Opinion
Docket No. 011234-2010 Docket No. 005724-2011 Docket No. 003691-2012
05-02-2016
Re: ARE-279 Princeton Road v. Township of East Windsor Block 4, Lot 1 (279 Princeton-Hightstown Road)
NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS Michael Caccavelli, Esq.
Zipp & Tannenbaum, L.L.C.
166 Gatzmer Avenue
Jamesburg, New Jersey 08831 Harry Haushalter, Esq.
Lexington Square Commons
2119 Route # 33, Suite A
Hamilton Square, New Jersey 08690 Dear Counsel:
This is the court's decision following trial of the above captioned matters. Plaintiff contests the local property tax assessments for tax years 2010-2012 on the above captioned property ("Subject") located in defendant ("Township"). The Township filed a counterclaim for tax 2010. The assessments, as allocated, are:
Tax Year 2010:
| Land | $2,206,800 |
| Improvements | $3,686,900 |
|---|---|
| Total | $5,893,700 |
Tax Year 2011
| Land | $2,206,800 |
| Improvements | $3,193,200 |
|---|---|
| Total | $5,400,000 |
| Land | $2,206,800 |
| Improvements | $1,793,200 |
|---|---|
| Total | $4,000,000 |
| Tax Year | Average Ratio | Upper Limit | Lower Limit |
|---|---|---|---|
| 2010 | 100% | ||
| 2011 | 92.12% | 105.94% | 78.30% |
| 2012 | 94.92% | 109.16% | 80.68% |
Each party presented an appraisal expert witness, whose reports were admitted into evidence without objection. Their value opinion for each tax year was:
Since the trial notice did not include 2013, plaintiff's expert's report for this year was not considered. Plaintiff moved to strike portions of the Township's expert's report on value conclusions using fourth quarter capitalization ("CAP") rates based on precedent. As the precedent post-dated the expert's report, the court allowed the Township's expert to amend the same and plaintiff to depose the expert.
| Tax Year | Plaintiff's Expert | |
|---|---|---|
| 2010 | $3,350,000 | $6,000,000 |
| 2011 | $3,000,000 | $6,700,000 |
| 2012 | $3,000,000 | $7,150,000 |
The Township's expert included a separate value for surplus land at $975,000 (2010); $1,000,000 (2011) and $1,100,000 (2012).
The principle area of contention between the experts was the Subject's designation based on its use and physical characteristics. Plaintiff's expert deemed the Subject an industrial property akin to a warehouse with standard laboratory/research and development ("R&D") space in below-average condition. He described the building on the Subject as R&D; or R&D flex; or R&D industrial flex; or warehouse/flex building. The Township's expert deemed the Subject an office and laboratory ("Lab") facility, comparable to quality office/Lab space with high desirability because of (i) its location in the "most prominent" Princeton Area office sub-market which had lower vacancies and higher asking rents than the Central Jersey office market; (ii) extensive competitive commercial land development in the adjacent areas, and, (iii) its unique physical configuration of all HVAC systems being located on the roof area allowed for higher-than-average usable interior space. The experts' respective designations caused sharp differences in their choice of rental comparables, which in turn, caused differences in their conclusion of the market rent per square foot which, in turn, widened the gap between their respective estimates of the Subject's potential gross income. Another issue was whether plaintiff's expert properly reduced tenant improvements from contract rents. A third area of dispute was plaintiff's expert's failure to attribute a separate value to the undisputed surplus land on the Subject.
For the reasons stated below, the court finds the Subject is a hybrid of office and tech-quality R&D/Lab space (portion of the building used for technological research and Lab activities, and a larger portion for the conduct of day-to-day business). It accepts the income approach used by the experts for valuation of the Subject, however, does not adopt their respective conclusions as to certain components of this approach (market rents, certain adjustments to market rents and certain net operating expenses). The court also rejects the Township's expert's value conclusion for the surplus land as unpersuasive. The court finds the Subject's value for 2010 as $4,796,260 and for 2011 as $4,579,960. For 2012, the assessment of $4,000,000 is affirmed. FACTS (A) Physical Description
The Subject is a +12.3-acre parcel of generally level land. It is improved by a one-story building of about 42,600 square feet ("SF") built in 1984, and includes + 154 space parking lot, and paved access drives and sidewalks. There are large grassy areas surrounding the building with trees around the perimeter of the site.
The building was designed by Sir Richard Rogers, a famed architect. It was built for the original owner, PA Consulting Group in 1984 which focused on technical and technological research. There are several orange-colored A-frame masts on the roof which also support the walls. The HVAC systems are on a platform within the A-frame spine of the building. The 200-ton air-cooled chiller has roof-mounted units. These attributes eliminate load bearing walls and create open space adaptable to a variety of uses. Supply lines are visible below the sky-lit ceiling areas in several areas. The Lab areas are serviced separately with custom air handling units. There is one loading door in the building which is used to take in supplies to a storage room/area.
