Nutley Manor, L.L.C. v. Nutley Township

NOT FOR PUBLICATION WITHOUT APPROVAL OF

THE TAX COURT COMMITTEE ON OPINIONS

 

TAX COURT OF NEW JERSEY

 

Mala Narayanan 153 Halsey Street

JUDGE Gibraltar Building, 8thFloor

Newark, New Jersey 07101

Telephone (973) 648-2921

TeleFax: (973) 648-2149

taxcourtnewark2@judiciary.state.nj.us

 

March 21, 2012

AMENDED (p. 20)

Via Electronic Mail

Steve Irwin, Esq.

The Irwin Firm, P.A.

The Irwin Law Firm, P.A.

90 Main Street, Suite 410

West Orange, New Jersey 07052

Raymond B. Reddin, Esq.

Piro, Zinna, Cifelli, Paris & Genitempo, P.C.

360 Passaic Avenue

Nutley, New Jersey 07110

 

Re: Nutley Manor, L.L.C. v. Nutley Township

Block 5900, Lot 12

Docket Nos. 004647-2008; 001301-2009; 001438-2010

Dear Counsel:

 

This letter constitutes the court s opinion after trial in the above-referenced matters. Plaintiff ( Nutley Manor ) challenged the assessments imposed by Defendant ( Nutley ) on an apartment complex located at 17-23 Church Street, designated as Block 5900, Lot 12 ( Subject ) for tax years 2008, 2009, and 2010. The assessments for tax years 2008 and 2009 were as follows:

Land $ 498,200

Improvements $1,784,800

Total $2,283,000

*

The assessment for tax year 2010 was as follows:

Land $ 453,200

Improvements $1,656,800

Total $2,110,000

 

For the tax years at issue the Chapter 123 ratios for Nutley were as follows:

Tax Year Chapter 123 Ratio Upper Limit Lower Limit

2008 94.95 109.19 80.71

2009 96.15 110.57 81.73

2010 96.12 110.54 81.70

 

Each expert s value opinion for each tax year was as follows:

Tax Year Plaintiff s Expert Township s Expert

2008 $1,506,000 $2,135,000

2009 $1,768,000 $2,215,000

2010 $1,416,000 $2,150,000

 

The court reduces the assessment for tax years 2008 through 2010 for the reasons set forth below.

PROCEEDINGS

Each party s witness was accepted by the court as an expert qualified to testify as a real estate valuation expert, and their reports were admitted into evidence without objection. Also in evidence were the rent rosters for the Subject for calendar years 2007-2009.

At the close of Nutley Manor s expert s testimony, Nutley moved to dismiss the complaints pursuant to R. 4:37-2 on grounds the former s expert provided no comparable market expenses. Nutley Manor duly opposed the motion on grounds that a well-managed apartment complex is presumed to be rented and operating at market, and in any event, its expert s expenses were supported by objective data. The court agreed, and denied the motion. See R. 4:37-2(b); Dolson v. Anastasia, 55 N.J. 2, 5-6 (1969) ( judicial function in deciding a R. 4:37-2(b) motion where court is not concerned with the worth, nature or extent . . . of the evidence, but only with its existence . . . ); MSGW Real Estate Fund, L.L.C. v. Borough of Mountain Lakes, 18 N.J. Tax 364, 379 (Tax 1998) (court uses rose-colored glasses in viewing the sufficiency of evidence to overcome the presumption of an assessment s correctness, but taxpayer still carries the ultimate burden of persuasion).

FINDINGS

I. Property Description

The Subject is comprised of land measuring approximately 0.833 to 0.90 acres1and a modern two-story, 29-unit residential apartment complex housed in three detached buildings, constructed sometime in 1962. The Subject is well situated in a residential area, amidst other single or multi-family residences and the local schools. The immediate neighborhood is improved with mixed-use commercial properties. It is well-connected to major highways, and is proximate to New York City.

