PORTER, HERBERT R., JR., C/O HOWARD PRESS v. BOROUGH OF ROSELLE BJS ASSOCIATES, C/O HOWARD PRESS V.BOROUGH OF ROSELLE ( 2018 )

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
___________________________________
PORTER, HERBERT R., JR., c/o ) TAX COURT OF NEW JERSEY
HOWARD PRESS, ) DOCKET NO. 007285-2009
) DOCKET NO. 015636-2010
Plaintiff, ) DOCKET NO. 014384-2011
)
v. )
)
BOROUGH OF ROSELLE, )
)
Defendant. )
___________________________________ )
BJS ASSOCIATES, c/o ) TAX COURT OF NEW JERSEY
HOWARD PRESS, ) DOCKET NO. 007284-2009
) DOCKET NO. 015726-2010
Plaintiff, ) DOCKET NO. 014386-2011
)
v. )
) MEMORANDUM OPINION
BOROUGH OF ROSELLE, )
)
Defendant. )
___________________________________ )
Decided: February 13, 2018
M. Sidney Donica, Esq., for plaintiff (Brach Eichler, LLC,
attorneys)
Robert F. Renaud, Esq., for defendant (Palumbo, Renaud &
DeAppolonio, LLC, attorneys)
DeALMEIDA, J.T.C.
This is the court’s opinion after trial in the above-referenced matters challenging the local
property tax assessments on real property for tax years 2009, 2010, and 2011. For the reasons
stated more fully below, the assessments are reduced for tax years 2009 and 2010, and affirmed
for tax year 2011.
I. Procedural History and Findings of Fact
The following findings of fact and conclusions of law are based on the evidence and
testimony admitted at trial.
These appeals concern two parcels of real property in Roselle Borough, Union County.
One parcel is designated in the records of the borough as Block 5301, Lot 1, and is commonly
known as 470 West First Avenue. The other parcel is designated in the records of the borough as
Block 5301, Lot 2, and is commonly known as 450 West First Avenue. The parties agree that the
two parcels are used as a single economic unit as a print shop, warehouse, and related offices by a
tenant, Howard Press, a wholly-owned subsidiary of Federal Express. 1
The combined parcels constitute 3.7 acres and are improved with two interconnected
buildings with a total of 65,222 square feet of rentable space. The structures, built in 1945, with
an addition constructed in 1947, are one-story with approximately 12-14 feet ceilings. The
buildings contain office space, warehouse space, and assembly space. Overall, the buildings are
in average condition and are of fair quality. Four loading docks, two on each side of the buildings,
can accommodate tractor trailers. Two loading docks in the front of one of the buildings can
accommodate only box trucks. The office space was last renovated in the 1970s. The ceilings in
the warehouse area are too low to facilitate modern standards for storage at a distribution center.
They instead are sufficient for storage associated with light industrial and commercial uses.
The buildings are air conditioned and heated, with ducted venting of heat from some areas,
and portions of the buildings are equipped with an air filtration system. The air filtration system
1
Although the two parcels were owned by different entities on the relevant valuation dates,
those entities were controlled by the same individuals. Neither party argues that the distinct
ownership of the parcels poses an obstacle to having the properties valued as a single economic
unit. See Universal Folding Box Co. v. City of Hoboken, 19 N.J. Tax 141 (Tax 2000), aff’d, 351
N.J. Super. 227 (App. Div.), certif. denied, 174 N.J. 545 (2002).
2
was the focus of a significant amount of trial testimony. The municipality's expert opined that the
system was a significant characteristic of the subject property. He relied on the existence of the
system, which he suggested is necessary for printing, as a basis for his opinion that the subject
property's highest and best use is for rental to a tenant who operates a printing enterprise. Plaintiff's
expert, on the other hand, viewed the air filtration system as equipment installed by the current
tenant at the subject property to suit the needs of its business operations, and not as a significant
feature of the buildings. He offered the opinion that the system had no influence on the subject
property's highest and best use, which he opined to be as a rental property for any light industrial
or commercial uses.
