LASSER, P.J.T.C.
This action was initially instituted by Morris Township to contest an agreement between Morristown and taxpayer pursuant to the Urban Renewal Act of 1961 {N.J.S.A. 40:55C-77) exempting the Headquarters Plaza complex from local property tax for a period of 17 years beginning with 1988. This court previously set aside the exemption, Morris Tp. v. LF Associates, 10 N.J. Tax 240 (Tax Ct.1988). This opinion deals with the proper tax assessments for the years 1988 and 1989 on two 11-story office buildings located in the Headquarters Plaza complex on Speedwell Avenue in Morristown, known as the East and West Buildings and shown on the Morristown tax map as Block 4901, Lots 1.01 and 1.03, respectively.
For tax year 1988, the assessor had regarded the properties as exempt from taxation pursuant to an agreement between Morristown and the taxpayers dated September 29, 1987, and therefore listed the properties as exempt. The exempt list, as required by N.J.S.A. 54:4-27, included values for the properties as if they were not exempt.
For the 1989 tax year, the assessor removed the subject properties from the exempt list and placed them on the taxable list.
The valuation and discrimination issues for the years 1988 and 1989 were heard together. Although Morris Township is plaintiff in the 1988 case, it informed the court that Morris Township would not take an active part in the valuation portion of this case.
Tax year 1987 was a revaluation year. For that year, the assessments and the Tax Court judgments which were entered pursuant to a settlement by the parties are:
[90] East Building (Lot 1.01)
Assessment Tax Court Judgment
Land $ 9,075,000 $ 6,776,000
Improvement 18.513.000 18.513.000
Total $27,588,000 $25,289,000
West Building (Lot 1.03)
Assessment Tax Court Judgment
Land $ 9,075,000 $ 6,776,000
Improvement 18.513.000 18.513.000
Total $27,588,000 $25,289,000
The values on the 1988 exempt list assessments are: and the 1989
East Building (Lot 1.01)
1988 1989
Land $ 9,075,000 $ 6,776,000
Improvements 18,513,000 18,513,000
Total $27,588,000 $25,289,000
West Building (Lot 1.03)
1988 1989
Land $ 9,075,000 $ 67776;000
Improvements 18,513,000 18,513,000
Total $27,588,000 $25,289,000
The 1988 and 1989 common levels of assessment for Morris-town Town as established by the Director of the Division of Taxation pursuant to N.J.S.A. 54:l-35b are:
1988 1989
Common level ratio 115.29% 95.95%
Upper limit 132.57% 110.34%
Lower limit 97.99% 81.56%
The East and West Office Buildings are high-rise, steel-frame, reinforced-concrete-panel and glass office buildings, [91] each containing 181,500 square feet of gross rentable area. The buildings were completed in 1982. Each building has 11 floors with 15,236 square feet on a floor1 (a total of 167,596 square feet), a lobby, a penthouse and building service areas (a total of 13,904 square feet). Four automatic, cable-type elevators serve all floors. The buildings are fully sprinklered.
The subject buildings are two of three office towers constructed within air rights above part of a platform that forms the roof of a 3,000-car parking garage.2 A hotel and health club, not in issue here, were also constructed above the garage. The subject buildings consist of floors 2-12 and are above a shopping mall which was constructed on top of the garage. The lobby and building service areas are located on the same level as the shopping mall. The lobby and building service areas (floor 1), as well as the shopping mall, are not the subject of this action but are the subject of separate assessments.3
[92] I.
East Office Building.
A.
Taxpayer’s Appraisal Expert.
Taxpayer’s appraisal expert valued the East Building using only the income approach. The sales comparison approach was not used because of a stated lack of recent sales of comparable properties. The cost approach also was not used, although the expert indicated that this approach, “if properly structured,” would approximate the value derived by the income approach.
