## Facts

- Merrick Holding Corp. owned a 29-store shopping center in Nassau County, New York.
- The shopping center’s success depended heavily on three anchor tenants: Fair Food, F. W. Woolworth, and National Shoes.
- Merrick leased space to the anchor tenants on long-term agreements with rents below then-current market levels as a business strategy to attract customers and other tenants.
- For tax years 1968–1975, the county assessed the property using the income-capitalization method.
- The county did not capitalize Merrick’s actual contract rents for the anchor tenants; it adjusted the income stream upward to reflect market rent for those leases, effectively adding the value of the tenants’ favorable lease positions (“leasehold bonuses”) to the income attributed to the property.
- Merrick challenged the assessments, arguing capitalization should be based on actual rents under existing leases and that adding leasehold bonuses improperly taxed value belonging to tenants rather than the owner.

## Issues

1. Whether an assessor using the income-capitalization method may substitute market rents for below-market contract rents under long-term leases to determine full value for real property tax purposes.
2. Whether the value of tenants’ favorable leasehold interests (“leasehold bonuses”) may be reflected in the assessed value of the underlying real property.
3. Whether, and how, an assessment using market-rent adjustments must account for the property’s entire income stream, including potentially above-market leases.

## Decision

- The Court of Appeals reversed the Appellate Division.
- The court held the county may assess the property at its full value and, when contract rents materially diverge from market because of long-term, below-market leases, may adjust income to reflect market rent and thereby account for leasehold bonuses.
- The court rejected a categorical rule barring use of leasehold bonuses or market-rent substitution absent proof the leases were improvident or made in bad faith.
- The case was remitted for further proceedings to determine the proper valuation on a more complete factual record, including review of the entire income stream and any offsetting above-market rents.

## Legal Principles

- The objective of assessment is full market value; valuation methods in tax assessment are flexible and not governed by a single mechanical formula.
- Actual income is a significant indicator under income capitalization, but it is not conclusive when long-term leases produce rents substantially below market.
- Taxable value focuses on the value of the real property as an economic unit, not on how private agreements allocate benefits between landlord and tenants.
- Market-rent adjustments and leasehold-bonus concepts may be used to avoid systematic undervaluation and disparate tax burdens caused by disadvantageous leases.
- A sound income-capitalization analysis must consider the entire income stream and avoid selective adjustments that distort overall economic income.

## Conclusion

The Court of Appeals held that assessors may adjust below-market contract rents to market and reflect leasehold bonuses to reach full value in income-capitalized assessments, and it remitted for factual determination of a valuation that accounts for the property’s total income profile.


In re Merrick Holding Corp. v. Bd. of Assessors, 45 N.Y.2d 538, 382 N.E.2d 1341, 410 N.Y.S.2d 565 (1978)