Today we have another guest post by New York colleague Jennifer Polovetsky, who writes about trade fixtures in New York. Lots of good stuff for those of us not in NY as well. Thanks to Jennifer (and to the New York Law Journal) for allowing us to republish her intriguing piece.
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Trade Fixtures In New York Eminent Domain Cases – What Qualifies and How Are They Valued?
In New York, the eminent domain laws require that compensation be made to a business tenant for the loss of its compensable trade fixtures in a separate condemnation award. A business tenant is entitled to receive compensation for its “chattel” (i.e., any machinery, equipment, and/or other legally compensable installations that are used for its business purposes) separately from any compensation offered to the landlord/owner of the property for the seizure of their real estate. See Eminent Domain Procedure Law (the “EDPL”) §504 (c); Rose v. State of New York, 24 N.Y.2d 80 (1969).
Before being entitled to any payment, however, a trade fixture claimant must first prove that each item being claimed on its trade fixture inventory (filed in court as part of its eminent domain claim) is actually a compensable trade fixture under the law.
When the government takes property by eminent domain, the Constitution requires that it compensate the owner “so that he may be put in the same relative position, insofar as this is possible, as if the taking had not occurred.” City of Buffalo v. Clement Co., 28 N.Y.2d 241 [1971]. Accordingly, New York courts have held that “[a]n appropriation of land … is an appropriation of all that is annexed to the land, whether classified as buildings or as fixtures…. The value of the fixtures ought, therefore, to [be] considered in estimating the total value of the property appropriated by the State.” See Jackson v. State of New York, 213 N.Y. 34 [1914]).
What then, constitutes a compensable trade fixture under New York law? This is one of the most heavily litigated and disputed issues amongst New York eminent domain practitioners.
The prevailing law on this issue can be found in the Court of Appeals decision Matter of In re City of New York (Kaiser Woodcraft Corp.), 11 NY3d 353, 359-63 [2008]. In Kaiser, the Court of Appeals held that in order for an item to be deemed a compensable trade fixture, it: (i) must first meet the age-old, three-pronged “annexation-adaptability-permanency” test in order to determine whether an item is a compensable trade fixture or non-compensable personalty, then (ii) must then meet the fourth prong of the trade fixture test, which only allows compensation for those improvements that are “used for business purposes and which would lose substantial value if removed.” Kaiser Woodcraft Corp., id. (citing Rose v. State of New York, 24 N.Y.2d 80 (1969)).
The first prong of the trade fixture test outlined by the Kaiser court requires that the “chattel” be “constructively annexed” to the land.
The second prong, the adaptability test, requires “both fitting the chattel to the particular purpose of the freehold, and the necessity of the chattel for complete use of the freehold, as when machinery is placed in a factory to perform a special purpose and is fitted for that purpose.”
The third prong requires an objective analysis that the chattel was installed by the owner with the intention of permanence; i.e., “even if the machinery could be removed, the critical factor was whether its installation was intended to be permanent.” See Kaiser Woodcraft Corp., id. (citing McRea v. Central Natl. Bank of Troy, 66 N.Y. 489, 494 [1876]). Assuming that the first three prongs have been met, then, as stated above, the item at issue must not only have been used by the trade fixture claimant for business purposes at the time of the eminent domain acquisition, but the claimant must prove that the item would lose substantial value if it was removed and/or moved to a new location.
What are some items that have been deemed trade fixtures under the law? The Kaiser court explained:
Several decisions are illustrative of the meaning of the phrase. A substantial loss in value would occur, for example, where machinery was specially constructed for the plant, or the building was so designed that the subject items were functionally dependent on other items or on the building (Matter of New York City Tr. Auth. [Superior Reed & Rattan Furniture Co.], 160 A.D.2d 705, 706, 553 N.Y.S.2d 785 [2d Dept 1990] ). Another example would be equipment that functions as part of a truly integrated operation, such that the removal of one item diminishes the utility of remaining items (Matter of City of New York [Fassler], 27 A.D.2d 810, 811, 278 N.Y.S.2d 33 [1st Dept 1967] )… .
Kaiser Woodcraft Corp., id.
The laws allowing compensation to a business owner for the loss of its trade fixtures evolved in the courts to protect business owners who substantially improved their demised premises, but hold less than a fee interest. Luckily for these business owners, New York has long taken an expansive view in evaluating what improvements constitute legally compensable trade fixtures. Not only is “machinery deemed a fixture ‘where it is installed in such manner that its removal will result in material injury to it or the realty, or where the building in which it is placed was specially designed to house it, or where there is other evidence that its installation was of a permanent nature”. Matter of City of New York (Whitlock Ave.), 278 N.Y. 276 (1938); see also Matter of City of New York (Allen St.).
It is important to note that the trade fixture claimant is not required to carve out its trade fixture award from their landlord’s condemnation award (oftentimes called the “Unit Rule”), because New York does not follow the Unit Rule. Both the New York Court of Appeals and the Appellate Division have consistently held that “separate interests require separate awards,” so that each property interest holder (i.e., the real estate owner, the lessee) is entitled to their own condemnation award.
