Little Stars Day Care Center v. Village of Ridgefield Park.

• Court: New Jersey Tax Court
• Decided: May 18, 2017
• Docket: 014260-2015
• Status: Unpublished

Opinion

TAX COURT OF NEW JERSEY

Joshua D. Novin Washington & Court Streets, 1st Fl. Judge P.O. Box 910 Morristown, New Jersey 07963 Tel: (973) 656-3931 Fax: (973) 656-4305

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS

May 16, 2017

Thomas A. Blumenthal, Esq. 143 Main Street Ridgefield Park, New Jersey 07660

William R. Betesh, Esq. Boggia & Boggia, L.L.C. 71 Mt. Vernon Street Ridgefield Park, New Jersey 07660

Re: Little Stars Day Care Center v. Village of Ridgefield Park Docket No. 014260-2015

Dear Mr. Blumenthal and Mr. Betesh:

This letter constitutes the court’s opinion following trial of plaintiff, Little Stars Day Care

Center (“plaintiff”), challenge to the 2015 local property tax assessment on its improved property

in the Village of Ridgefield Park, County of Bergen, and State of New Jersey.

For the reasons stated more fully below, the court affirms the 2015 tax year local property

tax assessment.

I. Procedural History and Factual Findings

Pursuant to R. 1:7-4, the court makes the following findings of fact and conclusions of law

based on the evidence and testimony offered at trial in this matter.

Plaintiff is the owner of the real property and improvements located at 77 Park Street,

Ridgefield Park, New Jersey. The property is identified on the municipal tax map of the Village of Ridgefield Park as Block 61, Lot 8.01 (hereafter referred to as the “subject property”). For the

2015 tax year, the subject property was assessed as follows:

Land: $105,800 Improvements: $450,100 Total $555,900

The average ratio of assessed to true value, commonly referred to as the Chapter 123 ratio, for the

Village of Ridgefield Park (“defendant”) was 94.51% for the 2015 tax year. See N.J.S.A. 54:1-

35a(a). When the average ratio is applied to the local property tax assessment, the implied

equalized value of the subject property is $588,191.73 for the 2015 tax year.

Plaintiff acquired the subject property on April 6, 2010 for reported consideration of

$590,000. The subject property is a rectangularly shaped, 0.46-acre lot, containing approximately

57 feet of frontage along Park Street. The subject property is improved with a 3,850 square foot

retail/office building containing two finished levels, constructed in approximately 1962. The

lower level of the building is partially subterranean and is accessed by staircases located in the

entrance vestibule and in the rear of the building, containing approximately 7-8 steps down. The

upper level is entirely above grade and is accessed by a staircase in the entrance vestibule,

consisting of approximately 7-8 steps. The building is in average condition. The building is

entirely occupied by plaintiff, who operates a day care and after school care center for

approximately 40 children of varying ages. The lower level of the building contains a small

administrative office, a classroom/activities area, an adult lavatory, and a children’s lavatory. The

lower level also contains a mechanical room. The upper level of the building contains a

classroom/activities area, a kitchenette, and a lavatory containing both children and adult fixtures.

The interior is finished with a combination of hardwood flooring, vinyl tile, carpeting, plaster

2 walls, and suspended acoustical tile ceilings. Both levels of the building are sprinklered. The site

is serviced by public and private utilities.

The subject property is located in the R-2 Residential Zoning District with permitted uses

including single- and two-family residential dwellings. Accordingly, the current use of the subject

property as a retail/office building is a pre-existing, legal, non-conforming use.

Plaintiff initially filed a Petition of Appeal challenging the 2015 tax year local property tax

assessment on the subject property with the Bergen County Board of Taxation (the “Board”). The

Board entered a Memorandum of Judgment affirming the assessment (the “Judgment”).

Thereafter, plaintiff timely filed a Complaint with the Tax Court challenging the Judgment. The

matter was tried to conclusion over two days.

Plaintiff and defendant each offered testimony from State of New Jersey certified general

real estate appraisers, who were accepted by the court, without objection, as experts in the field of

property valuation. Plaintiff’s appraiser also maintains credentials as a BCA, or business certified

appraiser. Each appraiser prepared an appraisal report expressing an opinion of the true market

value of the subject property as of the October 1, 2014 valuation date.

During trial, plaintiff sought to introduce opinion testimony from its appraiser/certified

business appraiser regarding the going concern value of the former day care center business that

occupied the subject property. The court declined to hear such testimony, concluding that

plaintiff’s appraiser’s opinions regarding the business value of the day care center that formerly

occupied the subject property, as of April 6, 2010, were neither relevant to nor probative of the

fair market value of the subject property as of the October 1, 2014 valuation date in this local

property tax appeal. See N.J.R.E. 401.

