Washington Shopping Center, Inc. v. Washington Township ( 2021 )

TAX COURT OF NEW JERSEY
JOSHUA D. NOVIN Morris County Courthouse
Judge Washington & Court Streets
1st Floor, P.O. Box 910
Morristown, New Jersey 07963
Tel: (609) 815-2922, Ext. 54680
Fax (862) 397-5690
NOT FOR PUBLICATION WITHOUT THE APPROVAL
OF THE TAX COURT COMMITTEE ON OPINIONS
February 11, 2021
Lawrence S. Berger, Esq.
Berger & Bornstein, LLC
237 South Street
P.O. Box 2049
Morristown, New Jersey 07962
Martin Allen, Esq.
DiFrancesco, Bateman, Kunzman,
Davis, Lehrer & Flaum, P.C.
15 Mountain Boulevard
Warren, New Jersey 07059
Re: Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
Dear Mr. Berger and Mr. Allen:
This constitutes the court’s opinion following trial of local property tax appeals filed by
plaintiff, Washington Shopping Center, Inc. (“WSCI”). WSCI challenges the 2016, 2017, and
2018 tax year assessments on its improved property located in Washington Township
(“Washington Township”).
For the reasons stated more fully below, the court affirms the 2016, 2017, and 2018 tax
year assessments.
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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I. Procedural History
A. Findings of Fact
WSCI is the owner of the real property and improvements located at 459-471 Route 31
South, Washington Township, Warren County, New Jersey. The property is identified on
Washington Township’s municipal tax map as Block 75, Lot 1 (the “subject property”).
The real property comprises a 22.84-acre rectangular shaped parcel located at the
intersection of Route 31 South and County Road 632 (also known as Asbury Anderson Road). As
of the valuation dates the real property was improved with an 82,233 square foot retail shopping
center constructed in 1996. The subject property also includes a McDonald’s fast-food restaurant
located on a 0.9703-acre pad site and two additional undeveloped pad sites. The site is serviced
by well water and an on-site sewage treatment system/plant. The on-site sewage treatment
system/plant is located southwest of the shopping center, with the septic field adjacent thereto. A
water reservoir is located on the site to maintain sufficient water pressure for the shopping center’s
sprinkler system. The site is serviced by natural gas and electric.
The subject property is located in Washington Township’s HC – Highway Commercial
District, permitting uses that include appliance stores, bakeries, banks, clothing stores, electronic
stores, furniture stores, grocery stores, hardware stores, liquor stores, medical and dental offices,
pet stores, pharmacies, restaurants, and movie theatres. 1 The subject property is located within the
Highlands Act Planning Area. 2 The subject property is located in a rural setting, including areas
1
The Expert (as such term is hereafter defined) offered testimony that although not identified in
his appraisal report, self-storage facilities are a permitted use in the HC – Highway Commercial
District.
2
New Jersey enacted the Highlands Water Protection and Planning Act, N.J.S.A. 13:20-1 to -35
(the “Highlands Act”), to provide an apparatus for regional land use planning in areas of northern
New Jersey identified as the Highlands Region. See N.J.S.A. 13:20-7(a).
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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of farms, open lands, residential developments, and some commercial development. The subject
property is in the X Flood Hazard Zone, denoting an area of minimal flooding risk.
WSCI timely filed complaints challenging the subject property’s 2016, 2017, and 2018 tax year
assessments. Washington Township timely filed a counterclaim for the 2018 tax year.
At trial, WSCI offered testimony from a State of New Jersey certified general real estate
appraiser, who was accepted by the court, without objection, as an expert in the field of property
valuation (the “Expert”). 3
As of each valuation date, the subject property’s tax assessment, implied equalized value,
and the Expert’s value conclusions are set forth below:
Avg. ratio Implied WSCI’s
Valuation Tax assessed to equalized Expert’s
date Assessment true value Value concluded value
10/1/2015 $6,438,700 94.19% $6,835,864 $3,525,000
10/1/2016 $6,438,700 97.43% $6,608,539 $3,525,000
10/1/2017 $6,438,700 98.35% $6,546,721 $3,525,000
When initially constructed in 1996, the shopping center was designed to accommodate an
A&P grocery store consisting of 45,190 square feet and approximately 37,043 square feet of
additional retail space. 4 According to the Expert, the subject property has historically experienced
“issues of vacancies,” and “poor economic performance.” In his estimation, the permanent closure
of the A&P store in December 2015 “impacted the financial feasibility and the future continuation
of this retail center.” During the tax years at issue, the subject property experienced the following
vacancy rates: (i) 25%, as of the October 1, 2015 valuation date (82,233 sq. ft./20,220 sq. ft. =
3
The defendant stipulated as to the Expert’s qualifications.
4
A portion of the 37,043 square feet comprises a building depth of 154 feet and was initially
designed for occupancy by a Walgreens pharmacy, however Walgreens never took possession of
the space. The remainder of the 37,043 square feet comprises a building depth of 100 feet.
Washington Shopping Center, Inc. v. Washington Township
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24.5%); (ii) 80%, as of the October 1, 2016 valuation date (82,233 sq. ft./65,410 sq. ft. = 79.5%);
and (iii) 89%, as of the October 1, 2017 valuation date (82,233 sq. ft./72,914 sq. ft. = 88.66%). 5
The subject property is located less than one mile from a shopping center containing a Shop
Rite grocery store constructed approximately “ten [to] fifteen years ago” that, in the Expert’s
opinion, “has had a negative impact on the subject [property].” The Expert offered that due to the
“locational characteristics” and “because of changing retail habits and because of the
demographics, . . . this center has been severely impacted by the loss of the A&P. And in my
opinion . . . it’s not something that can be fixed . . . it is a market concern that has substantially
affected this center.” In the Expert’s opinion the subject property has been experiencing some
physical obsolescence for several years and the costs that would have to be expended by the
property owner to secure new tenants for the former A&P space “will probably likely exceed any
rent they could collect over ten years or a reasonable holding period, and that further diminishes
the viability of this center.”
Specifically, the Expert opined that due to the depth of a portion of the buildings, between
154 and 184 feet, in-line retailers find “that’s just too much space, it’s too deep.” Thus, he
concluded that these portions of the buildings in the shopping center are “non-rentable space,”
“obsolete” and have “no economic value.” In the Expert’s opinion “you’d have to subdivide that
space off because your in-line tenants can’t use that.” In sum, the expert found that 49,769 square
feet of the shopping center is “non-useable space,” to which he ascribed no value. 6 However, the
5
In the Expert’s opinion, “as of October 1, 2015 everybody knew that [A&P] were going into
bankruptcy. This was the end of A&P. . . .” Thus, the Expert ascribed an 81% vacancy rate to the
subject property as of the October 1, 2015 valuation date, even though A&P remained in
possession and continued operations in the subject property until December 2015.
6
Under his income capitalization approach, the Expert ascribed a value to only 32,464 square feet
of the shopping center (82,233 - 32,464 = 49,769 square feet).
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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Expert’s testimony as to how he calculated this “non-useable” square footage was imprecise. The
Expert offered testimony that the “non-useable” area of the subject property comprises 23,500
square feet of “front retail space” and 21,690 of “non-useable space” (84’ depth x 235’ width =
19,740 square feet, plus 1,950 square feet of former shipping area = 21,690). Yet, that accounts
for only 45,190 square feet (23,500 + 21,690 = 45,190 square feet). Thus, the Expert apparently
concluded when preparing his appraisal report that an additional 4,579 square feet of the shopping
center was “non-useable.”
