnas 1 6 5 No rth St reet ,” t he p ro p ert y al so h as th e ad dres s 1 73 No rt h St reet , wh i ch s o m et i m es s h o wedup i n th e reco rd
.- 1 4 -

[* 1 4 ] fl o o r an darch edo n th e s eco n d fl o o r. Th e b u i l d i n g h as a ru s t i cat ed l i m es t o ne b as e wi th qu o i n s at th e co rn ers an d an o rn at e co rn ice. 1 7 5 No rt h St reet i s a g ran dei g ht -s t ory ap art m en tb ui l d i n g b u i l ti n the 1 9 2 0 s wi th Ren ai s s an ce Rev i v al feat ures . Duri n g th e l as t Ro ari n g ‘ 2 0 s , i twas a fi rs t cl as s ren t al b u i l di n g , an d ap art m en t s th ere are ag ai n i n h i g h d em an d . Th e fi rs ttwo fl oo rs o f t h e b u i l d i n g , as wel l as th e b as em en tl ev el , are ru s t i cat edl i m es t o n e, wh i le t h e up p er fl o o rs are b ri ckwi th co n tras t i n g s t o n e d et ai li n g. Th e m ai n
en tran ce i s i n th e cen t er o f t h e g ro u n dfl oo r. Th e wi n d o w d i rect l y ab o v e t h e
en tran ce i s t o p p edb y

a b ro k enarch edp ed im en t , wh i ch res t s ab o v e a co n t i n u o u s
s eg m en t edb an d -co u rs e an dd i v i d es th e s eco n dan d th i rd fl o ors . Th e wi n d o ws
acro s s th e facad e are o rg an izeds ym m et ri cal l y

an dare al l o f th e d oub l e-h u n g , m u lt i p an e v ari et y

wi th s as h es an ds i m

p l e s trai gh ts i l l s . Ki s s li n g In t eres t s b o u gh tth es e p ro p ert i es fro m a l i m i t edp art n ers h i p i n a p ri v at e s al e t hatreq u iredth e u n an i m o u s ag reem en to f ab o u t1 5 p art n ers . Th e b u i l d i n g s h av e m ore t h an 1 2 5 u n i t s co m b i n ed , were i n fai rl y

g o o ds h ap e, an dwere al m o s tfu l l y

ren t edatm o d erat e ren t s atth e t i m e o f p u rch as e. III. Do n at i o n o f Co n serv at i o n Eas em en t s In Decem b er 2 0 03 th e Un i t ed St at es Dep art m en to f t h e In t eri o r cert i fi edth at al l th ree b u i l d i n gs are h i s t o ri c. Each cert i fi cat i o n s t at es thatth e p ro p ert y- 1 5 -

[* 1 5 ] co nt ri bu t es t o th e s ig ni fi can ce o f t h e Al l en t o wnHi s t o ri c Di s tri ctan d i s a

“ cert i fi edh i s t o ri c s tru ctu re” el i g i b l e fo r a ch ari t ab l e co n tri b ut i o n fo r co ns erv at i o n p u rp os es i n acco rd an ce wi th t h e Tax Treat m en t Ex t en s i o n Acto f 1 9 8 0 . See s ec. 1 .1 70 A-1 4 (d )(1 )(i v ), In co m e Tax Reg s . On ce Ki s sl i n g In t eres t s h adth es e cert i fi cat es i n h an d , i tco n tri b ut ed
co n serv at i on eas em en t s o n al l th e p ro p ert i es ’ facad es t o th e Nat i o n al Arch it ectu ral Tru s t . Ki s s l in g In t eres t s an dth e Tru s t ex ecu t ed two d eed s o f eas em en t --o n e o n th e No rt h St reet p ro p ert ies , an d o n e o n 1 3 1 Al l en --wh i ch were reco rd ed o n Decem b er 1 3 , 2 0 04
. 1 1 Each p ro p ert y was s ub jectt o a m ort g ag e wh enth e
eas em en t s were g ran t ed , an deach l en d er jo i n edi n th e ex ecu t i o n o f t h e d eed s o f
eas em en tth ro u g h l en d er-s ub o rd i n at i o n ag reem en t s . 1 2 Th e eas em en t s b ro ad l y

d efi n e t h e t erm

“ facad e” t o i n cl u d e “ al l ex t eri o r
s u rfaces o f t h e i m

p ro v em en t s o n the [p ] ro pert y , i n cl u d i n g al l wal l s , ro o fs , an d ch i m n ey s” an ds t at e t h at“ [i ] ti s t h e i n t en to f t he p art i es thatth e [f] acad e v i s i b l e

1 1 Th e t erm s o f the d eed s o f eas em en tare n earl y i d en t i cal . As a res u l t , wh en we refer t o a s p eci fi c t erm , we refer t o b o th eas em en t s .

1 2 Th e l en d er-s ub ord in at i o n ag reem en t s m ay h av e g i ven th e l en d ers p ri o ri t y o v er t h e Tru s t fo r al l i ns u ran ce p ro ceed s an dp ro ceed s o f co n d em n at i o n . Th i s m i g h th av e m ad e th e eas em en t v u l n erab l e t o at t acku n d er Pal m ol i v e Bl d g . In v ’ rs , LLC v . Co m

m i s s i o n er, 1 49 T.C. 3 8 0 , 3 9 4 -9 5 (2 0 17 ). Bu tth e p art i es s t i p u l at ed th i s i s s u e away , an dwe wo n ’ tl o o ki n t o i t fu rt h er.- 1 6 -

[* 1 6 ] fro m

th e s treet -l ev el o n th e o pp o s i t e s i de o f [t h e p ro p ert y ] rem ai n s
es s en t i al l y u nch an gedan di n fu l l p ub li c v i ew.” Th e eas em en t s al s o res tri ctwh at Ki s s l i n g In t eres t s can d o t o th e p ro p ert i es wi th o u tthe Tru s t ’ s co n s en t . Th es e
res tri ct i o n s i n cl u d e “ an y

al t erat i o n , co n s tru ct i o n o r rem o d el i n g o f ex i s t i n g i m p ro v em en t s * * * , o r t h e p l acem en t * * * o f s i g n s o r m ark ers , th at wo u l d
m at eri al l y

al t er o r ch an g e t h e ap p earan ce o f t h e [f] acad e.” Th ey al s o res tri ct

“ ex t eri o r ex t en s io n s o f ex i s t i n g i m p ro v em en ts * * * [an d ] th e erect i o n o f n ew i m p ro v em en t s , i n cl u d i n g an arch i t ectu ral l y co n s i s t en t[f] acad e, t o rep l ace ex i s t i ng i m p ro v em en t s wh i ch h av e b een wh o ll y o r p art ial l y d es tro y ed(e.g
. , b y fi re).” Pai n t i n g o r cl ean i n g t h e facad e al s o req u i res th e Tru s t ’ s co n s en t , u n l es s th e p ro p ert i es h adb een d am ag edas a res u lto f a cas u al ty l o ss , d es tru ct i o n , o r d et eri o rat i on , i n wh i ch cas e Ki s s l i n g In t eres t s m ay p erfo rm an y n eces sary

“ m ai n t en an ce, reco n s tru ct i o n, rep ai r an d refi n i s h i ng * * * s o l o ng as i ti s
co n du ct ed i n a m an ner wh i ch wi l l m ai n t ai n o r recreat e t h e es s en ti al ap p earan ce o f th e [f] acad e.” Ki s s l i n g In teres t s al s o p ro m i s edatal l t i m es t o “ m ai n t ai n i n g o o d
o rd er t h e ro o f, th e [f] acad e, the fo u n d at i o n s an dth e o v eral l s tru ctural i n t eg ri ty o f th e b u il d i n g ” wh i l e “ co m p l y [i ng ] wi th th e req u irem en ts o f al l ap p l i cab l e fed eral , s t at e an dl o cal g o v ern m en t al l aws an dreg u l at i o ns * * * [wi th ] at t en ti o n * * *- 1 7 -

[* 1 7 ] d i rect edt o th e Secret ary o f t h e In t eri o r’ s St an d ard s fo r Reh ab i l i t at i n g Hi s t o ri c Bu i ld i n g s.” Th e eas em en t s p ro v i d ed v ari o u s ri g h t s t o th e Tru s t , i n cl u d i n g th e ri g h t“ t o
en t er up o n an d i n s p ectth e [f] acad e, an d an y i m p ro v em en tth ereo n , b u tn o t i n cl u d i n g th e i n s i de o f t he [b ] u i l d i n g . ” If Ki s sl in g In t eres t s v i o l at edthe t erm s o f th e eas em en t s an dfai l edt o cu re aft er b ei n g g i v en n ot i ce, t h e Tru s t h adth e ri g h t t o : (i ) “ in s t i tu te l eg al p ro ceed i n g s t o en jo i n s uch v i o l at i on * * * t o req u i re th e
res t orat i o n o f t h e [p ] ro p erty * * * t o i ts p ri or co n d i t i o n ” an ds eekrei m b u rs em en t fo r l eg al co s t s an dat t o rn ey s fees ; (i i ) “ en t er up o n th e [p ] ro p ert y an di m p ro v em en t s th ereo n i n o rd er t o co rrect s u ch v i o l at i o n an d* * * t o h ol d[Ki s s l i n g In t eres t s ]
res p o n s i b l e fo r the co s tth ereo f”; an d(i i i ) p l ace a l i en o n th e p ro p ert y . An d fi nal ly , i f t h e eas em en t s are ev er ex t i n g u is h ed , wh eth er t h ro u g h co n d em n at i o n , ju d i ci al d ecree o r o th erwi se, t h e Tru s ti s en t i t l edt o recei v e a p o rt i o n o f p ro ceed s fro m an y s al e, ex ch an g e, o r co nv ers i o n o f t h e p ro p ert i es . 1 3

1 3 Th e ex t i n g u is h m en tcl au s e g ran t s th e Tru s t “ a p o rt i o n o f t h e p ro ceed s * * * eq u al t o th e s a me p r o po r ti o n th at th e v al u e o f t h e i n i t i al eas em en td o n at i o n b o re t o th e en t ire v al u e o f t h e p ro p ert y * * * as es t i m at edb y

a s t at e l i cen s ed ap p rai s er.” (Em

p has i s ad d ed .) Th o u g h the Co m m i ss i o n er s t i p u l at edaway an y p o t en t i al i s s u e rel at ed t o th e ex t i n g u i s h m en tcl au s e, t h i s d o es n ’ t ru n afo ul o f o u r recen td eci s i o n i n Oak

b ro o kLan dHo l d in gs , LLC v . Co m m i s s i o ner, T.C. M em o . 2 0 2 0 -5 4
.- 1 8 -

[* 1 8 ] IV. Ki s s li n g In t eres t s ’ Po s t -eas em en tRel at i o n s W it h the Tru s t On ce i td o n at ed th e eas em en t s, Ki s s l in g In t eres t s h ad t o en du re t h e Tru s t ’ s
an n ual p ro p erty

i ns p ect i o n s . Th es e i n s p ect io n s are t h o ro u g h an d i n cl u d e a
co m p l et e i n t eri o r an dex t eri o r i n s p ect i o n . An i ns p ect o r fro m th e Tru stt ak es fi el d
n o t es , i d en t i fi es an y

req u i redm ai n t en an ce, an dch eck s fo r an y al terat i o n s th at
were m ad e t o th e p ro p ert i es . If h e fi n d s an y , h e ch eck s fo r a reco rdo f wh et h er t h e Tru s th adap p ro vedthem . Th e Tru stal s o k eep s b as el i ne i n fo rm at i on fro m th e t i m e
o f t h e d o n at i o n i n the fo rm o f d et ai l edp h ot og rap h s th ati tret ak es each y ear t o
s h o w an y ch an g es . Fo l l o w i n g i t s rev i ew o f t he fi el dn o t es an dth e p h ot o g rap h s , th e Tru s ts en d s a l et ter t o Ki s s l i n g In t eres ts t o p res en ti t s fi nd i n g s . If th e Tru s t d i s co v ers a v i o l at i o n , i tas k s Ki s s l i n g In teres ts t o p ro p o s e h o w t o fi x i t. W e s p eci fi cal l y

fi n dth atth e Tru s tt o oki t s res p o n s i b il i ti es fo r t h es e p ro p ert i es s eri o u s l y . Ki ss l i n g ad m i t t ed thath e m ad e s ev eral ch an g es t o t h e p ro p ert i es wi th o u tth e Tru s t ’ s co n s en t . Th es e were n o tth at ex trao rd i nary --at1 3 1 Al l en h e rem o vedfl owers i n th e fro n to f t h e b u i ld i n g , ch an g edth e awn i n g s fro m g reen t o b l ack , an d i n st al l eda v acan cy s ig n t o at tract t en an t s . Oneach o ccas i o n , th e Tru s tn ot edth e ch an g es , co n t act ed Ki s s l i ng In t eres t s t o d em an dan
ex p lan at i o n , an dthen rem ed i edth e m at t er. Th ere i s n o ev id en ce o f an y s u ch- 1 9 -

[* 1 9 ] co rres po n d en ce o r co n t actfro m th e DPI o r t h e Pres erv at i o n Bo ardab o u tan y
s u ch is s u es fo r an y

o f th e Pro p ert i es . Th e Tru s tal s o i s s u edd em an d s . Th e Tru st wan t edwi res rem o v edfro m th e
ex t eri o r o f 1 7 5 No rt h St reet an dreq u iredKi s s li n g In t eres t s t o rep ai n tth e co rn i ce. Th es e were n o t ex p en s i v e rep ai rs , an d Ki s s li n g co ul dp o i n tt o n o i n creas es i n
m an ag em en t , i n su ran ce, p ro fes s i o n al , o r rep ai r an dm ai n t en an ce co s t s cau s edb y th e eas em en t du ri n g th e fi rs tco up l e y ears the eas em en twas i n p l ace. V. Rep o rt i n g the Co n tri b u t i o n an dAu d i t Ki s s li n g In t eres t s rep o rt eda n o n cas h ch ari t ab l e co n tri b u t i o n o f $ 8 5 5 ,9 0 0 at tri b u t ab l e t o th e g ran t o f t h e eas em en t s t o th e Tru s to n i ts 2 0 0 4 Fo rm 1 06 5 , U.S. Retu rn o f Part n ers h i p In co m e. Ital s o i s su eda Sch edu l e K-1 , Part n er’ s Sh are o f In co m e, Deduct i o n s , Cred i t s , et c., t o Ki s s l i n g fo r t h e 2 0 0 4 t ax y ear, wh i ch rep o rt edh i s d i s tri b u t ab l e s h are o f th e co n tri b u ti o n as $ 7 7 0 , 3 1 0 (9 0 % × $ 8 5 5 ,9 0 0 ). Th e Ki s s li n g s were l i m it ed , h o wev er, i n th e am o u n to f t h ei r ch ari t ab l e
co n tri b u t i o n d edu ct i o n i n 2 0 04 b y s ect i o n 1 7 0 (b ) an dh ad t o carryfo rwards o m e o f th e d edu ct i o n t o thei r 2 0 0 5 an d 2 0 0 6 t ax y ears . Th e Co m m is s i o n er au d i t edal l th ree y ears an dco m p l et el y d i s al lo wedth e Ki s s l i n g s ’ d educt i o n s fo r t h e co n tri b u t i o n o f t h e eas em en t s t o the Tru st . Th e- 2 0 -

[* 2 0 ] Ki ss l i ng s fi l eda p et i t i o n , an d we t ri edthe cas e i n Bu ffal o. 1 4 Th e t ri al was
m o st l y a b at tl e o f ex p ert s , al th o u g h the Co m m i s si on er am en d edh i s an s wer t o
as s ertg ro s s v al u at i on -m i s s t at em en tp en al t i es u n d er s ect io n 6 66 2 (h ) fo r t ax y ears 2 0 0 5 an d2 0 0 6
. OPINION I. Qu al i fi ed Co n serv at i on Co n tri b u t i o n s Sect io n 1 7 0 al l o w s a t ax p ay er t o d edu ctth e v al ue o f an y ch ari tab l e
co n tri b u t i o n h e m ak es . Th ere i s an ex cep ti o n fo r co n tri b ut i o ns o f real p ro p ert y , i f th e g i ft“ co n s i s t s o f l es s th an th e * * * en t i re i n t eres ti n s u ch p ro p ert y .” Sec. 1 7 0 (f)(3 )(A). Th ere i s an ex cep t i o n t o th i s ex cep t i on th at al l o ws a d edu ct i o n fo r a p art i al i n t eres ti n real p ro pert y i f t he d o n at i on i s a “ qu al i fi edco n s erv at i o n
co n tri b u t i o n . ” Sec. 1 7 0 (f)(3 )(B)(i i i ). A “ qu al i fi edco n s erv at io n co n tri b u t i o n ” i s