The parcels are zoned for industrial and commercial uses and sit between a two-lane road
and railroad tracks along the municipal boundary with Roselle Park Borough. There are single-
family homes across the street from the subject property. While the parcels are not far from several
major arteries, the path from the subject property to those thoroughfares runs through residential
and commercial areas with two-lane streets and traffic signals, making the subject property inferior
to industrial properties with direct, or less congested, access to major highways. There is adequate
on-site parking at the subject property.
For tax years 2009 through 2011, Block 5301, Lot 1 was assessed as follows:
Land $240,000
Improvement $629,100
Total $869,100
The Chapter 123 average ratio for the municipality for tax year 2009 is 42.32%. When the
average ratio is applied to the assessment, the implied equalized value of the parcel for that tax
year is $2,053,639 ($869,100 ÷ .4232 = $2,053,639).
3
The Chapter 123 average ratio for the municipality for tax year 2010 is 43.22%. When the
average ratio is applied to the assessment, the implied equalized value of the parcel for that tax
year is $2,010,875 ($869,100 ÷ .4322 = $2,010,875).
The Chapter 123 average ratio for the municipality for tax year 2011 is 47.07%. When the
average ratio is applied to the assessment, the implied equalized value of the parcel for that tax
year is $1,846,399 ($869,100 ÷ .4707 = $1,846,399).
For tax years 2009 through 2011, Block 5301, Lot 2 was assessed as follows:
Land $419,500
Improvement $530,400
Total $949,900
The Chapter 123 average ratio for the municipality for tax year 2009 is 42.32%. When the
average ratio is applied to the assessment, the implied equalized value of the parcel for that tax
year is $2,244,565 ($949,900 ÷ .4232 = $2,244,565).
The Chapter 123 average ratio for the municipality for tax year 2010 is 43.22%. When the
average ratio is applied to the assessment, the implied equalized value of the parcel for that tax
year is $2,197,825 ($949,900 ÷ .4322 = $2,197,825).
The Chapter 123 average ratio for the municipality for tax year 2011 is 47.07%. When the
average ratio is applied to the assessment, the implied equalized value of the parcel for that tax
year is $2,018,058 ($949,900 ÷ .4707 = $2,018,058).
Because the parcels are operated as a single economic unit, the aggregate true market value
of the parcels is determined for purposes of analyzing the validity of the assessments. See Jaydor
Corp. v. Township of Millburn-Short Hills, 17 N.J. Tax 378 (Tax 1998); N.J.S.A. 54:51A-6. The
aggregate implied equalized value of the two parcels for each year is summarized as follows:
4
Tax Year Block 5301, Lot 1 Block 5301, Lot 2 Total
2009 $2,053,639 $2,244,565 $4,298,204
2010 $2,010,875 $2,197,825 $4,208,700
2011 $1,846,399 $2,018,058 $3,864,457
Plaintiff challenged the assessments on the parcels for each tax year, either through a direct
appeal to this court (tax year 2009), or by first appealing to the Union County Board of Taxation,
and, after receiving Judgments affirming the assessments, to this court (tax years 2010 and 2011). 2
The municipality did not file a Counterclaim in any tax year.
During the two-day trial, each party presented an expert real estate appraiser to offer
opinions of the true market value of the subject property on the relevant valuation dates. There
was no objection to the qualifications of the experts. Although they offered differing opinions
with respect to the subject property's highest and best use, both experts relied on the income
capitalization approach to determine the true market value of the subject properties. At the start
of trial, the parties stipulated to two variables in the income capitalization approach: a market
vacancy and collection loss rate (7.5%), and a market expense rate (12.5% of effective gross
income). The court accepted those stipulations. The experts also provided consistent testimony
that the buildings contain 65,222 square feet for rentable space. Accordingly, three of the five
variables of the income capitalization approach were resolved by the parties. The only variables
that remained to be determined at trial were market rent and the capitalization rate.
As will be discussed in greater detail below, the experts offered different opinions on the
two variables at issue. When the experts applied their opinions of market rent and capitalization
2
For tax year 2009, N.J.S.A. 54:3-21 permitted a direct appeal to be filed with this court
challenging an assessment exceeding $750,000. The statute was amended, effective January 16,
2010, to raise the jurisdictional limit for direct appeals to assessments exceeding $1,000,000. L.
