Case Name: Arlen of Nanuet, Inc., Respondent-Appellant, et al., Claimants, v. State of New York, Appellant-Respondent; Bernard S. Siegel et al., Respondents, v. State of New York, Appellant
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1970-04-16
Citations: 26 N.Y.2d 346
Docket Number: Claim No. 39972; Claim No. 40099
Parties: Arlen of Nanuet, Inc., Respondent-Appellant, et al., Claimants, v. State of New York, Appellant-Respondent. Bernard S. Siegel et al., Respondents, v. State of New York, Appellant.
Judges: 
Reporter: New York Reports
Volume: 26
Pages: 346–371

Head Matter:
Arlen of Nanuet, Inc., Respondent-Appellant, et al., Claimants, v. State of New York, Appellant-Respondent. Bernard S. Siegel et al., Respondents, v. State of New York, Appellant.
(Claim No. 39972.)
(Claim No. 40099.)
Argued December 5, 1969;
decided April 16, 1970
Louis J. Lefkowitz, Attorney-General (Julius L. Sackman and Ruth Kessler Toch of counsel), for appellant-respondent.
I. The total award of $1,227,610 is grossly excessive as a matter of law. (Matter of Union El. R. R. Co., 112 N. Y. 61; Marfil Props. v. State of New York, 9 Misc 2d 878; United States v. 70.39 Acres of Land, 164 F. Supp. 451; Matter of Daly, 29 App. Div. 286; Matter of City of New York [Delancey St.], 120 App. Div. 700; Matter of Trustees of N. Y. & Brooklyn Bridge, 137 N. Y. 95; Great Atlantic & Pacific Tea Co. v. State of New York, 22 N Y 2d 75; Levitin v. State of New York, 12 A D 2d 6; Levin v. State of New York, 13 N Y 2d 87, 17 A D 2d 335.) II. The leasehold has no value because (a) by the express terms of the ground lease the lessee has no claim prior to the erection of any structures, and (b) the economic rental of the property did not exceed the contract rental. (Matter of City of New York [Bronx Riv. Expressway], 278 App. Div. 813, 282 App. Div. 925, 308 N. Y. 782; Pekofsky v. State of New York, 15 Misc 2d 358; Great Atlantic & Pacific Tea Co. v. State of New York, 22 N Y 2d 75.) III. The before value determined by the State’s expert ($680,000) represents the true unencumbered fee value of the subject parcel. On the basis of the courts’ after value ($121,-000), which we accept, the total award should be reduded to the sum of $559,000 and allowed to the fee owners.
Bernard L. Bermant and Carl J. Moskowitz for respondent-appellant.
I. Whether these in personam claims had been separately tried, as permitted by section 10 of the Court of Claims Act, or tried together, as here, jointly but without consolidation, the courts below were required in any event to appraise the value of the landlords’ and tenant’s interests separately. Whether the court first fixes unencumbered fee value and then subdivides between landlord and tenant or separately ascertains each interest, thus determining total value, is within its discretion. But the total of the values of the separate interests of landlord and tenant must equal the value of the unencumbered fee. Neither of the courts below followed that rule. This was error. (Great Atlantic & Pacific Tea Co. v. State of New York, 22 N Y 2d 75; Matter of Trustees of N. Y. & Brooklyn Bridge, 137 N. Y. 95; Matter of City of New York [Allen St.], 256 N. Y. 236; Matter of City of New York [Mott Raven Rouses], 33 Misc 2d 808, 16 A D 2d 637, 13 N Y 2d 959; Matter of City of New York [A. & W. Realty Corp], 1 N Y 2d 428; Matter of City of New York [Erie R. R.], 193 N Y 117.) II. Claimant valued its leasehold correctly. The owners of the fee subject to the lease correctly refused to interpose themselves into an issue which did not concern them. They only valued their limited interest in the fee simple. The affirmed findings of fact, including the $2,220,000 finding of unencumbered fee value, fully supported by the evidence and the applicable law, would have fully justified a leasehold award far in excess of the $875,000 