Opinion
Docket No. 004176-2008 Docket No. 002059-2009 Docket No. 005815-2010
04-26-2012
Wachovia Bank, N.A. v. Borough of Hasbrouck Heights
Michael Donnelly, Esq. Lasser Hochman, LLC Ralph Chandless, Esq. Chandless, Weller & Kramer
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
TAX COURT OF NEW JERSEY
JOSEPH M ANDRESINI
JUDGE
125 State Street
Suite 100
Hackensack, NJ 07601
(201) 996-8029 Fax: (201) 996-8052
taxcourthackensack@judiciary.state.nj.us
Michael Donnelly, Esq.
Lasser Hochman, LLC
Ralph Chandless, Esq.
Chandless, Weller & Kramer
Dear Counsel:
This letter constitutes the court's opinion after trial in the above referenced matter. Plaintiff, Wachovia Bank, N.A. (the "Plaintiff" or "Taxpayer"), challenged the assessments imposed by Defendant, Borough of Hasbrouck Heights (the "Defendant" or "Borough"), on the above captioned properties for the referenced tax years. For the reasons stated more fully below, the court will enter Judgment reducing the assessment.
I. Procedural History and Findings of Fact
Plaintiff is the owner of real property located in the Borough of Hasbrouck Heights, Bergen County. The property is designated by the Borough as Block 24, Lots 5, 66, 69, and 72, and is commonly known as 181 Boulevard. The total assessment for each tax year (2008, 2009 and 2010) is $3,069,400. The Chapter 123 ratio for each tax year is as follows: 98.16% for 2008; 96.26% for 2009; and 97.35% for 2010.
For the tax years 2008, 2009 and 2010 the subject property (Block 24, Lot 5, 66, 69, and 72) was assessed as follows:
+-----------------------------------------------------------------+ ¦ ¦24 / 5 ¦24 / 66 ¦24 / 69 ¦24 / 72 ¦TOTAL ¦ +--------------+--------+---------+---------+----------+----------¦ ¦Land ¦$238,200¦$301,100 ¦$167,600 ¦$345,500 ¦1,052,400 ¦ +--------------+--------+---------+---------+----------+----------¦ ¦Improvements ¦$5,000 ¦$15,000 ¦$2,000 ¦$1,995,000¦$2,017,000¦ +--------------+--------+---------+---------+----------+----------¦ ¦Total ¦$243,200¦$316,100 ¦$169,600 ¦$2,340,500¦$3,069,400¦ +-----------------------------------------------------------------+
The subject property is a two-story mixed use bank branch and office building located on the southwest corner of the intersection of Boulevard and Walter Avenue. The subject site is level at grade, containing just over 24,000 square feet (approximately 0.57 of an acre). The parties were in disagreement as to the total square footage of the improvement by 91 square feet, a difference of no significance in arriving at the fair market value of the subject. The court finds and will use the square footage offered by Plaintiff—a total of 14,705 square feet, with an allocation of 6,000 square feet for bank branch use and the remaining 8,705 square feet for office use. Parking at the subject does not conform to the Borough's zoning requirements, necessitating Plaintiff to provide parking (via leased space) at a lot directly across Walter Avenue from the subject property.
The parties each presented an expert appraiser whose qualifications were stipulated to by the parties, which stipulation the court accepts. Plaintiff's expert offered the opinion that the subject property had a true market value for each of the years as follows:
+----------------------+ ¦Tax Year¦Market Value ¦ +--------+-------------¦ ¦2008 ¦$2,045,000 ¦ +--------+-------------¦ ¦2009 ¦$1,890,000 ¦ +--------+-------------¦ ¦2010 ¦$1,825,000 ¦ +----------------------+
Defendant's expert opined that the property had a true market value for each year as follows:
+----------------------+ ¦Tax Year¦Market Value ¦ +--------+-------------¦ ¦2008 ¦$3,100,000 ¦ +--------+-------------¦ ¦2009 ¦$3,100,000 ¦ +--------+-------------¦ ¦2010 ¦$3,000,000 ¦ +----------------------+
Both experts opined that the highest and best use of the subject as improved is for the continuation of its use as an office and bank branch facility. This use is in conformance with its permitted uses of the B-1 Central Business District Zone, where the subject was located.
II. Conclusions of Law
The court's analysis begins with the well-established principle that "[o]riginal assessments . . . are entitled to a presumption of validity." MSGW Real Estate Fund, LLC v. Borough of Mountain Lakes, 18 N.J. Tax 364, 373 (Tax 1998). As Judge Kuskin explained, our Supreme Court has defined the parameters of the presumption as follows:
The presumption attaches to the quantum of the tax assessment. Based on this presumption the appealing taxpayer has the burden of proving that the assessment is erroneous. The presumption in favor of the taxing authority can be rebutted only by cogent evidence, a proposition that has long been settled. The strength of the presumption is exemplified by the nature of the evidence that is required to overcome it. That evidence must be "definite, positive, and certain in quality and quantity to overcome the presumption."Ibid. (quoting Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985)(citations omitted)).
The presumption of correctness arises from the view "that in tax matters it is to be presumed that governmental authority has been exercised correctly and in accordance with law." Pantasote, supra, 100 N.J. at 413 (citing Powder Mill, I Assoc. v. Twp of Hamilton, 3 N.J. Tax 439 (Tax 1981)); See also Byram Twp. v. Western World, Inc., 111 N.J. 222 (1988). The presumption remains "in place even if the municipality utilized a flawed valuation methodology, so long as the quantum of the assessment is not so far removed from the true value of the property or the method of assessment is not so far removed from the true value of the property or the method of assessment itself is so patently defective as to justify removal of the presumption of validity." Transcontinental Gas Pipe Line Corp. v. Twp. of Bernards, 111 N.J. 507, 517 (1988).