B. Presumption of Validity
At the close of WSCI’s proofs, Washington Township moved for dismissal of these matters
under R. 4:37-2(b), arguing that WSCI failed to overcome the presumption of validity that attaches
to the local property tax assessments. See Pantasote Co. v. City of Passaic, 100 N.J. 408, 413
(1985); Riverview Gardens v. North Arlington Borough, 9 N.J. 167, 174 (1952)); Little Egg
Harbor Twp. v. Bonsangue, 316 N.J. Super. 271, 285-86 (App. Div. 1998); MSGW Real Estate
Fund, LLC v. Borough of Mountain Lakes, 18 N.J. Tax 364, 373 (Tax 1998).
According WSCI all reasonable and legitimate inferences which could be deduced from
the evidence presented, the court concluded that WSCI produced cogent evidence sufficient to
overcome the presumption of validity. If accepted as true, the opinions of the Expert and the facts
upon which the Expert relied raised debatable questions regarding the correctness of the subject
property’s local property tax assessments for the 2016, 2017, and 2018 years. MSGW Real Estate
Fund, LLC, 18 N.J. Tax at 376. Accordingly, the court denied Washington Township’s motion
and placed a statement of reasons on the record.
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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Following denial of its motion, Washington Township notified the court that under R. 8:3-
9, it was withdrawing its counterclaim for the 2018 tax year. 7 Additionally, Washington Township
advised the court that it was resting, without introducing or offering any proofs or evidence in
these matters, including any testimony from its proposed testifying expert.
The court then assigned dates for submission of post-trial briefs and reply briefs. WSCI’s
counsel then raised the prospect of seeking to compel testimony from Washington Township’s
proposed testifying expert, as a rebuttal witness. Although no testimony or evidence had been
offered by Washington Township in defense of the subject property’s local property tax
assessments, WSCI’s counsel argued that he should be permitted to compel testimony from
Washington Township’s proposed testifying expert. Washington Township objected to WSCI’s
request. Accordingly, the court afforded the parties an opportunity to submit written briefs
addressing the matter.
On April 9, 2019, the court delivered a written opinion concluding that WSCI could not
compel the testimony of Washington Township’s proposed testifying expert against the proposed
testifying expert’s wishes, or without his consent. In addition, the court declined to permit WSCI
to offer rebuttal testimony when Washington Township failed to offer any affirmative evidence.
The court declined to reopen the trial record in these matters and set down dates for the submission
of post-trial briefs.
C. Adverse Inference 8
In its post-trial brief WSCI asserts that it is “entitled to an adverse inference with regard to
the support that defendant[’]s appraisal and appraiser would have for plaintiff [WSCI’s]
7
No counterclaims were filed by Washington Township for the 2016 or 2017 tax years.
8
In its post-trial reply brief, WSCI refers to the adverse inference charge as a “negative inference.”
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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evidence.” 9 Specifically, WSCI asks the court to “draw an adverse inference from [Washington
Township’s] failure to call its [proposed testifying] expert as a witness to refute [WSCI’s Expert’s]
determinations and his conclusion as to the fair market value of the subject property.”
In response, Washington Township maintains that it would be impermissible for the court
to draw an adverse inference from its decision to rest and not offer any evidence in these matters,
including without limitation, soliciting testimony from its proposed testifying expert.
“When ‘a party fails to produce a witness who is within its power to produce and who
should have been produced,’ the adverse inference rule permits the factfinder ‘to infer that the
witness's evidence is unfavorable to the party's case.” Washington v. Perez, 219 N.J. 338, 352
(2014) (quoting Black's Law Dictionary, 62 (9th ed. 2009)). Thus, when it is within the power of
a party to produce a witness whose testimony would be meaningful and provide clarity regarding
issues presented, the rule permits the factfinder to presume that the testimony would have been
harmful. See Graves v. United States, 150 U.S. 118, 121 (1893); State v. Clawans, 38 N.J. 162(1962); Maul v. Kirkman, 270 N.J. Super. 596 (App. Div. 1994).
However, in New Jersey our courts have historically applied the adverse inference rule
with a measure of caution, requiring trial courts to adhere to a procedure requiring a “case-specific
9
WSCI argues in its post-trial brief that it sought the opportunity to “put parts of [Washington
Township’s proposed testifying expert’s] appraisal into evidence since his appraisal supported a
number of [WSCI’s Expert’s] findings and he was present in the courtroom.” However, the court
emphasizes that in support of its argument to compel testimony from Washington Township’s
proposed testifying expert, WSCI did not place any limitations on the scope of the expert testimony
or evidence that it would solicit. Instead, WSCI argued that it had anticipated it “would have the
opportunity to cross-examine Mr. Raymond and elicit testimony as to his expert report,” and that
“[s]ince Mr. Raymond’s appraisal report unequivocally corroborated Mr. Manzione’s testimony. .
. Mr. Raymond’s testimony will be helpful to the court is assessing the weight to be given to Mr.
Manzione’s determinations in finding the true value of the property.” See WSCI’s February 22,
2019 letter brief.
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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analysis,” and consideration of the potential prejudice and likelihood to “mislead or confuse the
jury,” in gauging whether an adverse inference charge is warranted. See Washington, 219 N.J. at
353-357; State v. Hill, 199 N.J. 545, 561 (2009); State v. Velasquez, 391 N.J. Super. 291, 306
(App. Div. 2007). This procedure and analysis mandates that the party seeking the adverse charge
notify the adversary and the court of the name of the witness not called, and who has “superior
knowledge of relevant facts.” State v. Hill, 199 N.J. at 561. Moreover, the trial court must make
specific factual findings on the record whether the witness is “peculiarly within the control or
power of only the one party”; the witness’ availability to that party “both practically and
physically”; and that the “testimony of the uncalled witness will elucidate relevant and critical
facts in issue.” Id. at 561-562.
Importantly, our Supreme Court has drawn a distinction between affording an adverse
inference charge with respect to fact witness testimony and expert testimony. Recognizing the
“significant distinctions” that exist between fact witness and expert witness testimony, the Court
observed that our court rules afford litigants broad discovery rights with respect to the opinions of
expert witnesses, in contrast to those of fact witnesses. Washington, 219 N.J. at 361. The Court
highlighted that because an expert is required to set forth the factual bases supporting the expert’s
opinion, “an expert is unlikely to be in exclusive possession of factual evidence that would justify
an adverse inference charge.” Ibid. Thus, “[r]arely will an expert be in a position to reveal
previously undisclosed factual information, for the first time, on the stand at trial.” Id. at 362.
Therefore, it will be an “unusual setting” when a party decides “not to call an expert witness . . .
prompted by the party's fear that the expert will reveal unfavorable facts that would otherwise not
be disclosed.” Ibid.Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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Moreover, the Court emphasized that giving an adverse inference charge because of the
failure of a party to call an expert witness would be inconsistent with our court rules which “do
not compel a litigant who has disclosed the name and opinion of a particular expert to call that
expert to testify at trial.” Ibid. Finally, the Court highlighted that during a trial there are “many
strategic and practical reasons that may prompt a party who has retained an expert witness to decide
not to present the expert's testimony . . . a party may decide against calling a particular expert at
trial to save resources . . . [a]n expert’s testimony may no longer be relevant because a previously
contested issue has been resolved. . . .” Id. at 363. Thus, the Court reasoned, there may be “many
explanations for a party's decision not to call a particular expert that may have nothing to do with
a party's fear that the expert will reveal prejudicial information.” Ibid. Accordingly, the Court
concluded that an adverse inference charge “will rarely be warranted when the missing witness is
not a fact witness, but an expert.” Id. at 364.
