Recent Decision Values Atlantic Yards Property at 9 Million
Goldstein, Rikon, Rikon & Houghton recently received a decision awarding one of its clients $9,186,000, plus interest, for damages resulting from a fee taking which occurred on March 1, 2010 in connection with the Atlantic Yards development project. The property consisted of a 20,738 square foot lot, with frontage on Atlantic Avenue and a rear lot adjoining the Long Island Railroad tracks. The property was zoned M1-1 and was vacant at the time of title vesting. The case was tried by Michael Rikon.
Claimants appraisal report valued the property at a highest and best use of a 12 story budget hotel, based on the reasonable probability that the property would have been rezoned from M1-1 to C6-2A on the title vesting date. A C6-2A District is a mixed commercial residential zone that allows and residential FAR of 6.02. Claimant’s appraisal report valued the property value at $20,650,000.
The Condemnor’s appraiser opined that there was no reasonable probability of rezoning, and the highest and best use of the property was an auto related use such as a gas station, parking lot, or garage. M1 zoning is an industrial use zone that allows for automotive uses, as well as hotels, and has a FAR of 1. The Condemnor’s report valued the property at $2,075,000.
However, most of the Condemnor appraiser’s comparable sales were purchased not for auto related uses, but to develop as hotels. This fact, the Court found, undermined the Condemnor’s conclusion that the highest and best use was automotive use.
Probability of Rezoning:
As to the reasonable probability of rezoning, the Court recited the state of the law:
An extraordinary assumption assumes a fact, uncertain information that if found to be false could alter the appraiser’s valuation. It is the Claimant’s burden to show that the assumption is justified, in this case, that there is a reasonable probability that the property would be rezoned to C6-2A. Rodman v State of New York, 109 AD2d 737, 485 NYS2d 842 (2d Dept 1985); Rebrug v State of New York, 42 AD2d 801, 356 NYS2d 452 (3d Dept 1973); Maloney v State of New York, 48 AD2d 755, 368 NYS2d 338 (3rd Dept 1975).
Claimant’s zoning expert testified that the property would absolutely have been rezoned as of March 1, 2010. His opinion was based on the built condition of the area, the zoning in the surrounding area, the City’s industrial policies, and the availability of mass transit on the site. He testified that the City rezoned large parts of the City and enacted 125 area wide rezonings; that the City had a policy of rezoning underutilized, industrial areas to higher commercial and/or industrial use, and that the property was not rezoned when the properties surrounding the site were rezoned because of the announcement of the Atlantic Yards project.
In contrast, the Condemnor’s zoning expert testified that C6-2A zoning would not have been appropriate for the subject property because it was not located in a central business district and would result in several existing uses becoming non-conforming. He also testified that most of the rezonings cited by Claimant’s expert were “down zonings” of brownstone neighborhoods, which decreased allowable density and did not support the probability that the City would have upzoned the subject property.
The Court found that there was a reasonable probability that the subject property would be upzoned from M1-1 to C6-2A (with an FAR of 6), stating:
Although there remained some industrial uses such as storage facilities, gas stations, and auto repair shops, the area no longer contains significant manufacturing uses. The Environmental Impact Statement submitted as part of the Atlantic Yards project describes the site as containing “long blocks that contain mainly underutilized industrial buildings.”
Further, the court found that just because the “exact boundaries of the area that would ultimately have been rezoned is not certain does not materially affect the probability that the subject property would probably have been rezoned, absent the project.”
Notably, the court differentiated the subject property from a nearby property from a recent decision by the same court, PJK Realty Corp., where the court found that no probability of rezoning existed. In contrast to the subject property, the court found, PJK’s property was more integrally part of Prospect Heights than Atlantic Avenue, was located further from mass transportation, was located on a narrower street with less frontage, and that rail yards separated the subject from Prospect Heights.
Having found a likelihood of rezoning, the court stated:
When, as in this case, the expert opinion of one of the parties is rejected as inadequate to support the court’s finding, then no range of testimony exists and consequently the award made by the trial court and every element thereof, if at variance with the remaining expert, must be supported by other evidence and a sufficient explanation provided by the court. (Matter of City of New York [A&W Realty Corp.], 1 NY2d 428, 154 NYS2d 1 (1956); Evans v State of New York, 31 AD2d 565, 294 NYS2d 349 (3d Dept 1968); Fredenburgh v State of New York, 26 AD2d 966, 274 NYS2d 708; Spyros v State of NY, 25 AD2d 696, 268 NYS2d 283 (3d Dept 1966).
Highest and Best Use Factors
Additionally, the Court noted, a highest and best use must be legally permissible, physically possible, financially feasible, and yield the highest value or highest net return.
The Condemnor argued that hotel development would not be legally permissible, as a lease was in effect on the property on the date of taking between the Claimant and Amoco Oil Company which ran until 2016 with an option to extend for an additional 5 years. However, the because Condemnor’s appraiser did not consider the lease when valuing the subject property, this argument failed. The court noted, “Condemnor’s counsel cannot argue a restriction of use that is not asserted by its appraiser in her report.”
The court also found that hotel development would be physically possible, noting that it is “generally not necessary to include detailed drawings and engineering specifications to establish highest and best use…. However, where a site presents extraordinary engineering or architectural problems, that might preclude the proposed use or bulk, the appraisal must account for those difficulties.” The court found that the existence of the street wall and the configuration of the parcel to be such difficulties, and made adjustments to the Claimant’s appraisal report accordingly.
Finally, after noting that the Claimant and Condemnor’s cost analysis differed based on the caliber of hotel constructed, the court found that the proposed hotel development would be financially feasible as a budget hotel. The court noted that any disadvantages with regard to the site (i.e.: rail yards and irregular shape) did not mean that a hotel would not be financially feasible. Rather, such disadvantages would mean only that an investor would pay less for the site as compared to other sites. The court also noted that several other budget hotels had been developed in this area of Brooklyn as of the title vesting date, evidencing that financing for the construction of the hotel would be available.
Finally, the court made adjustments to the Claimant’s sales comparison analysis. The Court specifically relied on sales it found to be most similar to the subject property and made additional deductions for extraordinary development costs for the excavation of unsuitable soil and a deep foundation system of drilled piles.
Finally, the court made a further deduction to account for its determination that Claimant had not demonstrated that absent the project the site would have been rezoned as of the title vesting date. The court noted:
If the highest and best use is based on the reasonable probability of rezoning then some adjustment must be made to the value of the property as zoned, with an increment to reflect what an investor would pay in light of the probability it would be rezoned or alternatively to the property valued under the new potential zoning, with a discount for the costs of obtaining the rezoning and the risk that the rezoning application may be denied. Public School Number 223 City of New York, 71 AD2d 1020, 420 NYS2d 501 (2d Dept 1979); Speach v Smith, 53 AD2d 1024, 386 NYS2d 149 (4th Dept 1976); Schwartz v State of New York, 72 AD2d 490, 426 NYS2d 100 (3d Dept 1980); Yachmovitz v State of New York, 25 AD2d 930, 270 NYS2d 333 (3d Dept 1966).
The court took a discount from the value of the property as rezoned to account for the fact that it had not been rezoned as of the vesting date. This discount reflected the costs, delay and risk associated with the rezoning process.
After all adjustments and discounts were made, the court found a value of the property as of the title vesting date of $9,186,000, plus interest.