Trocki Hotels LP v. Egg Harbor Township

• Court: New Jersey Tax Court
• Decided: April 4, 2017
• Docket: 014920-2010
• Status: Unpublished

Opinion

TAX COURT OF NEW JERSEY

Joshua D. Novin Court & Washington Streets Judge P.O. Box 910 Morristown, New Jersey 07963-0910 Tel: (973) 656-3931 Fax: (973) 656-4305

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS

April 3, 2017

Salvatore Perillo, Esq. Nehmad Perillo & Davis, P.C. 4030 Ocean Heights Avenue Egg Harbor Township, New Jersey 08234

Stanley L. Bergman, Jr., Esq. Bergman Law Offices, PA 3120 Fire Road, Suite 202 Egg Harbor Township, New Jersey 08234

Re: Trocki Hotels LP v. Egg Harbor Township Docket Nos. 014920-2010, 006657-2011 and 003246-2012

I & S Associates LLC v. Egg Harbor Township Docket Nos. 014921-2010, 013381-2011 and 013551-2012

Dear Mr. Perillo and Mr. Bergman:

This letter constitutes the court’s opinion following trial of local property tax appeals

filed by plaintiffs, Trocki Hotels LP and I & S Associates LLC. Trocki Hotels LP and I & S

Associates, LLC challenge the 2010, 2011 and 2012 local property tax assessments on their

improved and vacant property in Egg Harbor Township (“defendant”), Atlantic County, New

Jersey.

For the reasons stated more fully below, the court reduces the 2010, 2011 and 2012 tax

year local property tax assessments. I. Procedural History and Findings of Fact

Trocki Hotels, LP (“Trocki Hotels”) is the owner of the real property and improvements

located at 7095 Black Horse Pike, Egg Harbor Township, Atlantic County, New Jersey. Trocki

Hotels is owned by Ira M. Trocki, M.D. (“Dr. Trocki”) and his wife. The property is identified

on the tax map of Egg Harbor Township as Block 4305, Lot 1 (the “Trocki property”). For the

2010, 2011 and 2012 tax years, the Trocki property was assessed as follows:

Land: $ 754,500 Improvement: $2,993,800 Total: $3,748,300

I & S Associates LLC (“I&S Associates”) is the owner of the adjoining vacant real

property located at 7099 Black Horse Pike, Egg Harbor Township, Atlantic County, New Jersey.

Dr. Trocki owns a majority and controlling ownership interest in I&S Associates. The property

is identified on the tax map of Egg Harbor Township as Block 4305, Lot 2 (the “I&S property”).

For the 2010, 2011 and 2012 tax years, the I&S property was assessed as follows:

Land: $321,800 Improvement: $ 0 Total: $321,800

The Chapter 123 ratio and common level range for Egg Harbor Township was as follows:

2010 2011 2012 Average Ratio 51.06 54.17 57.87 Lower Limit 43.40 46.04 49.19 Upper Limit 58.72 62.30 66.55

When the average ratio is applied to the Trocki property’s local property tax assessment,

it has an implied equalized value of $7,340,971.40 for the 2010 tax year, $6,919,512.60 for the

2011 tax year and $6,477,103.80 for the 2012 tax year. When the average ratio is applied to the

2 I&S property’s local property tax assessment, it has an implied equalized value of $630,238.93

for the 2010 tax year, $594,055.75 for the 2011 tax year and $556,073.95 for the 2012 tax year.

Trocki Hotels and I&S Associates shall be collectively referred to herein as “plaintiffs.”

a. The Trocki property

The Trocki property is an irregularly-shaped 3.45 acre lot, containing approximately 352

feet of frontage along the south side of Black Horse Pike, a four-lane macadam state road, and

631 feet of frontage along Fox Place. The Trocki property is located approximately 2½ to 3

miles west of Atlantic City. The site is serviced by public and private utilities including electric,

natural gas, water and sanitary sewer.

The Trocki property is improved with a two and part three-story 68,985 square foot

masonry and steel structure, containing a Travelodge motel consisting of 197 guest rooms, each

equipped with a three fixture bathroom and individual electric heat and air conditioning units.

The 197 guest rooms consist of 194 one-bedroom suites and 3 two-bedroom suites. The motel

was constructed in or about 1986. The Travelodge is a limited service motel providing only

restricted dining and beverage service. The Travelodge affords guests interior corridor access to

guest rooms, an elevator, laundry services, “free high speed internet,” a continental breakfast,

parking for automobiles and trucks, use of “privately owned Bayside Beach,” “bayview rooms,”

and an in-ground outdoor swimming pool and deck overlooking Lakes Bay.1

During the years at issue, the Travelodge was managed by Piccasso’s, Inc., a corporation

owned by Dr. Trocki and his wife. In addition to managing the Travelodge, Piccasso’s, Inc.

served as manager for two other lodging facilities owned by Dr. Trocki, the Holiday Inn Express

1 Conflicting testimony was presented to the court with respect to the presence of an outdoor in-ground pool. Plaintiff’s appraiser included in his appraisal report a photograph of an outdoor area which he labeled “Pool Area” and the brochure for the Travelodge, included in defendant’s appraisal report, includes a photograph of an outdoor pool and states “[o]utdoor seasonal pool.” However, during cross-examination defendant’s appraiser offered testimony that there is no swimming pool on the subject property.

3 and Clarion Hotel and Convention Center, both located on Black Horse Pike in Egg Harbor

Township, New Jersey. A management agreement apparently exists between Piccasso’s, Inc.

and Trocki Hotels for management of the Travelodge, however, a copy of such agreement was

not provided to the court.

b. The I&S property

The I&S property is an irregularly-shaped, 2.81 acre principally vacant lot, containing

approximately 297 feet of frontage along the south side of Black Horse Pike. The I&S property

abuts the easterly lot boundary of the Trocki property and provides an alternate means of

vehicular ingress and egress from Black Horse Pike to the Travelodge motel.

The Trocki property and I&S property shall be collectively referred to as the “subject

property” or “subject properties.”

Located immediately to the rear of the subject properties is Lakes Bay, a 27-acre nature

preserve, containing a mixture of saltwater marshes, bayberry thickets and beaches, which serves

as a habitat for several local wildlife species. Lakes Bay also serves as a recreational area for

individuals wishing to partake in several non-motorized water sports, including windsurfing,

board-sailing, paddle boarding and kayaking.2 The Trocki property and I&S property attach to

form a horseshoe shape with the rear of the horseshoe bordering Black Horse Pike and the

prongs of the horseshoe extending towards Lakes Bay. Due to the subject properties’ proximity

to Lakes Bay, they are located in Special Flood Hazard Area Zone A5, which denotes an area

within the 100-year floodplain. According to Dr. Trocki, a gabion was erected along the subject

properties boundary with Lakes Bay to protect it from tidal flooding. Nonetheless, areas of the

subject property have experienced periodic flooding from Lakes Bay during significant storm

events and high tide.

2 www.njconservation.org/lakesbayperserve.htm

4 The subject properties are located in the R-5 Apartment Residential Zone district with

permitted uses including garden apartments, townhomes, single-family dwellings and Planned

Unit Developments for both residential and nonresidential uses. Commercial, motel and

commercial recreational uses are permitted in the R-5 Apartment Residential Zone as Planned

Unit Developments, however, such use requires a minimum land area of fifty acres. The use of

the Trocki property as a motel precedes adoption of the current zoning ordinances and, therefore,

is a pre-existing, legally permitted, non-conforming use.

Due to its close proximity to Atlantic City, the subject property and its environs was

developed as a secondary market to Atlantic City. There, consumers could find lower cost

alternatives to higher priced Atlantic City motels and hotels. However, with the development

and expansion of casino gaming in Connecticut, New York and Pennsylvania, Atlantic City’s

monopoly on East Coast gaming began to erode. See Marina Dist. Development Co., LLC v.

City of Atlantic City, 27 N.J. Tax 469, 476 (Tax 2013). This erosion, plaintiffs’ maintain,

caused the continued operation of the Travelodge to become increasingly challenging.