The garden-style apartment complex is located on the south side of Church Street between Franklin Avenue and Prospect Street. The red brick designed buildings with gabled roofs sit in a horseshoe shape around a large landscaped courtyard. There aresurface parking areas for the tenants, and three (3) built-in garages used by the Subject s owner for storage. The complex has a laundry facility in the basement with coin operated machines. Also in the basement is space for storage, hot water heaters, boilers and a furnace. The experts agreed that the Subject s exterior was in an average to good condition. The photographs evidencethe Subject s brick veneer and landscaped surroundings as being well-maintained.

There are twelve (12) two and a half room (one bedroom) units, and sixteen (16) four room (one bedroom) apartments. There is only one (1) three room (one bedroom) apartment. A full-time superintendent lives in one of the apartments for security and for as-needed services. Appliances are provided by the landlord including the air-conditioning units. The rentals include heat and hot water, but tenants have to pay for the individually metered gas and electric charges. Select apartments have been modernized or renovated over the years. The Subject s owner, which also owns several other properties in the State and is thus knowledgeable and competent, diligently attends to the Subject s upkeep and maintenance. Over the years since 2006, at least nineteen apartments have been upgraded or renovated. The hot water heaters and boiler were replaced sometime in 2006.

The Subject is located within the R-1 zone (one-family residence district) and its use is legally non-conforming. It is subject to a long-standing rent control ordinance with a vacancy de-control provision. This means that when an apartment becomes vacant, it can be re-let at the market rent, and once occupied, is subject to rent control with permitted annual increases of 5% for each tax year.

Both experts agreed that the highest and best use of the Subject as vacant and improved is its current use as a rental residential apartment building.

II. Valuation

Both experts agreed, and the court accepts, that the income approach is the most reliable valuation technique since the Subject is income-producing, and thus, an investment property.

A. Market Rents

Both experts agreed that the annualized actual rents of the Subject were representative of the economic rent for all three tax years, and thus, its potential gross income. They agreed that these amounts were $325,378, $335,390, and $344,923 for tax years 2008, 2009, and 2010, respectively. They both deducted the rent for the superintendent s apartment in the amounts reported on the Subject s annual Income and Expense ( I&E ) statements. While they agreed on almost all of the items of other income (such as laundry receipts) for each tax year, Nutley Manor s expert included the item for bad debt loss for tax year 2007 (+$54), and deducted amounts listed for ch[ange] in receivables (negative $673, $730, and $747 for each year). Since both of these items should be reflected in the annual vacancy and collection loss percentage, the court finds Nutley s expert s disregard of these items correct, and accepts his computations. However, for tax year 2010, he incorrectly totaled the other items as $11,227 instead of $10,227, therefore, for this tax year the total other income is $10,227.

Thus, the gross annual income for each year is $325,541; $335,864 and $343,085.

B. Vacancy & Collection Loss Allowance

Nutley Manor s expert applied the subject s actual vacancy rates for each tax year,2explaining that the actual vacancy rates were comparable to vacancy rates experienced in the Northern New Jersey region. He determined that 7.2%, 2.3%, and 3.8% were the appropriate vacancy loss allowance figures for each respective tax year. He also took a collection loss of negative $3,368 only for tax year 2010 (based on the Subject s I&E statement for that year) claiming it to be rent collected in 2009 from a defaulting tenant.

The expert agreed that generally rent control would lead to lower vacancy loss. He noted that in 2007 and onwards, however, rent control did not impact the declining local and national economic conditions. Thus, landlords would likely not raise rents to the full 5% allowable under the rent control ordinance due to market conditions. He pointed out that in the Subject, for instance, a tenant in Unit B-1 who was charged $590 in 2008, charged only $614 in 2009, and the rent in Unit #20 was $973 in 2008 but increased only by $27 in 2009, thus, evidencing a less than 5% increase. His market data backup (Cushman & Wakefield Northern & Central NJ Multifamily Report for year-end 2008 and 2009) showed that the vacancy rate for the third quarter of 2008 was about 3.5% and for the third quarter of 2009 was about 4.1%. Another report from Marcus & Millichap reported a 4.8% vacancy rate in West Essex County in the last quarter of 2009.

