Opinion
DOCKET NO. 004998-2005 DOCKET NO. 005647-2006
01-10-2014
ATLANTIC CITY ELECTRIC COMPANY, Plaintiff, v. TOWNSHIP OF PENNSVILLE, Defendant.
Gerald J. Corcoran, Esq., for plaintiff (Montgomery, McCracken, Walker & Rhodes, LLP, attorneys) Michael L. Mouber, Esq., for defendant
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
Civil Action
MEMORANDUM OPINION
Gerald J. Corcoran, Esq., for plaintiff (Montgomery, McCracken, Walker & Rhodes, LLP, attorneys)
Michael L. Mouber, Esq., for defendant DeALMEIDA, P.J.T.C.
This is the court's opinion after trial. The taxpayer challenges the 2005 and 2006 local property tax assessments on real property in Salem County on which is located a coal-fired electricity-generating plant. For the reasons explained more fully below, the assessments for both tax years are affirmed.
I. Findings of Fact and Procedural History
The following findings of fact are based on the testimony and other evidence admitted during the trial.
During the tax years at issue, plaintiff Atlantic City Electric Company ("ACE"), a public utility, was the owner of real property located in defendant Pennsville Township. ACE operated on the subject property a coal-fired electricity-generating power plant commonly known as the Deepwater Generating Station. The facility is immediately adjacent to and under the Delaware Memorial Bridge and abuts the Delaware River. The property has approximately 3,700 feet of river frontage from which a riparian grant extends about 1,000 into the river from the mean high water line. The riparian grant allows ACE to pump water into the facility for use in generating electricity and to discharge water from the facility into the river as a byproduct of the generation process. The other side of the property has approximately 2,300 feet of frontage along Route 49 and approximately 1,700 feet of frontage along Churchlanding Road.
The subject property is comprised 354.07 acres, of which approximately 105.65 acres are wetlands. The parcel is occupied by approximately 650,000 square feet of buildings. The main power plant is approximately 578,000 square feet in size and houses the bulk of the electricity-generating equipment. This brick building, which was constructed in phases between 1929-1959, is the equivalent of five stories in height. Each story, however, does not have a full floor. This is so because large electricity generators and other equipment several stories in height are located in the building. Catwalks surround the large equipment, providing employee access for operation and maintenance of the generators. Originally, the facility contained eight operating generators. As of the relevant valuation dates, however, only two of the units remained in operation. The other six units had been decommissioned. The building was approximately 45% occupied on the valuation dates.
The lower level of the main building floods on a yearly basis, requiring pumping. The annual cost of pumping is approximately $100,000. The experts offered differing opinions with respect to whether the flooding should be considered curable or incurable functional obsolescence. In addition, as of the valuation dates, the facility was reaching the end of its useful life. Most new electricity generating plants are fueled by natural gas, oil, or nuclear reactors.
Approximately 30 other buildings, including warehouses, sheds, a laboratory, fly ash houses, pump houses, and other structures, are also located on the subject property. The buildings were constructed on various dates ranging from 1928 to 1991. For the most part, these buildings are of masonry construction, and contain mostly limited finishes, given their industrial uses. For example, many structures do not have heating or cooling. The buildings are in average or poor condition and several are unoccupied because they are not necessary for the industrial activities remaining at the property. In addition to these structures, there are on the property a significant number of transmission lines, power lines, internal circulation roadways, railroad tracks, concrete walkways, and other equipment.
Several short-term leases are in place for small portions of the subject property. The Pennsville Township Historical Society leases 1.1 acres and a small house for $1 a year on a year-to-year basis. The United States Army Corps of Engineers rents a portion of the property for $1 a year on a year-to-year basis. The Pennsville Little League leases just under 12 acres for $1 a year on a year-to-year basis and Joyce Hildebrand leases a small residence on the property on an annual basis. The experts agreed that these leases do not add significant value to the property.
In March 1999, ACE began to examine contamination on the property to estimate its liability in the event that its statutory cleanup obligation was triggered by a then-contemplated sale of the property. At the time, the company voluntarily undertook a Phase I environmental assessment of the parcel. This assessment was based on a review of documentary evidence of the historic uses of the subject property, along with documentation of recorded spills of potentially toxic materials.
The assessment resulted in ACE filing with the Department of Environmental Protection ("DEP") a preliminary assessment report identifying approximately 70 areas of concern. Identified concerns included above-ground storage tanks, below-ground storage tanks, chemical unloading areas, chemical tanks and oil tanks. The report also identified as a concern coal piles, including the significant riverfront pile of coal at the property. Another important subject of the investigation was former fly ash ponds. Fly ash, a byproduct of burning coal, contains toxic metals. The operators of the plant had a prior practice of dumping fly ash in ponds on the property. The report also identified metal contamination in ground water at the property.
While a purchase agreement for the subject property was executed in 2000, no sale took place. The deal fell through in 2002. As a result, ACE's statutory obligation to remediate the environmental contamination under the Industrial Site Recovery Act ("ISRA"), N.J.S.A. 13:1K-6 to -14, was not triggered. ACE, however, voluntarily continued to investigate and remediate contamination on the property. After its initial review, ACE retained third-party consultants to initiate a remedial environmental investigation. Soil samples were taken from the property and submitted to laboratories to identify contaminants. Some smaller areas of contamination were remediated by ACE. This work continued until the time of trial. The taxpayer's voluntary cleanup actions benefit the company by keeping DEP from initiating an involuntary enforcement action against ACE.
