Petitioners Crossgates Mall General Company Newco, LLC; Crossgates Mall Devco LLC; and PCC Newco LLC have brought two proceedings by petition pursuant to Article 7 of the Real Property Tax Law to challenge the 2019 and 2020 tax assessments by respondent Town of Guilderland (the "Town" or "Guilderland") for the real property located at 1 Crossgates Mall Road, Guilderland, New York, on which is situated the shopping area commonly known as the [*2]Crossgates Mall ("Crossgates" or the "Mall"), and which appears on the Town's assessment roll as SBL Nos. 52.01-1-4.1, 52.01-1-4.2, 52.01-1-4.3, 52.01-1-44, 52.01-1-4.5, 52.01-1-4,7, and 52.01-1-4.8. The property consists of just over 1,500,000 square feet (see Petitioner's Proposed Findings of Fact and Conclusions of Law ["Pet FOF] ¶ 6]; Respondent's Proposed Findings of Fact and Conclusions of Law ["Resp FOF"] ¶ 12).^[FN1]

The Town Assessor found a total assessed valuation of the Property for the 2020 tax year, as of the taxable status date of March 1, 2020 and a valuation date of July 1, 2019, of $282,493,500.00, and also found a total assessed valuation of the Property for the 2021 tax year, based on a taxable status date of March 1, 2021 and a valuation date of July 1, 2020, of the same amount: $282,493,500.00 (Petition, 904834-20 ¶ 9, 13; Petition, 905706-21 ¶ 9, 13; Trial Transcript ["Tr"] 6). The petitions assert that the fair market value of the property was significantly less than these assessed valuations (Petition, 904834-20 ¶ 18; Petition, 905706-21 ¶ 19).

By order dated December 3, 2021, the two cases were consolidated into a single proceeding under docket number 905706-21. Both parties filed appraisal reports by their respective appraisal experts. Petitioner's expert Kenneth V. Gardner II valued the Property at $227,000,000 for the 2020 tax year and $156,000,000 for the 2021 tax year, while respondent's expert Mark Kenney valued it at $390,000,000 and $257,000,000 for tax years 2020 and 2021 respectively (Appraisal Report of Kenneth Gardner ["Gardner Rep"] 47-48; Appraisal Report of Mark Kenney ["Kenney Rep"] 205, 208).

A trial was conducted on the consolidated petitions on November 14 through November 18, 2022. The parties made post-trial submissions, which include a motion by petitioners to strike the appraisal prepared by respondent's expert, and a cross motion by respondent to strike the appraisal prepared by petitioners' expert valuation expert. This Decision & Order addresses all issues raised at trial and in those post-trial motions.

At the outset of the trial, the parties stipulated to the taxable status and valuation dates, as well as the following:

1. The equalization rates, for both years under review, is 100 percent.

2. There are no jurisdictional impediments to these proceedings at the administrative level.

3. The real property taxes, imposed by the various municipalities, town, school district, and library, have all been paid (Tr 6).

For their case, petitioners presented the testimony of Robert Utter, Chief Financial Officer of Pyramid Management Group, LLC ("Pyramid"), the management company for Crossgates and a number of other upstate New York malls; economics expert Dr. Steven A. Laposa, and appraisal expert Gardner, along with his appraisal report and numerous documentary exhibits. For its part, respondent presented the testimony of its appraisal expert Kenney, along with his report and one additional exhibit (Exhibit A) consisting of Crossgates' financials.

Mr. Utter provided background information on Crossgates as follows: Of the Mall's total [*3]leasable area of 1.513 million square feet, about 900,000 square feet is for anchor and major tenants, with the remainder dedicated to in-line mall shops ^[FN2] (Tr 20, 69). According to Utter, the anchor tenants once drew customers to the mall, but their importance in this respect has diminished (id. at 21-22). In 2019 and 2020, two of Crossgates' anchor tenants — Lord & Taylor and JC Penney — declared bankruptcy (id. at 22, 70). In the former case, about $4.8 million in inducements was necessary to keep the store at the Mall, since the alternative was to leave an empty two-floor space for an anchor tenant that would be very difficult to fill ^[FN3] (id. at 94-96). Utter noted that the situation of Crossgates is unusual among the Pyramid properties, as there is another regional mall - Colonie Center — operating in the same market (id. at 14-15).

Utter explained that the primary source of income for Crossgates is the collection of rent from tenants (id. at 17). Vacancy rates have grown in recent years, while the number of new tenants dropped significantly in 2019 and 2020 (Tr 78). Moreover, Utter said the challenge of finding new tenants increased "exponentially" with advent of the COVID pandemic in March 2020 (id. at 81). The power of tenants to negotiate leases has also grown. Leases were at one time "triple net" — that is, tenants would contribute to common area charges, taxes and insurance and other charges as well as rent (id. at 23-24). Now, however, agreements with tenants increasingly involve "gross leases" where such costs are borne by the landlord, and tenant contributions involve only pro rata contributions to taxes (and perhaps insurance) (id. at 25, 47-48). Moreover, such matters are often negotiated in ways that pass on risks and costs to the landlord, with some tenants paying a fixed percentage of sales as their rent (id. at 24-26). In addition, Crossgates will now give some tenants incentives such as rent abatements, cash allowances and reimbursement of broker commissions to attract or keep them (id. at 30-32). One major tenant — Forever 21 — declared bankruptcy and was able to get significant concessions in its March 2020 renewal lease to avoid the closure of the store ^[FN4] (id. at 82). While the Mall was able to fill some of the spaces with "specialty" tenants (i.e., seasonal businesses), they have short-term leases and the rent they pay "pales in comparison" to long-term tenants (id. at 28-29).

Utter described trends in the industry that brought about these changes. In particular, he noted pressure on brick-and-mortar business from on-line retailers, which has resulted in decreased in-person sales, and diminishing rent for the Mall (id. at 50-53).

Utter also discussed the impact of the COVID-19 pandemic on the Mall, which forced Crossgates to shut its doors, and they remained closed as of the July 1, 2020 valuation date (id. at 54). I took judicial notice of the fact that on March 18, 2020, then-Governor Andrew Cuomo issued Executive Order No. 202.5, which provided that "effective at 8 p.m. March 19, 2020, all [*4]indoor common portions of retail shopping malls with an excess of 100,000 square feet of retail space available for lease shall close and cease access to the public," with limited exceptions for stores with separate outdoor entrances (id. at 122-124; see 9 NYCRR 8.202.5). Utter testified that a phased re-opening of Crossgates began in July 2020, as tenants with exterior access were allowed to reopen, and other retailers were permitted to sell via curbside pickup (Tr 124-126). These internal retailers later reopened with limits on the number of customers, although entertainment venues remaining closed until 2021 ^[FN5] (id.).

Utter averred that the pandemic accelerated those pressures on retailers that had existed previously, and Crossgates' income "went down dramatically" (id. at 55, 59). Specifically, due to the closure, Crossgates' income dropped from $30.7 million in 2019 to $15.9 million in 2020, or $18 million if certain deferred paybacks and rents are considered (id. at 136-137). Additional costs were also imposed on the Mall through mandates for cleaning, air filtration and checks on fire and other safety systems during periods of disuse (id. at 62-63). Further, there was a decrease in demand for space by tenants (id. at 64). Markets for financing "seized up entirely" in 2019 and 2020, and the Mall's debt service obligations had to be deferred (id. at 98-100).

Utter gave testimony as well on certain specific issues addressed in the parties' appraisals. In regard to the Apple Store at Crossgates, whose impact on the Mall was a central topic of the appraisers' testimony and reports, Utter testified that it was "very much" an outlier in regard to its sales per square foot (id. at 27), and is "viewed discreetly apart from the rest of the shopping center in evaluating the [Mall's] cash flow . . . " (id. at 120). Although much smaller than the large department stores which serve as the Mall's "anchor" tenants, Apple acts like an anchor store in terms of its traffic draw and productivity (i.e., sales) (id. at 119). Thus, in 2019, Apple's sales were $53 million out of total mall shop sales of $193 million (id. 138-139). Its occupancy costs were only $375,000, and thus its occupancy cost ratio (i.e., the fraction of tenant costs in gross divided by sales) was less than 1% (id. at 140). In addition, Utter acknowledged that the sales information for another major tenant, Best Buy, was not reported by the store, and thus the calculations set forth in Crossgates' financial data were based on the estimates prepared by his team (id. at 139).

Petitioners presented the testimony of Dr. Steven Laposa as an expert in economic trends, over strenuous objection by respondent.^[FN6] Dr. Laposa holds a PhD in real estate planning, and served previously as the director of global real estate research for Pricewaterhouse Coopers [*5]("PwC") (id. at 144-145, 152). In the late 1990s, he wrote for the Korpacz Realty Advisors ("Korpacz") and after PwC purchased Korpacz, he prepared its investor survey, Emerging Trends in Real Estate, and other publications on retail properties including regional malls (id. at 152-153).

Dr. Laposa testified to the existence of "headwinds" and rising risks for regional malls that preceded the first valuation date of July 2019 (id. at 186-187). Specifically, he noted that the increased probability of recession, slowdown in employment, increase in unemployment rates, and changes in employment sectors such as retail and department stores would increase mall vacancy rates (id. at 188). He also described the increased difficulty in recent years for malls in obtaining financing and refinancing, declines in retailers' net income, increases in retail bankruptcy filings, and growth in e-commerce especially after the limitations placed on brick and mortar shopping beginning in March 2020 (id. at 188-191). He stated that retailer bankruptcies have increased each year between 2018 and 2020 (id. at 191). Laposa indicated that rent collections by regional malls had been declining before COVID, and went lower still with the advent of the pandemic (id. at 194).