Here, WSCI argues that because Washington Township elected not to offer testimony from
its proposed testifying expert the court should infer that the expert would have offered testimony
favorable or supportive of WSCI’s Expert’s value conclusions and opinions. Specifically, WSCI
asserts that had Washington Township’s expert testified during trial, he may have offered
testimony “supportive of [WSCI’s] conclusions on some issues.” However, WSCI does not
contend, nor has it effectively demonstrated that Washington Township’s expert possessed a
“superior knowledge of relevant facts” in these matters. The mere possibility that an expert may
have offered testimony supportive to the conclusions of another expert, had the expert testified
during trial, does not warrant application of an adverse inference. WSCI offered no evidence that
Washington Township’s proposed testifying expert witness possessed superior knowledge of facts
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Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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related to the subject property and that his testimony would have elicited more meaningful insight
into that information than WSCI’s Expert offered.
Significantly, WSCI was made aware, prior to commencement of trial, of both the factual
bases and conclusions reached by Washington Township’s proposed testifying expert, when the
parties exchanged discovery and appraisal reports. Thus, in advance of trial Washington Township
disclosed to WSCI, and WSCI was afforded the opportunity to discover any alleged “superior”
facts known by Washington Township’s proposed testifying expert witness probative to the subject
matter in these local property tax appeal actions.
Additionally, as expressed by the court in its April 9, 2019 letter opinion, in New Jersey “a
party cannot compel the testimony of an adversary’s proposed testifying expert unless the expert
has consented to offering such expert opinion testimony.” Thus, permitting the factfinder to apply
an adverse inference based on a litigant’s knowing and willful trial strategy, or by virtue of a
party’s selection during trial from multiple sources of expert testimony, would run afoul of those
principles. As cogently expressed by our Appellate Division, in local property tax appeal matters
the appealing party shoulders “the burden of proving [that] the assessment erroneous. The
evidence necessary to overcome the presumption of validity must be ‘definite, positive and certain
in quality and quantity’ . . . [the taxing district] ‘was under no legal obligation to shore up the
weaknesses in plaintiff's proofs by the presentation of independent evidence of value.’”
Glenpointe Associates v. Teaneck Twp., 12 N.J. Tax 118, 123 (App. Div. 1990).
Thus, applying the criteria and considerations expressed by the Court in Washington v.
Perez, the court finds that Washington Township’s failure to present expert witness testimony and
independent evidence of market value does not warrant an adverse inference charge.
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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D. Trial record
Annexed to the certification of WSCI’s counsel, in support of its post-trial brief, are copies
of Washington Township’s proposed testifying expert’s appraisal report and copies of tax bills and
farmland assessment applications. In its post-trial brief, WSCI’s counsel highlights portions of
the value conclusions reached by Washington Township’s proposed testifying expert in his
appraisal report, which report was not part of the trial record. Moreover, WSCI’s post-trial brief
requests the court “take judicial notice of the farmland assessment of the 34 acre [adjacent]
farmland-assessed parcel. . . . ,” which property was not the subject matter of these local property
tax appeals and which documents were not made part of the trial record.
Washington Township objects to “the references [contained] throughout plaintiff’s [post-
trial] brief to defendant’s expert’s appraisal report which was not introduced into evidence. . . .”
Additionally, Washington Township objects to “the submission of Exhibits C [Application for
Farmland Assessment and tax bills] and D [Washington Township’s proposed testifying expert’s
appraisal report] to [WSCI’s counsel’s] Certification, neither of which was in evidence at trial.”
It is well-settled principle that counsel is afforded “broad latitude in summation.” Colucci
v. Oppenheim, 326 N.J. Super. 166, 177 (App. Div. 1999); Hayes v. Delamotte, 231 N.J. 373, 387-
388 (2018); Diakamopoulos v. Monmouth Med. Cen., 312 N.J. Super. 20, 32 (App. Div. 1998);
Condella v. Cumberland Farms, Inc., 298 N.J. Super. 531, 534 (Law Div. 1996). However, that
latitude is not without its reasonable limits, and a counsel's “comments must be confined to the
facts shown or reasonably suggested by the evidence introduced during the course of the trial.”
Ibid. (Emphasis added); see also Spedick v. Murphy, 266 N.J. Super. 573, 590 (App. Div.), certif.
denied, 134 N.J. 567 (1993). “[C]ounsel may draw conclusions even if the inferences that the jury
is asked to make are improbable, perhaps illogical, erroneous or even absurd, unless they are
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couched in language transcending the bounds of legitimate argument, or there are no grounds for
them in the evidence.” Colucci, 326 N.J. Super. at 177. “Within those limits, however, ‘[c]ounsel
may argue from the evidence any conclusion which a jury is free to reach.’” Hayes, 231 N.J. at
387-388.
Significantly, in New Jersey, “[i]t is error to rest a decision on matters not appearing in the
record.” Second Reformed Church v. Board of Adjustment of Borough of Freehold, 30 N.J. Super.
338 (App. Div. 1954). A judge is “governed by the principle of the exclusiveness of the record,”
thus, the court must base its decisions on the trial record, and not information personally known to
the judge, or information that may have been disclosed outside of the trial record. Morris County
Land Improv. Co. v. Parsippany-Troy Hills, 40 N.J. 539, 549 (1963); see also Giordano v. City
Com. of Newark, 2 N.J. 585 (1949).
Here, in lieu of summation or closing arguments, the court afforded WSCI’s counsel and
Washington Township’s counsel the opportunity to submit post-trial briefs. Thus, WSCI’s
counsel’s post-trial brief, certification, and exhibits to the certification are the functional equivalent
of their summation or closing arguments in these matters. Accordingly, the arguments offered by
WSCI’s counsel must be confined to the facts disclosed in the trial record, or those that were
reasonably suggested by the evidence introduced during trial. Washington Township’s proposed
testifying expert’s appraisal report was not made part of the trial record in these matters and the
conclusions and opinions contained therein were not reasonably suggested by the evidence.
Additionally, the opinions and/or conclusions reached by Washington Township’s proposed
testifying expert in his appraisal report were not part of the trial record. Therefore, because
Washington Township’s proposed testifying expert’s appraisal report, including the statements
and conclusions reached therein, were not part of the trial record and were not reasonably
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suggested by the evidence, the court will not consider those documents and any statements or
conclusions reached therein as evidence in deciding these matters.
However, the court observes that during cross-examination the Expert disclosed that “there
is a farmland qualified piece that does add about another 30 plus acres to the site.” Moreover,
Washington Township’s counsel methodically cross-examined the Expert regarding the subject
property’s zoning and that “part of the property which is now farmland,” inquiring whether the
Expert made any inquiry into “developing the farmland area into [a] residential” subdivision.
Additionally, the Expert’s appraisal report, admitted into evidence as P-1, delineates the subject
property’s local property tax assessment, Washington Township’s applicable tax rate, and the
subject property’s local property taxes for the 2016, 2017, and 2018 tax years. Thus, insofar that
WSCI’s counsel’s certification or briefs contains or avers to the Applications for Farmland
Assessment for the 2016, 2017, and 2018 tax years, and copies of Washington Township’s tax
bills for the subject property and the farmland assessed property for the 2016, 2017, and 2018
years, the court will afford WSCI’s counsel’s deference and latitude in his summation papers, as
such information was reasonably suggested by the evidence introduced during trial.
II. Conclusions of Law
Having concluded that WSCI presented evidence sufficient to overcome the presumption
of validity that attaches to the local property tax assessment, does not inexorably lead the court to
the conclusion that the subject property’s tax assessments are erroneous. Once the presumption
has been 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. v. Edison Twp., 127 N.J. 290, 312 (1992). The court must be mindful that “although
there may have been enough evidence [presented] to overcome the presumption of correctness at
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the close of [the plaintiff’s] case-in-chief, the burden of proof remain[s] on the [plaintiff] . . . to
demonstrate that the judgment [or local property tax assessment] under review was incorrect.” Id.
at 314-15.