“ a co n tri b u t i o n (A) o f a qu al ifi edreal p ro p ert y i n t eres t , (B) t o a qu al i fi ed
o rg an i zat i o n , (C) ex cl u s iv el y fo r co n s erv at io n p urp o s es .” Sec. 1 7 0 (h )(1 ). Un d er
s ect i on 1 7 0 (h )(2 )(C), a q u al i fi edreal -p ro p ert y i n t eres tm

u s tb e “ a res tri ct io n (g ran t edi n p erp etu i ty ) o n th e u s e wh i ch m ay b e m ad e o f t he real p ro p ert y .” An d
s ect i on 1 7 0 (h )(5 )(A) t el l s u s t h at“ [a] co n tri bu t io n s h al l n o tb e t reat edas

1 4 Th e Ki ss li n g s were res i d en t s o f Fl o ri d a wh en th ey fi l edth ei r p et i t i o n . Th i s cas e i s t h erefo re p res u m p ti v el y ap p eal ab l e t o th e El ev en th Ci rcu i t . See s ec. 7 4 82 (b )(1 )(A).- 2 1 -

[* 2 1 ] ex cl u s i v el y fo r co n serv at i o n p u rp o s es u n l es s th e co n s erv at i o n p u rp o s e i s p ro t ect edi n p erp etui ty .” In Pi n e M o un t ai n Pres ., LLLP v . Co m m is s i o n er, 1 51 T.C. 2 4 7 , 2 8 0 -8 2 (2 0 1 8), aff’ di n p art , rev ’ di n p art , an dv acat ed , _ _ F.3 d

_ _ , 2 0 2 0 W L 6 1 9 3 8 9 7 (1 1 th Ci r. Oct . 2 2 , 2 0 2 0 ), we h el dth atth e ret ai n edp o wer o f al l co n tract in g p art i es t o ch an g e co n tract u al t erm s d o es n o tb y i t s el f d es tro y

an eas em en t ’ s req u i red p erp etu i ty . W e al s o h el dth ere t h ata d o n o r’ s ret ai n edri g h tt o ad di m p ro v em en t s

“ ap p u rt en an tt o res i d en t i al d ev el o p m en t ” d o es v i o l at e th e p erp etu i ty req u i rem en t
as a m at t er o f l aw wh en th e p reci s e l o cat i o n o f t h o s e i m p ro v em en t s i s n o ts etfo rth i n the d eedo f eas em en t . Id . at2 7 5 -7 9
. On ce we d eci d ed i n Pi n e M o u n t ai n th atth e p o wer o f p art i es t o am en da d eed of eas em en td idn o t i p s o f a ct o ren der al l d on at i o n s o f s u ch eas em en t s
n o n d edu ct i b l e, t h i s cas e b ecam e o n e o f t h e ap p aren t l y rare i n s t an ces i n wh i ch th e
o n l y d i s p u t e i s ab ou tthe p ro p er v al u e o f an eas em en t . Th at ’ s b ecau s e t h e p art i es
s t ip u l at edth atthe d eed s o f eas em en t i n th i s cas e s at i s fy each o f s ect i o n 1 7 0 (h )(1 )’ s req u i rem en t s . An d s o we tu rn t o the reg u l at i o n s . Th ey t el l u s th atth e v al u e o f a
co n serv at i on eas em en ti s t h e “ fai r m ark et v al u e o f t h e p erp etu al co n s erv at i o n
res tri ct i o n a t

th e t i me o

f th e co n tr i b ut i o n .” Sec. 1 .1 7 0 A-1 4 (h )(3 )(i ), In co m e Tax- 2 2 -

[* 2 2 ] Reg s . (em

p h as i s ad d ed ). Bu ti n th e cas e o f co n tri b u t i o n s o f real p ro pert y i n t eres t s , there are t wo p o t en t i al l y rel ev an t d at es fo r d et erm i n i n g wh en the
co n tri b u t i o n was m ad e: th e g ran td at e an dth e reco rd at i o n d at e. Th e reg u l at i o n s d o n ’ tex p res sl y

t el l u s wh i ch d at e t o u s e, b u tthey d o t el l u s th at o rd i n ari l y “ a
co n tri b u t i o n i s m ad e atth e t im e d el i v ery i s effect ed .” Sec. 1
. 1 70 A-1 (b ), In co m e Tax Reg s . Wh et h er d el iv ery i s effect edi s a qu es t io n o f s t at e l aw. Un i t edSt at es v . Nat ’ l Ban ko f Co m

m erce, 4 7 2 U.S. 7 13 , 7 2 2 (1 9 8 5 ) (s tat e l aw d et erm i nes real

p ro p erty ri g h t s , fed eral l aw d et erm i n es co n s equ en ces ). Becau s e t h e Pro p ert i es are i n New Yo rk , we l o o k t o it s l aw t o d et erm i n e wh en Ki s s l i n g In teres t s m ad e i t s d o n at i o n s. W e’ v e p rev i o us l y

co n cl ud edth at“ [u ] n d er New Yo rkl aw, an i n s tru m en t p u rp ort i n g t o creat e, co n v ey , m o d i fy , o r t erm in at e a co ns erv at i o n eas em en ti s n o t effect i v e u n l es s reco rd ed .” Zarl en g o v . Co m m i s s i o ner, T.C. M em o. 2 0 1 4 -1 6 1 , at* 2 1 (ci t i n g N.Y. En v t l . Co n serv . Law s ec. 4 9 -0 3 0 5(4 ) (M cKi n n ey 2 00 8 & Sup p . 2 0 1 4 )). Th e eas em en t s i n th i s cas e were reco rd ed o n Decem b er 1 3 , 2 0 0 4
. Th ats et s th e d at e o n wh i ch we d et erm i n e t h e eas em en t s ’ fai r m ark etv al u e. Th e reg u l at i o n s t el l u s h o w. Th ey t el l u s th atwh ere “ th ere i s a s ub s t an t i al
reco rdo f s al es o f eas em en t s co m p arab l e t o th e d on at ed eas em en t* * * , th e fai r
m ark etv al u e o f t h e d o n at edeas em en ti s b as edo n the s al es p ri ces o f s u ch- 2 3 -

[* 2 3 ] co m

parab l e eas em en t s .” Sec. 1 .1 70 A-1 4(h )(3 )(i ), In co m e Tax Reg s . Inth e ab s en ce o f s u ch s al es , “ th e fai r m ark etv al u e o f a p erp etu al co n s erv at i o n res tri ct i o n i s equ al t o th e d i fferen ce b et ween th e fai r m ark etv al u e o f t h e p ro p ert y i t
en cu m b ers b efo re t h e g ran t i n g o f t h e res tri ct i o n an d t h e fai r m ark et v al u e o f t h e
en cu m b eredp ro pert y

aft er t h e g ran t i n g o f t h e res tri ct i o n .” Id . Th i s ap p ro ach i s kn o wn as the “ b efo re an daft er” ap p ro ach an d we h av e o ft enu s edi t . See, e.g ., Hi l b o rn v. Co m

m i s s io ner, 8 5 T.C. 6 7 7 , 6 8 9 (1 9 8 5 ); Zarl en g o , T.C. M em o . 2 0 1 4 -1 6 1 , at* 41 -* 4 2 ; Go rra v . Co m m i s s io ner, T.C. M em o . 2 0 13 -2 5 4 , at* 4 9 ; Si m m o n s v . Co m

m is s i o n er, T.C. M em o . 2 0 0 9 -2 0 8, s li p o p . at1 8 -1 9 , aff’ d , 6 4 6 F.3 d6 (D.C. Ci r. 2 01 1 ). Un d er t h i s ap p ro ach , th e “ b efo re” an d “ aft er” v al u es are t o refl ectth e p ro p ert y ’ s h i g h es tan db es tu se, wh ich we’ v e d es cri b ed as “ [t ] h e
reas on ab l y

p ro b ab l e an dl eg al u s e o f v acan t l an d o r an i m pro v edp ro p ert y

th ati s p h y s i cal l y

p o s s i bl e, ap p ro p ri at el y

s up p o rt ed , an d fi n an ci al l y feas i b l e an d th at
res u l ts i n th e h ig h es tv al u e.” Wh i t eh o u s e Ho t el Lt d . P’ s h i p v . Co m m i s s i o n er, 1 3 9 T.C. 3 0 4 , 3 3 1 (2 0 1 2 ) (qu ot in g Ap prai s al In s t i tu t e, Th e Ap p rai sal o f Real Es t at e 2 7 7 -7 8 (1 3 th ed . 2 0 0 8 )), aff’ d i n p art , v acat edi n p art , an drem an d edo n o th er g ro u nd s , 7 5 5 F.3 d2 3 6 (5 th Ci r. 2 0 1 4 ). Th ere are t hree wi d el y

accep t edm eth o d s t o v al u e p ro p ert y u n d er t h e

“ b efo re an d aft er” ap p ro ach : (1 ) s al es co m p ari s o n , (2 ) i n co m e cap i t al izat i o n , an d- 2 4 -

[* 2 4 ] (3 ) rep l acem en tco s t. Th e p rem i s e o f t h e s al es -co m pari so n ap pro ach i s th at
m ark etv al u e i s d i rect l y

rel at edt o th e p ri ces b ei n g p ai d fo r co m p et in g p ro pert i es . Th i s req u i res n o to n l y th at th e co m p arab l e p ro p ert i es ch o s en b e t h em s el ves s i m i l ar t o the s ub jectp ro p ert y , b u tal s o thatth e s al es o ccu rredatarm ’ s l en gt h an dwi th i n a
reas on ab l e t im e o f t h e v al u at i o n d at e. See Ch an d l er v . Co m m i s si on er, 1 4 2 T.C. 2 7 9 , 2 8 5 (2 0 1 4) (ci ti n g W o l fs enLan d& Cat t l e Co . v . Co m m i s s i o ner, 7 2 T.C. 1 , 1 9 (1 97 9 )). Th e i n co m e-cap it al i zat i o n m et h odm eas u res th e s ub jectp ro pert y ’ s fai r
m ark etv al u e b y th e p res en tv al u e o f the fu tu re i n co m e s tream thati t s o wn ers can
ex p ectt o real i ze. Wh i teh o u s e Ho t el Lt d . P’ s h i p , 1 3 9 T.C. at3 21 -3 2 2 . Th e fo cu s
o f t h i s m et h o d i s o n fo recas t in g m ark eti n co m e an dd i s co un t i n g i tb y an ap p ro p ri at e cap i t al i zat i o n rat e, wh ich (ata h i gh l ev el o f g en eral i ty ) cap tu res th e ri ski n heren t i n th e i n v es t m en t . Id . at3 2 2. Fi n al ly , th e rep l acem en t -co s tm et h o d

“ d eri v es th e v al u e o f a p ro p ert y b y es t i m at in g th e rep ro du ct i o n o r rep lacem en tco s t
o f t h e i m p ro v em en t s , d edu ct i n g t h erefro m th e es t i m at edd ep reci at i o n , an dth en ad d in g th e m ark etv al u e o f t h e l an d.” Tal k in g t o n v . Co m m is s i o n er, T.C. M em o. 1 9 9 8 -4 1 2 , s l i p o p . at 2 2 . Th i s m et h o di s p art i cu l arl y s u s p ectwh en u s edt o v al u e
o l d er h i s t o ri c s tru ctu res . See Wh i t eh ou s e Ho tel Lt d . P’ s h ip , 1 3 9 T.C. at3 1 6
. W e h av e al so al read y

reco g n i zedth e s p eci al p ro b l em o f o wn ers wh o d o n at e facad e eas em en t s o n b ui l d i n gs i n h i s t o ri c-p res erv at io n d i st ri ct s . Th e reg u l at i o n s- 2 5 -

[* 2 5 ] t el l u s th atwe “ m

u s tt ak e i n to acco un t* * * an y effect fro m zo ni n g , co n serv at i on , o r h i s t o ri c p res erv at i o n l aws th atal read y res tri ct th e p ro p ert y ’ s p o t en t i al h i g h es tan db es t u s e.” Sec. 1 .1 7 0 A-1 4 (h )(3 )(i i ), In co m e Tax Reg s . Th i s t el l s u s t o d et erm i n e wh atp ro t ect i o n , i f an y , an eas em en tad d s b ey o n d l o cal l aw. Th i s i sn ’ ta n ew p ro b l em ei ther. See, e.g ., Ch an d l er, 1 4 2 T.C. at2 8 0 ; Wh i t eh ou s e Ho t el Lt d . P’ s h i p , 1 3 9 T.C. at3 0 7 -0 8 ; Kau fm an v . Co m m is s i o n er, T.C. M em o . 2 01 4 -5 2 , at* 2 , aff’ d , 7 8 4 F.3 d5 6 (1 s tCi r. 2 0 1 5 ); Zarl en g o , T.C. M em o. 2 0 1 4 -1 6 1 ; Sch ei d el m an v . Co m m is s i o n er, T.C. M em o . 2 0 1 3-1 8 , aff’ d , 7 55 F.3 d1 4 8 (2 dCi r. 2 0 14 ); Go rra, T.C. M em o . 2 0 1 3 -2 5 4 ; Si m m o n s , T.C. M em o . 2 0 0 9 -2 0 8 . Th es e cas es s h o w ju s th o w factb o u n d th i s rev i ew i s. Aft er al l ,

“ ‘ [v ] al u at i o n i s . . . n eces s ari ly an ap p ro x i m at io n [,] ’ an d‘ [i ] ti s n otn eces s ary th at th e v al u e arri v ed atb y

th e t ri al co u rtb e a fi g u re as t o wh i ch th ere i s s peci fi c t es t i m o ny , i f i ti s wi th in th e ran g e o f fi g u res th atm ay p ro p erl y b e d educed fro m th e ev i d en ce.’ ” Sch ei d el m an , 7 5 5 F.3 dat1 5 1 (qu ot i ng Si l v erm an v . Co m m i s s i o n er, 5 3 8 F.2 d9 2 7 , 9 3 3 (2 dCi r. 1 9 7 6 ), aff’ g T.C. M em o . 1 97 4 -2 8 5 ). W i th th atwe tu rn t o th e ex p ert s i n th i s cas e. II. Th e Ex p ert s Bo th p art i es s ub m i t t edex p ertrep o rt s o n the v al u e o f t h e eas em en t s . Th e Ki s s l i n g s ’ ex p ert s were J anBaren h o l t z, Darrel Ll o y d, an dKev i n M ah o n ey ; th e- 2 6 -

[* 2 6 ] Co m

m i s si o n er’ s ex p ertwas Greg o ry Kl au k . W e b ri efl y

i n tro du ce t h em

an d th ei r ap p ro ach es . A. J an Baren h o lt z Baren h o l t z wo rk s atM M J Co m m erci al , In c., an dKi s sl i ng fi rs tret ai n edh im atthe Tru s t’ s reco m

m en d at io n t o ap p rai s e t h e Pro pert i es b efo re th e eas em en t s ’
co n tri b u t i o n . Baren h o l t z i s a m em b er o f t h e Ap p rai s al In s t i tu t e, a h i g h ly reg ard ed
o rg an i zat i o n o f ap p rai sers , an di s al s o cert i fi edb y New Yo rkSt at e as a g en eral ap p rai s er. Befo re h e ap p rai s edth e Pro p ert i es h ere, Baren ho l tz h adap p rai s edm o re th an a h al f d ozen o th er facad e-eas em en t co n tri b u t io n s , al l i n co n n ect io n wi th th e Tru s twh ere i twas th e p ro b ab l e d o n ee. Baren h o l t z ap p rai s edthe Pro p ert i es fo r th e fi rs tt i m e i n 2 00 4
. He s en t Ki s s l i n g In t eres t s l et t ers i n Au g u s t2 0 0 4 thats t at edh is o p i n i on o f t h e m ark etv al u e
o f t h e Pro p ert i es b efo re an daft er g ran t i ng th e eas em en tas o f J u n e 2 9 , 2 0 0 4. He
co n cl u d ed th at th e h i g h es tan db es t u s e o f t h e Pro p ert i es , b o th b efo re an d aft er g ran t i n g th e eas em en t s , was th ei r co n t in u ed u se as res i d en t i al ap art m en tb u i l d i n g s. To cal cu lat e t h e Pro p ert i es ’ “b efo re” o r p re-eas em en t v al ues , Baren h o l t z
co n si d eredb u t reject ed th e s al es -co m p ari s on an drep l acem en t -co s tm etho d s an d i n s t eadu s edth e i nco m e-cap it al i zat i on m et h o d . He u s edth e Pro p ert i es ’ h is t o ri cal
rev en u e an d ex p en s e i n fo rm at i o n t o es t im at e each p ro p ert y ’ s n et o p erat i n g i n co m e- 2 7 -