All of these trends, according to Laposa, brought about a general decline in the net operating income of malls (id.). In addition, he averred that greater risk in mall investments has led to increases in capitalization rates (id. at 205), as well as a decline post-2018 in the sales and prices of regional mall properties (id. at 216-218). Specifically, Laposa opined that he would expect capitalization rates to have gone up between July 2019 and July 2020 (id. at 186-187, 225-227).

Petitioners then presented the testimony of Gardner, a licensed real estate appraiser who has practiced with Northeast Appraisals in Ithaca for more than 43 years, with much of his work performed in the Capital region ^[FN7] (id. at 249-250). Among other things, he represented the Town of Colonie in a recent challenge by Colonie Center to its tax assessment (id. at 253).

Both experts used an "income" approach to valuing the Mall (Gardner Rep 21; Kenney Rep 140-141). Specifically, both calculated Net Operating Income ("NOI") and applied a capitalization rate that "reflects the expectations of the market participants," as well as a tax factor, to reach the valuation ^[FN8] (Gardner Rep 40; see also Kenney Rep 218-222). Both appraisers indicated that there were insufficient comparable sales to apply the "sales comparison approach," which looks at recent sales of similar properties ^[FN9] (see Gardner Rep 21; Kenney Rep 140).

In order to value the property, both experts used the common practice (as reflected in industry reports provided by both parties) of giving a letter grade to the Mall, reflecting how it compares to similar properties in terms of investor risk, and which is thus central in determining the appropriate capitalization rate. Those grades are based on a number of market analyses and [*6]certain positive and negative factors employed therein. As Gardner described the role played by such grading:

"[A]s mall classification goes from A to B, as you change that mall classification risks associated with that mall are increasing, so, . . . [as] the mall classification declines, risks increase and, therefore, the range of cap-rates also increase reflecting that increased risk, as sales decline, vacancy increases and the operating performance, of the mall, is not within market expectations" (Tr 303-304).

Gardner testified that the starting point in such grading is mall shop sales ^[FN10] (Tr 272). In calculating these sales for Crossgates, he excluded sales at the Apple store (id.). Gardner reasoned that including Apple, which accounts for 1.4% of leasable area and 26% of mall shop sales — $6,500 per square foot as opposed to the overall average of $422 per square foot — would "distort" the sales information, since it would not accurately reflect the performance of "98%" of the shops (id. at 272-273, 282, 302). Including Apple, Gardner maintained, would lead all the relevant metrics to "fall out of line" (id. at 276). He agreed that Apple served as a sort of anchor tenant in drawing people to the mall — but said that this impact is reflected in overall sales at the Mall (id. at 277-278; see also id. at 457 [Apple has positive effect on overall valuation and sales]). Gardner noted that one analyst, Korpacz, specifically excludes Apple from mall sales in its grading approach — although it considers the presence of an Apple store as a distinct favorable factor in adjusting a mall's grade once sales are computed (id. at 283, 434; Gardner Rep 160). Under the practice of analyst Cushman & Wakefield ("Cushman"), however, Apple store sales are included in income calculations (Tr 294; see also Gardner Rep 163).

Gardner concluded that in 2019, the "step one" analysis for Crossgates, calculating sales as a starting point, would lead to its designation as an "A" or "A-" mall if Apple sales were considered, but a "higher B" mall if they were excluded, subject to adjustment by other variables (see Tr 282 [with Apple, Crossgates "within the range of an A mall," but a B if excluded]; id. at 284 [without Apple Crossgates is "Higher B"]; id. at 294 [Crossgates sales are A- under Cushman criteria if Apple included]). Gardner then evaluated a list of other factors by giving Crossgates a rating of positive, negative, or 0 (i.e., neutral) for each. That analysis was as follows (see Gardner Rep 17):

In his trial testimony, Gardner explained each of these factors in detail, noting among other things that the Mall had experienced declining rents, recent instances of lost anchors, low mall shop occupancy and a significant number of temporary tenants (Tr 305-309). Gardner also applied the overall criteria developed by analysts Cushman and Wakefield, and opined they would result in a B or B- grade for Crossgates, taking into account in particular the Mall's vacancy rate and occupancy costs (id. at 298-299). Gardner said there were only two factors among those listed by analysts that were in Crossgates' favor in regard to the grading, although neither is mentioned in the list of positive and negative factors contained in his report: the trade area, where there are strong demographics including high median income, and the presence of Apple (id. at 286-287). In contrast, negative factors included "dark anchor stores, [and] consistent decline in one or more of the following: occupancy, inline store sales, market rent, net operating income" (id. at 289). Gardner noted that while A malls generally had occupancy rates of around 95%, that of Crossgates was less than 75% (id. at 296).

Gardner also compared Crossgates to its primarily local competitor, Colonie Center, based on data from 2018 ^[FN11] (id. at 287-288, 300, 209-310; Gardner Rep 18). While Crossgates had higher mall shop sales (excluding Apple) per square foot ($416/SF vs $379/SF), Colonie Center had higher major store sales, lower rents, much lower vacancy rates (27.2% for Crossgates vs less than 1% for Colonie Center) and higher leasing activity (Gardner Rep 18.; see also Tr 309-310).

Gardner further found that Crossgates has been experiencing "declining operating trends for several years" (Gardner Rep 23). Specifically, he noted that major store sales declined from $152 per square foot in 2017 to $124 per square foot in 2021 (id.). His data also shows, however, an increase in mall shop sales per square foot (excluding Apple) from $403 in 2017 to $422 in 2019, and then after a severe dip in 2020, a rise to $478 in 2021 — an increase that Gardner attributed to pent-up demand in the post-COVID re-opening period (id.; Tr 322, 342-343). Over the same period, though, mall shop vacancy rates increased from 26.6% to 35%, with vacancy rates of 30.1% in 2019 and 32.4% in 2020 respectively ^[FN12] (Gardner Rep 24). Gardner [*8]said that the increasing vacancy rates were a "gigantic factor" in his analysis (Tr 323), as the Mall "can't seem to control" this gradual growth in vacancies despite granting incentives and cutting tenant costs (id. at 360). These vacancy rates are, according to Gardner, "totally inconsistent" with an A-graded mall (id.).

Another measure central to petitioner's expert analysis is the occupancy cost ratio, which reflects the ratio between the costs paid by tenants to occupy space at the Mall in terms of gross rent, and the sales made from that space (id. at 325). Gardner stated that such ratios are a "very important metric" as they are an "an important measure of how market participants, and real estate advisors, and analysts, gauge the performance of the mall" (id. at 325-327). In calculating the ratio for Crossgates, Gardner again did not consider Apple in his analysis, as Apple has by far the lowest occupancy cost ratio and Gardner considered it to be an "outlier" (id. at 272-278, 449]; Resp FOF ¶ 40]). Gardner's calculation of the Crossgates occupancy cost ratio also excluded Best Buy, as its sales information was only an estimate, and he considered the estimate to be unreliable as inconsistent with national Best Buy sales trends (Tr 449-451).

In his report, Gardner determined that occupancy cost ratios had declined for mall shops between 2017 and 2021, as follows:

As a result of these declines, these ratios reached a level that was competitive with Colonie Center in 2021 (Gardner Rep 24). Gardner noted, however, that they had increased for major stores during that period, and thus in his view "remain[] excessive as a result of declining store sales" (id.). Specifically, Gardner found that the major store occupancy cost ratios "suggest[] unsustainable rents based on store sales and a high risk of future vacancy," and are higher than those for other comparable malls, including those with grades in the B to C range (id. at 35; see also Tr 353 [occupancy costs at Crossgates will need to come down because of vacancy rate]). Further, Gardner determined that new leases were made at lower rents than had been the case previously, reflecting a 15% decline in gross rents for mall shops (Gardner Rep at 32).

Moreover, according to Gardner a "significant percentage of the tenants are obtaining lower rents through [the] renewal process" (Tr 330). That is, Gardner found that "the average renewed lease reflected gross rents of 24.2 percent less than the previous rents that those same tenants were paying, and, from all major stores, it was a minus 21.7 percent" (id. at 331). This [*9]does not take account of increased expenditures by Crossgates for incentives to keep tenants, which is what drives the occupancy cost ratios lower (id. at 336-340; see Gardner Rep at 33]). Gardner explained these trends as reflecting tenant leverage over the Mall, in light of the latter's efforts to prevent vacancies (Tr 332).

Gardner noted that despite such incentives, in recent years the amount of occupied space in Crossgates has diminished. From 2018 to 2021, 41 shops left the mall, representing about 111,000 square feet, while only 23 new mall shops or other tenants arrived, occupying 73,467 square feet (id. at 334). Further, while the occupancy cost ratios decreased in 2021 — attributed by Gardner to sales resulting from "pent up demand" post-COVID closure, as well as the presence of stimulus money in consumers' pockets — Gardner asserted that this trend would not be expected to continue (id. at 335, 342). He summarized his reading of present trends as follows: "[V]acancy is increasing, rents are declining, more shops are closing than opening, [and] renewals are down" (id. at 335). In his view, COVID advanced the trends generally applicable to regional malls, such as increasing vacancies, declining rents and rising challenges from e-commerce, that had begun before the pandemic (id. at 269).