"The presumption of correctness . . . stands, until sufficient competent evidence to the contrary is adduced." Little Egg Harbor Twp. v. Bonsangue, 316 N.J. Super 271, 285-86 (App. Div. 1998)(citations omitted); Atlantic City v. Ace Gaming, LLC, 23 N.J. Tax 70, 98 (Tax 2006).
"In the absence of a R. 4:37-2(b) motion . . . the presumption of validity remains in the case through the close of all proofs." MSGW Real Estate Fund, LLC, 18 N.J. Tax at 377. In making the determination of whether the presumption has been overcome, the court should weigh and analyze the evidence "as if a motion for judgment at the close of all the evidence had been made pursuant to R. 4:40-1 (whether or not the defendant or plaintiff actually so moves), employing the evidentiary standard applicable to such a motion." Ibid. The court must accept as true the proofs of the party challenging the assessment and accord that party all legitimate favorable inferences from that evidence. Id. at 376 (citing Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 535 (1995)). To overcome the presumption, the evidence "must be 'sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment.'" West Colonial Enters, LLC v. City of Orange, 20 N.J. Tax 576, 579 (Tax 2003)(quoting Lenal Props., Inc. v. City of Jersey City, 18 N.J. Tax 405, 408 (Tax 1999), certif. denied, 165 N.J. 488 (2000)), aff'd, 18 N.J. Tax 658 (App. Div. 2004).
Only after the presumption is overcome with sufficient evidence at the close of trial must the court "appraise the testimony, make a determination of true value and fix the assessment." Rodwood Gardens, Inc. v. City of Summit, 188 N.J. Super. 34, 38-39 (App. Div. 1982). If the court determines that sufficient evidence to overcome the presumption that the assessment is correct has not been produced, the assessment shall be affirmed and the court need not proceed to making an independent determination of value. Ford Motor Co. v. Twp. of Edison, 127 N.J. 290, 312 (1992); Global Terminal & Container Serv. V. City of Jersey City, 15 N.J. Tax 698, 703-04 (App. Div. 1996).
The court finds that Plaintiff produced sufficient evidence to overcome the presumption of validity attached to the assessments. If taken as true, the opinion of Plaintiff's expert and the facts upon which he relied create a debatable question regarding the correctness of the assessments sufficient to allow the court to make an independent determination of the value of plaintiff's property.
Of course, a finding that Plaintiff has overcome the presumption of correctness does not equate to a finding that the assessment is erroneous. To the contrary, Plaintiff's overcoming the presumption merely permits the court to address the question of what value should be accorded to the subject property. Once the presumption is overcome, the "court must then turn to a consideration of evidence adduced on behalf of both parties and conclude the matter based on a fair preponderance of the evidence." Ford Motor Co., supra, 127 N.J. at 312 (quotations omitted). "[A]lthough there may have been enough evidence to overcome the presumption of correctness at the close of plaintiff's case-in-chief, the burden of proof remain[s] on the taxpayer throughout the entire case . . . to demonstrate that the judgment under review was incorrect." Id. at 314-15 (citing Pantasote, supra, 100 N.J. at 413).
A. Valuation
"There are three traditional appraisal methods utilized to predict what a willing buyer would pay a willing seller on a given date, applicable to different types of properties: the comparable sales method, capitalization of income and cost." Brown v. Borough of Glen Rock, 19 N.J. Tax 366, 376 (App. Div.)(citing Appraisal Institute, The Appraisal of Real Estate 81 (11th ed 2006)), certif. denied, 168 N.J. 291 (2001). "There is no single determinative approach to the valuation of real property." 125 Monitor Street, LLC v. City of Jersey City, 21 N.J. Tax 232, 237 (Tax 2004)(citing Samuel Hird & Sons, Inc. v. City of Garfield, 87 N.J. Super. 65, 72 (App Div. 1965); ITT Continental Baking Co. v. Twp. of East Brunswick, 1 N.J. Tax 244 (Tax 1980)), aff'd, 23 N.J. Tax 9 (App. Div. 2005). The choice of the predominate approach to determine value is case specific, as it depends "upon the facts of each case and the reaction of the experts to those facts." Id. at 238 (citing City of New Brunswick v. Division of Tax Appeals, 39 N.J. 537 (1963); Pennwalt Corp. v. Twp. of Homdel, 4 N.J. Tax 51, 61 (Tax 1982)).
Defendant's expert used the comparable sales approach to determine value. The sales comparison approach is "[t]he process of delivering a value indication for the subject property by comparing similar properties that have recently sold with the property being appraised, identifying appropriate units of comparison, and making adjustments to the sales price (or unit price as appropriate) of the comparable properties based on relevant, market-driven elements of comparison." Appraisal Institute, The Appraisal of Real Estate 297 (13th ed 2008). This approach usually provides the primary indication of market value of "properties that are not purchased primarily for their income-producing characteristics." Id. at 300. Plaintiff's expert considered the sales comparison approach, relying on transactions within the market area, but ultimately rejected the approach due to its variability and inability to adequately verify the bona fides of the transaction.
Both experts relied on the income approach to value the subject property. The income capitalization approach is the preferred method for estimating the value of income producing property. Parkway Village Apartments Co. v. Twp. of Cranford, 108 N.J. Tax 68, 79 (Tax 1996). "In the income capitalization approach, an appraiser analyzes a property's capacity to generate future benefits and capitalizes the income into an indication of present value." The Appraisal of Real Estate, supra at 445. Because the record contains sufficient, reliable evidence to determine the value of the subject property based on the income approach, the court gives little weight to the sales comparison approach. The court finds that the income capitalization approach is the best method for determining the value of the subject property.
