New York State Court of Claims

New York State Court of Claims

520 EAST 81ST STREET v. THE STATE OF NEW YORK, #2000-014-112, Claim No. 91018-A


Synopsis


In a claim for the temporary regulatory taking of residential apartments, effectuated by statute subsequently determined by the Court of Appeals to be unconstitutional, the claimant is awarded damages in the amount of $976,450.

Case Information

UID:
2000-014-112
Claimant(s):
520 EAST 81ST STREET ASSOCIATES
Claimant short name:
520 EAST 81ST STREET
Footnote (claimant name) :

Defendant(s):
THE STATE OF NEW YORK
Footnote (defendant name) :

Third-party claimant(s):

Third-party defendant(s):

Claim number(s):
91018-A
Motion number(s):

Cross-motion number(s):

Judge:
S. Michael Nadel
Claimant's attorney:
Rosenberg & Estis, P.C.
By: Todd E. Soloway, Esq. and Lawrence M. Furtzaig, Esq.
Defendant's attorney:
Eliot Spitzer, Attorney GeneralBy: Victor J. D'Angelo, Assistant Attorney General
Third-party defendant's attorney:

Signature date:
October 4, 2000
City:
New York
Comments:

Official citation:

Appellate results:

See also (multicaptioned case)



Decision

This is a claim for the temporary regulatory (
de facto) taking of 39 residential apartments located in 520 East 81st Street in Manhattan, effected by the provisions of Chapter 940 of the Laws of 1984, as determined by the Court of Appeals in Manocherian v Lenox Hill Hospital, 84 NY2d 385, cert denied 514 US 1109. The building, located on the upper East Side of Manhattan, contains 163 apartments in all. In 1981 it had been converted to condominium ownership.
For a number of years prior to the
de facto taking herein, the 39 apartments had been leased by the claimant, the owner of the building, to Lenox Hill Hospital, which in turn subleased them to employees of the Hospital. Until 1983, under the provisions of the Rent Stabilization Law, the claimant was required to offer periodic renewal leases to the Hospital. Chapter 403 of the Laws of 1983, the Omnibus Housing Act (OHA), amended the Rent Stabilization Law to require that the named leaseholder occupy the apartment as a primary residence in order to qualify for a renewal lease, and to exempt from its coverage apartments which were not so occupied. As a result, upon the expiration of the leases of the 39 apartments, scheduled to occur on July 31, 1985, the claimant was not required to offer renewal leases for the 39 apartments to the Hospital. The enactment of Chapter 940 of the Laws of 1984, however, required the claimant to offer renewal leases.
The effect of Chapter 940 on the 39 apartments herein, and on the claimant as a result, was fully explained by the Court of Appeals (84 NY2d 385, at 390-391) as follows:
Next came chapter 940 of the Laws of 1984 (L 1984, ch 940, codified at Administrative Code of City of NY §YY51-3.0 [renum §26-504]). It was enacted 13 months after the passage of chapter 403 and exclusively exalts the renewal rights of not-for-profit hospitals, which had formerly subleased rent-stabilized apartments to qualified hospital employees. Section 1 of chapter 940 amended the nonprimary RSL §YY51-3.0(a)(1)(f) (renum §26-504[a][1][f]), providing "[w]here a housing accommodation is rented to a not-for-profit hospital for residential use, affiliated subtenants authorized to use such accommodations by such hospital shall be deemed to be tenants." Thus, under chapter 940, subtenants of the primary tenant, a nonoccupying, not-for-profit hospital, were deemed qualified tenants in specific contradiction of the general purpose of the 1983 OHA reforms. Chapter 940 further grants not-for-profit hospitals the right to sublet apartments to affiliated employees without first obtaining an owner's consent and without requiring the hospital itself to maintain these apartments as a primary residence. Indeed, unlike any other regulated tenants, all of whom are authorized to sublet for only two out of every four years, the sublets by the not-for profit hospital to its selected and variable employees is durationally unrestricted and open-ended. This is a unique and additional preference accorded no one else similarly situated. Moreover, the hospital's special privileges last for as long as its unilaterally controlled corporate existence