Gardner "stabilized"^[FN13] mall shop sales (excluding Apple) for July 1, 2019 at $430 per square foot, and for July 1, 2020 at $400 per square foot (id. at 343). For major stores, his estimate was $135 per square foot in July 2019 and $122 per square foot in July 2020 (id. at 344). Occupancy cost ratios were stabilized for mall shops at 14% for 2019 and 13% for 2020, and for major stores at 12.5% for 2019 and 12% for 2020 (Gardner Rep 36; Tr at 354).

On this basis, Gardner calculated the stabilized gross economic rent as follows:

(see Gardner Rep 36). These figures were lower than the actual rents for 2019, in order to reflect decreased rents and increasing tenant incentives in more recent leases, and higher than actual rents for 2020 so as to remove the distortion from the short-term impact of the pandemic closure.^[FN14] Overall, Gardner anticipated that rents are "coming down" and will continue to do so based on current trends (Tr 358).

Gardner also calculated specialty rent (i.e., rent based on agreements providing for short-term or seasonal leasing) at $3,134,685 for 2019 and $1,841,466 for 2020 (Gardner Rep 38). Because Gardner acknowledged that the latter figure reflected the impact of the COVID-19 pandemic, he stabilized these numbers at $3.2 million for July 2019 and $2.88 million for July 2020 (id.). Gardner further stabilized the losses suffered by the Mall as a result of vacancies and collection losses. Taking into account collection losses of 2% for 2019 and 3% for 2020, he stabilized the loss for mall shops at 30% for 2019 and 33% for 2020 (id. at 37). For major shops, the stabilized losses were 7% for 2019 and 13% for 2020 (id.).

In addition, Gardner stabilized mall operating expenses. He concluded that for July 1, 2019, the stabilized projected operating expenses were $9.77 per square foot, and for July 1, 2020 they were $9.47 per square foot, which he said was "relatively consistent" with the Mall's historic performance (Tr 375). He also compared Crossgates' expenses to those of Colonie Center, and found the expenses per square foot to be significantly higher at Crossgates (id. at 366; Gardner Rep 38). He attributed this difference to Crossgates' need to make concessions to tenants to limit vacancies (Tr 366-367). He further said that the stabilized expenses are higher than the actual expenses, because the latter made no provision for reserves, and because he took into account overall trends (id. at 484).

Gardner treated tenant concessions as operating expenses "above the line," i.e., part of repeating annual costs, while as discussed below, Kenney's appraisal treated them "below the line," i.e., as one-time expenses reflected only after the annual NOI was calculated and capitalized (id. at 379-380). The reason for Gardner's position, by his explanation, is that such costs are "a continuing expenditure, year-after-year, necessary to achieve the rents so if you are not accounting for that expense [the] rents would be different, because . . . the tenants wouldn't pay as much as they are without those incentives that are being paid to achieve those rents" (id. at 380; see also id. at 491-493).

Gardner stabilized Crossgates' gross income by totaling up the economic rents, and subtracting vacancy and collection losses (Gardner Rep 40). As of July 1, 2019, gross income was stabilized at $42,866,359, and as of July 1, 2020 at $35,447,270 (id.). He also calculated stabilized expenses based on estimates for various costs per square foot, arriving at an expense estimate of $14,779,909 for July 1, 2019, and $14,324,152 for July 1, 2020 (id. at 40). Subtracting the expenses from gross income, Gardner arrived at an NOI of $28,086,450 (or $18.57 per square foot) for July 1, 2019, and $21,123,118 (or $13.96 per square foot) for July 1, 2020 (id. at 40; Tr 375-376).

On the basis of this data and the factors listed above, Gardner gave Crossgates a B/B- rating as of July 1, 2019, and a B-/C+ rating for July 1, 2020 (Gardner Rep 17 & Tr 307-308). The lower grade for 2020 was due in large part to the impact of the COVID-19 pandemic, which Gardner found "accelerated the need for rent deferments, rent abatements and renegotiated leases" (Gardner Rep 21), and thus produced "market expectations," of a reduction in total occupancy costs and an increase in vacancies (id. at 46). The data cited also shows, however, that while sales dipped precipitously in 2020 (to $270 per square foot for mall shops and $68 per square foot for major stores"), they "rebounded strongly in 2021 (id. at 23).

Gardner then calculated a capitalization rate, which he said reflected the risk associated with the property for investors (Tr 386; Gardner Rep 40-44). Gardner's analysis of such rates [*10]nationally indicated that they are increasing (Tr 387). Specifically, he averred that recent trends in sales of regional malls nationally showed significant decreases in price, as well as increases in capitalization rates for B malls ^[FN15] (Gardner Report at 43, 214 [JLL Regional Mall Capital Markets Overview; Chart of Cap Rate trends] Tr 409, 545). In addition, based on the analysts' reports on which Gardner relied, he determined that capitalization rates increase as mall grades go down, and thus as risk increases (id. at 389). Gardner also cited the analysis of capitalization rates from NKF Capital Markets for 2017 and 2018, which indicated that class B malls have average rates of 10-13%, while class C and D Malls have rates between 15 and 20% (Gardner Rep 42 & 164-173 [NKF Capital Markets Overview]).

On these bases, Gardner found that for Class B malls on July 1, 2019, the appropriate capitalization rate was between 9 and 12 per cent, and that rates trended higher the following year, estimating that for upstate New York they would be between 10 and 13 per cent (Tr 409, 418; Gardner Rep at 44). Gardner acknowledged that these rates will vary, based on the mall and the creditworthiness of the buyer (Tr 411).

Applying these ranges to Crossgates, Gardner adjusted for factors such as store sales, vacancies, occupancy costs, market area and (for 2020) the uncertainty brought about by COVID (id. at 420-421). He also looked at equity dividend rates, which he found to be 10% for July 2019 and 11% for July 2020, with the latter adjusted to 12.5% to reflect the specific risks of Crossgates (id. at 411-413, 421; Gardner Rep 45). After pointing to other data including market surveys and sales of Class B malls, Gardner estimated that the July 1, 2019 economic capitalization rates would range from 9.5% and 12%, and in July 1, 2020 from 10.5% to 13% (Gardner Rep 46). From these, he settled on a cap rate of 10% for July 1, 2019 and 11% for July 1, 2020 (id.; Tr 421).

Finally, once the capitalization rate and value are determined, the outcome must be adjusted so as to remove the impact of taxes on the final calculation (Tr 423-424). In carrying out this calculation, Gardner relied on gross rents, so as to avoid "being influenced by the actual real estate tax burden that we're testing for" (id. at 424-425). Applying the capitalization rate to the NOI of $28,086,450 for 2019 resulted in a total rounded value of $227 million (id. at 427; Gardner Rep 47).^[FN16] For 2020, using an 11% cap rate and NOI of $21,123,119 produced a total rounded value $156 million (Tr 427-428; Gardner Rep 47). Those amounts were allocated among the 7 tax parcels at issue, based on their prorated share of rental income (Tr 428; Gardner Rep 48).

For its part, the Town presented a case consisting of the report and testimony of its expert, Mark Kenney, an MBA and licensed real estate appraiser (Tr 552).

Kenney's approach was different from Gardner's in a number of important respects. In calculating mall shop sales per square foot, he included Apple and reached the following figures: [*11]$567 for 2019 and $358 for 2020 ^[FN17] (id. at 591). Without Apple, the figure for 2019 would drop to $424 [id. at 699]. He noted that the 2020 number was the result of a 37.6% drop in annual retail sales between 2019 and 2020, due to the impact of the COVID pandemic (Kenney Rep at 156). Kenney agreed that the retail market was "struggling," and that situation was made much worse by COVID for 2020 (Tr 575; see also id. at 673-674 [pandemic accelerated rise of e-commerce at expense of traditional retail stores]).

Further, in calculating the market rents, Kenney concluded that such were reflected by the actual rents paid at the Mall ^[FN18] (id. at 717), and thus did not engage in the "stabilization" process that underlay Gardner's analysis. He conceded, however, that in making his calculations he omitted a number or renewals or mis-stated the amount of rent for particular tenants ^[FN19] (see e.g. id. at 730-731 [garage rent renewed at $34 less than listed in Kenney's report]; id. at 731-732 [J Jill gross rent listed at $62 per square foot, although renewal was $31 per square foot]). Indeed, it appears that none of the renewal leases were included in his calculations (id. at 724-736; Ex 16). He acknowledged that these examples of lower rent paid on renewal "did not fit" with the conclusions in his report that rents were too low, and occupancy costs could be higher (Tr 738).

Kenney calculated the Mall's NOI without reflecting rent abatements, cash allowances, broker commissions and construction allowances — that is, various incentive payments given to stores to encourage tenants to enter into or renew a lease. Instead, these costs were factored in "below the NOI line," i.e., adjustments were made after NOI was determined and capitalized, and not as a repeating expense ^[FN20] (see Kenney Rep at 181, 185; Tr 633-634). He justified this approach in his report by saying it is the methodology preferred by "a large majority of investors" (80%), citing to the PwC Real Estate Investor Survey (Kenney Rep 212 & App P [PwC Survey]). Kenney acknowledged that according to Appraisal of Real Estate, an "authoritative" text, these adjustments could be made "above the line" if consistent with "local practice" (Tr 752). He also agreed that in the case of Crossgates, such incentives were paid on a recurring basis, and not just as a "one time thing" (id. at 752-753).