Nutley s expert used a stabilized 3% vacancy factor for all three tax years. He noted that the Subject s actual vacancy was only one to two units, thus, about a 3% rate. He opined this rate was reasonable because it was commensurate with the vacancy rates of other garden-style apartment complexes in Nutley,3as well as a study of the market. He testified that although the Subject was rent-controlled, it was nonetheless operating at market therefore a market-based vacancy rate cannot be disregarded. His data (reports from Integra Realty Resources Inc. for 2007, 2008, and 2010), however showed northern New Jersey to have vacancy rates of around 4.94% in 2007 and 2008 5.8% in 2010.

The court finds Nutley Manor s expert s opinion less reliable. He discredited his own 7.2% allowance for 2007 by conceding that the rate was very high compared to the market data (which he opined was reasonable), and that he should have adjusted the rate. He agreed that with no other changes, using a 3.5% vacancy rate for tax year 2007 would increase his value conclusion by about $90,000 (to $1,590,000). Further, his inclusion of a negative amount for 2010 for collection loss is unpersuasive given that he did so only for one tax year, and even then on a questionable basis, namely, that it represented collected rent from a bad tenant as opposed to allowance for an existing non-paying tenant.

The court finds Nutley s expert s 3% allowance is appropriate for all three tax years. Although the data indicated somewhat higher rates, it is not controlling because it does not indicate whether the market-rate factored in or comprised of rent-controlled apartments. The 3% rate is reasonable because it is stabilized, and in line with the Subject s experience and its status as rent-controlled. SeeUniversity Plaza Realty Corp. v. City of Hackensack, 12 N.J. Tax354, 369 (Tax 1992), aff d, 264 N.J. Super.353 (App. Div. 1993), certif. denied, 134 N.J.481 (1993) (vacancy and collection loss rate must be predicated on an estimate of the long-term quality and durability of the rental income stream ). This provides an effective gross income of $315,775; $325,788 and $332,792 for each of the respective tax years.

C. Expenses

This was an area of significant disagreement between the experts, specifically as to allowances for superintendent s salary and for reserves.

For all tax years, Nutley Manor s expert used the operating expenses listed in the I&E statements, except for the one he removed because he considered then as reserves for replacement. He noted that since 2006, he was advised that the landlord had replaced nineteen bathrooms and nineteen kitchens at the Subject due to constant upgrading. He also testified that he provided reserves after ascertaining that the actual costs were commensurate with those provided by Marshall & Swift Publication Company ( Marshall s ), a generally accepted data source by real estate appraisers, as well as by comparing the actual costs to those incurred in other apartment complexes. He claimed that the costs listed by the Institute of Real Estate Management ( IREM ) did not analyze reserves, but since the Subject s actual costs were in-line with what a good prudent owner would expend, his allowance for reserves was reasonable.

The expert testified that the actual cost incurred to replace the kitchen with appliances was $5,000; to replace a bathroom with a tub was between $4,000 and $5,000 and to replace an air conditioning (A/C) unit was about $500. The expert stated that these costs were similar to the costs listed in the Marshall s report. He then estimated a useful life for a kitchen of fifteen years. For 29 units, at $5,000 each, extrapolated over 15 years, he opined that a prudent landlord would set aside about $9,600 per year, or $330 per unit per year, for reserves for kitchen replacements. He engaged in a similar analysis for bathroom replacements and provided an annual reserve of $8,700 ($4,500 per unit extrapolated over 15 years for 29 units), or $300 per unit per year. Similarly, for A/C unit replacement he imputed a value of $500 per unit for 29 units over fifteen years for an annual reserve of $967.

He then provided a reserve for structural items at what he termed as a conservative ratio of 2% of the effective gross income thus, ranging from $5,800 to $6,300 for each tax year. He testified that these included long-lived items such as the roof, exterior walls, doors, windows and water heaters, furnaces/boilers. Although the last two of these items had been replaced in the Subject property in 2006, he testified that they should nonetheless be subject to a reserve. All told, he allowed $25,141 for tax year 2008, $25,650 for tax year 2009, and $25,660 for tax year 2010 as reserves for replacement or about $860 per unit.