2009, c. 251 § 1. Plaintiff was, therefore, required to initiate its challenges to the tax years 2010
and 2011 assessments before the county board of taxation prior to seeking relief in this court.
5
rate to the agreed upon variables, the experts offered the following opinions of the combined true
market value of the two parcels:
Tax Year 2009 2010 2011
Valuation Date 10/1/2008 10/1/2009 10/1/2010
Plaintiffs’ Expert $2,484,000 $2,223,000 $2,373,000 3
Defendant’s Expert $4,275,000 $4,216,000 $4,275,000
The parties submitted post-trial written summations.
II. Conclusions of Law
The court’s analysis begins with the well-established principle that “[o]riginal assessments
and judgments of county boards of taxation 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 Assocs. v. Township of Hamilton, 3 N.J. Tax 439 (Tax
3
Plaintiff's expert offered a separate opinion of true value for each parcel. The values in this
chart reflect the combined true market values of the two parcels offered by plaintiff's expert for
each tax year.
6
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 itself is so patently defective as to justify removal of the presumption of validity.”
Transcontinental Gas Pipe Line Corp. v. Township 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)(citation 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, supra, 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)). In order 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 East 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), aff’d, 18 N.J. Tax 658 (App. Div.), certif. denied, 165 N.J. 488 (2000)), aff’d, 21
N.J. Tax 590 (App. Div. 2004).
7
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 has not been produced, the
assessment shall be affirmed and the court need not proceed to making a value determination. Ford
Motor Co. v. Township 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).
Plaintiff produced sufficient evidence to overcome the presumption of correctness attached
to the assessments, and the county board Judgments at issue here. The opinions of value offered
by plaintiff’s expert, which were based on an accepted methodology for determining value and on
evidence of the type often used for such determinations, if accepted as true, raised doubt in the
court’s mind with respect to whether the assessments on the subject property exceeded true market
for the tax years in question. The expert opined that the subject property had a true market value
approximately half that of the implied equalized value reflected by the assessments under review.
Plaintiff would be entitled to relief were the opinions of its expert adopted by the court.
The court’s inquiry, however, does not end here. Once the presumption is overcome, the
“court must then turn to a consideration of the 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).
8
A. Highest and Best Use.
A determination of the true market value of real property first requires a determination of
the property's highest and best use. In Clemente v. Township of South Hackensack, 27 N.J. Tax
255, 267-69 (Tax 2013), aff’d, 28 N.J. Tax 337 (App. Div. 2015), now Presiding Judge Andresini
succinctly explained the legal precedents that guide this court in making a highest and best use
determination:
For property tax assessment purposes, property must be valued at its
highest and best use. Ford Motor Co. v. Township of Edison, 127
N.J. 290, 300-01, 604 A.2d 580 (1992). “Any parcel of land should
be examined for all possible uses and that use which will yield the
highest return should be selected.” Inmar Associates, Inc. v.
Township of Edison, 2 N.J. Tax 59, 64 (Tax 1980). Accordingly,
the first step in the valuation process is the determination of the
highest and best use for the subject property. American Cyanamid
Co. v. Township of Wayne, 17 N.J. Tax 542, 550 (Tax 1998), aff’d,
19 N.J. Tax 46 (App. Div. 2000). “The concept of highest and best
use is not only fundamental to valuation but is a crucial
determination of market value. This is why it is the first and most
important step in the valuation process.” Ford Motor Co. v.
Township of Edison, 10 N.J. Tax 153, 161 (Tax 1988), aff’d o.b. per
curiam, 12 N.J. Tax 244 (App. Div. 1990), aff’d, 127 N.J. 290, 604
A.2d 580 (1992); see also Gen. Motors Corp. v. City of Linden, 22
N.J. Tax 95, 107 (Tax 2005).
The definition of highest and best use contained in The Appraisal of
Real Estate, a text frequently used by this court as a source of basic
appraisal principles, has remained relatively constant for all of the
years under appeal. Highest and best use is defined as:
The reasonably probable and legal use of vacant land
or improved property that is physically possible,
appropriately supported, and financially feasible and
that results in the highest value.
[Appraisal Institute, The Appraisal of Real Estate, 22
(13th ed. 2008).]