1. Market Rent
"Central to an income analysis is the determination of the economic rent, also known as the 'market rent' or 'fair rental value.'" Parkway Village Apartments Co., supra, 108 N.J. at 270. This differs from the actual rental income realized on the property, which may be below market rates. Parkway Village Assocs. v. Borough of Collingswood, 62 N.J. 21, 29-30 (1972). As the subject is a mixed-use property, the appraisers separately determined bank branch and office rents to derive the income stream for the subject bank space. For reasons more fully stated below, the court finds the comparable leases relied on by Plaintiff's expert to be more persuasive evidence in the record of market rent for the subject property.
Plaintiff's Bank Space Analysis
Plaintiff's expert relied on six comparable bank branch leases, all of which were verified as arms-length market transactions. Plaintiff's expert explained that the "bank branch market is a regional market." Accordingly his branch bank leases encompassed a market covering five counties.
Bank branch comparable lease number one, dated July 15, 2005, is for a 4,237 square foot property in Edison, Middlesex County at a rental value over a six year term of $37.23 per square foot net. To this comparable, Plaintiff's expert made a positive 5.67% time adjustment. He also made a negative 5.00% adjustment for physical characteristics, which he defined as building size, configuration, building quality, parking access, the presence or appearance of drive-up facilities. This resulted in a positive net adjustment of 0.67% and an adjusted economic rent of $37.23 per square foot net.
Comparable bank branch lease number two, dated December 3, 2006, is for a 3,577 square foot property in Warren Township, Somerset County for a five year term at $32.00 per square foot net. The expert adjusted comparable lease two by a positive 2.10% for time; a negative 5% for location, as the expert opined Warren to be superior location to Hasbrouck Heights; a negative 10% for physical attributes, for a net adjustment of negative 12.90%, resulting in an indicated rental value of $27.87 net.
Comparable bank branch lease number three, dated January 1, 2007, is for a 2,400 square foot property located in Elmwood Park. The lease is for a five year term at a rental of $30.08 per square foot net. The sole adjustment to comparable bank branch three was a positive 1.89% for time, resulting in an indicated net rental value of $30.65 per square foot net.
Comparable bank branch lease number four, dated April 2008, is for a 5,165 square foot property located in Oradell, Bergen County. The lease is for a five year term at $27.00 per square foot net. To this comparable lease the expert made a single negative 5% physical adjustment, resulting in an indicated net value of $25.65 per square foot net.
Comparable bank branch lease number five, dated April 1, 2009, is for a 2,545 square foot property located in West Caldwell, Essex County at $35.00 per square foot net. The sole adjustment to this comparable lease was a negative 10% for physical attributes, resulting in an adjusted rental of $31.50 per square foot net.
The sixth comparable bank branch lease, dated September 1, 2010, is for a 2,400 square feet located in Jefferson Township, Morris County. The lease term is for five years at $33.00 per square foot net. As with comparable bank branch five, the sole adjustment for the sixth comparable lease was a negative 10% for physical condition, resulting in an adjusted rental of $29.70 per square foot net.
Plaintiff's expert testified that he verified each of the comparable bank branch leases for accuracy and from his verification concluded that each lease represented an arms-length fair market value transaction. He testified that he spoke with virtually ever major bank that operates in northern New Jersey and that he spoke with those individuals who are in charge of the leasing of facilities. Additionally, he verified each lease transaction with a principal to the transaction. Plaintiff's expert had market-derived support for his time adjustment, as he relied upon a paired lease analysis that stemmed from his bank branch lease number four. Additionally, the expert testified that he reviewed published statistics, spoke with market participants, and thereafter concluded that the market was appreciating at 2.5% per annum up until October 2007 when it became stagnant or leveled off through October 2009.
Based on the expert's analysis of the leases and adjustments he concluded a $30.00 per square foot net rental value for the bank space for each of the years under appeal.
Defendant's Bank Space Analysis
Defendant's expert relied upon five bank branch leases for properties that are all located within Bergen County. It became abundantly clear during cross-examination that defendant's expert was less than conversant with the leases upon which he relied. With respect to comparable bank lease number one, he admitted that the property subject to the lease was not the property depicted in the photo in the appraisal report and that lease number one was instead for a bank branch in a strip mall. Defendant's expert testified that he did not discover this fact until he conducted a property inspection after the report was filed. He further testified that his only source of verification of the lease was in the lease abstract; that is, he did not verify the lease with a principal to the transaction. On rebuttal, Plaintiff's expert testified that he spoke with the broker for the strip mall wherein defendant's bank lease one was located and that the broker confirmed the following: (1) the rental stated in defendant's report was incorrect; (2) the actual rental was $20 per square foot, not $44 per square foot as reflect by defendant's expert; (3) that the square footage stated by defendant expert was incorrect; and (4) that the facility did not house a drive-thru as reported by defendant's expert.
Defendant expert's bank lease number three also proved to be problematic. Bank lease number three was entered into between Cresskill 1 Union Avenue LLC and North Jersey Community Bank on July 1, 2006 at a rental rate of $49.93 per square foot net. Defendant's expert opined that the lease was an arm's length transaction at market rates. During cross- examination, defendant's expert was shown documents which unequivocally demonstrated that three members of the Board of Directors of North Jersey Community Bank (Tenant) were the same principals in Cresskill 1 Union Avenue LLC (Landlord). Thereafter, Defendant's expert was compelled to acknowledge that he was unaware of the interrelation between the landlord and tenant. Now knowing the relationship, he was of the opinion that the transaction was not arm's length.
Defendant expert's bank lease number 4 does not fair much better. The expert reported the rent per square foot as $50.88 per square foot with a commencement date of March 1, 2008. On cross-examination, Defendant's expert was compelled to admit that he had used the incorrect lease commencement date, and that the correct date was August 6, 2002. He further testified that the 2007 lease was actually amended in March 2008, whereby the rental rate was reduced to $30.00 per square foot net. Additionally, unlike the subject property which is located in a free standing building, bank lease #4 is located in a strip-mall.
