MERRILL CREEK RESERVOIR C/O PROJECT DIRECT VS. HARMONY TOWNSHIP (TAX COURT OF NEW JERSEY) (CONSOLIDATED)

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NOS. A-1498-16T3
A-1500-16T3
A-1509-16T3
MERRILL CREEK RESERVOIR
c/o PROJECT DIRECT,
APPROVED FOR PUBLICATION
Plaintiff-Appellant/
Cross-Respondent, August 22, 2019
APPELLATE DIVISION
v.
HARMONY TOWNSHIP,
Defendant-Respondent/
Cross-Appellant.
___________________________
Argued January 16, 2019 - Decided August 22, 2019
Before Judges Fuentes, Accurso and Vernoia.
On appeal from the Tax Court of New Jersey, Docket
Nos. 010290-2011, 004562-2012 and 004474-2013,
whose opinion is reported at 29 N.J. Tax 487 (Tax
2016).
Frank E. Ferruggia argued the cause for
appellant/cross-respondent (Mc Carter & English LLP,
attorneys; Frank E. Ferruggia, of counsel and on the
briefs; Farhan Ali, on the briefs).
Lawrence P. Cohen argued the cause for
respondent/cross-appellant (Lavery Selvaggi Abromitis
& Cohen, attorneys; Lawrence P. Cohen, of counsel
and on the briefs; William Henry Pandos, on the
briefs).
Thomas J. Denitzio, Jr., argued the cause for amicus
curiae Royal Institute of Chartered Surveyors
(Greenbaum Rowe Smith & Davis, LLP, attorneys;
Thomas J. Denitzio, Jr., of counsel and on the brief;
Emily A. Kaller, on the brief).
The opinion of the court was delivered by
ACCURSO, J.A.D.
In these consolidated appeals, plaintiff Merrill Creek Reservoir c/o
Project Direct, a consortium of electric utility companies and owner of the
Merrill Creek Reservoir in Harmony Township, challenges three 2016 Tax
Court judgments affirming the 2011-2013 tax assessments on its property.
Harmony cross-appeals alleging error in adjustments the Tax Court made to
value. Merrill Creek, although conceding the improvements should be valued
using the cost approach the Tax Court employed, argues the court erred in
accepting the Township's trend analysis, which it characterizes as "a rarely
used valuation methodology, discredited by New Jersey Tax Court precedent,"
instead of its own quantity survey method. Because we find no error in the
court's acceptance of a trend analysis in this case or its adjustments to value
based on the evidence adduced at trial, we affirm.
The case was tried over the course of seven days. Certain facts are
undisputed. The reservoir property consists of ten parcels totaling 840 acres in
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Harmony. The reservoir, which has a capacity of over sixteen billion gallons
of fresh water, spans 650 acres. The remainder of the property not vacant land
contains major improvements including a main dam, several smaller saddle
dikes, a spillway, a conservation outlet, pipes and tunnels to transfer the water,
a pumping station, an electric substation, an inlet/outlet tower containing
equipment to regulate water flow, a maintenance building and a visitor center.
The reservoir was constructed between 1985 and 1988 following a
directive from the Delaware River Basin Commission. It was designed to
provide fresh water to offset consumptive use by electric power plants located
along the Delaware River during droughts. The reservoir is part of a larger
network of reservoirs that serve the Delaware by providing water in times of
drought and low flow conditions. Although the reservoir makes regular
releases of water for conservation purposes, there have been only four ordered
large-scale releases to counter drought conditions since construction was
completed in 1988.
Construction of the reservoir was led and supervised by Public Service
Electric and Gas Company (PSE&G), one of the members of the owning
consortium, acting on its behalf as the "managing utility." The sole fact
witness at trial was Robert Uniszkiewicz, manager of construction estimating
for PSE&G, and a thirty-four-year employee of the company. He manages a
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group of civil, electrical and mechanical estimators responsible for estimating
construction-related costs for all PSE&G projects. Uniszkiewicz was tasked
by PSE&G to estimate the costs of building the Merrill Creek Reservoir.
The parties stipulated the highest and best use of the property is as a
reservoir, and that the cost approach is the appropriate method for valuing the
improvements. They also stipulated the fair market value of the land for tax
years 2011 through 2013 was $4,800,000. They stipulated to the qualifications
of all experts testifying at trial and to the admission of their reports. Finally,
they agreed the total assessment of the property was $220,822,300 for tax
years 2011 and 2012, and $220,725,800 for 2013.
Each side presented a real estate appraisal expert and an expert who
estimated costs of construction of the improvements. The parties and their
experts having agreed that the cost approach was the best indicator of fair
value for this special purpose property, see Dworman v. Borough of Tinton
Falls, 1 N.J. Tax 445, 452 (Tax 1980), aff'd, 180 N.J. Super. 366 (App. Div.
1981), the focus of the expert testimony at trial was on their differing methods
for calculating the cost of reproducing or replacing the reservoir and its
attendant improvements, see Int'l Flavors & Fragrances, Inc. v. Union Beach
Borough, 21 N.J. Tax 403, 417 (Tax 2004) (explaining the two elements to a
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cost approach as "land value and the reproduction or replacement cost of the
buildings and other improvements").