The highest and best use analysis requires sequential consideration
of the following four criteria, determining whether the use of the
subject property is: 1) legally permissible; 2) physically possible; 3)
9
financially feasible; and 4) maximally productive. Ford Motor Co.,
supra, 10 N.J. Tax at 161; see also The Appraisal of Real Estate at
279. Implicit in this analysis is the assumption that the proposed use
is market-driven; in other words, that it is determined in a value-in-
exchange context and that there is a market for such use. WCI-
Westinghouse v. Township of Edison, 7 N.J. Tax 610, 616-17 (Tax
1985), aff’d o.b. per curiam, 9 N.J. Tax 86 (App. Div. 1986). A
highest and best use determination is not based on value-in-use
because the determination is a function of property use and not a
function of a particular owner’s use of subjective judgment as to
how a property should be used. See Entenmann’s Inc. v. Borough
of Totowa, 18 N.J. Tax 540, 545 (Tax 2000). The highest and best
use of an improved property is the “use that maximizes an
investment property’s value, consistent with the rate of return and
associated risk.” Ford Motor Co., supra, 127 N.J. at 301, 604 A.2d
580. Further, the “actual use is a strong consideration” in the
analysis. Ford Motor Co., supra, 10 N.J. Tax at 167.
Highest and best use is not determined through subjective analysis
by the property owner. The Appraisal of Real Estate at 279. The
proper determination of highest and best use requires a
comprehensive market analysis to ascertain the supply and demand
characteristics of alternative uses. See Cherry Hill, Inc. v. Township
of Cherry Hill, 7 N.J. Tax 120, 131 (Tax 1984), aff’d, 8 N.J. Tax
334 (App. Div. 1986). Additionally, the proposed use must not be
remote, speculative, or conjectural. Id. If a party seeks to
demonstrate that a property’s highest and best use is other than its
current use, it is incumbent upon that party to establish that
proposition by a fair preponderance of the evidence. Penn’s Grove
Gardens, Ltd v. Borough of Penns Grove, 18 N.J. Tax 253, 263 (Tax
1999); Ford Motor Corp., supra, 10 N.J. Tax at 167. Property should
be assessed in the condition in which it is utilized and the burden is
on the person claiming otherwise to establish differently. Highview
Estates v. Borough of Englewood Cliffs, 6 N.J. Tax 194, 200 (Tax
1983).
The parties’ experts offered conflicting opinions with respect to the highest and best use of
the subject property. Plaintiff's expert opined that the highest and best use of the subject is use as
an income-producing property for any industrial or commercial use. He offered the view that the
subject property is a standard light industrial/commercial building with average quality office,
warehouse, and assembly space amendable to being leased to a variety of light industrial or
10
commercial tenants. Defendant's expert, on the other hand, opined that the highest and best use of
the subject property is use for rental to a tenant who operates a print shop, with associated office
and storage space.
The court finds that the limited highest and best use opinion offered by defendant's expert
is not credible. The court gleans from the evidence that the expert's highest and best use opinion
is based primarily on the air filtration system in place at the subject property, along with the air
conditioning system, and the cleanliness of the facility. The expert opined that printing operations
require a high level of clean air. He implied, although he did not testify explicitly, that the air
filtration system was a fixed component of the real property of sufficient magnitude that the
optimal use of the buildings was for printing enterprises.
The expert, however, did not testify that removal of the air filtration system would destroy
or severely damage the buildings, or that its installation represents a significant investment. There
is, in fact, scant evidence on these points in the trial record. A few photographs of the air filtration
units do not support a conclusion that they are permanently affixed to the real property. They
instead appear to be hanging from the ceiling by a few thin chains in a limited number of locations
and plugged in through electrical outlets in the ceilings. There is no evidence in the record with
respect to the cost of installing the system, or the cost, feasibility, or physical consequences of
removing it. Nor is there any evidence in the record with respect whether the system would be
useful to tenants other than printers.