ACE and its consultants developed an environmental remediation cost estimate. In 2003, costs for 2005 and beyond were estimated to range from $4,964,000 in a best case scenario to $9,942,000 in a worst case scenario. For accounting purposes, ACE used a middle number of $7,000,000 as the estimated future remediation cost. A 2007 ACE document estimates the remaining remediation cost to be $5,483,000. This reflects a deduction from the $7,000,000 estimate of approximately $1,520,000 spent by ACE on contractors to analyze and complete remediation from 2003 to 2007.
The subject property is designated in the records of the municipality as Block 301, Lot 13 and is commonly known as 401 N. Broadway. For tax year 2005, this parcel was assessed as follows:
| Land | $ 6,561,000 |
| Improvements | $17,962,800 |
| Total | $24,523,800 |
The average ratio of assessed to true value in the municipality for tax year 2005 is 85.42%. See N.J.S.A. 54:1-35a.
ACE challenged the tax year 2005 assessment before the Salem County Board of Taxation ("the Board"). On May 17, 2005, the Board issued a Judgment affirming the tax year 2005 assessment.
On June 21, 2005, ACE filed a Complaint with this court challenging the tax year 2005 judgment of the Board. On July 7, 2005, the township filed an answer defending the assessment. The municipality did not file a counterclaim.
The assessment on the subject property remained unchanged for tax year 2006. The average ratio of assessed to true value in the municipality for tax year 2006 is 83.23%. See N.J.S.A. 54:1-35a.
ACE challenged the tax year 2006 assessment before the Board. On May 3, 2006, the Board issued a Judgment affirming the tax year 2006 assessment.
On June 13, 2006, ACE filed a Complaint in this court challenging the Board's Judgment affirming the tax year 2006 assessment. On July 7, 2006, the township filed an answer defending the assessment. The municipality did not file a counterclaim.
The Complaints also challenged county board Judgments affirming the 2005 and 2006 assessments on a separate parcel designated by the municipality as Block 301, Lot 15, commonly known as 64 Churchlanding Road. At trial, ACE withdrew its allegations with respect to that parcel for both tax years.
The tax year 2005 and 2006 assessments did not include the value of machinery, apparatus or equipment used to operate the electricity-generating plant that might otherwise be considered real property. On March 31, 2008, the municipality moved to amend its answers to assert counterclaims for both tax years even though the statutory deadlines for filing counterclaims had long since expired. The township's motion was based on its expert appraisal report, in which the expert opined that the machinery, apparatus and equipment at the subject property should have been included in the assessed values and that the true market value of those items alone was $33,567,000 as of October 1, 2004 and $36,887,000 as of October 1, 2005. The municipality sought to include these amounts in addition to the $24.5 million assessment on the subject property for each tax year.
On April 25, 2008, this court granted the municipality's motion to amend its answers, but denied its request to file untimely counterclaims.
On February 22, 2010, ACE moved for partial summary judgment barring the municipality from assessing and taxing any machinery, apparatus, or equipment located on the subject property. Plaintiff also moved to bar the municipality from introducing evidence of land value for 2005.
On March 8, 2010, the municipality cross-moved for a determination of the highest and best use of the subject property, to strike ACE's expert appraisal report, for summary judgment and for the submission of these matters for resolution without trial.
On May 13, 2010, the court issued a letter opinion granting ACE's motion for partial summary judgment. The court concluded that the township may not include in the assessments for tax years 2005 and 2006 the value of any "machine, device, mechanism, instrument, tool, tank or item of tangible personal property used or held for use in business" at the subject property. N.J.S.A. 54:4-1.17a; N.J.S.A. 54:4-1.15. This is so because ACE has, since January 1, 1998, paid the Transitional Energy Facilities Assessment ("TEFA"). TEFA was established by the Legislature as, in effect, a substitute for the revenue that municipalities might otherwise realize from the assessment of local property tax on a public utility's machinery, apparatus or equipment attached to land or buildings. The court also concluded that the statutory exclusion from assessed value is not altered by the fact that ACE transferred its ownership interest in all "machinery, equipment, vehicles, furniture, information technology and telecommunications assets and related personal property located on the" subject property to Conective Atlantic Generation, LLC in February 2004 after deregulation of the energy industry in New Jersey. N.J.S.A. 54:4-1.17.
The court denied the township's cross-motion to decide these matters without trial and for summary judgment. In addition, the court reserved on the parties' motions to bar expert testimony, electing instead to evaluate the testimony of the expert witnesses at trial. Finally, the court dismissed as moot the municipality's motion regarding highest and best use. The parties informed the court at oral argument on the motion that they had reached agreement that the cost approach would be used to value the property. The effect of this stipulation is that the experts would offer opinions of value based on the extraordinary assumption that the highest and best use of the property on the relevant valuation dates was its continuation as a coal-fired, electricity-generating facility. If any other highest and best use was applicable, it would make little sense for the experts to offer opinions on the replacement cost new of the facility.
The matters were thereafter tried over three days. The taxpayer's expert offered the opinion that the subject property had a true market value of $11,900,000 as of October 1, 2004 and $13,900,000 as of October 1, 2005.
In its pretrial motion, Pennsville moved to bar the report and testimony of ACE's expert because he was not licensed as a real estate appraiser by New Jersey. The court reserved decision on the motion, electing to decide the issue after hearing the trial testimony of plaintiff's expert. At trial, the court concluded that, despite its misgivings about whether the expert complied with statutory and regulatory obligations regarding appraisal licensing in this State, see N.J.S.A. 45:14F-1, et seq. and N.J.A.C. 13:40A-8.1, the court is not bound by the licensing requirements when determining whether a witness qualifies as an expert pursuant to N.J.R.E. 702. The court also concluded that plaintiff's expert met the qualifications as an expert under the evidentiary rule.
For tax year 2005, plaintiff's expert first reached an opinion of land value by examining five comparable land sales, the sales prices of which he adjusted for various factors. After making the adjustments, he determined that comparable vacant land would sell for $45,000 per usable acre on October 1, 2004, resulting in a land value of $11,200,000 for the 2005 tax year. In reaching these figures the expert included only the 249 upland acres on the subject property. From this amount he deducted $5,483,000 to account for estimated remediation costs for the property's environmental contamination. This resulted in a rounded land value of $5,700,000 for tax year 2005.
Plaintiff's expert then calculated the replacement cost new of the buildings on the subject property using Marshall Valuation Service, a well-recognized resource. The expert classified the main power plant as a Class C, low cost building. He characterized the remaining buildings as either Class C, Class S or Class D, all buildings on the lower end of the cost scale, given their limited finishes and utilitarian construction. After making adjustments, the expert opined an average cost of $56.16 per square foot. This resulted in direct costs of $36,885,247. Cost multipliers to trend the costs forward to the valuation date and to account for local conditions resulted in a base $66.73 per square foot direct cost. This resulted in direct costs of $43,823,363. After adding in site improvement costs of $4,382,336 (10% of the direct building costs) and indirect costs of $2,410,285 (approximately 5% of direct building costs) the expert opined replacement cost new of $50,615,984. He rounded this figure to $50,600,000.
To this figure, the expert added an entrepreneurial profit of 5% ($2,530,000) to account for the profit that a developer would expect for constructing the buildings on the subject property. This results in a final replacement cost new of $53,130,000 for all buildings.
Using the age/life method, the taxpayer's expert considered the effective age of each of the buildings and determined an overall weighted average of 78.66% of physical depreciation to the structures, many of which are very old. This resulted in physical deprecation of $31,989,030. The expert measured functional obsolescence based on the vacancy of many of the buildings and the partial vacancy of the main power plant. The expert credibly opined that if these buildings were to be constructed today, the operator of a coal-powered, electricity-generating plant would not need nearly as much square footage of buildings as exists on the property. Based on these findings, the expert calculated functional obsolescence of $4,172,941. He added to that figure an additional $1,000,000 to account for the annual expense of $100,000 a year over a ten-year period to address the incurable functional obsolescence associated with the persistent flooding of the main power plant. This resulted in additional functional obsolescence of $5,172,941.
The taxpayer's expert offered total depreciation of $46,966,523. When applied to his opinion of total replacement cost new, the resulting opinion of cost is $6,163,477 ($53,130,000 - $41,793,582 - $5,172,941 = $6,163,477). After adding his opinion of land value to this amount, the expert opined a final market value of $11,900,000 for tax year 2005 ($5,700,000 + $6,163,577 = $11,863,477).
For tax year 2006, plaintiff's expert reached an opinion of land value by examining five comparable land sales, the sales prices of which he adjusted for various factors. After the adjustments he determined that comparable vacant land would sell for $50,000 per usable acre on October 1, 2005, resulting in a land value of $12,500,000 for the 2006 tax year. From this amount he deducted $5,483,000 to account for estimated remediation costs for the property's environmental contamination. This resulted in a rounded land value of $6,950,000 for tax year 2006.
Plaintiff's expert then calculated the replacement cost new of the buildings using the same technique and building classifications he used for tax year 2005. Using the average cost of $62.63 per square foot of building he reached a direct cost figure of $41,132,603. Cost multipliers to trend the costs forward to the valuation date and to account for local conditions resulted in a base $74.41 per square foot direct cost. This resulted in direct costs of $48,869,646. After adding in site improvement costs of $4,886,965 (10% of the direct building costs) and indirect costs of $2,687,831 (approximately 5% of direct building costs) the expert opined a replacement cost new of $56,444,441. He rounded this figure to $56,450,000.
To this figure, the expert added an entrepreneurial profit of 5% ($2,822,500). This results in a final replacement cost new of $59,272,500.
Using the age/life method, the taxpayer's expert considered the effective age of each of the buildings and determined an overall weighted average of 78.64% of physical depreciation or $46,612,161. The expert calculated functional obsolescence of $4,664,426 using the same technique he applied for tax year 2005. He added to that figure an additional $1,000,000 to account for flooding. This resulted in functional obsolescence of $5,664,426.
The taxpayer's expert offered total depreciation of $52,276,587 for tax year 2006. When applied to the expert's opinion of total replacement cost new, the resulting opinion of cost is $6,995,913 ($59,272,500 - $46,612,161 - $5,664,426 = $6,995,913). After adding his opinion of land value to this amount, the expert opined a final market value of $13,900,000 for tax year 2006 ($6,950,000 + $6,995,913 = $13,945,913).
The municipality's expert offered the opinion that the subject property had a true market value of $27,000,000 for tax year 2005 and $29,000,000 for tax year 2006.
The municipality's expert originally offered the opinion that the assessable value of the subject property was $61,955,000 for tax year 2005 and $67,447,000 for tax year 2006. Those opinions included the true market value of machinery, apparatus and equipment at the subject property. As detailed above, the court made a pretrial determination that the value of the taxpayer's machinery, apparatus or equipment could not be included in the assessments. At trial, the expert extracted from his opinion the value he attributed to ACE's machinery, apparatus and equipment.