The East Office Building is leased to a single tenant, AT&T Resource Management Corporation (AT&T), for a five-year term commencing March 1, 1988 at $1,805,925 a year. This lease for 181,500 square feet of rentable area is at a net rental of $9.95 a square foot. A separate parking agreement, with First Roc, provides for 726 parking spaces in the garage at $35/car/month for the initial year, with 3% annual increases thereafter. This expert testified that the standard parking rental rate is $50/car/month, and that the total annual parking concession based on the $15 differential is $130,680. Following is a summary of this expert’s income approach valuation:
1988 Valuation.
Actual annual net contract rent @ $9.95/sq. ft.
Less: vacancy allowance @ 2% 36,118
Estimated annual effective net income $ 1,769,807
Estimated annual expenses.
Barking expense $130,680
Lease commissions (1) 119,744
Management, legal, auditing (2) 53,094
Exterior & structural repairs (3) 54,450
Reserve for replacements (4) 36,300
Total - 394,268
Estimated annual net income attributable to property before capitalization $ 1,375,539
[93] Capitalization Rate.
Mortgage - 75% X .1091 = .0818
Equity - 25% X .0800 = .0200
Weighted capitalization rate .1018
$1,375,539 capitalized @ .1018 $ 13,512,200
NOTES:
(1) Lease commissions—$119,744—Amortization of actual lease commissions of $598,721 over the five-year lease term ($598,721/5 years).
(2) Management, legal, auditing—$53,094—Stabilized @ 3% of estimated annual effective net income ($1,769,807 X 3%).
(3) Exterior & structural repairs—$54,450—Stabilized @ $.30 a sq. ft. of building area (181,500 sq. ft. X $.30)
(4) Reserve for replacements—$36,300—Stabilized @ $.20 a sq. ft. of building area (181,500 sq. ft. x $.20)
This expert stated that, of the $13,512,200 total property value, he allocated $6,776,000 (the 1989 land assessment) to land (air rights) and the balance of $6,736,200 to improvements. This expert concluded that the property had the same value as of October 1, 1987 and October 1, 1988.
B.
Taxing District’s Appraisal Expert.
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LASSER, P.J.T.C.
This action was initially instituted by Morris Township to contest an agreement between Morristown and taxpayer pursuant to the Urban Renewal Act of 1961 {N.J.S.A. 40:55C-77) exempting the Headquarters Plaza complex from local property tax for a period of 17 years beginning with 1988. This court previously set aside the exemption, Morris Tp. v. LF Associates, 10 N.J. Tax 240 (Tax Ct.1988). This opinion deals with the proper tax assessments for the years 1988 and 1989 on two 11-story office buildings located in the Headquarters Plaza complex on Speedwell Avenue in Morristown, known as the East and West Buildings and shown on the Morristown tax map as Block 4901, Lots 1.01 and 1.03, respectively.
For tax year 1988, the assessor had regarded the properties as exempt from taxation pursuant to an agreement between Morristown and the taxpayers dated September 29, 1987, and therefore listed the properties as exempt. The exempt list, as required by N.J.S.A. 54:4-27, included values for the properties as if they were not exempt.
For the 1989 tax year, the assessor removed the subject properties from the exempt list and placed them on the taxable list.
The valuation and discrimination issues for the years 1988 and 1989 were heard together. Although Morris Township is plaintiff in the 1988 case, it informed the court that Morris Township would not take an active part in the valuation portion of this case.