As to the vacancy rate, Kenney testified that when looked at in terms of gross leasable area, the figure was 11.5% in 2019 and 12.7% in 2020, although the "financial" vacancy rate — based on rental income — was higher at 20% in 2019 and 23.7% in 2020 (Kenney Rep 178). Moreover, he agreed that the rate was higher among mall shops — 28.9% in July 2019 and 31.9% [*12]in July 2020,^[FN21] (Tr 680-681; Kenney Rep 97). Kenney stabilized occupancy rates at 80% in 2019 and 73.5% in 2021, reflecting both vacancy and rent collection loss (Kenney Rep 178).

Kenney calculated the occupancy cost ratio for mall shops at 11.2% for 2019 and 14.2% for 2020 (Tr 599). He testified that across malls the average is typically 12 to 14%, and for Class A malls 14 to 16%, so Crossgates was on the low end of this classification for 2020 (id. at 600; see also Kenney Rep 156-157 [Crossgates was 'at the low end of the range for industry benchmarks"]). On cross examination, he acknowledged that recent survey data from Korpacz indicated that these occupancy cost ratios were too low for an "A" mall ^[FN22] (Tr 743).

On this basis, Kenney stabilized gross economic rents at $40,585,538 as of July 1, 2019, and $29,824,768 as of July 1, 2020 (Kenney Rep 198, 200).

Kenney assumed in his report that most new tenants would not get rent abatements, on the ground that the practice was not widespread in the national market or present in "recent leases" (Kenney Rep at 151). Kenney also did not include within rents what he referred to as "percentage rent clauses", i.e., lease terms that charged additional rent if the tenant's sales exceeded a certain threshold, because they were not relevant to calculating market rent (Tr 589-590, 592-593).

Kenney rated Crossgates a Class A mall (id. at 571). In his report, he states that the "A" designation is based on "retail sales and other considerations"^[FN23] (Kenney Rep at vi & viii). At trial, he said that this conclusion is based on the Crossgates' "dominant" position in the market on the basis of its size, anchors and the presence of the Apple Store (Tr 578). He also indicated that he based this classification on the Mall's retail sales, including sales by Apple, which he viewed as providing "a lot of draw to the property" (id. at 643-644). Kenney attested that including Apple sales within the mall's total sales is how "market participants" would do the calculation (id. at 608). Indeed, on cross examination Kenney acknowledged that the retail sales for Crossgates are only consistent with Class A status if Apple sales are included (id. at 692). He also conceded that the Apple lease would expire in January 2025, and that such would be taken into account by investors in valuing the property (id. at 710-711). Kenney did not change the classification for 2020, as the decline in sales that year reflected a "one time in 100 year event," and would be discounted by investors in determining the projected cash flow (id. at 598).

On cross examination, Kenney also acknowledged a number of market weaknesses for regional malls: flat sales; loss of market share to e-commerce (a shift he acknowledged was accelerated by the pandemic); increasing numbers of retail store closings; and rising mall store vacancies (Tr 667-676, 678). He agreed that certain stores (Forever 21, JC Penney) remained open at Crossgates during the period at issue only because the Mall renegotiated their leases, thereby reducing NOI, and that the vacancy rate at Crossgates was for 2019 and 2020 "significantly higher" than the national average for regional malls (Tr 676-679).

In fixing the appropriate capitalization rate, Kenney testified that he used three different approaches. The first was a "band of investment" approach, by which Kenney looked at the rate for 10-year US government backed bonds, and then adjusted it to account for the greater risk of this investment (Tr 635). He also looked at equity dividend rates arising out of retail property loans (id. at 638). He applied various measures to such data (including median and mean rates), ultimately deriving a rate of 6.4%, and adjusting it upward by a risk premium of 1.5% for a rounded rate of 8% (id. at 639-640; Kenney Rep at 205-208). When asked how he determined the risk premium, Kenney initially stated it was his "subjective judgment on the risk" (id. at 641). When asked to elaborate, he stated:

"Well, the base rate includes the retail properties. It's just that, unfortunately, I don't know exactly what properties are aggregated within those schedules, so we're already — the 6.4 is already a good approximation, from what I can determine, of larger retail properties, at the higher end, over, like, $100 a square foot, as a base rate, but I recognize that the shopping mall market has problems, and especially with the e-commerce and the competition from the discounters" (id. at 641).

Kenney acknowledged that the risk premium he selected was based on what he deemed to be the Mall's Class A status, and would "likely" be higher if it was a B or C mall (see id. at 774). He also admitted that in determining the appropriate return on investment, he used data from the American Council of Life Insurers loans to retail businesses, but did not know the nature of the recipients of the loans, or what criteria ACLI used to select them, or where the businesses were located (id. at 765-767).

Kenney's second approach was to look at three investor surveys, including the PwC Survey, which he characterized as "widely recognized" (id. at 574, 642; see also Kenney Rep, Ex P). He found that for the second quarter of 2019 capitalization rates ranged frm 6.08% to 6.80% for shopping mall properties, and that the average for Class A malls was 5.98% in 2019 and 6.28% in 2020 (Kenney Rep at 212-213).

Lastly, Kenney looked to other mall sales around the country — although he stated that there were few sales of Class A malls (Tr 648-649). He estimated the relevant capitalization rates associated with such sales at 7% for 2019 and 7.25% for 2020 (Kenney Rep at 217). On cross examination, he admitted that there was no data or methodology in his report used to determine these rates, and thus no way their accuracy could be confirmed (Tr 785-786). Further, there was no showing of NOI for the entities sold (id. at 785) and some consisted of portfolios of malls in different states (id. at 786-788). The only separate sale of a New York State mall he considered was the 2013 sale of Colonie Center (id. at 788).

Although Kenney did not discuss this in his report, a chart in his appendix showed the average cap rate for Class B regional malls according to the PwC Survey to be about 7% in the second quarter of 2019 and over 9% for the second quarter of 2020 (Kenney Rep 214). Another survey upon which he relied, conducted by Rynne Murphy & Associates, Inc. (although it was for 2021), listed "low" cap rates for regional malls for 6%, and an average rate of 11% (see id. at 215). Kenney explained that he selected a number at the low end because Crossgates was an A Mall (Tr 648).

On the basis of the above analysis, Kenney adopted "unloaded" capitalization rates — i.e., rates not adjusted for the effective tax rate — of 7.1% for 2019 and 7 % for 2020 (id. at 652; Kenney Rep 218). The loaded rates were 7.84% for 2019 and 8.19% for 2020 (Tr 653-656; Kenney Rep at 205, 208).

Adjusting the NOI of $31,703,185 that he calculated for 2019 by the 7.84% capitalization rate, Kenney reached a market value of $404,377,365 for 2019. He then deducted "below the line" adjustments for annualized rent abatements, cash allowances, broker commissions, construction allowances and future capital expenses, resulting in a total of $389,806,112, which he rounded to $390 million (Kenney Rep 205; see also supra p 13, 16; Tr 646, 654-655 [on below line adjustments]). As to 2020, adjusting the NOI of $21,900,000 by the 8.19% capitalization rate, Kenney reached a market value of $267,400,371. Making the below the line adjustments resulted in a total value of $257,491,736, which he rounded to $257 million, or $179.21 per square foot (Kenney Rep 208; Tr 656-657).

By motion filed post-trial, petitioners move to strike the testimony of respondent's expert. Respondent seeks the same relief as to the testimony of both of petitioner's experts in its post-trial submission, although it did so by "cross-motion" made after the initial deadline for post-trial submissions. I will address these applications in turn below.

The regulations governing tax assessment review proceedings outside New York City provide as relevant here:

"The appraisal reports shall contain a statement of the method of appraisal relied on and the conclusions as to value reached by the expert, together with the facts, figures and calculations by which the conclusions were reached. If sales, leases or other transactions involving comparable properties are to be relied on, they shall be set forth with sufficient particularity as to permit the transaction to be readily identified, and the report shall contain a clear and concise statement of every fact that a party will seek to prove in relation to those comparable properties. . . ." (22 NYCRR § 202.59[g][2]).

An appraisal "should be disregarded when a party violates section 202.59 (g) (2) by failing to adequately set forth the facts, figures and calculations supporting the appraiser's conclusions" (Matter of Board of Mgrs. of French Oaks Condominium v Town of Amherst, 23 NY3d 168, 176 [2014] [citation and internal quotation marks omitted]). The parties here each assert that their adversary's appraiser failed to meet these standards.

Since the striking of petitioner's appraisal would effectively end this proceeding, I address that application first, even though it is styled as a cross motion.

A. Respondent's "Cross Motion"

Respondent moves to strike the testimony of petitioner's expert Kenneth Gardner on a host of grounds. Specifically, it argues:

• Petitioners provided respondent with a different rent roll than that used by its expert; respondent was given rolls for the fiscal year, while petitioners used the calendar year notwithstanding that the valuation dates were July 1 (Affirmation in Support of Motion to Strike of William Ryan, Esq., dated March 3, 2023 ["Ryan Aff"] ] ¶ 9, 20; Resp FOF ¶¶ 14-17). Among other issues, the Town contends that this exaggerated the impact of COVID-19 in petitioners' appraisal, since Gardner's data reflected a greater period of time during which the Mall was closed (Ryan Aff ¶¶ 11-12).

• Gardner's occupancy cost ratio calculation was flawed in that it excluded Apple, and improperly took into account recent renewals and rent concessions (id. ¶ 15). Respondent also contends that Gardner failed to set forth the facts and figures to support the stabilized expenses, rents, and capitalization rates he employed (id. ¶¶ 16-17).