The legislative history of chapter 940 reveals that Lenox Hill Hospital was the principal agent in urging the amendment (see, Senate Debates, NY Senate Bill S 9983, June 28, 1984 ["(t)his bill has been introduced at the request of Lenox Hill Hospital in New York City * * * (and i)ts purpose is to enable Lenox Hill to have the right to renewal leases"]). The salutary motivation was the preservation of safe, convenient, affordable housing for hospital staff (see, Letter from Lenox Hill Hospital, dated July 27, 1984, Bill Jacket, L 1984, ch 940, at 29). The primary and real beneficiary of this legislation, however, is Lenox Hill Hospital, not actual dwellers. The latter are only incidentally benefitted and may be evicted under the exclusive control or at the whim of their employer, Lenox Hill Hospital, to which the Legislature transferred significant, distinctive, apparent ownership prerogatives without its having to endure the burdens and costs of ownership.
The Court of Appeals determined that Chapter 940 was unconstitutional because it did not substantially advance a legitimate State interest, and concluded that it had effected an unconstitutional regulatory taking of property.

By,
inter alia, requiring the claimant to offer renewal leases for the 39 apartments, subject to the regulatory provisions of the Rent Stabilization Law, the effect of Chapter 940 not only prevented the claimant from renting them, free from those regulations, at open market rates, but also effectively prevented the claimant from selling them as condominiums.[1] As noted by the Court of Appeals: "The statute vests renewal rights in an entity of unlimited existence, . . ." Manocherian v Lenox Hill Hospital, supra, at 399.
The parties agree that the period of the taking was from August 1, 1985, the date on which the claimant would no longer have been required to offer renewal leases but for the provisions of Chapter 940, to October 20, 1994, the effective date of the Court of Appeals determination that those provisions were unconstitutional.

Based upon the foregoing, both parties submitted appraisals of the subject property, in accordance with Rule 206.21 of the Uniform Rules for the Court of Claims, which governs appropriation claims. In accordance with Court of Claims Act §12(4), the Court has viewed the subject property.

Both appraisals valued the 39 apartments as if Chapter 940 had never been enacted (before value, on August 1, 1985), and as affected by the provisions of Chapter 940 (after value, on October 20, 1994). Both appraisals also calculated, as additional damages, the net operating loss attributable to the 39 apartments during the period of the temporary taking.

The claimant's appraisal calculated the "before" value as $8,818,660, the "after" value as $1,968,113, and the operating loss as $491,163, for total damages of $7,341,710. The State's appraisal calculated the "before" value as $100,000, the "after" value as zero, and the operating loss as $435,000, for total damages of $535,000.

The significant difference in the amounts of the appraisals results, in the first instance, from a difference in highest and best use in the respective appraisals. The claimant's appraisal is based upon a highest and best use of the subject property as condominium apartments; the State's appraisal is based upon a highest and best use as rental apartments.

The difference also results from the inclusion in the claimant's calculation of each of the 3 components of damages, of either an interest or a discount rate, the effect of which is to increase the "before" value and the amount of lost rental income, and to decrease the "after" value.

Upon consideration of the appraisals and the testimony of the appraisers, the Court concludes that the highest and best use of the 39 apartments is as condominium apartments. The conclusion of the State's appraisal's to the contrary is based upon the incorrect premise that without the enactment of Chapter 940 the 39 apartments would have remained subject to the provisions of the Rent Stabilization Law. Moreover, to the extent that the State's highest and best use is based upon the view that the conversion to condominium ownership in 1981 was financially unsound, because the apartments in the building were occupied by tenants afforded the protection of the Rent Stabilization Law, the State's appraisal ignores evidence which demonstrates that apartments were nonetheless sold.

While only 9 vacant apartments were sold prior to August 1, 1985, the evidence in the record that as apartments became vacant they were sold within a reasonable time, is uncontradicted.
See, Exhibit 22, page 8. In this regard, there is nothing in the record which undermines the claimant's contention that had the 39 apartments become vacant on August 1, 1985, they too would have been sold. In addition, 49 other apartments were purchased by their tenants, of which 8 were subsequently resold, all prior to August 1, 1985. The evidence in the claimant's appraisal also indicates that between August 1985 and October 1995, 18 apartments were sold, of which 16 were vacant, and 26 apartments were resold by their individual owners.
The claimant's appraisal utilized the sales comparison approach and aspects of the income capitalization approach. It estimated that sales of the 39 apartments would have occurred over a period of 5 years commencing in 1985, had Chapter 940 not been enacted; and that sales of the 39 apartments would have occurred over a period of 9 years, commencing in 1994, after the determination of the Court of Appeals that Chapter 940 was unconstitutional.