Plaintiffs brought petitions of appeal before the Atlantic County Board of Taxation (the

“Board”) challenging: (i) the 2010 tax year local property tax assessments on the subject

properties; and (ii) the 2011 and 2012 tax year local property tax assessments on the I&S

property. The Board entered Memorandum of Judgments (the “Judgments”) for each year

denying plaintiffs’ claims for relief under judgment code “6B” – “Hearing waived.” Plaintiffs’

filed timely Complaints with the Tax Court contesting the Judgments. In addition, Trocki Hotels

filed direct appeals with the Tax Court challenging the 2011 and 2012 tax year local property tax

assessments on the Trocki property. The defendant did not file Counterclaims.

5 During trial, testimony was offered by plaintiffs’ owner, Dr. Trocki. Dr. Trocki acquired

the Travelodge in late 2003 for the sum of $5,500,000. Dr. Trocki explained that, in the years

following acquisition of the Travelodge, with the loss of government groups and private

contracts, coupled with the decline of the Atlantic City gaming and hotel market, the Travelodge

began to experience a decline in revenues. The Travelodge is located near several newer motels,

including a Hampton Inn, Residence Inn and Comfort Inn, which directly compete for motel

patrons. In addition, several older and smaller wood-frame motels with less savory reputations

exist in proximity to the Travelodge. Moreover, because of its location, approximately one mile

west of the exit and entrance to the Atlantic City Expressway, Dr. Trocki expressed that

accessing the Travelodge is sometimes difficult for motel patrons. However, Dr. Trocki testified

that he kept the Travelodge open because, in his opinion, the cost of continuing to operate the

motel would equal the costs associated with closing it.

According to Dr. Trocki, the Travelodge “flag” ranks towards the bottom of limited

service chain motels and therefore derives one of the lowest daily room rates on a national basis.

In Dr. Trocki’s opinion, the national average daily room rate for Travelodge flag motels is

approximately $35.00 to $40.00 per night.

Dr. Trocki further testified that, as of the date of trial, he owned a Holiday Inn Express

motel, located approximately three miles from the Travelodge in Egg Harbor Township. The

Holiday Inn Express also contains 197 guest rooms. Although Dr. Trocki observed that as of the

valuation dates economic conditions were less than favorable, he expressed that occupancy at

his Holiday Inn Express remained relatively stable.

Dr. Trocki gave some consideration to selling the subject property or converting it into

condominium units, when K. Hovnanian began to develop the immediately adjacent property

6 into a 131 unit townhome development. However, according to Dr. Trocki, after the well-

documented economic downturn in late 2007, it was no longer financially feasible to develop the

subject property into condominiums. Dr. Trocki did not formally list the subject properties for

sale on any multiple listing services because doing so would have negatively impacted his

ability to continue to market the Travelodge to prospective guests, but he quietly continued to

field offers and gauge interest from prospective developers concerning the subject property.

In addition to Dr. Trocki’s testimony, at trial, plaintiffs and defendant each offered

testimony from a State of New Jersey certified general real estate appraiser, who were accepted

by the court, without objection, as experts in the property valuation field.

In the opinion of plaintiffs’ appraiser, the highest and best use of the Trocki property and

I&S property was for single-family residential development. Accordingly, plaintiffs’ appraiser

prepared two appraisal reports, each one expressing a separate opinion of the true market value

of the Trocki property and I&S property as a single-family residential development for each tax

year at issue.

Conversely, defendant’s appraiser concluded that the highest and best use of the subject

property is continuation of the existing use as a motel. Defendant’s expert prepared one

appraisal report, concluding that the subject properties “are joined in a Unity of Use and Value

of the Travelodge on Lot 1 [and] cannot be separated from Lot 2.” In the opinion of defendant’s

appraiser, the I&S property “has no independent value and should simply be allocated from the

value estimate for the Travelodge.”

The appraisers offered their opinions that the Trocki property and I&S property had a true

market value as follows:

7 October 1, 2009 October 1, 2010 October 1, 2011 Trocki I&S Trocki I&S Trocki I&S property property property property property property Plaintiffs’ $160,000 $130,000 $140,000 $120,000 $130,000 $110,000 Appraiser Defendant’s $6,129,000 $6,129,000 $6,129,000 appraiser

Thus, the court faces the task of resolving not only the appraisers’ differing approaches to

value the subject properties, but also attempting to reconcile the appraisers’ widely disparate

conclusions of value.

II. Conclusions of Law

a. Presumption of Validity

“Original 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). “Based on this presumption, the appealing taxpayer has the burden of

proving that the assessment is erroneous.” Pantasote Co. v. City of Passaic, 100 N.J. 408, 413

(1985) (citing Riverview Gardens v. North Arlington Borough, 9 N.J. 167, 174 (1952)). “The

presumption of correctness. . . stands, until sufficient competent evidence to the contrary is

adduced.” Little Egg Harbor Township v. Bonsangue, 316 N.J. Super. 271, 285-86 (App. Div.

1998). A taxpayer can only rebut the presumption by introducing “cogent evidence” of true

value. That is, evidence “definite, positive and certain in quality and quantity to overcome the

presumption.” Aetna Life Ins. Co. v. Newark City, 10 N.J. 99, 105 (1952). Thus, at the close of

plaintiff’s proofs, the court must be presented with evidence that raises a “debatable question as

to the validity of the assessment.” MSGW Real Estate Fund, LLC, supra, 18 N.J. Tax at 376.

In evaluating whether the evidence presented meets the “cogent evidence” standard, the

court “must accept such evidence as true and accord the plaintiff all legitimate inferences which

8 can be deduced from the evidence.” Id. at 376 (citing Brill v. Guardian Life Insurance Co. of

America, 142 N.J. 520 (1995)). The evidence presented, when viewed under the Brill standard

“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 Properties, Inc. v.

City of Jersey City, 18 N.J. Tax 405, 408 (Tax 1999), aff’d, 18 N.J. Tax 658 (App. Div. 2000),

certif. denied, 165 N.J. 488 (2000)). “Only after the presumption is overcome with sufficient

evidence. . . must the court ‘appraise the testimony, make a determination of true value and fix

the assessment.’” Greenblatt v. Englewood City, 26 N.J. Tax 41, 52 (Tax 2011) (quoting

Rodwood Gardens, Inc. v. City of Summit, 188 N.J. Super. 34, 38-39 (App. Div. 1982)). Hence,

even in the absence of a motion to dismiss under R. 4:37-2(b), the court is nonetheless required

to determine if the plaintiff has overcome the presumption of validity. If the court independently

concludes that plaintiff has not carried the requisite burden, dismissal of the action is warranted

under R. 4:40-1 and the trial court need not engage in an evaluation of the evidence to make an

independent determination of value.

According plaintiffs all reasonable and legitimate inferences which can be deduced from

the evidence presented, the court concludes that plaintiffs produced cogent evidence sufficient to

overcome the presumption of validity. If accepted as true, the opinions of plaintiffs’ appraiser

and the facts upon which he relied raise debatable questions regarding the correctness of the

local property tax assessments on the subject properties for the 2010, 2011 and 2012 tax years.

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

9 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., supra, 100 N.J. at 413).

b. Highest and Best Use and Market Analysis

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

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 a property’s true market value is discerning its

highest and best use. Ford Motor Co. v. Township of Edison, 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 phrase highest and best use is defined as follows:

The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. . . Alternatively, the probable use of land or improved property –

10 specific with respect to the user and timing of the use – that is adequately supported and results in the highest present value.

[Appraisal Institute, The Dictionary of Real Estate Appraisal (5th ed. 2010).]

Thus, 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).

The determination of a property’s highest and best use begins with the proposition that a

property must be valued as it was used on the valuation date, and the party proposing an alternate

highest and best use bears the burden, by a fair preponderance of the evidence, of presenting

evidence to support its position. Highview Estates v. Borough of Englewood Cliffs, 6 N.J. Tax

194, 200 (Tax 1983); Penns Grove Gardens, Ltd. v. Borough of Penns Grove, 18 N.J. Tax 253,

263 (Tax 1999); Ford Motor Corp., supra, 10 N.J. Tax at 167; Clemente, supra, 27 N.J. Tax at

269.