• Gardner's capitalization rate analysis was lacking for a hodgepodge of reasons, including: "[his] capitalization rates were nominal and not economic, the mortgage equity analysis was flawed due to use of the wrong amortization period, and the appraiser further failed to make necessary downward adjustments to the capitalization rate based upon recognized authoritative sources." (id. ¶ 18).

As an initial matter, I agree with petitioners' argument that the cross motion is untimely, and must be denied on that ground alone (see Affirmation in Opposition to Respondent's Cross-Motion to Strike & In Support of Petitioners' Motion to Strike ["Pet Opp"] ¶¶ 5-7). At the end of the trial, I gave the parties 45 days after receipt of the transcripts to make their initial post-trial submissions, with time thereafter to file simultaneous reply letters (Tr 809-810). I further directed that motions to strike the appraisal reports be included with those submissions (id.). Under this schedule, the due date for such motions was February 13, 2023, the date on which both parties submitted their proposed Findings of Fact and Conclusions of Law (see NYSCEF Nos. 53 & 58; Pet Opp ¶ 5). Respondent, however, did not make its "cross motion" until March 3, 2023, and did not seek an extension of time to do so.

In light of the foregoing, I find the Town's application was filed after the Court's deadline. There is no ambiguity in the schedule, as I confirmed with the parties that they would both make their motions to strike "as a part of [their] closing submission, not now," to which they agreed (Tr 809-810). There was no discussion of follow-up cross motions, and since respondent had all of the information it needed to make its motion by the deadline, there is no reason it had to await petitioners' filing before it presented its own.

As a general rule a cross motion may be deemed timely if it addresses the identical subject matter as the original, timely-filed motion (cf. Alonzo v Sage Harbors of the Hudson Hous. Dev. Fund Co., Inc., 104 AD3d 446, 449 [1st Dept 2013][court properly considered "plaintiff's mirror-image cross motion for partial summary judgment" made after the Court's deadline, as it addressed the same claims as to which defendant had timely moved for summary judgment]; see also Grande v Peteroy, 39 AD3d 590, 591-592 [2d Dept 2007]). But that is not what occurred here; the motions are not mirror images, as each seeks distinct relief in regard to a different appraiser. Absent any order, reason or legal principle on which the relief at issue could [*13]be sought via cross motion, the respondent's motion is barred as untimely.

In any event, I find respondent's application to be without merit. In regard to the rent roll argument, petitioners point out that the rent rolls provided were those asked for by respondent (see Demand for Discovery and Inspection in Resp Mot, Ex A ¶¶ 6-8), and the calendar year rent rolls are attached to the petitioners' verified statement of income and expenses (see Leslie Ltr to Ct 2/21/23, Ex B). The fact that different data was used by the two appraisers was disclosed and could have been discovered in advance of trial, and thus could have been addressed in Kenney's testimony or respondent's cross examination of Gardner.

It is also not clear why the use of different rent rolls violates 22 NYCRR § 202.59(g)(2) or otherwise provides a basis for striking the report. Instead, respondent's critique of the calendar year data goes to the relative accuracy of the appraisals. Putting aside petitioner's uncontested assertion that the data was included in the documents produced, respondent points to no case law or other legal principle which requires that the Court exclude an appraiser's report because he relied on a different data set than that used by its own appraiser. Rather, the caselaw requires that an appraisal be based on "confirmable data," not that both appraisers rely on precisely the same information ^[FN24] (see French Oaks Condominium, 23 NY3d at 177).

The same is true as to the challenges to the occupancy cost ratio and capitalization rates. Respondent is seeking to transform substantive disagreements (i.e. is Apple an outlier whose sales should be excluded or an integral element of the Mall's valuation) into bases to strike the appraisal in toto. While the specifics of these arguments are discussed below, they reflect different interpretations of relevant data, not a failure to rely on objective data altogether as would warrant striking the appraisal (cf. id. [appraisal struck when appraiser based his analysis on his "own unverifiable knowledge" about the property]).

As to respondent's challenge to the testimony given by Dr. LaPosa, the fact that he is not an appraiser does not bar consideration of his testimony, as I stated in my pre-trial decision denying the Town's motion in limine (see Matter of OCG L.P. v Bd of Assessment Review of the Town of Owego, 79 AD3d 1224, 1226 [3d Dept 2010]). That said, I find the testimony of marginal relevance, and it has not impacted the analysis below.

B. Petitioners' Motion

For their part, petitioners argue that the Court should strike Mr. Kenney's report because it does not explain the basis for his calculation of market rents, or of the applicable capitalization rates (Petitioners' Memorandum of Law in Support of the Motion to Strike Respondent's Appraisal Report ["Pet Mem"] 2). They charge that Kenney's calculation of market rents based on actual rents (see Tr 580, 717) was flawed in that Kenney did not consider leasing activity between 2018 and 2021, which showed rents were declining (Pet Mem at 5-6). Further, they contend that the rent analysis had several other flaws, including that it assumed Crossgates was an "A" mall and considered the Apple store in its calculation of occupancy costs (id. at 5-6 & n 3). Petitioners also maintain that the components of Kenney's capitalization rate analysis were flawed, to wit: (1) his mortgage equity analysis was based on American Council of Life Insurers data that did not indicate the type of retail establishments to which they pertained, and which [*14]came from a different region and as to which the methodology-containing appendix was omitted; (2) investor data on which his analysis was based concerned Class A malls (which petitioners argue Crossgates was not), was not relevant to Upstate New York, and was omitted from Kenney's report and (3) while Kenney relied on comparable sales, none of the data for such were in his report (id. at 6-9).

These arguments do not present a sufficient basis to preclude consideration of Kenney's appraisal. This is not a case where, as in French Oaks Condominium, the appraiser had "little or no confirmable data" to support his analysis (23 NY3d at 177); the actual rent rolls, for example, constitute actual data on which his analysis was based. As to the capitalization rate, both appraisers used a variety of measures to get a ballpark picture of the appropriate rate to employ for this valuation. For example, Gardner used national sales of regional malls in the absence of those in the northeast, as well as equity dividend rates, although neither is a direct analogue for the capitalization rate for the property at issue (Gardner Rep 43-45). The appraisers faced what they conceded to be an absence of data on recent sales of regional, comparably rated malls in the same area, and therefore used a collection of other measures to try to get at the appropriate calculation. The fact that these included data of limited materiality is a factor relevant to the ultimate determination, not a basis for excluding the testimony. While it is true that Kenney does not include in his report the data from other leases on which he purports to rely (see Tr 718-723), this information is part of his general background "retail market analysis," and his valuation analysis does not rely on it (see Kenney Rep 138-139).

As set forth below, I find many aspects of Kenney's analysis deeply flawed and unpersuasive. But that is not the same as finding that the appraisal does not meet the requirements of section 202.59, and therefore should be stricken (see Matter of Brookdale Senior Living Solutions & Meriweg Latham LLC v Town of Colonie Bd. of Assessment Review ["Matter of Brookdale"], 186 AD3d 1801, 1804 [3d Dept 2020] ["even when an appraisal report complies with 22 NYCRR 202.59[g][2] . . . the appropriateness of the [data] used must still be considered by Supreme Court in determining the weight to be accorded to the appraisal"]). In short, although the defects cited above impact the support for Kenney's analysis and the Court's credibility determination as discussed infra, they are not a basis for excluding the report from the record.

The property valuation issued by a tax assessor is "presumptively valid" (see Matter of FMC Corp. [Peroxygen Chems. Div.] v Unmack, 92 NY2d 179, 187 [1998]; see also Matter of Rite Aid of NY No. 4928 v Assessor of Town of Colonie, 58 AD3d 963, 964 [3d Dept 2009] ["tax assessments enjoy a presumption of validity"], lv denied, 12 NY3d 709 [2009]). To overcome this presumption, petitioners must come forward with "substantial evidence" that the subject property is overvalued (Matter of Board of Mgrs. of French Oaks Condominium, 23 NY3d at 174-175; Matter of Kohl's Ill. Inc.#691 v Board of Assessors of the Town of Clifton Park, 123 AD3d 1315, 1316 [3d Dept. 2014]). To decide whether this standard has been met, the Court need not determine the weight to be given such proof, but must "simply determine whether the documentary and testimonial evidence proffered by petitioners is based on sound theory and objective data" (Matter of FMC Corp., 92 NY2d at 188 [citation and internal quotation marks [*15]omitted]). This burden is "often satisfied by the submission of a detailed, competent appraisal based on standard, accepted appraisal techniques and prepared by a qualified appraiser" (Matter of Brookdale, 186 AD3d at 1802-1803, quoting Matter of Rite Aid Corp. v. Otis, 102 AD3d 124, 125-126 [3d Dept. 2012], lv denied 21 NY3d 855 [2013]).

Petitioners have met this initial burden through the submission of Gardner's appraisal, and thus "the presumption disappears and the court 'must weigh the entire record, including evidence of claimed deficiencies in the assessment, to determine whether petitioners have established by a preponderance of evidence that its property has been overvalued' " (Matter of Board of Mgrs. of French Oaks Condominium, 23 NY3d at 175, quoting Matter of FMC Corp. [Peroxygen Chems. Div.], 92 NY2d at 188).