[* 2 7 ] (NOI), wh i ch h e d i v i d edb y a ri s k -ad ju s t edcap i t al i zat i o n rat e t o arri v e ata fi nal val u e. Aft er cal cu l at i n g th e eas em en t s’ b efo re v al ues , h e t h en redu cedth em b y 1 1 % (fo r 1 3 1 Al l en ) an d 1 2 % (fo r t h e No rt h St reet p ro p ert i es ) t o arri v e atth ei r aft er v al u es . He cl ai m edi n h i s rep o rtth atth os e p ercen t ag es were b as edup o n

“ g u i d el in es i s s u edb y

th e In t ern al Rev en u e Serv ice as wel l as Tax Co urt d eci s i o n s ” wh i ch “ s u g g es t [ed ] th atth e g ran t in g o f h i st ori c co ns erv at i o n eas em en t s
cau s e a d i m i n u t i o n o f v al u e ran g i n g b et ween 1 0 % an d 1 5 %.” Hi s an al y s i s p ro duced th e fo l l o wi n g res ul t s : 1 3 1 Al l en No rt h St reet Pro p ert i es Pro p ert y v al u e: p re-eas em en t $ 6 9 0 ,0 0 0 $ 6 ,5 00 ,0 0 0 Pro p ert y v al u e: p o s t -eas em en t 6 1 4 ,1 0 0 5 ,7 20 ,0 0 0 Val u e o f Eas em en t 7 5 ,9 0 0 7 80 ,0 0 0 Baren h o l t z l at er up dat edh i s ap p rai s al s fo r t h e Pro pert i es i n l et t ers d at ed Sep tem b er 2 0 0 4
. Th es e up d at edap p rai s al s v al u edthe Pro p ert i es b efo re an daft er th e g ran t i n g o f t h e eas em en t s as o f Sep t em b er 7 , 2 00 4 . Inth em Baren h o l t z
co n cl u d ed th at th e v al u e o f t h e Pro p ert i es an dthe eas em en t s “ were u n ch an g ed fro m th e v al u es es t im at es as o f Ju n e 2 9 , 2 0 0 4 .” Baren h o l t z ret urn edt o th e t as ka t h irdt i m e aft er t h e Co m m is s i o n er
ex am i n edKi ss l i n g In t eres t s’ 2 0 0 4 retu rn . Du ri n g t h atau d itth e Co m m i s si o n er- 2 8 -

[* 2 8 ] o ffered Ki s s l in g In t eres t s an o p p o rtu n it y t o p res en tan y ad d it i o n al ap p rai s al i n fo rm at i o n . Back cam e Baren h o l t z wi th ad d en d a t o h i s 2 0 0 4 ap prai s al s, wh i ch h e
s en tt o Ki s sl i ng In t eres t s i n M arch 2 0 0 7 . Inthes e h e wal k edb ackh i s u s e o f a fl at p ercen t ag e-o ff ap p ro ach at cal cu l at i n g p o st eas em en tv al u es . Fo r t h e fi rs t t i m e h e
co n si d eredth e en fo rcem en t p o wers o f t h e Pres erv at i o n Bo ardas co m pared t o th e p o wers co n ferred o n the Tru s tan dco ncl u d edth atth e eas em en t s were m o re
res tri ct i v e an di m

po s edm o re o b l i g at i on s than th e Pres erv at i o n Bo ard . Th i s l ed h i m t o i n creas e h i s es t i m at e o f s ev eral p o st -eas em en t ex pen s es , an d i n creas e t h e Pro p ert i es ’ p os t -eas em en t cap it al i zat i o n rat es t o refl ect wh ath e i den t i fi edas i n creas edri s k . Th es e ad

ju s t m en t s , h o wev er, l edt o p o st -eas em en t v al ues th atwere
n earl y i d en t i cal t o th e o nes h e’ dcal cu l at edi n 2 00 4
. B. Darry l Ll o y d Attri al th e Ki s s l i n g s h ada s eco n dex p ert , Darrel Ll o y d o f IREM So l u t i o n s , In c. Ll o y di s a cert i fi ed g en eral real -es tat e ap prai s er i n b o th New Yo rk an d Pen ns y lv an i a an dh as m o re t h an 3 0 y ears ’ ex p eri en ce, m u ch o f wh i ch h as b een i n ap p rai s i ng p ro p ert i es wi th i n Bu ffal o ’ s v ari o us h i s t o ri c d i s tri ct s . He h as ev en ap p rai s edth e Gu aran ty

Bu i l d i n g --t h e o n l y o th er b u i l d i n g i n Bu ffal o wi th a facad e
eas em en ti n p l ace.- 2 9 -

[* 2 9 ] Ll o y dal s o v al uedthe Pro p ert i es u s i n g o n ly th e i n co m e-cap i t al izat i o n ap p ro ach b u t v al u edth em as o f Oct o b er 2 5 , 2 0 0 4 --t he d at e t h e Tru s tex ecu t edth e
eas em en t s . He cal cu l at edth e Pro p ert i es ’ NOI u s i ng m ark et -ad ju s t edrev en u e an d
ex p en s e i n fo rm at i o n, an dh e al s o co n cl u d edth atthe Pro p ert i es ’ h i g h es tan db es t
u s es , b ot h b efo re an d aft er t h e eas em en t , were as m u l t i fam i ly res i d en t i al ap art m en t
co m p l ex es . Bas edo n h i s an al y s i s , Ll o y dco n cl u d edth atth e eas em en t s redu ced th e fai r m ark etv al u e o f t h e Pro p ert i es . Li k e ev ery

o th er ap p rai s er wh o t es t i fi edi n th is cas e, Ll oy dreject edth e rep l acem en t -co s tap p ro ach as u n n eces s ari ly s p ecu l at i ve. An dl i k e Baren h o l t z h e al s o reject edthe s al es -co m p ari s o n m et h o d b ecau s e o f wh ath e cal l eda l acko f

“ s al es o f s i m il ar ty

p e p ro p ert i es en cu m

bered wi th a facad e eas em en t ” an dh i s b el i ef t h atan y s uch at t em p tt o u s e t h i s m et h o dwo ul dreq u i re “ s ub s t an t i al ad ju s t m en t s o f 4 0 [t o ] 5 0 p ercen t .” Ll o y dfel tth at ad j u s tm en t s o f t hatm ag n i tu d e were “ u n rel i ab l e” an d p o t en t i al l y “ m i s l ead in g .” C. Kev i n M ah o n ey Th e Ki s s l in g s ’ th ird an dfi n al ex p ertwas Kev i n M ah o n ey . M ah o n ey i s th e
s en i o r v i ce p res i d en tan d p art n er o f Baer & As so ci at es , LLC, a co n s tru ct i o n co n su l t i n g fi rm

th ats p eci al izes i n co s t es t im at i o n , co n di t i o n as ses s m en t s , cl ai m s
an al y s i s, an drel at eds erv i ces . M ah o n ey h as o v er 3 0 y ears ’ ex p eri en ce i n- 3 0 -

[* 3 0 ] co ns tru ct i o n , m

u ch o f i ti n th e Bu ffal o m ark et . W e reco g n i zedh i m as an
ex p erti n as s es s in g b ui l d i n g co n d i t i o n s an des ti m at i n g th e co s ts o f h i st o ri cal
res t orat i o n . Th e fo cu s o f M ah o ney ’ s ex p ertrep o rtwas “ o n t h e co m p ari s o n an d d i fferen ces b et ween th e Ci ty o f Bu ffal o Pres erv at i o n Bo ard ’ s en fo rcem en to f
m ai n t en an ce an d p res erv at i o n req u i rem en t s o n b u i l d i n g s wi th i n h is to ri c p res erv at i o n d i s tri ct s wi th th e requ i rem en t s ” o f th e facad e eas em en ts g ran t edt o th e Tru s t . Parto f h i s rev i ew was t o l o o katth e d et eri o rat i o n o f t h e Pro p ert i es ’ facad es an dt o es t i m at e th e co s to f rep ai ri n g th em t o t h e s t an d ard s fo r h i st o ri c b u i l d i n g s thatth e Secret ary o f t h e In t eri o r h ades t ab l i s h ed . M ah o n ey co n cl u d ed : Th e fi n an ci al co m

m i t m en tfo r m ai n t ai n i n g th e h i s t o ri cal facad es o f th e [Pro p ert i es ] , b as ed s im p l y o n th e req u i rem en t s an dh i s t o ry o f en fo rcem en to f ci ty

co d e b y th e Ci ty o f Bu ffal o an d the Bu ffal o Pres erv at i o n Bo ard , wo u l db e zero ; b as edo n th e req u i rem en t s o f th e co n s erv at io n eas em en t s fi n an ci al req u i rem en t s are as s u redan dco s t s wi l l b e s i g ni fi can t . To th e ex t en tM ah o n ey

d i rect l y co m p aredthe t erm s o f t h e eas em en t s t o Bu ffal o ’ s en fo rcem en to f i t s p res erv at i o n co d e t o reach h i s fi n al co n cl u s i o n , we d o
n o tg i v e h i s o p i n i o n an y

wei g h t . Th at ’ s b ecau s e wh en h e was ret ai n edb y th e Ki s s l i n g s , h e t es t i fi edth ath e “ h ado n l y a g en eral co n cep to f * * * facad e
eas em en t [s ] ” an d d i dn o th av e an y d i rect ex peri en ce d et erm in i ng wh et her- 3 1 -

[* 3 1 ] p art i cu l ar ren o v at i o n s m etBu ffal o ’ s p res erv at i o n co d e. He was th erefo re
n o tqu al i fi edt o g i v e an ex p erto p i n i o n reg ard i ng wh et her t h e eas em en t s were m o re
o r l es s b u rd en s o m e t h anBu ffal o ’ s en fo rcem en t o f i t s p res erv at i o n co d e. W e d o , h o wev er, cred i tth e p o rt i o ns o f h i s rep o rt th ati d en t i fi eds p eci fi c d et eri o rat i on thato ccu rredt o th e Pro p ert i es ’ facad es b efo re Ki s sl in g In t eres t s g ran t edth e eas em en ts t o th e Tru s t --i n o th er wo rd s , wh i l e th e Pro p ert ies were
s o l el y u n d er t h e Ci ty ’ s wat ch --an dh i s o p i n io n o n wh ati two u l d co s tt o res t o re t h e Pro p ert i es . M ah o n ey

i d en t ifi eds ev eral el em en t s o f each b ui l d i n g’ s facad es th at were ei th er rep l aced wi th n o n h i s t o ri cal m at eri al s , rep ai redu s i n g n o n h i s t o ri cal
s t an d ard s , o r i n n eedo f s i gn i fi can treh ab i l i t at i on i n th e n ear fu tu re. Fo r ex am p l e, at1 6 5 N o rt h St reet , M ah o n ey i d en t i fi edareas o f b ri ckrep l aced wi th n o n m at ch i n g
m at eri al , t erra co t t a wi n do w s i l l s rep l aced wi th m o d ern s t o n e s i ll s , an dt erra co t t a
co l u m ns i n n eedo f “ s ub s t an t i al reh ab i l i t at i o n o r rep ro du ct i o n i n th e n ear fu tu re.” At1 7 5 No rt h St reet , h e i d en t i fi eds o m e wi n d o w s rep l aced b y n o n h i s t o ri cal v i n y l wi n do ws wi th m et al tri m . An dat1 3 1 Al len St reet , h e i d en t i fi edwi n do ws th at

“ ap p ear[ed ] t o b e o f n on -h i st o ri c qu al i ty rep l acem en t s .” D. Greg o ry

Kl au k Th e Co m m is s i o n er’ s ex p ertwas Greg o ry Kl au ko f KLW

Ap p rai s al Gro up , In c. (f.k .a. Kl au k , Ll o y d& W i lh el m In c.). Kl au k i s al s o a cert i fi edg en eral real

-- 3 2 -

[* 3 2 ] es t at e ap p rai s er i n New Yo rkwi th o v er 3 0 y ears ’ ex p eri en ce p ri m ari l y i n th e Bu ffal o m ark et . Kl au k an dLl o y dwere p art n ers atKl au k , Ll o y d& W i l h el m , In c. b et ween 1 9 9 5 an d2 0 1 2
. Kl au kal s o v al u edth e Pro p ert i es u s i n g t h e i n co m e-cap i t al i zat i o n m et h o d , an d h e al s o fo u nd th at th e Pro p ert i es ’ h i gh es t -an d -b es tu s es , b ot h b efo re an daft er th e eas em en t , were as m

u l t i fam i l y ap art m en tb u i l d in g s . Kl au k, h o wev er, v al u ed th e Pro p ert i es as o f Decem b er 1 3 , 2 0 0 4 --th e d at e t h e eas em en t s were reco rd ed

-- an d h e co n cl u d edth atth e eas em en t s d i dn otredu ce t h e fai r m ark etv al ue o f t h e Pro p ert i es atal l
. Kl au kwas al s o th e o nl y

ex p ertt o u s e t h e s al es -co m p ari s o n m et h o d . He fo u n d fo u r p ro p ert i es h e s ai dwere co m p arab le t o 1 3 1 Al l en an d fi v e th ath e s ai d
were co m p arab l e t o th e No rt h St reet p ro p ert i es . Bas edupo n h i s an al y s i s , Kl au k
co n cl u d ed th at th e v al u es o f 1 3 1 Al l en an d t h e No rt h St reet p ro p ert i es were $ 3 8 2 ,5 0 0 an d$ 4 ,6 4 6 ,0 0 0
. W e h av e s o m e s eri o u s co n cern s ab o u t th es e co m p arab l e s al es : No n e o f t h e p ro p ert i es th ath e u s edwas s ubjectt o a facad e eas em en t atth e t i m e o f i t s s al e, wh i ch m ean s h e co ul dn ’ tp erfo rm a p ai red -s al es an al y s is
. 1 5 See Kau fm an , T.C.

1 5 A p ai red -s al es an al y s is co m p ares th e fai r m ark etv al u e o f a co m p arab l e p ro p erty wi th an dwi th o u tan eas em en t . Th i s an al y si s d i v i des th e fai r m ark et (co n ti n u ed ...)- 3 3 -

[* 3 3 ] M em o . 2 0 1 4 -5 2 , at * 3 7 (Co m m i s s i o n er’ s ex p ert“ d i d n o s al es co m p ari s o n
an al y s i s t o d et erm i n e t he p os t co n tri b u t i o n v al u e o f t h e p ro p ert y b ecau s e * * * h e
co u ldfi n dn o p ro pert i es b o th b u rd en edb y a p res erv at i o n res tri ct i o n an d s ol d
co n tem p o ran eo u s ly

wi th th e co n t ri b u t i o n o f t h e facad e eas em en t ”). Kl au ki n s t ead
u s ed th e s el ect edco m

p arab l e p ro p ert i es t o cal cu l at e p re-eas em en tv al u es an dth en b eg gedth e ques ti o n o f an eas em en t ’ s effect b y co n cl u d i n g t h atth e aft er v al u es
wo u l drem ai n u n ch an g edb ecau s e “ th ere i s n o cred i b l e s up p o rtfo r a Facad e Eas em en tad v ers el y

effect i n g th e m ark et v al ue o f a p ro p ert y l i k e t he s ub

jectwh en th e p ro p ert y

i s al read y en cu m

b eredwi th Hi s t o ri c Pres erv at i o n Res tri ct i on s .” Th i s l o g i cal fl aw al o n e wo u l d un d erm i n e Kl au k’ s s al es -co m p ari s o n an al y s i s . Ev en i f i td i dn ’ t , atl eas t two o f t he p ro p ert i es Kl au ku s edi n h i s an al y s i s
weren ’ tev en l o cat edwi th in a h i s t o ri c d i s tri ct . Yetn o wh ere i n h i s rep o rtd o es Kl au km ak e a l o cat i on ad ju s t m en t t o acco un tfo r wh ath e cl ai m s are t h e b u rd en s
an d co s t s o f o wn i ng a p ro p ert y i n a h i s t ori c d i s tri ctb ecau s e o f t h e Ci ty ’ s
en fo rcem en to f t h e p res erv at i o n co d e. Kl au kackno wl ed g edattri al , fo r ex am p l e,

1 5 (...co n t i nu ed ) v al u e o f t h e p ro p ert y

aft er i t ’ s en cu m

b eredb y i t s fai r m ark etv al u e b efo re i t ’ s en cu m b ered . Th e res u l t i ng fract i o n i s th en s ub tract edfro m o n e, p ro du ci n g th e p ercen t ag e d i m i n u t io n i n v al u e at tri b u t ab l e t o th e eas em en t . See Go rra, T.C. M em o. 2 0 1 3 -2 5 4 , at * 5 7 -* 5 8 (ci t i n g St ras bu rg v . Co m m i s s i o n er, T.C. M em o . 2 0 0 0 -9 4 , s l i p o p . at1 2 n .8 ). Th i s o f co u rs e req u i res th e u se o f co m parab l e p ro p ert i es th atare en cu m bered b y an eas em en t .- 3 4 -

[* 3 4 ] th at4 2 0 J ers ey

St reet --o ne o f t h e co m

parab l e p ro p ert i es th ath e u s edt o
v al u e 1 3 1 Al l en --was l o cat edo u t s id e a h i st ori c d i s tri ct . He m ad e wh ath e cal l ed