Merrill Creek's experts employed the quantity survey method, described
in The Appraisal of Real Estate as "[t]he most comprehensive method of cost
estimating." Lawrence Assocs. v. Lawrence Twp., 5 N.J. Tax 481, 526 (Tax
1983) (quoting American Institute of Real Estate Appraisers, The Appraisal of
Real Estate 216 (7th ed. 1978)).
In its strictest application, it is a repetition of the
contractor's original process of developing a bid
figure. A quantity survey is computation of the
quantity and quality of all materials used and of all
categories of labor hours required, to which unit cost
figures are applied to arrive at a total cost estimate for
materials and labor. To this are added estimates for
other contractor costs such as permits, insurance,
equipment rental, field office, supervision, and other
overhead, plus a margin for profit.
[Ibid. (quoting The Appraisal of Real Estate 216-17
(7th ed.)).]
Joseph Novelli, Merrill Creek's expert construction cost estimator,
testified as to how he prepared an estimate of the cost to reproduce new the
reservoir improvements less depreciation for the tax years at issue. See Gale
& Kitson Fredon Golf, L.L.C. v. Twp. of Fredon, 26 N.J. Tax 268, 283 (Tax
2011) (explaining the cost approach involves "a replication, through the use of
widely accepted cost services . . . of the cost of the components of the building
A-1498-16T3
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to be valued, less . . . depreciation" (quotation omitted)). Visiting the site,
inspecting the improvements and using the "as-built" drawings, he performed a
"quantity takeoff" by identifying the materials used to construct each
component of all improvements, calculating dimensions where necessary, and
estimating the quantities used in construction. He then consulted the RSMeans
Manual, a nationally recognized publication that provides construction cost
surveys relied upon by appraisers and cost estimators, to ascertain the cost of
each item. Novelli testified he multiplied the quantity of each material by its
code in the RSMeans manual. He applied time and location modifiers and the
RSMeans software provided him the total cost for each component including
labor at union rates. For the few items without an RSMeans code, he
consulted the Marshall and Swift Valuation Service, another widely accepted
building cost manual, see Ford Motor Co. v. Edison Twp., 10 N.J. Tax 153,
181 (Tax 1988), aff'd, 127 N.J. 290 (1992), called suppliers or vendors or
estimated the cost based on his own experience.
After costing out every component on the as-built plans using the
quantity survey method, Novelli summed them to obtain total "hard" costs,
representing material and labor, for each tax year. To those amounts, he added
a five percent contingency to account for extra work due to unforeseen
conditions or changes, ten percent for general conditions, and ten percent for
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general contractor overhead and profit. Novelli then added 14.25 percent in
"soft" costs, consisting of items such as architectural fees, engineering fees,
insurance and legal fees. Novelli testified he found total hard and soft costs of
$192,370,411 for tax year 2011; $202,214,888 for tax year 2012; and
$200,301,947 for tax year 2013.
Finally, Novelli deducted depreciation from each component using the
"age-life" method. See Brockway Glass Co. v. Twp. of Freehold, 10 N.J. Tax
356, 367 (Tax 1989) (explaining "in the cost approach, depreciation from all
causes is subtracted from the cost of reproduction new as representing a loss in
property value"), aff'd, 12 N.J. Tax 263 (App. Div. 1991). He first determined
the estimated useful life for each component and divided it by its effective age
to derive a depreciation factor, which he applied to reduce the cost of the
component. Novelli found final depreciated hard and soft costs of
$128,962,021 for tax year 2011; $132,888,329 for tax year 2012; and
$128,632,204 for tax year 2013.
Mark Sussman, Merrill Creek's real estate appraisal expert used
Novelli's cost estimates as the basis for his proposed valuation of the property.
Sussman worked with Novelli in developing the component-based depreciation
analysis Novelli applied to determine depreciated hard and soft costs for each
tax year. Sussman further reduced the value of the improvements by fifteen
A-1498-16T3
7
percent for functional obsolescence, reasoning that a reservoir of substantially
less capacity would have been sufficient in light of the limited number of times
the Delaware River Basin Commission has ordered the release of water into
the river. See CPC Int'l, Inc. v. Englewood Cliffs, 193 N.J. Super. 261, 265
(App. Div. 1984) (explaining functional obsolescence as a term to describe the
reduction of an improvement's market value based on costly features installed
to please the owner or unique to the improvement's special purpose that do not
enhance market value).
Sussman considered and rejected adding an "entrepreneurial profit"
factor to the project's costs, representing a value enhancement for the
developer's expectation of a reward or the anticipation of entrepreneurial
profit, because the consortium only built the reservoir after being directed to
do so by the Delaware River Basin Commission. See Westwood Lanes, Inc. v.
Borough of Garwood, 24 N.J. Tax 239, 249 (Tax 2008) (noting New Jersey
courts include entrepreneurial profit where improvements were made to
property with the anticipation of realizing a profit on sale). Using Novelli's
hard and soft cost estimates and depreciation analysis, applying a functional
obsolescence factor and adding the stipulated land value, Sussman opined the
total value of the property was $104,905,000 for tax year 2011; $107,356,000
for tax year 2012 and $103,385,000 for tax year 2013.
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In contrast, Harmony's experts relied on a "trend analysis," which
involved looking at the actual costs of the project and applying a multiplier to
trend those costs forward to the tax years. See Hackensack Water Co. v.