3 The appraisers offered their opinions that the subject property had a true market value as

of the October 1, 2014 valuation date, as follows:

Plaintiff’s appraiser: $350,000 Defendant’s appraiser: $670,000

II. Conclusions of Law

a. Rentable or leasable area

One of the principal differences between the appraisers’ opinions of value centered on how

the two levels of the building should be treated in determining the subject property’s value. In

plaintiff’s appraiser’s opinion, the building was a 1,962 square foot retail/office building with a

finished basement. Conversely, in defendant’s appraiser’s opinion, the building was a 3,850

square foot two-story retail/office building. In plaintiff’s appraiser’s opinion, although plaintiff

uses the lower level in furtherance of its day care and after school care business, it is only an

“amenity,” and should be attributed only a nominal “amenity value.” In contrast, defendant’s

appraiser opined that both the upper and lower levels of the building have separate egress and

access, are finished and designed for the use and occupancy of plaintiff, and are actively being

used by plaintiff in his day care center business. Thus, in employing the sales comparison and

income capitalization approaches to value, plaintiff’s appraiser computed values premised on a

1,962 square foot measurement and defendant’s appraiser computed values premised on a 3,850

square foot measurement.

In commercial settings, the term gross leasable area has been defined as “the total floor

area designed for the occupancy and exclusive use of tenants, including basements and

mezzanines.” The Appraisal of Real Estate, supra, at 225 (emphasis added). Moreover, the

description of an “office building should include measurements of gross building area – finished

building area – leasable building area.” Ibid. (citing The Building Owners and Managers

4 Association International, Office Buildings: Standard Methods of Measurement (ANSI/BOMA

Z65.1-2010)).

In general, when gauging the rentable or leasable area of a commercial structure, our courts

have focused on factors such as the private access to, use of, ability to independently lease,

condition and finish of the full or partial subterranean levels. See Berkeley Development Co. v.

Berkeley Heights Twp., 2 N.J. Tax 438 (Tax 1981); Shulton, Inc. v. Clifton City, 7 N.J. Tax 208

(Tax 1983); Litton Business Systems, Inc. v. Morris Plains Borough, 8 N.J. Tax 520 (Tax 1986);

RTC Properties v. Kearny Town, 13 N.J. Tax 146 (Tax 1993); Pine Plaza Associates, L.L.C. v.

Hanover Twp., 16 N.J. Tax 194 (Tax 1996); American Cyanamid Co. v. Wayne Twp., 17 N.J. Tax

542 (Tax 1998); S & R Realty v. Town of Kearny, 20 N.J. Tax 488 (Tax 2001), aff’d, 21 N.J. Tax

105 (App. Div. 2003); Worden-Hoidal Funeral Homes, Inc. v. Red Bank Borough, 21 N.J. Tax

336 (Tax 2001). Moreover, respected treatises have recognized that when “finished basements are

used for purposes other than storage and these uses are accepted and typical in the area, they can

add significantly to the property’s value.” The Appraisal of Real Estate, supra, at 244. Thus, the

exclusion of leasable, useable or saleable finished areas of a commercial building must be

supported by credible evidence. S & R Realty, supra, 20 N.J. Tax at 494.

Preliminarily, the court observes from the exterior photographs of the subject property that

the windows serving the upper level of the subject property are situated between the ground level

and second floor windows of the immediately adjacent property. In addition, evidence presented

during trial revealed that the lower level of the building on the subject property is fully finished,

contains an approximately 8’ high ceiling, is furnished with heat and air conditioning, contains an

adult lavatory, a children’s lavatory, an office, overhead fluorescent lighting, finished plaster walls

and ceilings, hardwood flooring and is fully sprinklered. Importantly, access to the lower level is

5 provided by two separate staircases, one located in the front entrance vestibule and the other in the

rear of the building. Thus, entry into the lower level does not require entry into the upper level of

the building. In sum, the lower level can be independently accessed, is fully finished with a

lavatory, is exclusively possessed and used by plaintiff, and materially contributes to plaintiff’s

overall use of the subject property. Thus, the court concludes that the lower level, and the

approximately 1,900 square feet of leasable floor area contained therein, should be ascribed a value

in computing the fair market value of the subject property.

b. Presumption of Validity

At the close of plaintiff’s proofs, defendant moved to dismiss plaintiff’s Complaint

pursuant to R. 4:37-2(b), arguing that plaintiff failed to overcome the presumption of validity. The

court concluded plaintiff overcame the presumption of validity, denied defendant’s motion and

placed a statement of reasons on the record.

However, concluding that the presumption of validity has been overcome does not equate

to a finding by the court that a local property tax assessment is erroneous. Once the presumption

has been overcome, “the court must then turn to a consideration of the evidence adduced on behalf

of both parties and conclude the matter based on a fair preponderance of the evidence.” Ford Motor

Co. v. Township of Edison, 127 N.J. 290, 312 (1992). The court must be mindful that “although

there may have been enough evidence [presented] to overcome the presumption of correctness at

the close of plaintiff’s case-in-chief, the burden of proof remain[s] on the taxpayer. . . to

demonstrate that the judgment [or local property tax assessment] under review was incorrect.” Id.

at 314-15 (citing Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985)).

c. Highest and Best Use

In the court’s pursuit to determine the true market value of the subject property,

6 consideration must be given to that price which a hypothetical buyer would pay a hypothetical

seller, neither of which are constrained to purchase or sell the property, as of October 1 of the

pretax year. See Petrizzo v. Edgewater, 2 N.J. Tax 197, 200 (Tax 1981); Genola Ventures v.

Shrewsbury Bor., 2 N.J. Tax 541, 551 (Tax 1981). An indispensable element to the process of

property valuation and to the determination of true market value is discerning a property’s highest

and best use. Ford Motor Co., supra, 10 N.J. Tax 153, 161 (Tax 1988), aff’d o.b., 12 N.J. Tax 244

(App. Div. 1990), aff’d, 127 N.J. 290 (1992). See also General Motors Corp. v. City of Linden,

22 N.J. Tax 95, 107 (Tax 2005). “For local property tax assessment purposes, property must be

valued at its highest and best use.” Entenmann's Inc. v. Totowa Borough, 18 N.J. Tax 540, 545

(Tax 2000). Thus, the highest and best use analysis is often referred to as “the first and most

important step in the valuation process.” Ford Motor Co., supra, 10 N.J. Tax at 161.

The highest and best use analysis comprises the “sequential consideration of the following

four criteria, determining whether the use of the subject property is: 1) legally permissible; 2)

physically possible; 3) financially feasible; and 4) maximally productive.” Clemente v. Township

of South Hackensack, 27 N.J. Tax 255, 267-269 (Tax 2013), aff’d, 28 N.J. Tax 337 (App. Div.

2015). See also County of Monmouth v. Hilton, 334 N.J. Super. 582, 588 (App. Div. 2000).

Here, both appraisers concluded that the “As Improved” highest and best use would be

continued use of the subject property as a retail/office building. Defendant’s appraiser concluded

that the highest and best use of the subject property “As Vacant” would be development consistent

with the parameters of the R-2 zone. Conversely, plaintiff’s appraiser concluded that the “As

Vacant” highest and best use would be “for office/retail development with a variance.” However.

plaintiff’s appraiser conducted no analysis, and offered little evidence in support of his conclusion

7 that it was reasonably probable a use variance would be granted for the subject property. Linwood

Properties, Inc. v. Fort Lee Borough, 7 N.J. Tax 320, 328-29 (Tax 1985).

d. Methodology

“There is no single determinative approach to the valuation of real property.” 125 Monitor

Street LLC v. City of Jersey City, 21 N.J. Tax 232, 237-238 (Tax 2004) (citing Samuel Hird &

Sons, Inc. v. City of Garfield, 87 N.J. Super. 65, 72 (App. Div. 1965)); ITT Continental Baking

Co. v. East Brunswick Township, 1 N.J. Tax 244, 251 (Tax 1980). “There are three traditional

appraisal methods utilized to predict what a willing buyer would pay a willing seller on a given

date, applicable to different types of properties: the comparable sales method, capitalization of

income and cost.” Brown v. Borough of Glen Rock, 19 N.J. Tax 366, 376 (App. Div. 2001), certif.

denied, 168 N.J. 291 (2001) (internal citation omitted)). The “decision as to which valuation

approach should predominate depends upon the facts of the particular case and the reaction to these

facts by the experts.” Coca-Cola Bottling Co. of New York v. Neptune Township, 8 N.J. Tax 169,

176 (Tax 1986) (citing New Brunswick v. Tax Appeals Div., 39 N.J. 537 (1963)). See also WCI-

Westinghouse, Inc. v. Edison Township, 7 N.J. Tax, 610, 619 (Tax 1985), aff’d, 9 N.J. Tax 86

(App. Div. 1986).

Here, both plaintiff’s appraiser and defendant’s appraiser employed the sales comparison

and income-capitalization approaches to value the subject property. Plaintiff’s appraiser attributed

equal weight to the sales comparison and income capitalization approaches. Defendant’s appraiser

attributed more weight to the sales comparison approach because the subject property is owner

occupied, and is operated for single tenant use.

8 1. Sales Comparison Approach

The sales comparison approach derives an opinion of market value “by comparing

properties similar to the subject property that have recently sold, are listed for sale, or are under

contract.” Appraisal Institute, The Appraisal of Real Estate 377 (14th ed. 2013). This approach

requires the appraiser to engage in a “comparative analysis of properties” and to focus on the

“similarities and differences that affect value. . . which may include variations in property rights,

financing, terms, market conditions and physical characteristics.” Id. at 378.

a. Plaintiff’s appraiser

Plaintiff’s appraiser identified six multi-tenanted, mixed-use buildings in Bergen County

that sold between August 2012 and May 2014, which he deemed comparable. The unadjusted sale

prices of the six sales ranged from $300,000 to $410,000, or $118.46 to $184.66 per square foot.

Plaintiff’s appraiser applied adjustments to the sales to account for perceived differences in

location and age/quality/condition. Plaintiff’s appraiser made no adjustment to account for the

presence of a fully finished and useable lower level on the subject property. The adjusted sale

prices ranged from $124 to $185 per square foot. The appraiser’s analysis yielded a fair market

value conclusion of $175.00 per square foot.

Plaintiff’s appraiser then applied the $175.00 value to the 1,962 square feet of the upper

level of the building on subject property, to arrive at his concluded value of $350,000 (1,962 x

$175.00 = $350,000), as of the October 1, 2014 valuation date. Plaintiff’s appraiser attributed no

value to the approximately 1,900 square feet of finished area in lower level of the building.

b. Defendant’s appraiser

Defendant’s appraiser identified four sales of day care centers in Bergen County, New

Jersey, that sold between April 2010 and August 2014, which he deemed comparable.

9 Defendant’s appraiser utilized the subject property’s sale in April 2010 as a comparable sale. The

unadjusted sale prices of the four sales ranged from $387,500 to $925,000, or $144.49 to $183.74

per square foot. Defendant’s appraiser applied adjustments to the sales to account for perceived

differences in location and parking. Defendant’s appraiser made a downward sale condition

adjustment to the subject property’s sale to account for what he termed “Assets - $35,000.”1 The

adjusted sale prices of the four transactions ranged from $144.49 to $175.97 per square foot.

Ultimately, defendant’s expert concluded a fair market value of $175.00 per square foot.

Defendant’s expert then applied the $175.00 value to the square footage of both the lower and

upper levels of the subject property, which he calculated as 3,850 square feet. Thus, defendant’s

appraiser concluded the subject property had a value of $673,800 (3,850 x $175.00 = $673,800),

as of the October 1, 2014 valuation date.

c. Conclusion

When employing the sales comparison approach, appraisers must adhere to “systematic

procedure[s].” The Appraisal of Real Estate, supra, at 381. Appraisers must conduct research of

the competitive marketplace for “information on properties that are similar to the subject property”

and that have recently sold. Ibid. A crucial element of this investigation and research involves the

data verification process. An appraiser must verify the integrity of the information by “confirming

that the data obtained is factually accurate and that the transactions reflect arm’s-length market

considerations.” Ibid. During the data verification process an appraiser must “elicit additional

information about the property such as buyer motivation, economic characteristics, [and] value

component allocations. . . to ensure that comparisons are credible.” Ibid. The process demands an

1 Evidence was presented during trial, including the HUD-1 Settlement Statement and Contract for the Purchase of Real Property and Retail Business revealing that the subject property sold for $590,000, and that plaintiff paid the seller the additional sum of $35,000 for the day care center business, including furniture, fixtures and equipment. Thus, defendant’s appraiser’s downward adjustment of $35,000 for “Assets” was inappropriate.

10 appraiser “verify information with a party to the transaction to ensure its accuracy and gain insight

into the motivation behind each transaction.” Id. at 385. An appraiser must endeavor to confirm

“statements of fact with the principals to the transaction. . . or with brokers, closing agents, or

lenders involved.” Ibid.

Here, plaintiff’s appraiser’s investigation, analysis and conclusions suffer from flaws that

are fatal to their credibility and reliability. Five of the sales relied on by plaintiff’s appraiser were

mixed-use, multi-tenanted properties (retail/residential and office/residential). Conversely, the

subject property is entirely a retail/office/day care center; no residential component exists on the

subject property. “Evidence of comparable sales is effective in determining value only where there

is a substantial similarity between the properties.” Venino v. Borough of Carlstadt, 1 N.J. Tax

172, 175 (Tax 1980), aff’d o.b. 4 N.J. Tax 528 (App. Div. 1981); See also Bloomfield Associates

v. Bloomfield Town, 12 N.J. Tax 501 (Tax 1992); Glenpointe Assocs. v. Township of Teaneck,

241 N.J. Super. 37, 48 (App. Div. 1990), certif. denied, 122 N.J. 391 (1990). Moreover, thorough

cross-examination revealed that plaintiff’s appraiser was seemingly unaware that the listing for his

comparable sale 2, the only retail/office building contained among his six sales, disclosed that the

seller was unusually motivated and wanted to divest itself of the property due to relocation.

Plaintiff’s appraiser was similarly unaware if any of his six comparable sales contained

partial basements or subterranean levels. “Evidence of comparable sales is effective in determining

value of property for purposes of taxation only where there is a substantial similarity between the

properties so as to admit of reasonable comparison.” Berkeley Development Co., supra, 2 N.J. Tax

at 443 (citing Erie R. System v. Walsh, 26 N.J. Misc. 81, 93 (Div. Tax. App. 1948)).

Plaintiff’s appraiser did not know if the any of the sales transactions were subject to long-

term lease agreements or were sold vacant and free of all tenants. Similarly, if any of the sale

11 transactions were sold subject to long-term lease agreements, plaintiff’s appraiser was unaware of

the lease terms and whether the leases were at market rates. “[A] period of vacancy of the property

may create a greater incentive to sell the property under duress for a price that is lower than market

value.” 125 Monitor Street LLC, supra, 21 N.J. Tax at 242.

Plaintiff’s appraiser could not explain why his comparable sale 3 was reported as being in

escrow for a period of 365 days. Plaintiff’s appraiser was seemingly unaware that his comparable

sale 5 was a private sale. Moreover, effective cross-examination revealed that plaintiff’s appraiser

did not verify the terms of comparable sale 5 with any transaction participants.

Although plaintiff’s appraiser maintained that he or a member of his staff verified the terms

of each sale transaction, the failure of such investigation to disclose meaningful details about each

transaction that could have materially affected the reported sales price, raises questions regarding

the veracity with which such investigation was performed. Thus, plaintiff’s appraiser’s lack of

detailed knowledge about the comparable sale transactions and failure to verify basic transaction

terms, including the unusual motivations of the parties casts doubt on the accuracy and integrity

of the sales data relied upon by plaintiff’s appraiser.