awarded to the claimant lessee by the Court of Claims. Since the lessee was a respondent in the Appellate Division, and not a cross-appellant, its original judgment should now he reinstated. (Boston Chamber of Commerce v. Boston, 217 U. S. 189; Matter of City of New York [Public Beach], 269 N. Y. 64; Matter of William & Anthony Sts. in City of N. Y., 19 Wend. 678; St. Agnes Cemetery v. State of New York, 3 N Y 2d 37; Matter of Port of N. Y. Auth. [Lincoln Tunnel], 2 N Y 2d 296; Levin v. State of New York, 13 N Y 2d 87; Matter of City of New York [Delancey St.], 120 App. Div. 700; People ex rel. U. S. Rubber Co. v. Knapp, 232 N. Y. 153; Mattydale Shopping Center v. State of New York, 303 N. Y. 974; United, States v. 25.406 Acres of Land in Arlington County, Va., 172 F. 2d 990.) III. That claimant’s principals on the date of taking-owned two adjacent leaseholds—not just one—is no justification for the taking of one of those two leaseholds without just compensation. (Great Atlantic & Pacific Tea Co. v. State of New York, 22 N Y 2d 75; Wolfe v. State of New York, 22 N Y 2d 292; Kahlen v. State of New York, 223 N. Y. 383; St. Patrick’s Church v. State of New York, 30 A D 2d 473; Duckett & Co. v. United States, 266 U. S. 149.) TV". As of the taking date claimant-lessee was entitled to the enhancement in value it had created by the lease and subleases, the change in zoning, the mortgage financing, the right to mortgage the fee, the option -to purchase, the obtaining of Korvette as its subtenant for shopping center purposes at a very great rent for only twenty of the twenty-six acres in the site. These and many other factors created the enhancement in value of the land over and above its value as six unconnected parcels, ordinary land originally mainly in a residential zone, some of them land-locked, before any of these events had taken place. (Latham Holding Co. v. State of New York, 16 N Y 2d 41; Brighton Plaza v. State of New York, 32 Misc 2d 266; Albany Country Club v. State of New York, 37 Misc 2d 134, 19 A D 2d 199; Marraro v. State of New York, 12 N Y 2d 285.) V. The Appellate Division properly affirmed the trial court’s conclusion that “ claimant is entitled to the fair and reasonable value of the entire leasehold as of the date of taking, even though there are two separate remainder parcels not appropriated, because the value of the leasehold for • the purposes of the leases was destroyed by the appropriation.” (Esso Std. Oil Co. v. State of New York, 10 A D 2d 760.) VI. The Appellate Division was correct in its affirmance of the trial court’s holding that the condemnation clause in the ground lease preserved the lessee’s leasehold claim. The fee owners subject to the lease conceded this to be so. How the parties to that lease chose to divide the unencumbered fee award between them was no business of the State. Nor does it concern the courts of this jurisdiction. In any event the State could not, for the first time, raise the issue on appeal. (Pekofsky v. State of New York, 15 Misc 2d 358.) VII. Claimant’s appraisal, being the only substantial evidence in the record of leasehold and unencumbered fee values, was entitled to full credence. The State’s valuation of the encumbered fee —which left out elements of value which must be considered — was unsubstantial evidence of value for that reason. The Appellate Division’s elimination of all leasehold value for six acres found by it to be capable of producing annually, $158,114 in net rental income, was based on erroneous principles of law. (Matter of City of New York [Kramer Realty Corp], 16 A D 2d 148, 12 N Y 2d 1094; Knickerbocker Life Ins. Co. v. Nelson, 78 N. Y. 137; Matter of City of New York [West Side Urban Renewal], 27 A D 2d 243; Matter of City of New York [Newtown Creek], 284 N. Y. 493.)
David Marcus, Graham Barkham and William S. Gray for respondents.