For other expenses, Nutley Manor s expert compared the Subject s actual expenses to the figures listed in the IREM report figures and to other apartment complexes.4 He concluded that the Subject s actual expenses per unit fell within the IREM ranges, were comparable to the expenses per unit for the other apartment complexes, and were reflective of the market. He thus accepted the reported electric utilities, management, insurance, telephone, license/fees, advertising expenses, supplies, legal fees and miscellaneous. He also accepted payroll expenses (salary, insurance, workers compensation and payroll taxes of and for the superintendent) as reported. He further accepted the reported expenses for repairs and maintenance, and for painting, HVAC repairs, masonry repairs, extra container service, carpets and flooring.

Nutley s expert disagreed with the other expert s provision for reserves. He testified that most property owners who owned garden-style apartments such as the Subject, himself included, do not actually maintain high levels of reserves. He noted that the high levels of reserves opined to by Nutley Manor s expert, which were almost 8.5% of the potential gross income, were not only unusual, but also un-economical and impractical in that a property owner would not have enough income to cover the mortgage payments after providing for reserves. In his opinion, a stabilized amount of $250 per unit total, or $7,250 annually was appropriate.5

Nutley s expert also quarreled with Nutley Manor s reported expenses for salaries ($30,966, $30,360, and $32,940 for tax years 2008-2010, respectively) and other payroll related costs. He maintained that if the actual salary paid was controlling, that would be an allocation of about $750 per unit, which was extremely high especially when the superintendent s free apartment was taken into account. He therefore stabilized the actual costs to $10,000 per year, and explained that a complex this size does not require attributing costs of a full-time superintendent with a rent-free apartment.

As to the repair and maintenance expenses category, the expert noted that the Subject reported several sub-categories (HVAC or masonry) in addition to the separately stated category, which fluctuated each year when added together. Because items of repairs and maintenance vary from year to year and from property to property (depending upon prior history and property condition), they had to be stabilized. He thus stabilized the repairs and maintenance figure at 5% of effective gross income. He also stabilized the water and sewer expenses at $5,800 per year ($200 per unit), professional expenses at $2,000 per year, and exterminator and miscellaneous expenses each at $1,000 per year. He stated that he compared the actual costs with the IREM reports and expenses of other garden apartment complexes.6 He accepted the reported expenses for utilities, insurance, management and landscape.

The actual operating expenses of a well-managed apartment complex should be considered as representative of the market when they are within normal operating limits. Parkway Village Apartments Co. v. Township of Cranford, 8 N.J. Tax 430, 441-42 (Tax 1985), aff'd, 9 N.J. Tax 199 (App. Div. 1986), rev d on other grounds, 108 N.J. 266 (1987). Thus, if the rentals were driven by market forces but expenses were unusually high, an adjustment must be made to fit the well-managed standard. Equitable Life Assur. Soc. of U.S. v. Township of Secaucus, 16 N.J. Tax 463, 467 (App. Div. 1996) (applying to operating expenses the ruling in Parkview Village Assoc. v. Borough of Collingswood, 62 N.J. 21, 34-35 (1972) that rents of a well-managed apartment complex are presumed to be economic absent convincing evidence to the contrary). In other words, the actual expenses of a well-managed property, if reasonable, can be properly considered, unless there is convincing evidence to the contrary.

There is no dispute that the Subject is a well-managed property. Therefore, its reported expenses are deemed reasonable unless established otherwise. Here, both experts recognized the principle in that they considered the Subject s actual expenses. The difference is that while Nutley Manor s expert accepted and used all categories of expenses (except a few items which he included in reserves as opposed to operating expenses), Nutley s expert accepted some, stabilized some, and did not include some. There was sufficient evidence, testimony and market data to establish that some of the actual costs cannot be automatically utilized. Therefore, the court will make the following findings.7