Tax year 1987 was a revaluation year. For that year, the assessments and the Tax Court judgments which were entered pursuant to a settlement by the parties are:
[90] East Building (Lot 1.01)
Assessment Tax Court Judgment
Land $ 9,075,000 $ 6,776,000
Improvement 18.513.000 18.513.000
Total $27,588,000 $25,289,000
West Building (Lot 1.03)
Assessment Tax Court Judgment
Land $ 9,075,000 $ 6,776,000
Improvement 18.513.000 18.513.000
Total $27,588,000 $25,289,000
The values on the 1988 exempt list assessments are: and the 1989
East Building (Lot 1.01)
1988 1989
Land $ 9,075,000 $ 6,776,000
Improvements 18,513,000 18,513,000
Total $27,588,000 $25,289,000
West Building (Lot 1.03)
1988 1989
Land $ 9,075,000 $ 67776;000
Improvements 18,513,000 18,513,000
Total $27,588,000 $25,289,000
The 1988 and 1989 common levels of assessment for Morris-town Town as established by the Director of the Division of Taxation pursuant to N.J.S.A. 54:l-35b are:
1988 1989
Common level ratio 115.29% 95.95%
Upper limit 132.57% 110.34%
Lower limit 97.99% 81.56%
The East and West Office Buildings are high-rise, steel-frame, reinforced-concrete-panel and glass office buildings, [91] each containing 181,500 square feet of gross rentable area. The buildings were completed in 1982. Each building has 11 floors with 15,236 square feet on a floor1 (a total of 167,596 square feet), a lobby, a penthouse and building service areas (a total of 13,904 square feet). Four automatic, cable-type elevators serve all floors. The buildings are fully sprinklered.
The subject buildings are two of three office towers constructed within air rights above part of a platform that forms the roof of a 3,000-car parking garage.2 A hotel and health club, not in issue here, were also constructed above the garage. The subject buildings consist of floors 2-12 and are above a shopping mall which was constructed on top of the garage. The lobby and building service areas are located on the same level as the shopping mall. The lobby and building service areas (floor 1), as well as the shopping mall, are not the subject of this action but are the subject of separate assessments.3
[92] I.
East Office Building.
A.
Taxpayer’s Appraisal Expert.
Taxpayer’s appraisal expert valued the East Building using only the income approach. The sales comparison approach was not used because of a stated lack of recent sales of comparable properties. The cost approach also was not used, although the expert indicated that this approach, “if properly structured,” would approximate the value derived by the income approach.
The East Office Building is leased to a single tenant, AT&T Resource Management Corporation (AT&T), for a five-year term commencing March 1, 1988 at $1,805,925 a year. This lease for 181,500 square feet of rentable area is at a net rental of $9.95 a square foot. A separate parking agreement, with First Roc, provides for 726 parking spaces in the garage at $35/car/month for the initial year, with 3% annual increases thereafter. This expert testified that the standard parking rental rate is $50/car/month, and that the total annual parking concession based on the $15 differential is $130,680. Following is a summary of this expert’s income approach valuation:
1988 Valuation.
Actual annual net contract rent @ $9.95/sq. ft.
Less: vacancy allowance @ 2% 36,118
Estimated annual effective net income $ 1,769,807
Estimated annual expenses.
Barking expense $130,680
Lease commissions (1) 119,744
Management, legal, auditing (2) 53,094
Exterior & structural repairs (3) 54,450
Reserve for replacements (4) 36,300
Total - 394,268
Estimated annual net income attributable to property before capitalization $ 1,375,539
[93] Capitalization Rate.
Mortgage - 75% X .1091 = .0818
Equity - 25% X .0800 = .0200
Weighted capitalization rate .1018
$1,375,539 capitalized @ .1018 $ 13,512,200
NOTES:
(1) Lease commissions—$119,744—Amortization of actual lease commissions of $598,721 over the five-year lease term ($598,721/5 years).
(2) Management, legal, auditing—$53,094—Stabilized @ 3% of estimated annual effective net income ($1,769,807 X 3%).
(3) Exterior & structural repairs—$54,450—Stabilized @ $.30 a sq. ft. of building area (181,500 sq. ft. X $.30)
(4) Reserve for replacements—$36,300—Stabilized @ $.20 a sq. ft. of building area (181,500 sq. ft. x $.20)
This expert stated that, of the $13,512,200 total property value, he allocated $6,776,000 (the 1989 land assessment) to land (air rights) and the balance of $6,736,200 to improvements. This expert concluded that the property had the same value as of October 1, 1987 and October 1, 1988.
B.
Taxing District’s Appraisal Expert.