A. Highest and Best Use
In the court’s pursuit to determine the true value of the subject property, consideration must
be given to that price which a hypothetical buyer would pay a hypothetical seller, neither of which
are constrained to purchase or sell the property, as of October 1 of the pretax year. See Petrizzo
v. Borough of Edgewater, 2 N.J. Tax 197, 200 (Tax 1981); Genola Ventures v. Shrewsbury
Borough, 2 N.J. Tax 541, 551 (Tax 1981). An indispensable element to the process of property
valuation and to the determination of a property’s true market value is discerning its highest and
best use. Ford Motor Co., 127 N.J. 290 (1992). “For local property tax assessment purposes,
property must be valued at its highest and best use.” Entenmann's Inc. v. Totowa Borough, 18 N.J.
Tax 540, 545 (Tax 2000). Thus, the highest and best use analysis is often referred to as “the first
and most important step in the valuation process.” Ford Motor Co. v. Edison Twp., 10 N.J. Tax
153, 161 (Tax 1988).
The highest and best use analysis comprises the “sequential consideration of the following
four criteria, determining whether the use of the subject property is: 1) legally permissible; 2)
physically possible; 3) financially feasible; and 4) maximally productive.” Clemente v. Twp. of
South Hackensack, 27 N.J. Tax 255, 267-269 (Tax 2013), aff’d, 28 N.J. Tax 337 (App. Div. 2015).
See also County of Monmouth v. Hilton, 334 N.J. Super. 582, 588 (App. Div. 2000).
However, the highest and best use of a property is not a static principle. The highest and
best use of a property may alter over time with a market that is in transition, or because of changes
in the economic climate, zoning, or from the presence or lack of development. When engaging in
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a highest and best use analysis the appraiser must interpret “the market forces that affect the subject
property and identify[] the use or uses on which the final opinion of value is based.” Appraisal
Institute, The Appraisal of Real Estate, 42 (14th ed. 2013). An appraiser must closely examine the
parcel being appraised “for all possible uses and that use which will yield the highest return should
be selected.” Inmar Associates, Inc. v. Edison Twp., 2 N.J. Tax 59, 64 (Tax 1980).
In arriving at a conclusion of a property’s highest and best use, the “focus of [the] highest
and best use analysis is on the potential uses of the land as though vacant. In practice, however,
the contributory value of the existing improvements and any possible alteration of those
improvements are just as important in determining highest and best use and . . . in developing an
opinion of the market value of the property.” The Appraisal of Real Estate at 337.
[A]n appraiser needs to test whether the existing improvements
contribute value, rather than simply assume that the current use is
the highest and best use because the improvements are already in
place. . . . Demolition of improvements can be considered the most
extreme form of modification to the current use of the property as
improved. If the value of the property as improved is greater than
the value of the site as though vacant less demolition costs, the
existing improvements contribute value to the property's highest and
best use, and the improvements should not be demolished at that
time. When the improvements no longer contribute to
value, demolition and redevelopment of the ideal improvement
would be economically supportable.
[The Appraisal of Real Estate, at 346 (Emphasis added).]
1. As Improved
The Expert concluded that the highest and best use of the subject property, as improved,
and to “reduce operating costs, including maintenance, taxes, insurance and other items . . . is to
demolish the former A&P portion of the facility.” In reaching that conclusion the Expert indicated
that he examined the subject property’s historical vacancy rates, and the vacancy rates of the
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shopping centers comprising his comparable leases. After performing that analysis, the Expert
reached the conclusion that it is “not financially feasible” to maintain the A&P space, and that it
should be razed rather than attempting to refit it and subdivide it. 10 The Expert explained that
“considering the physical deficiencies of the [property] . . . the highest and best use [as improved]
is to demolish the A&P space and then you’re really left with just in-line retail that can serve the
local market where the type of ma and pop user would go to that center.” In the Expert’s opinion,
“the market’s not going to absorb this space [so] there’s no point in having it.” Therefore, the
Expert concluded that the highest and best use of the subject property, as improved, is as a
neighborhood strip retail center with demolition of the existing A&P space.
However, the court finds the Expert’s concluded highest and best use analysis of the subject
property, as improved, flawed and not credible. The Expert opines that it would be more
financially advantageous for WSCI to reduce its overhead and expenses by demolishing 49,769
square feet of leasable area in the shopping center, or approximately 61% of the shopping center
(49,769 sq. ft./82,233 sq. ft. = 60.52%), because of what he characterizes as a perceived inability
of the marketplace to absorb such retail space. In support of such proposition, the Expert offered
testimony that one mid-sized retail space, approximately 50 to 60 years old, has remained vacant
for an extended time. Nonetheless, the Expert then undertakes an income capitalization approach
to value, relying on six comparable retail leases entered into between 2004 and 2014. 11 These six
10
Although the Expert conceded that the A&P space could be subdivided and repurposed for other
retail uses, he offered testimony that the cost to subdivide and repurpose the space would be
between $70 to $200 per square foot. However, this testimony must be reconciled with the
Expert’s appraisal report, which states that the costs for “sub-dividing the space to attract smaller
tenants” would be approximately “$100+/SF.”
11
The Expert’s appraisal report included a total of fifteen leases ranging in size from 1,500 to
30,000 square feet. However, for reasons detailed later in the court’s opinion, the court found that
several leases were not credible evidence of economic rent due a number of factors, including the
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comparable leases comprise mid-sized retail stores ranging in size from 7,600 to 16,934 square
feet, and bear unadjusted rental rates of between $7.17 to $13.30 per square foot. Thus, despite
the Expert’s conclusion that it would not be “financially feasible” to subdivide the 45,190 square
feet of former A&P space because the market would be unable to absorb it, his reliance on an
income capitalization approach to value and six comparable leases ranging in size from 7,600 to
16,934 square feet suggests otherwise. Moreover, although the Expert opined that the market
cannot absorb this type of retail space, and that the highest and best use of the subject property, as
improved, would be to demolish 61% of the shopping center, the Expert was unable to identify
any other shopping centers in the subject property’s market area that have engaged in such
wholesale demolition.
The court’s conclusion is further buttressed by the Expert’s testimony regarding how he
computed the subdivision costs. During trial, the Expert offered testimony that in reaching his
conclusion that it was not financially feasible to subdivide the A&P space, he consulted Marshall
and Swift Valuation Service’s cost tables to estimate the subdivision costs. According to his
testimony, the tables for Neighborhood and Community Shopping Center Interior Retail Space
discloses “if you look at the good space, it’s $53.38 a square foot. You’ve got to multiply it by a
local multiplier, which is about a third, 1.3. That gives you up to about $72, give or take.” 12 The
Expert further offered that the aforesaid calculated amount does not include interior demolition
dates of execution of the leases, the circumstances surrounding the execution of the leases, and
locational differences between the subject property and the comparable leased property.
12
The Marshall and Swift Valuation Service cost tables reproduced in the Appendix to the
Expert’s report discloses that for a Neighborhood and Community Shopping Center Interior Retail
Space of “Good” quality, the cost would be $55.38 per square foot, not $53.38 per square foot.
Additionally, the court is uncertain how the Expert determined the local multiplier to be applied
to the base finish cost was 1.30, as no local multiplier for Washington Township or any
municipality in Warren County was included in the Expert’s Appendix.
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costs, therefore, he opined that it would be uneconomical to incur approximately $100 per square
foot to subdivide the A&P space into smaller retail space. However, during cross-examination the
Expert acknowledged that his estimates for demolition and alteration of mechanicals systems were
offered.
Significantly however, later during trial and in an effort to explain his estimated
subdivision costs, the Expert offered that “I think the best someone could hope to get at this center
would be $5 a square foot for that type of space” and “[i]f I’m getting $5 rent and it cost me $100
[to subdivide the A&P retail space], that’s a 5 percent return before making any [money] on my
investment. Plus, . . . it’s going to take me 20 years to recoup my cost.” Thus, in reaching his
conclusion that the subject property’s highest and best use, as improved, was demolition of 49,769
square feet of retail area he determined it was not financially feasible to subdivide, the Expert
apparently attributed only a $5.00 per square foot rental value to those subdivided area, rather than
his concluded economic rental value of $12.00 per square foot. Stated differently, in analyzing
the financial feasibility and maximally productive uses of the subject property under the highest
and best use analysis, the Expert did not apply his concluded economic rent. Instead, the Expert
applied a value of $5.00 to the potential subdivided area, or approximately 40% of his concluded
economic rent.