For each year of each period, the claimant's appraisal calculates the income the claimant would have received from sales, based upon a per square foot of value arrived at by comparison with sales of other apartments in the building, and from the rental, at estimated market rates, during the estimated time apartments would have remained unsold. Each "sell out" scenario, and "interim rental" scenario, accounts for a variety of factors such as selling costs, renovation costs, real estate taxes, common condominium charges, vacancy rate, and costs associated with the interim rental of the apartments.

Using the foregoing methodology, the claimant's appraisal arrived at a cash flow for each of the 5 years of the sell out commencing in 1985, and applied a rate of interest through October 1994. Similarly, a discount rate was applied to the cash flow for each of the 9 years of the sell out commencing in 1994, to arrive at a present value as of October 1994.

Upon examination, the estimated sell outs, while not without any reasonable basis, are speculative at best; they do not "provide a sound basis for approximating with reasonable certainty" the lost profits the claimant seeks to establish as its damages.
Anbe Realty Co., v City of New York, 223 AD2d 416, 417. In the first place, the "after" sell out, commencing in 1994, is based upon sales occurring over a 9 year period, despite the fact that evidence was offered by the claimant (Exhibit 30) that at least 36 of the 39 apartments were actually sold within 2 years, from November 1996 to December 1998. Notable by its absence is any evidence of the actual price at which any of the 39 units were sold. Nor does the appraisal include evidence of actual market rents received during the period of the sell out commencing in 1985, although that information, too, must exist, but was not offered.[2]
Upon the evidence presented, therefore, the Court is left to value the subject property by comparison with evidence in the record of actual sales of similar apartments in the building at or about each of the dates which are pertinent to the taking herein. The difference between the value of the 39 apartments on August 1, 1985, and their value on October 20, 1994, constitutes the direct damages to the claimant as a result of the taking.

In arriving at a value before the taking for the 39 apartments, therefore, the Court has considered 25 sales of apartments in the building from May 1984 through December 1986,[3]
15 months before and 17 months after August 1, 1985, the date on which the provisions of Chapter 940 resulted in a taking. In arriving at a value after the taking, the Court has considered 10 sales of apartments in the building from July 1993 through October 1995,[4]
The Court has not considered the sale of apartment 12E, on October 27, 1994. As noted in the claimant's appraisal, the sale was to an "officer of a company related to ownership/sponsor." It has not been considered for that reason.
16 months before and 12 months after October 20, 1994, the date on which the claimant once again had the ability to sell the apartments, as a result of the determination of the Court of Appeals. All of the sales considered were either of vacant apartments, or resales by individual owners, thus representing market value.
The data in the claimant's appraisal concerning the sales of apartments listed in footnote 3,
supra, results in an average value per square foot of $233.64, and a median value of $226. In order to utilize these values as a basis for determining the value of the 39 apartments, it is necessary to consider that nearly two-thirds (25) of the 39 apartments are 2.5 rooms, and that for the 8 comparable sales which were of 2.5 room apartments,[5] the average value per square foot is $214.63, and the median value is $208. Upon all of the evidence, therefore, the Court adopts $220 per square foot as the basis for determining the value of the subject property as of August 1, 1985.
As applied to the 39 apartments affected by the taking (with a total area of 18,617 square feet,
see Exhibit 21, page 15), this results in a value before the taking of $3,264,996 ($220 x 18,617 square feet minus 6% selling costs minus $585,000 renovation costs).[6]
Utilizing the data in the claimant's appraisal concerning the sales of apartments listed in footnote 4,
supra, results in an average value per square foot of $199.90, and a median value of $193.50. The Court adopts $195 per square foot as the basis for determining the value of the subject property as of October 20, 1994.[7]
As applied to the 39 apartments affected by the taking, this results in a value after the taking of $2,632,496 ($195 x 18,617 square feet minus 6% selling costs minus $780,000 renovation costs).[8]

The difference between the before and after values is $632,500, which are the direct damages as a result of the temporary taking of the 39 apartments.

Having arrived at the value in 1994 in accordance with the foregoing, there is no basis for applying a discount rate to the value as of October 1994. Nor, under the circumstances, is there any basis for the application of a rate of interest to the August 1985 value. As noted by the Assistant Attorney General in the State's post trial brief, any damage suffered by the claimant attributable to the lost opportunity to earn a return is accounted for by the interest on the damages to which the claimant is entitled by statute from the date of the taking.[9]

In addition, the Court has considered evidence of the actual losses sustained by the claimant during the period of the taking, as a result of the fact that the 39 apartments remained subject to the Rent Stabilization Law, so that the rent received was less than the claimant's costs. The State does not dispute that the claimant suffered such a loss during the period of the taking (Exhibit A, page 47).