Pennsville's expert reached a land value opinion by examining five comparable sales. He made adjustments to those sales and ultimately reached an opinion that the appropriate land value was $45,000 per acre as of October 1, 2005 for tax year 2006. He then applied a time adjustment to that determination to trend backward to arrive at an opinion of land value of $43,000 per acre as of October 1, 2004 for tax year 2005. The expert applied these value estimates to the entire 354.07-acre property to arrive at a land value of $15,225,000 for tax year 2005 and $15,933,000 for tax year 2006.
Defendant's expert also used Marshall's Valuation Service to determine the replacement cost new of the buildings on the subject property. The expert considered the main building to be a Class C structure in average condition. He priced the main building without including a cost for each of the floors, given his opinion that the catwalks around the large generators do not justify costing five floors. Defendant's expert used a base cost of $86.84 per square foot for the main building to reach a value of $50,162,084 for tax year 2005. To that figure he added 10% for entrepreneurial profit for a total replacement cost new of $55,162,084. Defendant's expert then opined a total of 80% physical and functional obsolescence, or $44,129,667. This resulted in a final opinion of cost for tax year 2005 of $11,030,000 for the main building.
For the remaining buildings on the subject property, defendant's expert used a stabilized cost of $50 per square foot. When applied to 76,080 square feet of structures, this resulted in a replacement cost new of $3,804,000. The expert attributed a total of 80% physical and functional depreciation to this figure to arrive at a replacement cost new of $760,000 for the ancillary buildings. When added together, the two cost figures resulted in a total replacement cost new of $11,790,000 ($11,030,000 + $760,000 = $11,790,000).
The combined land and replacement cost figures result in a final opinion of value for tax year 2005 of $27,000,000 ($15,225,000 + $11,790,000 = $27,000,000).
For tax year 2006, as explained above, defendant's expert reached an opinion of land value of $15,933,000. He reached an opinion of replacement cost new for tax year 2006 by using a base cost of $96.18 per square foot for the main building to reach a value of $55,557,222. To that figure he added 10% for entrepreneurial profit for a total replacement cost new of $61,057,222. Defendant's expert then opined a total of 80% physical and functional obsolescence, or $48,845,778. This resulted in a final opinion of cost for tax year 2006 of $12,210,000 for the main building.
For the remaining buildings on the subject property, the expert started his analysis with the $760,000 replacement cost he opined for 2005. He then increased this amount by 10% to account for an increase in the replacement cost for tax year 2006. This factor resulted in a total replacement cost new for the ancillary buildings of $837,000 for tax year 2006. When added together the two cost figures resulted in a total replacement cost new of $13,047,000 ($12,210,000 + $837,000 = $13,047,000).
The combined land and replacement cost figures result in a final opinion of value for tax year 2006 of $29,000,000 ($15,933,000 + $13,047,000 = $29,000,000).
The experts' opinions can be summarized as follows:
| Tax Year 2005 | Taxpayer | Municipality |
| Land | $ 5,700,000 | $15,225,000 |
| Buildings | $ 6,163,477 | $11,790,000 |
| Total | $11,900,000 | $27,000,000 |
| Tax Year 2006 | Taxpayer | Municipality |
| Land | $ 6,950,000 | $15,933,000 |
| Buildings | $ 6,995,913 | $13,047,000 |
| Total | $13,900,000 | $29,000,000 |
The parties submitted extensive post-trial briefs. After reviewing all of the documentary evidence admitted at trial, as well as the post-trial briefs, and after refreshing its memory by listening to the recorded proceedings of every day of trial, the court issues this opinion.
II. Conclusions of Law
A. The Presumption of Validity.
The court's analysis begins with the well-established principle that "[o]riginal assessments and judgments of county boards of taxation are entitled to a presumption of validity." MSGW Real Estate Fund, LLC v. Borough of Mountain Lakes, 18 N.J. Tax 364, 373 (Tax 1998). As Judge Kuskin explained, our Supreme Court has defined the parameters of the presumption as follows:
The presumption attaches to the quantum of the tax assessment. Based on this presumption the appealing taxpayer has the burden of proving that the assessment is erroneous. The presumption in favor of the taxing authority can be rebutted only by cogent evidence, a proposition that has long been settled. The strength of theIbid. (quoting Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985)(citations omitted)).
presumption is exemplified by the nature of the evidence that is required to overcome it. That evidence must be "definite, positive and certain in quality and quantity to overcome the presumption."
The presumption of correctness arises from the view "that in tax matters it is to be presumed that governmental authority has been exercised correctly and in accordance with law." Pantasote, supra, 100 N.J. at 413 (citing Powder Mill, I Assocs. v. Township of Hamilton, 3 N.J. Tax 439 (Tax 1981)); see also Byram Twp. v. Western World, Inc., 111 N.J. 222 (1988). The presumption remains "in place even if the municipality utilized a flawed valuation methodology, so long as the quantum of the assessment is not so far removed from the true value of the property or the method of assessment itself is so patently defective as to justify removal of the presumption of validity." Transcontinental Gas Pipe Line Corp. v. Township of Bernards, 111 N.J. 507, 517 (1988)(citation omitted).