This expert used all three approaches to value the East Building. For the cost approach, three land sales were considered, and the Marshall Valuation Service, a nationally-known building cost manual published by the Marshall and Swift Publication Company, was used to value the improvements. The purchase prices of the land sales were converted to square-foot-of-building figures using the amount of permitted improve[94] ment area, and adjustéd for conditions of sale, date of sale, location and physical character of the property. The improvements rate, taken from the Marshall Valuation Service, for a good, class A building was adjusted for multi-story, sprinkler, multipliers (local, current and perimeter), indirect costs, entrepreneurial profit and time. A summary of this expert’s cost approach analysis follows:
Land.
Sale 1 Sale 2 Sale 3
Sale price $2,350,000 $33,000,000 $10,100,000
Unit value $34.56/ sq.ft.bldg. $30.34/ sq.ft.bldg. $28.83/ sq.ft.bldg.
Adj. unit $35.14/ $30.34/ $33.15/
value sq.ft.bldg. sq.ft.bldg. sq.ft.bldg.
Land value conclusion 181,500 sq.ft. X $30/sq.ft. = $5,445,000
Improvements.
10/1/87 10/1/88
Base cost $ 93.06/sq.ft.
Multi-story adjustment 4.19
Sprinkler adjustment 1.25
Adjusted base cost $ 98.50/sq.ft.
Adjusted for multipliers
Local cost (1.27) 125.10
Current cost (1.04) 130.10
Perimeter (.926) 120.47
Indirect costs not covered by Marshall X 1.05
$126.50/sq.ft.
Entrepreneurial profit X 1.10
$139.14 $139.14
Time adjustment X .9151 X .9819
(rounded) $127.00/sq.ft. $137.00/sq.ft.
Building value $23,219,664 $25,047,984
Depreciation @ 5% - 1,160,982 @ 7% - 1,753,359
Net value $22,058,682 $23,294,625
[95] Summary.
10/1/87 10/1/88
Land value $ 5,445,000 $ 5,445,000
Improvements value 22,058,682 23,294,625
Total value (rounded) $ 27,500,000 $28,740,000
This expert’s sales comparison approach considered three sales, summarized as follows:
Sale Sq. Ft. Price/
Location No. Sale Price Date Bldg.Size Sq.Ft.Bldg.
Parsippany 1 $114,250,000 1/87 528,315 $216.25
Parsippany 2 12,000,000 1/87 72,217 166.17
Morristown 3 15,750,000 8/88 82,561 190.77
After adjustments for date of sale, location and physical condition, taxing district’s expert selected a figure of $155 a square foot for the subject property. Using 181,500 square feet of building, the resulting value as of October 1,1987 by the sales comparison approach is $28,130,000 (rounded). This expert determined the sales comparison approach value as of October 1, 1988 to be the same as that for October 1, 1987.
This expert’s income approach varied from taxpayer’s expert’s in the treatment of the lease rental. Taxing district’s expert concluded that the lease between LF Associates and AT&T for the East Building “is not reflective of current economic rent as of the dates of the appraisal.” This expert used instead the rental information from the West Building and other office buildings in the area. His lease information is summarized here.
[96] Date Signed Landlord Tenant Term (Yrs.) Unit Area Rent (Sq.Ft.) ($/S.F.) Net Rent 4 ($/S.F.)
3/88 Third Roc AT&T 5 66,000 19.75 13.77
3/88 Bristol Myers 5 2,890 25.00 18.12
12/88 Paine Webber 10 13,610 29.98 16.40
2/88 Secret Service 10 16,500 27.38 21.24
9/81 Riker, Danzig 12 44,658 16.25 12.60
12/85 10 4,842 18.00 14.35
9/87 7 33,000 22.50 16.18
4/88 MorstwnOffCtr Giblin 5 6,598 22.63 15.04
6/87 Mut.Omaha 3 2,350 24.50 16.91
3/87 ADT 15 135,012 22.03 21.90
10/88 Mack