Borough of Haworth, 178 N.J. Super. 251, 261 (App. Div. 1981) (explaining
the elements of the trended original cost methodology). For proof of the actual
costs of the improvements, Harmony relied on Uniszkiewicz, the head of
construction estimating at PSE&G, who explained how he estimated the
original cost of the reservoir project and how it compared to the actual cost the
owners incurred in completing the project.
Uniszkiewicz testified that before construction began, he spent between
two and three years working with an engineering firm to develop a
construction cost estimate. In 1984, prior to construction, he estimated the
total project would cost approximately $217 million to complete. He
explained that figure was divided between "bid" and "risk," with bid
representing the "contract face value for the job," and risk representing "all the
issues that could happen from the base cost." He testified that of his initial
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budget figure of $217 million, $136 million represented the base or "bid" and
the remaining $30 million "risk assessment and contingency." 1
Uniszkiewicz revised his estimates in 1986, changing the base "bid" as
the scope of the project changed and modifying the "risk" or management
reserve "based on the uncertainty of the project," but his predicted total project
cost remained at $217 million. After construction, Uniszkiewicz calculated the
project's actual costs and compared it to his estimate. The final actual cost of
the project was approximately $215 million representing a base of $131
million and change orders of roughly $84 million, to which he added a punch
list reserve of $5 million, representing a difference of roughly $2 to $3 million
off his original estimate of $217 million. Uniszkiewicz agreed with Harmony's
counsel that his estimate of $217 million was remarkably accurate given the
size of the project.
Uniszkiewicz acknowledged, largely in response to cross-examination
by Merrill Creek's counsel, the several difficulties PSE&G encountered during
construction, including discord between PSE&G's project manager and the
general contractor, leading to the project manager's replacement; thirty-nine
days of rain at the start of construction, which delayed the schedule and
1
Uniszkiewicz's estimate for bid and risk totaled $167.2 million. He testified
the $217 million budget also accounted for acquisition costs, management
services, utilities, engineering fees and construction management.
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required the erection of a bubble over the site at a cost of over $300,000 to
permit work to continue "in the winter as if it was summer"; and "a lot of
environmental issues," including shutdown of the site for a month by the
Warren County Soil Conservation District over sediment control.
Uniszkiewicz testified the design of the project evolved "from beginning to the
end." He explained that "[m]aterials were changing, the laydown areas were
changing, the amount of materials were constantly changing," because "[a]s
they did more engineering they found that they had to modify it as they went
along."
Uniszkiewicz reviewed on cross-examination a letter from the general
contractor from July 1986 complaining about PSE&G's mismanagement of the
project and the attendant delays, disruption and escalating costs. Specifically,
the contractor complained of deficiencies in the project design, inefficiency of
the site organization, interference from the environmental regulators, differing
site conditions "of a surprising magnitude" and the adverse weather.
Uniszkiewicz agreed with Merrill Creek's counsel that the contractor's claims
resulted in a number of requests for additional payment in the form of change
orders.
On redirect, Uniszkiewicz conceded the general contractor's July 1986
letter was typical of the types of letters PSE&G regularly received from
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contractors attempting to establish a basis for additional payments on a pro ject.
Uniszkiewicz agreed with Harmony's counsel that his estimate anticipated
unforeseen costs, and that some of those costs, such as those resulting from
issues with the design and site conditions, would be the same if the
construction were undertaken in 2010.
Uniszkiewicz was unable to quantify the degree of increased costs
attributable solely to mismanagement or incompetence. He also acknowledged
that some of the change orders requested by the contractor actually decreased
costs. Ultimately, Uniszkiewicz observed that even with all of the changes,
the final cost of the project, including the punch list reserve for items to be
completed after construction was finished, exceeded his estimate by only $3
million.
Eric Ditchey, a licensed civil engineer with a master's degree in
geotechnical engineering who specializes in working on dams and hydraulic
structures, testified for Harmony about the costs of construction. He testified
he had been involved in the design of ten or twelve new dam projects and sixty
or seventy dam rehabilitation projects, as well as in the construction of twenty
to twenty-five dam related projects. Ditchey explained he was asked by
Harmony to review the Merrill Creek Reservoir and develop what it would
cost to build in 2010, 2011 and 2012 dollars and to give an opinion on what
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the service life of the reservoir should be and what an appropriate method of
depreciation would be, based on his experience in the design and construction
of such projects.
Ditchey testified he inspected the site and reviewed the as-built plans for
the reservoir, several inspection reports and Uniszkiewicz's 1986 cost estimate
and final cost compilations. He determined to trend the original costs of
construction because in his professional opinion, the design and construction
of the dam remained "perfectly appropriate" despite the passage of time. He
testified that if the reservoir were constructed today it would be built in the
exact same way it was built in the 1980s. There would be no changes in the
design, the methods of construction or the materials used. Ditchey also
testified that no aspect of the project would cost less.
Ditchey testified he considered, and rejected, a component cost analysis
because he did not believe he could come up with an accurate number for cost
of construction given the complexity of the project and the inability to
ascertain some of the specifics of the construction. According to Ditchey,
having access to the level of detail provided by Uniszkiewicz's cost
compilations was a great advantage in accurately calculating the cost of
reproducing the reservoir during the tax years at issue by trending the costs
forward.
