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Volume 5 - Opinions of Counsel SBEA No. 116

Opinions of Counsel index

Assessments, generally (cost approach to value) (special purpose buildings) - Real Property Tax Law, § 306:

The cost of construction of a newly constructed building is a highly significant indicator of value for purposes of taxation. However, unless the building is a “specialty” or a “prestige type structure,” the cost of construction thereof is accepted only as a maximum value and is only one of the factors to be considered in ascertaining market value for purposes of real property taxation.

Our opinion has been requested concerning the use of the cost approach to value and guidelines which may be used in determining when a building is a special purpose building.

Section 306 of the Real Property Tax Law requires that real property be assessed at “the full value thereof.” As stated in the case of Pepsi Cola Co. v. Tax Commission of City of New York, 19 App. Div.2d 56, 240 N.Y.S.2d 770:

The ascertainment in a given case of “full value”, which is equated to market value, necessarily depends on the proper consideration and weighing of many elements which would have a bearing and influence on market value. Relevant factors, which must receive consideration if properly proven, as pointed out many times, are the location and accessibility of the property, conditions in the neighborhood which affect value of the property therein, the nature of the buildings and type of construction, the age of the buildings and state of repair, cost of construction of buildings on present-day basis less depreciation, bona fide price in connection with a sale of the premises during or reasonably near the tax years, a bona fide rent received for the premises or portion thereof during or reasonably near the tax years, the reasonable rental value of the premises or any portion thereof, and prices paid on bona fide sales of comparable property during or reasonably near these years. (See, for instance, Heiman v. Bishop, 272 N.Y. 83, 88, 4 N.E.2d 944, 946; People ex rel. Four Park Ave. Corp. v. Lilly, 265 App. Div. 68, 37 N.Y.S.2d 733; People ex rel. Clinton Trust Co., v. Sexton, 258 App. Div. 1082, 1083, 18 N.Y.S.2d 19, 20.) [240 N.Y.S.2d at 775]

If the property being appraised is of a type which readily sells on the open market, the comparable sales approach should be used since this is the best evidence of the market value of the property in question (Lane Bryant, Inc. v. Tax Commission of City of New York, 21 App.Div.2d 669, 249 N.Y.S.2d 994, aff’d, 19 N.Y.2d 715, 225 N.E.2d 882, 279 N.Y.S.2d 175).

If the property is of a type which does not readily sell on the open market but is rental income producing, the income approach to valuation is usually used for taxation purposes. This approach estimates the value of the property on the basis of what a knowledgeable businessman would invest in property in order to receive a reasonable return upon his investment (Sharwill Gardens. Inc. v. Calistri, 20 App. Div.2d 842, 247 N.Y.S.2d 925; Pepsi Cola Co. v. Tax Commission of City of New York, supra). However, the valuation derived by means of the income approach to value may not exceed reproduction cost less depreciation since the latter is the maximum value which may be placed upon real property for purposes of real property taxation (People ex. rel. Parklin Operating Corp. v. Miller, 287 N.Y. 126, 38 N.E.2d 465).

The cost of construction of a newly constructed building is a highly significant indicator of value for purposes of taxation (Matter of Seagram and Sons v. Tax Commission, 18 App. Div.2d 109, 238 N.Y.S.2d 228). However, unless the building is a “specialty” or a “prestige type structure,” the cost of construction thereof is accepted only as a maximum value and is only one of the factors to be considered in ascertaining market value for purposes of real property taxation (Matter of Semple School for Girls v. Boyland, 308 N.Y. 382, 126 N.E.2d 294).

A “specialty” has been variously defined as a building so unique that it can be used for no other purpose (People ex rel. New York Stock Exchange Building Co. v. Cantor, 221 App. Div. 193, 223 N.Y.S. 64, aff’d, 248 N.Y. 533, 162 N.E. 514), or a structure which produces income only in combination with a business conducted upon it (People ex rel. Hotel Paramount Corp. v. Chambers, 298 N.Y. 372. 83 N.E.2d 839). The definition most generally accepted is that of a building designed for unique purposes (In re Lincoln Square Slum Clearance, 24 Misc.2d 190, 201 N.Y.S.2d 443, mod., 15 App. Div.2d 153, 222 N.Y.S.2d 786, mod., 12 N.Y.2d 1086, 190 N.E.2d 423,240 N.Y.S.2d 30). Other cases involving unique property are People ex rel. New York Dock Co. v. Cantor, 208 App. Div. 52, 203 N.Y.S. 424 (piers, warehouses and manufacturing buildings); People ex rel. Metropolitan Jockey Club v. Mills, 190 Misc. 277, 72 N.Y.S.2d 757, aff’d, 273 App. Div. 971, 79 N.Y.S.2d 304 (grandstand, paddock, clubhouse and stables); People ex rel. New York Athletic Club v. Chambers, 111 App. Div. 395, 71 N.Y.S.2d 298, aff’d, 297 N.Y. 986, 80 N.E.2d 364 (20-story athletic club building). Factors to be considered are the size and unique construction of the improvement; whether it was constructed for a use peculiarly adapted to the conduct of a certain type of business; special features; etc. Such factors, together with an inability to obtain meaningful sales or income data are ample evidence that the property to be valued is a speciality.

Reproduction cost less depreciation is also a proper factor to be considered in the valuation of property which is not a specialty type. The reproduction cost less depreciation valuation of a newly constructed building should, in theory, produce substantially the same result as the rental income approach to valuation. However, if there is a substantial variance between the results of the income approach and the cost approach, the appraisal should be reexamined for possible errors (e.g., inappropriate capitalization rate etc.).

January 27, 1977

Updated: