Property Taxation Without Services

New York municipalities have often conditioned development approvals on developers' agreements to provide services ordinarily provided by the municipality. These agreements are typically silent on the tax consequences of the municipality's failure to provide services. Under what circumstances, then, can landowners challenge the municipality's power to collect taxes for services the municipality does not provide? Two cases recently decided — one by the Court of Appeals and one by the Second Department — shed light on that question.

New York towns and counties can and do fund most services by imposing ordinary real property taxes, which can be collected without regard to the benefit enjoyed by individual landowners. But the town or county can also establish a special district for a wide variety of purposes, and can finance district expenses by levying an ad valorem tax on all property within the district. (As a third alternative, the town or county can establish a special district and finance expenses by levying a special assessment proportioned to the benefit received by individual landowners — but special assessments are beyond the scope of this article).

Collard Incorporated Village of Flower Hill

At the same time, the Court of Appeals has established that New York municipalities may engage in the practice of conditional zoning. In Collard v. Incorporated Village of Flower Hill, 52 NY2d 594, the Court of Appeals catalogued the various objections to conditional zoning, and dismissed all of them, concluding that “[c]onditional rezoning is a means of achieving some degree of flexibility in land-use control by minimizing the potentially deleterious effect of a zoning change on neighboring properties; reasonably conceived conditions harmonize the landowner's need for rezoning with the public interest … ” Id. at 602.

In light of Collard, a municipality might condition a zoning amendment or some other zoning or planning approval on an agreement not to seek a particular municipal service, thus reducing the burdens of the new development on the remainder of the town. Can a town that imposes such a condition, and that also establishes a special district for the municipal services the town will not provide to the new development, nevertheless collect an ad valorem tax from owners of property within the development?

Appelbaum v. Town of Oyster Bay

The Court of Appeals first addressed that question in Appelbaum v. Town of Oyster Bay, 81 NY2d 733. The developer sought to develop property and to create a homeowners association. As a condition for zoning and planning approval, the town required the developer to enter into a declaration of covenants and restrictions that required the owners to provide at their own expense for garbage disposal, The declaration also stated that the town would not be requested or petitioned to provide for garbage disposal services. The homeowners association contracted for private garbage collection, but the town continued to impose an ad valorem levy for the garbage district in which the development was located. When the homeowners challenged the levy, the Court of Appeals held the levy invalid because the town “does not provide and does not intend to provide the residential property owners with the benefit of garbage collection services.”

Water Club Homeowner's Association, Inc. v. Town Board

It is against that background that the Second Department faced Water Club Homeowner's Association, Inc. v. Town Board. In 1986, the town board of zoning appeals (ZBA) granted the association permission to construct 56 single-family dwellings in a gated community located within the Atlantic Beach Estates Park District. The permission, however, was conditioned on the recording of a declaration of covenants in which the association and unit owners waived their rights to use of cabana, locker, locker facilities, or parking facilities at the beach club located within the Atlantic Beach Estates Park District. The town had chosen to fund the Park District by assessing an ad valorem tax on residents of the District, which included the association's homes. In 2002, the association and several homeowners brought a declaratory judgment action to declare invalid the portion of the restrictive covenant preventing the homeowners from using the facilities in the Park District's beach club. Subsequently, the association sought to add a cause of action declaring the ad valorem taxes invalid because the association's members could not use the facilities for which the taxes were levied. The trial court granted the town's summary judgment motion, and denied the association leave to add the new cause of action.

In affirming, the Second Department held first that the challenged covenant was not illegal because the association itself had power to repeal the restrictions without the town's approval — an interesting construction of the town's conditional approval, but one beyond the scope of our current subject. But the court went on to hold that the Supreme Court had properly denied leave to add an additional cause of action, because the additional claim was “patently lacking in merit.” In particular, the court emphasized that the association members did have the right to use the park district's beach and shuttle bus service, even though the covenant prevented them from using the cabana, locker, locker facilities, or parking facilities at the district's beach club. Because the homeowners enjoyed some benefit from imposition of the ad valorem tax, they could not successfully challenge the tax (the court also emphasized that the restrictions were self-imposed).

New York Telephone v. Town of Oyster Bay

Three days later, the Court of Appeals, in New York Telephone v. Town of Oyster Bay, examined — and sustained — an entirely different challenge to an ad valorem tax. The Town of Oyster Bay had established a refuse and garbage district. Situated within the district was “mass property” owned by New York Telephone — telephone lines, wires, cables, poles, supports, and enclosures for electrical conductors. The town subjected this mass property to the ad valorem tax used to fund the refuse and garbage district. New York Telephone challenged the tax, arguing its property was not subject to human occupation, and could not therefore produce garbage or refuse of any kind. Because the property would not receive garbage collection, the town could not impose an ad valorem tax for the purpose of garbage collection. The Court of Appeals agreed, reaffirming Appelbaum's holding that an ad valorem tax requires some benefit to the taxpayer, and that to be benefited, the property must be capable of receiving the service funded by the ad valorem levy. The court explained further that in determining whether property is benefited, “we look to the innate features and legally permissible uses of the property, not the particularities of its owner or occupant or the state of the property at a fixed point in time.” Because telephone poles can never require municipal garbage collection, they are not benefited by the tax, and hence not subject to the ad valorem tax.

In focusing on the “innate” characteristics of the property, the court in New York Telephone cast some doubt on the vitality of Appelbaum, where the subject property was capable of receiving garbage collection, but for the agreement made between the developer and the town. Although the New York Telephone opinion was careful to include “legally permissible” uses along with “innate features” as the relevant factors in determining benefit, the legally permissible uses are subject to easy change — by simple agreement between the town and the landowners — in a way that innate features are not.

Perhaps more important, the analysis in New York Telephone, together with the holding in Water Club, provides a blueprint for towns seeking to limit access to district services while still collecting ad valorem taxes: provide very limited access to district services, rather than withholding services altogether. Water Club and New York Telephone together suggest that courts would be unlikely to consider the quantity of benefit a taxpayer derives from ad valorem taxes, so long as the quantity exceeds zero. In a footnote, the New York Telephone opinion referred to Sperry Rand Corp. v. Town of N. Hempstead, 53 Misc2d 970, affd 29 AD2d 968, affd 23 NY2d 666, as an example of a rare case in which an ad valorem tax might be invalid despite some benefit to the landowner. In that case, the town limited garbage collection to 40 pounds, three times a week, while the landowner generated 4500 pounds of garbage daily. Although the Court of Appeals did not overrule Sperry Rand in New York Telephone, the court appeared to treat Sperry Rand as the extreme case at which the court might conclude that the benefit to the landowner was effectively zero.

In light of New York Telephone and Water Club, then, towns should find it easy to condition development approvals on service limitations, while still subjecting development property to ad valorem taxation.

New York municipalities have often conditioned development approvals on developers' agreements to provide services ordinarily provided by the municipality. These agreements are typically silent on the tax consequences of the municipality's failure to provide services. Under what circumstances, then, can landowners challenge the municipality's power to collect taxes for services the municipality does not provide? Two cases recently decided — one by the Court of Appeals and one by the Second Department — shed light on that question.

New York towns and counties can and do fund most services by imposing ordinary real property taxes, which can be collected without regard to the benefit enjoyed by individual landowners. But the town or county can also establish a special district for a wide variety of purposes, and can finance district expenses by levying an ad valorem tax on all property within the district. (As a third alternative, the town or county can establish a special district and finance expenses by levying a special assessment proportioned to the benefit received by individual landowners — but special assessments are beyond the scope of this article).

Collard Incorporated Village of Flower Hill

At the same time, the Court of Appeals has established that New York municipalities may engage in the practice of conditional zoning. In Collard v. Incorporated Village of Flower Hill , 52 NY2d 594, the Court of Appeals catalogued the various objections to conditional zoning, and dismissed all of them, concluding that “[c]onditional rezoning is a means of achieving some degree of flexibility in land-use control by minimizing the potentially deleterious effect of a zoning change on neighboring properties; reasonably conceived conditions harmonize the landowner's need for rezoning with the public interest … ” Id. at 602.

In light of Collard, a municipality might condition a zoning amendment or some other zoning or planning approval on an agreement not to seek a particular municipal service, thus reducing the burdens of the new development on the remainder of the town. Can a town that imposes such a condition, and that also establishes a special district for the municipal services the town will not provide to the new development, nevertheless collect an ad valorem tax from owners of property within the development?

Appelbaum v. Town of Oyster Bay

The Court of Appeals first addressed that question in Appelbaum v. Town of Oyster Bay , 81 NY2d 733. The developer sought to develop property and to create a homeowners association. As a condition for zoning and planning approval, the town required the developer to enter into a declaration of covenants and restrictions that required the owners to provide at their own expense for garbage disposal, The declaration also stated that the town would not be requested or petitioned to provide for garbage disposal services. The homeowners association contracted for private garbage collection, but the town continued to impose an ad valorem levy for the garbage district in which the development was located. When the homeowners challenged the levy, the Court of Appeals held the levy invalid because the town “does not provide and does not intend to provide the residential property owners with the benefit of garbage collection services.”