"In the absence of a R. 4:37-2(b) motion . . . the presumption of validity remains in the case through the close of all proofs." MSGW Real Estate Fund, LLC, supra, 18 N.J. Tax at 377. In making the determination of whether the presumption has been overcome, the court should weigh and analyze the evidence "as if a motion for judgment at the close of all the evidence had been made pursuant to R. 4:40-1 (whether or not the defendant or plaintiff actually so moves), employing the evidentiary standard applicable to such a motion." Ibid. The court must accept as true the proofs of the party challenging the assessment and accord that party all legitimate favorable inferences from that evidence. Id. at 376 (citing Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 535 (1995)). The court is concerned with the existence of the evidence, not its weight. Dolson v. Anastasia, 55 N.J. 2, 5-6 (1969). In order to overcome the presumption, the evidence "must be 'sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment.'" West Colonial Enters, LLC v. City of East Orange, 20 N.J. Tax 576, 579 (Tax 2003)(quoting Lenal Props., Inc. v. City of Jersey City, 18 N.J. Tax 405, 408 (Tax 1999), aff'd, 18 N.J. Tax 658 (App. Div.), certif. denied, 165 N.J. 488 (2000)).
Only after the presumption is overcome with sufficient evidence at the close of trial must the court "appraise the testimony, make a determination of true value and fix the assessment." Rodwood Gardens, Inc. v. City of Summit, 188 N.J. Super. 34, 38-39 (App. Div. 1982)(citations omitted). If the court determines that sufficient evidence to overcome the presumption has not been produced, the assessment shall be affirmed and the court need not proceed to making an independent determination of value. Ford Motor Co. v. Township of Edison, 127 N.J. 290, 312 (1992); Global Terminal & Container Serv. v. City of Jersey City, 15 N.J. Tax 698, 703-04 (App. Div. 1996).
The taxpayer has overcome the presumption of validity attached to the assessments and Judgments under review. During its case-in-chief, the taxpayer presented the testimony of an expert appraiser who relied on comparable land sales, well-recognized construction cost manuals and other data to offer an opinion of the true market value of the subject property on the two valuation dates. The opinions of value, reached through the cost approach, an accepted appraisal method for special use property, were millions of dollars below the assessment on the subject property for both tax years. This is true even if the court adjusts the opinion of plaintiff's expert to account for the court's determination, explained in detail below, that the projected cost of environmental remediation on the subject property cannot be considered in the manner suggested by plaintiff's expert. When the amounts removed by plaintiff's expert for remediation are added back to his opinions of value, the revised opinions are still well below the tax year 2005 and 2006 assessments.
While the municipality pointed out perceived flaws in the expert's data and analysis during cross-examination, the court does not at this juncture of its analysis determine the weight to be given to expert testimony. Instead, it is the existence of evidence, not its reliability, which controls. Dolson, supra, 55 N.J. at 5-6. Questions of credibility are irrelevant. Ibid. Giving the evidence every positive inference in favor of plaintiff, as the court is required to do at this juncture, the court concludes that plaintiff adduced sufficient evidence in its case-in-chief to raise a doubt in the court's mind with respect to the validity of the assessments on the property for tax years 2005 and 2006. The court, as a result, turns to the task of determining the true market value of the subject property on the relevant valuation dates. B. Approaches to Value.
"There are three traditional appraisal methods utilized to predict what a willing buyer would pay a willing seller on a given date, applicable to different types of properties: the comparable sales method, capitalization of income and cost." Brown v. Borough of Glen Rock, 19 N.J. Tax 366, 376 (App. Div.)(citing Appraisal Institute, The Appraisal of Real Estate 81 (11th ed 1996)), certif. denied, 168 N.J. 291 (2001). "There is no single determinative approach to the valuation of real property." 125 Monitor Street, LLC v. City of Jersey City, 21 N.J. Tax 232, 237 (Tax 2004)(citing Samuel Hird & Sons, Inc. v. City of Garfield, 87 N.J. Super. 65, 72 (App. Div. 1965); ITT Continental Baking Co. v. Township of East Brunswick, 1 N.J. Tax 244 (Tax 1980)), aff'd, 23 N.J. Tax 9 (App. Div. 2005). "The choice of the predominant approach will depend upon the facts of each case and the reaction of the experts to those facts." Id. at 238 (citing City of New Brunswick v. Division of Tax Appeals, 39 N.J. 537 (1963); Pennwalt Corp. v. Township of Holmdel, 4 N.J. Tax 51, 61 (Tax 1982)).
"The cost approach is normally relied on to value special purpose property or unique structures for which there is no market." Borough of Little Ferry v. Vecchiotti, 7 N.J. Tax 389, 407 (Tax 1985); Dworman v. Borough of Tinton Falls, 1 N.J. Tax 445, 452 (Tax 1980), aff'd, 180 N.J. Super. 366 (App. Div.), certif. denied, 88 N.J. 495 (1981). The cost approach "involves a replication, through the use of widely accepted cost services . . . of the cost of the components of the building to be valued, less . . . depreciation[s]." Gale & Kitson Fredon Golf, LLC v. Township of Fredon, 26 N.J. Tax 268, 283 (Tax 2011)(quotations omitted). "A cost approach has two elements - land value and the reproduction or replacement cost of the buildings and other improvements." International Flavors & Fragrances, Inc. v. Borough of Union Beach, 21 N.J. Tax 403, 417 (Tax 2004). From the estimated reproduction cost is deducted depreciation from all causes. Depreciation is defined as a loss in value from three causes: physical depreciation, functional obsolescence and external economic factors. The cost approach is most effective when the property being valued is new, in light of the difficulties in accurately estimating the various components of depreciation. See Worden-Hoidal Funeral Homes v. Borough of Red Bank, 21 N.J. Tax 336, 338 (Tax 2004).