Both appraisals calculated these losses based upon the rental income for the 39 apartments for the period of the taking, offset by the following expenses: common charges, special assessments, real estate taxes, repairs and maintenance, reserves, and management. In addition, the claimant's appraisal accounted for decorating expenses. The State's appraisal calculated the net operating loss as $285,958, for the years 1986 to 1994. The claimant's appraisal calculated the net loss for the same period as $343,950, before applying an annual reinvestment rate and a future value factor, to October 1994. The difference in these amounts is accounted for by differences in the estimation of repairs and maintenance, reserves, and management, and the inclusion of decorating expenses in the claimant's appraisal, and small differences in the amounts for common charges and special assessments.

Upon consideration of the respective appraisals, the Court adopts the calculation of the amount as arrived at in the claimant's appraisal, $343,950. As previously noted, the Court finds no basis for the application of reinvestment factor or future value factor, which is accounted for by the interest to which the claimant is entitled by statute from the date of the taking.

In accordance with the foregoing, the claimant is entitled to a total award of $976,450 with statutory interest from August 1, 1985 to the date of this decision and thereafter to the date of entry of judgment pursuant to CPLR 5001 and 5002, and Court of Claims Act §19(1).

In the absence of opposition from the defendant, the claimant's application for the severance of that portion of the claim seeking attorney's fees is granted; the Chief Clerk is directed to assign a new claim number to the severed claim. Counsel for the parties are directed to submit, and exchange, memoranda of law which address the applicability of EDPL §701 to the claim herein. Upon receipt of the memoranda of law, the Court will schedule any necessary further proceedings.

LET JUDGMENT BE ENTERED ACCORDINGLY.


October 4, 2000
New York, New York

HON. S. MICHAEL NADEL
Judge of the Court of Claims




[1]While the parties disagree as to the marketability of any of the apartments in the building as condominiums (discussed, infra), it is not disputed that, although the 39 apartments were technically available for sale, they could not be sold by virtue of their occupancy by subtenants of Lenox Hill Hospital.
[2]According to the claimant's appraisal, the information was unavailable. See, Exhibit 21, page 33.
[3]The following apartments during 1984: 4L on May 4, 4K on May 8, 5E on June 13, 11M on July 26, 6M on July 27, 7N on August 22, 3H on September 10, 4A on October 15, 7A on November 2, 10D on December 20; the following apartments during 1985: 9D on January 10, 12J on May 29, 4J on August 15, 5B on August 29, 12C on October 28, 5C and 12D on November 29, 10B on December 14; the following apartments during 1986: 2H on March 27, 7H on June 3, 10M on June 6, 3H on July 8, 3J on October 8, 1D on December 24, 8L on December 31. See, Exhibit 21, page 29.

[4]The following apartments during 1993: 12D on July 16, 12G on July 22, 14E on September 15; the following apartments during 1994: 12B on February 14, 5C on May 19, 8J on August 2, 1L on December 2; the following apartments during 1995: 12C on January 6, 3C on July 27, 11J on October 31. See, Exhibit 21, page 29.

[5]Apartments 4K, 5E, 4A, 7A, 10D, 9D, 12C and 1D.
[6]The claimant's appraisal estimates the costs associated with selling apartments at 6%; and estimates $15,000 per apartment renovation costs. Exhibit 21, page 33.
[7]Inasmuch as only one of the 10 comparable sales is of a 2.5 room apartment, there is insufficient data upon which to account for the fact that nearly two-thirds of the 39 apartments are 2.5 rooms, as was done with respect to the value as of August 1, 1985. In this regard, the Court notes, again, that no evidence was offered, by either side, as to the actual sale prices of the 39 units.
[8]The claimant's appraisal estimates the costs associated with selling apartments at 6%; and estimates $20,000 per apartment renovation costs. Exhibit 21, page 36.
[9]In reaching this conclusion, the Court has given no weight to the testimony of Dr. Scribner, called by the State as an expert, whose testimony was essentially cumulative of the State's appraisal and the testimony of the State's appraiser.