The Lab area (about 40% of total space) was distinguishable due to features such as fume/walk-in hoods, bench top lab hoods, plumbed sinks, and Lab-necessary utilities such as hot/cold water distillers; holding tanks; waste, and chemical/air outlets/channels. These areas have tiled floors and a drop ceiling. The remaining office space was tiled, and prior to its vacancy, was carpeted in sections which had cubicles, with the HVAC ducts suspended from the ceiling. The ceiling height is about 12 feet, and is lower is some areas. There is also a space cordoned off by wire fencing and used as storage space for FDA-restricted drugs/chemicals. The photographs and testimony evidence the Subject's condition was average, with signs of water and roof damage, and requiring deferred maintenance. (B) Zoning
The Subject lies in the R-O (Research Office) zone. Permitted principal uses include manufacturing; research Labs; warehousing/storage; office; pharmaceuticals; industrial office parks; agriculture/horticulture; day care centers. The minimum lot area is 4 acres. The maximum building coverage is 20%; floor area ratio ("FAR") is 25%; and improvement coverage is 65%. Both experts deemed the Subject's use as legal conforming.
The experts agreed that as of the valuation dates, and pursuant to the limitations set forth in the zoning ordinance, the Subject had surplus land. The layout of the improvements on the Subject would not allow for sub-division of the site, and its separate sale. The Township's expert noted that applying the maximum FAR to the Subject provided for a build-out of +134,600 SF, thus, for expansion of 65,080 SF (maximum build-out less area of existing current structure). (C) Location
Plaintiff's responses to the Township's interrogatories stated that "an additional 42,600 square feet building can be developed" on the Subject, however, the site itself could not be subdivided.
The Subject is proximate to major and well-traversed local highways, as well as to public transportation. It is located in an area which has some farmland and several commercial buildings used for retail/office/warehouse purposes. As of the valuation dates, the Subject was also proximate to some of the Township's largest employers: Elementis Specialties, which occupied a 65,975 SF office/R&D building; Shiseido Corporation, which occupied a 211,000 SF warehouse (scheduled for a future expansion of 72,988 SF); and McGraw Hill Companies, which occupied a 50-acre campus with office buildings.
The Township's expert noted that the neighboring area also included a 2012 state-of-the art hospital campus in Plainsboro (completed in 2012) occupying about 171 acres and 630,000+SF. He claimed that this new construction, along with two apartment complexes built in or after 2012 (one in the Township and one in the next town over), showed increased land development, which tended to stabilize vacancy rates, increase lease rates, and influence future need for retail, medical and office properties. He noted the Subject as competitive with similar buildings in the local market area, which included the "Greater Princeton area." (D) Occupancy
The Subject was leased to Phyton Biotech, Inc. from March 2005 to September 2010 on a triple net basis. The area occupied was 27,588 SF or about 65% of the building. The tenant vacated sometime in 2008, however continued to pay rent at $17.45 per SF ("PSF") until the lease termination date in 2010. The building remained vacant until its sale in 2013. (E) Subject Sale
The Subject was marketed for lease and sale starting mid-2007 through a commercial listing broker. The marketing materials indicated the Subject as an office and Lab building/space located in the Greater Princeton Area within the "heart of the Central New Jersey Life Sciences corridor," desirable to biotech companies being proximate to Princeton University. The listing price was $90 PSF (sale) or an undisclosed lease rental for a 5-year term with 24-months free rent. The Subject was shown six times and received three written offers of $4.8 to $4 million, which were rejected. Thereafter, the price was reduced periodically until it was about $4 million.
Positive investor feedback included "existing cash flow; tenant investment in space; expandable and accessible site; ability to buy below replacement cost; upside in 35% vacancy." Negative factors were "high cost of electric and current reimbursement with Phyton; marketability of vacancy given the building's exterior image; capital costs to maintain the fiberglass panels and painted metal frames; need for a better understanding of HVAC system and cost to submeter tenants."
In 2011 or 2012, plaintiff and its parent made an accounting decision to divest itself of underperforming assets from its real estate asset portfolio. The Subject was one such asset. In 2013, the Subject sold for $2,750,000 to an entity in the pharmaceutical business (research and, per plaintiff's expert, drug manufacture) which had outgrown its existing space elsewhere, and had initially rejected the purchase at $4 million, but later reconsidered at the lower price. The entity desired the Subject since it deemed the Lab and building's configuration as optimal for its needs and growth. The sale was not categorized as non-usable for purposes of the Chapter 123 ratio studies. Post-purchase, the owner spent about $3 million in repairs and renovation. VALUATION BY EXPERTS (A) Highest and Best Use
Plaintiff's parent is Alexandria Real Estate Equities, Inc., a leading real estate investment trust (REIT) in the business of "owning, operating, developing, redeveloping, and acquiring high-quality, sustainable real estate for the life science industry." As of 2006, it owned 159 properties nationally.