However, the highest and best use of a property is not a static principle. The highest and

best use of a property may alter over time with a market that is in transition, or as a result of

changes in the economic climate, zoning, or from the presence or lack of development. When

engaging in a highest and best use analysis the appraiser must interpret “the market forces that

affect the subject property and identify[] the use or uses on which the final opinion of value is

based.” Appraisal Institute, The Appraisal of Real Estate, 42 (14th ed. 2013).

11 The highest and best use of a property “is not determined through subjective analysis. . .

rather, highest and best use is shaped by the competitive forces within the market where the

property is located. . . the [market] analysis and interpretation of highest and best use is an

economic study of market forces focused on the subject property.” Entenmann's Inc., supra, 18

N.J. Tax at 545; see also Clemente, supra, 27 N.J. Tax at 267-269. Market analysis is defined as

a “study of market conditions for a specific type of property.” Appraisal Institute, The Appraisal

of Real Estate, 41 (14th ed. 2013). Market analysis is pivotal in the appraisal process, because it

offers an understanding of the predominant market conditions that exist, against which proposed

local developments will be measured. It also offers meaningful insight into matters of supply

and demand in the marketplace and how property values may change over a period of time.

Embedded in that analysis is the concept of value in exchange, i.e. the selected use “must be a

probable use for which there must be a demand in the relevant market.” WCI-Westinghouse, Inc.

v. Edison Twp., 7 N.J. Tax 610, 616 (Tax 1985). An appraiser’s highest and best use analysis

must not be grounded upon the value in use of a property, i.e. the value a property may have for

its specifically designed purposes, because that use may not reflect true market value. A

property “should be examined for all possible uses and that use which will yield the highest

return should be selected.” General Motors Corp., supra, 22 N.J. Tax at 125 (quoting Owens-

Illinois Glass Co. v. Bridgeton, 8 N.J. Tax 495 (Tax 1986)).

c. Plaintiffs’ Approach to Value

In the opinion of plaintiff’s appraiser, the highest and best use of the subject properties

was for development of single-family dwellings. However, plaintiffs’ appraiser did not value the

subject properties as one cohesive unit, instead electing to value the Trocki property and I&S

property separately, relying upon the sales comparison approach.

12 Plaintiffs’ appraiser’s “As Improved” highest and best use analysis began with his review

of the Travelodge’s audited income and expense statements for the years ending 2008, 2009,

2010, 2011 and 2012. The reproduced abstract of the Travelodge’s operating revenues and

expenses set forth in plaintiffs’ appraisal report revealed that plaintiffs’ gross revenues were

$1,172,921 for the 2008 calendar year; $579,118 for the 2009 calendar year; $776,195 for the

2010 calendar year; $836,663 for the 2011 calendar year; and $960,304 for the 2012 calendar

year. However, exclusive of real estate taxes, plaintiffs’ operating expenses for the 2009, 2010

and 2011 years exceeded gross revenue, resulting in operating losses between $37,302 and

$225,867. Therefore, in plaintiffs’ appraiser’s opinion, the Travelodge was “unprofitable” and

no longer economically viable as a motel. Accordingly, plaintiffs’ appraiser attributed no value

to the Travelodge motel and posited that the motel should be demolished, estimating demolition

costs to be $275,000 or $4.00 per square foot. However, because the demolition costs exceeded

plaintiffs’ appraiser’s concluded fair market value, his “As Improved” highest and best use of the

Trocki property was to “Hold for Development.”

In conducting his “As Vacant” highest and best use analysis for the subject properties,

plaintiffs’ appraiser reached a different result, concluding that the “As Vacant” highest and best

use of the subject properties was for “single family residential development.” Plaintiffs’

appraiser reached this conclusion by first examining the permitted density of apartments and

townhomes in the R-5 Residential Apartment Zone, which he opined was limited to 12 units per

acre.3 In plaintiffs’ appraiser’s opinion, “townhome land sells for more than apartment land on a

per unit basis, so townhomes are considered to be the higher and better use.” However,

3 Although the R-5 Apartment Residential Zone § 225-34 reproduced in the Addenda to plaintiffs’ appraisal report reflects a maximum density for residential townhomes and for planned unit developments of 12 units per acre, the section of the ordinance which identifies the maximum density for multi-family residential apartments was not reproduced.

13 plaintiffs’ appraiser offered no market data, surveys or evidence during trial or in his appraisal

reports supporting such bare conclusion.

Plaintiffs’ appraiser next expressed that between 2009 and 2012, sales of multi-family

apartment units in Atlantic County sold in the range of $25,000 to $64,000 per unit. Therefore,

plaintiffs’ appraiser concluded that development of the subject properties for multi-family

apartment units was not financially feasible. Yet, plaintiffs’ appraiser offered the court no data,

reports, or construction cost information for multi-family residential apartment units. Moreover,

no evidence was offered by plaintiffs’ appraiser regarding the location, quality, composition or

the effective age of the multi-family apartment unit sales that he examined to form his

conclusion.

However, because plaintiffs’ appraiser concluded that townhomes would “sell for

considerably more per unit,” than multi-family residential apartment units, he surveyed the

feasibility of developing the subject properties as townhomes. Plaintiff’s appraiser estimated

that approximately 40 townhouse units could be constructed on the Trocki property and 33

townhouse units could be constructed on the I&S property. Plaintiffs’ appraiser then consulted

the Marshall & Swift valuation manuals to compute the estimated construction costs of Class D

wood frame townhomes, which he concluded would be $105.07 per square foot.

According to plaintiffs’ appraiser, the median sale price of townhomes between October

1, 2009 and February 2014, in the immediately adjacent K. Hovnanian townhome development,

was $189,900, or $92.00 per square foot. Therefore, plaintiffs’ appraiser concluded that

redevelopment of the subject properties into townhomes was not financially feasible. Although

plaintiffs’ appraiser presented the court with a scatter plot chart indicating the range of sale

prices in the adjacent townhome development, no detailed information was furnished to the court

14 by plaintiffs’ appraiser identifying the property location, date of sale, sale price, interior finishes

and square footage of each townhome unit.

Thus, in plaintiffs’ appraiser’s opinion, “[t]he only remaining use permitted is single

family development. . . so that is what guided me in my search for comparable sales” and in

concluding that the maximally productive use of the subject properties “As Vacant,” was as a

single-family residential development. However, plaintiffs’ appraiser did not consider or

analyze the costs associated with subdividing the subject property and constructing single-family

homes. Moreover, plaintiffs’ appraiser gave no consideration to the fact that the subject

properties are located in a flood hazard area nor how that might impact the use of the subject

properties for single-family residential development. The proposed highest and best use must be

legally permissible, physically possible, financially feasible and maximally productive.

Clemente, supra, 27 N.J. Tax at 267. Here, plaintiffs’ appraiser conducted no analysis of the

financial feasibility of subdividing and redeveloping the subject property into single-family

homes, much the same way he considered redeveloping the subject property into townhomes. In

fact, plaintiffs’ appraiser conceded during trial that due to market conditions, “there wasn’t much

[residential] development going on at all in this time frame.”

Moreover, in attempting to offer support for an explanation of his market adjustments,

plaintiffs’ appraiser concluded that the median sales price of single-family dwellings in Egg

Harbor Township declined during 2009, 2010 and 2011 at rates of -7.2%, -10.9%, and -2.2% per

year respectively, or in the aggregate -20.3% over the three year period. Thus, a proposed

highest and best use that advocates for redevelopment of the subject properties into single-family

dwellings would seemingly conflict with the existing market conditions, and casts doubt on the

maximally productive use and financial feasibility of plaintiffs’ appraiser’s proposed highest and

15 best use. A prudent and circumscribed market analysis is pivotal to, and serves as a framework

for, understanding the conditions which exist and shape the highest and best use of a property.