Additionally, plaintiff’s adjustments lacked any credible foundation supported by objective

data or market derived sources. Plaintiff’s appraiser concluded that the demographics of his

comparable sale 2 and comparable sale 4 were “inferior” to the demographics of the subject

property and thus, he made a 10% upward adjustment to those comparable sales. However,

plaintiff’s appraiser could not identify any difference that existed in the demographics between the

two municipalities, much less explain how any perceived difference specifically warranted a 10%

adjustment. Moreover, although plaintiff’s appraiser opined that his comparable sales 1, 3 and 5

12 warranted upward adjustments of 5% for age/condition/quality, plaintiff’s appraiser did not inspect

the comparable sales and was unfamiliar with their interior condition.

Plaintiff’s appraiser further testified that he performed a “paired data analysis,” however,

his data set and analysis was not contained in the appraisal report or in any addendum thereto.

Thus, the information and data he examined and relied upon in conducting such paired data

analysis was not available for the court’s review.

It is a well-settled principle that an expert’s opinion must be grounded in “facts or data

derived from (1) the expert's personal observations, or (2) evidence admitted at the trial, or (3) data

relied upon by the expert which is not necessarily admissible in evidence but which is the type of

data normally relied upon by experts.” Polzo v. Cnty. of Essex, 196 N.J. 569, 583 (2007) (quoting

State v. Townsend, 186 N.J. 473, 494 (2006)). The opinion of an expert must be supported by a

proper foundation and based upon credible facts and data. Peer v. City of Newark, 71 N.J. Super.

12, 21 (App. Div. 1961), certif. denied, 36 N.J. 300 (1962). N.J.R.E. 703 requires that an expert’s

opinion be based on facts, data, or another expert’s opinion, either perceived by or made known to

the expert, at or before trial. Buckelew v. Grossbard, 87 N.J. 512, 524 (1981); Nguyen v. Tama,

298 N.J.Super. 41, 48-49 (App. Div. 1997).

The weight to be accorded expert testimony “depends upon the facts and reasoning which

form the basis of the opinion. An expert's conclusion can rise no higher than the data providing

the foundation (citation omitted). If the bases for the adjustments are not made evident the court

cannot extrapolate value.” Inmar Associates v. Edison Township, 2 N.J. Tax 59, 66 (Tax 1980).

Thus, in order for the opinion of an expert to be of any value to the trier of fact, the expert is

required to “identify the factual bases for their conclusions, explain their methodology, and

demonstrate that both the factual bases and the methodology are scientifically reliable.” Landrigan

13 v. Celotex Corp., 127 N.J. 404, 417 (1992). “Without explanation as to the basis, the opinion of

the expert is entitled to little weight…” Dworman v. Tinton Falls Borough, 1 N.J. Tax 445, 458

(Tax 1980) (citing to Passaic v. Gera Mills, 55 N.J. Super. 73 (App. Div. 1959), certif. denied, 30

N.J. 153 (1959)).

Here, plaintiff’s appraiser’s lack of knowledge of critical factual details of his comparable

sales transactions, which formed the basis of his opinions, produces an unreliable and

untrustworthy result. Moreover, plaintiff’s appraiser failed to offer a reasonable explanation or

basis for his adjustments, rooted in objective market data. In sum, plaintiff’s appraiser has not

furnished the “why and wherefore” supporting his sales comparison approach conclusion of value

for the subject property.

The court’s review of defendant’s analysis produces a more credible, albeit an imperfect

result. As stated above, defendant’s appraiser’s comparable sales 1 and 2 were effectuated in April

2010 and August 2010. Thus, these sales were effectuated approximately four years prior to the

October 1, 2014 valuation date involved herein. These sales were too remote in time to provide

meaningful evidence to the court of the fair market value of the subject property as of the October

1, 2014 valuation date. Accordingly, the court attributes no weight to defendant’s comparable

sales 1 and 2. See Little Ferry Borough v. Vecchiotti, 7 N.J. Tax 389 (Tax 1985); Newport Center

v. Jersey City, 17 N.J. Tax 405 (Tax 1998).

Conversely, the court finds defendant’s appraiser’s comparable sale 3 and comparable sale

4 more credible evidence of value. Comparable sale 3 and comparable sale 4 were arms-length

transactions, selling within approximately 2 months of the October 1, 2014 valuation date; the

sales involved day care facilities located in Bergen County; and the age and condition of the

buildings were substantially similar to the age and condition of the building on the subject property.

14 After making a 5% downward adjustment to these sales to account for the presence of on-site

parking, and a 5% downward adjustment to sale 4 for location, defendant’s appraiser’s range of

value for these sales was $174.55 to $175.97. Thus, the court concludes that defendant’s

appraiser’s derived value of $175.00 for the upper level of the building on the subject property is

supported by the record.

However, neither plaintiff’s appraiser nor defendant’s appraiser furnished the court with

any objective market data, comparable sales, meaningful testimony or evidence as to the value

which should be ascribed to the lower level of the building on the subject property. In plaintiff’s

appraiser’s opinion, the lower level possesses only “amenity value.” Conversely, defendant’s

appraiser opined that the lower level and upper level of the building should be valued identically.

The court concludes that the record before the court fails to support either appraiser’s opinion in

this regard. None of the comparable sales offered by plaintiff’s appraiser or defendant’s appraiser

contained full or partial subterranean levels, let alone, fully finished lower levels with bathrooms

and a separate means of egress and access. Thus, no comparable sales were offered by either

plaintiff’s or defendant’s appraiser with respect to how the market would value a retail/office

property possessing such characteristics. Without this critical market data and information, it is

impossible for the court to reach a conclusion of the true value of the subject property employing

the sales comparison approach. Any reduced value per square foot that the court would ascribe to

the lower level of the building on the subject property would be mere speculation and conjecture,

unsupported by market evidence.

Accordingly, for the above stated reasons, the court must reject both plaintiff’s and

defendant’s appraisers’ conclusions of the fair market value of the subject property under the sales

comparison approach.

15 2. Income Capitalization Approach

When a property is income-producing, the preferred method for determining the estimated

market value of that property is the income capitalization approach. Parkway Village Apartments

Co. v. Township of Cranford, 8 N.J. Tax 430 (Tax 1985), aff’d, 9 N.J. Tax 199 (App. Div. 1986),

rev'd on other grounds, 108 N.J. 266 (1987); Helmsley v. Borough of Fort Lee, 78 N.J. 200 (1978);

Hull Junction Holding Corp. v. Borough of Princeton, 16 N.J. Tax 68, 79 (Tax 1996). “The

income capitalization approach to value consists of methods, techniques, and mathematical

procedures that an appraiser uses to analyze a property’s capacity to generate benefits (i.e., usually

the monetary benefits of income and reversion) and convert these benefits into an indication of

present value.” The Appraisal of Real Estate, supra, at 439. Critical to the income capitalization

approach is the appraiser’s scrutiny, evaluation and analysis of data, information, statistics, costs,

and a property’s capacity to generate future benefits in order to determine the “‘market rent’ or

fair rental value’” of a property. Parkway Village Apartments Co., supra, 108 N.J. at 270. See also

New Brunswick v. State Div. of Tax Appeals, 39 N.J. 537 (1963).

Expressed as a formula, the income capitalization approach can be best summarized as

follows:

Market Rent x Rentable Square Footage Potential Gross Income

- Vacancy and Collection Losses Effective Gross Income

- Operating Expenses Net Operating Income

÷ Capitalization Rate Market Value of Property

16 a. Plaintiff’s appraiser

In performing his income capitalization approach, plaintiff’s appraiser identified eight

rental properties with proposed “move-in” dates between April 2012 and July 2014. Plaintiff’s

appraisal report states that he “analyzed actual leases where available” and “[w]hen details of

actual leases were not available, we utilized asking rents. . .”

Effective cross-examination revealed that four of the eight leases submitted by plaintiff

were lease offers or asking rents and not consummated leases. It is well-settled that lease offers

or asking rents are unreliable indicators of market rental value. This is because they “represent

only one half of the necessary equation,” that is to say, a willing landlord but no willing tenant.

Korvettes Home Furnishing Ctr. v. Borough of Elmwood Park, 1 N.J. Tax 287, 291 (Tax 1980).

Moreover, because asking rents are subject to continued negotiation and change until a lease is

actually consummated, they are not “evidentiary and may not be considered in determining a

property's economic rent” or market rent. Harrison Realty Corp. v. Township of Harrison, 16 N.J.

Tax 375, 381-83 n.3 (Tax 1997) (citations omitted), aff'd, 17 N.J. Tax 174 (App. Div. 1997), certif.

denied, 153 N.J. 213 (1998). See also Lamm Assocs. v. Borough of Caldwell, 1 N.J. Tax 373, 379

(Tax 1980). Thus, plaintiff’s appraiser’s consideration of the four asking rents in his income

capitalization approach was inappropriate. Accordingly, the court accords no weight to plaintiff’s

four asking rents in attempting to discern the market rent for the subject property.

Of the four remaining leases, three were identified as modified gross leases and one was

identified as a triple net lease. Plaintiff’s appraiser was unaware whether any of the comparable

leases contained basements or subterranean areas. In plaintiff’s appraiser’s opinion, a triple net

lease arrangement for the subject property would be most appropriate because it would most likely

be occupied by a single tenant, and single tenants tend to rent property on a triple-net basis. Thus,

17 plaintiff’s appraiser adjusted the modified gross leases downward by $3.50 per square foot to

account for what he characterized as an amount that “typically accounts for the property owner

paying property taxes and insurance.” However, cross-examination revealed a lack of any data

and support for plaintiff’s appraiser’s adjustment amount. Plaintiff’s appraiser did not investigate

the real estate taxes attributable to the comparable leases and had no information or studies to

support his insurance cost estimates or other expenses of the properties. In response to requests

for support for this adjustment amount, defendant’s appraiser summarily responded that “if we had

to have all that [expense] information we wouldn’t get too many appraisals done.”