Both experts agreed that the current use was the highest and best use as improved, but disagreed as to the character of the use. Plaintiff's expert deemed the Subject's development consistent with the zoning requirements, and based on location, convenient transportation access and proximity to employment centers, its highest and best use, as vacant and as improved, was for the "development of a single-tenant [R&D] industrial flex building." He vehemently disagreed that the building on the Subject was or could be designated as office only, although it could be designated as Lab/storage/office or R&D with office space, or flex (noting that the CAP rates for R&D, flex or warehouse in the East Coast was lower than office buildings). He stated that the Subject was never developed or converted into an office building despite the extensive property development during 2005, nor were there any permit applications for further expansion.
The Township's expert agreed that the Subject's use was legally permissible and physically possible. He opined that although "office development" was the highest and best use as vacant, it was not financially feasible or maximally profitable due to negative market conditions, high vacancy rates in the Subject and in its "office market" as of the valuation dates, low asking rents, and decline in Central New Jersey's industrial market. Therefore, "land banking," i.e., holding on to vacant land until improved economy, was the highest and best use as vacant.
As improved, he opined land banking as the highest and best use for the surplus portion of land (of 65,080 SF of buildable FAR), and continued use of the Subject as a Lab/office facility "until such time as the surplus land can be developed with a +65,080 [SF] addition." He vehemently disagreed that the Subject's building could be characterized as R&D or flex or industrial (noting that these terms were being misconstrued) because it lacked the standard features of those styles such as higher ceilings, loading docks and storage space. The Township noted that the rent rolls indicated allocation of space of the entire building of 42,600 SF (not just the tenanted portion for tax year 2010) was about 44% for Lab and 56% for office, which evidenced that the property owner itself deemed the space as office/Lab. (B) Experts' Valuation
Both experts used the income approach to value thus, initially developed a market rent for the Subject and capitalized the same after deducting standard operating expenses.
Plaintiff's expert used seven commercial rental properties as comparables for developing the market rent. Four were in Mercer County (Lawrence and Hamilton); two in Middlesex County (Piscataway and South Brunswick); and two in Union county (New Providence). He identified the comparables' occupancy status as "flex" or "R&D," which, he testified, was based solely on his opinion. There were no pictures of any comparables (interior or exterior).
He deducted the negotiated tenant improvement ("TI") allowances from the contract rent of the two Union county comparables as an "above the line" item. He also adjusted for physical condition (-20%) if "average," -30% if "above average") based on the estimated costs of bringing the Subject to an "occupiable" condition of 25% to 30% (cost of $700,000, per plaintiff's representatives divided by his value conclusion of $3 million). He opined that the comparables must have been in an "occupiable" condition given the fact of their occupied status, thus, must be superior to the Subject's "below average" condition due to its vacancy. He adjusted for size at -10%) based on economies of scale and 10% for functional utility based on functional obsolescence.
The comparables' grid was as follows:
| Location | Size (SF) | Term | Date | Avg. Rent | TI (PSF) | Rent less TI | Total Adj. | Adj. Rent | |
| 1 | Piscataway | 56,150 | 10.4 yrs | 08/08 | $13.50 | -20% | $10.80 |
| 2 | New Providence | 10,595 | 8.5 yrs | 11/08 | $15.94 | $20.00 | -30% | ||
| 3 | New Providence | 39,274 | 10 yrs | 12/08 | $15.00 | $31.60 | $11.88 PSF | -30% | $ 8.32 |
| 4 | Lawrence | 28,700 | 10 yrs | 06/10 | $7.50 | -30% | $ 6.75 | ||
| 5 | Hamilton | 6,800 | 3 yrs | 10/10 | $ 8.50 | -20% | $ 6.80 | ||
| 6 | S. Brunswick | 10,000 | 3 yrs | 10/10 | $11.75 | -30% | $ 8.23 | ||
| 7 | Lawrence | 10,000 | 7.1 yrs | 07/11 | $10.24 | -30% | $ 7.17 |
$20 PSF TI amortized over the lease term of 8.5 years or $2.35 although the first five months were rent-free.
His total adjustment was -40% (-10% for size and -30% for above average condition) but he used -30%.