The parties agree that the cost approach is the appropriate method for determining the value of the subject property. Both experts concur in this agreement, as each has the opinion that the subject property is a complex, special use property for which comparable sales are not likely to be found. In addition, the subject property is not income producing, given that it does not generate significant rental income. The court concludes that the cost approach is the most credible method by which to determine the true market value of the subject property.
1. Value Determination.
The weight to be given to an expert's opinion depends especially upon the facts and reasoning which are offered as the foundation of his [or her] opinion. Ocean County v. Landolfo, 132 N.J. Super. 523, 528, 334 A2d 360 (App. Div. 1975). The weight and value of expert testimony are for the trier of fact. Robbins v. Thies, 117 N.J.L. 389, 398, 189 A. 67 (E & A 1937). An expert's opinion may be adopted in whole or in part or completely rejected. Middlesex County v. Clearwater Village, Inc., 163 N.J. Super. 166, 174, 394 A.2d 390 (App. Div. 1978), certif. denied, 79 N.J. 483, 401 A.2d 239 (1979).
[City of Atlantic City v. Ginnetti, 17 N.J. Tax 354, 362 (Tax 1998), aff'd, 18 N.J. Tax 672 (App. Div. 2000).]
The court had the opportunity during live testimony to weigh the credibility of both experts. Because the matter was tried without a jury, in addition to the many questions asked of the experts by counsel, the court posed a limited number of questions to the witnesses to assist in clarifying their testimony. In addition, the court reviewed the written reports of the experts and examined the data upon which the experts relied.
The court is constrained to reject the land value opinion offered by the taxpayer's expert. The court's analysis of comparable land sales is influenced by the unique nature of the stipulated highest and best use for the subject property. Electricity generating plants are large, complex structures, which are not routinely constructed. Both experts acknowledged that it would be highly unlikely that any existing municipal zoning regulations would include an electricity generating plant as an approved use for vacant land that was not already the subject of lengthy negotiations between a utility and governing officials regarding the siting of a power plant. Those negotiations would likely involve tax benefits, payments in lieu of taxation, licensing and other factors, the value of which would not necessarily be reflected in the reported consideration for land purchased for the power plant. In addition, the subject property has wetlands, frontage on the Delaware River, riparian rights that allow for the intake and discharge of water from the river, and highway access. It is not likely that property with all of those attributes, which was the subject of an arms' length transaction during the relevant timeframe, would be identified by the expert.
To address these challenges, the taxpayer's expert selected comparable land sales of parcels zoned for commercial, heavy commercial, office and special office uses. In addition, the expert selected parcels with wetlands and water frontage. For each comparable sale the expert calculated the sale price per acre by considering only the upland, developable portion of the parcel. To the price per acre of developable land, the expert applied adjustments. It is at this point that his analysis loses credibility.
The expert's adjustments for location, physical attributes of the parcels and economic features are described merely as "upward" or "downward." No percentage or adjustment unit is assigned to any category. No monetary amount is listed for any adjustment. He merely considers unquantified "upward" and "downward" adjustments to conclude a "net adjustment" of either "upward," "downward" or "similar." No market data is cited by the expert to justify any single adjustment or any net adjustment.
The expert's opinion must be weighed according to evidentiary rules and established legal precedents. An expert's opinion, to be admissible evidence, must be based on data:
The facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made know to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.An expert's bare conclusions, unsupported by factual evidence or other data, are inadmissible net opinions. State v. Townsend, 186 N.J. 473, 494-95 (2006). An expert must give the "whys and wherefores" of her opinion, rather than a mere conclusion. Rosenberg v. Tovarath, 352 N.J. Super. 385, 401 (App. Div. 2002); Greenblatt v. City of Englewood, 26 N.J. Tax 41, 54-55 (Tax 2010). An expert's opinion "depends upon the facts and reasoning which form the basis of the opinion. Without explanation as to the basis, the opinion of the expert is entitled to little weight in this regard." Dworman, supra, 1 N.J. Tax at 448.
[N.J.R.E. 703.]
The rationale for these well-established precedents is evident here. It is not possible for the court to determine the credibility of the taxpayer's expert's various adjustments. For example, because the expert's upward and downward adjustments for location are not quantified or supported by data it is not possible to conclude that they are reasonable and well supported. In addition, it is not possible to determine whether those adjustments were uniformly applied to the various comparable sales, which are in numerous municipalities and counties. The same is true for each of the expert's other adjustments, as well as for his "net adjustments."
Even if the court were to accept the value per useable acre opinion offered by the taxpayer's expert, his adjustment to his value conclusion for the estimated cost of remediation lacks credibility. In Inmar Assocs., Inc. v. Borough of Carlstadt, 112 N.J. 593 (1988), our Supreme Court acknowledged the fact that environmental contamination has an impact on property valuation for local property tax purposes. As the Court explained, where environmental contamination drives "down the value of commercial property potentially subject to cleanup costs, the effect of those market forces cannot be ignored in the assessment process simply because it would be counter to the environmental policy." Id. at 606 (footnote omitted). The exact role that remediation costs play in the assessment process, however, was not established by the Court in Inmar. "Where exactly environmental cleanup cases fit in such a spectrum was not fully developed" by case law, the Court noted. Id. at 605. Justice O'Hern, writing for a unanimous Court, however, eliminated one approach:
One thing is certain: the methodology for resolving the question is not simply to deduct the cost of the cleanup from a putative value of the property. That would reflect only the cost accounting of the current owners.