Water Club Homeowner's Association, Inc. v. Town Board

It is against that background that the Second Department faced Water Club Homeowner's Association, Inc. v. Town Board. In 1986, the town board of zoning appeals (ZBA) granted the association permission to construct 56 single-family dwellings in a gated community located within the Atlantic Beach Estates Park District. The permission, however, was conditioned on the recording of a declaration of covenants in which the association and unit owners waived their rights to use of cabana, locker, locker facilities, or parking facilities at the beach club located within the Atlantic Beach Estates Park District. The town had chosen to fund the Park District by assessing an ad valorem tax on residents of the District, which included the association's homes. In 2002, the association and several homeowners brought a declaratory judgment action to declare invalid the portion of the restrictive covenant preventing the homeowners from using the facilities in the Park District's beach club. Subsequently, the association sought to add a cause of action declaring the ad valorem taxes invalid because the association's members could not use the facilities for which the taxes were levied. The trial court granted the town's summary judgment motion, and denied the association leave to add the new cause of action.

In affirming, the Second Department held first that the challenged covenant was not illegal because the association itself had power to repeal the restrictions without the town's approval — an interesting construction of the town's conditional approval, but one beyond the scope of our current subject. But the court went on to hold that the Supreme Court had properly denied leave to add an additional cause of action, because the additional claim was “patently lacking in merit.” In particular, the court emphasized that the association members did have the right to use the park district's beach and shuttle bus service, even though the covenant prevented them from using the cabana, locker, locker facilities, or parking facilities at the district's beach club. Because the homeowners enjoyed some benefit from imposition of the ad valorem tax, they could not successfully challenge the tax (the court also emphasized that the restrictions were self-imposed).

New York Telephone v. Town of Oyster Bay

Three days later, the Court of Appeals, in New York Telephone v. Town of Oyster Bay, examined — and sustained — an entirely different challenge to an ad valorem tax. The Town of Oyster Bay had established a refuse and garbage district. Situated within the district was “mass property” owned by New York Telephone — telephone lines, wires, cables, poles, supports, and enclosures for electrical conductors. The town subjected this mass property to the ad valorem tax used to fund the refuse and garbage district. New York Telephone challenged the tax, arguing its property was not subject to human occupation, and could not therefore produce garbage or refuse of any kind. Because the property would not receive garbage collection, the town could not impose an ad valorem tax for the purpose of garbage collection. The Court of Appeals agreed, reaffirming Appelbaum's holding that an ad valorem tax requires some benefit to the taxpayer, and that to be benefited, the property must be capable of receiving the service funded by the ad valorem levy. The court explained further that in determining whether property is benefited, “we look to the innate features and legally permissible uses of the property, not the particularities of its owner or occupant or the state of the property at a fixed point in time.” Because telephone poles can never require municipal garbage collection, they are not benefited by the tax, and hence not subject to the ad valorem tax.

In focusing on the “innate” characteristics of the property, the court in New York Telephone cast some doubt on the vitality of Appelbaum, where the subject property was capable of receiving garbage collection, but for the agreement made between the developer and the town. Although the New York Telephone opinion was careful to include “legally permissible” uses along with “innate features” as the relevant factors in determining benefit, the legally permissible uses are subject to easy change — by simple agreement between the town and the landowners — in a way that innate features are not.

Perhaps more important, the analysis in New York Telephone, together with the holding in Water Club, provides a blueprint for towns seeking to limit access to district services while still collecting ad valorem taxes: provide very limited access to district services, rather than withholding services altogether. Water Club and New York Telephone together suggest that courts would be unlikely to consider the quantity of benefit a taxpayer derives from ad valorem taxes, so long as the quantity exceeds zero. In a footnote, the New York Telephone opinion referred to Sperry Rand Corp. v. Town of N. Hempstead , 53 Misc2d 970, affd 29 AD2d 968, affd 23 NY2d 666, as an example of a rare case in which an ad valorem tax might be invalid despite some benefit to the landowner. In that case, the town limited garbage collection to 40 pounds, three times a week, while the landowner generated 4500 pounds of garbage daily. Although the Court of Appeals did not overrule Sperry Rand in New York Telephone, the court appeared to treat Sperry Rand as the extreme case at which the court might conclude that the benefit to the landowner was effectively zero.

In light of New York Telephone and Water Club, then, towns should find it easy to condition development approvals on service limitations, while still subjecting development property to ad valorem taxation.