In sum, the court finds that Expert’s conclusion that the subject property’s highest and best
use, as improved, is demolition of demolition of 49,769 square feet, or approximately 61% of the
subject property’s retail area not credible.
2. As Vacant
The Expert concluded the subject property’s highest and best use, as vacant, was for
“commercial use.” However, in performing his highest and best use, as vacant analysis, the Expert
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apparently did not consider the maximally productive or financially feasible criteria under the
highest and best use test. Although the Expert’s appraisal report detailed that “[f]inancially
feasible and maximally productive uses for the site are for commercial development,” his
testimony revealed that he did not investigate or analyze what specific “commercial use” would
produce the highest and best use of the subject property. Stated differently, the Expert did not
analyze what legally permissible and physically possible commercial uses of the subject property
would be both financially feasible and maximally productive. In response to Washington
Township’s counsel’s inquiry that “[y]ou didn’t go through the exercise of determining what was
maximally productive and financially feasible as a . . . vacant highest and best use,” the Expert
responded, “Yeah. Typically[,] you’re looking at what’s legally permissible, and there’s lots of
uses there. So, it depends on the individual user’s needs for that.” In sum, the Expert offered no
meaningful testimony or evidence as to his analysis of either the size of the improvement that
could be erected on the subject property, nor did he delineate exactly what type of commercial use
would be financially feasible and maximally productive.
3. Excess and Surplus Land
The Expert’s appraisal report further contains the conclusion that the “subject contains
excess land for future retail development.” However, effective cross-examination caused the
Expert to alter this conclusion and contend that he erred in describing the land as “excess land.”
Rather, the Expert submitted during cross-examination that the land should be more appropriately
characterized as “surplus land.” While this distinction may seem inconsequential, the analysis
required to be undertaken with respect to “excess land” and “surplus land” can be very different.
Surplus land is the portion of the land that is unnecessary “to support the existing improvement
and cannot be separated from the property and sold off.” Appraisal Institute, The Appraisal of
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Real Estate, 214 (13th ed. 2008) (Emphasis added). Conversely, excess land is “land beyond the
normal needs of a particular use and that which is not necessary to support the existing
improvements.” Schimpf v. Little Egg Harbor Twp., 14 N.J. Tax 338, 343 (Tax 1994). Thus,
excess land possesses a separate and distinct value, has the ability to be sold, and must be “valued
at its highest and best use and added to the value of the lot currently used, in order to ascertain the
value of the lot as a whole.” Ibid. (citing Appraisal Institute, The Appraisal of Real Estate, 212
(10th ed. 1992)) (Emphasis added).
Here, despite the Expert having initially concluded in his appraisal report that the subject
property contains excess land, the report failed to contain any analysis of the highest and best use
of this land, nor did the report offer any credible evidence of the market value of the land.
Moreover, in an attempt to support the conclusion in his report that the excess land had little
contributory value, the Expert’s report includes a land offering “[a]cross Asbury Anderson Road
from the subject (with frontage on Rt 31 also), a 22.15-acre site is for sale . . .” However, a sale
offering is not credible evidence of a property’s true value. See New Jersey Turnpike Authority
v. Bowley, 27 N.J. 549, 556 (1958); Olin Mathieson Chem. Corp. v. Paulsboro, 3 N.J. Tax 255,
262-263 (Tax 1981); Red Devil v. Union Twp., 5 N.J. Tax 1, 5 (Tax 1982); Highview Estates v.
Englewood Cliffs Bor., 6 N.J. Tax 194, 213 (Tax 1983). Thus, the Expert offered no credible
evidence of the value of the land.
Importantly, despite contending during cross-examination that the land should be more
appropriately characterized as surplus land and not excess land, the Expert continued to express
his opinion that this land attributed little value to the subject property because of the subject
property’s high vacancy rates. However, regardless of whether the land should be characterized
as surplus land or excess land, and a highest and best use analysis performed, because the Expert
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failed to present the court with any credible evidence of value, the court is unable to make a
determination of its value, if any.
B. Approach to Value - Income Capitalization Approach
“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, 237-238 (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. East Brunswick Twp., 1 N.J. Tax 244, 251 (Tax 1980). “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. 2001), certif. denied,
168 N.J. 291 (2001) (internal citation omitted)). The “decision as to which valuation approach
should predominate depends upon the facts of the particular case and the reaction to these facts by
the experts.” Coca-Cola Bottling Co. of New York v. Neptune Twp., 8 N.J. Tax 169, 176 (Tax
1986) (citing New Brunswick v. Tax Appeals Div., 39 N.J. 537 (1963)). See also WCI-
Westinghouse, Inc. v. Edison Twp., 7 N.J. Tax, 610, 619 (Tax 1985), aff’d, 9 N.J. Tax 86 (App.
Div. 1986).
Here, the Expert relied exclusively on the income capitalization approach to derive an
opinion of the subject property’s market value. When a property is income producing, the income
capitalization approach is the favored method for determining the estimated value of that property.
Parkway Vill. Apartments Co. v. Twp. of Cranford, 8 N.J. Tax 430 (Tax 1985), aff’d, 9 N.J. Tax
199 (App. Div. 1986), rev'd on other grounds, 108 N.J. 266 (1987); Hull Junction Holding Corp.
v. Borough of Princeton, 16 N.J. Tax 68, 79 (Tax 1996). The income capitalization approach
“consists of methods, techniques, and mathematical procedures that an appraiser uses to analyze a
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property’s capacity to generate benefits (i.e., usually the monetary benefits of income and
reversion) and convert these benefits into an indication of present value.” Appraisal Institute, The
Appraisal of Real Estate, 439 (14th ed. 2013). As Judge Hopkins succinctly stated, in valuing a
property employing the income-capitalization approach:
the gross rental value of the property is estimated. From the
estimated gross rental there is deducted a factor for possible
vacancies and collection losses. This results in effective gross
income. Then all the expenses involved in running the property are
subtracted, resulting in net income. Net income is the money which
an investor could expect to receive through an investment in the
property. It is computed into a value by means of a capitalization
rate which embodies consideration of capital cost, remaining
economic life of the property, and the degree of risk involved.
[Lamm Associates v. West Caldwell Borough, 1 N.J. Tax 373, 377
(Tax 1980).]
Thus, central to the income capitalization approach is the appraiser’s scrutiny, evaluation
and analysis of data, information, statistics, costs, and a property’s capacity to generate future
benefits in order to determine the economic rent, “‘market rent’ or fair rental value’” of a property.
Parkway Village Apartments Co., 108 N.J. at 270.
1. Market or Economic Rent
The term economic or market rent refers to “the most probable rent that a property should
bring in a competitive and open market reflecting all conditions and restrictions of the lease
agreement, including permitted uses, use restrictions, expense obligations, term, concessions,
renewal and purchase options and tenant improvements.” Appraisal Institute, The Dictionary of
Real Estate Appraisal, 121-22 (5th ed. 2010). The economic or market rent attributable to a
property may differ substantially from the actual rent derived on a property, which may be below
market rates. Parkview Village Assocs. v. Collingswood Bor., 62 N.J. 21, 29-30 (1972). However,
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“this does not mean that the actual rent is to be disregarded . . . ‘in determining what is fair rental
income, the actual rental income, while not controlling, is an element to be considered.’” McCrory
Stores Corp. v. Asbury Park, 89 N.J. Super. 234, 243 (App. Div. 1965) (quoting Somers v. City of
Meriden, 174 A. 184, 186 (Sup. Ct. Err. 1934)).