The unadjusted per square foot rental values attributable to the remaining four comparable

leases ranged from $15.00 to $25.00 per square foot. The adjusted values of the comparable leases

ranged from $15.00 to $21.50 per square foot. Ultimately, plaintiff’s appraiser concluded a market

rent value of $17.00 per square foot for the 2015 tax year.

In order to reach his conclusion of value, plaintiff’s appraiser multiplied his market rent by

the square footage of the upper level of the building on the subject property. This resulted in a

Potential Gross Income of $33,354 ($17.00 x 1,962 = $33,354). Plaintiff’s appraiser attributed no

market rent value to the approximately 1,900 square feet of the lower level of the building.

Plaintiff’s appraiser then deducted a vacancy and collection loss factor (7%) to derive an Effective

Gross Income of $31,019. Plaintiff’s appraiser applied operating expenses for management fees

(4%), “repairs & reserves” (5%) and “general & administrative” expenses at “$1.00 per square

foot,” applied only to the square footage of the upper level of the building. This produced an

estimated Net Operating Income of $26,265. Plaintiff’s appraiser then employed the band of

investment technique utilizing a mortgage interest rate of 5.25%, loan amortization term of 20

years, loan-to-value ratio of 75% and equity rate of 5.80% to derive an overall capitalization rate

18 of 7.50%. Finally, the appraiser applied the capitalization rate to the Net Operating Income figure

to reach his concluded opinion of value for the subject property of $350,000, as of the October 1,

2014 valuation date.

Defendant’s appraiser, on the other hand, researched lease transactions, selecting those

lease transactions that he deemed most competitive. Defendant’s appraiser identified four leases

of retail buildings he considered reflective of market rent for the subject. Defendant’s appraiser

explained that day care centers are “quantified as retail use” in the subject market and fit within

the category of retail properties under The Dictionary of Real Estate Appraisal. Three of the leases

were of day care and child care centers, the remaining lease was for a martial arts studio. The

unadjusted per square foot rental values attributable to the four comparable leases ranged from

$16.43 to $31.97 per square foot. Defendant’s appraiser applied adjustments to the comparable

leases, accounting for differences in: size, building type, physical condition, parking, visibility and

lease type. In defendant’s appraiser’s opinion, a modified gross lease arrangement for the subject

property would be more appropriate because “daycare centers are leased on a modified gross lease

basis. . .” Thus, defendant’s appraiser adjusted the comparable net leases upward by 15% to

account for the landlord’s contribution for “some, but not all of the property’s fixed expenses. . .”

The adjusted values of the comparable leases ranged from $18.07 to $24.31 per square foot.

Defendant’s appraiser ultimately concluded a market rent value of $21.00 per square foot for the

2015 tax year.

In order to reach his conclusion of value, defendant’s appraiser multiplied his market rent

by the square footage of both the upper and lower levels of the building on the subject property.

In contrast to plaintiff’s appraiser, defendant’s appraiser attributed the identical market rent value

19 to both the lower and upper levels of the building on the subject property. This resulted in a

Potential Gross Income of $80,850 ($21.00 x 3,850 = $80,850). Thereafter, defendant’s appraiser

deducted a vacancy and rent loss factor (10%) to derive an Effective Gross Income of $72,765.

Defendant’s appraiser then applied operating expenses for management fees (5%), real estate

commissions (3%) and reserves of $1.00 per square foot. This produced an estimated Net

Operating Income of $63,094. Defendant’s appraiser then employed the band of investment

technique utilizing a mortgage interest rate of 4.20%, loan amortization term of 25 years, loan-to-

value ratio of 70% and equity rate of 6.00% to derive a capitalization rate of 6.30%. Defendant’s

appraiser then weighted the capitalization rate by adding the effective tax rate (3.355) to the

capitalization rate to determine an overall capitalization rate of 9.66% (3.355 + 6.30% = 9.66%).

Finally, defendant’s appraiser applied the overall capitalization rate to the Net Operating Income

to reach his concluded opinion of value for the subject property of $650,000, as of the October 1,

The court finds comparable leases 2, 3 and 4, offered by defendant’s appraiser to be the

most credible evidence of market rent. The primary reason for this determination is that

defendant’s appraiser reviewed lease abstracts or lease agreements for each of these comparable

leases and confirmed the information on these abstracts with transaction participants. In addition,

comparable leases 2, 3 and 4 were competitive day care center or retail property leases in the

Bergen County marketplace entered into between April 2012 and April 2014, dates in reasonably

close in proximity to the October 1, 2014 valuation date. Moreover, defendant’s appraiser

furnished satisfactory explanations for his building type, parking and visibility adjustments.

Defendant’s appraiser credibly testified that he performed an interior inspection of comparable

20 lease 2, substantiating his conditions adjustment. However, the court accords no weight to

defendant’s comparable lease 1, as that lease was consummated in February 2009, approximately

five years prior to the October 1, 2014 valuation date and thus, is too remote in time to be a reliable

indicator of market rent.

Conversely, the comparable leases offered by plaintiff’s appraiser were less credible.