I. The quantum of the award to the fee owners is solely a question of fact and is not a proper matter for review by this court. (Matter of City of New York [Sound View Houses], 307 N. Y. 687; St. Agnes Cemetery v. State of New York, 3 N Y 2d 37.) II. The award of $702,610 to the fee owners herein is completely supported by the evidence. III. The interest rate utilized by claimants’ appraiser was properly developed and fully substantiated. IV. The interest rate utilized by the State’s appraiser was improperly arrived at, was wholly unsubstantiated, and is incorrect. V. Utilization of a single rental and an uncertain sale price is a speculative, improper method of determining a capitalization rate. VI. The figures used by the State’s appraiser are not in accord with the facts, and the computations made therefrom are therefore wholly inaccurate. VII. The State’s appraiser’s attempt to arrive at his capitalization rate by the summation method was wholly unsubstantiated. (Matter of City of New York [Madison Houses], 17 A D 2d 317; United States v. Tax Comm, of City of N. Y., 22 A D 2d 290; Matter of City of New York [A. & W. Realty Corp.], 1 N Y 2d 428; Diocese of Buffalo v. State of New York, 18 N Y 2d 41.) VIII. The courts below herein properly valued separately the interests of the fee owners and the tenants. (Matter of Board of Water Supply of City of N. Y., 277 N. Y. 452; Matter of City of New York [Mott Haven Houses], 33 Misc 2d 808, 16 A D 2d 637, 13 N Y 2d 959; Matter of Trustees of N. Y. & Brooklyn Bridge, 137 N. Y. 95; Great Atlantic & Pacific Tea Co. v. State of New York, 22 N Y 2d 75.)

Opinion:
Chief Judge Fuld.
The principal question posed—an important one in the field of condemnation—is whether it is permissible to fix the market value of land, completely bare when condemned, solely on the basis of capitalization of income expected to be realized from buildings and other extensive improvements not yet financed, on which no work had even been begun on the day of taking.
The State on May 10,1961, appropriated slightly over 16 acres of vacant land—part of a larger 26.78-acre parcel—for hi > way purposes. The property fronted on a main highway in Rockland County and was well situated for development as a shopping center. The claimant fee owners (Siegel et al.) had completed their assemblage of the entire 26-acre parcel several months before the condemnation at a cost of $247,800 and had leased it to the claimant tenant (Banner Holding Corp., the assignor of Arlen of Nanuet) only four months before the taking for an annual rent, after the first year, of $61,250, for a 25-year term, with options in the tenant to renew or purchase. This ground lease expressly envisaged that the tenant would sublet the parcel to E. J. Korvette, Inc., a discount department store chain. Subleases were thereafter executed which obligated the tenant to erect, at its own expense, a large retail store building, a supermarket building, a patio shop and a parking area. Upon completion of this construction—an enterprise involving the investment of several million dollars by the ground tenant— the obligation of the subtenant, Korvette, was to become effec tive. It was to pay an annual rent of $285,000 to its sublessor, the tenant Banner. Although these leases had all been entered into before the condemnation, not a shovel had been turned, no work whatsoever done, on the site. In a word, the plot consisted of vacant, raw land.
For the 16 acres taken by the State, the Court of Claims awarded $702,610 to the fee owners and $875,000 to the tenant (50 Mise 2d 934). A divided Appellate Division affirmed the award (of $702,610) to the fee owners but modified the tenant's award by reducing it to $525,000 (31 A D 2d 221). In determining the value of the land, the courts below adopted a capitalization of income method—that is, they capitalized the rent expected to be realized from the buildings to be constructed on the parcel-—-and this, as indicated above, gives rise to the question with which we are primarily concerned.
The question is not a new one. (See Levin v. State of New York, 13 N Y 2d 87; see, also, Salzberg v. State of New York, 24 A D 2d 664, 665, affd. 18 N Y 2d 965; Levitin v. State of New York, 12 A D 2d 6, mot. for rearg. den. 13 A D 2d 611.) Indeed, in Levin v. State of New York (13 N Y 2d 87, supra), we dealt with the problem -of valuing vacant land which, on the day of taking, had been leased to financially responsible people for development. In the Levin case, the State argued that the Court of Claims had fallen into the error of basing its valuation of the vacant land there involved on a capitalization of income from the land as if it had been improved by buildings which were not constructed at the time title vested in the State. We agreed with the State's position that such a method was impermissible but decided that the record did not support such a hypothesis. More specifically, although we held that executory leases and agreements — relating to land vacant on the day of the taking— may be given some weight as enhancing the value of the vacant parcels, we pointedly declared that it would be error to expand the weight of such evidence by treating those leases and contracts as if they represented an income flow already in being.
