Opinion
Docket No. 002583-2011
12-28-2012
Re: Waterside Villas Holdings, LLC v. Monroe Twp.
Kevin S. Englert, Esq. The Irwin Law Firm, P.A. Richard A Rafanello, Esq. Shain, Schaffer & Rafanello, P.C.
JUDGE
NOT FOR PUBLICATION WITHOUT THE APPROVAL
OF THE TAX COURT COMMITTEE ON OPINIONS
Kevin S. Englert, Esq.
The Irwin Law Firm, P.A.
Richard A Rafanello, Esq.
Shain, Schaffer & Rafanello, P.C.
Dear Counsel:
This action is an appeal of assessment for tax year 2011 on property designated as Block 27, Lot 9.4 on the tax map of the defendant Township. The subject property is a 100-unit apartment building on which construction was completed in 2009. Following the filing of the complaint, the defendant moved for dismissal on the ground that plaintiff had failed to provide income and expense information as required by N.J.S.A. 54:4-34 ("Chapter 91"). The court granted the motion, subject to the plaintiff's right to a "reasonableness" hearing, which the plaintiff subsequently requested. See Ocean Pines Ltd. v. Point Pleasant Bor., 112 N.J. 1 (1988). This letter constitutes the court's decision following that hearing. For the following reasons, the court concludes that plaintiff has failed to establish either that the data upon which the assessor relied or his methodology were unreasonable within the meaning of Chapter 91.
In Ocean Pines, the Supreme Court held that when a taxpayer fails to comply with an assessor's request for current income and expense information made pursuant to Chapter 91, that taxpayer is barred from pursuing an appeal that is based on the data withheld from the assessor. 112 N.J. at 8. However, the taxpayer is entitled to an appeal limited in its scope to the reasonableness of the valuation, "'based upon the data available to the assessor.'" Id. at 11.
The inquiry will focus solely on whether the valuation could reasonably have been arrived at in light of the data available to the assessor at the time of the valuation. Encompassed within this inquiry are (1) the reasonableness of the underlying data used by the assessor, and (2) the reasonableness of the methodology used by the assessor in arriving at the valuation.
[Ibid.].
The Court further noted that the limited appeal permitted would be subject to the same underlying principles that control all appeals of property tax assessments: the original assessment is entitled to a presumption of correctness, and the taxpayer must produce evidence that is "definite, positive and certain in quality and quantity" in order to overcome that presumption. Id. at 12. Finally, the Court pointed to Transcontinental Gas Pipe Line Corp. v. Bernards Township, 111 N.J. 507 (1988) as a case demonstrating an example of an "aberrant" methodology that had overcome the presumption of correctness: "the assessor valued the property to produce the same revenue as the prior assessment yielded." Ocean Pines Ltd., supra, 112 N.J. at 12.
As noted in Lucent Technologies, Inc. v. Berkeley Heights Township, 24 N.J. Tax 297, 307 (Tax 2008), "[t]he decisional law discussing what constitutes 'reasonable' assessing practices is limited." Based upon Ocean Pines, supra, Judge Kuskin concluded that:
[I]n order to establish that the data upon which an assessor has relied was unreasonable, or that the methodology used by the assessor was unreasonable, a taxpayer must establish by evidence that is "definite, positive and certain in quality and quantity," that, in selecting the data, the assessor acted arbitrarily or
capriciously or that the methodology used by an assessor was arbitrary or capricious.
[Lucent Technologies, supra, 24 N.J. Tax at 311].
The only witness at the hearing was the municipal assessor. He testified that the certificate of occupancy for the subject property was issued in May 2009. He visited the subject property and met with plaintiff's representative shortly before the certificate of occupancy was issued. At that time, he was provided by plaintiff's representative with a document setting forth in column form for each apartment in the building: the apartment number, a description (one bedroom, two bedroom, two bedroom with terrace and so forth), the model name, the view, square footage, the "original' monthly rent, first year's monthly rent, and second year's monthly rent. It is unknown precisely what "original rent" was intended to signify. First year monthly rents were less than the rents in the "original" rent column. Second year rents appeared to be about 10% greater than first year rents, but less than original rents.
A footnote at the bottom of this document stated: "If the name is highlited [sic], that means the resident has moved in." Six apartments were highlighted. The assessor testified that he did not know when that document had been prepared and that he did not know how many apartments had actually been rented at the time of his visit.