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Ditchey analyzed PSE&G's cost compilations and the as-built drawings
to determine how much the improvements actually cost at the time of
construction. He determined the total cost, including both hard and soft costs,
was approximately $215 million. But after deducting more than $11 million
for the value of the real estate and the cost of some furnishings in the visitor 's
center he considered should be categorized as personal property, he concluded
the actual cost of constructing the improvements in 1988 would be
$203,934,813. He testified based on his experience in designing dams and
reservoirs and supervising their construction that $203,934,813 would have
been a reasonable cost for construction in 1988, considering the complexity of
the project.
Ditchey then "trended" the historical costs forward to determine what the
cost of the improvements would be if the project were constructed in tax years
2011, 2012 and 2013. To derive a trending factor, Ditchey consulted the
RSMeans historical cost indices, the Consumer Price Index, the Construction
Cost Index and the Building Cost Index. He relied most heavily on the
RSMeans indices because they dealt specifically with heavy construction,
appropriate for a reservoir project. He concluded the project's trended cost,
before depreciation, was $416,027,019 for tax year 2011; $434,381,152 for tax
year 2012; and $440,499,196 for tax year 2013.
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Ditchey testified he regularly employed the same trending analysis when
he developed an engineer's estimate of construction costs for clients replacing
or rehabilitating a dam or reservoir built fifteen or twenty years before. He
explained his firm would look at the original cost of construction and use the
RSMeans indices to calculate what it would cost to construct the same project
today, which the client would then use as a benchmark in putting the project
out for bid. Ditchey testified that trending original construction costs for dams
and reservoirs using the RSMeans indices was "common practice," and that
based on his experience, the trended figures he computed represented a
reasonable cost of constructing the Merrill Creek Reservoir in the tax years in
question.
Ditchey testified he calculated depreciation by assigning the entire
reservoir a service life of 100 years, the same service life the New Jersey
Water Supply Authority assigned to the Manasquan Reservoir built at roughly
the same time. Ditchey determined straight line depreciation would be most
appropriate for the reservoir and thus divided the chronological age of the
structure by 100 years to obtain the depreciation factor. Ditchey readily
acknowledged that some components of the project, such as the visitor's center
or certain mechanical parts, might last less than 100 years. He testified,
however, that the mechanical components were not subject to abuse and
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Merrill Creek was one of the best maintained facilities he had ever seen. He
believed that with proper maintenance the reservoir could last 200 years.
Ditchey concluded the design and construction of the reservoir and the way it
was maintained actually made his 100 year service life a conservative estimate.
He calculated trended costs after depreciation as $324,256,353 for tax year
2011; $334,453,093 for tax year 2012; and $336,492,441 for tax year 2013.
In response to questions from the court about the reliability of Novelli's
quantity takeoff analysis, Ditchey explained why he thought it less reliable
than trending original costs in the case of dams and reservoirs. According to
Ditchey, dam engineering and construction is different from the cost
estimating associated with the construction of buildings because the majority
of the work on a dam is in the foundation well below grade where it is difficult
to fully assess conditions ahead of construction.
Ditchey explained that although dam engineers would typically take core
samples and run permeability tests to get a sense of the kind of seepage they
could expect through the foundation rock, "there's only a limited number of
holes you can drill during the investigation or design phase," making it
"unlikely that you're going to really understand the full and true permeability
of the rock." Ditchey explained it was thus very common to find conditions
A-1498-16T3
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worse than anticipated "just because your borings didn't hit all the porous areas
when you did the subsurface investigation program."
Because there are typically so many unknowns, Ditchey explained that
for dam engineers and general contractors to "have an actual bid and/or
construction costs from a dam project, regardless of the age of that data is
very, very important." He readily acknowledged that the actual costs on which
he relied included multiple change orders that made construction more
expensive, but he contended many of them were the result of difficult site
conditions that any contractor would have encountered. He maintained those
change orders represented
a real cost that . . . needed to be spent to build that
reservoir. So, accepting that and in trending that
forward to me is totally appropriate. To do the
component approach by just taking quantities off the
as-builts then going to Means to get a unit price, there
was no way to include some of those costs that the
contractor had to incur.
Ditchey used the "borrow material" to illustrate his point. Merrill Creek
is an earthen dam. Ditchey explained that he did not know where the
contractor got the soil and rock or "borrow material" used in the dam, but
assumed the majority was pulled from a borrow pit "on-site relatively close to
where the embankments were constructed," as that is "the only way a project
like this with this many millions of cubic yards could be constructed
A-1498-16T3
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economically." Ditchey explained he "didn't have to worry about where they
got it because" it was already "included in [his] cost where the contractor got
the material and how far he had to take it to put it into the dam." In contrast,
[t]o do the component approach, the person doing it,
Mr. Novelli, would have to make some assumptions
on where that material was gotten, you know, where
the borrow sources were, how far they were and I
don't know how he would do that. . . . I didn't see the
information on the as-builts and I think that's what he
said, as well. He didn't know that — how far away the
material had to come from.