The court finds Nutley s expert s provision for reserves more credible. Although Nutley Manor s expert s costs were commensurate with Marshall s costs, nonetheless, the court finds a reserve of about 8.5% of effective gross income for reserves unduly high to be an economical figure for a prudent property owner, and therefore it is not within normal operating limits. Parkway Village Apartments, supra, 8 N.J. Tax at 441-42. Cf. Maple Court Assoc. Ltd. v. Township of Ridgefield Park, 7 N.J. Tax 135, 153 (Tax 1984) (proper to use actual expenses if they undisputedly exist, are within reasonable limits and do not constitute an inordinate percentage of effective gross income. The use of both actual and stabilized expenses is acceptable appraisal practice ). Further, the expert relied simply on management s assertion that nineteen bathrooms and nineteen kitchens had been replaced over the past six years, however, there is no evidence that any building permits had been obtained for these projects, thus, these allegations, to the extent they are a justification for the provision of large reserves, are unsupported. Therefore, the court will apply a reserve for replacement expense of $7,250 per year.

The court also finds Nutley s expert s stabilization for payroll expenses more credible. The costs are simply not commensurate since the Subject has only 29 units and the superintendent is provided a rent-free apartment. Since the salary amount was likely negotiated, it may not necessarily be reflective of a market salary.

Nutley Manor s expert s IREM data (as applicable to Northern New Jersey Garden Type Buildings) also corroborates the need for stabilization. While they do not specify salaries as a category, they nonetheless include as payroll costs, administrative expenses, security, grounds maintenance and recreational/amenities, and other payroll. For 2007, the excerpt indicates that for a 2,812 apartment complex, the average expenses for these items were about $1,219 per unit. For 2008, these expenses for a 4,835 apartment complex totaled about $1,642 per unit. For 2009, these expenses totaled about $1,728 per unit for 5,616 apartments. Here, the salary alone is about $750 per unit, and that is for a 29-unit complex.

Nutley Manor s expert countered that the IREM reports included a payroll recap of different but higher amounts for each year, thus, the lower amount indicated as administrative expenses may not fully reflect salary expenses. He also pointed out that each category deemed payroll cost bore a double asterisk sign, which indicated a full explanation of the description, report layouts and method of data analysis was contained on another page titled Guidelines for the Use of this data and Interpretation of a page of Data, and argued that thus, the IREM excerpts were incomplete and unreliable.

The court is not persuaded. Even if the higher amounts of the payroll recap were included, they indicate total payroll expenses of $2,173 per unit for a 2,812 apartment complex; $2,797 per unit for a 4,835 apartment complex, and $3,026 per unit for 5,616 apartments. Here, Nutley Manor s expert conceded that if all payroll expenses (such as taxes, insurance, workers compensation) were included, they would amount to about $1,800 per unit. Thus, this amount is still high when considering the fact that the Subject has 29 units.

Further, Nutley Manor s expert s discrediting of the IREM data only as to payroll is not credible. His report, which used the IREM excerpts, did not contain the explanation indicated by the double asterisk sign. He himself relied upon the IREM for all expense categories, and did not establish that the publication was not generally accepted or reliable amongst real estate appraisers. While selective use of a category from a data source, is not per se inappropriate (so that the reasonableness of the Subject s expenses are carefully analyzed as opposed to blindly adopted), the expert s rejection of this aspect of the IREM excerpts as being incomplete is not plausible without any explanation as to why the missing explanation was unobtainable or not provided. The court therefore accepts Nutley s expert s stabilized payroll figure of $10,000 (salaries plus taxes and insurance).

The court also accepts Nutley s expert s provision of a stabilized amount for water and sewer charges of $5,800 per year (as opposed to the varying actual costs from $600 to $5,700 used by Nutley Manor s expert). The amount is commensurate with the actual costs but on a stabilized basis. His stabilized repair and maintenance provision for each tax year is more credible and commensurate with the actual costs. Nutley Manor s expert s inclusion of the reported costs are not persuasive because they include an unexplained general category, repairs and maintenance, and then individual items labeled repairs or service, in varying amounts each year. Without any explanation of the items comprised in the general category of repairs and maintenance that would establish lack of duplication, the court cannot accept the numbers proffered by Nutley Manor s expert.8