Defendant's expert lease number five also did not withstand the scrutiny of cross-examination. Defendant's expert identified bank comparable lease five as between Walker-Ridgewood Associates, LLC (landlord) and North Jersey Community Bank (tenant) with a lease date of May 1, 2009. On Cross-Examination, Defendant's expert conceded that Citizens Community Bank actually was closed on May 1, 2009 by the New Jersey Department of Banking with the FDIC installed as the receiver. On the same date, the FDIC entered into a purchase and assumption agreement with North Jersey Community Bank, which was admitted into evidence. Defendant's expert was unaware of the bank's closure, the authority of the FDIC, and the Purchase and Assumption Agreement between the FDIC and North Jersey Community Bank; all of which place defendant's expert's reliance of bank lease five into serious question.
In Dworman v. Tinton Falls, 1 N.J. Tax 445 (Tax 1980), this court established that "[t]he opinion of an expert depends upon the facts and reasoning which form the basis of the opinion. Without explanation as to the basis, the opinion of the expert is entitled to little weight in this regard." Id. at 458. Thus, an expert's opinion is only as good as the data upon which the expert relied.
Defendant's expert relied on five comparable bank leases of which three are of no assistance to the court in determining the market rent for the subject property. The court finds that Defendant's expert failed to properly verify the information about the majority of his comparable bank leases utilized in his analysis. An appraiser is required to verify the information about his comparable leases. Further, the appraiser must confirm that the lease date is factually accurate and reflects a market transaction. It is clear to the court that defendant's expert made no independent examination of comparable bank leases one, three and five, or confirm the data with a principal to the transaction, thereby placing their usability in determining the fair market value of the subject into serious question. For the reasons set forth, the court places little weight on Defendant's expert's bank lease economic rent.
For the foregoing reasons, I find the market rent for the bank space to be $30.00 per square foot net for all years.
Office Space Analysis
Plaintiff's expert's fair market rental for the office space was $18.00 per square foot net for each year. Defendant's expert opined a fair market rental value of $18.50 per square foot net for tax year 2009 and $19.00 per square foot net for 2010.
Plaintiff's expert relied on six leases with commencement dates ranging from September 2004 to October 2009. Comparable leases one, two, and three were sited at a two-story walk-up, multi-tenanted, mixed-use retail and office building located in Fair Lawn, Bergen County. Comparable leases four, five, and six were sited in a five-story, multi-tenanted, elevated, mixed-use office building located in Paramus, Bergen County.
Defendant's expert relied on nine comparable leases. Comparable leases one and two are sited in a Class B 17,688 square foot office building located on Route 17 North in Hasbrouck Heights, Bergen County. Comparable leases three, eight, and nine are sited in six-story 126,075 square foot building located in Hackensack, Bergen County. Comparable lease 4 is sited in a 28,000 square foot multi-tenanted office building. Comparable lease five is sited in a 123,504 square foot multi-tenanted office building located in Hasbrouck Heights, Bergen County. Comparable lease six is sited in an 81,190 square foot multi-tenanted office building located in Saddle Brook, Bergen County. Comparable lease seven is sited in a 13,224 square foot multi-tenanted office building located in Hackensack, Bergen County.
For a property to be comparable, it must be substantially similar to the subject to be admitted as a reasonably comparable lease. Congoleum Corp. v. Hamilton Twp., 7 N.J. Tax 436 (Tax 1985). I find Plaintiff's expert's comparable lease four, five, and six, which are sited in a large multi-story, multi-tenanted building, not to be substantially similar to the subject, a two-story walk-up building.
Likewise, I find that Defendant's comparable leases three, five, six, eight, and nine are not comparable to the subject. These leases are all located in multi-tenanted office buildings with square footage in excess of 80,000 square feet and have adequate on-site parking. I find the Defendant's leases three, five, six, eight, and nine are not substantially similar enough to the subject, so as to permit their use in arriving at the fair market rental for the office portion of the subject property. Accordingly, the court will use plaintiff's expert comparable leases one, two and three, and defendant's comparable leases one, two and four, all of which I find to be substantially similar to the subject.
Plaintiff's expert made no adjustment to leases one, two or three, arriving at an average rate per square foot of $18.76 gross. Defendant's expert, after making adjustments to the comparable lease as he deemed necessary, arrived at an average rate per square foot of $19.00 gross.
Both experts opined that the leases provided an accurate representation of market conditions for the relevant valuation dates. Accordingly, no time (market condition) adjustment was made. A review of the comparable leases reveals the following. Plaintiff's comparable office lease one, dated May 2008, had a rental value of $18.25 per square foot. Comparable office lease two, dated November 2005, had a rental value of $18.73 per square foot. Comparable office lease three, dated January 2008, had a rental value of $19.30 per square foot. Defendant's comparable office lease one, dated September 2006, rented for $18.50 per square foot. Comparable lease two, dated November 2006, rented for $20.00 per square foot. Comparable office lease four, dated July 2007, rented for $18.00 per square foot. The date range of November 2005 to January 2008, with a tight rental range of $18.00 per square foot to $20.00 per square foot, supports the experts' opinion that the market was stagnant, negating a time adjustment. From the evidence presented, I find that a time adjustment would be inappropriate and will not be applied.
Giving equal weight to the six comparable leases, I find the market rent for the office portion of the subject to be $18.75 per square foot gross for all years. 2. Vacancy and Credit Loss
Plaintiff's comparable lease #1, #2, and #3, as well as Defendant's comparable lease #1, #2, and #4.
Plaintiff's expert utilized a vacancy and credit loss of 5% for the bank space and 10% for the office space for tax year 2008, 7.5% and 10% respectively for tax year 2009, and 10% for both spaces for tax year 2010. Defendant's expert used a stabilized 5% for all years.
