Court Opinion

ID: 3599930
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:46:38.231425+00
Date Added: 2024-06-11T09:15:37.476094
License: Public Domain

[EDITORS' NOTE:  THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 158 
This appeal, involving the construction and application of the Business Rent Law (L. 1945, ch. 314), presents a question of considerable importance and interest to landlord *Page 160 
and tenant of business and commercial space in the city of New York.
The current emergency rent legislation, it is common knowledge, was enacted to curb the existing and expected evils of exorbitant rents and widespread evictions while the wartime shortage of housing, business, and commercial space continued. At the same time, in order to afford landlords a reasonable return from leased property, the emergency laws provide a means to alleviate possible hardships visited on landlords as their costs rise and their rent returns dwindle. Thus, in the case of business and office space, the Business Rent Law allows the landlord a blanket "emergency" increase of 15% over the rents prevailing on June 1, 1944, without need to resort to court proceedings (§ 2, subd. [c]). If he seeks a greater return, he may apply to the Supreme Court for such further increase as is "reasonable" according to the general formula set out in section 4 of the Law to guide the court in fixing higher rent.
The key figure in this formula — and the figure which the court fixing rent must first compute — is the "fair value" of the property. Once such fair value is ascertained, section 4 recites, a "net annual return" equal to 6% of such value and an additional 2% of the principal of any mortgages on the property to allow their amortization "shall be presumed to be a reasonable return." And, continues the statute, in determining reasonable rent, "due consideration shall be given to the cost of maintenance and operation of the entire property (including land and building in which such business space is located) including amount paid for taxes assessed against such property, and to the kind, quality and quantity of services furnished, but excluding amortization or interest paid or accrued on any incumbrances". (Emphasis supplied.)
In this case, petitioner initiated a proceeding for determination of a reasonable rent for its twenty-one-story building, housing 180 tenants. The increase sought would have raised rents more than 50%. The court at Special Term entered an order allowing petitioner a uniform rent increase of 17 1/2% as to all tenants. The Appellate Division unanimously affirmed and we granted leave to appeal. Petitioner complains, among other things, that the courts below erred in excluding an item of *Page 161 
annual depreciation from its costs. A regard for both legislative history and purpose of the rent laws persuades us that that ruling was right.
The Legislature's explicit inclusion of taxes as an item of cost, its express exclusion of continuing fixed charges — such as interest and amortization — suggest a restrictive content for the phrase, "cost of maintenance and operation". Depreciation, not specifically included as such a cost, should not be so treated unless — having in mind the basic anti-inflationary aim of the statute — a reasonable construction requires that result.
Property owners, it was foreseen, might suffer unfairly if rents were to be solidly frozen in a period when costs of goods and services were rising. Accordingly, provision was made for revising rents upward to meet those exigencies. But such increases were to be limited to compensating landlords "for increased costs of operation resulting from war conditions." (See Report of N.Y. State Joint Legislative Committee to Inquire Into and Study Commercial Rents in N.Y. City, N.Y. Legis. Doc., 1945, No. 2, p. 20.) With that in mind, the conclusion is clear that — however depreciation may be treated as an accounting item in other situations (1 Bonbright, Valuation of Property [1st ed.], pp. 179 et seq.; Finney, Principles of Accounting, p. 318; Kester, Advanced Accounting [3d Rev. ed.], p. 246) — it may not be considered a cost within the meaning of the Business Rent Law. The phrase "cost of maintenance and operation", in that statute, is to be confined to sums actually paid out or incurred. (Cf.Schack v. Handel, 271 App. Div. 1, 7; Matter of 76 Crown St.Corp. [Carl  Sons, Inc.], 271 App. Div. 1030.)
Petitioner herein, choosing merely to rely upon a bookkeeping entry which charged an item of $54,310 to depreciation, offered no evidence that its property had actually depreciated in value. It is not hard to find the reason for the lack of proof of actual depreciation; it was not available. Quite apart from the fact that war-induced shortages in rental space arrested and reversed the normal downward trend of the value of a building as it ages, one of the petitioner's own expert witnesses confirmed that there had been no depreciation in the value of this *Page 162 
particular building since 1942. Under these circumstances, an allowance for theoretical depreciation would not be warranted — even in the view of those courts which had permitted such a deduction in cases decided under the emergency rent legislation (L. 1920, chs. 136, 944, § 4) enacted during the First World War. (See Alabama Holding Corp. v. Conrey, 201 App. Div. 565, 568;Hall Realty Co. v. Moos, 200 App. Div. 66, 73.)
Nor do we find any merit in petitioner's companion point — that the statute is unconstitutional if interpreted to exclude depreciation as a cost. In essence, petitioner argues that a statute is discriminatory and confiscatory, and, therefore, unconstitutional, if it fails to give the landlord the benefit of a sum for theoretical annual depreciation, even though there be no actual depreciation.
Failure to include depreciation as a cost, it is said, gave petitioner a return on his property of 5.23% instead of the 6% envisaged by the statute. Of course, since we conclude that depreciation is not to be treated as a cost, the determination does actually allow petitioner a return of 6%. In any event, though, neither State nor Federal Constitution commands that 6% is the lowest yield that may properly be allowed to landlords. We need not now decide at exactly what point a return which a statute makes presumptively reasonable becomes confiscatory. For present purposes, it is enough to say that, unless and until petitioner can show that 5.23% is so low a return as to be beyond the power of the Legislature to authorize, no constitutional problem arises.
The discriminatory feature of the legislation is said to arise from the fact that fully depreciated property derives its allowable return of 6% under the statute, while property not fully depreciated receives less since it is not allowed any item for depreciation. Petitioner would have us hold, in effect, that a landlord is entitled, as a matter of constitutional law, to have an otherwise reasonable return from property augmented by an allowance for theoretical depreciation. If we assented, lessors of fully depreciated property could claim with equal force that they were being discriminated against because they, too, were not granted an allowance for theoretical depreciation. However, absent proof of actual depreciation, basis for *Page 163 
urging a constitutional question just does not exist. We need go no further in this case.
We have considered the other points raised by petitioner and believe that they were properly decided.
The order of the Appellate Division should be affirmed, with costs.
LOUGHRAN, Ch. J., LEWIS, CONWAY, DESMOND, THACHER and DYE, JJ., concur.
Order affirmed.