With respect to the air conditioning and heating system, the court agrees with defendant's
expert that building-wide air conditioning and heating is an attractive feature for a light
industrial/commercial space. While there is no direct evidence on point in the record, it seems
reasonable to conclude that many 1970s vintage warehouse/office buildings are not fully air
11
conditioned and heated, particularly in the warehouse space. The court concludes that this feature
of the subject property is best addressed through adjustments to rents at comparable buildings
without air conditioning and heating, and is not a sufficiently distinct characteristic to limit the
subject property's highest and best use.
There is simply not enough evidence to support the expert's narrow highest and best use
conclusion. The court adopts the highest and best use opinion offered by plaintiff's expert. The
subject property's highest and best use as of the relevant valuation dates is for rental for any light
industrial or commercial use, which the court determines to be the subject property's current use
as of the valuation dates.
B. Approach to 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. Township of East Brunswick, 1 N.J. Tax 244 (Tax 1980)),
aff’d, 23 N.J. Tax 9 (App. Div. 2005). “The choice of the predominant approach will depend upon
the facts of each case and the reaction of the experts to those facts.” 125 Monitor Street, supra, 21
N.J. Tax at 238 (citing City of New Brunswick v. Division of Tax Appeals, 39 N.J. 537 (1963);
Pennwalt Corp. v. Township of Holmdel, 4 N.J. Tax 51, 61 (Tax 1982)).
12
Both experts relied primarily on the income capitalization approach to valuing the subject
property. The income capitalization approach is the preferred method of estimating the value of
income producing property. Parkway Village Apartments Co. v. Township of Cranford, 108 N.J.
266, 270 (1987); Hull Junction Holding Corp. v. Borough of Princeton, 16 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.” Appraisal
Institute, The Appraisal of Real Estate 445 (13th ed. 2008). The court finds that the income
capitalization approach is the best method for determining the value of the subject property, an
income-producing industrial/commercial building.
C. Calculation of Value Using Income Capitalization Approach
Determining the value of real property pursuant to the income capitalization approach can
be summarized as follows:
Market Rent
x Square Footage
Potential Gross Income
- Vacancy and Collection Losses
Effective Gross Income
- Operating Expenses
Net Operating Income
÷ Capitalization Rate
Value of Property
See Spiegel v. Town of Harrison, 19 N.J. Tax 291, 295 (App. Div. 2001), aff’g, 18 N.J. Tax 416(Tax 1999); Appraisal Institute, The Appraisal of Real Estate 466 (13th ed 2008).
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, supra, 108 N.J. at 270. This
13
differs from the actual rental income realized on the property, which may be below market rates.
Parkview Village Assocs. v. Borough of Collingswood, 62 N.J. 21, 29-30 (1972). However, actual
income is a significant probative factor in the inquiry as to economic income. Id. at 30. “Checking
actual income to determine whether it reflects economic income is a process of sound appraisal
judgment applied to rentals currently being charged for comparable facilities in the competitive
area.” Ibid.Plaintiff’s expert identified eight leases from buildings in Union and Middlesex Counties,
all but one of which are multi-tenanted buildings, that he considered reflective of market rent for
the subject property. Seven of the expert’s proffered comparable leases reflect triple net rents,
with the tenant paying all but a few expenses. See N.J. Indus. Props., Inc. v. Y.C. & V.L., Inc.,
100 N.J. 32, 434 (1985). One of the expert's comparable leases reflects gross rent, with the tenant
paying no expenses except tenant electric charges. See American Cyanamid Co. v. Township of
Wayne, 17 N.J. Tax 542, 572 (Tax 1998), aff’d, 19 N.J. Tax 46 (App. Div. 2000). The expert
adjusted the gross rent downward by 20% to make it comparable to a net rent. After application
of additional adjustments for location, and building quality, he opined adjusted rents per square
foot of
Tax Year 2009 $3.60 to $4.82
Tax Year 2010 $3.60 to $4.82
Tax Year 2011 $3.20 to $4.82
Based on those comparable rents, the expert opined market rents per square foot of
Tax Year 2009 $4.00
Tax Year 2010 $4.00
Tax Year 2011 $4.00
14
Defendant’s expert, on the other hand, identified ten leases from buildings in Union County
that he considered reflective of market rent for the subject. Seven of the buildings were multi-
tenant, with the remaining three single-user. As discussed at greater length above, defendant's
expert opined that the subject property had a highest and best use as a tenant-occupied printing
operation. His comparable leases, however, were not limited to buildings rented to printers. In
fact, none of his comparable leases were for the use he found to be the highest and best use of the
subject property. In light of the court's decision to adopt a more general highest and best use –
rental for any light industrial or commercial use – the court will consider the comparable leases of
defendant's expert, which comport with the court's conclusion of highest and best use.