He used Leases 1, 2 and 3 for 2010; Leases 4, 5, 6 for 2011; and Leases 5, 6 and 7 for 2012 and concluded a market rent for the Subject at $9 PSF (2010) and $7.50 PSF (2011 and 2012). He then reduced the potential gross income ("GI") for vacancy loss at 10% based on the Subject's historical vacancy, and supported by a 2012 paper that New Jersey's reputation as a "high-tech mecca" was being challenged due to increasing national and global "high-tech clusters," which were the "new leading-edge research centers of pharma and life-science companies." From this effective gross income ("EGI") he deducted 5% for management fees and leasing commissions; 2% for reserves for replacements; and 1% for miscellaneous expenses. To this net operating income ("NOI"), he applied a CAP rate under the Band of Investment method using data from ACLI and RERC for second-tier properties. His value conclusions were as follows:
| Year | Market Rent | GI | Vacancy | EGI | Expenses | NOI | CAP Rate | Net Income |
| 2010 | $9.00 | $383,400 | -10% | $345,060 | -$45,000 | $300,060 | 8.50% | $3,500,000 |
| 2011 | $7.50 | $319,500 | -10% | $287,550 | -$37,500 | $250,050 | 8.20% | $3,000,000 |
| 2012 | $7.50 | $319,500 | -10% | $287,550 | -$37,500 | $250,050 | 8.25% | $3,000,000 |
The Township's expert used seven commercial rental properties to develop the Subject's potential market rent. Three were in Mercer County (Ewing and East Windsor, including the Subject's lease); two in Middlesex County (Monroe and Edison); and two in Somerset County (Bridgewater and Somerville). He made adjustments for the one lease which was modified gross ($2 PSF); market conditions (2% when market started to decline in 2008-2009); superior location due to desirability and/or highway access (-2% to -15%); superior age/condition and quality of construction (-3% to -15%); and size, with smaller spaces being superior due to economies of scale (-4%) to -15%). % to -15%); and size, with smaller spaces being superior due to economies of scale (-4%) to -15%). His comparable grid was as follows:
| Location | Size (SF) | Term | Date | Avg. Rent | Total Adj. | Adj. Rent | |
| 1 | Bridgewater | 118,000 | 10 | 07/11 | $17.00 | -10% | $15.30 |
| 2 | Ewing | 40,914 | 10 | 04/11 | $16.25 | $13.97 | |
| 3 | Monroe | 7,143 | 22 | 01/11 | $21.00 | -30% | $14.70 |
| 4 | Edison | 99,260 | 15 | 09/10 | $16.16 | -6% | $15.19 |
| 5 | East Windsor | 31,785 | 10 | 02/10 | $14.56 | -3% | $14.12 |
| 6 | Somerville | 16,000 | 5 | 05/09 | $12.00 | 12% | $13.44 |
| 7 | Subject | 5 | 02/05 | $16.46 | -11.5% | $14.57 |
This was in addition to the $2 PSF for the modified gross lease structure.
This was the initial space rented in 2005, however, the space actually leased was 21,873 SF, which expanded to 27,588 in 2006. No rent was charged for six months after the lease commenced in February 2005.
For 2010, he used Rentals 5, 6 and the Subject, placing least weight on Rental 6 due to its distance from Subject, most weight on the Subject's lease, and then on Rental 5 which was in the Subject's Township. For 2011, he used Rentals 4, 5, 6, again placing least weight on Rental 6 and most weight on Rental 5, and then on Rental 4. For 2012 he used Rentals 1-5, with least weight on Rental 3 being combined leases of medical office space, most weight on Rental 5, being located in the Subject's town, and secondary weight on Rental 2. His market rent for each year was $14.50.
In developing the Subject's value, he had a higher vacancy loss provision based on the "increased vacancy rates in the Mercer County industrial market [and] the Princeton submarket" for each tax year. He also provided 5% of EGI for management fees and leasing commissions, nothing for miscellaneous expenses, and $0.25 PSF (or $10,650) for replacement reserves due to the overall average condition of the Subject based on his experience and use of this rate for other properties. He also used the Band of Investment method with data from ACLI and PWC. His value conclusions were as follows:
| Year | Market Rent | GI | Vacancy | EGI | Expenses | NOI | CAP Rate | Net Income |
| 2010 | $14.50 | $617,700 | -17% | $512,691 | -$61,919 | $450,772 | 9.00% | $5,008,578 |
| 2011 | $14.50 | $617,700 | -16% | $518,868 | -$62,537 | $456,331 | 8.00% | $5,704,138 |
| 2012 | $14.50 | $617,700 | -16.5% | $515,780 | -$62,228 | $453,552 | 7.50% | $6,047,360 |
He then separately valued surplus land using six vacant land sales, one in Bordentown, three in Plainsboro and Monroe, and two in West Windsor and Lawrence, on a per-Floor Area Ratio ("FAR") basis. He opined that obtaining development approvals to enlarge the building on the Subject (by extending the first floor and adding another floor) would be easier since the Subject is already improved, and the larger rentable space would earn more income/returns to an owner or investor. He adjusted for market conditions (-5% per year for sales between 01/08 and 07/11 after which the market stabilized), lot size (5% to 20%), location (5% to 15%), development approvals (5%) and sale terms (10% to Sale 1 since it was a 99-year ground lease). His comparable grid was:
| Sale | Location | Lot Size(acres) | Zoning | ProposedFAR | Sale Date | Sale Price | PSFFAR | Approvals |
| 1 | Bordentown | 24.43 | Highway Com | 212,503 SF | 07/2011 | $3,000,000 | $14.12 | |
| 2 | Plainsboro | 11.6 | Hosp./Med Cmplx | 146,971 SF | 06/17/11 | $4,556,101 | $31.00 | Yes |
| 3 | Monroe | 10.22 | Light Industrial | 103,876 SF | 12/31/09 | $2,100,000 | $20.22 | |
| 4 | Plainsboro | 158 | Hosp./Med Cmplx | 2.4 mill SF | 03/18/08 | $62,500,000 | $26.04 | |
| 5 | W. Windsor | 7.71 | Research/Off/Man. | 100,500 SF | 03/03/08 | $2,400,000 | $23.88 | |
| 6 | Lawrence | 1.78 | Office | 14,740 SF | 01/08/08 | $662,150 | $44.92 |
Approvals were for two new office buildings, a health center, an indoor sports field, and a bank pad.