A. Retail Leases
To compute the economic rent of the retail stores, the Expert identified fifteen retail leases.
Comparable lease 15 was a lease offering and did not result in the execution of a lease agreement.
Accordingly, during trial, the court struck consideration of comparable lease 15 in determination
of the subject property’s economic or market rent. See Harrison Realty Corp. v. Harrison Town,
16 N.J. Tax 375 (Tax 1997), aff’d, 17 N.J. Tax 174 (App. Div. 1997). In addition, comparable
leases 12, 13, and 14 were lease modification agreements apparently entered into by WSCI with
three existing tenants sometime after A&P vacated the subject property. 13 However, the date of
each of the three lease modifications was not identified by the Expert in his appraisal report, nor
during trial. Moreover, the Expert acknowledged during direct examination that he used
comparable leases 12, 13, and 14 simply “to illustrate what’s going on at the center. I wouldn’t
say that I really relied on these to determine the [market] rental rate.” Because comparable leases
12, 13, and 14 were lease modifications, and were either modified gross or gross lease
arrangements, and do not represent the exposure of the retail space to a competitive and open
market, the court does not find them credible evidence of economic or market rent.
13
The leases were apparently modified from net to gross, and the gross rent paid ranged from
$5.00 to $24.00 per square foot. It was unclear from the Expert’s testimony whether the leases are
modified gross or gross leases. Additionally, the Expert made no adjustments to these three leases
in his adjustment grid to account for the fact that these were gross leases and not net leases.
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The remaining eleven comparable leases bore commencement dates between January 2004
and June 2016. Four of the leases were in Warren County, five were in Sussex County, and two
were in Union County. The unadjusted rents ranged from $6.35 per square foot to $13.30 per
square foot. In determining the effective rent for the remaining eleven comparable leases, the
Expert computed the average rent over the lease term. See First Republic Corp. of Am., 16 N.J.
Tax at 578 (concluding that the technique of averaging rents payable over the life of a lease is
“consistent with sound appraisal principles”).
The Expert then applied a -10% location adjustment to comparable leases 2, 5, and 6. In
the Expert’s opinion, because comparable lease 2 had “better visibility” and “better traffic counts,”
40,070 vehicles, compared to the subject property’s 18,700 vehicles, the Expert opined that a
-10% location adjustment was appropriate. 14 In addition, in the Expert’s opinion the location of
comparable leases 5 and 6 in New Providence, Union County, New Jersey had “better surrounding
demographics, population income characteristics.” Thus, the Expert applied a -10% location
adjustment to comparable lease 5 and 6.
Moreover, despite the wide range of leased area of the remaining eleven comparable leases,
fluctuating between 2,196 and 30,000 square feet, in the Expert’s opinion he could not discern a
size adjustment in the marketplace. Thus, he made no size adjustment to any of the comparable
leases in computing his adjusted rents.
Additionally, although the lease dates for the eleven remaining comparable leases range
from January 2004 through June 2016, the Expert applied no adjustment for time or market
14
Although the Expert testified that traffic count studies “are one of the things that we look at” in
making comparisons and adjustments to retail properties, the Expert did not include the traffic
count studies in the Appendix to his report, nor did he furnish the court with copies of the traffic
count studies he relied on.
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conditions. In the Expert’s opinion, despite the country having experienced a nationwide recession
beginning in late 2008 and lasting for several years, he saw no basis to justify a time or market
adjustment.
After applying the adjustments, the adjusted rents of the eleven remaining comparable
leases varied from $6.35 per square foot to $13.30 per square foot, with an average of $10.32. 15
After analyzing the adjusted and unadjusted rents, the Expert concluded an economic or
market rent of $12.00 per square foot for the retail space in the subject property. The Expert then
applied his $12.00 per square foot economic rent to 32,464 square feet of in-line retail space in the
subject property to discern the Potential Gross Income for the subject property during each tax
year. According to the Expert, the 32,464 square foot figure was derived from “tak[ing] down the
A&P space, that’s what you’re left with.” However, the court’s analysis of the Expert’s conclusion
reveals that by deducting 45,190 square feet, representing the leased area formerly occupied by
A&P, from the total shopping center square footage of 82,233 square feet, causes 37,043 square
feet to remain (82,233 – 45,190 = 37,043 square feet). To reach the Expert’s computation of
32,464 square feet, one must include demolition of an additional 4,583 square feet of retail area
originally designed for occupancy by Walgreens.
However, the court has material concerns with respect to the quality, value, substance, and
comparability of several leases identified by the Expert. Comparable lease 1 was entered into on
January 1, 2004, approximately 11 years prior to the first valuation date involved in these tax
appeals. In response to defendant’s cross-examination on comparable lease 1, the Expert opined
15
The range of adjusted rents reported in the Expert’s appraisal report was $5.00 to $13.30 per
square foot and the average rental rate was $10.06 per square foot as it included comparable leases
12, 13, 14, and 15.
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that this “market is pretty static. I’m not going to say that this is the best lease to use to determine
the market value, but I thought it told a lot of the story of what was going on in the market.”
However, effective cross-examination revealed that WSCI negotiated a lease for one of its in-line
retail stores in 2004 at a substantially higher rental rate than comparable lease 1 that the Expert
characterized as “too old” in determining the economic rent of the shopping center as of the
October 1, 2015, October 1, 2016, and October 1, 2017 valuation dates. Thus, while comparable
lease 1 executed in 2004 was deemed acceptable by the Expert in determining the subject
property’s economic rent, WSCI’s 2004 lease for an in-line retail store at the subject property was
characterized by the Expert as “too old.” In sum, the court finds the Expert’s inconsistency in the
characterization and treatment of these two 2004 lease agreements renders comparable lease 1
meaningless in the determination of the subject property’s economic or market rent.
Similarly, comparable lease 2 was originally entered into on February 9, 2008,
approximately 7 years prior to the first valuation date involved in these tax appeals at an initial
rate of $11.28 per square foot. However, comparable lease 2 was subsequently renewed, modified
or amended in about January 2009 to an average rent of $11.64 per square foot. Thereafter,
comparable lease 2 was again renewed, modified, or amended in July 2014 to extend the term for
an additional six months through December 2014, at rental rate of $12.20 per square foot. Finally,
comparable lease 2 was again renewed, modified, or extended in December 2014 for an additional
term of six months at a rental rate of $9.76 per square foot. The court does not find that a lease
agreement executed in 2008, and which has undergone three renewals, modifications, or
amendments accurately represents the economic rent of the subject property on the valuation dates
involved herein. The motivations of a landlord or a tenant can shape how the rental rate is fixed
in a lease modification, extension, or renewal. Tenants unwilling to incur costs associated with
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moving and relocating their business operations may be willing to pay a rent higher than the
market. Conversely, landlords fearing that one tenant vacating will result in the mass exodus of
tenants may be willing to offer a below-market rent to a tenant to entice them to remain. Without
engaging in in-depth discussions with both the landlord and tenant to gain a better understanding
and perspective of their relationship and what motivated them to execute the lease renewal,
modification, or extension, it is of questionable usefulness. Here, the Expert acknowledged during
cross-examination that he did not have any discussions with the tenant and thus, did not ascertain
their motivations for executing the three lease modifications, extensions, or renewals. Therefore,
the court finds comparable lease 2 not to be meaningful and credible evidence of the subject
property’s economic rent for the 2016, 2017, and 2018 tax years.
Comparable lease 3 is located at 128 Route 94, Blairstown, Warren County, New Jersey.