In determining which of the competing experts' testimony on the value of the property to credit, the Court "enjoys broad discretion in that it can reject expert testimony and arrive at a determination of value that is either within the range of expert testimony or supported by other evidence and adequately explained by the court" (20 Mall at Guilderland, LLC v Board of Assessment Review of the Town of Guilderland, 211 AD3d 1396, 1397 [3d Dept 2022] [citation omitted]).

In this case, both appraisers used the "income capitalization" approach, which is "well recognized as the best approach for valuing income-producing property such as shopping malls" Matter of Colonie Ctr. v Town of Colonie, 209 AD3d 1214, 1216 [3d Dept. 2022], lv denied 39 NY3d 916 [2023]). This methodology "requires an appraiser to formulate a value estimate for the property by converting projected net income into a single present value" (id., citing Matter of New Cobleskill Assoc. v Assessors of Town of Cobleskill, 280 AD2d 745, 746 [3d Dept. 2001], lv denied 96 NY2d 715 [2001]). To do so, "the market rent for the subject property must be estimated and then, from available market data, the appraiser must estimate a property allowance for vacancy and credit loss forecast to occur during the period of ownership," estimate and project "anticipated fixed and operating expenses during the ownership," and then "elect and apply an appropriate capitalization rate" (id. at 1217, citing Matter of New Cobleskill Assoc., supra).

In the context of evaluating the value of a mall, moreover, the analysis entails selecting the appropriate "grade" for the mall, which impacts the capitalization rate (id.).

As described above, the assessors here have taken their shot at performing these various calculations, and I consider their relative merits below.

Consideration of the COVID-19 Pandemic

Before discussing the specific issues in dispute at trial, I must address first an extraordinary claim made by respondent in a post-trial reply submission: that the COVID-19 pandemic has no relevance to the valuations at issue. Specifically, the Town states the following in a letter replying to petitioners' proposed Findings of Fact:

"The Town did not ignore the impacts of Covid-19 in its assessment of the Subject Property, rather the Town assessed the Subject pursuant to the statutory language. In terms of the Subject Property's value, the Covid-19 pandemic and any national trends that it may or may not have accelerated are inapplicable to this proceeding and should not be considered by this Court" (Ltr of Ryan to the Court 2/21/23).

Respondent bases this assertion on Real Property Tax law §§ 301 and 302, which provide in pertinent part that "[a]ll real property subject to taxation, and assessed as of a March first taxable status date, shall be valued as of the preceding first day of July" (RPTL § 301) and the "[t]taxable status of real property in cities and towns shall be determined annually according to its condition and ownership as of the first day of March and the valuation thereof determined as of the applicable valuation date" (RPTL § 302). The parties stipulated that, as to the assessment roll for 2021, the valuation date was July 1, 2020, and the tax status date was March 1, 2021 (Tr 6 ["taxable status dates are March 1, 2020, and March 1, 2021, valuation dates are July 1, 2019, and July 1, 2020."]). By July 1, 2020 COVID had become, of course, a national crisis.^[FN25]

Nobody in this case contends that COVID had any relevance to the 2020 tax assessment roll challenged in proceeding 904834-20; to the extent respondent's statement is limited to this aspect of the proceeding, it goes without saying (see Pet FOF ¶ 63 [noting that "[t]he second of the valuation dates at issue, July 1, 2020, occurred after the onset of the COVID-19 pandemic"]). But respondent's claim appears to be broader — that COVID is generally "inapplicable to this proceeding," which encompasses the challenge to the assessment roll for 2021 as well. To the extent that is the meaning of the Town's argument, it is incorrect on its face, and indeed at odds with the record at trial, where both appraisers addressed the impact of COVID at length (see e.g. Tr 575 [Kenney: "vacancy rates are going up, and this was, again, even before COVID, in 2020, which was really adverse, and caused poor operation conditions for that year"]; id. at 599 ["I got 11.22 percent [occupancy cost ratio], for 2019, for 2020 it shot up to 14.2, also including Apple, and that's expected, because you had Covid . . ."]; Kenney Rep 118 ["In 2020, the COVID-19 pandemic was a serious external event"]; id. at 157 [retail sales in 2020 were "down 37.6% from 2019 because of the COVID-19 pandemic and resulting business lockdowns"]).

As consistent with the record and the stipulated tax status and valuation dates, I will consider the impact of the COVID-19 pandemic on the valuation for the 2021 tax assessment roll challenged in the proceeding 905706-21.^[FN26] Any argument to the contrary is frivolous.

Market Rent

In employing the income approach, an appraiser must estimate the fair market rent of the property (Matter of VGR Associates, LLC v Assessor, Board of Assessment Review of Town of New Windsor, 51 AD3d 678, 679 [2d Dept 2008]). The "economic" or "market" rent "takes into consideration all the fair and reasonable payments, judged by rents in the market place, that a tenant makes for use of said premises" (id.). Thus, utilization of the "occupancy cost ratio — reflecting what tenants are willing to pay in total occupancy costs, such as base rent, real estate [*16]taxes and common area charges as a percentage of their retail sale" — is "a recognized appraisal method for the valuation of shopping malls" (Matter of Colonie Ctr., 209 AD3d at 1219; see also Matter of Sangertown Square, L.L.C. v Assessor of Town of New Hartford 118 AD3d 1344, 1344 [4th Dept 2014] [estimation of total market rental income "by multiplying projected sales by the occupancy cost ratio, i.e., what tenants are willing to pay in total occupancy costs, such as base rent, real estate taxes, and common area charges, as a percentage of their retail sales" is a recognized appraisal method], lv denied 24 NY3d 907 [2014]).

While respondent asserts that actual rents are the appropriate stand in for economic rents, Gardner's approach is fully consistent with New York law. As summarized by the Court of Appeals: "[c]ourts recognize . . . that reliance on contract rents, particularly those involving property subject to below market long-term leases, may yield distorted valuations and that an assessor, therefore, may apply compensatory measures calculated to adjust such income figures to a point at which they become reliable indicators of full value" (Matter of Merrick Holding Corp. v. Board of Assessors of County of Nassau, 45 NY2d 538, 543 [1978]).

Indeed, the methodology employed here by Gardner mirrored the one he adopted — and which was upheld — in Champlain Ctr. N. LLC v Town of Plattsburgh (165 AD3d 1440 [3d Dept 2018]). In that case, Gardner "reviewed historical operations data for the property that demonstrated substantial declines in retail sales and corresponding increases in the vacancy rates, which he testified were consistent with industry trends," and "resulted in lower base rents, higher vacancy rates and extensive tenant concessions"^[FN27] (id. at 1443). On this basis, Gardner concluded that "the property's actual income did not accurately reflect its future income or, therefore, its fair market value" and instead multiplied projected sales by an occupancy cost ratio i.e., "the total occupancy costs . . . [t]hat tenants are willing to pay as a percentage of their retail sales" (id. at 1444). The Court found this to be a "recognized appraisal method" and that it had been properly adopted by the trial court (id.). In other words, Gardner's practice of "stabilizing" economic data such as sales based on trends, rather than using the actual annual data, is permissible and appropriate.

Finally, I am persuaded that Gardner's approach produced a more accurate reflection of economic rent. Kenney acknowledged in his testimony that recent leases reflected an increase in concessions and reduced rental payments (see Tr 725-736). Yet his approach did not take that into account such trends, which reflect changes in key variable economic rent seeks to measure: the amount tenants are willing to pay for space at the Mall.

Store sales

Gardner calculated the stabilized mall shop sales at $430/sq ft (from actual sales of $422) for 2019 and $400/sq ft for 2020. In contrast, Kenney projected store sales at $567/sq ft for 2019 and $358/sq ft for 2020 (id. at 591).

While there are a number of specific differences underlying the appraisers' sales estimates, in 2019 Gardner's lower figure is accounted for almost entirely by the exclusion of [*17]Apple. The appraisers both calculated that including Apple would increase the sales figure by $150 per square foot, which would result in essentially equivalent sales per the square foot findings by both Gardner and Kenney ^[FN28] (see Tr 273 [Gardner: in 2019, sales with Apple would be $573 per square foot, compared to $422 per square foot without counting Apple]; id. at 697-700 [Kenney: in 2019, sales with Apple would be $573 per square foot, compared to $424 per square foot without counting Apple]).

Gardner's determination in this regard is supported by Korpacz, which excludes Apple from its calculation of sales per square feet ^[FN29] (see Gardner Rep 160 n &161). I find the reasoning underlying this to be persuasive. The purpose of these calculations is to determine economic rent, i.e., the amount the rent would be under market conditions (see Tr 320). This turns on what tenants are "willing to pay" (see supra p 28). Including the Apple store, an entity whose occupancy costs to earnings ratio is not remotely like any other shop in the Mall, results in an expectation of market rent significantly distorted by an extreme outlier. Rather, the presence of Apple should — as Korpacz suggests — be taken into account only in determining the overall mall classification, as discussed below.^[FN30]

As to the other critiques of Gardner's calculation of NOI, I find them unpersuasive. In particular, while respondent claims that the use of calendar year data for rents rendered Gardner's [*18]analysis erroneous, it provides the example only of a single restaurant, and proffers no evidence that this made any material difference in his calculations (Resp FOF ¶¶ 14-17). Although the Town asserts generally that the use of the calendar year heightened the impact of the pandemic on the 2020 analysis (see Ryan Aff ¶¶ 11-12), there is no reason to think that is so. As noted, Gardner stabilized the 2020 figures at a much higher point than actual COVID-reduced sales based on long-term trends. Given that he did not use the actual sales figures for the pandemic year, it is not clear how the calendar year data distorted his analysis, and respondent does not explain why this is the case.

