APPEAL by the Board of Assessors, the Board of Assessment Review, and the Assessment Review Commission of the County of Nassau, in consolidated tax certiorari proceedings pursuant to Real Property Tax Law article 7 to review real property tax assessments for the tax years 2006/2007, 2007/2008, and 2008/2009, as limited by their brief, from so much of an order and judgment (one paper) of the Supreme Court (Stephen A. Bucaria, J.), entered in Nassau County on August 11, 2010, as, after a nonjury trial, and upon a decision of the same court dated July 15, 2010, granted the petitions to the extent of awarding a reduction in the tax assessments for the tax years 2006/2007, 2007/2008, and 2008/2009, and directed that the assessment rolls be corrected and any tax overpayments be refunded, with interest.
John Ciampoli, County Attorney, Mineola, N.Y. (David A. Tauster and Dennis J. Saffran of counsel), for appellants.
Santemma & Deutsch LLP, Syosset, N.Y. (Jon N. Santemma, Jonathan D. Gottlieb, Koeppel Martone & Leistman [Michael R. Martone and Michael P. Guerriero], and Farrell Fritz, P.C. [Arthur K. Feldman], of counsel), for respondent.
MARK C. DILLON, J.P., THOMAS A. DICKERSON, L. PRISCILLA HALL, LEONARD B. AUSTIN, JJ.
OPINION & ORDER
The petitioner, Hempstead Country Club (hereinafter the County Club), owns approximately 123 acres of property in Nassau County on which it operates a private, not-for-profit, golf course. The Country Club commenced these consolidated tax certiorari proceedings to challenge the tax assessments imposed on its property by the appellants, the Board of Assessors, the Board of Assessment Review, and the Assessment Review Commission of the County of Nassau, for the tax years 2006/2007, 2007/2008, and 2008/2009.
The Country Club and the appellants agree that, for the purposes of the assessments, the property should be assessed as a private, for-profit golf course. The parties also agree that the income capitalization method of valuation is the proper approach for the purposes of these assessments. Although the parties' respective appraisers agree that the amount of real estate taxes imposed on the property should be taken into account when computing the property's fair market value, they differ on how to do so. The Country Club's appraiser, in effect, converted the leases for his comparable properties into gross leases, under which the owner, rather than the lessee, is obligated to pay the real estate taxes, and utilized the "assessor's formula, " pursuant to which a factor is added to the capitalization rate to account for real estate taxes. The appellants' appraiser adopted an approach assuming a triple net lease, under which the lessee, not the owner, is obligated to pay real estate taxes. Therefore, according to the appellants, the expense of real estate taxes is accounted for in the fair market rent for the property, and need not be accounted for in the capitalization rate. Additionally, the appellants' appraiser downwardly adjusted his rent-to-revenue ratio, used in determining the fair market rent for the property, to account for high real estate taxes in the subject location. The Supreme Court adopted the approach proposed by the Country Club, which resulted in a reduction of the original assessed value.
The principal issue we must decide on this appeal is whether the approach advocated by the Country Club's appraiser, and adopted by the Supreme Court, was "fair and nondiscriminating, " was "acceptable, " and resulted in a fair market value assessment of the subject property, or if, as the appellants assert, it resulted in improper "double counting." We must make this determination against a background which includes the fact that, in a case decided in 2007, Matter of Mill Riv. Club v Board of Assessors (48 A.D.3d 169), a tax certiorari proceeding challenging the assessment of parcels on which a private, not-for-profit golf course was operated, this Court approved of the triple net lease approach advocated by the taxing authority in that case and by the appellants here.
Factual and Procedural Background
The real property at issue in these tax certiorari proceedings consists of approximately 123 acres in Nassau County. The property is owned by the Country Club, which operates a private, not-for-profit country club on the property. The property is improved by, among other things, an 18-hole golf course.
Pursuant to article 7 of the Real Property Tax Law, the Country Club commenced tax certiorari proceedings to challenge the assessed values of its real property for the tax years 2006/2007, 2007/2008, and 2008/2009. The Supreme Court consolidated these proceedings and conducted a nonjury trial beginning on December 1, 2009.
The Country Club's Appraisal
Jeffrey Dugas, a commercial real estate appraiser, consultant, and broker, testified on behalf of the Country Club, and his appraisal was admitted into evidence.
In appraising the value of the property, Dugas utilized the income capitalization approach, explaining in his appraisal that this was "the most pertinent valuation method for... golf course facilities" because "golf courses are [typically] bought based on their income-generating ability." According to Dugas's appraisal, the most likely purchaser of the subject property would be an investor. Therefore, the valuation in Dugas's appraisal attempted to replicate the analysis a prospective purchaser would most likely employ. In order to determine the market value of the property under the income capitalization method, Dugas estimated a fair market rent for the property, and then capitalized "the income attributed to the real estate at a real estate capitalization rate." In arriving at the fair market rent for the properly alone, Dugas emphasized the need to "first isolate the contributory value of the business and personal property."
Dugas explained that "rent is a function of the income-generating potential of the property, " and was often computed as a percentage of gross sales. Thus, as a first step in estimating the fair market rent the property could command, Dugas began by analyzing the gross sales revenue for the property, including income generated by greens fees, cart rentals, pro shop sales, and food and beverage sales. Although the Country Club provided Dugas with audited financial statements itemizing annual income, Dugas did not rely on these figures for purposes of his valuation because, as a not-for-profit club, the Country Club's members maintained the club without regard for profit.