Sold to Monroe Township for use as recreational open space.
Redevelopment site pursuant to a 2007 redevelopment plan.
Approvals for two office buildings totaling 100,500 SF.
Approvals for a two-story office building totaling 14,740 SF. Per his report, the sale was "of 35.62% interest in common elements of a condominiumized. 5-acre lot."
He used Sales 3-6 for 2010, Sales 2-5 for 2011, Sales 1-3 for 2012, and chose $20 PSF of FAR for all tax years. Applying a holding period for future office expansion of five, four and three years (for 2010, 2011, and 2012) at a 5% discount rate per holding year (based on research and discussions with developers/realtors), his FAR value translated to $15, $16, and $17 per tax year for an estimate surplus land value of $975,000 (2010); $1,000,000 (2011), and $1,100,000 (2012). ANALYSIS AND FINDINGS
"Original assessments . . . are entitled to a presumption of validity." MSGW Real Estate Fund, L.L.C. v. Borough of Mountain Lakes, 18 N.J. Tax 364, 373 (Tax 1998). "The presumption of correctness . . . stands, until sufficient competent evidence to the contrary is adduced." Township of Little Egg Harbor v. Bonsangue, 316 N.J. Super. 271, 285-86 (App. Div. 1998). If the presumption of correctness is found overcome, the court must determine the value "based on a fair preponderance of the evidence." MSGW, supra, 18 N.J. Tax at 377. The court's "independent assessment" depends "on the evidence before it and the data that are properly at its disposal." F.M.C. Stores Co. v. Borough of Morris Plains, 100 N.J. 418, 430 (1985). The complainant has, and continues to bears the burden of persuading the court that the "judgment under review" is erroneous. Ford Motor Co. v. Township of Edison, 127 N.J. 290, 314-15 (1992).
For reasons stated on the bench, the court decided that plaintiff provided evidence which tended to question the presumptive correctness of the assessments. It will now analyze the proofs to decide value.
First, based on the physical characteristics, as evidenced by the photographs and testimony, the court concludes that the Subject is a hybrid of office and tech-quality R&D Lab space. An R&D building is a "type of industrial building popular in high technology industries, such as computers, electronics, and biotechnology; generally a hybrid of office, manufacturing, and warehouse space housed in appealing, high-quality buildings; often characterized by a location in a campus-like industrial park with extensive landscaping, above-standard parking, architectural standards, and ample open space." Appraisal Institute, The Dictionary of Real Estate Appraisal at 223 (5th ed. 2010). The Subject (land and improvements, including its standard Lab, with standard grade fire-suppression system and wet sprinklers) meets the definition of R&D in terms of users, ample open space, and location. See also id. at 169 (defining R&D "space" as one "designed and equipped to meet the specific [R&D] needs of a high technology industry").
However, the term "industrial building" in the definition is not necessarily referring, or confining the definition, to an inferior or a lower-tier warehouse-type property as is plainly evident from the remainder of the definition. Cf. id. at 101 (defining "[i]ndustrial property" as "land and/or improvement that can be adapted for industrial use; a combination of land, improvements, and machinery integrated into a functioning unit to assemble, process, and manufacture products from raw materials or fabricated parts; factories that render service (e.g., laundries, dry cleaners, storage warehouses) or those that produce natural resources (e.g., oil wells))." Similarly, although "flex" space is defined as "industrial space designed to allow flexible conversion of warehouse or manufacturing space to a higher percentage of office space . . . [i.e.] service center or tech space," see id. at 81, it does not require a conclusion that because the definitions of "flex" and R&D space cross-reference each other, the Subject, or its highest and best use is industrial. The Subject was never used for warehouse or manufacturing. Its lack of high ceilings, single loading bay, limited area assigned for storage space, insulated fiberglass paneled interior/exterior walls, and areas with a glass roof, endorse a conclusion of its dissimilarity to a lower-tier warehouse or industrial building. The building was erected for an entity specializing in technical and technological research. Its last tenant was a biotechnology entity. The lease agreement specified the permitted uses of the building was for R&D Lab, cell culture production, and related office space, with each page (except page one which contained the summary information) titled "Net Multi-Tenant Office/Laboratory." The 2006 lease amendment included a description of tenant alterations as including a reconfiguration of distribution ductwork "to serve the laboratory and office layouts." A larger portion of the Subject was used as office space as seen by the cubicle dividers, the bull-pen area, and difference in the flooring/ceiling to demarcate the office space. The Subject was consistently marketed as a life-science facility with office/Lab space, located in "the heart of the Princeton research corridor which offered highly professional and technically oriented employee base," not as an industrial or warehouse-type improvement.