Cross-examination revealed that plaintiff’s appraiser did not review or have in his possession a

copy of any of the lease agreements. Instead, plaintiff’s appraiser concluded a market rent value

premised on lease information, including the leased square footage, lease terms and lease type,

gathered from the Garden State Multiple Listing Service, CoStar and LoopNet.2 Although

plaintiff’s appraiser initially averred to a data verification process with the real estate brokers,

continued cross-examination revealed the brokers he attempted to contact were not responsive.

Additionally, in response to the court’s questions regarding the accuracy of the multiple listing

service information, defendant’s appraiser responded, “unless we have appraised the property or

it’s a broker that we have an existing relationship with, or that we have done business with before

that doesn’t mind sharing private information with us, we just don’t have it.” Thus, plaintiff’s

appraiser did not properly scrutinize, evaluate or analyze the comparable lease data; a fundamental

prerequisite to determination of market rent and performing the income capitalization approach.

See Parkway Village Apartments Co., supra, 108 N.J. at 270. Accordingly, the accuracy,

correctness and completeness of plaintiff’s appraiser’s comparable leases are suspect.

Thus, the court finds defendant’s appraiser’s concluded value of $21.00 per square foot, on

a modified gross lease basis, more credible evidence of the market rent attributable to the upper

level of the building on the subject property for the 2015 tax year. However, that does not lead

2 CoStar provides information and analytic services for commercial real estate customers and brokers. LoopNet provides marketing, advertising and real estate listing services for commercial real estate customers and brokers.

21 the court to conclude that a market rent of $21.00 per square foot should be attributable to the

lower level of the building on the subject property.

As stated above, plaintiff's appraiser attributed no market rent value to the lower level of

the building on the subject property. In the opinion of plaintiff’s appraiser, the lower level was

not independently marketable, “basement space doesn’t rent for the same as regular space,” and

the lower level merely constituted an amenity of the upper level. Nonetheless, the court observes

that none of the comparable leases submitted by plaintiff’s appraiser shared this distinct amenity

and physical characteristic. Moreover, plaintiff’s appraiser failed to make any adjustment to his

comparable leases to account for the value which should be attributed to this so-called amenity.

Thus, the leases submitted by plaintiff’s appraiser were not truly competitive with and comparable

to the subject property in the marketplace. Conversely, defendant’s appraiser attributed full market

rent value to the lower level of the building on the subject property. In the opinion of defendant’s

appraiser, because the lower level of the building was finished and being used by plaintiff in his

day care business, it should be ascribed market rental value. However, none of the four comparable

leases offered by defendant’s appraiser included any basement or lower levels. Thus, defendant’s

appraiser did not furnish the court with any comparable or competitive leases that ascribed a

market rent to a subterranean or lower level. Accordingly, neither plaintiff’s or defendant’s

appraiser furnished the court with evidence that the lower level of the subject property should be

ascribed: (i) an equivalent market rent to the upper level, (ii) a lower market rent than the upper

level, or (iii) no market rent, because the upper level rent will reflect the additional “amenity value”

of the lower level.

The court readily observes that physical characteristics result in the two levels not being

equivalent to one another (i.e. the lower level is partially subterranean and contains no windows,

22 while the upper level is above grade and has windows). It is well settled that factors which

influence the value of retail and office space include “physical characteristics such as the visibility,

attractiveness, quality of construction, and condition of properties” and the “character and location

of existing or anticipated competition.” The Appraisal of Real Estate, supra, at 176-77. However,

neither appraiser appropriately accounted for the differences in physical characteristics that exist

between the upper and lower levels. These differences shape the market value to be attributed to

the subject property. Thus, the manner or capacity of the lower level of the subject property to

generate income, a critical component of the income capitalization approach, was not adequately

addressed by plaintiff’s appraiser or defendant’s appraiser.

The court is mindful of its duty “to apply its own judgment to valuation data submitted by

experts in order to arrive at a true value and find an assessment for the years in question.” Glen

Wall Associates v. Wall Twp., 99 N.J. 265, 280 (1985) (citing New Cumberland Corp. v. Roselle

Borough, 3 N.J. Tax 345, 353 (Tax 1981)). Moreover, the court acknowledges that “[t]he judges

presiding in the Tax Court have special expertise” in matters of property valuation and taxation.

Glenpointe Assoc. v. Township of Teaneck, 241 N.J. Super. 37, 46 (App. Div.), certif. denied,

122 N.J. 391 (1990). However, in order to permit the court to apply its own judgment and make

a finding of market rent, credible and objective evidence of comparable and competitive leases in

the marketplace must be presented. Here, such evidence was not furnished by plaintiff or

defendant.

Without this necessary objective data and information, the court is unable to discern the

market rent that should be ascribed to the lower level of the building on the subject property, if

any. Therefore, the court is unable to derive an estimate of value for the subject property using

the income capitalization approach.

23 III. Conclusion

For the above stated reasons, the court concludes that plaintiff has failed to prove, by a

fair preponderance of the evidence, that the local property tax assessment on the subject property

exceeds its true value. Additionally, the court further concludes that defendant has failed to

provide credible and competent evidence establishing the true value of the subject property.

Accordingly, the court will enter judgment dismissing plaintiff’s Complaint.

Very truly yours,

/s/ Hon. Joshua D. Novin, J.T.C.