Occupancy Cost Ratio

As stated supra p 10, Gardner calculated the stabilized occupancy cost ratios for mall shops at 14% for 2019 and 13% for 2020, and for major stores at 12.5% for 2019 and 12% for 2020 (Gardner Rep 35; Tr 354). For mall shops, Kenney found the occupancy cost ratio to be 11.2% for 2019 and 14.2% for 2020 (Kenney Rep 156; Tr 599). The differences in the mall shop ratio are almost entirely a function of the appraisers' different calculations of sales per square foot based on the exclusion of Apple. Again, I find that including one distant outlier — Apple — results in a number unrepresentative of the calculus for the vast majority of mall shops.

Respondent further notes that the renewal leases reviewed by Gardner (and which reflected greater concessions by the landlord) constituted only 44% of the leasable area over a four-year period (Resp FOF ¶ 44). Since the purpose of Gardner's analysis of this data is to determine the economic rents on the valuation date, and to estimate based on trends how such had changed from the dates of original leases, it is hard to see why the fact that this is only a partial sample undermines the analysis.

The Town contends that Gardner's occupancy cost ratio is wrongly based on his stabilized sales figure, and that using actual sales data would have raised projected economic rent for 2019 from $51,614,798 to $56,560,927, and for 2020 from $44,627,635 to $48,146,003 (id.¶ ¶ 51-52). But this again ignores the distinction between actual and economic rent. Kenney's use of actual rents as a stand in for market rents took no account of what he acknowledged to be trends such as increasing concessions and declining rents, and thus does not accurately capture how the market presently values rents for Crossgates' mall shops (see Champlain Centre North LLC, 165 AD3d at 1444-1445 [upholding trial court's finding that respondent's appraisal expert was "less credible" because he "failed to account for declining occupancy rates and income, or the likely loss of a major anchor tenant" and "disregarded necessary expenses incurred by petitioner to attract and retain tenants and to maintain the property"]).

Above the Line vs Below the Line

One central point in dispute between Gardner and Kenney is whether the various tenant concessions offered by Crossgates should be incorporated into their calculations "above the line" — that is, deducted from income on an annual basis — or adjusted "below the line," that is, deducted after the overall valuation has been calculated.^[FN31]

The case law is consistent with Gardner's approach. In particular, Champlain Centre North LLC, supra found that "estimated expenses properly included expenses for tenant concessions—amounts necessary to entice tenants to lease property, such as paying store build-out expenses—to the extent that they were to be incurred by the landlord" (165 AD3d at 1444). A similar outcome was reached in Reckson Operating Partnership L.P. v Town of Greenburgh (2 Misc 3d 1005[a] [Sup Ct, Westchester County 2004]), where the Court specifically found tenant improvement expenses to be appropriate for calculation "above the line." The Court reasoned that "[t]enant improvement costs are a recognized expense for space being re-tenanted in a building that, like the subject property, is well into its economic life span," and that "on a stabilized basis over the course of an investment an owner would recognize the need to fund tenant work and meet these expenditures when they arise" (id. at *6). It distinguished Matter of CCB Associates v Penale, (266 AD2d 805 [4th Dept.1999]), which found an expense to be "below the line" on the ground that it dealt with "expenditures for a complete retrofit of the space rather than ordinary tenant improvement costs" (id.). In contrast, "in the context of ordinary turnover in a multi-tenant office building . . . courts have recognized tenant-installation costs as an ongoing expense to be deducted from income as part of the capitalization process" (id.).

Against this approach, respondent relies on the following language from The Appraisal of Real Estate, which Gardner recognized at trial as "authoritative" (Tr 494):

"Rental properties, major anchor tenants, lease and income expenses, leasing commissions, paid by the landlord to agent, or broker, tenant improvements, leasing commissions, are typically treated as below-the-line items, not deducted before derivation of net operating income. . . . Expenditures for capital improvements, usually do not recur annually, and, therefore, should not be included in an estimate reflecting the typical/annual expenses of operation. Capital improvements may enhance value, by increasing the net operating income, or economic life of the property, but the capital expenditure is not a periodic operating expense" (Resp FOF ¶¶ 81-82, citing The Appraisal of Real Estate, 15th Edition at 437, 456; see also Tr 495).

Gardner's answer to this was that his approach is authorized by the case law in New York, and the concessions by Crossgates are recurring and necessary expenditures and thus (unlike the situation considered by the treatise) do in fact recur (see Tr 494-495). Gardner's characterization of the law is correct, as discussed above. As to the recurring nature of the expense, that assertion is supported by the testimony of Mr. Utter, which I credit in this regard (see Tr 31-34). As a result, the passage from the treatise is based on a premise — that these expenses do not regularly repeat — which is not bourne out in this case.

Further, Gardner asserted that his approach was consistent with the following other passage from The Appraisal of Real Estate:

"In certain real estate markets space is rented to a new tenant only after substantial interior improvements are made. If this work is performed at the landlord's expense, and is required to achieve the estimated rent, the expense of these improvements may be included in the reconstructed operating statement as part of the replacement allowance in a separate tenant improvement or capital expenditures category depending on local practice" (Tr 541).

In light of all the foregoing, I find that Gardner's approach is both permissible and reasonable, and consistent with New York law.

Respondent makes other challenges to Gardner's calculation of the Mall's expenses, arguing that Gardner stabilized expenses at the upper end of the "reported actual range," that were different from actual expenses (Resp FOF ¶ 72). Gardner stated that those actual expenses did not include a reserve for physical plant costs such as HVAC, roof and parking lot repairs, and that the stabilized figure also reflected historic trend lines and mall surveys (Tr 484; Gardner Rep 38-39). The Town does not explain why the stabilized expenses are in error, and its argument is essentially an attack on the use of stabilization rather than the actual figures. As set forth above, Gardner's approach is permissible, and I find his calculations to be persuasive.

Mall Grade

While Kenney adjudged Crossgates to be an A mall, he relied largely on a single variable for this proposition: retail sales including Apple. In contrast, Gardner took into account a number of other variables in assigning a B/B- rating for 2019 and a B-/C+ rating for 2020, including high and growing vacancy rates, and increasing concessions paid to existing tenants. I find that neither determination fully captures the appropriate grade for the mall as indicated by the trial evidence, and the analysts on which the appraisers relied.

Initially, I find Kenney's conclusion that Crossgates was an "A" mall entirely inconsistent with the evidence introduced at trial regarding the Mall's status and performance at the time of the valuation dates in 2019 and 2020. His efforts to defend his conclusions in this regard were generally not well supported, and consisted of his reiteration of the overall sales figures and the presence of the Apple Store. Kenney essentially acknowledged in his testimony that Crossgates' occupancy cost ratios were consistent with a B mall, according to the Korpacz survey (Tr 739, 741-743), while his own basis for finding the 11.2% occupancy cost ratio reflected an A mall was premised, instead, on data from 2003 (id. at 736-737). He also agreed that the Mall's vacancy rates were "consistently higher than the national average," conceding that the vacancy rate for mall shops had risen to nearly 30% by July 1, 2019, and to 31.9% by July 1, 2020 (id. at 679-681). A review of the Cushman analysis makes clear that these rates are inconsistent with an A mall. It denotes B malls as having mall shop occupancy rates of over 85%, and A malls with rates over 95%, both well above that of Crossgates (Gardner Rep 163). The latter is well above respondent's own estimates of vacancies at the Mall, even if one uses Kenney's lower numbers based on unoccupied space, and not excluding specialty leases (see Kenney rep 178 [2019 vacancy rate of 11.5% based on space and 20% based on rental income]; see also Resp FOF ¶¶ 69-70 [Gardner miscalculated the vacancy rate for grading purposes by excluding specialty (i.e. short term) leases, which if included would result in actual vacancy rate of 11.5% in 2019 and 12.6% in 2020]). And even if some recognition should be made of specialty leases, I am [*19]convinced by petitioner's evidence that temporary or "specialty" tenants are not viewed as equivalent to long-term lessees, since their rents are lower and "because [investors] know those specialty tenants are not there for the long term, not paying the rents the other tenants are, and [thus] the vacancy, or the occupancy of the permanent tenants is what's important" (Tr 28-29, 531-532). Aa number of respondent's other criticisms of Gardner's conclusion are misplaced. For example, its list of criteria that Gardner failed to consider includes variables (i.e., "only mall in region," "dominant mall with high occupancy") that simply do not apply to Crossgates (see Resp FOF ¶ 29). .

Nevertheless, there are some significant problems with Gardner's analysis. In particular, Gardner not only excludes Apple sales from Crossgates' data; he also does not consider the presence of Apple as a variable in his grading. Petitioners deny that Apple's impact is excluded, since Apple's ability to draw traffic to other stores is accounted for in the sales of those stores (see Pet FOF ¶¶ 114-115). But the same could be said for any of the positive factors in the grading analysis, as any positive aspect of a mall helps draw in more consumers and is reflected in mall sales. As the various cited market analyses presented by the parties indicate, however, the grading takes into account a host of other factors besides sales themselves, since investors look to such things to understand the overall viability of the property. Indeed, it is petitioner's position that "mall grading requires a multi-factor analysis, not simply a calculation based solely on mall shop sales per square foot" (id. ¶ 127). Yet when it comes to the impact of Apple, petitioner's assert that looking to such sales (excluding Apple's own sales) is sufficient to register its impact.^[FN32]

As a result of this approach, the juggernaut represented by the Apple store is entirely absent from Gardner's analysis. While he cited Apple's presence as a "positive factor" in his trial testimony (Tr 287), he did not list it anywhere in his grading matrix in his report, and it is not reflected the report's grading discussion at all (see Gardner Rep 17-18). Thus, although this store accounts for over one quarter of mall shop sales, those sales disappear entirely from Gardner's analysis. This is particularly problematic in light of the fact that another high sales property — Best Buy — is left out of the analysis as well (see supra p 30 n29).