In conducting his sales comparison approach, plaintiffs’ appraiser identified five land

sales he considered comparable to the subject property. One land sale was located in Atlantic

County and the remaining four land sales were located in Ocean County. The five land sales are

set forth below:

Sale Address Lot Size Sold with Zoning/ Sale date Sale price/ Approvals Minimum lot price per size acre #1 26143 Mill Road 6.74 acres Yes. Two lot RG-1, 11/22/2011 $292,500/ Egg Harbor Township, NJ subdivision for drug Residential $43,398 Atlantic County rehabilitation 30,000 sq ft lot facility. #2 Miro Avenue 14.52 No. Old residential R20 6/24/2011 $600,000/ Barnegat, NJ acres subdivision existed. Residential $41,322 Ocean County Buyer seeking 20,000 sq ft lot approval for 24 lots. #3 Gudz Road 19.98 Yes. Approvals R-12 9/14/2010 $2,450,000/ Lakewood, NJ acres granted for 37 lots. Single-Family $122,623 Ocean County Residential 12,000 sq ft lot #4 Radio Road 46.85 Yes. Approvals R-100 3/2/2010 $3,500,000/ Little Egg Harbor, NJ acres granted for 73 lot Residential $74,707 Ocean County subdivision. 10,000 sq ft lot #5 1113 Church Road 6.34 acres No. R-200 9/10/2009 $550,000 Toms River, NJ Residential $86,751 Ocean County

After identifying the land sales, plaintiffs’ appraiser made a series of adjustments to

account for perceived differences in time, location, approvals and lot size.

In computing his time adjustment, plaintiffs’ appraiser computed the median sales price

of single-family dwellings sold in Egg Harbor Township during the period from 2008 to 2013.

Based upon this analysis, he concluded that a downward sales price trend existed in Egg Harbor

Township for single-family dwellings during the 2009, 2010 and 2011 years. Plaintiffs’

appraiser calculated a percent change, per year, of -7.2% for the 2009 tax year, -10.9% for the

16 2010 tax year and -2.2% for the 2011 tax year. Plaintiffs’ appraiser then applied the computed

percentage on a per year and per month basis to each of the five land sales.

In addition to his time adjustments, plaintiffs’ appraiser adjusted land sales three and five

downward 10% for location in each tax year, because in his opinion, they are in “superior Ocean

County locations.” Plaintiffs’ appraiser further opined that a downward adjustment of 25% was

warranted to land sales one, three and four, for each tax year, because they were sold with

subdivision approvals and no subdivision approvals for the subject properties were undertaken.

Finally, in plaintiffs’ appraiser’s opinion, larger single-family dwelling lots sell for more than

smaller single-family dwelling lots, and because the minimum single-family dwelling lot size for

the subject property would be 10,000 square feet, he adjusted land sales one, two and four

downward by 10% to account for differences in lot size.

The range of adjusted sale prices of the five comparable transactions, per acre of land,

was as follows: (i) $32,400 to $87,675 for the 2010 tax year; (ii) $29,619 to $79,705 for the 2011

tax year; and (iii) $28,208 to $75,719 for the 2012 tax year. Plaintiffs’ appraiser then attributed

the highest degree of weight, 60%, to land sale one and attributed 10% weight to land sales two,

three, four and five. Ultimately, plaintiffs’ appraiser concluded an estimated value per acre of

$45,169 for the 2010 tax year, $41,053 for the 2011 tax year and $39,065 for the 2012 tax year.

Plaintiff’s appraiser then applied those concluded values to the Trocki property’s 3.45 acres, and

to the I&S property’s 2.81 acres. Plaintiffs’ appraiser’s final concluded value for the Trocki

property was: $160,000 for the 2010 tax year, $140,000 for the 2011 tax year and $130,000 for

the 2012 tax year. Plaintiffs’ appraiser’s final concluded value for the I&S property was:

$130,000 for the 2010 tax year, $120,000 for the 2011 tax year and $110,000 for the 2012 tax

year.

17 It is well-settled that a witness who has been qualified by the court as an expert is

permitted to offer opinion testimony. N.J.R.E. 702. However, the weight to be accorded expert

testimony shall hinge “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). Although the facts or data relied

upon by the expert need not be admissible, the testimony must nonetheless be rooted in facts,

science, data or the opinions of other experts. N.J.R.E. 703. Thus, in order for the opinion of an

expert to be of any import, 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 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 Passaic v. Gera Mills,

55 N.J. Super. 73 (App. Div. 1959), certif. denied, 30 N.J. 153 (1959)).

During trial, in explaining the basis for his location adjustments to land sale three,

plaintiffs’ appraiser expressed only that “development in Lakewood barely stopped during the

recession, it was going pretty well relative to the rest of the world.” Moreover, plaintiffs’

appraisal report offers no meaningful support for his location adjustments, stating only that land

sale three and five “are in superior Ocean County locations.” The facts, surveys, data or sales

information upon which plaintiffs’ appraiser relied to conclude that land sales three and five

were superior to the subject properties and that his downward -10% location adjustment was

warranted were not set forth in his appraisal report or in his testimony.

18 In addition, plaintiffs’ appraiser’s time adjustments improperly attempt to link the sale

price of single-family dwellings with the sale price of vacant land which has not been

subdivided, without offering any evidence that the value of vacant land declined, or declined at

the same rate as single-family dwellings. In fact, if this court was to accept plaintiffs’ appraiser’s

bare conclusions that land sales three and five were in “superior Ocean County locations,” the

court would have to consider that those sales demonstrate the inverse may be true. Land sale

five sold in October 2009 for $86,751 per acre and land sale three sold one year later, in

September 2010, for $122,623 per acre. According to plaintiffs’ appraiser’s single-family

dwelling sales analysis, a -9.50% adjustment would be warranted over the 2009 to 2010 time

period. Instead, the court observes that a 40% increase existed in the per acre value of vacant

land between these Ocean County locations. Even if the court accepted plaintiffs’ appraiser’s

proposed adjustment for approvals of -25%, a 15% increase in the value of vacant land remains;

not a decrease of 9.50%. This results in a difference of almost 25%. Thus, the court finds

plaintiffs’ appraiser’s proposed time adjustments are without adequate support in the record,

grounded in objective market data. Moreover, the foregoing analysis by the court casts doubt on

the credibility of plaintiffs’ appraiser’s time adjustments.

Plaintiffs’ appraiser’s approvals and lot size adjustments must be rejected for similar

reasons. The court readily acknowledges that obtaining subdivision approvals can take time,

resources and involve a certain measure of risk. However, plaintiffs’ appraiser offered only his

unsupported conclusions with respect to an adjustment amount, without supplying any objective

market data, surveys, analysis or statistics associated with the costs to obtain approvals.

Moreover, the court observes that lot size alone does not dictate value; other factors including lot

location, accessibility and proximity to natural resources can materially affect value. For

19 instance, a 10,000 square foot vacant building lot adjacent to a waterfront or bay may sell for

significantly more than a 15,000 square foot lot that is located miles from any waterway. Here,

the Trocki property and I&S property are immediately adjacent to Lakes Bay, however none of

plaintiffs’ appraiser’s comparable land sales are adjacent to any waterway.

The court further observes that a wide disparity exists between the size of the comparable

land sales and the size of the Trocki property and I&S property. The I&S property is

approximately 139% smaller than land sale one, 416% smaller than land sale two, 611% smaller

than land sale three, 1567% smaller than land sale four, and 125% smaller than land sale five.

Similarly, the Trocki property is approximately 95% smaller than land sale one, 320% smaller

than land sale two, 479% smaller than land sale three, 1257% smaller than land sale four and

83% smaller than land sale five.

By definition, comparability does not require properties to be identical, as “differences

between a comparable property and the subject property are anticipated. Such differences are

dealt with by adjustments recognizing and explaining these differences, and then relating the two

properties to each other in a meaningful way so that an estimate of the value of one can be

determined from the value of the other.” U.S. Life Realty Corp. v. Jackson Township, 9 N.J. Tax

66, 72 (Tax 1987). However, here, plaintiffs’ appraiser offered no meaningful explanation to

account for the wide disparity that exists in property size between the subject properties and his

comparable land sales.

The court further highlights that plaintiffs’ appraiser’s proposed highest and best use for

the subject properties was derived by a process of elimination, and not based upon an

examination and analysis of demand in the marketplace. Plaintiffs’ appraiser excluded

consideration of continued use of the subject properties as a motel, as multi-family residential

20 apartments and as multi-family townhomes. However, plaintiffs’ appraiser conducted no

evaluation of the subject property to determine how many building lots the subject property

would yield and introduced no evidence or data that it would be financially feasible or

maximally productive to subdivide the subject properties and erect single-family dwellings.