In estimating a vacancy allowance for the Subject, plaintiff's expert referenced a 2012 scholarly paper on how New Jersey was once the "true high-tech mecca . . . in the era of great industrial research laboratory" and was internationally known for, among others, its several "pharmaceutical research complexes on stand-alone facilities set in suburban corporate complexes," but was facing competition with other "tech and life science companies."
The court therefore agrees with the Township's expert that Subject's improvement is an office/Lab facility, and that flex space simply means adaptable area and is not a basis to relegate the Subject an inferior quality space. See also The Dictionary of Real Estate Appraisal, supra, at 146 (3d ed. 1993) (defining flex as "space that is adaptable to various uses"). Evidence does not support a conclusion that the Subject is similar to an industrial building or warehouse or a combination of the two, whether labeled as "R&D" or as "flex." However, the court does not agree that Subject is similar to modern, state-of-the art office buildings, complexes, or corporate headquarters. Although the Subject's unique style and architecture provides more interior space due to lack of load-bearing walls, the photographs and testimony evidence a standard Lab space with standard office space as opposed to a pure Class A or Class B office building. Based on the above appraisal definitions, the facts, the Subject's historical use, its use permitted by the zoning laws and the lease in effect for tax year 2010, and its use allocation in the rent rolls, the court finds that the Subject's use as improved to be a hybrid of office and tech-quality R&D/Lab space.
"Office occupancy" is defined as "use of a building or space for business, as opposed to manufacturing, warehousing or other uses." The Dictionary of Real Estate Appraisal, supra, at 250. "Lab/office" space or vice-versa is undefined.
Second, the above conclusion does not require a total rejection of plaintiff's expert's rent comparables and a total acceptance of the Township's expert's rent comparables despite the latter labeling the former's comparables as fully industrial, since the court must examine all of the evidence before it. A review of the leases show that some of plaintiff's expert's comparables meet the Subject's use and description, while some of the Township's expert's do not. The court finds the following comparables are unpersuasive, thus of no weight:
(1) Plaintiff's Expert's Lease 1 (Piscataway): The expert was unaware of the ratio of office-to-other space or the nature of the flex use. Cross examination revealed the tenant as Cablevision with the leased space used for return of cable boxes or to pay bills. The property is not comparable and space was not used for R&D/Lab.
(2) Plaintiff's Expert's Lease 4 (Lawrence): The expert testified he would not rely on this comparable.
(3) Plaintiff's Expert's Lease 6 (South Brunswick): The comparable was located in an industrial park and leased to Scholastic Book Fairs to store books. 80% of space used for warehouse/storage and there was no R&D/Lab configuration or use.
(4) Township's Expert's Rental 2 (Ewing): The expert relied upon an advertisement which stated the entire building was rentable as Lab space, when it was actually leased to a loan service facility on a modified gross basis. The building was industrial warehouse later configured into Lab/office/warehouse, and 15,000 SF of Lab space was demolished to create office space (rated as Class A by CoStar). The expert conceded its lack of reliability.
(5) Township's Expert's Rental 3 (Monroe): Both properties were used as medical offices, with an attached bank building, and were part of a complex on an adjacent land which had an office building, driveways, and parking areas. Thus, they were not comparable to the Subject's location and R&D Lab use. There was a TI allowance of $50 PSF, which the expert maintained was above-market but for which he made no adjustments. Plaintiff's expert credibly testified that combining two spaces with different types of leases, one a modified gross and the second a fully net, is not reliable for appraisal purposes.
Of the remaining nine leases, the court will consider as most persuasive plaintiff's expert's Leases 2, 3 (both in New Providence) and 7 (Lawrence), and the Township's expert's rentals 5 and 6. Lesser weight is given to the Township's Rentals 4 and 7 as the former (in Edison) was negotiated in 1984 with renewal provisions, and analysis whether the renewal rent provisions were at market was absent; and the latter (Subject lease) was executed in 2005, which plaintiff's expert credibly testified, was at the market's peak. Plus, the Township's expert computed the average rental using 20,191 SF when the leased area was 27,588 SF starting year 2 (2006). Least weight is given to plaintiff's expert's Lease 5 (Hamilton) due to its location is in an industrial area, speculation as to space use, and much smaller size, and to the Township's Expert's Rental 1 (Bridgewater) as he was unaware that the property was reconfigured from corporate headquarters to high-grade/quality Lab space for the lessee's business of tissue grafting, and that there was an 8-month free rental, which if factored in, would render the average rent of $16 PSF. The court will also accord weight to the dates of the nine leases vis-à-vis the assessment dates.