As to the expenses not included by Nutley s expert (supplies, telephone, license & fees, and advertising), the court finds as follows: the reported amounts for advertising expenses ($7,787, $4,755, and $5,909 for tax years 2008-2010) are excessive due to the fact that the Subject has historically experienced relatively low vacancy for the tax years at issue. The court will therefore make an adjustment by providing an annual stabilized figure of $3,000. Equitable Life, supra, 16 N.J. Tax at 467. The expenses for telephone, license/fees and miscellaneous are properly stabilized by Nutley s expert in the miscellaneous category at $1,000 each year. There was no dispute with respect to expenses for supplies, therefore, this will be allowed as provided by Nutley Manor s expert.

With all of the above adjustments, the total expense figures are $112,031 for tax year 2008, $107,940 for tax year 2009, and $116,265 for tax year 2010. This results in net incomes of $203,744 (2008); $217,848 (2009) and $216,527 (2010).

D. Capitalization Rates

Both experts used the mortgage-equity Band of Investment method to develop their capitalization rates. For tax year 2008, Nutley Manor s expert estimated the availability of a 58% mortgage for twenty years with a 5.87% rate of interest, and a 6.5% equity return rate. He arrived at the 6.5% figure by adding a factor to the average equity return rate of 5.75% for the fourth quarter of 2007 because the landlord pays for heat/hot water for the entire apartment complex. His overall capitalization rate ( OAR ) was 7.7% to which he added the effective tax rate of 2.169 for a final rate of 9.87%.

For tax year 2009, Nutley Manor s expert estimated the availability of a 59% mortgage for twenty years with a 6.53% rate of interest, and a 7.0% equity return rate. Again, he arrived at the 7.0% figure by adding to the average equity return rate of 6.13% for the fourth quarter of 2008, because the landlord pays for heat/hot water for the entire apartment complex. His OAR was 8.2% to which he added an effective tax rate of 2.315%9 for a final rate of 10.52%

For tax year 2010, Nutley Manor s expert estimated the availability of a 65% mortgage for twenty years with a 6.73% rate of interest, and an 8.75% equity return rate. Like the prior tax years, he arrived at the 8.75% figure by adding to the average equity return rate of 8.03% for the fourth quarter of 2009, because the landlord pays for heat/hot water for the entire apartment complex. He computed the OAR at 9% plus the effective tax rate for 2009 (since at the time he served his report, he did not have the 2010 tax rate) for a final rate of 11.32%.

In addition to his experience and familiarity with the mortgage market, and his conversations with bankers, owners, operators, he relied upon the rates provided by the American Council of Life Insurance ( ACLI ) for apartment properties for the fourth quarter of each tax year, to derive his mortgage component. He assumed a loan amount of $2 million to $4 million, and derived an interest rate using statistics based on loan size and the geographical location. He admitted that given his value conclusion, he should have considered the ACLI tables with a loan value of less than $2 million. He utilized twenty-year amortizations based on information he received from talking to bankers in the area.

The expert relied upon the Korpacz Real Estate Investor Survey ( Korpacz ) to derive the equity component. He maintained that while rent-controlled buildings may provide a safety cushion in terms of return on equity, nonetheless, the economic uncertainty from 2007 onwards would exert an influence vis- -vis their investment potential. He agreed that Korpacz addressed institutional grade properties (which the Subject, according to him, was not since the landlord provided heat and hot water), nonetheless, he adjusted those rates by the Subject s characteristics (heat and hot water provision). He asserted that heat and hot water were significant expense items which reduced the cash flow, which in turn, rendered the Subject a riskier investment.

Nutley s expert assumed the availability of a 65% mortgage for twenty years with a 6% interest rate for tax year 2008, a 65% mortgage for twenty years with a 6.00% interest rate for tax year 2009, and a 65% mortgage for twenty years with a 6.25% interest rate for tax year 2010. He relied upon his conversations with bankers in the area and the interest rates and loan-to-value ratio published by the ACLI for the third quarters of 2007 and 2008, and based on his experience as an appraiser and landlord, 60% to 65% loans were very typical.10 He estimated a 6.25% equity return rate for tax years 2008 and 2009, and a 6.50% equity return rate for tax year 2010.