The assessor testified that he established the added assessment for tax year 2009 by using the income approach to valuation. He totaled the first year monthly rents provided by plaintiff, and multiplied that monthly total by twelve to arrive at total annual rents. He utilized a 10% vacancy and collection loss, expenses of 45%, and a capitalization rate of 8% to arrive at a market value of $14,945,800.
The assessor testified that he also looked at the cost approach. The subject property sold as vacant land in 2004 for a sale price of $1,450,000. The assessor added the sale price of the land to the cost of constructing the subject improvements, $11,581,901, as reported by the contractor in the application for building permits. The total was $13,031,900, rounded. The assessor testified that this was not a traditional or "true" cost approach, but an approximation, based on what the builder had reported. He regarded the results of his income approach and his cost approach as relatively close. He testified that he did not use the sales comparison approach because the subject is a somewhat unique higher end property and he did not believe that sales of other apartment properties in the Middlesex County area would be useful.
The assessor utilized the valuation reached via the income approach, $14,945,800, multiplied that by the Chapter 123 ratio applicable to Monroe Township for tax year 2009, which was .4488 and arrived at an assessment of $6,707,700. Because that is also the assessment for tax year 2011, at issue here, the court assumes that the added assessment made for tax year 2009 was carried over to tax years 2010 and 2011. There was no testimony by the assessor on that point.
Plaintiff contends that the assessor's valuation was unreasonable because: (1) his income approach was based on the owner's estimate of first-year rents rather than on market data; and (2) he did not apply a "true" common level to the market value that he determined for the subject.
The court first considers plaintiff's assertion that the assessor's data and methodology were unreasonable because he employed the data provided by the taxpayer. Plaintiff acknowledges that the income approach is generally the preferred method for valuing income-producing properties. Parkway Village Apartments Co. v. Cranford, 108 N.J. 266, 270 (1987). Further, in the absence of contrary evidence, "the current ongoing income scale of a large, well-managed apartment project like this, functioning as customary with leases of relatively short length, should be deemed prima facie to represent its fair rental value for purposes of the capitalized income method of property valuation." Id. at 271 (quoting Parkwood Village Associates v. Borough of Collingswood, 62 N.J. 21, 34 (1972).
Plaintiff nevertheless maintains that the assessor's reliance on plaintiff's projected first year's rent was unreasonable because it cannot be presumed that the projected first year rents are equal to market rents where the rentals were projections only, and only six units had been leased at the time those rents were provided to the assessor. Plaintiff relies on several cases in which the Tax Court has rejected estimates of market rent based on actual income that did not conform to standard appraisal practice. Plaintiff asserts that the assessor should have been aware that his valuation reached using the income approach was unreasonable because the cost approach produced a lower valuation.
Plaintiff's argument amounts to an assertion that an assessment based on a valuation using the income approach is unreasonable and arbitrary if the assessor cannot demonstrate that he reviewed market rents at the time of the assessment. The court concludes that to accept this arguments turns the burden of proof on its head. The assessor is not obliged to prove that the assessment was reasonably based on market data. The burden is on the plaintiff to establish by proof that is definite, positive, and certain in quality and quantity that the assessor's selection of data or his methodology is arbitrary or capricious. Lucent Technologies, supra, 24 N.J. Tax at 311.
The standard applicable in the context of a Chapter 91 hearing for purposes of determining whether an assessor acted reasonably is less stringent than the standard applicable in the context of a plenary valuation hearing for purposes of determining whether a presumption of validity attaches to an assessment. In the
latter context, if a taxpayer challenges the presumption, a court may require proof that the assessor obtained and considered market data in setting the assessment. In the Chapter 91 context, however, the express language of the statute requires only that the assessor "reasonably determine" the value of a property based on "any information in [the assessor's] possession or available to [the assessor]." N.J.S.A. 54:4-34.
[Id. at 312].
Moreover, the assessor's valuation of the subject property took place in 2009 in connection with the added assessment placed on the subject property that year. The assessment was, presumably, carried over to tax year 2010 and tax year 2011. The assessor was not asked about and did not testify as to his reasons for carrying over the assessment to tax years 2010 and 2011. Plaintiff does not contend here that carrying over the added assessment for the 2009 tax year to the 2010 and 2011 tax years was unreasonable, nor is the court aware of any decision holding that the carrying over of an assessment from one year to the next is per se unreasonable.