The court does not accept plaintiff's expert's assignment of a "below average" condition to the Subject, which was based in part due to its vacant status. Nor does it agree with his -30% condition adjustment for his Rental 3 because the TIs in 2008 were only for the additional space of about 2,500 SF, and the building itself was older than the Subject being built in 1955. The court also does not agree with the Township's expert's assignment of the Subject's condition in his "age/condition" adjustment which he noted was "2008/Good," when in fact the Subject was built in 1984, and the pictures did not support its condition as "good." Based on the photographs and testimony, the court will use -20% for condition adjustment where provided by the experts.
Neither party provided credible evidence to question the persuasiveness of each expert's other adjustments, therefore, the court will use them in the manner applied by the experts.
Contested, however, was plaintiff's expert's adjustment for lessor-paid TI costs. He stated that while he would generally adjust for TI costs as part of the operating expenses, here he reduced the same from the contract rent because he deemed the Subject as an industrial building in poor condition, and because asking rents were generally much higher in New Providence due to lessor-paid TI costs and superior location. The Township's expert maintained no adjustment should be made for TI costs if the comparable was finished and occupied, otherwise it would deem the Subject or a portion of it unfinished (or assume the comparable to be in a different condition), which is against the appraisal principles of making comparisons to the Subject as is. He agreed that if the comparable and Subject had unfinished space he would likely adjust for the same in the reserves, typically at $0.10 PSF (based on his experience), however since Lab leases are atypical, and mostly owner-occupied, he would provide $0.25 PSF ($5 PSF if it was a shell).
The problem with plaintiff's methodology is his premise that the Subject is inferior industrial/warehouse type property not warranting TI, therefore the New Providence comparables must be reduced to that inferior level. The court has found otherwise. Additionally, if he claims that asking rents are higher in New Providence because of its market superiority and location, it casts doubt as to why a landlord would even be impelled to provide for TI costs. See e.g. Pine Plaza Associates v. Township of Hanover, 16 N.J. Tax 194, 211-12 (Tax 1996) (agreeing with the hypothesis that TI allowance is dependent on, among others, the "general strength of the market--the stronger the market the less the landlord will expend" as being "consistent with" the court's finding that TI expenses are a reasonable "operating expense deduction if, in the relevant market, the allowance or expense is a customary, regularly recurring landlord expense."). Therefore, the expert's justification for his reduction of TI allowance from the contract rent is unpersuasive.
The above findings provide for adjusted market rents of $11.16; $12; $7.17; $11.65; $13.44; $15.19; $14.57; $6.80; and $15.30. With the weights to the same as explained earlier, and also factoring the lease start dates vis-à-vis the assessment dates, the court finds the Subject's market rent as $12.50 for each tax year. This provides a GI of $532,500 ($12.50 x 42600 SF).
Plaintiff's expert's vacancy allowance was unsupported. He maintained that statistical data usually provided only a "snapshot," however, since appraisal requires use of stabilized rates, his 10% allowance was reasonable despite the Subject's 30% vacancy rate since no prudent investor would invest in, nor a developer build, property with estimated 30% vacancy. The Township's expert's allowance was based on the data of lease absorption and vacancy statistics of the Central Jersey and the Princeton submarket of Class A office space. The Subject is not Class A office space. The Township's expert's report noted that despite the market depression for office space in these two areas, the pharmaceutical industry was "somewhat recession resistant," as was healthcare, and there was a "growing medical office building segment." Factoring this with the Subject's size, its historical vacancy, its inclusion of standard Lab space (thus, absence of pure office space), the Township's expert's concession (in his market rent analysis) that medical space is superior to the Subject's office with standard grade Lab space, the court finds 12% as the appropriate vacancy and collection loss allowance. The EGI is thus $468,600.
The court finds plaintiff's expert's allowance of 2% of EGI for reserves more reasonable as opposed to the Township's expert's allowance of $0.25 PSF. The plaintiff's expert's allowance of 1% for miscellaneous expenses is also reasonable since a property's use for R&D Lab-cum-office would have more expenses than if treated as a low-tier warehouse-industrial type property. The court will apply plaintiff's expert's CAP rates to the NOI of $407,682 since the Township's expert's CAP rates focused on pure office buildings which the Subject is not.
Third, the court is unpersuaded that the Subject's 2013 sale for $2,750,000 is a reliable indicator of its value for 2010-2012. The Township's expert's investigation into the sale and his conclusion that the circumstances rendered it a "fire" sale of an underperforming portfolio asset, is more persuasive than plaintiff's expert's refutation that a REIT must maximize profits for its shareholders therefore the Subject's sale price would be its value.