* * *
An owner's expenditures of cost are "never conclusive on the question of value for tax purposes;" Dworman v. Borough of Tinton Falls, 1 N.J. Tax 445, 455 (Tax Ct. 1980), aff'd, 180 N.J. Super. 366, 3 N.J. Tax 1 (App. Div.) certif. denied, 88 N.J. 495 (1981)(quoting Borough of Haworth v. State Board of Tax Appeals, 132 N.J.L. 306, 308 (1945)); and "[m]ere costliness, therefore, cannot
rationally be made the basis of exemption from taxation." CPC Int'l, Inc. v. Borough of Englewood Cliffs, 193 N.J. Super. 261, 268 (App. Div. 1984)(quoting Turnley v. City of Elizabeth, 76 N.J.L. 42, 44 (Sup. Cit. 1908)).
[Id. at 605.]
The Court suggested that in the absence of evidence of market data contaminated properties might best be treated as "special purpose properties using a measure of flexibility that will aid in the determination of" true value. Id. at 606. "Generally, when 'there is no market' for the property, a property may be so classified." Ibid. (quoting Sunshine Biscuits, Inc. v. Borough of Sayreville, 4 N.J. Tax 486, 495 (Tax 1982)). Moreover, the Court recognized that contaminated property for which there is no market may have "a distinct 'value in use' to the owner so long as the owner continued to operate the facility. Hence, when property is in use, normal assessment techniques will remain an appropriate tool in the appraisal process." Id. at 607. In addition, the Court noted that "the seeds of useful doctrine" were present in the suggestion that "the cost to cure the contaminated property could be treated as a capital improvement, which can be depreciated over the beneficial life of the property." Ibid.
In Metuchen I, LLC v. Borough of Metuchen, 21 N.J. Tax 283 (Tax 2004), the court applied the holding in Inmar and made an adjustment to the assessable value of a parcel that was contaminated with pollutants as a result of the operation of a manufacturing facility that had been shut down. Id. at 286. The court determined that "the appropriate way to deal with the contaminated property in this case is to discount over five years the remaining cleanup costs rather than allowing all of it to be deducted in every year once the cleanup has begun." Id. at 295. The court explained that "[t]o allow continued deductions after the money has been expended ignores the reality that after money is expended the property is worth more." Ibid. The court found that a five-year discount period was appropriate because the evidence in the record established that the owner contemplated completion of the remediation process over five years.
ACE's expert did not follow these precedents. The expert accepted the taxpayer's $5,483,000 estimate of future remediation costs. He then deducted that entire amount from the land value he reached for tax year 2005. He did not discount the cost over the estimated remediation period. In addition, he compounded his error when he deducted the entire $5,483,000 from the land value he reached for tax year 2006. He did not discount the estimated remediation costs, nor did he consider the fact that estimated remediation costs for tax year 2006 would presumably be different from the estimated remediation costs for tax year 2005, either because remediation costs were actually incurred during the one-year period between valuation dates or because the cost of remediation would have to be adjusted to account for changes in costs during that period.
It is not entirely clear that an environmental remediation adjustment would apply at all to the subject property, given that the property was in use on the valuation dates and that ACE's statutory remediation obligations had not been triggered. See Pan Chemical Corp. v. Borough of Hawthorne, 404 N.J. Super. 401, 413 (App. Div.)( "If the . . . property is not to be treated as 'closed' for statutory cleanup purposes, then it is not unfair that it be treated as a continuing operation, that is, not closed for tax assessment purposes."), certif. denied, 198 N.J. 473 (2009). Compare University Plaza Realty Corp. v. City of Hackensack, 264 N.J. Super. 353, 358 (App. Div.)(allowing adjustment to assessed value reflecting non-mandated costs to remediate health hazards akin to "adverse property conditions which are subject to discretionary correction."), certif. denied, 134 N.J. 481 (1993). See also Orient Way Corp. v. Township of Lyndhurst, _ N.J. Tax _, 2013 N.J. Tax Lexis 14 (Tax 2013)(allowing adjustment for estimated remediation costs where statutory clean-up obligation was triggered and subsequent use of property by entity not related to polluter was incidental and unrelated to industrial activity resulting in pollution), appeal pending. Because of its findings that the expert's adjustments are fatally flawed, the court need not decide whether the holding in Pan Chemical precludes a remediation adjustment here.
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The court concludes that the land value opinion of the municipality's expert also lacks credibility. This conclusion is supported by several factors. First, Pennsville's expert relied most heavily on what he described as the sale of land at 3 Paradise Road in West Deptford Township for $14 million. This transaction, however, was not a consummated sale. In addition, the document on which the expert relied as evidence of the sale and from which he obtained the sales price - a July 31, 2006 Memorandum of Understanding ("MOU") - was not fully executed, had numerous conditions precedent which the expert admitted either were not satisfied or about which he had no knowledge and contained material terms that were directly contrary to the expert's description of the "sale."
According to the municipality's expert, in 1990, West Deptford Township sought to redevelop the parcel, which it did not own but contemplated condemning, and issued a request for proposals for that purpose. An entity the expert described as Crown Vista proposed constructing a coal-fired cogeneration plant on the land. This proposal was rejected.