When an appraiser proposes a highest and best use that requires subdivision into single-family

residential building lots “an analysis of the feasibility of a subdivision development – a more

detailed market analysis will be required.” Appraisal Institute, The Appraisal of Real Estate, 42

(14th ed. 2013). A property must be valued as it was used on the valuation date, and the party

proposing an alternate highest and best use bears the burden, by a fair preponderance of the

evidence, of presenting evidence to support its position. Highview Estates v. Borough of

Englewood Cliffs, 6 N.J. Tax 194, 200 (Tax 1983); Penns Grove Gardens, Ltd. v. Borough of

Penns Grove, 18 N.J. Tax 253, 263 (Tax 1999); Ford Motor Corp., supra, 10 N.J. Tax at 167;

Clemente, supra, 27 N.J. Tax at 269. Here, plaintiffs have not presented evidence sufficient for

this court to conclude, by a fair preponderance of the evidence, the highest and best use of the

subject properties is for a single-family residential development.

Finally, assuming that the cost to construct a single-family dwelling paralleled the

$105.07 opined by plaintiffs’ appraiser to construct a townhome, and further assuming the

average size of a newly constructed single-family dwelling in Egg Harbor Township was

approximately 2,500 square feet.4 The cost to build a single-family dwelling would be

approximately $262,675 ($105.07 x 2,500 square feet). However, according to plaintiff’s

appraiser, the median sale price of single-family homes in Egg Harbor Township was $255,611

in 2009, $227,736 in 2010 and $222,716 in 2011. Without accounting for any costs associated

4 Plaintiffs’ appraiser offered testimony that the size of the townhome units in the immediately adjacent development were in excess of 2,300 square feet.

21 with the land or the subdivision and development process, the court finds it implausible that

redevelopment of the subject property into a single-family residential development would be a

financially feasible or maximally productive use. Accordingly, for the reasons set forth herein

above, the court rejects plaintiffs’ appraiser’s proposed highest and best use of the subject

properties and adjustments to the comparable land sales, and concludes that plaintiffs’

appraiser’s sales comparison approach to value the subject properties does not produce a credible

result.

d. Defendant’s Approach to Value

In contrast to plaintiffs’ appraiser, defendant’s appraiser concluded that the highest and

best use of the subject properties is continuation of the existing use as a motel. Although

defendant’s appraiser conceded that “it is unlikely that, if vacant and available for development,

a hotel/motel would be built” on the subject properties, after reviewing and analyzing the subject

property and available market data, he concluded that the highest and best use of the subject

properties is the “existing development,” as a motel. In the opinion of defendant’s appraiser, the

continued operation of the Travelodge as of the October 1, 2009, October 1, 2010, and October

1, 2011 valuation dates, further supports its highest and best use as a motel. Defendant’s

appraiser further expressed that when a motel maintains a nationally recognized flag, such as the

Travelodge flag, although internal motel operations may be affected, the use of the subject

property as a motel will usually remain the most maximally productive use. Defendant’s

appraiser examined all three approaches to value, ultimately concluding that the income

capitalization approach should be employed to value the subject properties.

In defendant’s appraiser’s opinion, the I&S property is an “integral part” of the Trocki

property, providing a “private access road for the benefit of the Travelodge” and its guests.

22 Therefore, defendant’s appraiser concluded that the Trocki property and the I&S property are

“joined in a Unity of Use and Value. . . [and] cannot be separated.”

Defendant’s appraiser reviewed the audited income and expense statements furnished by

plaintiffs. However, in defendant’s appraiser’s opinion, such statements were unreliable because

they reported rent expenses, amortization income, travel expenses and other “unreliable data, that

I could not verify and could not check.” Specifically, defendant’s appraiser highlighted that the

Travelodge’s Statement of Revenues and Expenses for the year ending December 31, 2009

identified gross revenues of only $457,662, however a separate line item of $123,414 identified

as “other hotel revenue” is included, without any explanation for how that income was derived.

In addition, defendant’s appraiser noted that the Travelodge’s income and expense statements

contain deductions for certain expenses, without any explanation for these expenses. Moreover,

because expenses, such as rent, were paid by the Travelodge to Picasso’s, Inc., a corporation

owned by Dr. Trocki, defendant’s appraiser opined that the expense statements were unreliable

to develop an estimate of stabilized expenses. Defendant’s expert also took exception to

plaintiffs’ deductions for depreciation, real estate taxes, and amortization. Defendant’s appraiser

offered that while it may be appropriate to deduct these expenses under federal income tax laws,

they should not be deducted when determining the value of real property under the income-

capitalization approach.

Defendant’s appraiser examined the revenues reported by plaintiffs on their income and

expense statements and compared those revenues to average daily room rates and occupancy

rates he obtained from Smith Travel Research, Inc. (“STR”). STR is a fee-based service

provider who collects, benchmarks, and analyzes data on hotels and motels worldwide.

Defendant’s appraiser purchased a report from STR captioned “Egg Harbor Township, NJ Area

23 Selected Properties” for the period July 2010 through April 2014. After analyzing the data,

defendant’s appraiser concluded that the revenues reported by plaintiffs were not representative

of the market or of the economic rent which could be derived from proper operation of the

Travelodge.

The formula applied by defendant’s appraiser to derive an opinion of the fair market

value for the subject properties included the following steps: (1) computing gross stabilized

revenues from room rates, including revenues derived from food and beverage service, as a

function of the average occupancy rates and average daily room rates; (2) deducting stabilized

expenses to determine the estimated effective gross revenues; (3) deducting a percentage of gross

revenues allocated to motel management; (4) applying a capitalization rate to the stabilized

income of the motel; and (5) deducting the depreciated value of the furniture, fixtures and

equipment (“FF&E”) from the capitalized value.

According to the STR report, average occupancy rates in the Egg Harbor Township

environs hotel/motel market during the period July 2010 to October 2012 ranged from 29% to

69.10%. Thus, in the opinion of defendant’s appraiser, a stabilized occupancy rate of 40%

should be applied to the Travelodge. The STR report further reported average daily room rates

in the Egg Harbor Township hotel/motel market during the July 2010 to October 2012 period

ranged from $44.74 to $89.26. Thus, in the opinion of defendant’s appraiser, a stabilized daily

room rate of $68.00 should be applied to the Travelodge.

Therefore, defendant’s appraiser stabilized the estimated revenue attributable to the

Travelodge as follows: 197 rooms x 365 days x $68.00 average daily room rate x 40%

occupancy rate = $1,955,816. Defendant’s appraiser then stabilized anticipated food and

beverage income at 3% of the stabilized room revenues, or $58,674. Although defendant’s

24 appraiser conceded that the Travelodge is a limited service motel, serving only a continental

breakfast to motel patrons without charge, defendant’s appraiser opined that the Travelodge

could derive additional revenue from charging a fee for breakfast service. Next, defendant’s

appraiser testified that he examined PKF Hospitality Research Group studies and concluded that

a ratio of stabilized expenses to effective gross revenues of 65% exists in the hotel/motel

industry.5 Therefore, he adopted stabilized expenses of 65% of gross revenues, or $705,071, and

deducted that sum from the gross stabilized revenues. Defendant’s appraiser then allocated 5%

of the effective gross revenues to the management fees of the motel, or $35,253 and deducted

that sum from the effective gross revenues. As a result, defendant’s appraiser concluded a net

stabilized income attributable to the Travelodge’s real estate and FF&E of $669,817 ($1,955,816

+ $58,674 = $2,014,490 - $705,071 - $35,253 = $669,817).

Defendant’s appraiser then capitalized the stabilized income at an average rate of 10.5%

for all tax years to determine a rounded value of the real estate and FF&E of $6,379,000

($669,817/.105 = $6,379,209.50). To arrive at his capitalization rate, defendant’s appraiser

relied upon Korpacz/Price Waterhouse Coopers surveys of the “National Economy/Limited-

Service Lodging Segment” for the 3rd quarter 2009, 3rd quarter 2010, and 3rd quarter 2011. The

court’s review of the Korpacz/Price Waterhouse Cooper surveys reveals a range of overall

capitalization rates as follows: 9.00% to 14.00% for 3rd quarter 2009; 8.00% to 12.00% for 3rd

quarter 2010; and 8.00% to 12.00% for 3rd quarter 2011.