Fourth, the Township's expert's surplus land valuation is unpersuasive. The vacant lands were not "surplus" as the term is understood in appraisal parlance. The comparable vacant land sales were of fully developable tracts. The expert's report noted that the vacant land sales were comparable to the Subject in terms of "physical characteristics" in that as the Subject's surplus land, they were adjacent to an existing Lab/office building. However, fully developable vacant or excess land is not surplus because they neighbor some other building. Further, this justification is questionable, for instance, in Sale 5, where the existing Lab was to be replaced by two Class A office buildings leaving no adjacent Lab building.
Moreover, the comparable sales had a different highest and best use potential. Sale 1 was approved for, among others, an indoor sports field and a bank pad site, thus, for retail space as opposed to the Subject's use. Sales 1 and 2 were part of a larger economic unit which had mixed uses, including retail. The expert's justification that since some portion of the improvement would be for office use, is refuted by his conclusion that the Subject's surplus land's highest and best use was for land banking for future expansion to office space, not office and retail space. Sale 3 was sold to a municipality for preservation of open space, a very different highest and best use than land banking for future commercial expansion.
It is true that in a cost approach analysis, courts have accepted use of all developable area in valuation of the land component. See e.g. Best Foods v. Borough of Englewood Cliffs, 19 N.J. Tax 266, 272, 274 (Tax 2001) (accepting the land value conclusion under a cost approach by the municipality's expert who multiplied the PSF land value with the maximum potential building area allowed under the zoning even though the existing improvement's "actual configuration [would] not permit additional development"). This "difference in land value . . . is not strictly speaking, a question of the property's potential for development in addition to that which existed on the appraisal date, but of the value contributed by underutilized land." Ibid. (noting if land is "underutilized," the cost approach "nonetheless ascribes a value to the land in light of its greater potential for development." Id. at 273-74).
In this case, the cost approach is not being utilized. Regardless, valuation should be reality-based. Id. at 274. See also Appraisal Institute, The Appraisal of Real Estate, 346 (14th ed. 2013) (surplus "is currently unused land that might at best be used for the expansion of the current improvement . . . if legally permissible and financially feasible."). As stated in Berkeley Development Co. v. Township of Berkeley Heights, 2 N.J. Tax 438, 444-445 (Tax 1981), "[p]roperty to be assessed, whatever may be its character, is to be taken and valued in the actual condition in which the owner holds it" and "in the condition in which it is utilized." Indeed, "[h]ighest and best use does not necessarily require that a property should be developed with improvements to the maximum coverage permitted by law," rather, the same "for land is the use that, at the time of the appraisal, is the most profitable likely use." Id. at 444.
Here, the Subject was used for office space with R&D components. Its unique architectural structure with the utility systems on the roof may not render addition of a second floor as physically feasible or economically feasible if has to be reconfigured and retrofitted. The surplus land existed since the improvement's initial construction in 1984 and at no time was there ever attempt to expand the improvements, even during years when the market was booming. There were no applications or approvals for further development. The Subject was vacant for a majority of 2010 until May 2013, during which it was extensively marketed. These facts tend to cast doubt as to the realistic potential for profitably developing the surplus land in 2010-2012. Therefore, the value conclusions of the Subject's surplus land are not persuasive. CONCLUSION
It could be posited that the Subject's sale price factored in, and attributed no value to the surplus land because the new owner had previously declined to buy the Subject at $4 million. Thus, arguably, the sale price tends to show that an investor would not have gained by land banking for the duration of the projected holding periods of 5, 4 and 3 years (for 2010, 2011 and 2012) and that the 5% discount rate is questionable. However, it could also be posited that the true purchase price would have to include the post-purchase repair/renovation costs of $3 million, which arguably, renders the Subject's value at least $5 million. Hence, the Subject's sale does not assist in the analysis of valuation to be attributed to the surplus land. --------
In sum, and using the experts' income approach as modified by the court's findings above, the Subject's value (rounded) for each year is $4,796,260 (2010); $4,971,730 (2011), and $4,941,600 (2012).
Since 2010 was a revaluation year, the Chapter 123 ratio is inapplicable. The true value is therefore $4,796,260.
For 2011, the assessed-to-true value ratio for is 108% ($5,400,000/$4,971,730), therefore, requires application of the average ratio of 92.12%. This renders the value $4,579,960 (rounded).
For 2012, the assessed-to-true value ratio is 80.95% ($4,000,000/$4,941,600), which is above the lower limit of 80.68%, therefore, requires affirmance of the assessment.
A final Order and Judgment in accordance with these findings reflecting the Subject's true value will accompany this memorandum opinion.
Very truly yours,
/s/
Mala Sundar, J.T.C.