In 2001, West Deptford issued a second request for proposals to redevelop the parcel. An entity the expert described as National Energy proposed the construction of a gas-fired electricity generating plant. This proposal was accepted and negotiations began. Plaintiff's expert testified on more than one occasion that the purchase price for the parcel for the gas-fired plant was different than it was for the coal-fired plant.
According to the municipality's expert, the July 31, 2006 MOU attached to his report memorialized the parties' agreement to sell the parcel for the gas-fired plant. The agreement is between West Deptford Energy Associates, L.P. ("WDEA") and West Deptford Township. In the agreement, WDEA is described as an affiliate of LS Power Associates, L.P. It is not clear how, if at all, these entities relate to National Energy, the entity the expert identified as having proposed construction of the gas-fired plant.
Moreover, the MOU quite plainly concerns a coal-fired plant, not a gas-fired plant. The agreement states that WDEA's affiliate entered into a Letter of Intent with the township "for the development of a large-scale, modern coal-fired power generation facility" on the property. According to the MOU, WDEA "will undertake" the project described in the Letter of Intent. Another provision of the MOU indicates that WDEA "or a related entity intends to pursue the development and operation of a modern coal-fired power generation facility with capacity of approximately 500 megawatts on the property." In addition, the contract notes that WDEA will obtain "contracts and approvals for the delivery of coal and disposal of ash for the" facility. Nowhere in the MOU is a gas-fired electricity generating plant mentioned. The distinction is significant because the municipality's expert testified that the purchase price changed when the proposed plans for the parcel changed from a coal-fired plant to a gas-fired plant.
The municipality's expert could not provide a satisfactory explanation for the fact that the document on which he relied concerned a proposal to construct a coal-fired plant. He speculated that an unnamed attorney failed to revise the agreement, leaving in numerous references to a coal-fired plant from a previous document. He provided no evidence to support this rank speculation. This explanation is also entirely lacking in credibility, as the expert asks the court to conclude that a MOU for a $14 million transaction in several instances misidentifies the very subject of the agreement and in no instance correctly identifies the very subject of the agreement. The more likely explanation, and the one adopted by the court, is that the municipality's expert relied on the incorrect document to identify the material terms of the transaction. Because the expert testified that the purchase price for the parcel changed when the proposed development changed from a coal-fired plant to a gas-fired plant, the purchase price listed in the July 31, 2006 MOU does not verify, and in fact contradicts in material ways, the expert's first comparable sale.
Moreover, even if the court were to consider the July 31, 2006 MOU to concern the sale identified by the expert, the agreement is not credible evidence of true market value. The agreement plainly applies to both vacant land and to various easements that the municipality agreed to obtain and transfer to WDEA with the land. The expert made no attempt to allocate the purchase price between land and easements, which obviously would have independent value. Moreover, the expert testified that the sale of the land would not take place without a fully-executed and governmentally approved agreement for payments in lieu of taxes. Such an agreement did not exist at the time of trial. The effect of such an agreement on the purchase price was not addressed by the expert. In addition, the expert testified that it was his understanding that the municipality would receive from WDEA either discounted electricity or rebates or credits toward electricity use. The expert could provide no details of the precise nature of this arrangement, whether it applied only to the municipality or also to residents of the municipality, or the value of this benefit. Of course, these benefits would have value and likely would influence the purchase price.
The MOU also contained numerous conditions precedent to closing including: (1) the execution of a redevelopment agreement; (2) WDEA obtaining necessary financing for purchase of the property and construction of the facility; (3) WDEA obtaining all government permits and approvals required to construct an electricity-generating plant, including a letter from the DEP that remediation on the property was not necessary, as well as stream encroachment permits; (4) WDEA obtaining water supply and discharge permits; (5) execution of a financial agreement between the parties; and (6) the township acquiring insurable and marketable title to the property and an insurable interest in the easements. The expert provided no proof that any of these conditions had been satisfied.
This transaction, on which the taxpayer's expert relied primarily when reaching his opinion of land value, is entirely lacking in evidentiary value.
The fourth comparable land sale on which the municipality's expert relied also is entitled to little weight. This June 20, 2006 sale was of two lots totaling 102.45 acres in Burlington Township for $3,073,725. The waterfront lot was only 15 acres of uplands with 15 acres of riparian rights. The second parcel was 72.42 landlocked acres completely separated from the waterfront parcel by a contaminated lot owned by the seller but not transferred in this sale. To the sales price, the municipality's expert made gross adjustments of 100%. This included a 45% adjustment for the fact that more than half of the acreage involved in the transaction was landlocked and separated from the small waterfront parcel. The extent of the adjustments is convincing evidence that this sale is not comparable to the subject and should be given little weight.
The remaining two comparable land sales on which the municipality's expert relied are insufficient to establish the true market value of the land component of the cost approach by a preponderance of the evidence. To the purchase price of one sale - a $6,750,000 sale of 136.5 acres of land in Burlington Township - the expert made gross adjustments of 75%. To the other - a $28,891,000 purchase of 895 acres in Logan Township with no waterfront access - the expert made gross adjustments of 45%. While it might, in some circumstances, be possible to determine land value based on two comparable sales that is not the case here. The sales are too dissimilar from the subject property and required too large an amount of adjustments to serve as the basis for a determination of land value.
Having concluded that the record is insufficient for a determination of land value, the court is unable to determine the true market value of the subject property on the relevant valuation dates. As a result, the taxpayer has not met its burden of proof. The county board of taxation Judgments upholding the assessments are, therefore, affirmed.