Finally, defendant’s appraiser deducted the sum of $250,000 from his derived value of

the Travelodge to account for the contributing value of the FF&E, to derive a market value for

5 Defendant’s appraisal report did not contain copies of the PKF Hospitality Research Group studies that defendant’s appraiser examined in deriving a ratio of expenses to revenues.

25 the subject properties as of each of the valuation dates of $6,129,000 ($6,379,000 - $250,000 =

$6,129,000).

e. 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); see also 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). Moreover, our courts have recognized that “the income approach is a viable

method of appraising hotels and, in many cases, is given the greatest weight. Knowledgeable

buyers of lodging facilities generally base their purchase decisions on factors such as forecasted

net income and return on investment. . .” Glen Pointe Associates v. Teaneck Twp., 10 N.J. Tax

380, 390 (Tax 1989), aff’d, 12 N.J. Tax 118 (App. Div. 1990) (internal citation omitted); see also

Chesapeake Hotel LP v. Saddle Brook Twp., 22 N.J. Tax 525, 526-27 (Tax 2005).

“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. Central 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 Hull Junction Holding Corp. v. Borough of Princeton, 16 N.J.

Tax 68, 79 (Tax 1996).

26 However, our courts have recognized that “in the absence of convincing evidence to the

contrary, the actual rent of a well-managed apartment complex functioning with customary

leases of relatively short length is prima facie representative of economic rent. . .” Parkway

Village Apartments Co., supra, 108 N.J. at 276. This presumption of competent management

similarly attaches to hotels and motels and the burden rests with the municipality to prove, by

convincing evidence, that a property is poorly managed. Glen Pointe Associates, supra, 10 N.J.

Tax at 390; see also Westmount Plaza v. Twp. of Parsippany, 11 N.J. Tax 127, 131 (Tax 1990);

Prudential Insurance v. Parsippany-Troy Hills, 16 N.J. Tax 58, 62 (Tax 1995); Equitable Life

Assurance v. Town of Secaucus, 16 N.J. Tax 463, 467 (App. Div. 1996). Although the criteria

necessary to overcome this presumption are not unattainable, Judge Small observed that the

“burden of establishing by convincing evidence that a subject property is badly managed and not

a comparable for itself is so great that there is no reported tax case in New Jersey where a Court

has found bad hotel management.” Equitable Life Assur. Soc. of U.S., supra, 16 N.J. Tax at 467.

Here, defendant’s appraiser disregarded the income and expense statements furnished by

plaintiffs. Defendant’s appraiser concluded these statements were “unreliable” because the

statements identify expenses such as “rent,” “management fee,” “auto expense,” and “travel,”

without explanation for the derivation of the expense. Moreover, comparing the gross revenues

reported by Trocki Hotels to the average daily and occupancy rates contained in the STR report,

defendant’s appraiser concluded that the gross revenues were not representative of market rates.

Therefore, defendant’s appraiser relied exclusively on the STR report for his average daily room

and room occupancy rates in order to compute his stabilized income. However, income and

expense statement aberrations are not alone convincing evidence sufficient to overcome the

presumption that a hotel or motel is well-managed. An expense statement that is not “within

27 normal operating limits” may justify “an adjustment be made to fit the ‘well-managed’

standard,” however it does not demonstrate that a motel or hotel is poorly managed. Equitable

Life Assur. Soc. of U.S., supra, 16 N.J. Tax at 467 (quoting Parkway Village Apartments, supra,

108 N.J. at 276). Here, defendant’s appraiser did not consider or know the average daily room

rates for the Travelodge, did not investigate the occupancy rates for the Travelodge, and made

no inquiry into how room revenue was being generated in the operation of the Travelodge, other

than his review of the audited financial statements.

Additionally, effective cross-examination revealed that the STR report, exclusively relied

upon by defendant’s appraiser to establish the range of average daily room and occupancy rates,

was not limited to Egg Harbor Township motels, but rather included “Egg Harbor Township and

Travelodge [flags] within fifty miles” of the subject properties. Thus, the range and accuracy of

the average daily room and occupancy rates that were applicable only to the Egg Harbor

Township motel marketplace was unknown by defendant’s appraiser.

Effective cross-examination further revealed that defendant’s appraiser considered the

Travelodge a “seasonal hotel,” located in “seasonal area.” Thus, motel occupancy during the

winter months suffers and occupancy during summer months peaks. Conversely, average daily

room rates decline in the winter months and surge in the summer months. However, defendant’s

appraiser performed no analysis of the average daily room and occupancy rates of the

Travelodge during the off-peak and peak months to discern the range of rates.

Defendant’s appraiser further conceded during cross-examination that as of the valuation

dates at issue there was an over-supply of motel rooms in the Egg Harbor Township market.

Although a surplus of motel rooms existed, defendant’s appraiser did not consider how this

surplus affected the average daily room and occupancy rates of the Travelodge.

28 Cross-examination also revealed that the average daily room and occupancy rates

employed by defendant’s appraiser and reflected in the STR report did not take into

consideration the quality and character of the Travelodge, the competition in the marketplace, or

the décor, chain or flag affiliation and amenities offered by other motels in the marketplace.

Moreover, a clear and logical explanation was offered during trial by Dr. Trocki for the

expenses highlighted by defendant’s appraiser. Dr. Trocki explained that: (i) the expense item

categorized as “rent” was actually a management fee paid by the Travelodge to Picasso’s, Inc.

for managing and operating the motel; (ii) the expense item categorized as “management fee”

was for services rendered by an outside motel management consultant to review and analyze the

management and operations of the Travelodge; (iii) the expense item categorized as “auto

expense” encompassed expenses for operation, maintenance and repair of vans owned and

rented by the Travelodge to provide local transportation for motel guests; (iv) the expense item

categorized as “travel” expense included expenses incurred by the Travelodge to send its general

manager and front desk manager to motel training seminars required by the franchisor and to

solicit groups and organizations to use the Travelodge motel.

Defendant’s appraiser’s contention that the income and expense statements should be

disregarded simply because the Travelodge was being managed by Picasso’s, Inc. is also not

supported by the record before the court. The record reveals that Dr. Trocki is well-versed in the

operation and management of motels and large apartment complexes, having owned and

operated a number of facilities, including the Clarion Hotel and Convention Center and Holiday

Inn Express in Egg Harbor Township. Additionally, the court’s own review of the management

fee paid by plaintiffs to Picasso’s, Inc. during the 2009 tax year reveals that it represents

29 approximately 6.58% of the Travelodge’s gross revenues, a figure that closely resembles the 5%

management fee proposed by defendant’s appraiser in his income-capitalization approach.

Finally, although the court is charged with the task of determining the true market value

of the subject properties as of the October 1, 2009, October 1, 2010 and October 1, 2011

valuation dates, defendant’s appraiser’s STR report recites average daily room and occupancy

rates only for the period of July 2010 through October 2014. Defendant’s appraiser did not

present any market data, surveys or information to the court with respect to the average daily

room and occupancy rates during the 2009 calendar year and first six months of 2010.