Comparable lease 3 was a net lease at $12.00 per square foot, for 7,600 square feet of retail space
executed in April 2013. The Expert obtained a copy of the lease from another appraiser and did
not verify the lease terms with either the landlord, tenant, or any brokers involved in negotiation
of the lease.
Comparable lease 4 is located at 46 Route 94, Vernon, Sussex County, New Jersey,
approximately thirty (30) miles from subject property. Comparable lease 4 was a net lease for
$12.75 per square foot, for 9,100 square feet of retail space executed in May 2013. The Expert
obtained a copy of the lease from another appraiser and did not verify the lease terms with either
the landlord, tenant, or any brokers involved in negotiation of the lease.
Comparable lease 5 and comparable lease 6 were part of a former A&P grocery store
located at 598 Central Avenue, New Providence, Union County, New Jersey, more than thirty (30)
miles from the subject property. Following A&P vacating the property the landlord subdivided
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the A&P space and erected demising walls to create smaller leased areas. Comparable lease 5
consists of 16,934 square feet and comparable lease 6 consists of 10,274 square feet. The landlord
apparently incurred costs to subdivide and fit-up comparable lease 5 of $894,473, or approximately
$52.82 per square foot ($894,473/16,934 sq. ft. = $52.82). In addition, the landlord apparently
incurred costs to subdivide and fit-up comparable lease 6 of $345,747, or approximately $33.65
per square foot ($345,747/10,274 sq. ft. = $33.65). 16 A net lease for comparable lease 5 was
entered into in August 2012 at a rate of $10.88 per square foot and a net lease for comparable lease
6 was entered into in January 2013 at a rate of $10.23 per square foot.
Comparable leases 7, 9, 10, and 11 are all located in the same shopping center at 205 Route
23, Wantage, Sussex County, New Jersey, more than thirty (30) miles from the subject property.
Since the disparity in leased area of these four leases is significant, from 2,196 to 10,512 square
feet, the court finds that comparable lease 9 (2,204 square feet), comparable lease 10 (2,897 square
feet) and comparable lease 11 (2,196 square feet) should be grouped separately from comparable
lease 7 (10,512 square feet), as well as the other comparable leases which contain significantly
larger leased areas. 17 Comparable lease 7 was a net lease entered into in December 2014 at an
average rental rate of $7.17 per square foot over the lease term. Comparable lease 9 was a net
lease entered into in March 2015 at an average rental rate of $11.57 per square foot over the lease
term. Comparable lease 10 was a net lease entered into in June 2015 at an average rental rate of
16
The Expert offered testimony during cross-examination that the landlord’s costs of $33.65 to
$52.82 per square foot to erect demising walls and fit-up comparable lease 5 and 6 did not include
demolition costs, which the Expert had no information about.
17
The key elements of comparison in a rental analysis is “location – [t]ime-distance linkages and
unit-specific locations in project.” Appraisal Institute, The Appraisal of Real Estate, 466 (14th ed.
2013). It is pivotal for an appraiser to establish appropriate “elements of comparison for a given
appraisal through market research and [to] support those conclusions with market evidence.” Id.
at 390.
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$12.61 per square foot over the lease term. Comparable lease 11 was a lease renewal, the tenant
had apparently occupied the leased area on a month-to-month basis and entered into a new lease
agreement in June 2016 at an average rental rate of $8.164 per square foot over the lease term.
Comparable lease 8 is located at 100 Main Street, Hackettstown, Warren County, New
Jersey. Comparable lease 8 consists of a stand-alone retail store in downtown Hackettstown, an
older store than the subject property. Comparable lease 8 was a net lease for $13.30 per square
foot, for 8,770 square feet of retail space, executed in December 2014. The Expert obtained a copy
of the lease from another appraiser and did not verify the lease terms with either the landlord,
tenant, or any brokers involved in negotiation of the lease.
The Expert’s concluded adjusted rents for the comparable leases containing leased areas of
between 7,600 and 16,934 square feet are set forth below:
Lease 3 Lease 4 Lease 5 Lease 6 Lease 7 Lease 8
$12.00 $12.75 $9.79 $9.21 $7.17 $13.30
The court places the greatest weight on comparable leases 3 and 8, as those properties are
in closest proximity to the subject property, are in Warren County, and did not require any
adjustments. Conversely, the court places the least weight on comparable leases 4, 5, 6, and 7, as
those shopping centers were located more than thirty (30) miles from the subject property, were
located in Sussex and Union Counties, and several required adjustments to account for perceived
differences in location. Further, the court emphasizes that the Expert offered little data and
support, other than his years of experience as an appraiser, for his -10% adjustment to comparable
leases 5 and 6. During cross-examination the Expert admitted that his -10% adjustment to
comparable leases 5 and 6 amounted to simply a “judgment call.” Moreover, the Expert
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acknowledged during cross-examination that the traffic counts for the subject property (18,700),
the traffic counts for comparable leases 5 and 6 (18,339), and the traffic counts for comparable
lease 4 (12,000) and comparable lease 7 (15,917) were almost identical. In addition, the Expert
opined that the demographics surrounding comparable leases 5 and 6 were superior to the subject
property, justifying a -10% adjustment. However, the Expert offered no meaningful statistics,
data, evidence, or analysis as to how the demographics surrounding comparable lease 5 and 6
translated into it being 10% superior to the subject property, or how that perceived superiority was
measured. The Expert performed no paired analysis or study of the marketplace surrounding
comparable lease 5 and 6 to demonstrate not only that it is superior, but that a -10% adjustment
appropriately accounts for the locational differences.
Additionally, the Expert offered no meaningful evidence how the perceived similar
location of and demographics surrounding comparable lease 4 and 7 led him to conclude that no
adjustment was warranted. During cross-examination regarding the comparability of the
demographics of Wantage to Washington Township, the Expert offered only that he “live[s] in
that area” and that he “knows those markets very well . . . They’re almost what we call a cherry
comp.” The Expert performed no paired analysis or study of the marketplace surrounding
comparable lease 4 and 7 to demonstrate that it is truly a similar market to the subject property.
By definition, comparability does not require properties to be identical, as “differences
between a comparable property and the subject property are anticipated. Such differences are dealt
with by adjustments recognizing and explaining these differences, and then relating the two
properties to each other in a meaningful way so that an estimate of the value of one can be
determined from the value of the other.” U.S. Life Realty Corp. v. Jackson Twp., 9 N.J. Tax 66,
72 (Tax 1987). Generally, properties are considered comparable when they “lend logical, coherent
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support . . . show[ing] ‘comparable building density ratios, functional similarities, . . . similarity
of age, construction, and condition, and in some cases size.’” Ford Motor Co., 127 N.J. at 308(quoting Shulton, Inc. v. Clifton City, 7 N.J. Tax 208, 218 (Tax 1983), aff’d, 7 N.J. Tax 220 (App.
Div. 1984)). However, when the opinion of an expert is offered “[w]ithout explanation as to the
basis, the opinion of the expert is entitled to little weight. . . .” Dworman v. Tinton Falls, 1 N.J.
Tax 445, 458 (Tax 1980).
Accordingly, the court finds that the economic or market rent of the subject property’s
retail areas containing between 7,600 and 16,934 square feet, is $12.50 per square foot, as of each
valuation date involved herein.
The Expert’s concluded adjusted rents for the comparable rentals containing leased areas
less than 7,600 square feet are set forth below:
Lease 9 Lease 10 Lease 11
$11.57 $12.61 $8.64
However, the court observes that each of these comparable leases is located in the same
shopping center in Wantage, Sussex County, New Jersey, a distance more than thirty (30) miles
from the subject property, and located in a county different than the subject property. As outlined
above, despite this seemingly material difference, the Expert opined that no location adjustment
was warranted finding that the traffic counts, location, and demographics of Wantage comparable
to Washington Township. However, as set forth above, the Expert offered little tangible statistical
and analytical evidence with respect to the similarities between Washington Township and
Wantage, other than his personal views, and did not offer any empirical evidence as to how those
similarities translated into an accurate representation of comparable economic or market rent. In
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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sum, the Expert offered no data, research, or analysis, other than his personal observations and
reporting on this single shopping center in Wantage.