Nutley s expert thus computed capitalization rates of 7.80%, 7.80%, and 8.00% for tax years 2008-2010 respectively, and after adding in the actual tax rates to the same (2.16%; 2.29% and 2.4%), arrived at OARs of 9.96%, 10.09%, and 10.40% for tax years 2008-2010, respectively. He noted that these rates were appropriate given the fact that the Subject is well-located with good quality income stream potential. He also noted that the rates were commensurate with the OARs reported by the ACLI Korpacz and Real Estate Research Corporation ( RERC ). He further opined if the contract rents were lower than the market due to rent-control, a lower equity rate may be reasonable, however, where there is vacancy de-control, thus, contract rents adequately reflect market rents, there should not be a rent-control based equity return rate.

The RERC data reflected a capitalization rate for second-tier (defined as aging, former first-tier properties, in good to average condition ) apartment complexes ranging from 6.00% to 9.00% for the fourth quarter of 2007 and an average of 7.4%; from 6.50% to 12% and an average of 8.1% for the fourth quarter of 2008; and from 6.30% to 10% with an average of 8.2% for the fourth quarter of 2009. The Northern New Jersey section of the report indicated a 6.2% to 6.5% going-in capitalization rate for the fourth quarter of 2007; 7% for the fourth quarter of 2008; and 7.5% to 7.6% for the fourth quarter of 2009. Korpacz reported OARs ranging from 3.5% to 8%, and an average of 5.75%, for the last quarter of 2007; from 3.80% to 8.5%, and an average of 6.13% for the last quarter of 2008; and from 5.75% to 11% with an average of 8.03% for the last quarter of 2009.

The court finds unpersuasive Nutley Manor s expert s development of the capitalization rates, specifically, his add-on of .72% to .87% to the equity component due to the landlord incurring heat and hot water expenses. Under his reasoning any item of expense incurred solely by the landlord, and not passed through to the tenant, would decrease cash flow, and therefore, justify high equity return rates. But operating expenses such as heat and hot water are taken into account when computing the Subject s net operating income and it is this net income which is capitalized. Moreover, there was no objective evidence or data to support his theory that an add-on for heat/utility factor is required, or that it is a commonly accepted practice in the field of real estate appraisal that higher equity returns are merited because a landlord incurs greater risk on its investment simply because he pays for heat and utilities.

The court finds more persuasive Nutley s expert s development of the mortgage and equity components. The expert confirmed with bankers as to the mortgage terms and interest rates for the market. His substantiation for a lower equity return rate is reasonable. The Subject is a sound investment property, with strong income potential and desirability given its excellent location, and its high occupancy. These facts make it a lesser investment risk, and therefore, does not warrant very high rates of return. Additionally, Nutley s expert, having considered heat and utilities expenses in the calculation of effective gross income, appropriately did not include any add-on factor to the equity rate of return. His rates are also supported by the market data. Although national, the ACLI survey covers debt-equity transactions, and thus, is more properly applicable as a check in the Band of Investment analysis. SeePartridge Run Apartments v. Township of Parsippany-Troy Hills, 12 N.J. Tax275, 278-289 (App. Div. 1992) (appropriate to rely upon ACLI survey even if it is not the best market evidence in terms of developing an OAR). Whiledata in RERC and Korpacz comprise of a survey of un-leveraged or all cash transactions, and thus, provides the possibility of higher-than-normal equity return rates, seeHull Junction Holding Corp. v. Princeton Borough, 16 N.J. Tax68, 102 (Tax 1996), Nutley s expert s OARs are commensurate with, and not unreasonably or even significantly lower than the data in these sources. The court therefore finds more credible and persuasive the OARs developed by Nutley s expert.

