Supreme Court, Allegany County, October 21, 2016

Herman Katz Cangemi & Clyne, LLP (Jacquelyn L. Mascetti of counsel) for petitioner.

Bennett, DiFilippo & Kurtzhalts, LLP (Joel R. Kurtzhalts of counsel) for respondents.

The subject property of this proceeding is located at 4100 Bolivar Road in the Town of Wellsville (Town). It is approximately 4.4 acres and includes improvements such as a paved parking lot, lighting, and a 49,857 square foot building currently used as a skilled nursing facility. Petitioner is the owner and operator of this skilled nursing facility, which had a gross revenue of $47,627,498 in 2012 and $8,511,146 in 2013. The relevant tax year for this proceeding is 2014-2015, during which the respondent Town of Wellsville assigned an assessed value of $3.8 million to the subject parcel as of the valuation date of July 1, 2013. The Town of Wellsville has a 100% equalization rate for 2014-2015, so the assessed value and the market value are equivalent for the purposes of this decision.

Petitioner commenced this tax certiorari proceeding to contest the assessment, claiming that the assessed value is excessive. At the nonjury trial, petitioner provided an expert witness who testified that the assessment was overly high pursuant to his method of calculating its income value. Utilizing Medicaid reimbursement rates as a basis for the rental value of the facility, petitioner's expert concluded that a properly calculated value for the subject parcel was $1.92 million.

Respondent's expert testified as to the Town's methodology of calculation of the assessed value. The Town calculated the property's income value by utilizing actual rents less actual [*2]expenses to achieve an actual net income. From this he subtracted a value for the business to isolate the amount attributable solely to the real estate. Using this approach, the Town's expert calculated the value of the subject parcel to be $3.8 million, the amount of the assessment.

Both experts critiqued the other's methodology in their testimony. There were no other witnesses. Each party urges the adoption of their respective propounded calculations.{**59 Misc 3d at 437}

RPTL 706 provides the procedure for judicial review of real property assessments. A petitioner may challenge an assessment on the grounds that the assessment is excessive, unequal or unlawful, or that the property is misclassified. (Id.) The process is a two-step process. First, petitioner must supply competent, relevant proof based upon "sound theory and objective data" that the assessment is incorrect. (Matter of Abele v Dimitriadis, 53 AD3d 969, 971 [3d Dept 2008].) Until petitioner has provided this proof, the assessment remains presumptively valid. (RPTL 305 [2]; Matter of FMC Corp. [Peroxygen Chems. Div.] v Unmack, 92 NY2d 179 [1998]; Matter of Techniplex III v Town & Vil. of E. Rochester, 125 AD3d 1412 [4th Dept 2015]; Matter of Abele v Dimitriadis, 53 AD3d 969 [3d Dept 2008]; Matter of Montgomery v Board of Assessment Review of Town of Union, 30 AD3d 747 [3d Dept 2006]; Matter of Adams v Welch, 272 AD2d 642 [3d Dept 2000].) If petitioner meets this threshold burden, petitioner bears the burden going forward showing by a preponderance of the evidence that the assessment is invalid:

"In the absence of 'substantial evidence' to the contrary, the tax assessment should be upheld as presumptively valid. On the other hand, once petitioner has met its initial burden and rebutted the presumption of validity that attaches to the assessment, a court must weigh the entire record, including evidence of claimed deficiencies in the assessment, to determine whether petitioner has established by a preponderance of the evidence that its property has been overvalued." (Matter of FMC Corp. [Peroxygen Chems. Div.] v Unmack, 92 NY2d 179, 188 [1998].)