Here, defendant has not met its burden of proving, by convincing evidence, that the

Travelodge motel is poorly managed. The court concludes that the financial difficulties

experienced by plaintiffs during the 2009, 2010 and 2011 tax years were not caused by bad

management, but rather the decline of the Atlantic City gaming and hotel market and the well-

documented economic downturn that began in late 2007, plunging the United States into one of

the worst recessions it had experienced in decades. Although the court readily observes that

during 2009 the Travelodge’s gross expenses exceeded its gross revenues by a ratio margin of

1.67 to 1, good management of a hotel or motel is nonetheless presumed. Glen Pointe

Associates, supra, 10 N.J. Tax at 390. The court therefore concludes that the irregularities

observed by defendant’s appraiser in the expenses reported by the Travelodge can be accounted

for by making an “adjustment. . . to fit the ‘well-managed’ standard.” Equitable Life Assur. Soc.

of U.S., supra, 16 N.J. Tax at 467 (quoting Parkway Village Apartments, supra, 108 N.J. at 276).

f. Determination of Value

Plaintiffs’ counsel argues that in spite of defendant’s appraiser’s conclusion that the

subject properties were a single economic unit and joined in a unity of use and operation,

30 defendant’s appraiser was required to develop separate opinions of value for the Trocki property

and I&S property. As a result of this alleged deficiency, plaintiffs’ counsel urges the court to

reject defendant’s appraiser’s conclusion of value. As authority for this proposition, plaintiffs’

counsel points to an unreported Tax Court decision Tip’s Trailer Park, Inc. v. Twp. of Fairfield,

2014 N.J. Tax Unpub. LEXIS 87, 2014 WL 2895795, at 11 (N.J. Tax Ct. June 25, 2014).

However, it is well settled that “[n]o unpublished opinion shall constitute precedent or be

binding upon any court.” R. 1:36-3; see also Trinity Cemetery Assoc. v. Township of Wall, 170

N.J. 39, 48 (2001). Thus, the opinion cited by plaintiffs’ counsel is not authority, binding the

court in this matter. Nonetheless, the court finds a general lack of support for plaintiffs’

counsel’s argument.

A unity of use is established when there is “a connection or relation of adaptation,

convenience and actual. . . use to make the enjoyment of one [parcel] reasonably necessary to the

enjoyment of the other [parcel]. . .” Manalapan v. Genovese, 187 N.J. Super. 516, 521 (App.

Div. 1983). Thus, when separately assessed parcels are integral parts of a single economic unit

an appraiser should develop an opinion of value that takes into consideration the entire economic

operation and how the individual component parts contribute to the value of the whole.

Authority for such an approach can be found in Purex Corp. v. Paterson City, 8 N.J. Tax 121

(Tax 1986); Mobil Oil Corp. v. Greenwich Twp., 9 N.J. Tax 123 (Tax 1986); and Atlantic City v.

Ginnetti, 17 N.J. Tax 354, 362-363 (Tax 1998), aff’d, 18 N.J. Tax 672 (App. Div. 2000).

An appraisal is “‘the act or process of developing an opinion of value’ of an asset.” The

Appraisal of Real Estate, supra, at 2. In performing an appraisal, an appraiser is duty-bound to

value the property according to its highest and best use. However, when the subject of the

appraisal includes multiple integrated properties, the appraiser may reasonably conclude that the

31 properties should be valued as a single economic unit, rather than as a number of fractional parts.

Here, defendant’s appraiser concluded that the Trocki property and I&S property shared a unity

of use and, correspondingly, should be valued as a single economic unit. Plaintiffs charge that

after defendant’s appraiser reached his conclusion of value for the subject properties as a single

economic unit, he was required to apply a fractional appraisal method, and attribute a separate

value to the individual components of the subject property, so that “the appropriate assessment”

could be imposed. However, the obligation to fix a local property tax assessment is a function of

the court, under N.J.S.A. 54:51A-6, or the municipal tax assessor, under N.J.S.A. 54:4-23, once a

conclusion has been reached regarding the estimated true market value of the property as of

October 1st of the pretax year. Any attempt by defendant’s appraiser to allocate the true market

value of the subject properties among its individual component parts after he has valued it as a

single economic unit would likely be random and arbitrary. In fact, this court has observed that

allocations of local property tax assessments among properties comprising a single economic

unit “are usually arbitrary” and “the correct assessment is to be based on the total value of the

entire complex.” Mobil Oil Corp., supra, 9 N.J. Tax at 127. Thus, the court rejects plaintiffs’

counsel’s assertion that defendant’s appraiser was required to assign separate values to the

component parts of a property that was valued as a single economic unit.

Here the court concludes, as did defendant’s appraiser, that the Trocki property and I&S

property are joined in a unity of use and operations, and their parts cannot be fairly and

adequately considered separately. First, Trocki Hotels and I&S Associates share common

ownership, as controlling interests in both entities are owned by Dr. Trocki. Second, the Trocki

property and I&S property are constituent parts of a single economic unit, the Travelodge motel.

The I&S property is instrumental to the effective operation of the Travelodge, providing an

32 alternate means of vehicular ingress and egress along Black Horse Pike. Third, the ties and inter-

relationship between the two properties are a material component of the Travelodge’s marketing

and promotional materials. By virtue of the dune-like landscape of the I&S property, motel

guests are afforded expansive and open views of Lakes Bay from guest rooms and from a rear

patio/deck area of the Travelodge. These physical characteristics are highlighted in the

marketing and promotional material generated by the Travelodge as the availability of “Bayview

Rooms,” an “Outdoor Seasonal Pool and Deck on Bay,” and a “Privately Owned Bayside

Beach.” Thus, the court is satisfied that the I&S property furthers the operation and use of the

Travelodge motel. The subject properties are joined in a unity of use and operation, and

constitute a single economic unit. See Housing Authority of Newark v. Norfolk Realty Co., 71

N.J. 314, 322 (1976).

Additionally, based on the record and evidence adduced, and for the reasons more fully

expressed herein, the court concludes that the highest and best use of the subject property is

continuation of the existing use as a limited service motel. Moreover, the court is satisfied that

the income-capitalization approach produces a more credible result in valuing the subject

properties than does any other approach to value. “Knowledgeable buyers of lodging facilities

generally base their purchase decisions on factors such as forecasted net income and return on

investment, which are not reflected in the cost approach” or sales comparison approach. Glen

Pointe Associates, supra, 10 N.J. Tax at 390.

However, this court is charged with the responsibility to apply its own expertise and

“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). “[T]he trial judge as the factfinder is not bound by the opinion valuation of the experts

33 on either side. Just as a jury, a judge may adopt ‘so much of it as appears sound, reject all of it,

or adopt all of it.’” Riorano, Inc. v. Weymouth Township, 4 N.J. Tax 550, 564 (Tax 1982)

(quoting State Highway Com. v. Dover, 109 N.J.L. 303, 307 (E. & A. 1932)).

Because defendant failed to overcome the presumption of good management that attaches

to the subject properties, the court must reject defendant’s appraiser’s proposed stabilized

revenues and instead accepts plaintiffs’ reported gross revenues, with adjustments to fit within

the “‘well-managed’ standard.” Equitable Life Assur. Soc. of U.S., supra, 16 N.J. Tax at 467.

The evidence adduced during trial, including plaintiffs’ appraiser’s reproduced abstract of

the Travelodge’s operating revenues and defendant’s appraiser’s reproduced copy of plaintiffs’

Statements of Revenues and Expenses for the tax year ended December 31, 2009, revealed that

plaintiffs’ gross revenues were as follows: $579,118 for the 2009 calendar year; $776,195 for the

2010 calendar year; and $836,663 for the 2011 calendar year. Therefore, the court will attribute

the following stabilized revenue to the Travelodge: (i) $579,118, as of the October 1, 2009

valuation date; (ii) $776,195, as of the October 1, 2010 valuation date; and (iii) $836,663, as of

the October 1, 2011 valuation date.

The record further reveals that the Travelodge offers limited breakfast service and does

not offer room service, beverage service, or other meal service to motel guests. However, the

Travelodge does not assess any charge or fee to motel guests for breakfast and thus, derives no

revenue from breakfast service. In defendant’s appraiser’s opinion, the Travelodge could

reasonably charge for breakfast, and therefore, in his opinion, food and beverage revenue of 3%

of gross revenues should be included in the Travelodge’s gross revenues. The court finds

credible defendant’s appraiser’s conclusion that additional revenue could be derived by the

Travelodge by charging a fee for breakfast and beverage services. However, because the

34 Travelodge is only a limited service motel, without any restaurant, affording patrons only

restricted breakfast service, the court concludes that defendant’s appraiser’s food and beverage

service income of 3% of gross revenues is not credible. The court concludes that a more credible

approach would be to stabilize food and beverage service at 1% of the gross room revenues, or

$5,791 as of October 1, 2009; $7,762 as of October 1, 2010; and $8,367 as of October 1, 2011.