“ a l o cat i o n ad

ju s t m en t ” b utd i d n o tm ak e an ad ju s t m en t“ s p eci fi c t o th e p res erv at i o n i s su e.” Hi s rep o rtco n fi rm s thi s . Kl au ks t at es th ere t h atth e l o cat i o n ad ju s t m en tt o 4 2 0 J ers ey

i s at tri b u t ab l e t o th e factth ati t “ i s i n a l es s d es i rab l e l o cat io n b as edo n o ccup an cy an dren tl ev el s ” co m

p aredt o 1 3 1 Al l en b utm ak es n o
m en t i o n o f ad

ju s t in g the v al u e b as edo n i t s l o cat i o n o u t si d e a h i s t o ri c d i s tri ct . Th i s al s o u n d erm in es h i s an al y s i s . Th es e were n o t th e o n l y p ro b l em s . Kl au kad m i t t edat tri al th ath e h adb een
u n aware t h at Ki s s l i n g In t eres t s s ub s t an t i al l y ren ov at ed1 3 1 Al l enb efo re i td o n at ed th e eas em en t --wh i ch res u l t edi n Kl au k ’ s u n d erv al u i ng 1 3 1 Al l en wh en h e
co m p aredi tt o wh ath e s ai dwere co m p arab l e p ro p ert i es . An d a b i g g er p ro b l em i n Kl au k ’ s ap p rai s al was th ats o m an y o f h is co m

p arab l es were s o d i s s im il ar t h ath e h ad t o m ak e l arg e o r n um ero u s ad ju s t m en t s . Th ree o f th e fi ve p ro p ert i es th ath e
u s ed as co m

p arab le t o th e No rt h St reet p ro p ert i es req u ired t o t al n etad ju s tm en t s o f 4 3 .9 % t o 5 6
. 6 % . An dev en tho u g h Kl au km ad e n etad ju st m en t s o f o nl y

aro u n d 1 0 % t o 1 3 % t o th e co m

p arab l es i n h i s 1 3 1 Al l en ap p rai s al , h e h adt o m ak e a
n u m b er o f s ig n i fi can t ad

ju s t m en t s t o g etthere. As we’ v e p rev io u s l y s t at ed ,

“ [w] h enan ap p rai s er m ak es n u m ero u s ad ju st m en t s t o a s ub

jectp ro pert y ’ s- 3 5 -

[* 3 5 ] co m

parab l es , th e s ub

j ect p ro p ert y ’ s v al u at i o n b eco m es l es s rel i ab l e.” Ch an d l er, 1 4 2 T.C. at2 8 7 (affo rd i n g l i t t l e wei g h tt o two o f t he ap p rai s er’ s
co m p arab l es wh ere s al e p ri ce ad ju s t m en t s “ ran g edfro m

1 1 .2 % t o 2 0 .3 % an d i n cl u d eds i g n i fi can tad

ju s t m en t s b as edo n [t h e ap p rai s er’ s ] s ub ject i ve ev al u at i o n
o f t h e p ro p ert ies ’ ‘ co n di t i o n ’ ”). W e t h erefo re g i v e n o wei g h tt o Kl au k ’ s s al es -co m p ari s on an al y s es . III. In co m e-Cap i t al i zat i o n M et ho d Al th ou g h h e u s edth e p referred i n co m e-cap i t al i zat i o n m eth o d , we s t i l l h av e p ro b lem s wi th Baren ho l t z’ s an al y s i s . W e fi n d h i s t es ti m o n y n ei th er cred i b l e n or

“ th e p ro du cto f rel i ab l e p ri nci p l es an dm et h o ds .” See Fed . R. Ev i d. 7 0 2(c). Th ere
are s ev eral reas o n s fo r t h i s . Th e fi rs ti s h i s u s e o f b l an k et d i m i n u t i o n am o un t s fo r th e v al u es o f t h e Pro p ert i es . Ev en Baren h o l tz h i m s el f qu es t i o ns th i s m et h o d . He atfi rs t ap p rai s edth e p o s t -eas em en tPro p ert i es s im p l y b y kn o ck i n g o ff a p ercen t ag e o f t h ei r p re-eas em en tv al u es . He p i ck ed th es e p ercen tag es b as edo n

“ g u i d el in es i s s u edb y

th e In t ern al Rev en u e Serv ice as wel l as Tax Co urtd eci s i o n s wh i ch h av e es t ab li s h ed* * * th atth e g ran t i n g o f h i s t o ri c co n s erv at i on eas em en t s
cau s e a d i m i n u t i o n o f v al u e ran g i n g b et ween 1 0 % t o 1 5 %.” No wh ere i n h is rep o rt d o es he s p eci fy

wh atIRS g u i d an ce o r Tax Co u rt o pi n i on s h e co n s u l ted , an dwh en
as k edattri al h e was n o m o re s p eci fi c. Th e Ki ss l i n g s arg ue t h atBaren h ol tz was- 3 6 -

[* 3 6 ] referri ng t o an art icl e p rev i o u s l y p o s t edo n th e Nat i on al ParkServ i ce web si t e b y

M arkPri m o l i --an IRS em p l oy ee--en ti t l ed “ Facad e Eas em en t Co n tri b u t i o n s” (Pri m o l i art i cl e). Th e Pri m o l i art i cl e i n cl u d es th e fo l l o wi ng
s en t en ce: “ In t ern al Rev en u e Serv i ce En g i n eers h av e co n cl ud edth atthe p ro p er
v al u at i o n o f a facad e eas em en ts h ou l dran g e fro m ap p ro x i m at el y

1 0% t o 1 5% o f th e v al u e o f t h e p ro p ert y .” An das t o the Tax Co urtd eci s i o n s , we s u s p ecth e was referri n g t o a s tri n g o f h is t o ri c-facad e eas em en tcas es , m os t l y o u t o f Lo u i s i an a, i n th e m i d -t o -l at e ‘ 8 0 s an d earl y ‘ 9 0 s . See, e.g ., Hi l b o rn , 8 5 T.C. at6 99 (fi n di n g a 1 0 % d i m i n u t i o n i n v al u e); Do rs ey v . Co m m is si o n er, T.C. M em o . 1 9 9 0-2 4 2, 5 9 T.C.M . (CCH) 5 9 2 , 6 0 2 (1 9 9 0 ) (1 0 % d i m i n u t i on ); Ni co l ad i s v . Co m m i s si o n er, T.C. M em o . 1 98 8 -1 6 3 , 5 5 T.C.M . (CCH) 6 24 , 6 2 9 (1 9 8 8 ) (1 0 % d i m i n u t i o n ); Gri ffi n v . Co m

m i s s i o n er, T.C. M em o. 1 9 89 -1 3 0 , 5 6 T.C.M . (CCH) 1 5 6 0 , 1 5 6 4 (1 9 8 9) (2 0 % d i m in u t i o n ), aff’ d, 9 1 1 F.2 d 1 12 4 (5 th Ci r. 1 9 90 ). W e’ v e fo u n ds u ch ru l e-o f-t hu m b v al u at io ns u np ers u as i ve. In Kau fm an , th e t ax p ay er’ s ex p erts i m i l arl y as s u m ed“ th at th e p ercen t ag e redu ct i o n i n v al u e o f t h e p ro p erty o n acco u n to f the co n tri bu t i o n o f t h e facad e eas em en tt o [t he Tru s t ] fel l
s o m ewh ere b et ween 1 0 % an d1 5 %” b as edup o n th e Pri m o l i art i cl e an dTax Co u rt g u i d an ce. Kau fm an , T.C. M em o . 2 0 1 4 -5 2 , at* 2 4 -* 2 5 . W e refu s edt o accep tth i s
m et h o d. Id . at* 5 0-* 52 ; s ee al s o Sch ei d el m an , T.C. M em o. 2 0 1 3 -1 8, at* 1 4 . An d- 3 7 -

[* 3 7 ] ev enBaren h o l t z t es t i fi edth at , as o f t h e t i m e o f t h e t ri al , thi s v al u at i on t ech n i qu e was n o tap p ro p ri at e. Th e u n rel iab i l i ty

o f d eri v i n g p o s t -eas em en tv al u es b y as s u m i n g th atth ey

are a p ercen t ag e o f p re-eas em en tv al ues i s wh y Baren h ol t z p rep aredh i s 2 0 0 7 ad d en du m

t o “ am p l i fy i s s u es rel at i n g t o th e d i m i n u ti o n o f v al ue o f t he [Pro p ert i es ]
* * * fo l lo wi n g th e d on at i o n o f a facad e co n s erv at i o n eas em en t .” In th i s ad d en du m

h e ag ai n cal cu lat edth e Pro p ert ies ’ p o s t -eas em en tv al u es b u tu s ed
v ari o u s ex p en ses an dcap i t al i zat i o n rat es t o ad ju s t fo r wh ath e, atthatp o in t , i d en t i fi edas i n creas edco s t s an dri s k s as s o ci at edwi th o wn i n g t h e en cu m bered Pro p ert i es . Bu t d es p i t e wh atap p ears t o b e an i nt eres t i ng fact u al an al y s i s, Baren h ol t z rem ark ab l y --an dn o tv ery cred i b l y --arri v edat th e s am e p o s t -eas em en t
v al u es h e cal cu l at edi n 2 0 04 . W e fi n dth e p ro b ab i l i ty thatth i s i s a co i n ci d en ce i s cl o s e t o zero , es p eci al l y wh en ackn owl ed gi n g h o w s u s cep t i b l e v al u at i o n s u s i n g th e i n co m e-cap i t al i zat i o n ap p ro ach are t o m i n o r ch an g es i n th ei r i np u t s . Wh en Baren h ol t z was as k edattri al wh atth e ch an ces o f t wo ap p rai s ers reach i n g th e
s am e v al u at i o n fo r a p ro pert y are, h e res p o n dedth ati two u l db e “ un u su al
* * * [b ] ecau se d i fferen t ap p rai s ers h av e d i fferen tway s o f g o in g ab o utd o i n g ap p rai s al s .” In th e s am e way , we fi n dth e ch an ces o f o n e ap p rai s er reach i n g th e
s am e v al u at i o n u s i n g two d i s t i n ctap p rai s al m et h o d s t o b e “ u n u s u al ”. W e al s o- 3 8 -

[* 3 8 ] h av e co n cern s wi th th e i np u t s th ath e u sed . Fo r ex am pl e, Baren h o l tz was th e o n ly ap p rai s er t o ap pl y

a l o wer “ b efo re” cap i t al izat i o n rat e fo r 1 3 1 Al l en (8 .2 5 % ) t h anfo r t h e No rt h St reet p ro p ert i es (8 .5 %). He was al s o th e o n l y ap p rai s er t o u se h is t o ri cal , as co m p aredt o m ark et , ren tan dex p en s e d at a i n h i s
m o del
. Wh en ques ti on edab o u tth es e ch o i ces , Baren ho l tz t es t i fi edth ath e u s edth e l o wer cap i t al i zat i o n rat e fo r 1 31 Al l en b ecau s e h e b el i ev ed th atth e No rt h St reet p ro p ert i es rep res en t eda g reat er ri s kt o an i n v es t or i n 2 0 0 4 an d t h ath e u s ed h i s t o ri cal ren t s b ecau s e h e “ wo u l dn ’ tex pect there t o b e a b i g d i fferen ce” b et ween th em an d m ark etren ts . Ho wev er, h e p ro vi d edn o fu rt h er ex p l an at i o n fo r wh y h e b el i ev ed1 3 1 Al len was l es s ri s ky th an th e No rt h St reet p ro p ert ies ; an dwh i l e h e
m ay n o t h av e ex p ect eda l arg e d i fferen ce b et ween h i st o ri cal an d m ark etd at a, h i s rep o rtfai l s t o ex p lai n th e reas o n fo r t h at ex pect at i o n . W e acco rd Baren h o lt z’ s rep o rtn o wei g h t. A. “ Befo re” Val u at i o n Th atl eav es u s wi th Ll o y d ’ s an d Kl au k ’ s v al u at io n s . Th e way we an al y ze th es e ap p rai sal s i s t o d es cri b e t h em i n d et ai l an dex am i ne each p o in to f d i s ag reem en t . W e th en p l u g o u r fi n d i n g s o n each co nt es t edd et ai l b ack i n t o th e ap p rai s al . Th e read er wi l l b e u n s u rp ri s edt o l earn th at we en dup s o m ewh ere b et ween th e ex trem es of b o th v al u at i o n s .- 3 9 -

[* 3 9 ] Letu s b eg i n wi th th e s u m m ari es . Fi rs t , 1 3 1 Al l en :
L lo y d Klauk % B ef

o re % A f ter % Bef o re/A f ter Rental rev enu e $ 9 7 ,6 2 0 $ 9 7 ,6 20 $1 0 1 ,4 0 0 L aun dry rev enu e 2 ,6 5 2 2 6 5 2 1 ,3 2 6 P o tential g ro ss rev en

u e 1 0 0 ,2 7 2 1 0 0 ,2 72 1 0 2 ,7 2 6 Vacan cy & co llectio n lo ss 5 % (5 ,0 1 4 ) (5 ,0 1 4) 5 % (5 ,1 3 6 ) Ef f ectiv e g ro ss in co m e 9 5 ,2 5 8 9 5,2 5 8 9 7,5 9 0 Op eratin g exp en s es Real estate tax es 6 ,9 0 8 6 ,9 0 8 6 ,5 7 6 In su ran ce 1 ,7 6 4 1 ,7 6 4 3 ,4 0 0 Utilities 1 2 ,7 5 0 1 2,7 5 0 1 7 ,1 7 0 Garb ag e rem o v al

- - - - - - 5 9 5 Rep airs/m ainten an ce 5 ,1 0 0 5 ,6 1 0 1 0 ,2 0 0 P ay ro ll 3 ,4 0 0 3 ,4 0 0 - - - Clean in g & su

p p lies 1 ,2 7 5 1 ,2 7 5 - - - Sn o w & g ro un dcare - - - - - - 3 0 0 Man ag em ent f

ees 5 % 4 ,7 6 3 6 % 5 ,7 1 6 6 % 5 ,8 5 5 A d v ertisin g 1 ,7 0 0 1 ,7 0 0 - - - P ro f essio n al serv ices 1 % 9 5 3 2 % 1 ,9 0 5 1 ,0 0 0 Miscellan eo u s 5 0 0 50 0 - - - Reserv es f

o r rep lacem ents 4 ,2 5 0 4 ,2 5 0 3 ,4 0 0 T o tal expen ses 4 3 ,3 6 3 4 5,7 7 8 4 8,4 9 6 Net o p eratin g in co m e 5 1 ,8 9 6 4 9,4 8 1 4 9,0 9 3 Cap italizatio n

rate 8 .5 % 9 .2 5 % 1 1 % Valu e $ 6 1 0 ,5 4 0 5 3 4 ,9 27 4 4 6 ,3 0 3 An d n ex t , th e No rt h St reet p ro p ert i es :- 4 0 -

[* 4 0 ] L lo y d Klauk % B ef

o re % A f ter % B ef o re/A f ter Rental rev enu e $ 9 8 2 ,2 6 0 $ 9 8 2 ,2 6 0 $ 9 67 ,2 6 0 L aun dry rev enu e 2 0 ,4 3 6 2 0 ,4 3 6 9 ,9 8 4 B eauty sh o p rev enu e 7 ,8 6 0 7 ,8 6 0 6 ,5 0 0 P o tential g ro ss rev en

u e 1,0 1 0 ,5 5 6 1,0 1 0 ,5 5 6 9 83 ,7 4 4 Vacan cy & co llectio n lo ss 5 % (5 0 ,1 3 5 ) (5 0 ,1 3 5 ) 5 % (4 9 ,1 8 7 ) Ef f ectiv e g ro ss in co m e 9 6 0 ,4 2 1 9 6 0,4 2 1 9 34 ,5 5 7 Op eratin g exp en s es Real estate tax es 7 9 ,0 1 2 7 9 ,0 1 2 7 5 ,2 2 9 In su ran ce 1 8 ,9 4 0 1 8 ,9 4 0 3 5 ,2 0 0 Utilities 1 5 1 ,8 0 0 1 5 1,8 0 0 1 79 ,2 0 0 Garb ag e rem o v al

- - - - - - - - - Rep airs/m ainten an ce 2 7 ,0 6 0 3 2 ,4 7 2 5 1 ,2 0 0 P ay ro ll 2 6 ,4 0 0 2 6 ,4 0 0 5 7 ,6 0 0 Clean in g & su

p p lies 1 3 ,2 0 0 1 3 ,2 0 0 2 7 ,5 2 0 Co nt racted serv ices

- - - - - - 1 5 ,3 6 0 Man ag em ent f

ees 5 % 4 8 ,0 2 1 6 % 9 ,6 0 4 6 % 5 6 ,0 7 3 A d v ertisin g 7 ,9 2 0 5 7 ,6 2 5
- - - P ro f essio n al serv ices 1 % 9 ,6 0 4 2 % 1 9 ,2 0 8 1 % 9 ,3 4 6 Miscellan eo u s 3 ,5 0 0 3 ,5 0 0 1 0 ,8 8 0 Reserv es f

o r rep lacem ents 2 6 ,4 0 0 2 9,7 0 0 2 8 ,8 0 0 T o tal expen ses 4 1 1 ,8 5 7 4 3 9 ,7 7 8 5 46 ,4 0 8 Net o p eratin g in co m e 5 4 8 ,5 6 4 5 2 0,6 4 3 3 88 ,1 4 9 Cap italizatio n

rate 8.5 % 9.2 5 % 8 .5 % Valu e 6 ,4 5 3 ,6 9 3 5 ,6 2 8 ,5 7 5 4 ,5 6 6 ,4 5 7- 4 1 -

[* 4 1 ] Th e m o sts i g n ifi can td ifferen ce b et ween Ll o y d’ s an d Kl au k ’ s v al u at i o n s i s th atKl au kco n cl u d edth atth e eas em en ts h adn o effect . Bu tthey al so d i s ag ree ab o utth e v al ue o f the Pro p ert i es b efo re t h e eas em en t s. An d t h at ’ s wh ere we’ l l
s t art . W e n o t e t h at we n eedn o taccep tth e v al u es co m p u tedb y ei th er s i d e’ s ex p ert wi tn es s i n t o t o , an d i n s t ead “ m ay reach o u r o wn d et erm i nat i on o f v al u e o n th e b as i s o f o u r an al y s is o f th e ev i d en ce i n th e reco rd .” Zarl en g o , T.C. M em o. 2 0 1 4
- 1 6 1 , at * 4 6 (ci t i n g Si lv erm an , 5 3 8 F.2 dat9 3 3 ).