Plaintiff's expert arrived at his vacancy and credit factor by conducting a market overview of bank branch locations in Bergen County. The results of his analysis revealed that since 2007 there is a glut of available bank branch locations, and that demand and asking price have declined. In addition to the market overview, the expert interviewed banking personnel whose responsibility is the leasing of bank branches. For his analysis of the office space, the expert looked to the vacancy at the subject, vacancies in the Hasbrouck Heights market, and the expanded market surrounding Hasbrouck Heights. Additionally, he studies vacancy data published by GVA Williams for the relevant market.
Defendant's expert did not rely on published data, independent market studies, or discussion with broker or bankers in arriving at his vacancy and credit loss factor. He provided the court with a naked statement that for office space "[he] will utilize a 5% factor for vacancy and credit loss . . . based upon market trends as of the effective date(s) of valuation." For his bank branch factor he stated, "Demand for branch bank space in the subject market area has been strong. Therefore, we will utilize a 5% factor for vacancy and credit loss. . ." As stated in Comment 3 of N.J.R.E. 703, an expert must "'give the why and wherefore' of his or her opinion rather than mere conclusions." Defendant's expert has not identified the date upon which he relies in developing his vacancy and credit loss factor. He has not provided the "whys and wherefores." The court finds that Plaintiff's expert properly went out into the market and retrieved data to determine the rate. Thus, the court finds that the appropriate vacancy and credit loss for the components of the subject property is as opined by Plaintiff's expert. 3. Operating Expenses
The major difference in the two experts operating expense is Plaintiff's expert's inclusion of expenses for tenant improvements and parking lot rental. Due to the hybrid nature of the income stream—gross for office space and net for bank space—both experts allocated expenses to each space.
Certain Operating Expenses
Both experts applied a management fee (Plaintiff 4%, Defendant 5%), leasing commission (Plaintiff 5%, Defendant 3%), reserve for improvement (Plaintiff 0.35 per square foot, Defendant 0.30 per square foot), operating expenses attributable only to the office space (Plaintiff 6.00 per square foot, Defendant 5.00 per square foot). Plaintiff expert's total expenses for the above for each tax year are: $75,040 for tax year 2008; $74,635 for tax year 2009; $74,230 for tax year 2010. Defendant expert's total expenses are: $75,007 for tax year 2008; $74,774 for tax year 2009; $75,044 for tax year 2010.
Defendant's appraisal report has incorrect values for the expenses listed. It appears that defendant's expert utilized potential gross income, as opposed to effective gross income in calculating percentage expenses. Utilizing the corrected values for defendant's expenses, there is an insignificant difference between the two experts. Considering the detailed analysis provided by Plaintiff's expert coupled with the slight difference between the parties, the court finds plaintiff's expenses to be reasonable.
However, this does not conclude the discussion of operating expenses. The major difference in expenses is a result of Plaintiff expert's inclusion of two additional categories of expenses that he deemed necessary and reasonable to be applied. These categories include tenant improvements solely for the office portion, and the rental cost associated with rental of parking lot. The appraiser for the municipality did not deduct such expenses.
Tenant Improvement Costs
Tenant improvement costs may constitute an operating expense. "In certain real estate markets, space is rented to new tenants only after substantial interior improvements are made. If this work is performed at the landlord's expense and is required to achieve market rent, the expense of their improvements should be included in the reconstructed operating statement or part of the replacement allowance." The Appraisal of Real Estate at 496. Tenant improvement costs incurred by the landlord may be either capital expenditures or operating expenses. If the proofs establish that, in the relevant market, landlords customarily and regularly incur such costs, then deduction of such costs as an operating expense is appropriate. See. RTC Properties v. Town of Kearney, 13 N.J. Tax 146, 156 (Tax 1993) (rejection of deduction for tenant improvement costs involving industrial property); Morris Twp. v. LF Assocs. 12 N.J. Tax 87, 103 (Tax 1991) (tenant allowance customary and appropriate in an office building context); Hall Junction Holding Corp. v. Princeton Bor., 16 N.J. Tax 68 (Tax 1996) (tenant improvement allowance permitted in retail center).
The taxpayer's proofs as to tenant improvement costs consist of the testimony of its appraiser. The appraiser testified that landlords normally bear the cost of tenant improvements. He reviewed leases from the market area, as well as the Korpaz Survey, both of which demonstrated that tenant improvement allowance was a recurring cost and thus deductible as an operating expense. The municipality's appraiser offered no testimony with respect to tenant improvements.
I find that the proofs are adequate to establish that a tenant improvement allowance is a customary, regularly occurring landlord expense in the office market in which the subject is located. I further find that Plaintiff's expert has established by competent proofs, the appropriate amount of such deduction.
Parking Lot Expenses
With respect to the parking lot rental expenses, taxpayer's expert deducted the actual rental costs associated with the leased parking lot. These expenses included base rent, electric and real estate taxes. The municipal appraiser made no such deduction.
Though he acknowledged that the subject does not conform to the borough's parking requirements, Plaintiff expert's estimate of market rent for both office and bank space was developed with the understanding that the leased spaces would be available to tenants. Stated another way, the expert's market rent would be lower if the parking associated with the leased lost were not available to the tenants. As stated, the expert deducted the actual annualized cost of the leases as an operating expense.
The parking lot lease set out in Plaintiff expert's appraisal reflects a term of 5 years (2006-2011) with a base rent that increases 3% a year plus a flat fee of $25 a month for electricity and a tax pass through utilizing 1992 as the base year. Plaintiff's expert offered not a scintilla of evidence that his lease was at fair market value, or that it was an arms-length transaction between unrelated parties. In fact, there is no identification as to whom the landlord is, nor does he offer comparable parking lot leases from which a fair market rental value might be determined.