When Merrill Creek's counsel asserted that the unforeseen conditions
and the materials and methods for dealing with them would all be reflected on
the as-built drawings, Ditchey replied, "[n]ot necessarily." He explained:
If there was a change in quantity or an addition of a
material[,] that would be shown on the as-builts, but if
say the material that they intended to use for the core
[of the dam], as an example, if it came out of the
borrow area much wetter than they anticipated, they
would have to then do extra effort to dry that material
or get it to a certain moisture content. [2] That would
be an added cost that, I don't know where or how they
would reflect that on the as-builts.
Ditchey asserted that for someone trying to assess what it might cost to
replicate a dam project, "how a contractor chooses to bid that work or how the
2
Uniszkiewicz testified the rain made the soils wetter than what the engineers
deemed acceptable for the dam, requiring the contractor to dry them out before
using it in the construction.
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ultimate cost works out because of change orders associated with those
unknowns, that's all very valuable." Ditchey concluded that for him and he
believed it "standard practice within the engineering community, the
compilation of these bid tabulations from previous projects, we as dam
engineers put a lot of value on that and having that type of information, [and]
being able to trend it forward."
Harmony's real estate appraisal expert was Louis Izenberg. He agreed
with Ditchey's use of a trend analysis to determine market value of the
reservoir improvements because the trended cost approach relied on fewer
"hypotheticals" than the quantity survey approach in replicating costs of
construction of the reservoir. He explained that the inability to obtain precise
information about the quantities of the material used in the dam resulted in
"that first input if you will [having] to be an opinion of someone else and that
follows for the next thousand inputs — that it was an opinion based upon
opinion."
Izenberg asserted that because the reservoir would be built in the exact
same way if constructed in the applicable tax years, the trended cost approach
was most appropriate in calculating value because it accorded great weight to
the project's actual cost. Izenberg's report states he calculated replacement
cost, rather than reproduction cost, but he testified the trending multiplier takes
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into account modern materials and methods, thus making reproduction and
replacement virtually the same in this case.
Izenberg used Ditchey's calculated actual cost of $203,934,813 as his
baseline figure for the actual cost of the improvements in 1988. He further
reduced that number to approximately $199 million by deducting amounts he
determined were linked to land acquisition, rather than improvements. After
reviewing Ditchey's report and the Marshall & Swift Valuation manual,
Izenberg used a double trending multiplier for tax year 2011, meaning the cost
to build the dam in 2011 would be twice what it cost in 1988. Izenberg
increased that multiplier by three percent in tax years 2012 and 2013, thus
applying a multiplier of 2.060 in 2012 and 2.120 in 2013. After applying the
multipliers to the base cost, his calculated replacement cost was approximately
$398 million for tax year 2011, $410 million for tax year 2012, and $422
million for tax year 2013.
Izenberg also added an entrepreneurial incentive factor of ten percent to
further increase the replacement costs in each tax year. He testified he did so
because the concept of market value embodies the majority of behaviors that
people involved in real estate would undertake and most people invest in real
estate for profit, although he acknowledged the reservoir was not built for
profit or resale. With that factor included, the total replacement cost was
A-1498-16T3
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approximately $438 million for tax year 2011, $451 million for tax year 2012,
and $464 million for tax year 2013.
Izenberg testified he rejected functional obsolescence because he found
nothing in the discovery to support a finding of excess capacity, and certainly
nothing from the Delaware River Basin Commission to that effect. He then
applied a depreciation factor to the total costs, using the age-life method. His
approach differed from that of Sussman, who had engaged in a component -by-
component depreciation analysis for every improvement on the property.
Izenberg found an effective age of twenty years for the improvements for all
three tax years. He found a 100-year useful life for the reservoir as a whole,
and applied a twenty percent depreciation factor for each tax year.
After reducing for depreciation and adding the stipulated land value,
Izenberg's final market value estimate for each tax year in rounded dollars was
$355,000,000 for tax year 2011; $365,750,000 for tax year 2012; and
$375,250,000 for tax year 2013.
On cross-examination, Izenberg was queried about the reasonableness of
trending construction costs consisting of a $131 million base bid and $84
million in change orders. He took issue with the assumption that change
orders were synonymous with cost overruns in light of Uniszkiewicz's pre-bid
cost estimate, and his testimony that total cost of construction was within $3
A-1498-16T3
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million of PSE&G's original estimate. Izenberg emphasized that the contract
came in within budget and on schedule, making trending those costs the most
credible method of estimating what it would cost to build the same reservoir in
the exact same manner in 2010 and the ensuing tax years.
The Tax Court judge found both parties' experts "produced generally
credible valuation reports and rendered credible testimony." Merrill Creek Res
C O Proj. Direct v. Harmony Twp., 29 N.J. Tax 487, 495 (Tax 2016). He
concluded, however, that "the testimony and cost conclusions of Harmony's
cost estimator," an engineer specializing in the design and construction of
dams, was "more compelling" and the trended cost approach used by
Harmony's appraisal expert was "most appropriate" on the facts. Id. at 495-96.
The judge agreed with Harmony's appraisal expert that in assessing true
value of the reservoir, there was no difference between reproduction and
replacement costs. Id. at 496. Finding the trended original cost approach "an
accepted methodology," id. at 498 (citing Transcon. Gas Pipe Line Corp. v.
Bernards Twp., 111 N.J. 507, 542 (1988)), the judge found any concern about
its reliability given the age of the reservoir was assuaged by the undisputed
testimony "that the reservoir would be built the exact same way today as it was
in the 1980s" and the accuracy of the original costs of construction, ibid.