1
. Ren t al Rev en u e To cal cu l at e rev en u e, b o th Ll oy dan dKl au kco m p aredth e Pro p ert i es ’ h i s t o ri cal ren t al rat es wi th co m p arab l e m ark et rat es . M an y o f t h e co m parab l e ap art m en tren t al s u s edi n Ll o y d’ s an d Kl au k ’ s an al y s es were i d en t i cal . Al th o u g h we fi n db o th v al u at i o n s en t i rel y reas o n ab le, we ad o p tKl au k ’ s v al u es b ecau s e h e
ex p li ci t l y d et ai l edeach ad

ju s t m en tm ad e t o each co m p arab l e p ro p ert y ’ s ren t , wh i l e Ll o y dd idn o t .

2
. Lau n dry

Rev en u e To cal cu l at e l au n dry rev en u e, b o th ex p ert s as su m edeach u n i two ul d u s e t h e l au n dry ap p l i an ces i n th e Pro p ert i es ’ b as em en t s o nce p er week . Ll o y d , h owev er,
as s u m eda p er-l o adp ri ce o f $ 3 , wh i l e Kl au k as su m eda p er-l oadp ri ce o f $ 1 .5 0
.- 4 2 -

[* 4 2 ] W e h av e n o th i n g i n the reco rdt o h el p u s d eci d e th i s m i n o r p oi n t , an dwi ll g o wi th Kl au k ’ s , b ecau s e Ki s s l i n g h adth e b u rd eno f p ro o f.

3
. Beau ty

Sh o p Rev en u e Th i s rev en u e fl o w s p ran g fro m an ap art m en tat1 7 5 No rt h St reet thatwas
u s ed as a b eau ty s ho p . Kl au k refers t o th i s rev en u e s tream s i m p ly as

“ m i s cel l an eo u s rev enu e,” h i s t o ri cal l y wi th in th e ran g e o f $ 6,0 0 0 t o $ 7 ,0 0 0 p er y ear. Ll o y di d en t i fi es th i s rev en u e s tream as b eau ty -s ho p ren t al rev en ue an du s ed th e act u al m o n th l y

ren t ch arg ed , wh i ch h e al s o d et erm in edt o b e wi th i n m ark et p aram et ers . Ll o y dwas cred i b l e i n h i s rep o rtan dt es t i m o n y o n th is p o i n t , an dwe fi ndh i s v al u e p ers u as i v e.

4
. Vacan cy

an dCo l l ect i o n Lo s s Bo th ex pert s ag reed on a t o t al v acan cy an dco l lect i o n l o s s fact or o f 5 % fo r th e Pro p ert i es . To cal cu l at e t h e l o s s fo r 1 3 1 Al len , Ll o y dan dKl au k m u lt i p l i ed 5 % b y p o t en t i al g ro s s rev en u e. Kl au kem pl o y edth e s am e ap pro ach fo r t he No rt h St reet p ro p ert i es . Ll o y d , h owev er, wi th o utex p l an at i on ap pl i ed5 % n o tt o p o t en t i al g ro s s rev en u e fo r t h e No rt h St reet p ro p ert ies b u tt o p o t en t i al g ro ss
rev en u e l es s b eau ty

s h op rev en u e. W e fi n d n o reas o n wh y th e b eau ty

s h o p can no t al s o ex p eri en ce a v acan cy l os s . Th erefo re, t o cal cu l at e th e l o s s fo r t h e p ro p ert i es we ap p l y 5 % t o p ot en t i al g ro s s rev en u e.- 4 3 -

[* 4 3 ] 5
. Real Es t at e Tax Bo th ex pert s cal cu l at edth i s ex p en se b y ex am i n i n g the Pro p ert i es ’ h i s t o ri cal t ax ex p en s e. Ll o y dcal cu l at edth i s ex p en s e b y t ak i n g th e Pro pert i es ’ 2 00 4 tru e t ax
ex p en s e an d i ncreas in g i tb y 2 % t o acco un tfo r p o t en t i al i nfl at i o n i n th e o v eral l t ax rat e. Kl au k , o n th e o th er h an d , u s edth e Pro p ert i es ’ actu al as ses s edv al ues an d t ax rat es fo r J an u ary

2 0 0 5 th ro u g h Decem

b er 2 0 0 5 . As o f t h e effect i v e d at e o f t h e
v al u at i o n s i n 2 0 04 , th e Pro p ert i es ’ actu al t ax fo r t h e 2 0 0 5 t ax y ear wo ul dh av e b een un kn o wn . Th erefo re, we ad o p tLl o y d ’ s es ti m at i o n b as ed o n th e Pro pert i es ’ 2 0 0 4 t ax as ad

j u s t ed
. 6
. In s uran ce To cal cu l at e i n s uran ce ex p en se, Kl au kes t i m at edth e ex p en s e p er u n i t , wh i l e Ll o y des t i m at edthe ex p en se p er s qu are fo ot . Kl au k ’ s i n s u ran ce ex p en s e fo r 1 3 1 Al l en am o un ts t o aro u nd3
. 5 % o f h i s cal cu l at edeffect i ve g ro s s i n co m e, wh i l e Ll o y d ’ s am o u n t s t o ap p ro x i m at el y 1 .9 % o f h i s . Th e co m

p arab les i n Kl au k ’ s o wn rep o rts h o w i n s u ran ce ex p en s es ran g in g fro m 0 .6 % t o 2 .9 % o f effect i v e g ro s s i n co m e. Becau s e h i s v al u es fal l o u t s i d e t h i s ran g e wi th ou tex p l an at i o n , an d Ll o y d ’ s fal l wi th i n i t , we ad o p t Ll oy d ’ s es t i m at es o f t hi s ex p en s e fo r t h e Pro p ert i es .- 4 4 -

[* 4 4 ] 7
. Ut i l i t i es Bo th ex pert s cal cu l at edu t i l i ty ex p en s es o n t h e as s u m

p t i o n thatth e l an d l o rd
was res p on s ib l e fo r each u n i t ’ s h eat , wat er, an d co m m o n-area el ect ri c. Fo r t h e Pro p ert i es , Kl au kad o p t eda h i gh er v al u e th an Ll o y d . Fo r 1 3 1 Al l en , we fi n dth at p arto f t hi s d i s crep an cy

res u l t s fro m

Kl au k ’ s i gn o ran ce o f t h e s i gn i fi can t
ren o v at i o n s m ad e t o th e p ro p ert y b efo re t he d o n at i o n o f t h e eas em en t . See s up ra p . 3 4. Ll o y d ex p res s ly

co n s i dered th e recen t ren ov at i o n s i n h is rep o rt , an dwe ad o pth i s v al u e fo r 1 3 1 Al l en . W e al s o ad o ptLl oy d ’ s v al u e fo r t h e No rt h St reet p ro p ert i es b ecau s e h i s rep o rtp ro v i d es m o re d et ai l edi n fo rm at i o n t h an Kl au k ’ s , an d h i s v al u e i s reas o nab l e co n s i d eri n g th e ran ge o f h i s t o ri cal an dm ark etd at a p ro v id ed
. 8
. Garb ag e Rem o val , Sn o wan dGro u ndCare,

an dCo n tract edServ i ces W e’ v e co m

b i n edo ur d i s cu s s i o n o f t h es e t h ree ex p en ses b ecau se o f t h e d i fferen t way

Kl au k i n cl u dedthem

i n h i s rep o rt s. Fo r 1 3 1 Al l en , Kl au k l i s t ed g arb ag e rem o val s ep arat e fro m s n o w an dg ro u n dcare. Fo r t he No rt h St reet p ro p ert i es h e i n cl u d ed th em --al o n g wi th el ev at o r s erv i ci n g --u n d er a cat eg o ry th at h e cal l ed“ co n tract ed s erv ices .” Ll o y d i n cl u d edn o s u ch ex p en s es . W e g o wi t h Kl au ko n thi s o n e an d fi ndh is es t i m at es reas o n ab le (an di n th e cas e o f s no w- 4 5 -

[* 4 5 ] rem o v al , we b el iev e t h ei r n eces s i ty i n Bu ffal o a s ub

jectfi tfo r ju di ci al
n o t i ce) an db as edo n h is t o ri cal an dm ark etd at a. W e ad op tth em .

9
. Rep ai rs an dM ai n t en an ce To cal cu l at e t h i s ex p en s e, Ll o y dl o o k edo n l y atth e co s to f rep ai rs an d
m ai n t en an ce, wh i le Kl au ki n cl ud edjan i to ri al an d s up p l y co s t s 1 6 fo r 1 3 1 Al l en an d th e co s to f s up pl i es an d d eco rat i o n s fo r t he No rt h St reet p ro p ert i es (Ll o y d
co n si d eredth es e co s t s s ep arat e ex p en s e cat eg o ri es ). Kl au k ’ s n u m b ers d idn o t refl ectth e s ub s t an t ial p re-eas em en tren ov at i o n s m ad e t o 1 31 Al l en , wh i l e Ll o y d ’ s d i d . Ll o y d ’ s ap p ro ach was m ore d et ai l ed an dreas o n ab l e, an d we ad o p th i s
es t i m at es o f t h em .

1 0. Payro l l Bo th ex pert s ag ree t h atth i s ex p en s e s h ou l d b e reco g n ized . Kl au k d i dn o t
es t i m at e i tfo r 1 31 Al l en , s o we ad o p tLl o y d ’ s v al ue fo r t h at b u i l d i n g . As fo r t h e No rt h St reet p ro p ert i es , Kl au kap p ears t o h av e i n creas edth is ex p en s e b y a cert ai n
am ou n to f u n s peci fi ed“ t ax an db en efi tex p en s e.” It ’ s u n cl ear wh y th i s ex p en s e
wo u l db e u n i qu e t o th e No rt h St reet p ro p ert i es an dwh at“ t ax an db en efi t ex p en s e” i n cl u d es . W e t h erefo re ad o p tLl o y d ’ s v al u es fo r t h es e p ro pert ies t o o .

1 6 Th i s am o u ntal so ap p ears t o i n cl u d e $ 30 0 p er y ear fo r s no w rem o v al an d g ro u nd s care, wh i ch we’ v e al read y al l o wed
.- 4 6 -

[* 4 6 ] 1 1. Cl ean i n g an dSup p l i es Fo r 1 3 1 Al l en , Kl au ki n cl u d edcl ean i n g an ds up p l i es i n h i s rep ai rs an d
m ai n t en an ce ex pen s e an d d i dn o th av e a s ep arat e cat eg o ry fo r t h em i n h i s rep o rt . Si n ce Ll o y d ’ s v al ue i s wi th in b o th th e h i s t o ri cal an dm ark etran g es fo r s u ch an
ex p en s e, we ad o p th is v al u e. W e ad op tKl au k ’ s v al u e, h o wev er, fo r th e No rt h St reet p ro p ert ies . W e d o th i s b ecau s e Ll o y d’ s v al u e i s u n reas o n ab l y (an di n ex pl i cab l y ) b el o w th e l o wer b o u n do f t he p ro p ert ies ’ h i s t o ri cal ex p en s e ran g es , wh i le Kl au k ’ s m ark et -ad ju s t ed
v al u e i s s qu arel y

i n s i d e. 1 2. M an ag em en tFees Th e ex p ert s ag ree t hatthi s ex p en s e i s ap p ro p ri at el y cal cu lat ed u si n g a p ercen t ag e o f effect i v e g ro s s i n co m e b u td i s p u t e wh atth atp ercen t ag e s ho u l db e. Kl au ks ay s 6 %, wh il e Ll o y ds ay s 5 %. Th e d i fferen ce s eem s at tri b u t ab l e t o Kl au k ’ s i n cl us i on o f ad v ert is i n g an do ffi ce-s up pl y ex p en s es as p arto f
m an ag em en tfees
. Ll o y d b ro k e t h o s e ex p en s es o u t . Wh i l e b o th ap p ro ach es ap p ear reas o n ab l e, we ad o p tLl o y d ’ s b ecau s e o f i t s m o re g ran u l ar ap p ro ach . As a
res u l t, we ad o p tLl o y d ’ s m an ag em en t -fee p ercen t ag e fo r t h e Pro p ert i es .- 4 7 -

[* 4 7 ] 1 3. Ad v ert i si n g Ll o y dp ro j ect edad v ert i s i n g as a s ep arat e ex p en s e. He s ay s th e ex p en s e fo r 1 3 1 Al l en h i s t o ri cal l y

ran g edfro m

$ 1 ,6 9 5 (o r $ 1 0 0 p er u n it ) t o $ 2,1 3 1 (o r $ 1 2 5 p er u n it ), wh il e th e m ark et ’ s ad v ert i s i n g ex p en s e t y p i cal l y ran g edb et ween $ 4 0 t o $ 1 0 0 p er u ni t . Bas edo n t h i s , h e ad o p t edan ad v ert i si n g ex pen s e o f $ 1 0 0 p er u n i t , o r $ 1 , 7 0 0 an n u al l y . Fo r t he No rt h St reet p ro p ert i es , the ex p en s e h i s t o ri cal l y
ran g ed fro m

$ 2 ,6 1 2 (o r $ 20 p er u n i t ) t o $ 8 ,5 0 0 (o r $ 6 4 p er u n it ). Th i s , co m b i n ed wi th ad v ert i si n g ex p en s es i n s i m i l ar b u i l di n gs th atran g edfro m $ 4 0 t o $ 1 0 0 , l ed Ll o y dt o ad o p tan ad vert i s i n g ex p en s e o f $ 6 0 p er u ni t , o r $ 7 ,9 2 0 an nu al l y . Si n ce Kl au kd i dn ’ ts ep arat e ad v ert is i n g fro m m an ag em en t , we wi l l co n t i n u e t o ad o p tth e
m o re g ran u l ar ap p ro ach . W e wi l l u s e Ll o y d ’ s ad v ert is i ng ex p en s e fo r t h e p ro p ert i es . 1 4. Pro fes s i o n al Serv i ces Bo th ex pert s ap p ear t o ag ree t h atth e p ro fes s io n al s erv i ces ex p en s e s h o u l d equ al 1 % o f effect i ve g ro s s i n co m e. W e fi n dth i s reas o n ab l e an dad o pti t .

1 5. M i s cel l an eo u s Ll o y di n cl u d es th i s ex p en s e fo r each o f t h e Pro p ert i es , wh i l e Kl au ki n cl u d es i t on l y fo r t h e No rth St reet p ro p ert i es . Al th o u g h Ll o y dco n s i st en t l y ap p l i edth e
ex p en s e t o th e Pro pert i es , h e p ro v i d edn o ju s t i fi cat i o n fo r h i s es t i m at es . Kl au k ’ s- 4 8 -

[* 4 8 ] es t i m at e, o n th e o th er h an d , i s s up p o rt edb y h is t ori cal an dm ark etd at a. W e ad o ptKl au k ’ s v al u e fo r t h e No rt h St reet p ro p ert i es .