Petitioner has provided substantial evidence to rebut this presumption. Petitioner provided the testimony of a qualified expert and his prepared appraisal. This is substantial evidence of the "existence of a valid and credible dispute." (Matter of FMC Corp. [Peroxygen Chems. Div.] v Unmack, 92 NY2d 179, 188 [1998].) Petitioner's expert utilized a methodology for the calculation of valuation using Medicaid reimbursement rates rather than actual income. This methodology was adopted by the Supreme Court in Tarrytown Hall Care Ctr. v Board of Assessors of the Town of Greenburgh (Sup Ct, Westchester County, Mar. 15, 2004, index No. 14267/98) and therefore was not "mere{**59 Misc 3d at 438}wishful thinking" (Matter of FMC Corp. [Peroxygen Chems. Div.] v Unmack, 92 NY2d 179, 188 [1998]), "conjecture" or "speculation" (id. at 188), which would not have met this threshold standard. (Id.)

Therefore, going forward, the respondent is no longer entitled to the presumption that the assessment is valid. The assessment stands on its merits. Petitioner bears the burden of proving that the assessment is excessive pursuant to RPTL 706.

Both petitioner and respondent calculated the value of the subject property using an [*3]income approach. In other words, both parties calculated a rental value of the property and used that rental value to determine the present-day market value of that rental income stream.

The income capitalization approach to valuation

"rests on the proposition that the value of income-producing property is the amount a willing buyer, desiring but not compelled to purchase it as an investment, would be prepared to pay for it under ordinary conditions to a seller who desires, but is not compelled, to sell . . . That amount will depend on the net income the property will likely produce inasmuch as the purchase price represents the present worth of anticipated future benefits." (Matter of Techniplex III v Town & Vil. of E. Rochester, 125 AD3d 1412, 1414-1415 [4th Dept 2015], quoting Matter of Hempstead Country Club v Board of Assessors, 112 AD3d 123, 136 [2013].)

The dispute here exists because each party used a different methodology to calculate the income capitalization of the property.

The Town's expert determined the property's income capitalization by utilizing actual income figures. The expert calculated the property's operating income after verifying that both the petitioner's daily room rate and the petitioner's operating expenses were within market range. Usage of the subject property's actual income is an appropriate basis for valuation (Matter of Techniplex III v Town & Vil. of E. Rochester, 125 AD3d 1412 [4th Dept 2015]) and even deemed the "best indicator of value." (Matter of Rite Aid Corp. v Huseby, 130 AD3d 1518, 1522 [4th Dept 2015].) Moreover, the usage of competitive market daily rental rates to determine that a property's daily rates are locally{**59 Misc 3d at 439} competitive is not only within the professional purview of the appraiser but appropriate to do for the sake of valuation. (See Matter of Adult Home at Erie Sta. Inc. v Assessor of City of Middletown, 8 Misc 3d 1010[A], 2005 NY Slip Op 51010[U] [Sup Ct, Orange County 2005] [where this was done in a nursing home context].)

After determining the property's net operating income, the Town's expert then divided that net income by the capitalization rate. This resulted in a figure of $5.1 million. Because this figure included both the value of the nursing home business and the value of the real estate, respondent elected to subtract 25% of the $5.1 million, a reduction that he attributed to the value of the business. Respondent testified that when isolating the value of a business from the value of real estate, HUD estimates that the business value is approximately 5-25% of the total and his 25% figure was within that range. The net result was respondent's calculation of the value of the property: $3.8 million.

Petitioner argues that the Town's methodology for calculating income capitalization using the property's net income results is an excessive assessment for two reasons. First, petitioner argues that a business value cannot be subtracted from a gross real estate value. The premise for petitioner's argument is that one cannot determine a business's value without first expensing out the real estate to determine how much the business is first worth. It is a "chicken or the egg" argument: which comes first, the calculation of the business value or the calculation of the real estate value? In this court's view, it does not prohibit respondent's methodology. Respondent's expert was not appraising the business, he was appraising the real estate and therefore more appropriately focused upon precision with regard to the real estate. Respondent's expert assigned a percentage figure for the value of the business, which was a method propounded by HUD specifically to address this conundrum. Though petitioner argues that HUD's estimates are rough estimates only, this does not defeat respondent's methodology. Here, respondent utilized a [*4]business value of 25% which was the highest figure within the HUD guidelines. The "arbitrary" argument made by the petitioner loses its relevance because respondent chose the highest figure within the propounded guidelines. This was not required. (See Adult Home at Erie Sta. Inc. v Assessor of City of Middletown, 8 Misc 3d 1010[A], 2005 NY Slip Op 51010[U] [2005] [where no{**59 Misc 3d at 440} business value was subtracted at all].) Even if the percentage should be higher in this isolated case (a fact which the petitioner did not prove), the respondent's use of the highest accepted figure and the one most advantageous to the petitioner cannot equate to an assessment which is per se excessive. Petitioner's argument fails on that point.

