Brooklyn Union Gas Co. v. State Board of Equalization & Assessment

Distribution’s pipelines in New York are composed 9% plastic, 25% coated steel, 63% bare steel and 4% cast iron. Special Term found that Distribution’s system would not be exactly reproduced in its present form, but would be reasonably expected to be replaced.

Special franchise property is defined as real property by Real Property Tax Law (RPTL) § 102 (12). It is subject to annual assessment by the State Board of Equalization and Assessment (RPTL 600) and all taxes and special ad valorem levies for county, city, town, village, school or special district purposes are imposed on the final assessment of each special franchise (RPTL 622). Both the tangible real property and the intangible right to use the streets and thoroughfares (the intangible franchise) are components of a special franchise, and the values of each must be added to determine the value of the entire special franchise.

In April 1980, the State Board of Equalization and Assessment (SBEA) made tentative equalized valuations for the 1980-1981 tax year of the special franchise properties belonging to Brooklyn Union, Distribution and Supply. Each challenged the tentative assessment, contending that it was erroneous by reason of overvaluation, inequality and illegality. Distribution and Supply’s challenge was rejected and they instituted proceedings against SBEA pursuant to RPTL article 7 contesting these final valuations.

Brooklyn Union’s challenge to its valuation was also rejected by SBEA and instead of being reduced its final equalized valuation was increased because of a revised city-wide equalization rate. Brooklyn Union also instituted an article 7 proceeding against SBEA charging overvaluation, illegality and inequality.

The court accepted the expert opinions of the petitioner’s witnesses and their valuation of the special franchise property, which appraisals and valuations were arrived at through capitalization-of-income and original-cost-less-depreciation (rate base) appraisal methods. The court accepted the capitalization-of-income method of valuation as “a legitimate method for valuing a special franchise * * * especially when the only evidence in the record is that the system, if reproduced, would not be reproduced in its present form.” The court determined the final equalized values of Brooklyn Union’s special franchise property, located in Kings, Queens and Richmond Counties, for the tax year 1980-1981, to be $83,336,183, $45,511,625 and $25,990,355 respectively. These valuations were significantly lower than the final assessments of SBEA.

The Appellate Division affirmed, concluding that the “capitalization of income method used [by petitioner’s experts] herein provides the most accurate method of determining value”, and that rejection of the RCNLD method of appraisal was proper since “the system would never be reproduced in its present form but would be replaced with a new completely modern system”. The court found that, in the parlance of an expert real estate appraiser, “[Reproduction means replacement with an exact model” which “[i]n this case * * * is totally unrealistic”. Thus, the court held that Brooklyn Union’s franchise property “could not be considered a specialty since it is unreasonable to conclude that the facility could be replaced on an economic basis.” The court noted, moreover, that it would “reach the same result even if the facility were considered a specialty” ( 101 AD2d 414 , 416-417).

Distribution and Supply commenced 10 separate proceedings challenging the SBEA assessments alleging overvaluation, inequality and illegality. The proceedings were consolidated for trial and Niagara-Wheatfield Central School District was permitted to intervene. SBEA appraisal reports, received in evidence, showed that Distribution and Supply’s special franchises for 1980 were assessed by computing the reconstruction cost new of all their tangible special franchise property in New York and deducting appropriate figures for depreciation from all causes. SBEA added 5% of the value of the tangible property as the value of the intangible franchises. The total full value assessments for Distribution and Supply were then allocated to the individual taxing jurisdictions by applying a ratio of surviving original cost in each jurisdiction to total surviving original cost for each company. Appropriate equalization rates were applied. These computations produced final total equalized special franchise assessments of $65,071,328 for Distribution and $813,694 for Supply.

Petitioners’ experts arrived at full market values of the special franchise properties of Distribution and Supply by using capitalization-of-income under the “unit” method of accounting, with petitioners’ operating multistate systems as the “unit”. They allocated a proportionate value to those portions of the “unit” located within New York State. They also used the original-cost-less-depreciation method, apparently taking as original cost figures and depreciation rates those used in determining petitioners’ “rate bases” by the Public Service Commission and the Federal Energy Regulatory Commission.

Trial Term rejected the valuations of petitioners’ experts, finding that capitalization-of-income was an inappropriate method for determining the value of a special franchise such as that under consideration here because, inter alia “[t]he basic

Trial Term concluded, as a matter of law, that “[t]he subject special franchise property is specialty property within the definition set forth in [.Matter of County of ] Suffolk (Van Bourgondieri) [ 47 NY2d 507 ]”, and that “[petitioners failed to demonstrate that the method by which [SBEA] arrived at the 1980 assessments was incorrect.” Accordingly, the petitions were dismissed.