I find that parking lot lease expenses, if adequately supported, would be a proper operating expense deduction. My finding is based on the facts adduced at trial as to the fair rental value for the bank and office space, which anticipated via appropriate adjustments, that sufficient parking would be available for tenants at the subject. I further find that the proofs fail to establish the appropriate amounts of such deductions. Plaintiff's proofs contain no market date establishing the appropriate amount of the expenses. Accordingly, I reject the deduction of an operating expense for the leased parking because of the inadequacy of the proofs.
Having determined potential gross income, the vacancy and collective loss allowance and operating expenses, I turn to the determination of the appropriate capitalization rate. 4. Capitalization Rate
Both appraisers used the Band of Investment technique for developing their respective capitalization rates. This technique includes a component reflecting the requirements of assumed mortgage financing, based on market factors, and a component reflecting the requirements of the equity investor. For tax year 2008, Plaintiff's appraiser used a 7.00% interest rate for his mortgage component. Defendant's appraiser assumed a 6.30% interest rate for his mortgage component. Taxpayer's appraiser assumed a 30 year mortgage amortization period and the defendant's appraiser assumed a 25 year amortization period. Taxpayer's appraiser assumed a 75% loan-to-value ratio and the defendant's appraiser a 65% ratio. Plaintiff's appraiser assumed an 8% equity dividend rate, defendant's expert assumed a 7% equity dividend rate.
The resulting overall capitalization rate for tax year 2008 is 7.99% for plaintiff, which he rounded to 8.0%. Defendant's overall capitalization rate for tax year 2008 is 7.62%, which he rounded to 7.6%.
For tax year 2009, Plaintiff's expert assumed a 7.5% interest rate for his mortgage component, and Defendant's appraiser utilized a 6.5% interest rate for his mortgage component. Taxpayer's appraiser again assumed a 30 year mortgage amortization period, defendant assumed as with his 2008 cap rate, a 25 year mortgage amortization period. Plaintiff's appraiser assumed a 70% loan-to-value ratio, and Defendant's expert used a 65% loan-to-value ratio. With respect to the equity dividend rate, Taxpayer's expert utilized 8.50% and defendant's expert used 8%. The resulting overall capitalization rate for Taxpayer was 8.42%, which he rounded to 8.5%, and 8.07% rounded to 8.00% for the municipality.
For tax year 2010, Taxpayer's expert utilized the same assumption as tax year 2009, while the municipal expert's only change in assumption for tax year 2010 was his interest rate for his mortgage component, which he increased to 6.75%, resulting in Taxpayer's capitalization rate at 8.42% again rounded to 8.5%, and the municipality's capitalization rate at 8.199% rounded to 8.2%.
In arriving at their respective capitalization rates, both experts reviewed data published by "Korpacz Real Estate Investors Survey" and "Real Estate Research Corporation," (RECR). Additionally, Defendant's expert reviewed data published by the American Council of Life Insurance ("ACLI") for all of the respective years under review.
The overall capitalization rate is an "income rate for a total real property interest that reflects the relationship between a single year's net operating income expectancy and the total property price or value." The Appraisal of Real Estate at 462. The overall capitalization rate is "used to convert net operating income into an indication of overall property value." Ibid.
As stated, both experts relied on the Band of Investment technique for calculating an overall capitalization rate. "This technique is a form of 'direct capitalization' which is used 'to convert a single year's income estimate into a value indication.' The technique includes both a mortgage and an equity component." Hull Junction Holding Corp. v. Princeton Borough, 16 N.J. Tax 68, 80-81 (Tax 1996) (quoting Appraisal Institute, The Appraisal of Real Estate at 467 (10th ed. 1992)).
Because most properties are purchased with debt and equity capital, the overall capitalization rate must satisfy the market return requirements of both investment positions. Lenders must anticipate receiving a competitive interest rate commensurate with the perceived risk of the investment or they will not make funds available. Lenders generally require that the loan principal be repaid through periodic amortization payments. Similarly, equity investors must anticipate receiving a competitive equity cash return commensurate with the perceived risk, or they will invest their funds elsewhere.The Appraisal of Real Estate, supra, at 505.
In "using the Band of Investment technique, it is incumbent upon the appraiser to support the various components of the capitalization rate analysis by furnishing 'reliable market data...to the court as the basis for the expert's opinion so that the court may evaluate the opinion.'" Hull Junction Holding Corp., supra, 16 N.J. Tax at 82 (quoting Glen Wall Assocs. V. Wall Twp., 99 N.J. 265, 279-80 (1985)). "For these purposes, the Tax Court has accepted, and the Supreme Court has sanctioned, the use of data collected and published by the American Council of Life Insurance." Id. at 82-83. Additionally, appraisers may also use data collected and published by Korpacz Real Estate Investor Survey. Id. at 83. "By analyzing this data in toto, the court can make a reasoned determination as to the accuracy and reliability of the mortgage interest rates, mortgage constants, loan-to-value ratios, and equity dividend rates used by the appraisers." Ibid.
I have reviewed the tables contained in the respective appraisal reports and find that the taxpayer's expert presented a more reasoned analysis of the component parts of the capitalization rate. The basis capitalization rate for each of the years under review is: 8.99% for 2008, 8.5% for 2009, and 8.5% for 2010.
The Taxpayer's expert added to each of his base capitalization rates a factor representing real estate taxes payable to the landlord attributable to the income derived from the office space.
The municipality's expert added a tax factor attributable to the income derived from both the bank and office spaces. I find that applying the tax factor to the entire net operating income is inconsistent with an appraisal based upon both net leases (bank space) and gross leases (office space).