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Although accepting Harmony's cost trending analysis, the Tax Court
rejected inclusion of entrepreneurial incentive, agreeing with Merrill Creek
that "the reservoir was built because the [Delaware River Basin Commission]
required it be built" and "profit was not the primary motivation." Id. at 499-
500; see Tex. E. Transmission Corp. v. E. Amwell Twp., 13 N.J. Tax 24, 42
(Tax 1992), aff'd, 18 N.J. Tax 126 (App. Div. 1999).
The Tax Court was also persuaded by Merrill Creek's argument about
the excess capacity of the reservoir, finding its "expert provided credible
evidence for a 15% deduction for functional obsolescence due to an incurable
superadequacy." Merrill Creek, 29 N.J. Tax at 502. Acknowledging "[t]he use
of replacement cost can eliminate the need to measure many, but not all, forms
of functional obsolescence such as superadequacies and poor design," ibid.
(quoting Appraisal Institute, The Appraisal of Real Estate 386 (13th ed.
2008)), the court noted replacement cost should, in theory, "implicitly
eliminate functional obsolescence," ibid. The Tax Court found, however, that
although Harmony's experts acknowledged design factors, including the
reservoir's size and the infrequent discharge orders, "its limited sedimentation
load that enhances its effective capacity and function, its current capacity to
handle future rainfall and seismic activities, and its anticipated continued
A-1498-16T3
23
functionality due to superior maintenance," they "failed to account for much of
the excess construction costs testified to by Merrill Creek's witness." Ibid.
Adopting Harmony's cost approach adjusted to eliminate entrepreneurial
incentive and apply a fifteen percent deduction for functional obsolescence,
the Tax Court arrived at a true value of $263,700,000 for tax year 2011;
$271,461,000 for tax year 2012; and $279,022,000 for tax year 2013. Id. at
503. Although the valuations exceeded the assessments for each tax year, and
Harmony filed counterclaims, the ratios between the court's true values and the
original assessments being within permissible Chapter 123 limits, see Glen
Wall Assocs. v. Twp. of Wall, 99 N.J. 265, 271 n.2 (1985) (explaining "[t]he
'Chapter 123 ratio' is the average ratio of assessed value to market value of all
property in a town or tax district," (citing N.J.S.A. 54:51A-6)), the court
affirmed the assessments, Merrill Creek, 29 N.J. Tax at 503.
Merrill Creek appeals, arguing the Tax Court erred in using a cost trend
analysis based on inflated and unreliable historic costs going back over twenty
years. Amicus Royal Institute of Chartered Surveyors echoes Merrill Creek 's
arguments.3 Harmony cross-appeals, arguing the court erred in disallowing
entrepreneurial incentive and allowing a deduction for functional
obsolescence. Our review of the record convinces us that none of these
3
Merrill Creek is paying amicus's fees and costs in this court.
A-1498-16T3
24
arguments is of sufficient merit to warrant extended discussion in a written
opinion. See R. 2:11-3(e)(1)(E).
The scope of our review of judgments of the Tax Court is, of course,
limited. United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, 430
N.J. Super. 1, 7 (App. Div. 2013). Because "[t]he judges presiding in the Tax
Court have special expertise . . . their findings will not be disturbed unless they
are plainly arbitrary or there is a lack of substantial evidence to support them."
First Republic Corp. of Am. v. Borough of E. Newark, 17 N.J. Tax 531, 536
(App. Div. 1998) (quoting Glenpointe Assocs. v. Twp. of Teaneck, 241 N.J.
Super. 37, 46 (App. Div. 1990)).
The Tax Court reviews challenged property tax assessments pursuant to
N.J.S.A. 54:3-21. "The settled rule is that there is a presumption that an
assessment made by the proper authority is correct and the burden of proof is
on the taxpayer to show otherwise." 125 Monitor St. v. City of Jersey City, 23
N.J. Tax 9, 13 (App. Div. 2005) (quoting Aetna Life Ins. Co. v. City of
Newark, 10 N.J. 99, 105 (1952)). The taxpayer must present "sufficient
competent evidence to overcome the presumption, that is, to establish a true
valuation of the property at variance with the assessment." Ibid. "Such
evidence must be definite, positive and certain in quality and quantity to
overcome the presumption." Ibid. Once the presumption is overcome, "[t]he
A-1498-16T3
25
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. Twp. of Edison, 127 N.J. 290, 312 (1992)
(citation omitted).
Applying those standards here, we find no error in the Tax Court's use of
a trended cost analysis to value the Merrill Creek Reservoir, a textbook
example of a special purpose property. As our Supreme Court has observed,
there is no single "approach that must be followed in valuing real property."
Pantasote Co. v. City of Passaic, 100 N.J. 408, 414 (1985). "There can be no
rigid rule. The answer depends upon the particular facts and the reaction to
them of experts." New Brunswick v. State Div. of Tax Appeals, 39 N.J. 537,
544 (1963).
Contrary to Merrill Creek's assertion, trended cost analysis is not
"discredited by New Jersey Tax Court precedent," although it is likely correct
the methodology is somewhat rarely used, at least in comparison with other
methods employed in a cost approach in the reported cases. But it is easy to
see why. Trended cost analysis is most often used in valuing true special
purpose properties, see Transcon., 111 N.J. at 542; Hackensack Water Co. v.