1 6. Res erv e fo r Rep l acem en t s Bo th ex pert s ag ree t h ati ti s reas o nab l e t o i n cl u d e t h i s ex p en s e as an am o u n t a p ro p erty

o wn er wo u l ds et as i d e t o rep ai r m ajo r s tru ctu ral i tem s, s uch as th e ro o f, ap p li an ces , an dh o t -wat er t an k s . Wh i l e b o th ex p ert s ’ v al u es ap p ear reas on ab l e, Kl au kp erfo rm eda h i g h l y d et ai l edb reak do wno f t he res erv e req u i red fo r each i t em th at m ay requi re rep l acem en t . It ’ s p ers u as iv e, an dwe ad o pti t. 1 7. Cap i t al izat i o n Rat e To cal cu l at e t h e Pro p ert i es ’ cap i t al i zat i o n rat es , b o th ex pert s an al y zed
n at i o n al rat e i n d icat o rs an d rat es d eri v edfro m the l o cal m ark et . Each al s o ap p l i ed th e m o rt g ag e-eq ui ty

b an d -o f-i nv es t m en t t ech n iqu e, “ wh i ch p ro du ces a wei g h t ed
av erag e co s t o f cap it al b as ed o n th e co s to f d eb tan dequ i ty fi n an ci n g fo r t h e
s ub jectp ro p erty .” LeFrakv . Co m m i ss i o ner, T.C. M em o. 1 9 93 -5 2 6 , 6 6 T.C.M
. (CCH) 1 2 9 7 , 1 3 0 2 (1 9 9 3 ). As a res u l to f t h ei r an al y ses , b o th Kl au kan dLl o y d ag ree t h atth e ap p ro p ri at e cap it al i zat i o n rat e fo r t h e No rt h St reet p ro p ert ies i s 8 .5 % , wh i ch we fi n dreas o n ab l e. Th ey are n o ts o ag reeab le ab o u tth e p ro p er cap i t al i zat i o n rat e fo r 1 3 1 Al l en .- 4 9 -

[* 4 9 ] Kl au k ’ s an al y s i s b eg an wi t h a rev i ew o f n at io n al ap art m en t -m ark et cap i t al i zat io n rat es fo u n di n t h e PwC Ko rp acz Real Es tat e In v es t or Su rv ey (4 th Qu art er 2 0 0 4 ). Becau s e Kl au kfel tth at“ th e s ubjecti s cl earl y no t an i n st i tu t i o n al g rad e p ro p ert y ,” h e was p art i cu l arl y i n t eres t edi n t h e s u rv ey ’ s fi n d in g s o n th e cap i t al i zat io n rat es o f n o n i ns t itu t i o n al p ro p ert ies , wh i ch “ i n d i cat e[d that ] a cap rat e fo r n o n i n st i tut i o n al ap art m en t p ro ject s s h o u l dran g e fro m

5 .2 5%-1 0
. 5 % wi t h
an av erag e o f 8 .0 6 %.” Kl au kth en p ro ceed edt o cal cu l at e t h e cap i t al i zat i o n rat e u nd er t h e
m o rt g ag e-eq u i ty

t ech n iqu e. He as s u m edth at7 5 % o f t he v al u e o f t h e b u i l d i n g
wo u l db e fi n an cedwi th d eb tan dth atthe p rev ai l i n g rat e fo r a 1 0 -y ear m o rt g ag e,
am ort i zedo v er 2 0 y ears , was 6 %. Th i s i n t eres trat e was b as edo n th e rat es o f fed eral Treas uri es an dco rp o rat e b on d s o f v ary i n g ri s k . Kl au kal s o as s u m edth at 2 5 % o f t h e v al u e o f t h e b u i l d i n g wo u l db e fi n an cedwi th equ it y ata rat e o f 1 6 %. He b as edth i s o n h i s i n t erv i ews wi th i n v es t o rs i n W es t ern New Yo rkwh o i n d i cat edth atth ey

wo u l dex p ecta retu rn o f 8 % t o 1 4%, wh i l e t h ree ad d it i o n al , u n d i s cl o s edl o cal i nv es t ors s ai dth ey wo ul dex p ect y i el d s b et ween 8 % an d2 0 %. Kl au kd et erm in edth atth e b u i ld i n g wo u l dn o ti n creas e i n v al ue o v er a 1 0 -y ear h o l d i n g p eri o d . He then wei gh t ed h i s v al u e b y a n u m b er o f fact o rs t o arri v e ata cap i t al i zat io n rat e o f 9 .2 %.- 5 0 -

[* 5 0 ] Fi n al l y , Kl au kan al y zedth e cap i t al izat i o n rat es o f t h e p ro p ert ies h e u s edi n h i s s al es -co m

p ari s o n m et h o d , wh i ch ran g edfro m 1 0 .2 % t o 1 5.6 %. He reas o n ed th atth e cap i t al i zat i on rat es fro m th e l o cal m ark etrefl ect edth e co n d i t io n s o f 1 3 1 Al l en an d co n cl ud edth atth e ap p ro p ri at e cap i t al i zat io n rat e was 1 1 %, th ou g h at tri al h e t es ti fi ed th atth e rat e s h o u l d l i k el y b e 1 0% aft er l earn in g o f t h e s ig n i fi can t
ren o v at i o n s Ki s s l in g In t eres t s m ad e at1 3 1 Al l enb efo re i td o n at edthe eas em en t . Ll o y d ’ s an al y s i s i s qu i te s i m i l ar t o Kl au k ’ s . He s t art edb y rev i ewi n g th e Real ty Rat es In v es t o r Su rv ey

(4 th Qu art er 2 01 4 ), wh ich s h o w edan av erag e
n at i o n al cap i t al i zat i o n rat e fo r ap art m en t s i n 2 00 4 o f 9 %. He then l o o k edatl o cal p ro p erty s al es , m os t ly

fro m 2 0 0 1 , wh i ch s h o w edcap i t al i zat i o n rat es b et ween 9 .5 4% an d 1 3 .2 6 %--al th o u g h h e n o t edthats i nce t hes e s al e d at es , b o th i n t eres tan d cap i t al i zat io n rat es h ado n av erag e d ro p p ed
. Ll o y dth en cal cu l at eda cap i t al i zat i o n rat e u si n g th e m o rt g ag e-eq u it y t ech n i qu e. M an y

o f h is as s u m

p t i o n s were t h e s am e as Kl au k ’ s . Fo r ex am p l e, Ll o y das s u m eda l o an -t o -v al u e rat i o o f 7 5 %, wi th a 6 % i n t eres t rat e o n a 1 0 -y ear
m o rt g ag e, am o rt i zedo v er 2 0 y ears . He al s o p ro j ect edn o ap p reci at i o n i n th e v al ue
o f t h e b u i l di n g s o ver a 1 0 -y ear h o ld i n g p eri o d. Ho wev er, h e al tered o n e i m p o rt an t
as s u m pt i o n ab o ut th e eq u i ty

y iel drat e, l is t i n g i t at1 3 % co m p aredt o Kl au k ’ s 1 6 %.- 5 1 -

[* 5 1 ] As a res u l t o f t h is ch an g e, Ll o y dcal cu l at eda cap i t al i zat i o n rat e u s i n g th e
m o rt g ag e-eq u i ty

t ech n iqu e o f 8 .2 5 %, i n co n tras tt o Kl au k ’ s 9 .2 0 % rat e. W ei g h i n g th e n at io nal an dl ocal m ark etrat es , b u trel y i n g p ri n ci p al l y o n th e
m o rt g ag e-eq u i ty

t ech n iqu e, Ll o y dfi n al ly

ch o s e a cap i t al izat i o n rat e o f 8 .5 % (i n
co n tras t t o Kl au k’ s fi n al rat e o f 1 0 % ), wh ich h e b el i ev edwas ju s t ifi edb as edo n th e “ lo wer i n t eres t rat e en v i ro n m en t atth e t i m e o f v al u at i o n an dth e s ub ject ’ s
recen tren o v at io n s .” Th i s s in gl e n um

b er ex pl ai n s a g reat d eal o f t h e d i fferen ce i n Kl au k’ s an d Ll o y d ’ s an al y s es o f 1 3 1 Al l en ’ s b efo re v al u e, 1 7 an dwe n eedt o p ay s p eci al at t en ti o n t o i t . A rev i ew o f t h e reco rdl ead s u s t o co ncl u d e th atLl o y d ’ s an al y s i s i s m o re
reas on ab l e t han Kl au k ’ s . M u ch o f t h e Co m m i s s i o n er’ s at tacko n Ll o y d ’ s ap p rai s al
s p ri n g s fro m

Ll o y d ’ s u s e o f 8 .5 % fo r t he Pro pert i es . Acco rd i n g t o th e Co m m i s s i o n er, “ th ere i s n o way th e [Pro p ert i es ] can h av e t he ex acts am e cap i t al i zat io n rat es ” b ecau s e t h e No rt h St reetp ro p ert i es are cl earl y s up eri o r t o 1 31 Al l en . He b as es th is b el i ef o n t h e fact th atth e t wo “pro p ert i es ati s s u e are
s i gn i fi can t l y

d ifferen ti n s i ze, qu al i ty , co n d i t io n , th e t wo p ro p ert i es are m i l l i o n s o f

1 7 Fo r ex am

p l e, i f Ll o y dad o p t edKl au k ’ s cap i t al i zat i o n rat e o f 1 0 % i two u l d ch an ge h i s i n co m e ap p ro ach v al u e b y $ 9 1 ,5 8 0 . An d i f Kl au k ad o p tedLl o y d ’ s 8 .5 % rat e i two u l dch an g e h i s i n co m e ap p ro ach v al ue b y $ 8 6,6 3 5
.- 5 2 -

[* 5 2 ] d o l l ars ap arti n v al u e, an dth e i n co m e p o t en t i al i s v as t l y d i fferen t .” Th erefo re, h e arg u es , 1 3 1 Al l en m u s th av e a h i g h er cap i t al izat i o n rat e th an th e No rt h St reet p ro p ert i es b ecau s e i tp res en t s m ore ri s kan dl es s retu rn , an d wo u l d at tract i n t eres tfro m

d i fferen ti nv es t o rs . Ll o y d , h o wev er, cred i bl y ex p l ai n edh o w h e arri v edath i s co n cl us i o n s . Un l ik e Kl au k, Ll o y d“b el iev e[d ] th ere [was ] v ery l it t le ri s k ” as s o ci at edwi th 1 3 1 Al l en i n 2 0 0 4 b ecau s e o f t h e recen tren ov at i o n s , h i g h o ccup an cy l ev el s , an ds o l i d
ren t al i n co m e. Th i s was i n co nt ras tt o th e m u ch l arg er No rt h St reet p ro p ert i es , wh i ch h e fel tp res en t eda s ub s t an t i al ri s k t o i n v es to rs . Acco rd i ng t o Ll o y d , th ere
was “ a l o to f ri s k* * * as s o ci at edwi th l arg er p ro p ert i es i n th e Bu ffal o m ark et ” i n 2 0 0 4 b ecau s e i n ves to rs “ h a[d ] t o k eep [t hem ] wel l o ccup i ed an d
* * * m ai n t ai n[ed ] .” St at edd i fferen t l y , al th ou g h th e s izes , v al u es , an di n co m e ch aract eri s ti cs o f t h e Pro pert i es d i ffer i n an ab s o l u t e s en s e, t h e rel at i v e ri s k
as s o ci at ed wi th each i s th e s am e. W e fi n dth i s co n cl u s i o n reas o n ab l e. W e al s o h av e a n u m

b er o f co n cern s wi th h o w Kl au kes t im at edh i s cap i t al i zat io n rat es . Inh i s rep o rtKl au k s el ect ed , wi tho u tan y m ean i n g fu l d i s cu s s i o n , a cap i t al i zat i o n rat e n earl y 3 % h i g h er t h an wh ath e fo un dt o b e t h e
n at i o n al av erag e cap i t al i zat i o n rat e fo r n o ni n s ti tut i o n al ap art m en t b u i l d i n g s . He al s o s eem i n g l y

d i s reg ard edthe 9 .2 % cap i t al i zat i o n rat e h e cal cu l at edu n d er t h e- 5 3 -

[* 5 3 ] m ort g ag e-eq u i ty t ech ni qu e i n fav o r o f rel y in g o n th e rat es o f t h e p ro p ert i es h e h adch o sen t o i n cl u d e i n h i s s al es -co m p ari s on m et h o d --p ro p ert i es th atwe’ v e al read y fo u n dwere n o t co m

p arab l e. See s up ra p p . 3 2-3 5 . Kl au k al s o d i d n o tt ak e i n t o acco u n tth e s ub s t an t i al ren o v at i o n s m ad e at1 3 1 Al l en , wh i ch wo u l di n fl at e h i s cap i t al i zat i o n rat e u n d er t h e m o rt g ag e-eq u i ty t ech ni qu e. An dKl au k ’ s redu ct i o n o f t h atrat e fro m 1 1 % t o 1 0 % attri al , t o acco u n t fo r th e redu cedri s k
res u l ti n g fro m

th o s e ren o vat i o n s , was d on e o n th e fl y an d wi tho u tm ean i n g fu l i n v es t i g at i o n . Inal l , we are l eftwi th th e d is t in cts en s e th atKl au k’ s d et erm i n at i o n
o f 1 3 1 Al l en ’ s “ b efo re” cap i tal i zat i on rat e was l es s a res u l t o f reas o n edan al y s i s
an d m o re a res u lto f h i s b el i ef t h ati ts i m p l y m u s tb e h i g h er t h an th e rat e fo r t h e No rt h St reet p ro p ert i es . W e reject Kl au k ’ s cap i t al i zat i o n -rat e an al y s i s an dad o p t Ll o y d ’ s . B. “ Aft er” Val u at i o n Hav i n g an al y zedth e “ b efo re” v al u at i o n , we n o wtu rn t o th e p art i es ’ m o s t
s tren uo u s d i s ag reem en t --wh eth er t h e eas em en t s actu al ly redu cedth e Pro p ert i es ’
v al u es . Aft er al l , i f t h e eas em en t s h adn o ap p reci ab l e effect o n th e Pro p ert i es ’

“ b efo re” v al u es , i t ’ s i rrel ev an tfo r t ax p u rp o s es wh atth o s e v al u es were. Th e co re
o f t h i s d i s p u t e i s wh et h er t h e eas em en t s were red u n d an t o f t h e Ci ty ’ s p res erv at i o n l aws , o r wh et h er t hey

th em s el v es redu cedth e Pro p ert i es ’ v al u es .- 5 4 -

[* 5 4 ] Th e Co m

m is s i o n er arg u es th atth e eas em en t s h av e n o v al u e b ecau s e t h ei r
res tri ct i o n s dupl i cat e t h o se al read y i m p o sedb y Bu ffal o ’ s Pres erv at i o n Co d e. He
as s ert s th atth e Tru s td oes n o th av e m o n i t o ri n g o r en fo rcem en tp o wers g reat er t h an th e Ci ty ’ s an d th atth e Tru s td o es n o ten fo rce t he t erm s o f th e eas em en t s . He h as
o n h i s s i d e a n u m

ber o f recen t cas es i n wh i ch we h el dth atd o n at i o ns t o th e Tru s t
o f facad e eas em en t s wi th s i m i l ar res tri ct io n s o n b u i l d i n g s i n o th er h i st o ri c d i s t ri ct s d i dn o t redu ce p ro p ert y

v al u es . See, e.g ., Ch an dl er, 1 42 T.C. 2 7 9 ; Kau fm an , T.C. M em o. 2 0 1 4 -5 2 ; Sch ei d el m an , T.C. M em o . 2 0 1 3-1 8 ; Du n l ap , T.C. M em o. 2 0 1 2 -1 2 6
. Th e Ki s s l in g s res p o n dthatth e eas em en t s thatth ei r co m p an y g ran t edd o i m p o s e g reat er o b li g at i o n s--an dth u s co s t s --o n th e p ro p ert y o wn er t h an d o th o s e i m p o s edb y th e Pres erv at i o n Co d e. Th ey d i s ti n g u i sh th e cas es ci t edb y th e Co m m i s s i o n er as eas em en ts g ran t edo n p ers o n al res i d en ces , n o tco m m erci al p ro p ert i es . An db y

far t hei r m o s ts i g n i fi can t arg u m en tfo cu s es o n Bu ffal o ’ s al l eg edl ack o f en fo rcem en to f i t s Pres erv at i o n Co d e atth e effect i v e d at e o f
v al u at i o n i n 2 0 0 4
.- 5 5 -