After application of adjustments for market conditions, size, single occupancy (which the
expert considered to be superior), parking, age, condition, and air conditioning, heating and
ventilation system at the subject property, he opined adjusted rents per square foot of
Tax Year 2009 $5.16 to $6.95
Tax Year 2010 $4.90 to $7.17
Tax Year 2011 $4.90 to $7.17
Defendant’s expert opined market rents of
Tax Year 2009 $6.00
Tax Year 2010 $5.75
Tax Year 2011 $5.75
A crucial consideration for the court is that the lease in place at the subject property on the
valuation dates was for $5.71 per square foot. While the court is careful not to consider a lease at
the subject property automatically to constitute market rent, lest the court value a leased fee interest
15
as opposed to true market value, an arm's length lease at the subject property may be used by the
court to corroborate an opinion of market rent offered by expert appraisers.
Plaintiff's expert did not consider the subject lease at all. He determined the lease to lack
credibility as evidence of market rent because, in his view, the lessor and lessee are related parties.
There is no convincing evidence in the record that this proposition is accurate. According to the
testimony, the lessee, Howard Press, Inc., a subsidiary of Kinkos, which is owned by Federal
Express, was purchased from the lessor prior to the commencement of the relevant lease. Plaintiff's
expert testified that the lessor's son continued to work for the tenant after the sale. He did not
identify the responsibilities of the lessor's son with the tenant or provide any evidence that the rent
was adjusted because of the son's position.
Contrary to the expert's position, the lease contains convincing evidence that it is the result
of an arm's length negotiation. Express lease clauses establish a detailed procedure in which
licensed real estate appraisers will be used to determine a fair market rent for the subject property
when the lease is renewed (in the event that the parties do not agree to a fair market rent). These
provisions strongly suggest that the rent in place at the subject property is the result of arm's length
negotiations. The court will use the rental in the subject lease as corroborative evidence.
The subject lease tends to corroborate the economic rent offered by defendant's expert. The
expert opined a market rent slightly higher than the subject lease for tax year 2009, and almost
exactly at the subject lease level for tax years 2010 and 2011. The comparable leases of defendant's
expert, all from Union County and one in Roselle Borough, are of buildings sufficiently similar to
the subject to provide credible evidence of market rent, with appropriate adjustments. Although
some of the comparable leases are from properties that are newer than the subject with features
more amenable to current business practices in the commercial/warehouse market, plaintiff
16
acknowledges that defendant's comparable leases Nos. 1, 6, 7, 8 & 9 derive from properties that
are similar to the subject property. The adjusted rents offered by defendant's expert on those
comparable leases are $5.16, $5.13, $6.30, $7.17, and $5.50. These rents create a range into which
the rent reflected in the subject lease squarely falls.
The court agrees with plaintiff that a location adjustment to defendant's comparable leases
is appropriate, given the location of the subject property in area not readily accessible to major
arteries. The roads on which trucks must travel to access Routes 1&9 and the Turnpike from the
subject property are, in effect, local roads with traffic lights. Defendant's expert did not make such
an adjustment. The negative 5% location adjustment applied by plaintiff's expert to his comparable
leases is reasonable. If applied to all of defendant's comparable leases, the adjustment would lead
to a 5% reduction in the adjusted rents and, logically, to a 5% reduction in his opinions of economic
rents, resulting in economic rents of $5.70 ($6.00 x .95 = $5.70) for tax year 2009, and $5.46
($5.75 x .95 = $5.46) for tax years 2010 and 2011.
Many of the comparable leases used by plaintiff's expert are from outside Union County.