Old Tappan, 77 N.J. 208, 217 (1978), which are relatively rare things, see Ford
Motor Co., 127 N.J. at 312; see also, The Appraisal of Real Estate 397 (13th
A-1498-16T3
26
ed.) (noting cost index trending is "useful for estimating the current cost of
one-of-a-kind items when standard costs are not available").
The Tax Court was correct that trended cost analysis is a perfectly
acceptable valuation method in this state in the right circumstances, and one
our Supreme Court has specifically endorsed. See Transcon., 111 N.J. at 542
(noting "the trended original cost approach, suggested in Hackensack Water
Co., 77 N.J. at 217-18, and outlined in Haworth, [178 N.J. Super. at 261], . . .
may in some cases be a more convenient valuation methodology" for equitably
calculating replacement costs of special purpose property). We likewise
affirmed the Tax Court's use of a trended cost analysis in valuing "a 'one of a
kind' corporate headquarters of unique design" in Beneficial Facilities Corp. v.
Peapack & Gladstone Borough, 11 N.J. Tax 359, 375 (Tax 1990), aff'd, 13 N.J.
Tax 112, 113 (App. Div. 1992).
Moreover, there was ample substantial credible evidence to support the
Tax Court judge's finding that the trended cost approach produced the best
approximation of the reservoir's true value in the tax years at issue. Merrill
Creek presented no evidence to rebut Ditchey's testimony that the dam and
reservoir would be built the same way today as it was in the late 1980s with no
changes in the design or the means and method of construction. That
testimony undercut one of the practical limitations of the trended cost method,
A-1498-16T3
27
namely, that "as the time span increases, the reliability of the current cost
indication tends to decrease." The Appraisal of Real Estate 397 (13th ed.).
The other practical limitation in applying the cost trending method,
ascertaining the accuracy of historical costs, was also not an impediment here.
Not only were detailed cost compilations of the construction readily available,
Uniszkiewicz, the PSE&G employee responsible for estimating the costs of the
reservoir project in the 1980s, remained at the company as manager of
construction estimating and testified at trial. While Merrill Creek asserts in its
brief that construction of the reservoir was an "unmitigated disaster," the trial
testimony does not bear that out.
Uniszkiewicz, the only fact witness to testify at trial, testified the project
was completed on time and under budget. When Merrill Creek's counsel asked
if the "project [was] beset by cost overruns," Uniszkiewicz disagreed, replying
"[t]here were a lot of changes that occurred that were part of the risk and not
part of the base. . . . [W]e had the money in the budget . . . but we were hoping
not to spend all those risk dollars up front like we did." Further, Uniszkiewicz
was clear that a number of the "risk dollars" were spent as a result of design
changes from unanticipated site conditions that would be the same regardless
of whether the dam was built in 1988 or 2010. Uniszkiewicz's testimony
A-1498-16T3
28
strongly supported Ditchey's opinion that those change orders represented "a
real cost that . . . needed to be spent to build that reservoir."
The record simply does not support Merrill Creek's assertion that the
"original costs being trended are inflated and unreliable." To the contrary, it
provides ample support for the Tax Court's finding that the original
construction costs of the reservoir were sufficiently reliable and reasonable to
support trending them to ascertain true value.
We also reject Merrill Creek's argument that the Tax Court judge trended
personal property costs of $19 million, thus violating the Uniformity Claus e,
or that Harmony's experts rendered net opinions because they could not
identify the particulars of each item Merrill Creek asserts was personalty. The
law is well settled that soft or indirect costs such as engineering and architect 's
charges, environmental site planning, interior design, the expenses of a
landscape architect, the cost of bringing utilities to the site, project
supervision, a traffic consultant, financing charges, interest and taxes during
construction, insurance and legal fees are all properly included in the cost of
improvements for the purpose of establishing true value. See Beneficial
Facilities Corp., 11 N.J. Tax at 379.
Merrill Creek compiled a list of items from the cost sheet that it asserts
constituted personalty that should not have been trended, including $13 million
A-1498-16T3
29
for settling claims with the contractor, $4 million for public relations, and a
list of smaller items such as $600,000 for the installation, maintenance and
dismantling of the bubble that permitted work to continue through the winter
months, a $441,000 premium for extended hours and cold weather concrete
and $640,000 for emergency action sirens. Although the Tax Court did not
address these items in its opinion, we cannot find the failure to do so
constituted reversible error.
First, we note that Harmony's real estate appraisal expert trended costs
of approximately $199 million, not the $220 million final costs including the
$5 million punch list reserve. Izenberg used Ditchey's calculated actual cost of
$203,934,813, including hard and soft items, as his baseline figure for the
actual cost of the improvements in 1988 and further reduced that number to
$199 million before trending the costs forward. Second, Uniszkiewicz
testified that the disputed claims with the contractor were nothing out of the
ordinary, suggesting the expenses could fairly be characterized as
administrative expenses incidental to a $220 million construction project.