[* 5 5 ] 1
. Res tri ct i o ns Im p os ed : Eas em en t s Vers u s Pres erv at i o n Co d e Th e Ki s s l in g s i d en ti fy wh atth ey cl ai m are n u m ero u s req u i rem en t s i m p o s ed b y th e eas em en t s t h atare n o ti m p o s edb y Bu ffal o ’ s Pres erv at io n Co d e. W e can
s u m m ari ze th o s e al leg edd i fferen ces i n a t ab l e: Is s u e Term s o f Eas em en t Ci ty o f Bu ffal o Part i al d es tru ct i o n (e.g ., b y fi re) M u s t reb u il d t o m at ch No req u i rem en tt o reb u i l d ; can d em ol i s h M ai n ten an ce In s p ect i o n freq u en cy An n u al No n e t o m o n i t o r m ai n t en an ce; 3 -y ear cy cl e t o ren ew cert i fi cat e o f o ccup an cy ; fo cu s i s o n l i fe, s afet y , an dfi re co d e St an d ard Go o do rd er p ro t ect i n g h is t o ri cal an ds tru ctural i n t eg ri ty Go o d rep ai r t o p rev en t d et eri o rat i o n Dan gero u s co n d i t i o n s M u s t rep ai r t o ex i s t i n g co n d i t i o n Can o rd er d em o li t i o n Au th ori ty

t o req u ire m ai n t en an ce Tru s th as p o wer t o d i rect wo rkb e d o n e, an dt o en t er an dp erfo rm

wo rk i n th e ev en to f a v io l at i o n o f eas em en t t erm s Req u i res o rd er fro m th e Ho u si ng Co u rt

Pen al t i es Ho l do wn er fi n an ci al l y acco u n t ab l e fo r co st s an d at t o rn ey fees , an d p l ace a l i en Fi n es an d i m pri s o n m en t n o ten fo rced fo r p res erv at io n- 5 6 -

[* 56 ] In s p ect i o n rep ort s Own er p uto n n o t i ce o f cu rren to r p en d in g p res erv at i o n req u i rem en t s No p res erv at i o n i n s p ect i o n rep o rt s

Dem o l it i o n No tp erm i t t ed Al lo wab l e o n t h e b as i s o f “ u n du e h ard sh i p ” res u l ti n g fro m

l acko f reas o n ab l e ret urn , u n s ui t ab i l i ty

fo r reas o n ab l e u se, o r p rev en t i o n o f p u rp o s e Ap p eal s No tav ai l ab l e Pres erv at i o n Bo ard d eci s i o n s can b e ap p eal edt o Co m

m o n Co u n ci l Du rab i l i ty

o f res tri ct io ns Perp etu al reg ard l es s o f

p ro p ert y o wn er Sub

ject t o rep eal o r am en d m en t Defi n i t i o n o f facad e Al l ex t eri o r s u rfaces i n cl u d i n g al l wal l s , ro o fs , an dch i m n ey s On l y

th e fro n to f t h e b u i l d in g , n o tth e ro o f o r s i des Th e Co m m is s i o n er at t ack s m an y

o f t h es e al l eg edd i fferen ces as ei th er
u n tru e o r o f n o co n seq uen ce t o v al u at i o n . He h as the b et t er o f t h e arg u m en th ere. In Kau fm an , T.C. M em o . 2 01 4 -5 2 , we rev i eweda Tru steas em en to n a p ro p ert y i n Bo s t on ’ s So ut h En d H is t ori c Di s tri ct . Th e eas em en t t erm s were v ery s i m i l ar t o th o s e i n th i s cas e, s ee i d . at* 5 -* 6 , an d the t ax p ay ers m ad e m an y o f t h e s am e arg u m en t s fo r wh y

th o s e t erm s were m o re b u rd en s o m e t h an th e res tri ct i o ns- 5 7 -

[* 5 7 ] i m p o s edb y th e h i s t o ri c d i s tri ct , s ee i d
. at* 5 6 -* 6 2 . W e u l ti m at el y d et erm i n edth at“ th e res tri ct i v e co m p o n en t s o f t h e p res erv at i o n ag reem en t [were] b as i cal l y dup l i cat iv e o f, an dn o tm at eri al l y d i fferen tfro m ” t h e h i s t o ri c d i s tri ct ’ s p res erv at i o n s tan d ard s . Id . at* 6 3 ; s ee al s o Ch an d l er, 1 4 2 T.C. at2 9 0 (“ W e
reco g n ize t ech n i cal d i fferen ces b et ween th e eas em en t s an d l o cal l aw, b u twe ag ree wi th res p o n d en t ’ s co n cl u si o n th atth e res tri ct i o n s were p ract i cal l y th e s am e”). Gi v enth e s i m il ari ty

b et ween the eas em en tres tri ct i o n s an dh i s to ri c p res erv at i o n
s t an d ard s i n th i s cas e an d th o s e i n Kau fm an an dCh an d ler, we are n o t p ers u ad ed th atth e l eg al d i s t i n ct i o n s i d en ti fi edb y th e Ki s s l in g s wo u l db y th em sel v es h av e a
m at eri al effect o n th e Pro p ert i es ’ v al u es .

2
. In co m e-Pro du ci ng Vers u s No n -In co m e-Pro du ci n g Pro p ert i es Th e Ki s s l in g s n o n et h el es s d i s t i n g ui s h the Co m m i ss i o n er’ s cas es b ecau s e th ey al l i n v o l v ed no n -i n co m e-p ro du ci n g p ro p ert i es --i n co nt ras t wi th the p ro p ert i es i n thi s cas e--an dthey

qu o t e o u r ack n o wl ed g m en ti n Ch an dl er t h ateas em en t
res tri ct i o n s i m

p ai r th e v al u e o f “ co m

m erci al p ro p ert y

m o re t an g i bl y than th ey i m p ai r t he v al u e o f res i d en t i al p ro p ert y .” Ch an d l er, 1 4 2 T.C. at2 8 9
. Th ere i s s o m e s tren g th t o th i s arg u m en t . Th e eas em en t s ati s s u e i n Kau fm an
an d Ch an d l er were al l p laced o n s i n g le-fam i l y h o m es . Th e eas em en t ati s s u e i n Sch ei d el m an was p l aced o n a p ri v at e t h ree-fam i ly t o wn h o u s e. An dth e eas em en t- 5 8 -

[* 5 8 ] ati s s u e i n Du n l ap was p l aced o n an o wn er-o ccup i edco n d o m in i u m . Incas es th atfeat u re co m

m erci al p ro p ert i es , we’ ve up h el dv al uat i on s s im i l ar t o th e Ki s s l i n g s ’ . See, e.g ., Wh i t eh o u s e Ho t el Lt d . P’ s h ip , 1 3 9 T.C. 3 04 ; Do rs ey , T.C. M em o. 1 9 9 0 -2 4 2 ; Gri ffi n , T.C. M em o . 1 9 8 9 -1 3 0 ; Lo s ch v . Co m m i s s i on er, T.C. M em o. 1 9 8 8 -2 3 0
. Th e p ro b lem wi th thi s arg u m en t , h o wev er, i s n o t d eci di n g wh et h er t he Pro p ert i es are i n co m e p ro du ci n g --t h ey cl earl y are--b u t wh y

i n co m e-p ro du ci n g p ro p ert i es are, as a g en eral m at t er, m o re affect edb y co n serv at i o n -eas em en t
res tri ct i o n s th an n o nco m

m erci al p ro p ert ies . InCh an d l er, 1 4 2 T.C. at2 89 , we
s u m m ari zedth e reas o n as fo l l o ws : Co m m erci al p ro p erty

d eri v es i t s v al u e fro m

i t s ab i l i ty

t o g en erat e cas h fl o w s . Fo r co m

m erci al p ro p ert y , d ev el o p m en tg en eral l y co rrel at es wi th i n creas edfu tu re cas h fl ows . M o re ret ai l s pace, m o re s p ace fo r t en an t s, an d m o re ro o m fo r cu st o m ers g en eral l y

i n creas e p ro fi t ab i l it y . Res tri ct io ns o n th e d ev el op m en t o f co m m erci al p ro p erty redu ce p o t en t i al fo r i ncreas edfu tu re cas h fl o ws an d th u s d im in is h v al u e. Th i s i s i n co nt ras t t o s i n gl e-fam i l y h o m es , wh o s e b u y ers --t h o u g h th ey d o n ’ to b ject t o cap i t al g ai n wh en th ey s el l --t y p i cal l y d o n ’ td o cas hfl o w an al y s es wh en th ey b u y . See i d . Ins o m e s cen ari o s t h i s m u s tb e t ru e. If, fo r ex am

p l e, Ki s s li ng In t eres ts co u l d o th erwi s e h av e d o ub l edth e s i ze o f 1 3 1 Al l en fro m 1 7 t o 3 4 u n i t s- 5 9 -

[* 5 9 ] ab sen tth e eas em en t, th e eas em en two u l dh av e m os td efi ni t el y l o weredth e p ro p erty ’ s v al u e b y

b an ni ng th is p o s s i b l y

m o re p ro fi t ab l e u s e. Bu tas the Co m

m is s i o n er co rrect l y

p o i nt s o u t , b efo re Ki s s l in g In t eres t s g ran t edth es e eas em en t s , th e Pro p ert i es were l eg al l y n o nco nfo rm i ng u n d er Bu ffal o ’ s cu rren tzo n i n g an dth ere was n o way t o ex p an d th ei r s i zes . Bo th ex p ert s ag reedth atth e eas em en t s h adn o effect o n th e Pro p ert i es ’ h i g h es tan db es tu s es . Ll o y d , h o wev er, s u g g es t ed th atth ere m ay h av e b een creat i ve way s t o ex p an dth e Pro p ert i es . Acco rd i n g t o h im , Ki s s l i n g In t eres ts co u l dh av e req u es t ed a zo n i n g
v ari an ce fro m

the Ci ty , o r i tco u l dh av e co nv ert edth e No rt h St reet p ro p ert i es t o
s en i o r as s i s t ed -l i v i n g faci l i t i es , wh i ch wo u l d redu ce t h e p ark in g -s pace req u i rem en t s b y

tw o-t hi rd s an dth ereb y

o p en a p o rt i o n o f t h e p ro p ert y fo r ad d it i o n al d ev el o p m en t . W e ag ai n thi n kth atth e Co m m i s s i o n er h as the b et t er o f t h e arg u m en t . Wh et h er t h e Ci ty

wo ul dg ran tKi s sl i n g In t eres t s a v ari an ce o n th e Pro p ert i es i s
v ery s p ecu l at i v e. An dwh et h er t h e co n v ers io n o f t h e No rt h St reet p ro p ert ies t o
s en i o r-l i v i n g faci l i t i es wo u ldactu al l y i n creas e p ro fi t ab i l i ty --ev eni f o ne as su m es
s o m e ad d i t i o nal d ev el o pm en t --i s al s o s p ecu lat i v e an dl ack s an y s upp o rt i n th e
reco rd
.- 6 0 -

[* 6 0 ] W e fi n di tm o re reas o n ab l e t h atthe Pro p ert i es are cu rren t l y o p erat i n g at th ei r h ig h es tan db es t u s e wi th ou tth e p o t en t i al fo r s i g n i fi can tad d i t io n al d ev el o p m en t . Th at th e Pro p ert i es p ro du ce i n co m e d o es n o tm ean th atth e
eas em en t s redu ced th ei r v al u es .

3
. Bu ffal o ’ s En fo rcem en to f It s Pres erv at io n Co d e Th e Ki s s l in g s ’ fi n al arg u m en ti s ab ou tBu ffal o ’ s en fo rcem en t o f i t s Pres erv at i o n Co d e atth e t i m e o f v al u at i o n i n 2 0 0 4
. 1 8 Th ey cl ai m th atal th o u g h Bu ffal o h adp res erv at i on s t an d ard s , i t s eco n om i c p ro b lem s m ad e i ts m on i t o ri n g
an d en fo rcem en t o f t h os e s tan d ard s i n effect u al . Th ey arg u e t h atth e eas em en t s t o th e Tru s tcreat eda s y s t em o f en fo rcem en twh ere n o n e i n facth adex i s t ed . Th e Co m m i s s i o n er s tren uo us l y

d i s ag rees . Acco rd i n g t o h i m , p res erv at i on s t an dard s i n Bu ffal o are ag gres s i v el y

en fo rced , an d i t i s th e Tru s tth atfai l s t o en fo rce t h e t erm s
o f i t s eas em en t s . W e v i ew t h i s as a fact u al i s s u e, an di t i s o n e t h atth e Ki s sl i ng s h av e t h e b et t er o f o n th e p art i cu l ar fact s o f t h i s cas e. W e n eedt o fo cu s o n th e s i tu at i o n wh en th e d o n at edeas em en t s were creat edb ack i n 2 0 0 4 . At thatt i m e, Bu ffal o

1 8 W e h av e i n th e p as tco n s i d ered a ci ty ’ s en fo rcem en to f i t s p res erv at i o n co d es i n h i g h l y

reg u l at edm ark et s . See e.g ., Ch an d l er, 1 4 2 T.C. at2 9 0 ; Kau fm an , T.C. M em o . 2 01 4 -5 2 , at* 5 6 -* 6 0 ; Du n l ap , T.C. M em o . 2 0 1 2 -1 26 , 2 01 2 W L 1 5 2 4 6 6 0 , at* 1 9 -* 2 0
.- 6 1 -

[* 6 1 ] l ack edth e res o u rces t o reco rdev en a b as el i n e co n d it i on o f h i s to ri c p ro p ert i es . W i th o u ta reco rd o f wh ata b u i l di n g l oo k edl i k e wh en i t b ecam e p ro t ect edb y

th e Pres erv at i o n Co d e, t h e Ci ty co u l dn o tju d g e i t s d et eri o rat i o n y ear b y y ear. Acco rd i n g t o DPI Co m m i ss i on er Co m erfo rd ’ s en ti rel y cred i bl e t es t i m o ny , Bu ffal o s t i l l l ack s s u ch reco rd s . Al m o s tal l th e wi tn es ses ag reedth at d em o l it i o n -b y -n eg l ecti s a b i gg er p ro b l em i n Bu ffal o than d em o l it i on fo r n ew d ev el o p m en t . An dthe n u m b er o f i ns p ect o rs wh o m i g h th av e h el p edt o p rev en t th i s was s l as h ed b y th e b u d g et co n s trai n t s i m p o s ed b y th e Bu ffal o Fi s cal St ab i l i t y Au tho ri ty . Dem o l i t i on -b y -n eg l ectran ram p an tatthe t i m e as s pecu l at o rs wh o h ad
n o i n t en t i o n o f m ai n t ai n in g p ro p ert i es b o u g h tth em wi th h op e fo r ri si n g p ro p ert y
v al u es s o m et i m e i n th e i n d efi n it e fu ture. An dev en wh enthe Pres erv at io n Bo ard
an d th e DPI b ro ug h ta l aws u i ti n Bu ffal o Ho u s i n g Co u rtt o req u i re en fo rcem en t o f th e Pres erv at i o n Co d e, t h atco u rtwo u l d o ft enal lo w d em o li t i o n . Al l o f t h i s g i v es
u s th e d is t i n cts en s e t h atBu ffal o ’ s en fo rcem en to f i t s Pres erv at i o n Co d e was n o t p ro act i v e, b u treact i v e; o r as Co m erfo rd p u ti t , “ cri s is m an ag em en t .” Bu twe n eedn o trel y o n t es t i m o n y an dan ecd o t es al o n e, as th e Ci ty ’ s l acko f
en fo rcem en twas b orn e o u t b y th e h is t o ry

o f t h e Pro p ert i es i n t h i s cas e. Acco rd in g t o M ah o ney ’ s rep ort , n u m ero u s el em en ts o f t h e Pro p ert i es ’ facad es h adei ther
s ub s t an t i al l y

d et eri o rat edo r b een rep l aced wi th h is t ori cal l y i n co n s i s ten t m at eri al s- 6 2 -

[* 6 2 ] b efo re t h e eas em en t s , wh en th e Pro p ert i es were s ub jecto nl y t o th e Ci ty ’ s Pres erv at i o n Co d e. Th es e al terat i o n s , wh i ch ap p ear t o h av e g o n e co m p l et el y
u n n o t i cedb y

ei th er t he DPI o r t h e Pres erv at i o n Bo ard , s up p o rta fi n d i n g thati n 2 0 0 4 Bu ffal o h adu n d ers t an d ab l y fo cu s edi ts i n s p ect o rs o n h eal th an d s afet y h azard s an dn o to n p res erv i n g i t s arch i tect u ral l eg acy fro m b et ter t i m es . Th ere i s al s o th e t es t i m o n y an dp as tap p rai s al s o f t h e ex p ert s i n th i s cas e. Ll o y dcred i b l y

t es t i fi edth ati n h i s m o re t h an 2 5 y ears o f ex p eri en ce ap p rai s i n g p ro p ert i es i n Bu ffal o , th e fact th ata p ro p ert y i s l o cat edwi th i n o n e o f t h e Ci ty ’ s h i s t o ri c d i s tri ct s h as n o im p acto n an ap p rai s er’ s v al u at i o n --a s en t i m en trei t erat ed i n each o f h i s ap p rai s al rep o rt s . Kl au ks eem edt o (p o s s i b l y i n ad vert en t l y ) ag ree. He s t at edi n h i s ap p rai sal rep o rt s th at , “ i f t h i s p ro p ert y were l o cat edi n an area
* * * o u t s i d e an i den t i fi edh i s t ori c d i st ri ct , th e eas em en tco u l dco ncei v ab l y b e
cau s e fo r co n cern fo r a l o ss i n v al u e,” b u tas p rev i o u s l y d i s cu s sed , s ee s up ra p p . 3 3 -3 4, wh en Kl au k u s edth e s al es -co m p ari s o n m et ho dh e m ad e n o ad ju s t m en t s
ev en if co m

p arab l e p ro p ert i es were o ut s id e a h i s t o ri c d i s tri ct . Kl au k ’ s o p i n i o n th atth e eas em en t s dup l i cat e l o cal l aw an dtherefo re d o n o t redu ce t h e Pro pert i es ’ v al ues i s al s o ato d d s wi th o th er ap prai s al s h e p erfo rm ed
n ear t he t i m e o f t h e eas em en t s ’ effect i v e d at es . In 2 00 3 Kl au kap p rai s edtwo
av i g at i o n eas em en t s aro un dth e Bu ffal o ai rp ort --o n e fo r t h e Ni ag ara Fro n t ier- 6 3 -