In a net lease, the landlord is fully reimbursed for the taxes attributed to the area of the improvement that is subject to the net lease. Accordingly, there is no expense attributable to the landlord, unlike a gross lease where the landlord is responsible for the tax payment from the rent paid. Therefore, I reject the tax factor computation included by the municipality's expert, and further find that the taxpayer's expert tax factor computation to be appropriate based on the facts in this case.
B. Valuation Summary
For the reasons set forth above, I find the value for the subject under the income approach to be $2,571,000 for 2008; $2,394,000 for 2009; and $2,334,000 for 2010.
+-------------------------------------------------------------+ ¦Tax Year 2008: ¦ +-------------------------------------------------------------¦ ¦Bank $30.00 (Net) @ 6,000 ¦$180,000.00 ¦ ¦ +--------------------------------+-------------+--------------¦ ¦Office $18.75 (Gross)@ 8,705 ¦ ¦$163,219.00 ¦ +-------------------------------------------------------------¦ ¦Less: Vacancy and Credit Loss ¦ +-------------------------------------------------------------¦ ¦Bank 5% ¦($)9,000.00 ¦($)16,322.00 ¦ ¦ ¦ ¦ ¦ ¦Office 10% ¦$171,000.00 ¦$146,897.00 ¦ +--------------------------------+----------------------------¦ ¦Total Gross Potential Income ¦$317,897.00 ¦ +--------------------------------+----------------------------¦ ¦Less: Expenses (w/o parking lot)¦$82,348.00 ¦ +-------------------------------------------------------------+
+--------------------------------------------------------------+ ¦Net Operating Income ¦$235,549.00 ¦ +--------------------------------+-----------------------------¦ ¦Capitalization Rate = 9.16% ¦$2,571,496.00 ¦ +--------------------------------+-----------------------------¦ ¦ Value (rounded) ¦ $2,571,000 ¦ +--------------------------------------------------------------¦ ¦Tax Year 2009: ¦ +--------------------------------------------------------------¦ ¦Bank $30.00 (Net) @ 6,000 ¦$180,000.00 ¦ ¦ +--------------------------------+--------------+--------------¦ ¦Office $18.75 (Gross)@ 8,705 ¦ ¦$163,219.00 ¦ +--------------------------------------------------------------¦ ¦Less: Vacancy and Credit Loss ¦ +--------------------------------------------------------------¦ ¦Bank 7.5% ¦($)13,500.00 ¦($)16,322.00 ¦ ¦ ¦ ¦ ¦ ¦Office 10% ¦$166,500.00 ¦$146,897.00 ¦ +--------------------------------+-----------------------------¦ ¦Total Gross Potential Income ¦$313,397.00 ¦ +--------------------------------+-----------------------------¦ ¦Less: Expenses (w/o parking lot)¦$81,943.00 ¦ +--------------------------------+-----------------------------¦ ¦Net Operating Income ¦$231,454.00 ¦ +--------------------------------+-----------------------------¦ ¦Capitalization Rate = 9.67% ¦$2,393,526.00 ¦ +--------------------------------+-----------------------------¦ ¦ Value (rounded) ¦ $2,394,000 ¦ +--------------------------------------------------------------¦ ¦Tax Year 2010: ¦ +--------------------------------------------------------------¦ ¦Bank $30.00 (Net) @ 6,000 ¦$180,000.00 ¦ ¦ +--------------------------------+--------------+--------------¦ ¦Office $18.75 (Gross)@ 8,705 ¦ ¦$163,219.00 ¦ +--------------------------------------------------------------¦ ¦Less: Vacancy and Credit Loss ¦ +--------------------------------------------------------------¦ ¦Bank 10% ¦($)18,000.00 ¦($)16,322.00 ¦ ¦ ¦ ¦ ¦ ¦Office 10% ¦$162,000.00 ¦$146,897.00 ¦ +--------------------------------+-----------------------------¦ ¦Total Gross Potential Income ¦$308,897.00 ¦ +--------------------------------------------------------------+
+----------------------------------------------+ ¦Less: Expenses (w/o parking lot)¦$81,538.00 ¦ +--------------------------------+-------------¦ ¦Net Operating Income ¦$227,359.00 ¦ +--------------------------------+-------------¦ ¦Capitalization Rate = 9.74% ¦$2,334,281.00¦ +--------------------------------+-------------¦ ¦ Value (rounded) ¦ $2,334,000 ¦ +----------------------------------------------+
As stated above, the final market value conclusion for each tax year is as follows:
+-------------------------------------------------------+ ¦ ¦2008 ¦2009 ¦2010 ¦ +----------------------+----------+----------+----------¦ ¦Overall Market Value ¦$2,571,000¦$2,394,000¦$2,334,000¦ +-------------------------------------------------------+
Having found the fair market value, the court will now determine the correct assessment by applying the Chapter 123 ratio to the fair market value. See. N.J.S.A. 54:1-35a. Pursuant to N.J.S.A. 54:51A-6a, in a non-revaluation year an assessment must be reduced when the ratio of the assessed value of the property to its true value exceeds the upper limit of the common level range. The common level range is defined by N.J.S.A. 54:1-35a(b) as "that range which is plus or minus 15% of the average ratio" for the municipality in which the subject property is located. The formula for determining the subject property's ratio is: Assessment ÷ True Value = Ratio
The ratio for the subject property, therefore, is determined as follows for each tax year in question:
TY 2008: $3,069,400 ÷ $2,571,000 = 1.1938
TY 2009: $3,069,400 ÷ $2,394,000 = 1.2821
TY 2010: $3,069,400 ÷ $2,334,000 = 1.3150
The chapter 123 average ratio for Defendant in 2008 was .9816 with an upper limit of 1.1316 and a lower limit of .8344. The county percentage level is 100%. Pursuant to N.J.S.A. 54:51A-6(b), "if the average ratio [for the municipality] is below the county percentage level (100%) and the ratio of the assessed value of the subject property to its true value exceeds the county percentage level (100%), the tax court shall enter judgment revising the taxable value of the property by applying the average ratio to the true value of the property." Here, the average ratio for the municipality, .9816, is below the county percentage level (100%) and the ratio of the assessed value of the subject property to its true value, 1.1938, exceeds the county percentage level (100%). Consequently, the court will determine the assessment for the property as follows:
$2,571,000 * .9816 = $2,523,694
That amount will be rounded to $2,524,000.