Moreover, the court observes that comparable lease 11 is a lease renewal where the tenant
had occupied the demised space since 2005 under a previously expired lease agreement. As
expressed above, the motivations of a landlord or a tenant may shape how the rental rate is fixed
in a lease modification, extension, or renewal. Without engaging in in-depth discussions with both
the landlord and tenant to gain a better understanding and perspective of their relationship and
what motivated them to execute the lease renewal, modification, or extension, it is of questionable
usefulness. Here, the Expert acknowledged during cross-examination that he did not have any
discussions with the tenant and thus, did not ascertain their motivations for executing the lease
renewal. Therefore, the court finds comparable lease 11 not to be meaningful and credible
evidence of economic or market rent.
Thus, the court turns to consideration of two remaining comparable leases containing retail
areas less than 7,600 square feet. Given the limited sampling size of comparable retail leases
comprising less than 7,600 square feet and the lack of credible analytical data demonstrating that
these two leases are located in a market substantially similar to that of the subject property, the
court cannot decisively conclude that either comparable lease 9 or 10 accurately reflect the market
or economic rent for the subject property as of the valuation dates at issue. Accordingly, the court
concludes that insufficient analytical and market data has been proffered by WSCI and the Expert
to enable the court to discern the economic or market rent for the subject property’s retail stores
containing less than 7,600 square feet.
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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B. Pad Sites
The Expert offered testimony that the subject property contains three pad sites, one
developed with a McDonald’s fast-food restaurant, and the other two which are undeveloped. In
computing the economic rent of the three pad sites, the Expert relied exclusively on a 1995 ground
lease between WSCI and McDonald’s. 18 The Expert’s appraisal report states that the annual rent
for the pad site was $62,355 and “[u]pon A&P’s departure, the rent was reduced to $31,177 as per
the lease agreement.” No other evidence or testimony was offered to the court with respect to how
this reduction in ground rent was calculated. However, because the Expert opined that WSCI
knew A&P was in bankruptcy and “closing in 2015,” the Expert applied the $31,177 McDonald’s
pad rental rate to the three pad sites as of each valuation date herein to determine an economic rent
of $93,531 ($31,177 x 3 = $93,531).
Notably, the Expert offered no other market evidence of value of the pad sites. The Expert
did not consider, nor did the Expert research or evaluate any other ground leases for the tax years
at issue. Moreover, the Expert offered no evidence of other comparable leases for fast-food
restaurants. Cross-examination further revealed that the Expert had only limited familiarity with
the McDonald’s site, did not measure the McDonald’s building, and was unable to recite basic
information about the McDonald’s site like whether it possessed one drive-thru window or two
drive-thru windows.
The court finds the Expert’s analysis of the economic or market rent for the pad sites to be
fundamentally flawed and not credible. Here, the Expert relied on a 1995 ground lease to establish
18
The 1995 land lease between WSCI and McDonald’s apparently expired in 2016. However,
the Expert was unfamiliar with the terms of the land lease renewal and was initially unsure whether
the lease renewed, reasoning during direct examination that it must have renewed because
McDonald’s continued to occupy the subject property in 2018, as of the date of his appraisal report.
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Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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a market rent for the subject property’s three pad sites for the 2016, 2017, and 2018 tax years.
Although more than twenty years elapsed from execution of the McDonald’s ground lease, and
without having conducted any current market analysis, the Expert opined that the McDonald’s
ground lease rent should be the economic rent for the 2016, 2017, and 2018 tax years. Moreover,
while limited testimony and evidence was elicited during trial regarding the terms of the
McDonald’s lease, the Expert’s appraisal report states that the “rent was reduced . . . as per the
lease agreement” (emphasis added). Thus, it is possible that under the terms of the 1995
McDonald’s ground lease, the parties expressly stipulated that the rent would be reduced by 50%
($62,355/2 = $31,177) in the event the shopping center attained a certain vacancy rate or the
shopping center’s anchor tenant vacated. However, neither WSCI nor the Expert offered any
evidence or testimony as to how the reduced rental rate of $31,177 was computed. 19 Without this
critical evidence, the court cannot reasonably conclude that the $31,177, per pad value opined by
the Expert represents the economic or market rent. Fundamental to the conclusion of an economic
or market rent is that the value reflects the most probable rent that the property would bring in an
open and competitive market. Here, the Expert offered no credible evidence permitting the court
to rationally conclude that the $31,177 value represents what the subject property would reap in
an open and competitive market. Accordingly, the court rejects the Expert’s opinions of value for
the subject property’s three pad sites.
19
For instance, was the reduced ground rent based on a fixed formula set forth under the 1995
ground lease agreement? Was the $31,177 a negotiated rent between WSCI and McDonald’s
based on other fast-food restaurant leases in the marketplace?
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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2. Potential Gross Income
The next step under the income capitalization approach to value is computation of a
property’s Potential Gross Income. To determine Potential Gross Income the concluded economic
or market rent is applied to the square footage of the improvements. After determining Potential
Gross Income, the applicable vacancy and collection loss rate is applied to calculate a property’s
Effective Gross Income.
Here however, as a result of the court’s inability to discern the economic or market value
of: (i) the subject property’s retail space comprising less than 7,600 square feet; (ii) the subject
property’s excess or surplus land, if any; and (iii) the three pad sites located on the subject property,
the court is rendered unable to determine the subject property’s Potential Gross Income.
Correspondingly, the court is unable to discern the subject property’s estimated fair market value
as of the October 1, 2015, October 1, 2016, and October 1, 2017 valuation dates.
3. The Glen Wall dilemma
Nonetheless, the court is mindful of its obligation “to apply its own judgment to valuation
data submitted by experts in order to arrive at a true value and find an assessment for the years in
question.” Glen Wall Associates v. Wall. Twp., 99 N.J. 265, 280 (1985) (citing New Cumberland
Corp. v. Roselle Borough, 3 N.J. Tax, 345, 353 (Tax 1981)). However, to enable the court to make
an independent finding of true value, credible and competent evidence must be adduced in the trial
record.
Here, the court’s review of the Expert’s testimony and appraisal report regarding his
highest and best use analysis and comparable leases discloses material issues of credibility,
rendering his conclusions of dubious value. Although the court was able to discern from the
testimony offered an economic or market rent of $12.50 per square foot, for the subject property’s
Washington Shopping Center, Inc. v. Washington Township
Docket Nos. 005517-2016, 002869-2017, and 006408-2018
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retail space containing between 7,600 and 16,934 square feet, the court was unable to determine
an economic or market rent to be applied to the subject property’s retail space comprising less than
7,600 square feet. Moreover, based on the Expert’s faulty analysis of the pad sites, the court was
unable to ascribe any value to the subject property’s three pad sites. Thus, without credible
evidence of economic or market rent supported by objective, market extracted data, the court is
unable to discern the units of value to be applied to each of the subject property’s component parts.
The court’s independent determination of value must be based “on the evidence before it
and the data that are properly at its disposal.” F.M.C. Stores Co. v. Morris Plains Borough, 100
N.J. 418, 430 (1985). Here, the court concludes that based on the Expert’s testimony and appraisal
report, the trial record contains insufficient credible information to enable the court to make a
reliable independent finding of the subject property’s value as of the October 1, 2015, October 1,
2016, and October 1, 2017 valuation dates.
Accordingly, for the above stated reasons, the court will enter judgments affirming the
subject property’s 2016, 2017, and 2018 local property tax assessments.
Very truly yours,
Hon. Joshua D. Novin, J.T.C.