In addition, all but one of the comparable leases are from multi-unit buildings. No evidence was
introduced with respect to the feasibility, from physical or economic standpoints, of converting
the subject property, which was occupied by a single tenant on the valuation dates, to a multi-
tenant property. Plaintiff's expert did not make an adjustment to the multi-tenant rental rates for
the single-occupant status of the subject. Defendant's expert made a positive 5% adjustment for
this factor, which the court finds to be reasonable. In addition, plaintiff's expert did not make an
adjustment for the air conditioning and heating system at the subject, which while not limiting the
subject's highest and best use, is a valuable attribute of the subject. Because of these factors, the
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court considers the analysis of defendant's expert to be more credible, with the adjustments noted
above.
In light of these findings, the court concludes a market rent for the subject of $5.50 for each
tax year.
2. Building Size
As noted above, the parties are in agreement that the subject property had 65,222 square
feet of rentable space for each of the tax years at issue.
3. Vacancy and Collection Loss Rate
A determination of value under the income-capitalization approach must include “a
vacancy and loss allowance over the economic life of the property, using, in some measure, the
actual history, but placing more emphasis on the trends in the most recent years.” First Republic
Corp. of Am. v. Borough of East Newark, 16 N.J. Tax 568, 580 (App. Div. 1997), aff’d, 17 N.J.
Tax 531 (App. Div. 1998). “The important principle implicated in the estimate of a vacancy and
loss allowance is that the estimate is simply the appraiser’s informed judgment of the long-term
and durability of the income stream.” Ibid. As Judge Crabtree explained:
[The] determination involves more than uncritical acceptance of the
vacancy rates prevailing in the subject on the valuation dates or, for
that matter, the office building vacancy rates prevailing in the
subject’s market area. Rather, a vacancy allowance must be
predicated on an estimate of the long-term quality and durability of
the rental income stream.
[University Plaza Realty Corp. v. City of Hackensack, 12 N.J. Tax
354, 369 (Tax 1992), aff’d, 264 N.J. Super. 353 (App. Div.), certif.
denied, 134 N.J. 481 (1993)(citation omitted).]
The rate should not be “unduly influenced by the experience of the subject property during
a period of financial turmoil,” but also cannot “totally ignore[] the history of the subject property
. . . .” Pine Plaza Assocs., LLC v. Township of Hanover, 16 N.J. Tax 194, 205 (Tax 1996).
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Here, the parties stipulated to a vacancy and collection loss of 7.5% for each tax year.
4. Operating Expenses
The parties stipulated to market expenses of 12.5% of effective gross income for each of
the tax years at issue.
5. Capitalization Rate
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 . . . .” Appraisal Institute, 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.Defendant’s expert used the Band of Investment technique to calculate 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, supra, 16 N.J. Tax. at 80-81 (quoting Appraisal
Institute, Appraisal of Real Estate 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.
[Appraisal Institute, Appraisal of Real Estate 505 (13th ed 2008).]
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
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the court as the basis for the expert’s opinion so that the court may evaluate the opinion.’” Hull
Junction Holding, supra, 16 N.J. Tax at 82 (quoting Glen Wall Assocs. v. Township of Wall, 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. “Relevant data is also 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.
Plaintiff's expert used these tools to determine a range of capitalization rates for tax years
2009 and 2010 from 4.3% to 8.5% for properties similar to the subject. He considered the quality,
quantity and durability of the income stream and physical characteristics of the subject to warrant
a capitalization rate of 8.5%, at the high end of the range, for both tax years. For tax year 2009,
he determined a range of capitalization rates from 5.15% to 12% for properties similar to the
subject. He opined a capitalization rate of 9.5% for tax year 2011, given the economic downturn
generally, and in the real estate market in particular, that began in late 2008 and continued on each
of the relevant valuation dates. Those years have been described as “the deepest and longest
economic contraction since the Great Depression,” defined by “more job losses than any
contraction since the Great Depression as well as a painfully slow recovery.” Steven A. Ramirez,
The Virtues of Private Securities Litigation: An Historic and Macroeconomic Perspective, 45 Loy.
U. Chi. L.J. 669, 684-85 (2014).
Defendant's expert, using the same tools opined capitalization rates of 7.0% for tax year
2009, 7.2% for tax year 2010, and 7.1% for tax year 2011. Defendant urges the court to reject the
variation of rates reflected in the opinion of plaintiff's expert, given the well-established principle
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that market data must be stabilized for local property tax purposes. See Entenmann's, Inc. v.
