Tax Certiorari—Real Property Tax Law Article 7—Trial Court Properly Utilized Income Capitalization Methodology Rather Than Comparable Sales or Market Approach Since Property Functioned More Like Cooperative Corporation Than a Homeowner’s Association

This case involved a Real Property Tax Law (RPTL) Article 7 proceeding. The trial court had utilized an “income capitalization” methodology “rather than a ‘comparable sales’ or market approach,” because it had found that the subject property had functioned more like a cooperative corporation (co-op) than a homeowners’ association (HOA).

The property consisted of approximately 239 acres of land containing 283 seasonal cottages and other improvements, including a marina which could accommodate 153 boats. The property is situated on a single tax lot. The petitioner was organized as “a not-for-profit corporation for the purpose of holding title to the…property and its common improvements for the benefit of its parent company” (Club) and the club’s 283 members (members). The club was formed “under the former Membership Corporation Law, the predecessor to the Not-For-Profit Corporation Law, for the purpose of providing facilities for the recreation and enjoyment of its members…during the summer months and to promote social activities during the winter months. The Club is the sole shareholder of the petitioner….” Each of the members owns one of the cottages. However, “the owners do not hold title to the land upon which the cottages are situated.”

When an individual wants to purchase a cottage, he or she negotiates with the present owner. Sale contracts are in a form prescribed by the Club’s board of directors. After the buyer and seller reach an agreement, the prospective purchaser then applies for membership in the Club, and, upon acceptance, the purchaser completes the transaction with the owner selling the cottage. Once the transaction is completed, the former owner surrenders his or her Club membership certificate, and a membership certificate is issued to the new owner. No deeds are issued because the dwellings are considered by the Club to be personal property. Since no land interest is conveyed, the cottages cannot be purchased with the proceeds of a mortgage loan. Additionally, due to the nature of this sales procedure, the sales are not publicly recorded.

All members are required to abide by the petitioner’s bylaws. The bylaws, among other things, restrict construction to 800-square-foot cottages. The bylaws permit the owners to demolish their cottages and construct new ones, or to move a cottage off of the premises and replace it, with the approval of the Club’s board of directors. Members are not permitted to rent or lease their cottages.

The Club collects dues from the cottage owners, and provides staff and services such as lifeguards, gate personnel, maintenance, and recreational events. The Club also collects fees for the use of the boat slips at the marina, at a rate of $35 per slip per season. The petitioner is entrusted with the maintenance of the facilities and common improvements, and pays the real property taxes, which are assessed against the petitioner rather than the individual Club members. Funds for paying the real property taxes are remitted by the Club members through their Club dues.

The subject town had classified the property as “non-homestead” property within the meaning of RPTL 1901. The zoning permitted, inter alia, single family dwellings. Co-ops were “not enumerated as a permitted use” in the zoning district. “The cottages are permitted to occupy the subject parcel by permission from the Town…Zoning Board of Appeals as a use permitted through a five-year renewable camping permit.”

The town’s property record cards for each of the internal lots classified each cottage as “a ‘Property Class 260′ or ‘seasonal residence,’ and not as a condominium” or co-op.

A nonjury trial was held. The petitioner’s appraiser testified that the property was “similar to a cooperative form of ownership in the following ways:

the entire 239 acres constituted one tax lot; common areas of the property were maintained by the “cooperative board,” or in this case, the Club; stock in the form of membership certificates was issued to the residents in order for them to occupy the cottages; members needed approvals by different boards in order to make changes to their cottages; and cottage sales, in effect, had to be approved by the Club’s board of directors, as that board had to approve the buyer for Club membership, which would not be a consideration for someone owning a cottage in fee.

The petitioner’s appraiser used “the ‘income capitalization’ approach, pursuant to which he treated the property” as if it were a rental apartment complex and had relied on rental comparables. The petitioner valued the marina utilizing actual reported income derived from dues for the use of the boat slips. The petitioner had acknowledged that “there were no stock transfers, and no transfer taxes paid, in connection with cottage sales. He also noted that there were no proprietary leases, no prospectus, and no offering statement. He also acknowledged that when a cooperative form of ownership is employed, the real estate taxes are passed through to the cooperative owners.”

Here, the petitioner “was the entity that used the real estate taxes as a deduction, not the cottage owners.” Nevertheless, the petitioner’s appraiser was “more analogous” to a co-op than an HOA. The appraiser further noted that, in a co-op, “major structural repairs” are paid for by the co-op. Here, the cottage owners made their own repairs.” The petitioner thus asserted that the property was “overassessed.”

The appellants’ appraiser argued that the cottages should be valued based on the “comparable sales” or “market approach.” He argued that “this was the only acceptable approach when valuing single-family detached homes such as the subject cottages.” The appellants also argued that the marina should be valued based on comparable rental data from marinas in the area. Each side produced a legal expert. The appellants’ legal expert argued that the petitioner functioned more like an HOA than a co-op or a condominium. The petitioner’s expert argued that the petitioner operated more like a co-op.