The 1% figure is further supported by the court’s review of the “Supplemental Data” report of

the “Travelodge formerly Red Roof Inn” for the year ended December 31, 2007 annexed to

defendant’s appraisal report. That statement discloses that “Lounge Sales – Beverage” amounted

to approximately 1% of the Travelodge’s room sales for the 2007 calendar year.

In addition, although not attached to his appraisal report, defendant’s appraiser offered

credible testimony with respect to the contents of the PKF Hospitality Research Group studies he

consulted for limited service motels, like the Travelodge. Based on his review of those studies,

the limited service motel industry experiences an average ratio of stabilized expenses to effective

gross revenues of 65%. The court finds defendant’s appraiser’s testimony credible on this issue

and adopts stabilized expenses of 65% of gross revenues. Therefore, the court determines

plaintiffs’ stabilized expenses to be as follows: $380,191 as of October 1, 2009; $509,572 as of

October 1, 2010; and $549,270 as of October 1, 2011.

“One method of separating the real estate and business interest in hotel valuation is to

extract from hotel revenues the fee paid by the owner to a management company pursuant to a

management contract.” Glen Pointe Associates, supra, 10 N.J. Tax at 391. This technique, also

known as the Rushmore approach, is a well-recognized method for determining the true market

value of hotels and motels. See also Marina Dist. Development Co., LLC, supra, 27 N.J. Tax at

492; City of Atlantic City v. Ace Gaming LLC, 23 N.J. Tax 70, 97-8 (Tax 2006). This approach

35 is premised on the theory that by employing a professional managing agent, the owner is placed

into the position of passive investor, thereby eradicating any potential profit that may be derived

from motel business operations. Defendant’s appraiser relied upon and produced copies of

published studies from Korpacz/PWC of the limited service hotel and motel market as of the

Third Quarter 2009, Third Quarter 2010 and Third Quarter 2011. Korpacz/PWC is a respected

and well-known financial analysis firm. The study data is commercially available, widely

circulated and frequently relied upon by professionals in the real estate appraisal field. The

court’s review of those studies reveals that the “Lodging Management Fees” for

“Economy/Limited Service” lodging establishments averaged: 3.33% as of the Third Quarter

2009; 3.30% as of the Third Quarter 2010; and 3.45% as of the Third Quarter 2011. Defendant’s

appraiser allocated 5% of the effective gross revenue to management fees. In light of the data

revealed in the Korpacz/PWC studies, the court concludes that it is more reasonable to assign a

management fee of 3.35% to the management and business interest of the Travelodge for the

2010, 2011 and 2012 tax years, computed as follows: $6,858 as of October 1, 2009; $9,192 as of

October 1, 2010; and $9,908 as of October 1, 2011.

Defendant’s appraiser further relied on published studies of the Limited-Service Lodging

Segment from Korpacz/PWC in order to determine his capitalization rates for the relevant time

periods. The studies are generated from surveys completed by investors who took part in real

estate transactions during the survey period. The court has reviewed the Korpacz/PWC studies

which express an average overall capitalization rate of 10.85% as of Third Quarter 2009, 10.20%

as of Third Quarter 2010, and 9.80% as of Third Quarter 2011 for the Limited-Service Lodging

Segment. After considering the foregoing studies, defendant’s appraiser concluded that a 10.5%

capitalization rate should be applied to the stabilized income allocable to the real estate and

36 FF&E as of the October 1, 2009, October 1, 2010 and October 1, 2011 valuation dates. In light

of the data revealed in the Korpacz/PWC studies, the court concludes that it would be more

reasonable to apply a capitalization rate of 10.85% as of the October 1, 2009 valuation date;

10.20% as of the October 1, 2010 valuation date; and 9.80% as of the October 1, 2011 valuation

date.

Plaintiffs argue that defendant’s appraiser failed to examine the actual FF&E inventory of

the Travelodge, and therefore, defendant’s contributing value of the FF&E must be rejected by

the court. However, defendant’s appraiser credibly testified that he assessed the age and

condition of the FF&E during his inspections of the motel rooms and property between 2010 and

2014. Based on his visual inspections of the FF&E, defendant’s appraiser concluded that the

FF&E was principally at the end of its useful life expectancy. Accordingly, defendant’s

appraiser employed the straight-line method to isolate the FF&E value from the real property

component of the Travelodge. This method computes the yearly return of personal property

based upon the estimated total replacement cost of the FF&E and divides that figure by the

estimated annual life expectancy of the FF&E. After consulting the Marshall & Swift valuation

manuals, defendant’s appraiser calculated the “cost new” of the Travelodge’s FF&E as

$1,625,250. Defendant’s appraiser then determined that accrued depreciation of 85% existed

with respect to the Travelodge’s FF&E. Therefore, defendant’s appraiser applied a depreciation

rate of 15% to the “cost new” of the FF&E to determine the contributing value of the

Travelodge’s FF&E as $250,000 per year. The court concludes that defendant’s appraiser’s

approach to valuing the FF&E is credible and provides a useful mechanism to isolate

components of business operating income from the value of the real property.

Therefore, the court’s calculation of true market value is as follows:

37 As of 10/1/2009 As of 10/1/2010 As of 10/1/2011 Room Revenues $579,118 $776,195 $836,663 Food and Beverage $5,791 $7,762 $8,367 TOTAL: Stabilized Revenues $584,909 $783,957 $845,030 LESS: Stabilized Expenses $380,191 $509,572 $549,270 Effective Gross Revenue $204,718 $274,385 $295,760 LESS: Allocation to Business $6,858 $9,192 $9,908 TOTAL: Real estate/FF&E Stabilized Income $197,860 $265,193 $285,852 Capitalization Rate 10.85% 10.20% 9.80% TOTAL: Real estate & FF&E value $1,823,594 $2,599,931 $2,916,857 LESS: Contributing value FF&E $250,000 $250,000 $250,000 TRUE MARKET VALUE $1,573,594 $2,349,931 $2,666,857

Having reached a conclusion of the true market value of the subject properties, the court

will turn its attention to a determination of the correct assessment for the 2010, 2011 and 2012

tax years. Under N.J.S.A. 54:51A-6(a), commonly referred to as Chapter 123, when the court is

satisfied in a non-revaluation year by the evidence presented “that the ratio of the assessed

valuation of the subject property to its true value exceeds the upper limit or falls below the lower

limit of the common level range, it shall enter judgment revising the taxable value of the

property by applying the average ratio to the true value of the property....” N.J.S.A. 54:51A-6(a).

This process involves application of the Chapter 123 common level range. N.J.S.A. 54:1-35a(b).

For the 2010 tax year, the ratio of total assessed value, $4,070,100, to true market value,

$1,573,594, yields a ratio of 2.5865% which exceeds the upper limit of the Chapter 123 common

level range. Consequently, under N.J.S.A. 54:51A-6(a), the formula for determining the revised

taxable value of the subject properties for the 2010 tax year is:

True market value x Average ratio = Revised taxable value

38 Thus, the calculation for the 2010 tax year is:

$1,573,594 x .5106% = $803,500 [ROUNDED]

For the 2011 tax year, the ratio of total assessed value, $4,070,100, to true market value,

$2,349,931, yields a ratio of 1.732% which exceeds the upper limit of the Chapter 123 common

level range. Consequently, under N.J.S.A. 54:51A-6(a), the formula for determining the revised

taxable value of the subject properties for the 2011 tax year is:

Thus, the calculation for the 2011 tax year is:

$2,349,931 x .5417% = $1,273,000 [ROUNDED]

For the 2012 tax year, the ratio of total assessed value, $4,070,100, to true market value,

$2,666,857, yields a ratio of 1.5262% which exceeds the upper limit of the Chapter 123 common

level range. Consequently, under N.J.S.A. 54:51A-6(a), the formula for determining the revised

taxable value of the subject properties for the 2012 tax year is:

Thus, the calculation for the 2012 tax year is:

$2,666,857 x .5787% = $1,543,300 [ROUNDED]

The parties are directed to provide a proposed allocation of the above between the Trocki

property and I&S property within ten (10) business days of the receipt of this letter opinion, after

which the court will enter judgments in accordance therewith. See R. 8:9-3; R. 9-4

Very truly yours,

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