Borough of Totowa, 18 N.J. Tax 540, 555 (Tax 2000).
The court finds that the capitalization rates opined by plaintiff's expert to be credible, given
the age and condition of the subject. The court concludes that the capitalization rates opined by
defendant’s expert do not adequately reflect the risk involved in the purchase of the subject, given
the economic conditions developing as of October 1, 2009 and October 1, 2010, and the age of the
property. The court will stabilize capitalization rates at 8.5% for each tax year.
6. Calculation of Value
In light of the consistent market rent and capitalization rates determined by the court, as
well as the consistent vacancy and collection rate, and market expenses stipulated by the parties,
the calculation of value is the same for each tax year:
+ Market Rent ($5.50 x 65,222) $ 358,721
Potential Gross Income (PGI) $ 358,721
- Vacancy & Collection (7.5% PGI) $ 26,904
Effective Gross Income (EGI) $ 331,817
- Expenses (12.5% of EGI) $ 41,477
Net Operating Income $ 290,340
÷ Capitalization Rate .0850
Value of Property $3,415,765
The court will round this figure to $3,420,000, which is the true market value of the subject
property as of the valuation date for each tax year.
D. Applying Chapter 123
Pursuant to N.J.S.A. 54:51A-6a, commonly known as Chapter 123, 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
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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
In this instance, the aggregate assessments of the two parcels under appeal, $1,819,000
($869,100 + $949,900 = $1,819,000), will be considered because they are operated as a single
economic unit. 4
1. Tax Year 2009
For tax year 2009, the formula produces a ratio of:
$1,819,000 ÷ $3,420,000 = .5319
The Chapter 123 common level ratio for Roselle Borough for tax year 2009 is .4232, with
an upper limit of .4867 and a lower limit of .3597. The ratio for the subject property for this tax
year is .5319, which exceeds the upper limit of the range for this tax year. Consequently, the court
will determine the assessment for the subject property for tax year 2009 by multiplying the true
value by the Chapter 123 ratio:
$3,420,000 x .4231 = $1,447,002
The court will round this figure to $1,447,000. The court will allocate the assessment among the
two parcels.
A Judgment establishing the assessment for Block 5301, Lot 1 for tax year 2009 will be
entered as follows:
Land $240,000
Improvement $407,000
Total $647,000
4
As noted above, the court has determined the aggregate true market value of the two
parcels.
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A Judgment establishing the assessment for Block 5301, Lot 2 for tax year 2009 will be
entered as follows:
Land $400,000
Improvement $400,000
Total $800,000
2. Tax Year 2010
For tax year 2010, the formula produces a ratio of:
$1,819,000 ÷ $3,420,000 = .5319
The Chapter 123 common level ratio for Roselle Borough for tax year 2010 is .4322, with
an upper limit of .4970 and a lower limit of .3674. The ratio for the subject property for this tax
year is .5319, which exceeds the upper limit of the range for this tax year. Consequently, the court
will determine the assessment for the subject property for tax year 2010 by multiplying the true
value by the Chapter 123 ratio:
$3,420,000 x .4322 = $1,478,124
The court will round this figure to $1,447,000. The court will allocate the assessment roughly
evenly among the two parcels.
A Judgment establishing the assessment for Block 5301, Lot 1 for tax year 2010 will be
entered as follows:
Land $240,000
Improvement $407,000
Total $647,000
A Judgment establishing the assessment for Block 5301, Lot 2 for tax year 2010 will be
entered as follows:
Land $400,000
Improvement $400,000
Total $800,000
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3. Tax Year 2011
For tax year 2011, the formula produces a ratio of:
$1,819,000 ÷ $3,420,000 = .5319
The Chapter 123 common level ratio for Roselle Borough for tax year 2011 is .4707, with
an upper limit of .5413 and a lower limit of .4001. The ratio for the subject property for this tax
year is .5319, which is within the common level range. No adjustment to the assessments is
warranted. The court will enter a Judgment affirming the Judgments of the county board of
taxation for tax year 2011.
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