The trial court found that the petitioner had proven by a preponderance of the evidence that the property had “more in common with a cooperative corporation than [an HOA]” and “ therefore, [RPTL] §581 applied” and that the property was overvalued.

The Appellate Division affirmed. The court noted that the property was on a single tax lot, there is only one tax bill charged to the property owner, the tax bill is paid by the petitioner, membership and occupancy is subject to an approval process, members and occupants are subject to rules and regulations promulgated by the petitioner’s bylaws, membership and the right to occupancy may be canceled by the petitioner for violation of the bylaws, cottage rentals and subleases are prohibited and cottage transfers require the petitioner’s approval.

The court reasoned that the petitioner was unlike an HOA because properties managed by an HOA are “divided into individual tax lots ascribed to each unit.” Although each cottage was assigned a designated plot by the petitioner, that was not done for tax purposes. Although HOAs lack the power to evict members for failing to abide by their rules, the petitioner has such right and has exercised it in the past. Moreover, “[s]ponsorship or member recommendation is not required in [HOAs], whereas it is required by the petitioner to occupy a unit. Conveyances of properties subject to management by [HOAs] do not depend upon the approval of the [HOAs], whereas the petitioner…must approve of conveyances.”

Further, an HOA “typically does not impose occupancy restrictions such as the seasonal restriction imposed by the petitioner. [HOAs] do not usually impose rental restrictions on units, whereas the petitioner prohibits such arrangements.” In addition, the town’s tax bills designate the property “as ‘non-homestead’ as opposed to ‘homestead’ pursuant to RPTL article 19, which subjects the property to a higher commercial tax rate.” Thus, “the Town historically has treated the property as though it were commercial property, and not as though it were a residential single-family subdivision” and “the Town’s own classification does not support the appellants’ contention that the units should be valued individually as single-family homes.” Accordingly, the court held that the petitioner was more similar to a co-op than an HOA.

The court further found that “the petitioner’s manner of owning the…property falls within the definition of ‘cooperative corporation’ within the meaning of RPTL 581(4),” that RPTL 581 applies to the subject proceedings and the income capitalization approach was correct. The court also rejected the appellants’ challenges to the petitioner’s comparables. The court found that the “rental comparables were neither grossly remote in distance nor dissimilar to the subject property.”

The court then explained, if the rent for the marina had been arbitrarily set without regard to market value, then the rent arrangement would be of “little, if any, guidance to sound appraisal.” The appellants contended that the appraiser should have used other marinas as comparables. However, such other marinas were “full-service marinas equipped with electricity, repair services, and fueling stations. The subject marina has virtually no amenities, and merely consists of boat slips.” Accordingly, the Appellate Division affirmed.

Matter of W.O.R.C. Realty Corp. v. Board of Assessors, 2010-07257, NYLJ 1202571624180, at *1 (2d Cir., Decided Sept. 12, 2012). Before: Dillon, J.P., Dickerson, Chambers, Miller, JJ., Decision by Dickerson, J. All concur.

Landlord-Tenant—SRO—Temporary Occupants of a “Sober” Program Were Licensee Holdovers

The petitioner had commenced licensee holdover proceedings against several individuals “who presently occupy single room units at the subject premises.” This case involved contested underlying facts and “myriad issues raised and the existence of a prior Supreme Court determination relating to these proceedings, which is presently under appeal.”

In July 2010, the petitioner leased part of a 193 unit Class B hotel to a non-profit organization ["A"]. “A” called that portion of the building, with approximately 89 single occupancy (SRO) rooms, “Clay Street House,” and “operated it as a ‘sober house.’” The respondents had occupied their SRO units at various times in 2010 and 2011. They had signed “temporary residency agreements” or “transitional residency agreements” (agreements) with “A.” The agreements contained “restrictive waivers and rules which participants agree to follow during their…participation in ['A''s] counseling program.” Those agreements specified that “Clay Street House is a ‘temporary residence;’” and that “each ‘client’ is limited to a stay of ’6 to 9 months.’” Clients must attend an outpatient program. The rules further provided that the clients would be “discharged immediately: if they fail to attend ['A''s] program or violate other ‘house rules’ (such as no visitors; no visiting with each other; a 9:00 PM curfew with bed/turn all lights off by 12:00 AM, no use of radios, televisions or mobile phones past 12:00 AM; and all bags or personal items subject to search.”

On various dates between 2010 and 2011, the respondents requested six-month leases from the petitioner and “A,” pursuant to Rent Stabilization Code (RSC) §§2520.5(j) and 2522.5(a)(2).