Indeed, Gardner's position is at odds with the analysts on which he relies. Thus, while Gardner points to Korpacz as support for excluding Apple sales, its publication explicitly states that "the presence of an Apple store is considered in step 2 of the mall classification process," i.e., when the grade is adjusted for other factors besides sales per square foot (see Gardner Rep 160; see also id. at 161 [included in Korpacz' list of "reasons for increasing mall classifications" is "Tenancy by Apple, a major draw of foot traffic"]). And the other primary analyst on which he relies, Cushman, considers Apple sales in calculating NOI (see Tr 294). None of the analysts cited do what Gardner has done: simply exclude Apple altogether from both calculation of NOI and of the mall classification except to the extent that its drawing power is reflected in the overall sales.

Finally, this is not the only variable which Gardner's classification analysis would seem to short change. For one thing, he acknowledged that Crossgates had higher sales per square foot than Colonie Center (which he deemed a "B+" in its tax assessment challenge) even when Apple is included, there had been an increase since 2017 in mall shop sales until the COVID closure, and such sales rose again thereafter (supra p 9). Indeed, he conceded that looking at such sales alone — which is the starting point for the grading analysis — he would rate the Mall a "higher B" for 2019 and "lower in the range of the B category" for 2020 (see Tr 284). And while he notes a decline in major store sales, the scope of that decline, pre-COVID, is relatively modest, from $104 million in 2018 to $102 million in 2019 (see Gardner Rep 23). Finally, Gardner found "increasing area population household income to support the mall" to be a positive factor in his analysis of Colonie Center, but omits such in his analysis of Crossgates (see Gardner Rep 319 [trial court opinion in Colonie Center v Town of Colonie at 10]).

In sum, I find that Gardner's grade is too low, and given the presence of Apple, stable and even growing overall mall shop sales, the appropriate grade for Crossgates should be B+ for 2019, and B for 2020. Indeed, I find that the trial evidence supports a finding that Crossgates' grade in 2019 should be roughly equivalent to that given by Gardner (and upheld by the Third Department) for Colonie Center. While there are measures at which Colonie Center was superior — especially in terms of its mall shop vacancy rate — Crossgates is superior in other important indicia as set forth above. A higher grade than the B+ and B, however, would be inconsistent with the negative variables listed above, and in particular the extensive vacancy rate. Moreover, the trial testimony regarding the highly negative impact of the COVID pandemic on regional malls generally, and Crossgates in particular, justify a drop in the grade for 2020.

With these findings in mind, I proceed to consider the capitalization rate

Capitalization Rate

The capitalization rate "represents the return an investor would expect if the property were purchased" (Shore Haven Apts. No. 6 v Commissioner of Fin. of City of NY, 93 AD2d 233, 236 [2d Dept 1983]). It is "what the investment market requires in return from a property of the age, kind, condition and location of the subject property" (Matter of Onondaga Sav. Bank v Cale Dev. Co., 63 AD2d 415, 418 [4th Dept 1978] [citation omitted]).

Mr. Kenney suggests the appropriate capitalization rates are 7.1% for 2019 and 7% for 2020. This contrasts with the rate of 8.5% the Third Department upheld in Matter of Colonie Ctr., supra as to Colonie Center for 2017 through 2019. In that case, the Court found that the rate was supported by "increasing rents, low occupancy costs and vacancy rates and stable tenant sales" (209 AD3d at 1220). As noted above, Crossgates' circumstances for 2019 are relatively comparable to the other local mall. Mall shops sales are increasing and Crossgates' occupancy costs are comparable to Colonie Center, while on the one hand vacancy rates are far higher and recent leases reflect a decline in economic rents as a result of greater concessions, while total sales and the presence of Apple weigh in the Crossgates' favor. Given this comparison, there is no reason that the capitalization rate should be, as Kenney suggests, and order of magnitude lower than 8.5%.

There are other reasons why I find Kenney's proffered rates are unsupportable. For one thing, they are inconsistent with the grade I have determined to be consistent with the record. Kenney essentially acknowledges that his capitalization rates would not stand absent his A grade; [*20]he states that market conditions for malls falling below a B+ profile "remain weak" (Kenney Rep at 133). Further, the surveys on which Kenney relied sustain his analysis only if Crossgates is deemed a sufficiently high grade mall. Thus, the PwC Survey, which estimates cap rates for regional malls at 4% to 9% for July 2019, and 4% to 15 % for July 2020, notes that this only applies to B+, A and A+ malls (Tr 793-799). Moreover, it lists the following cap rates by grade: Class A+ — 5.38%; Class A — 6.28%; and Class B+ — 9.33%^[FN33] (see Kenney Rep, App S). Similarly, the rates in the RERC survey are based on "first tier investment properties," defined as "best quality assets in largest markets"^[FN34] (id., App W).

While Kenney purported to use other comparable sales to determine the capitalization rate, he did not provide any data to determine how the rate for these sales was derived, and thus there is no basis to consider this claim (see Matter of Board of Mgrs. of French Oaks Condominium, 23 NY3d at 176 [comparable sale could not be considered when "the appraiser did not provide the sources of the income or expense figures related to each comparable"]). Finally, I note that Kenney's unloaded capitalization rates of 7% for 2020 crosses all lines of credibility. To uphold that finding, I would need to conclude that in July 2020, with a pandemic raging and the Mall closed, recent trends from brick and mortar stores towards e-commerce accelerating as a result, capitalization rates generally increasing (see PwC Survey, supra; Kenney Rep 133 [national average cap rate increased from 6.08 to 6.95% from July 2019 to July 2020]), and Crossgates facing significant and growing vacancy rates, investors would see less risk in Crossgates than they had the year before. Indeed, he suggests they would employ a lower capitalization rate than for the 2013 sale of Colonie Center (see Tr 401 [sale had 7.8% cap rate; Gardner noted that capitalization rates have increased since then in light of trends in regional malls]). These are not supportable conclusions.

In contrast, I find Gardner's overall analysis of the appropriate range of capitalization rates to be credible, and consistent with the data just cited. The question, then, is the impact of my finding that his grade for Crossgates was too low.

How the change in a grade impacts the capitalization rate varies by the surveys appended to the appraisal reports. Thus, the 2018 Green Street survey included in the appendix to petitioner's appraisal, which set a 6.2% economic capitalization rate for B+ malls, also set the rate at 7.4% for B malls; 9% for B-; and 13.2% for C+ (Resp FOF ¶ 98; Gardner Rep 225). As noted, the 2019 PwC survey shows the cap rate for Class A to be 5.38%; for Class A malls to be 6.28%; and for Class B+ malls to be 9.33% (see supra). A JLL survey proffered by Gardner for 2019 and 2020 reflected a 2% difference in cap rates between Class B and Class B+ malls (see Gardner Rep 214). In other words, a decrease of a grade (say from B+ to B) signals a change of [*21]roughly between 1% and 2% in capitalization rates, although it is sometimes higher.

In light of the foregoing, and given that I have found Crossgates grade for 2019 roughly comparable to Colonie Center, I find an 8.5% capitalization rate to be appropriate for that year. Since I find Gardner's estimate of a 1% increase in the applicable capitalization rate for 2020 to be persuasive, in light of the significantly greater risks facing malls given the valuation date falls during the COVID closure, a 9.5% rate should be used for that year.

Tax Factor

Kenney agreed that, given Gardner's use of gross rents, applying 100% of the tax factor is correct, although he adjusted the factor to reflect his own use of net rents, to reflect the owner's share of the costs (Tr 760-761). Given that I am using Gardner's projected NOI, I will adopt his 100% tax factor as appropriate. Further, although Kenney's report sought to carve out only those taxes paid directly by the owner, I find Gardner's approach as most consistent with excluding the taxes actually paid from the analysis. I shall therefore employ the calculation of the tax factor contained in his report (Gardner Rep 47).

Calculation

Plugging the revised capitalization rate into the formula employed by Gardner (see id.), results in the following:

Accordingly, it is

ADJUDGED and ORDERED that the cross motions to strike the appraisal reports are DENIED; and it is further

ADJUDGED and ORDERED that the Petition, together with costs pursuant to RPTL§722(1) in the discretion of the Court, are sustained to the extent indicated above, the Respondents' assessment rolls are to be corrected accordingly, and any overpayments of taxes are to be refunded with interest.

This constitutes the Decision & Order of the Court. This Decision & Order is being [*22]electronically filed with the Clerk's Office, with copies e-mailed to counsel for the parties. The signing and e-filing of this Decision and Order shall not constitute Notice of Entry, and counsel is not relieved from the applicable provisions of the CPLR respecting to filing and service of Notice of Entry.

"If this was a lease fee valuation you may just adopt what the actual numbers are, but for a fee simple valuation, we're trying to get what the market expects without the influence of existing leases. The influence of existing leases is only to provide a history of the property and to demonstrate trends as opposed to actual numbers" (Tr 365).