Dugas hypothesized, for purposes of his valuation, that the Country Club was a for-profit facility, and relied on, among other things, comparison with available relevant market data, analyzing a number of comparable golf courses in the New York metropolitan area with weather patterns and demographics similar to those of the Country Club. Based on figures from the comparable properties, and relying on the hypothetical premise that the County Club was operated on a for-profit basis, Dugas calculated the projected revenue for the Country Club for each relevant year. As a component of his calculations, Dugas "trend[ed] downward" by 1.5% annually for prior tax years. He then arrived at estimated revenue figures of $5, 864, 107 for the 2006/2007 tax year, $5, 954, 624 for the 2007/2008 tax year, and $6, 046, 250 for the 2008/2009 tax year.
Having estimated the revenue of the subject property, Dugas proceeded to estimate the fair market rent based on eight comparable golf course rental properties. Dugas explained that "golf courses are typically rented [at a rental price that is] a percentage of revenue." As such, the next logical step in the valuation process was to find comparable rents in order to estimate how much of the projected revenue the Country Club could expect to pay in rent. In short, Dugas sought to determine the percentage of revenue typically paid in rent by similar clubs, providing him with a rent-to-revenue ratio which he could then apply to the Country Club and its projected revenue.
To compare rent at the various comparable properties and at the Country Club, it was necessary to consider properties with different types of leases. Each of the lease agreements for the eight comparable properties in the northeastern United States analyzed by Dugas fell into one of four categories: (1) gross lease, (2) triple net lease, (3) municipal lease, and (4) hybrid lease.
Dugas explained that a key difference between a gross lease and a triple net lease is the manner in which the responsibility to pay real estate taxes is allocated. Under a gross lease, the landlord or owner is responsible for paying the real estate taxes on the property. Under a triple net lease, the tenant assumes the responsibility of paying the real estate taxes. All other things being equal, the rental payment under a triple net lease would be lower than the rental payment under a gross lease, since the tenant under a triple net lease assumes the additional financial burden of paying the real estate taxes on the property. As Dugas explained, "[i]f an operator knows he can lease the same golf course and not pay taxes compared to the same golf course that has to pay taxes, he can pay more rent [for] the one with no taxes, so the taxes [are] critical as an operating expense."
Under a municipal lease, the property is owned by the municipality. Therefore, neither the tenant nor the municipal owner is responsible for paying taxes on the tax-exempt property.
In his appraisal, Dugas determined that,
"Since the determination of an appropriate real estate tax burden is the ultimate objective in this valuation, the most mathematically accurate approach to value begins with an analysis of fair market rent to include the operator's occupancy costs associated with real estate taxes. Or in other words, the equivalent additional amount of rent that a Lessee would be willing to pay if not responsible for payment of taxes."
Accordingly, when Dugas considered comparable properties to determine the percentage of revenue that was typically charged as rent (the rent-to-revenue ratio), he used gross lease figures. Where the comparable property was rented under a triple net lease, he added the additional amount a lessee would be willing to pay in rent in light of the fact that the lessee did not have to pay taxes. Dugas considered all of the municipal leases to be gross leases, since, as with a gross lease, the tenants at these comparable properties had no obligation to pay taxes. Thus, Dugas, in effect, compared the rental costs of the various comparable properties "as if they were gross rents."
The only comparable property actually held under a triple net lease was a property located in New Jersey, where the lessee paid approximately 3% of gross revenue in taxes. To compensate for this difference, Dugas added 3% to the rent-to-revenue ratio for that property, thereby effectively converting the lease into a gross lease. With regard to the one "hybrid" lease Dugas reviewed, the tenant made payments of $14, 000 to the landlord in lieu of taxes. Dugas adjusted the rent-to-revenue ratio for this lease by 0.7%, since $14, 000 constituted 0.7% of revenue. Since Dugas deemed the municipal leases to be the equivalent of gross leases, he made no adjustments to those leases.
Taking into account the various adjustments he made to the value of comparable properties, the rent-to-revenue ratios for the golf courses alone across the four properties where golf course rents could be separated from overall rents ranged from 16.5% to 26.7%. Of the six properties where overall rents, as opposed to golf rents, were used, the rent-to-revenue ratios ranged from 11.4% to 23.8%. Dugas referred to these figures as the "grossed up" number, meaning that the triple net lease, the hybrid lease, and the municipal leases had been effectively converted into gross leases. Dugas made additional adjustments to the "grossed up" values to account for "capital obligations" and various other economic factors. After factoring in these adjustments, the rent-to-revenue ratios for the four properties with "golf only" rents ranged from 18.2% to 26.7%. The rent-to-revenue ratios for the six properties with "overall" rents ranged from 13.3% to 16.7%.
Dugas determined that the golf course at the Country Club would be at the high end of the spectrum, and fixed the rent-to-revenue ratio for the golf course at 25%. Then, he chose rent-to-revenue ratios of 10% for the pro shop, 8% for food and beverage, and 10% for "other." Applying these percentages to the revenue streams for each of these components, and then totaling the values, Dugas computed a rental value of $933, 364 for the tax year 2006/2007, $947, 637 for the tax year 2007/2008, and $962, 063 for the tax year 2008/2009. Using the valuation numbers for the 2008/2009 tax year, he divided the estimated rental value ($962, 063) by the total revenue for that year ($6, 046, 250) for an overall rent-to-revenue ratio of approximately 16%. As this percentage was within the range of overall rent-to-revenue ratios for the comparable properties, Dugas concluded that his ratio choice of 25% for golf, as well as the final computation for overall rent-to-revenue ratio, had been validated. He ...