In April 2011, the respondents had filed a class action against the petitioner, “A” and two other defendants. They claimed, inter alia, that the defendants had violated the Rent Stabilization Law (RSL) by compelling them to consent to the agreements containing waivers of their rights, including the right to permanent tenancy, by refusing to offer rent stabilized leases to those who had requested them and by charging excessive rents. They also alleged that the defendants had “created unlawful illusory tenancies in that the owner, [petitioner], leased rent regulated SRO units to a corporate entity ['A'] that, in turn, subleased the rooms back to respondents as ‘program’ housing and that this subleasing scheme was used to circumvent the rent regulation laws and illicitly profiteer.”

The respondents argued, inter alia, that “the subject rooms are subject to rent regulation; that respondents who have resided at Clay Street House for more than six months, or who have requested a six-month rent stabilized lease, are permanent tenants; that all other residents are hotel occupants, and that the agreement between the [petitioner] and ['A'] created an illegal illusory tenancy and therefore respondents are prime tenants of their rooms.”

The defendants in the class action had moved to dismiss, citing the agreements in support of their argument that the respondents “were not hotel rent stabilized tenants or even ‘hotel occupants.’” The petitioner asserted that “the only tenant in the subject premises was ['A'], and that, ['A'], as a licensor, gives participants in its programs (licensees) a revocable license, under the terms and conditions expressed in the temporary residency agreements, to use the subject premises…, while they are active and proper participants in the off-site ['A'] counseling program.” The petitioner contended that it had “no privity or other…relationship with the plaintiffs” and that “A”‘s relationship, as it relates to the plaintiffs, “is not one of ‘landlord-tenant,’ but rather ‘licensor-licensee.’”

The defendants further argued that the RSC was inapplicable to the subject premises since they did not constitute a “housing accommodation,” and that the “plaintiffs’ occupancy was not accompanied by sufficient indicia of permanency because ‘by way of the temporary residency agreements they were expressly informed that their stay at the subject premises was “temporary” and could be terminated at any time upon failure to abide by the House Rules, a copy of which was provided to all.’”

Finally, the defendants argued that “even if the plaintiffs were tenants, the…premises would be exempt from…stabilization based on a charitable exemption ‘as ['A''s] sober house at the subject premises was operated by ['A'], a not-for-profit corporation, primarily for charitable purposes on a non-profit basis.”

The plaintiffs had countered that the residency agreements were “void and that SRO tenancies are unique in that the RSC provides that any person in possession of an SRO room pursuant to a license of any term is defined as a ‘hotel occupant’; all hotel occupants have a non-waivable right to convert into a permanent regulated tenancy; any individual living in the building for six months or who makes a lease request is defined as a permanent tenant, and owners are prohibited from restricting an occupant’s ability to become a permanent tenant or from setting aside units for ‘temporary occupancy only.’”

They further asserted that the respondents’ signing of private transitional residency agreements cannot legally convert what were “rent stabilized hotel rooms into unregulated non-housing accommodations, or else owners could deregulate all rent stabilized housing—SROs and apartments—by simply requiring incoming individuals to sign an agreement that the unit was for ‘temporary occupancy only.’” The plaintiffs also contested the charitable exemption claim.

A trial court had dismissed the plaintiffs’ (here respondents’) case against the petitioner and “A.” The prior decision found that the occupants were deemed licensees of “A” and not tenants of the premises and the landlord was directed to proceed to landlord-tenant court to proceed with summary eviction proceedings. “A” thereafter surrendered its lease on the Clay House portion of the building. After the petitioners served 10-day notices to quit on the respondents, the respondents requested leases from the petitioner. The petitioner then commenced licensee holdover proceedings against the respondents. The respondents had sought a stay of the subject proceedings pending determination of their appeal of the prior court decision. The motion for a stay was denied and the appeal was still pending when the subject decision was written.

The court noted that “A” had already stopped operating Clay House and had surrendered control of the premises to the petitioner and only the formal signing of the surrender agreement remained. The court believed that the prior trial court had been aware of “A”‘s imminent surrender of its lease to the petitioner and the termination of Clay Street House when it had rendered its decision and directed the petitioner to proceed to the landlord-tenant court with summary proceedings. While “A” held the lease for the Clay Street House, the petitioner could not bypass “A” and move directly against the respondents. The court believed that “whether petitioner’s view of the predominancy of the…agreements prevails, or respondents’ view of the predominancy of the SRO rent stabilization laws and regulations prevails, will not and should not be determined by this court, but rather, will rise or fall depending upon whether the Appellate Divisions affirms or reverses the [prior trial court] decision.”

Accordingly, the court found that the respondents could not prevail as a result of “A”‘s surrender of its lease and the court granted the petitioner’s motion for a final judgment of possession against the respondents. The court noted that the prior decision remained the “law of the case unless and until it is reversed by the Appellate Division.”

1109-1113 Manhattan Avenue Partners LLC v. Munoz, L&T 088712/11, NYLJ 1202574965991, at *1 (Civ., KI, Decided Sept. 25, 2012), Finkelstein, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.