Therefore, trade fixture claimants in New York are entitled to their own, separate award for trade fixtures; and no part of the property owner’s award may be offset by a trade fixture award made to a commercial tenant. See Rose v. State of New York, 24 N.Y.2d 80 (1969); Whitehall Corners, Inc. v. State of New York, 210 A.D.2d 398 (1994); Matter of Incorporated Vil. of Hempstead, 38 A.D.2d 957 (1972); see also EDPL §§101, 302, 303.
Now that we know what the courts consider a compensable trade fixture (assuming that such item meets the four prong tests outlined above), the next question you must be asking is how are trade fixtures valued in eminent domain proceedings? That is a much simpler answer.
New York courts have consistently held that the proper method of valuation for trade fixtures is reproduction cost less depreciation. This means that each fixture item is valued based on the cost of reproducing that item as of the time of the eminent domain seizure, less the depreciation of such item, to arrive at its sound value.
In Universal Empire Indus., Inc. v. State, 149 Misc. 2d 773, 566 N.Y.S.2d 442 (Ct. Cl. 1990), the court held that:
[t]he rule in New York is that the proper method of valuing trade fixtures in place is by determining their sound value [citing City of Buffalo v. J.W. Clement Co., Inc., 28 N.Y.2d 241 (1971), and the sound value of a trade fixture in place is measured by the reproduction cost of the fixture less depreciation (citing Marraro v. State of New York, 12 N.Y.2d 285 (1963)).
Courts have used this specialty approach to valuation for many years, going back more than half a century. For example, in St. Agnes Cemetery v. State of New York, 3 NY2d 37 (1957), the Court of Appeals held that:
Since a trade fixture in place consists of the functioning trade fixture, the specialty building or shell which houses the fixture, required ancillary equipment, installation and the particular real property to which it is affixed, a realistic market for such fixtures does not exist and, consequently, market value cannot be found or does not result in the owner receiving his constitutional just compensation.
Accordingly, courts and commentators have held that such special purpose properties cannot be valued by the market value approach and, therefore, the constitutional standard of “[j]ust compensation is properly measured by determining what the owner has lost.”
Sometimes a real property is so unique that it may be valued as a trade fixture in New York. Some examples include signs and sign structures, certain types of cross-dock trucking terminals, ready-mix concrete plants, etc. See Tinnerholm v State, 15 Misc 2d 311, 320 [Ct Cl 1958].
When a property is so unique that it cannot feasibly be used for anything other than what it was built for, courts have held that these properties constitute a “specialty” property, and that the proper method for valuing them is the cost approach, or the reproduction less depreciation method. Specifically:
“[W]hen the property is of a kind seldom traded, it lacks a market price and there must accordingly be recourse to some other method of evaluation (see, e.g., Kimball Laundry Co. v. United States, 338 U.S. 1, 6, 69 S.Ct. 1434, 93 L.Ed. 1765). Churches, hospitals, clubhouses and like structures held by nonprofit agencies as centers for community service commonly fall within this category (Keator v. State of New York, 23 N.Y.2d 337, 339, 296 N.Y.S.2d 767, 244 N.E.2d 248; Matter of Simmons, 127 N.Y.S. 940; 1 Orgel, Valuation under Eminent Domain [2d ed], § 40)… .
As is also relevant herein, a specialty may be “best defined as a structure which 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” (Great Atlantic & Pacific Tea Co., 42 N.Y.2d at 240, 397 N.Y.S.2d 718, 366 N.E.2d 808, citing People ex rel. Hotel Paramount v. Chambers, 298 N.Y. 372, 375 [1949]; Matter of Sperry Rand v. Board of Assessors of County of Nassau, 10 A.D.2d 720 [1960] ).
In re City of New York, 21 Misc 3d 1127(A) [Sup Ct 2008](Gerges, J.)
Once the following four criteria are met, then a real property may be valued as a trade fixture based on the cost approach:
- The improvement must be unique and be specially built for the specific purpose for which it is designed;
- There must be a special use for which the improvement is designed and the improvement must be so specially used;
- There must be no market for the type of property … and no sales of property for such use; and
- The improvement must be an appropriate improvement at the time of the taking and its use must be economically feasible and reasonably expected to be replaced.
See Matter of County of Nassau (Colony Beach Club), 43 A.D.2d 45 (2nd Dept. 1973); aff’d 39 N.Y.2d 958 (1976); see also In re Poe Ctr., 250 A.D.2d 304 (1st Dept. 1988), 680 N.Y.S.2d 533.
Specialty properties are rare but they do exist; therefore, they are valued in such a way as to compensate the condemnee for what they have lost. Even though trade fixtures are not real estate, they are valued similarly to specialty properties, as there is no other way to compensate the owner ‒ who holds less than a real estate interest but has still expended considerable sums of money to improve their business premises ‒ for what they have lost due to the seizure of their property by eminent domain.
Despite New York having the reputation as being the state that may have the broadest eminent domain authority in the country (granted to condemnors), the New York eminent domain laws protecting condemnees (both property owners and business tenants) are some of the strictest in the country. So although eminent domain is a stressful and scary time for many who are on the receiving end of it, New York laws do protect condemnees and ensure that they are made whole.
Reprinted with permission from New York Law Journal, © ALM Media Properties LLC. All rights reserved.