The chapter 123 average ratio for Defendant in 2009 was .9626 with an upper limit of 1.1126 and a lower limit of .8182. The county percentage level is 100%. Pursuant to N.J.S.A. 54:51A-6(b), "if the average ratio [for the municipality] is below the county percentage level (100%) and the ratio of the assessed value of the subject property to its true value exceeds the county percentage level (100%), the tax court shall enter judgment revising the taxable value of the property by applying the average ratio to the true value of the property." Here, the average ratio for the municipality, .9626, is below the county percentage level (100%) and the ratio of the assessed value of the subject property to its true value, 1.2821, exceeds the county percentage level (100%). Consequently, the court will determine the assessment for the property as follows:
$2,394,000 * .9626 = $2,304,464
That amount will be rounded to $2,304,000.
The chapter 123 average ratio for Defendant in 2010 was .9735 with an upper limit of 1.1235 and a lower limit of .8275. The county percentage level is 100%. Pursuant to N.J.S.A. 54:51A-6(b), "if the average ratio [for the municipality] is below the county percentage level (100%) and the ratio of the assessed value of the subject property to its true value exceeds the county percentage level (100%), the tax court shall enter judgment revising the taxable value of the property by applying the average ratio to the true value of the property." Here, the average ratio for the municipality, .9735, is below the county percentage level (100%) and the ratio of the assessed value of the subject property to its true value, 1.3150, exceeds the county percentage level (100%). Consequently, the court will determine the assessment for the property as follows:
$2,334,000 * .9735 = $2,272,149
That amount will be rounded to $2,272,000.
III. Conclusion
For administrative purposes, the aggregate assessment will be allocated among the four lots in the same proportion as the original assessments. Judgment will be entered fixing the assessments of the subject properties as follows.
For Tax Year 2008, a Judgment by the Tax Court Clerk should be entered as follows:
+-------------------------+ ¦Block 24, Lot 5 ¦ +-------------------------¦ ¦Land ¦$195,874 ¦ +------------+------------¦ ¦Improvements¦$4,111 ¦ +------------+------------¦ ¦Total ¦$199,985 ¦ +-------------------------¦ ¦Block 24, Lot 66 ¦ +-------------------------¦ ¦Land ¦$247,598 ¦ +------------+------------¦ ¦Improvements¦$12,335 ¦ +------------+------------¦ ¦Total ¦$259,933 ¦ +-------------------------¦ ¦Block 24, Lot 69 ¦ +-------------------------¦ ¦Land ¦$137,820 ¦ +------------+------------¦ ¦Improvements¦$1,645 ¦ +------------+------------¦ ¦Total ¦$139,465 ¦ +-------------------------¦ ¦Block 24, Lot 72 ¦ +-------------------------¦ ¦Land ¦$284,108 ¦ +------------+------------¦ ¦Improvements¦$1,640,509 ¦ +------------+------------¦ ¦Total ¦$1,924,617 ¦ +-------------------------+
For Tax Year 2009, a Judgment by the Tax Court Clerk should be entered as follows:
+-------------------------+ ¦Block 24, Lot 5 ¦ +-------------------------¦ ¦Land ¦$178,801 ¦ +------------+------------¦ ¦Improvements¦$3,754 ¦ +------------+------------¦ ¦Total ¦$182,555 ¦ +-------------------------¦ ¦Block 24, Lot 66 ¦ +-------------------------¦ ¦Land ¦$226,015 ¦ +------------+------------¦ ¦Improvements¦$11,260 ¦ +------------+------------¦ ¦Total ¦$237,275 ¦ +-------------------------¦ ¦Block 24, Lot 69 ¦ +-------------------------¦ ¦Land ¦$125,801 ¦ +------------+------------¦ ¦Improvements¦$1,501 ¦ +------------+------------¦ ¦Total ¦$127,308 ¦ +-------------------------¦ ¦Block 24, Lot 72 ¦ +-------------------------¦ ¦Land ¦$259,345 ¦ +------------+------------¦ ¦Improvements¦$1,497,517 ¦ +------------+------------¦ ¦Total ¦$1,756,862 ¦ +-------------------------+
For Tax Year 2010, a Judgment by the Tax Court Clerk should be entered as follows:
+-------------------------+ ¦Block 24, Lot 5 ¦ +-------------------------¦ ¦Land ¦$176,318 ¦ +------------+------------¦ ¦Improvements¦$3,701 ¦ +------------+------------¦ ¦Total ¦$180,019 ¦ +-------------------------¦ ¦Block 24, Lot 66 ¦ +-------------------------¦ ¦Land ¦$222,877 ¦ +------------+------------¦ ¦Improvements¦$11,103 ¦ +------------+------------¦ ¦Total ¦$233,980 ¦ +-------------------------¦ ¦Block 24, Lot 69 ¦ +-------------------------¦ ¦Land ¦$124,059 ¦ +------------+------------¦ ¦Improvements¦$1,481 ¦ +------------+------------¦ ¦Total ¦$125,540 ¦ +-------------------------¦ ¦Block 24, Lot 72 ¦ +-------------------------¦ ¦Land ¦$255,743 ¦ +------------+------------¦ ¦Improvements¦$1,476,718 ¦ +------------+------------¦ ¦Total ¦$1,732,461 ¦ +-------------------------+
Very truly yours,
Joseph Andresini, J.T.C.