In other words, the only evidence adduced at the hearing was with respect to the making of the 2009 added assessment. The issue here is not that assessment, but the 2011 assessment. The scope of a reasonableness hearing is limited to the data available to the assessor as of the October 1, 2010 valuation date for tax year 2011. Ocean Pines, supra, 112 N.J. at 11. Plaintiff did not provide the assessor with current income and expense information that could be used in making the 2011 assessment. Under these circumstances, it was not unreasonable for the assessor to carry over to tax year 2011 an assessment based on a valuation derived from 2009 first year rents on a building that was partially leased up as of May 2009, but whose occupancy was unknown as of October 1, 2010.
The court also concludes that the assessor's use of the income approach to valuation rather than the cost approach was not unreasonable or arbitrary. As already noted, the income approach is the preferred methodology for income properties. It appears that the assessor used a rough cost approach essentially as a check on the reliability of his income approach. In other words, in his opinion, there were no stark differences in the two results and he accepted the results of the preferred methodology. Further, as pointed out by the Township's counsel, the assessor's cost approach did not include any amount for entrepreneurial profit, so that the valuation reached by the assessor's cost approach was somewhat lower than it should have been. See, e.g., Westwood Lanes, Inc. v. Garwood Bor., 24 N.J. Tax 239, 249-60 (Tax 2008) (reviewing and summarizing case law on inclusion of entrepreneurial profit in the cost approach). That the two methodologies produced valuation results that differed to some extent does not establish that the use of the preferred methodology was unreasonable or arbitrary.
I next consider plaintiff's contention that the assessor's application of the Chapter 123 ratio for tax year 2009 was unreasonable at the time he made his 2009 added assessment. After establishing the valuation for new construction, it is the usual practice of assessors to bring the assessment for that property into line with the common level of assessment for the municipality by applying the average ratio to the valuation, or by bringing the assessment within the common level range. See N.J.S.A. 54:1-35a(a)(defining "average ratio") and N.J.S.A. 54:1-35a(b)(defining "common level range"). As acknowledged by plaintiff, the constitutional requirement of uniformity in assessments requires that all real property in a taxing district be valued according to the same standard of value. N.J. Const. art. VIII, § 1, ¶ 1(a).
Plaintiff bases its contention that it was unreasonable to apply the Chapter 123 ratio to the valuation of the subject property upon this court's decision in Keane v. Monroe Township, 25 N.J. Tax 479 (Tax 2010), in which the court ordered the defendant Township to undertake a revaluation of all the real property in the taxing district. The court concluded that, based on statistical data compiled by the Division of Taxation for the period July 1, 2006 through June 30, 2009, as well as on other evidence, the criteria for a revaluation set forth at N.J.A.C. 18:12A-1.14(b) were met. Among other things, the court concluded that there was no common level of assessment for Class 2 property (defined by N.J.A.C. 18:12-2.2(b) as residential property housing no more than four families). Plaintiff maintains that the Chapter 123 ratio for the defendant Township is, therefore, unreliable.
In Murnick v. City of Asbury Park, 95 N.J. 452 (1984), the Court considered whether Chapter 123 was the exclusive remedy for discrimination in tax assessment. It held:
[T]o the extent that a taxpayer relies on a presumptive ratio to establish a common level of assessment, we find that the Legislature intended to restrict the taxpayer to the Director's average ratio determined under chapter 123. In the absence of additional proof, a taxpayer may not substitute another statutory ratio, such as that computed under N.J.S.A. 54:1-35.1. To overcome the presumption that the chapter 123 ratio reflects the common level, the taxpayer must establish that application of the ratio would be "virtually confiscatory." As a practical matter, the presumption created by chapter 123 is so strong that it will be conclusive in all but the most egregious cases.
[Murnick v. Asbury Park, id. at 463 (citations omitted)].
Based on the "strong presumption" created by Chapter 123, and in the absence of any evidence to the contrary, I conclude that the assessor's use of the Chapter 123 ratio was reasonable here. Plaintiff did not produce any statistical evidence supporting the use of an alternative ratio.
I conclude that plaintiff failed to establish that the data employed by the assessor in making the assessment for tax year 2011 was unreasonable or arbitrary, or that the methodology employed by him was unreasonable or arbitrary. There is therefore no need to address plaintiff's contention that existing case law does not provide an appropriate remedy in the event an assessment is found to be unreasonable.
For the foregoing reasons, the court concludes that the complaint must be dismissed with prejudice. Judgment will be entered accordingly.
Very truly yours,
Gail L. Menyuk, J.T.C.