The foregoing analysis can be summarized as follows for each tax year:

Tax Year 2008

Potential Gross Income

Rental Income $ 313,878

Laundry and Other Income $ 11,663

Total $ 325,541

Less:

Vacancy & Collection Loss (3%) $ (9,766)

Effective Gross Income ( EGI ) $ 315,775

 

Less:

Operating Expenses $(112,031)

 

Net Operating Income $ 203,744

 

OAR at 9.96%

Value (rounded) $2,045,622

Rounded to 2,045,600

The assessed to true value ratio is 111.6% ($2,283,000/2,045,600). This exceeds the Chapter 123 limits. Thus, the assessment must be calculated by applying the average ratio of 94.95% to the determined true value of $2,045,600 which results in an assessment for tax year 2008 of $1,942,297 or $1,942,300. N.J.S.A. 54:51A-6.

Tax Year 2009

Potential Gross Income

Rental Income $ 323,625

Laundry and Other Income $ 12,239

Total $ 335,864

Less:

Vacancy & Collection Loss (3%) $ (10,076)

EGI $ 325,788

 

Less:

Operating Expenses $(107,940)

Net Operating Income $ 217,848

OAR at 10.09%

Value $2,159,048

Rounded to $2,159,050

 

The assessed to true value ratio is 105.74% (2,283,000/$2,159,050). This requires an application of the average ratio. N.J.S.A. 54:51A-6(b). The assessment is therefore $2,075,926.

Tax Year 2010

Potential Gross Income

Rental Income $ 332,858

Laundry and Other Income $ 10,227

Total $ 343,085

Less:

Vacancy & Collection Loss (3%) $ (10,293)

EGI $ 332,792

Less:

Operating Expenses $(116,265)

Net Operating Income $ 216,527

 

OAR at 10.40%

Value $2,081,990

 

The assessed to true value ratio is 101.34% ($2,110,000/2,081,990). This requires an application of the average ratio. N.J.S.A. 54:51A-6(b). The assessment is therefore $2,001,208.

CONCLUSION

The Clerk of the Tax Court shall enter judgments revising the assessments for tax year 2008 to 2010 in accordance with this opinion.

Very truly yours,

 

 

Mala Narayanan, J.T.C.

1 Nutley s expert report states the lot size is about 0.833 acres. Nutley Manor s expert testified that pursuant to the property record card, the lot measures 39,770 square feet ( SF ). While page 1 of the excerpt shows this measurement in connection with tax year 2010, page two (updated as of June 2008), an excerpt from the website for Monmouth County, shows the land area as 161 x 230, or 37,030 SF.

2 As of 12/01/07 there were two (2) vacancies; as of 12/3/08 there was one (1) vacancy; as of 12/01/09 there were no vacancies; and as of 12/30/09 there was one (1) vacancy.

3 The court was not provided, nor did the report contain, any source documents in this regard.

4 The expert included a list of the annual overall (i.e., not itemized) expenses for four garden apartment complexes in Essex County (but not in Nutley). He did not have information for three of them for tax year 2010, and lacked data for one of them for 2007.

5 He noted that the Subject s I&E statements for the respective tax years did not include a reserve amount.

6 The expert provided photographs of and an itemization of the annual expenses for two garden-style apartment complexes located in Essex County (but not in Nutley).

7 Nutley Manor s expert agreed that his computation of operating expenses plus reserves resulted in a ratio of 52% of the 2008 potential gross income; 45% of the 2009 potential gross income; and 52% of the 2010 potential gross income.

8 For each tax year the amount of repairs and maintenance plus the sub-categories totaled $14,163; $10,059; and $17,417. The sub-categories the court totaled also include costs for carpet/flooring which ranged from $750 to $2,495. It is questionable whether the replacement of carpets and flooring are operating expenses or more properly categorized as capital improvements which are covered by reserves. Regardless, Nutley s expert s provision of $15,789, $16,289 and $16,289 adequately covers all the sub-categories.

9 The effective tax rate for Nutley for tax year 2009 was 2.29% as calculated by Nutley s expert. Nutley Manor s expert calculated his effective tax rate using an average ratio of 97.15% when the actual average ratio for 2009 was 96.15%.

10 He testified that his amortization period should have been 25 years since as landlord he had, in 2007 and 2011, re-financed his income-producing properties in Orange and Jersey City, for that term.