Second, petitioner argues the Town's usage of actual income figures is improper because this method presupposes the property's income will exceed its expenses. Petitioner argues that when a nursing home business loses money (as petitioner's did in 2011), the Town's method would create the mathematical fiction that the real estate has a negative value. Since this is inherently untrue, petitioner argues that the Town's method is incorrect. However, in making this argument, petitioner disregards the fact that its own method would also, when extrapolated out, conclude that the real estate had no inherent value (Franklin tr at 43-44). Therefore, the petitioner has not convinced the court that respondent's methodology is incorrect.

Petitioner urges this court to apply a different means of calculating the property's income, based exclusively on Medicaid reimbursement rates. Petitioner argues that a nursing home valuation, where so much of the rental income is set by Medicaid, is more akin to rent-controlled apartments than a free market rent of a building. Petitioner must accept Medicaid patients and therefore is "locked in" to the rate that Medicaid will pay. Petitioner reasons that because Medicaid compartmentalizes reimbursements and sets the value for "rent" within its reimbursements, it (alone) sets the market rate for rent. This is logical, petitioner argues, because when Medicaid reimbursement rates drop, the income of the property necessarily drops and consequently the property's value must drop. Petitioner argues that this approach has been used successfully and adopted by courts in other cases, and cites Tarrytown Hall Care Ctr. v Board of Assessors of the Town of Greenburgh (Sup Ct, Westchester County, Mar. 15, 2004, index No. 14267/98).

While the utilization of Medicaid rates can be a starting point in the calculation of income capitalization, the exclusive use of Medicaid rates does not, in the court's view, create a realistic value either. Even the Tarrytown court did not use exclusively Medicaid rates. The Tarrytown method made "adjustments . . . for private pay income" (id.), which implicitly acknowledged that private-pay patients do exist and their payments form part of the income stream that was the Tarrytown{**59 Misc 3d at 441} nursing home's economic reality. Petitioner did not do this. Instead the petitioner's expert calculated the property's income stream as if all its patients were Medicaid patients. Petitioner argues that this is proper because nursing home valuation should be approached similar to that of rent-controlled properties. The court does not accept this argument. Petitioner's approach to valuation (presupposing that all patients are Medicaid patients) artificially constrains the rental value of the property. This assumption is not in accordance with petitioner's own market reality, wherein approximately 35% of its residents are paying privately. Petitioner's percentage of private-pay residents may fluctuate, and petitioner may at some point be in the position of having exclusively Medicaid patients. However, the fact that petitioner does not exclusively accept Medicaid patients means that there is a market for [*5]rental rates and the constraints that Medicaid applies are not the exclusive "market" for the building. Therefore, petitioner's calculation of rental valuation based exclusively on Medicaid rates is artificially low and does not represent a market rate.^[FN*]

The Tarrytown holding that petitioner relies upon did not exclusively utilize Medicaid reimbursement rates. Petitioner did not incorporate its private-pay percentage into its calculations and therefore did not provide a market-based realistic calculation of the real estate's value. As such, it did not meet its burden to show that respondent's assessment was excessive.

It is therefore ordered that the property was not excessively improperly assessed for the 2014-2015 tax year and petitioner is not entitled to fees or a refund in tax payments.