The following article was written by HK Partner Jacquelyn L. Mascetti for the November 2022 issue of The Suffolk Lawyer, The Official Publication of the Suffolk County Bar Association.

On March 16, 2016, the Supreme Court, Appellate Division, Second Department issued the decision in Hampshire Recreation, LLC, v. Board of Assessors, a tax certiorari case involving the sale of a golf course for future development. Hampshire Recreation, LLC v. Bd. of Assessors, 137 A.D.3d 1029 (2d Dep’t 2016). The primary focus of the Court’s decision resolved the conflict between long-standing case law and the statutory mandates set forth in New York Real Property Tax Law (“RPTL”) regarding a subject sale. In Plaza Hotel Assocs. v. Wellington Assocs., Inc., the Court of Appeals held that “the purchase price set in the course of an arm’s length transaction of recent vintage, if not explained away as abnormal in any fashion, is evidence of the ‘highest rank’ to determine the true value of the property at that time.” Plaza Hotel Assocs. v. Wellington Assocs., Inc., 37 N.Y.2d 273, 277 (1975). Conversely, the statutory mandate pursuant to RPTL Section 302, and case law, requires that the value of property for taxation must be based on its actual condition and use as of the taxable status date without regard to future potentialities or possibilities and may not be assessed on the basis of some use contemplated in the future. See N.Y. Real Prop. Tax Law Åò 302 (McKinney); Allied Corp. v. Town of Camillus, 80 N.Y.2d 351, 360 (1992); Addis Co. v. Srogi, 79 A.D.2d 856, 857 (4th Dep’t 1980).

In Hampshire Recreation, LLC, the petitioner purchased a golf course for $12,000,000 with the intent to transform the property into a residential development. Prior to acquisition, the petitioner performed significant due diligence. After acquisition, the petitioner continued to operate the property as a golf course to offset costs while the development process continued. The petitioner introduced an appraisal that valued the property at $4,700,000 – $4,800,000 as a golf and country club and determined that the sale reflected future development potential, which violated the legal instructions. Respondents, citing Plaza Hotel Associates, chose to rely solely on the fact that the sale was arms-length and therefore evidence of the “highest rank.” At a trial to determine the value for the RPTL Article 7 proceeding, the Supreme Court concluded that because the property was still operating as a golf course at the time of the purchase (and after), the sale price, which was arms-length, and not abnormal, was reflective of the value of the property as a golf course. In re Hampshire Recreation LLC v. The Assessor and the Bd. of Assessment Review of the Town of Mamaroneck, No. 14474/2011, 2013 WL 6360468, at *3 (Sup. Ct. Westchester Cty. Sep. 23, 2013).

The Second Department reversed and rejected the holding that the $12,000,000 purchase price reflected the value of a golf course in its actual use and condition without regard to future potentialities or possibilities. The Court acknowledged the petitioner demonstrated the property had in fact been purchased for future development that had not yet occurred, and the adoption of a “sales price that was based upon speculation for future development, rather than continuation of the property’s current use, is not a proper indicator of value,” and thus, was in error. Hampshire Recreation, LLC, 137 A.D.3d at 1031–32. The Court ultimately held that the value of the entire property as a golf and country club was $5,400,000, which was a product of the petitioner’s appraiser’s values as adjusted by the Court for a corrected tax load factor.

The Second Department’s decision remedied the longstanding issue with regard to a subject sale. It is clear that for a subject sale to be used to value the property, it must still be recent, arms-length, and not abnormal; however, it must also comply with the RPTL Section 302 standard and case law to reflect a value of the property in its actual use and condition without regard to future potentialities or possibilities only. Most commercial properties include some element of future potentialities or possibilities. A subject sale may fit all the requirements for only certain types of property where development potential is not inherent in the purchase price, such as a single family home. Nonetheless, all subject sales, and arguably, all sales used in the comparable sales analysis, must be thoroughly investigated and analyzed to ensure they comply with the legal standard.