[* 6 3 ] Tran s p o rt at io n Au tho ri ty an dth e o ther fo r Bu d g etRen t -A-Car. 1 9 As i n th i s
cas e, t h e p u rp o s e o f Kl au k ’ s ap p rai s al s was t o p ro v i de a “ d am ag e es t i m at e,” o r redu ct i o n i n v al ue, res u l t i ng fro m th e eas em en ts . Des pi t e fi n d i n g i n b o th ap p rai s al s th at“ [t ] h e i m

pact o f t h e av i g at i o n eas em en t [was ] n o tap p reci ab l y d i fferen t th an wh at al read y ex is t edb y

v irtu e o f th e u nd erl y i n g zo n i n g g o vern i n g th e area i n an daro u n d th e ai rp o rt ,” Kl au kn o n eth el es s co n cl u dedth at th e
eas em en t s redu ced th e v al u e o f o n e p ro p ert y b y 1 0 % an dth e o th er b y 5 %. W e real ize t h atav ig at i o n an dfacad e eas em en ts i m p o s e d i fferen tres tri ct i o n s, b u tth i s k i n do f i n co n s i s ten treas o n i n g d o es affect o u r p ercep t i on o f h i s cred i b i l it y o n thi s p o i n t .W e wo u l db e l es s co m fo rt ab l e wi th t h i s co ncl u s io n i f t he Tru s t al s o s eem ed t o b e a p ap er t i g er. Bu twh en Ki s sl i n g In t eres t s m ad e al t erat io n s wi th o u t fi rs t g et t i n g th e Tru s t ’ s co n s en t , th e Tru s t n o ti ced th e al t erat i o n s an dd em an d eda
res p o n s e. Th e reco rdh as n o ev i d en ce t h atth e Ci ty ev en n o t i cedan y

al t erat i o n s i n th e Pro p ert i es ’ facad es . W e t h erefo re d o fi n dth atth e Tru s t ’ s en fo rcem en to f t h e

1 9 Anav i gat i o n eas em en tres tri ct s t he h ei g h to f s tru ctures o n th e p ro pert y .- 6 4 -

[* 6 4 ] eas em en t s was m

u ch m o re p ro act i v e t h an the Ci ty ’ s en fo rcem en to f i t s Pres erv at i o n Co d e. 2 0 Th e Ci ty ’ s en fo rcem en to f i t s Pres erv at i on Co d e atth e t i m e o f t h e
eas em en t s ’ d o n at i o n was l arg el y i n effect iv e. Th i s m ean s thatth e eas em en t s th em s el v es i m

p o sedm at eri al res t ri ct i o n s th atl owered th e Pro p ert i es ’ v al u es . W e
n o w h av e t o m eas u re th ateffect
. Rep a i r s a n d Ma i nt en a n ce . Ll o y d i n creas ed thi s ex p en s e b y 1 0 % fo r 1 3 1 Al l en an d 2 0 % fo r t h e No rth St reet p ro p ert i es . Ll o y dt es t i fi edth atth e ad ju s t m en t s were d i fferen tb ecau se 1 3 1 Al len “ d i dn ’ t h av e as m u ch o rn at e d et ai l o r i t em s th at
wo u l dreq u i re rep l acem en t , rep ro du ct i o n [,] an d/ or m ai nt en an ce” as d idth e No rt h St reet p ro p ert i es . Th i s i s al s o refl ect edi n Ll o y d ’ s ap p rai s al rep o rt s. In h i s No rt h St reet Pro p ert i es rep ort , Ll oy ds p eci fi cal l y m en t i o n s that“ th ere are o rn at e cas t
s t on e an db u i l d i ng m at eri al s wh i ch req u i re s p eci al i zeds k i l l s an d kn o wl ed g e.”

2 0 Ev en if we were t o fi n dth atth e Tru s tfai l edt o en fo rce t h e eas em en t s ’ t erm s , we qu es t i o n wh et h er t hatwo ul dh av e an y i m p act o n th e Pro p ert i es ’ v al u at i on s . Becau s e an eas em en ti s v al u edb as edo n th e i n fo rm at i o n th atco u l db e reas on ab l y

kn o wnas o f i t s effect i v e d at e, i t s eem s i m p ro p er t o fact o r i n p o s t eas em en trel at i o ns b et ween d o n o rs an d d o n ees , u n l es s th ey were fo res eeab l e as o f th atd at e. Fo r t h e s am e reas o n , we d o n o tcred itKi s sl in g ’ s t es ti m o n y thatm an ag em en t , i n s u ran ce, p ro fes s io n al , an d rep ai r an d m ai n ten an ce ex p en s es d i d n o ti n creas e aft er t h e eas em en t s . No to n l y i s h i s t es t i m o n y

u n d ercu t b y

th e reco rd --fo r ex am p l e, Ki ss l i n g In t eres ts d i dp erfo rm res t o rat io n wo rkat th e req u es to f t h e Tru s t , s ee s up ra p p. 1 8 -1 9 --b u twe fi n di t reas o nab l y fo res eeab l e t o ex p ect , as o f th e effect i v e d at e, t h at s uch ex p en s es wo u l di n creas e aft er t h e eas em en t s .- 6 5 -

[* 6 5 ] Th ere i s n o s u ch m en t i o n i n h is 1 3 1 Al l enrep o rt . W e fi ndLl o y d ’ s i n creas es
co m p l et el y reas o n ab l e an dad op tth em . Ma n a g emen t

Fees . Fo r each p ro pert y , Ll o y des t im at edan i n creas e i n
m an ag em en tfees fro m

5 % o f effect i v e g ro s s i n co m e p re-eas em en tt o 6 % p o s t eas em en t . He wro t e t h atth i s was “ [d ] u e t o ad d i t i o n al req u i rem en ts fo r co m p l i an ce wi th th e p ro v i s i on s o f t h e eas em en t , i n cl u d i n g th e m an ag em en to f ad d i t i o n al
m ai n t en an ce p ro

ject s an d co st s .” W e fi n dth es e i n creas es reas o n ab l e, s in ce t h e
reco rdco n t ai n s n u m ero u s ex am p l es o f co rres p o n d en ce b et ween th e Tru s tan d Ki s s l i n g In t eres t s d i s cu s s i n g co n cern s n ot edb y Tru s ti n s p ect o rs du ri n g th e an n u al i n s p ect i on s . Res p o n di n g t o th e Tru s t ’ s p res erv at i o n co n cern s rep res en t eda fo res eeab l e n ew jo b du ty n o tp rev i o u s l y req u i redo f m an ag em en t . W e ad o p t Ll o y d ’ s i n creas es . Pr o f es s i o n a l S

er vi ces . Ll o y dex p ect ed th i s ex p en s e t o d o ub l e fro m 1 % t o 2 % o f each p ro p ert y ’ s effect i v e g ro s s i n co m e aft er t h e eas em en t“ [a] s a res u l to f h i g h er co s t s fo r en g i neeri n g , arch i t ectu ral an dl eg al s erv i ces rel at edt o th e
eas em en t .” W e h av e n o ex p lan at i o n fo r wh y th is ex p en se wo u l di n creas e s o m u ch p o s t -eas em en t , an d we fi nd i tm o re l i k el y th an n o t thatth e i n creas edco s t s fo r
en g in eeri n g an darch i t ectural s erv i ces were al read y i n cl u d edi n o ur es ti m at es o f i n creas es i n rep ai rs an dm ai n t en an ce ex p en se. W e d o fi n d i t reas o n ab l e t h atth e- 6 6 -

[* 6 6 ] eas em en t s co u ldi m p o s e ad d i ti o n al l eg al co s ts o n th e d on o r as a res u l to f t h e l eg al ri g h t s g ran tedt o t h e Tru s ti n th e ev en tKi ss l i n g In t eres t s v i ol at es th e
eas em en t s . Th erefo re, we fi n dth atan i n creas e o f 0 .5 % o f effect i v e g ro s s i n co m e i s ap p ro p ri at e. Res er ves f

o r Rep l acemen t . Ll o y di n creas edth i s ex p en s e o n l y fo r th e No rt h St reet p ro p ert i es “ [d ] u e t o the o rn at e d es i g n s o n th e i m p ro v em en ts ” an db ecau s e

“ th ere can b e h i g h er an t i ci p at edex p en s es as s o ci at edwi th rep ro du ct i o n co s tv ers u s rep l acem en tco s ts .” Al tho u g h 1 3 1 Al l enm ay b e l es s o rn at e t h an th e No rt h St reet p ro p ert i es , i t ’ s u n cl ear t o u s wh y Ll o y dwo u l dn o ts t i l l h av e i n creas edi tb u tb y a
s m al l er am o u n t , as h e d i dwi th th e rep ai rs an dm ai n t en an ce ex p en s es . W i th o u t fu rt her ex p l an at i o n fro m

Ll o y d , we d o n ’ ts ee an y

d i st i nct i o n b et ween th i s i n creas e
an d h i s i n creas e fo r rep ai rs an dm ai n t en an ce. W e t h erefo re d o n o t fi n dth i s i n creas e reas on ab l e. Ca p ita l i z a t i o n Ra t e . Ll o y di n creas edeach p ro p ert y ’ s p o s t-eas em en t cap i t al i zat io n rat e b y

0 .7 5 %. Hi s rep o rt s at tri b u t e th es e i ncreas es t o t h e fo l l o wi n g fact ors : i n creas ed o p erat i n g co st s , h i g h er ri s k du e t o l es s l i qu i d it y (l i m i t ed m ark etp art i ci p an t s wi l l i n g t o p u rch as e a p ro p ert y wi th a facad e eas em en t ), l im i t at i o n o f u t i l i ty t o th e s i t e (n o ex p an s i o n o r ad d i t i o n al co n s tru ct io n o n s i t e), p o t en t i al rep aym en to f eas em en tv al u e, ri s k o f- 6 7 -

[* 6 7 ] l i en s p l aced b y

eas em en th o l d er an d req u i redl en d er s ub o rd in at io n wh i ch wo u l dl i m i tth e p oo l o f p o t en t i al l en d ers . W e fi n dm o s t o f t h es e as s u m pt i o ns reas o n ab l e, an dwe al s o fi ndth atth es e fact ors , wh en v i ewedfro m th e p ers p ect i v e o f 2 0 0 4 , are at tri bu t ab le t o th e i m p o s i t i o n o f t h e eas em en t s an dn o tl ocal l aw. W e fi n d i tes p eci al ly p ers u as i v e th atth e eas em en t ’ s reco n s tru ct i o n o b l i g at i o n m ean tth atth e p ro bab i l i ty o f d em o l it i o n -b y -n eg l ect --a real p o s s i b i li ty i n th e Bu ffal o o f th at t i m e--was g reat l y redu ced
. Th e ex i st en ce o f th es e fact o rs i s s up p o rt edi n p artb y v ari o u s i n t erv i ews Kl au kp erfo rm edwi th l o cal d ev el o p ers an db an ko ffi cers as p arto f h i s rep o rt s . Of th e fo u r d ev el o p ers Kl au k i n t erv i ewed , th ree were u n fam i l i ar wi th facad e
eas em en t s , o n e o f wh o m

“ s aw n o real b en efi t t o s u ch a p ro g ram i n the Bu ffal o area” an dan o ther wh o “ fel ti t w o u l db e a p ro g ram b es tav o id ed , i f i ti n v o l v ed
o u t s i d e i n t erv en t i o n . ” Ban k o ffi cers fro m W el l s Farg o , M &T Ban k , an d No rt h wes tSav i ng s Ban k al s o s ai d th atth e d o n at i o n o f a facad e eas em en tm i g h t
res u l t i n v ari at i o n s i n b o th th e l o an -t o -v al ue rat i o an dth e l o ant erm , wi th o n e ev en
s u g g es t i n g th ath e m ig h treq ui re a p ers o nal g u aran ty fro m a p ro s p ect iv e b u y er. Becau s e b o th t h e l oan -t o-v al u e rat i o an d the l oan t erm are i np ut s i n th e m o rt g ag eequ it y t ech n ique, we fi n di tm o re l ik el y than n o tth atth e eas em en t s wo u l dch an g e- 6 8 -

[* 6 8 ] th e res u l t i n g cap i t al i zat i o n rat es . W e al s o ad op tLl o y d ’ s es t i m at es o f t h o s e i n creas es . IV. Co n cl u si o n Th i s t ab l e s u m

m ari zes o u r fi n d i n g s as t o th e Pro p ert i es ’ v al u es b efo re an d aft er t h e eas em en t:
131 Al l en 165 & 175 Nor t h

% Bef

or e % A f

t er % B ef

or e % Af

t er Rent al r ev enue $ 1 0 1 , 4 0 0 $ 1 0 1 , 4 0 0 $967,260 967,260 Laundr y r ev enue 1,326 1,326 9,984 9,984 Beaut y shop r ev enue - - - - - - 7,860 7,860 Gr oss r ev enue 102,726 102,726 985,104 985,104 V acancy & col l ect i on l oss 5% ( 5,136) ( 5,136) 5% ( 49,255) ( 49,255) Ef f ect i v e g r oss i ncom e 97,590 97,590 935,849 935,849 Oper at i ng expenses: Real est at e t ax 6,908 6,908 79,012 79,012 I nsur ance 1,764 1,764 18,940 18,940 Ut il i t i es 12,750 12,750 151,800 151,800 Garbag e r em ov al 595 595
- - - - - - Repai r s/ m ai nt enance 5,100 5,610 27,060 32,472 Payr ol l 3,400 3,400 26,400 26,400- 6 9 -

[* 69 ] Cl eani ng& suppl i es 1,275 1,275 27,520 27,520 Cont ract ed ser v i ces - - - 15,360 15,360 Snow & g round car e 300 300
- - - M anag em ent f ees 5% 4,880 6% 5,855 5% 46,792 6% 56,151 Adv er t i si ng 1,700 1,700 7,920 7,920 Pr of essi onal ser v i ces 1% 976 1.5% 1,464 1% 9,358 1.5% 14,038 M i scel l aneous - - - - - - 10,880 10,880 Reser v es f

or r epl acem ent s 3,400 3,400 28,800 28,880 T ot al expenses 43,048 45,021 449,842 469,293 Netoper at i ng i ncom e 54,542 52,569 486,007 466,556 Capi t al i z at i on r at e 8.5% 9.25% 8.5% 9.25% V al ue 641,670 568,314 5,717,729 5,043,849 Decr ease i n v al ue ( 73,356) (673,880) Bas edo n o u r fi n d i n g s, we’ ve d et erm i n edth atth e co rrect t o t al v al ue o f t h e
eas em en t s --an dres u l t i ng d edu ct i o n--t o Ki s sl in g In t eres t s i s $ 7 4 7 ,2 3 6 (= $ 7 3 ,3 5 6 + $ 67 3 ,8 8 0 ). Si n ce Ki s s l i n g h el da 9 0 % s h are o f Ki ss l i n g In teres t s p ro fi t , l o s s , an d cap i tal , th e Ki s s l i n g s ’ co rrect d edu ct i on i s $ 67 2 , 5 1 2 --$ 9 7 ,7 98 l es s th an th ey cl ai m edi n th e ag g reg at e o n th ei r 2 0 0 4 , 2 0 0 5 , an d2 0 0 6 retu rn s (= $ 7 70 ,3 1 0

! $ 6 7 2 ,5 1 2 ). Becau s e t h e v al u e o f t h e eas em en t s cl ai m edo n th e Ki ss l i n g s’ retu rn s- 7 0 -

[* 7 0 ] i s o n l y

1 5 % m o re t h an th e v al u e t hatwe’ v e d et erm i n edt o b e t h e co rrect
am ou n t , th e p en al t i es u n d er s ect i on 6 6 6 2(h ) d o n o tap p ly
. Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.