The Appellate Division reversed, granted the petitions to the extent of annulling the final 1980 assessments and remitted the matter to SBEA for “reconsideration in light of the fact that the capitalization of income method is an acceptable method for assessing the value of the property at issue” ( 103 AD2d 187 , 189). Citing Brooklyn Union, where it had held that property similar to that which is the subject of these appeals is not specialty property and that the capitalization-of-income method would therefore be permissible as a means of valuation, the court concluded that this record “demonstrates no reason to treat the property involved here differently * * * for the purpose of determining that it is not specialty property” (id.).

The courts of this State have uniformly held that the appropriate method of valuing the tangible component of special franchise property is by the reproduction-cost-new-less-depreciation method (People ex rel. Delaware, Lackawanna & W. R. R. Co. v Clapp, 152 NY 490 ; People ex rel. Jamaica Water Supply Co. v State Bd. of Tax Commrs., 196 NY 39 ; Matter of Onondaga County Water Dist. v Board of Assessors, 39 NY2d 601 ; Matter of Consolidated Edison Co. v State Bd. of Equalization & Assessment, 101 Misc 2d 910 , mod on other grounds 83 AD2d 355 , affd 58 NY2d 710 ). This is because such property is considered to be “specialty property” property designed for “unique” purposes or is “uniquely adapted” to the business conducted upon it or use made of it, for which there is no market, and which cannot be converted to other uses without the expenditure of substantial sums of money (Consolidated Edison, 101 Misc 2d, at pp 913-914, supra).

There can be no doubt that the special franchise properties of Brooklyn Union, Distribution and Supply fully satisfy the first three criteria for “specialty property” set forth above.

The evidence in both cases establishes conclusively that the underground mains, pipes, services and related measuring and regulatory equipment that comprise the tangible special franchise property placed in the public streets and thoroughfares for the transmission of natural gas are “unique” and “specially built for the specific purpose for which [they were] designed”. This equipment was designed for the “special use” of distribution of natural gas and is being “specially used” for that purpose. It is “uniquely adapted to the business conducted upon it or use made of it and cannot be converted to other uses without the expenditure of substantial sums of money” (Matter of Great Atl. & Pac. Tea Co. v Kiernan, 42 NY2d 236 , 240). Clearly, there is no market for this specially designed property, nor is there any evidence that there have been any sales of similar such property for such use.

Nonetheless, the trial court in Brooklyn Union found that the system “would not be reproduced in its present form”. The Appellate Division agreed and held that because it is “unreasonable to conclude that the facility could be replaced on an economic basis”, the property “c[an] not be considered a specialty.” This view misperceives the meaning of the requirement that in order for a property to qualify as “specialty” property “the improvement must be an appropriate improvement — and its use must be economically feasible and reasonably expected to be replaced”. This requirement relates to the use or function of the property and means that use or function must reasonably expected to be replaced. As we pointed out in Matter of County of

So too, in these cases, the value of the tangible property properly should be determined on a cost basis. Although there is a difference between valuing property by means of the reproduction cost as opposed to using the replacement cost, this fact does not deny to special franchise property the status of “specialty” property, to be valued as such where replacement cost is used rather than reproduction cost, nor does it warrant utilizing the capitalization-of-income method of valuation with respect to petitioners’ tangible property.

We hold, therefore, that the special franchise properties of Brooklyn Union, Distribution and Supply are “specialty properties” and that the proper method of valuing their tangible property is by RCNLD, to which should be added, in order to determine the full value, the value of the intangible franchise (the right to use the public streets and thoroughfares for the placement of their tangible property), arrived at by capitalization-of-income, where there exists excess income, or by adding 5% of the value of the tangible real property where there is no excess income.

Accordingly, the order of the Appellate Division in Matter of National Fuel Gas Distrib. Corp. should be reversed and the judgments of the Supreme Court dismissing the petitions reinstated. The order of the Appellate Division in Brooklyn Union Gas Co. should be reversed, the petition dismissed and SBEA’s determination reinstated.

Chief Judge Wachtler and Judges Jasen, Meyer, Simons, Kaye and Titone concur.

In Matter of Brooklyn Union Gas Co. v State Bd.: Order reversed, with costs, petition dismissed, and the determination of the State Board of Equalization and Assessment reinstated.

In Matter of National Fuel Gas Distrib. Corp. v State Bd.: Order reversed, with costs, and the judgments of Supreme Court, Albany County, reinstated.