Addressing itself to the State's claim of error, we wrote that the trial court " did not fall into [that] error of valuing the property by capitalizing the net rental income as might have been proper if the building had been completed and rent had commenced" (13 N Y 2d, at p. 91). As I have already indicated, to give the anticipated rentals an annuity-like significance, as the courts below have done, is a distortion of the realities of the situation, of the condition of the property still vacant and unimproved. As we observed in the Levin case, one cannot " expect the prospective purchaser to pay for the vacant land in suit an amount equal to the worth of the conjectured net rental income for, then, he would be paying an amount which would preclude any profit " (13 N Y 2d, at p. 91). We might have added, what is implicit in the opinion, that, if one paid before construction an amount equal to the value of the conjectured net income, he would not only have been precluding any possibility of profit but, indeed, might be letting himself in for a loss if the conjectured net income did not later materialize. Moreover, we went on to say, an experienced prospective purchaser, in determining the price he would be willing to pay, would be most directly concerned with ' ' what other properties were selling for " and with what other " competitive alternatives "— fees or leaseholds — " were available " to him (13 N Y 2d, at p. 91).
These settled principles and guidelines, the indicia of value most frequently relied upon by businessmen as well as courts, are not to be deemed irrelevant merely because the vacant land appropriated was leased to a developer. However, both the Court of Claims and the Appellate Division were of the opinion that they could properly disregard such settled principles and the accepted indicia of value and, instead, rely on a capitalization of rents from structures not yet begun to be built because they believed that there were special circumstances present.
With this in mind, let us consider the circumstances. In April of 1961, about a month before the taking, it was still not clear whether the projected highway improvement would go through the subject property or around it. Undoubtedly to guard against the eventuality of condemnation, the tenant on April 13, 1961, obtained a ground lease of an adjacent 26-acre parcel—for the lower annual rental of $52,500—and, after the taking of the subject property, transferred its Korvette subleases to that adjoining parcel. It was on this new site that a shopping center was subsequently erected; somewhat larger than the one planned for the subject property, it was completed and in operation long after the taking but before the trial.
The conclusion of the courts below—that the rental income actually being earned by these buildings was not presumed or hypothetical and was, therefore, properly used as the basis for income capitalization of the sublease rentals of the subject property—was egregious error. So, too, was the treatment accorded the ground lease, for the courts below not only capitalized the rentals for its first 10 years but proceeded to treat all the other terms of that lease as self-executing. For example, the courts assumed that the ground tenant would exercise an option in the lease to purchase the land at the end of 10 years and, having made that assumption, they then simply added the present worth of the supposed purchase price to the present value of a 10-year flow of rent in order to determine the award to be made to the fee owner.
Such a use of the experience of the project on the adjacent site, a project on which construction had not been commenced on the day of the taking, was in violation of the principle that, to determine the market value of land appropriated, we must look to the situation existing on the day of the taking. It matters not that, in the case before us, the project had in fact been developed on adjacent property prior to the trial. The significant fact is that it was not begun until after the appropriation. To sanction the capitalization of income method adopted below would be to overturn the long-established and wise rule, reflected in our Levin decision (13 N Y 2d 87, supra). It would be a serious departure from principle, and most unsound, to announce that fair compensation is to be determined not as of the day of taking but, instead, as of the time of trial, whenever that might happen to be.
Additional error was committed by the rejection below of the settled procedure followed in valuing real property in which a tenant may have a leasehold interest that survives the taking. Such procedure is, first, to value the unencumbered fee—thereby determining the value of all the interests taken — and, then, to determine the value of the tenant's interest, if any—such value being dependent upon whether the rental value of the land is greater or less than the rent reserved in the ground lease. If there is an excess rental value, the worth of that excess is the amount to be awarded to the tenant. That amount is carved out of the amount of the total award—the value of all the interests in the land taken — and the balance is the sum to be awarded to the owner of the fee. (See, e.g., Great Atlantic & Pacific Tea Co. v. State of New York, 22 N Y 2d 75, 84; Matter of City of New York [Allen St.], 256 N. Y. 236.)
Instead of determining the tenant's interest in the manner just indicated, the courts below valued it by capitalizing—after deducting an estimated return on the buildings and the ground rental — the rent of $285,000 to be paid by the subtenant. This was error not only because the land was still vacant and raw on the day of taking but because the value of the subleases to Korvette was already reflected in the size of the ground rent of $61,250 which had been arrived at in express contemplation of the subleases to Korvette and the eventual construction of the buildings and other improvements by the ground tenant. To state the matter somewhat differently, the sublease rental of $285,000 (payable by Korvette) was to be the reward to the tenant for investing several million dollars in construction costs and for gambling on the eventual success of the shopping center. The land was simply one component of the enterprise.