Finally, none of the specific items Merrill Creek identifies, the bubble,
cold weather concrete, the public relations expense or emergency action sirens ,
impugns the Tax Court's implicit conclusion that Harmony carried its burden
to show those items as fairly included in the real property tax assessment. See
A-1498-16T3
30
Gen. Motors Corp. v. City of Linden, 20 N.J. Tax 242, 265 (Tax 2002). Other
courts have considered public relations a reasonable expense incidental to
construction of a controversial project, see Pub. Serv. Co. v. Town of
Seabrook, 580 A.2d 702, 704 (N.H. 1990) (including public relations among
indirect costs for Seabrook nuclear power plant), and the record supports a
conclusion that the construction related items and emergency warning sirens
are costs that any prudent person reproducing or replacing the reservoir would
pay, see Transcon., 111 N.J. at 531. Merrill Creek's contention that the
testimony of Harmony's experts should have been excluded as net opinion for
their failure "to do a scintilla of due diligence in regard to the original
historical costs" borders on the frivolous. 4
4
We also regard as meritless Merrill Creek's assertion that we should reverse
this case based on an error in the opinion that Novelli, Merrill Creek's cost
estimator, was an "engineer who specializes in contamination sites," while
correctly observing that Ditchey was a licensed engineer who actually
designed and supervised the construction of several dams. The Tax Court
corrected its error to accurately describe Novelli as a real estate appraiser
whose reservoir and dam-related experience was limited to cost estimation. In
an amplification letter issued pursuant to Rule 2:5-6(c), the court noted the
corrected factual error did "not change or affect the decision in the case in any
way," but instead "reinforce[d] the court's finding that [Harmony]'s expert was
'more compelling.'"
Having reviewed the testimony of both experts, we readily agree. These
were not two licensed engineers with different specialties. Ditchey was the
only expert to testify with actual engineering experience in dam design and
construction. His response to the court's questions about the reliability of
(continued)
A-1498-16T3
31
The issues Harmony raises on its cross-appeal require but brief
comment. The Tax Court's elimination of entrepreneurial incentive is
consistent with Tax Court precedent. See Tex. E. Transmission Corp., 13 N.J.
Tax at 42 (declining to apply entrepreneurial incentive to a pipeline project
"exclusively constructed by regulated operating companies for use in their
business at costs which are passed through to the ratepayers"); Lawrence
Assocs., 5 N.J. Tax at 535-38 (applying entrepreneurial incentive as an
element of market value of the Quaker Bridge Mall but not the highway
overpass providing access to it because it was not constructed "with the
expectation of earning a profit separate from that derived from the Mall
itself").
Although the Tax Court's application of a fifteen percent deduction for
functional obsolescence might be a closer question on this record, we find no
reversible error. The Tax Court based its deduction for functional
obsolescence on both excess construction costs and superadequacy, accepting
the opinion of Merrill Creek's real estate appraisal expert Sussman that a
reservoir of substantially less capacity would have been sufficient to
accomplish the Delaware River Basin Commission's goal of providing a source
(continued)
Novelli's quantity takeoff analysis for producing an accurate cost estimate for
reproducing the dam and reservoir makes the Tax Court's point obvious.
A-1498-16T3
32
of fresh water to offset consumptive use by electric power plants located along
the Delaware River during droughts and low flow conditions. Merrill Creek,
29 N.J. Tax at 502.
The record support for that conclusion is thin, consisting of only a single
document entitled "Strategy for Resolution of Interstate Flow Management
Issues in the Delaware River Basin," prepared at the request of the
Commission in 2004. That document, while stating the water flow yield for
the reservoir during extreme drought conditions was double the consumptive
use of the existing electrical grid, also notes, however, that the reservoir was
designed to accommodate future needs. More important, there is nothing in
the record as to why the reservoir was built to a sixteen billion gallon capacity.
Without knowing whether the regulator required the existing capacity or
whether it could be built smaller today, a conclusion on superadequacy is
difficult. See BP Pipelines (Alaska) Inc. v. State Dep't of Revenue, 325 P.3d
478, 492-93 (Alaska 2014) (finding functional obsolescence for oversized
pipeline based on use value as integral part of owner's oil business).
Resolution of whether functional obsolescence based on superadequacy
was appropriate here is unnecessary, because the Tax Court also based its
finding on excessive construction costs, which is supported by the record. See
Brockway Glass, 10 N.J. Tax at 367 (noting "[f]unctional obsolescence is
A-1498-16T3
33
measured by excess construction costs and/or excess operating expenses").
Although refusing to agree with Merrill Creek's counsel that the project was
"beset by cost overruns," Uniszkiewicz acknowledged that over a month of
rain at the start of construction and mismanagement leading PSE&G to replace
its project manager led to increased costs, notwithstanding that the project
came in within budget.
We are accordingly satisfied the evidence supports the Tax Court's
conclusion, based on Uniszkiewicz's testimony, Ditchey's analysis and its own
expertise, that the original costs to construct the reservoir were both
sufficiently reasonable and reliable to support trending them forward and that
the taxpayer was entitled to a fifteen percent deduction to value for functional
obsolescence due to increased costs of construction. See In re Consolidated
Edison Co. of N.Y., Inc. v. City of New York, 869 N.E.2d 634, 636 (N.Y.
2007) (noting in a reproduction cost case that "allowing for increased
consideration of functional obsolescence may, in the appropriate case, further
the purpose of valuation proceedings — to arrive at a fair and realistic
appraisal of the value of the property at issue").
Affirmed.
A-1498-16T3
34