Valuation of Real Property When There Has Been a Recent Sale

By Michael Rikon

Michael Rikon is president and a shareholder of Goldstein, Rikon, Rikon & Houghton, P.C., in New York, New York.

In any trial to determine the value of real property, whether it be to determine just compensation in an eminent domain taking or an application to reduce assessed taxes, a recent sale of the parcel will be extremely relevant.

Basic Principles

If a sale is an open market transaction with a buyer under no compulsion to buy and a seller under no compulsion to sell, the transaction, unless explained away, will be considered a fair market sale at the time of its execution. Keator v. State of New York, 23 N.Y.2d 337 (1968).

Normally, appraisers use the market data or comparable sales approach to valuation. In this approach, the appraiser values the subject parcel by comparison with other properties. To be considered comparable, the sales must be sufficiently near in time to the valuation date and sufficiently similar to the parcel in character, size, situation, usability, and zoning. This makes it clear that the sales are comparable in value and that the cash equivalent prices realized for the properties sold fairly compare to the property being valued. Dennis v. Cnty. of Santa Clara, 215 Cal. App. 3d 1019 (1989).

The Ohio Supreme Court made clear that a recent sale price is not an absolute determinant of a property’s valuation. Instead, it held where the parcel has been the subject of a recent arm’s-length sale, the sales price is the best evidence of the true value of the property, but this presumption may be rebutted by evidence that indicates otherwise. Ratner v. Stark City Bd. of Revision, 35 Ohio St. 3d 26 (1988).

The California Supreme Court held that the sale price of the subject parcel may be considered even if it may have reflected “project enhancement value.” The court must be able reasonably to determine that the sale price, despite it reflecting some projected enhancement value of the land, still evinced fair market value. Interestingly, if a judge instructs the jury to disregard that part of the compensation representing project enhancement, a claimant might be awarded less than it paid. Los Angeles v. Retlaw Enters., Inc., 16 Cal. 3d 473 (1976).

The rule is that “the sale of real property in an arm’s-length transaction, if recent and not explained as extraordinary, is the best evidence of value for tax assessment purposes because it directly reflects the property’s market value and does not require the court to engage in speculation.” Blue Hill Plaza v. Assessor of the Town of Orangetown, 280 A.D.2d 544, 545, 720 N.Y.S.2d 527, 527 (2002) (citing 50540 Realty, Inc. v. Tax Commission of City of New York, 136 A.D.2d 699, 524 N.Y.S.2d 55 (1988). Put another way, “[a] recent sale has been characterized as evidence of the ‘highest rank’ in determining market value.” Rite Aid Corp. v. Huseby, 130 A.D.3d 1518, 1520, 13 N.Y.S.3d 753, 755 (2015).

Cedar Manor Case: Rebutting the Presumption

For example, in a recent New York tax assessment case, Cedar Manor Acquisition LLC v. Assessor and Board of Assessment Review of the Town of Ossining, Index No. 62538/2020 (Sup. Ct. N.Y., filed Sept. 29, 2021) (unpublished), the Honorable E. Loren Williams of the Westchester Supreme Court had before him an application by a nursing home to reduce the assessed value of its property. The transfer tax form filed with the county clerk indicated that the purchase price included both the price of the real estate and of the business enterprise. The transfer tax form indicated that the property sold for $23,715,000 and that the real estate was apportioned in the amount of $18,800,000.

The court found that “[t]he best evidence of value, of course, is a recent sale of the subject property between a seller under no compulsion to sell and a buyer under no compulsion to buy.” Id. at 7 (quoting Matter of Allied Corp v Town of Camillus, 80 N.Y.2d 351, 356 (1992). “Petitioner maintains that the $51,000,000 sales price is not indicative of the fair market value of the property since it was an arbitrary figure established as a business convenience . . . . We must reject its claim that the $51,000,000 figure does not represent the sales price of the subject property, particularly as it may be reasonably inferred that it is continuing to utilize the $51,000,000 sales price to obtain corporate and income tax advantages.” Id. (quoting Matter of Meditrust c/o Conifer Park Inc. (The Mediplex Group Inc.) v. Rosalie Fahey, as Assessor of the Town of Greenville, 226 A.D.2d 999 (1996)).

The Court found it important whether the sale of a property in question is an arms-length transaction and whether the price paid by a purchaser is consistent with the value of the property as determined by the tax assessor’s expert (subject to market trends).” Id. (citing Rite Aid Corp. v Otis, 102 A.D.3d 124, 127, 954 N.Y.S.2d 666, 668 (2012)).

The court concluded that it is the price that Manor paid in an open market that determines value in this case. “Generally, the best evidence of value, if not explained away as abnormal in any fashion, is a recent sales price established in an arm’s length transaction.” Id. at 13 (quoting Matter of Meditrust v Fahey, 226 A.D.2d 999, 1000, 641 N.Y.S.2d 202, 203 (1996), citing W.T. Grant Co. v. Srogi, 52 N.Y.2d 496, 511, 438 N.Y.2d 761, 768 (1981)). The sale between the buyer and seller was an arms-length transaction, and there was no testimony in the record or evidence presented at trial that disturbs that fact. Id. The court held:

Based on the foregoing, this Court finds Petitioner has failed to maintain its burden and in addition this Court finds the Petitioner’s appraisal uncredible. Therefore, the Manor failed to withstand the Court’s threshold inquiry of producing “substantial evidence” to overcome the validity of [the] assessments, and their petitions for the years 2017, 2018, 2019, and 2020 [are dismissed].

Id. at 15.

As the holding in the Cedar Manor case shows, it is clear that if one wishes to limit the recent purchase price rule, one must rebut the presumption by evidence that indicates otherwise. All property in condemnation must be valued at its highest and best use on the vesting date. For example, one could show a change in the highest and best use or a reasonable probability of a zoning change that did not exist on the date of sale. Or one could show substantial improvement to the property or other significant addition to the property.

Conclusion

The important question, then, is whether the property owner can establish that the recent sale was not a fair market sale and does not reflect the property’s true value and that therefore the court should disregard the price it yielded. One can challenge a recent sale price using evidence other than the recent sale price to show its true value: for example, did the market change in the period between the purchase date and vesting? How so? Was there a zoning change? Was the project or other major development announced that created an increase in value due to project enhancement? It is clear that although the recent purchase price rule will always be considered, it is not chiseled in stone. n

Published in Probate & Property, Volume 36, No 2 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.