No shopping center was appropriated by the State. The vacant lot which it took was not a shopping center and, certainly, the agreements among financially responsible people about what they planned to do in the future with that lot did not transform it into one. The ground lease rental was one reflection of the value of the land; the sublease rental was only remotely such a reflection. This is not to say that it was improper for the trial court to receive the subleases in evidence as bearing on the issue of highest and best use but it was grave error to give them the weight which was accorded them.
Upon the retrial, the value of the entire land — that is, the value of all the interests in the land — should be determined by reference to the sales prices and ground rentals paid for neighboring or competitive lands. This would include the ground rent of $52,500 which the tenant contracted to pay for the adjacent property to which the Korvette subleases were transferred. (See Levin v. State of New York, 13 N Y 2d 87, 91-92, supra; see, also, 31 A D 2d, at pp. 229-230, per Reynolds, J., dissenting.) Capitalization of the $61,250 ground rental may be properly used as one of the indicia of value of the vacant land, since, as already noted, such ground rent reflected the opinion of experienced businessmen as to the value of this vacant land for shopping center use. As for the capitalization rate to be employed, we agree with the view expressed by Judge Reynolds, in dissent, that the rate must be not only one with support in the evidence but one which indicates that the rental income to be derived from this ground lease was, on the day of taking, " subject to more than the usual risks " (31 A D 2d, at p. 231).
In valuing the tenant's leasehold interest, the inquiry upon the new trial is to be confined to ascertaining whether the rental value of the vacant land was greater or less than the ground rental of $61,250 a year. The leasehold interest is not to be valued according to the method, adopted by the courts below, of valuing that interest on the basis of what the tenant hoped to earn from its speculative investment of millions of dollars in buildings not yet built and a business not yet in operation. On this issue of rental value, the State points to the fact that the tenant succeeded in obtaining, about a month before the taking, the long-term lease of adjacent property to which we have referred. That rent was $52,500 a year for property virtually a twin, in size and location, of the subject land. Manifestly, this goes far toward demonstrating that the claimant tenant had no leasehold interest at all, since such rental would indicate that the rental value — the market value of the leasehold—was less than the $61,250 ground rent stipulated in the lease. This being so, there is much to be said for the view expressed by the dissenting Appellate Division justices that the tenant's claim be dismissed. However, since the trial court found, in another context, that this adjacent parcel may not have been " as attractive and favorable " as the subject property, it is our conclusion that the tenant should be privileged to prove, if it can, that competitive land for shopping center use commanded, at the time of the taking, a higher rental than at the rate of $61,250 for 26 acres.
We also agree with the dissenters below that the claimant tenant, by moving its shopping center project to the vacant neighboring parcel, retained all of its potential profits under the Korvette subleases and that, consequently, the award gives the claimant a windfall by allowing it compensation for the fictional loss of such benefits. As Presiding Justice Heblihy put it, " ' [j]ust compensation ' requires a holding that Arlen is not entitled to receive the full financial benefits from its sublease and also receive compensation for the fictional loss of such benefits " (31 A D 2d, at p. 228).
In sum, the erroneous methods of valuation to which we have called attention require a complete retrial of the claim of the fee owners' as well as that of the tenant and, accordingly, the orders appealed from should be reversed, with costs, and a new trial ordered.
. Even after the amount had been reduced by the Appellate Division to $1,227,610, the award, per acre, for the 16 acres 'involved is nine times more than the purchase price, per acre, paid by the owners for the entire 26-acre parcel but a few months before the taking.
. We call attention to the dissenting opinion (in Levin) at the Appellate Division, written by then Presiding Justice Bergan, which states the matter well (17 A D 2d, at p. 339) : "But there were no improvements on this land when the State appropriated it. To treat a plan to put up a building as a building that has been put up; and then to capitalize the rent reserved in the lease as though the building had been put up and occupied and the lease had successfully run its full course to the end, seems an unrealistic approach to a proper award in condemnation."
. In the case before us, there was a partial taking, 16 acres of a 26-acre tract. The value of the 10 acres of land retained by the owners after the taking would, of course, have to be deducted from the value of the entire tract to determine the amount of the total award.