No. 75 - Matter of Consolidated Edison Company of New York, Inc. v City of New York

New York City is appealing a judgment that reduced the real property assessments on Consolidated Edison Company's Arthur Kill Generating Station and related facilities on Staten Island by about 11 percent, from an average full market value of roughly $368.5 million to $329.4 million for tax years 1994-95 through 1998-99. Both sides agree that the generation units and transmission facilities are specialty properties that must be valued using the reproduction-cost-new-less depreciation (RCNLD) method. Under
this method, the appraiser calculates the cost of reproducing an exact duplicate of a building with the same materials, standards, design and workmanship, including all of the building's deficiencies, superadequacies and obsolete features, then deducts amounts attributable to physical and functional depreciation.

The dispute in this case arises over a particular type of depreciation, "functional obsolescence due to excess construction costs," which represents the cost of reproducing outmoded and obsolete features of a structure. Con Ed contended this type of depreciation must be deducted from reproduction cost to arrive at a fair value. The City argued that approach produces a valuation based on replacement cost, rather than reproduction cost, which it said is prohibited by Matter of Brooklyn Union Gas Company v State Board of Equalization and Assessment (65 NY2d 472).
Supreme Court ruled in favor of Con Ed, saying Brooklyn Union "merely held that the RCNLD method is the proper methodology to value specialty property" without determining how depreciation and obsolescence should be calculated.

The Appellate Division, Second Department affirmed in a 3-2 decision, saying, "Depreciation for functional obsolescence due to excess construction costs is, where indicated by the facts, a necessary measure of 'disutility diminishing in some way the value of the property'...." The majority said depreciation of that kind "adjusts reproduction costs to account for reductions in the value as measured by those costs due to changes in materials and technology..., and as such is an appropriate factor in determining the current value of a specialty property that would otherwise be overvalued by the use of reproduction cost alone.... That the amount of depreciation is calculated by comparing reproduction cost to replacement cost, or even that the calculation resulted here in a valuation equal to that which would have been reached on the basis of replacement cost, is not a basis to reject the methodology...." Rejecting the City's claim that depreciation for functional obsolescence was inappropriate because the Con Ed property was still economically viable, the court said, "Complete lack of economic viability is not required...."

The dissenters said replacement cost is an inappropriate method of tax appraisal because it measures future value, rather than value on the taxable status date. "The testimony at the trial established that recognition of 'all forms of excess construction costs as a form of obsolescence' would result in a valuation 'identical to replacement cost...,'" they said. "The replacement value was not an appropriate method of valuation in this tax certiorari proceeding" and its adoption "constitutes reversible error." They also said,
"If the facility is capable of profitable operation, deduction for functional obsolescence based upon replacement cost is not appropriate...."